Knorr-Bremse AG

Dear ladies and gentlemen, welcome to Knopren's 18th conference call to the second quarter financial results. And our customer's request for this conference will be recorded. As a reminder, all participants will be in a listen-only mode. If any participant has difficulty hearing the conference, please press star key followed by zero on the telephone for operator assistance. May I now hand you over to Andrea Spitzauer, Head of Investor Relations of Knorr Bremse, who will lead you through this conference today. Please go ahead, sir.

Thank you, operator. Good afternoon as well as good morning, ladies and gentlemen. My name is Andreas Wittsauer, Head of Investor Relations of Knorr Bremse AG. I want to welcome you to Knorr Bremse's conference call for the second quarter results of 2021. Webcast and conference call will be recorded and they are available on our homepage www.knorr-bremse.com in the Investor Relations section. Here you can find today's presentation and later a transcript of the call. It is now my pleasure to hand over the call to Dr. Jan-Michel Rosig, our CEO, and Frank-Marcus Weber, our CEO. Please go ahead, Dr. Rosig.

Thank you, Andreas. and welcome everybody to our today's conference call. Today's focus is primarily on the business figures for the second quarter, as well as on our outlook in an environment that remains challenging. Before we look forward to your questions and comments. In the second quarter of 2021, we continued our recovery from the corona pandemic and again increased order intake revenue, earnings, and free cash flow, in some cases even significantly. In the second quarter of 2021, Knaubremse generated revenues of 1.7 billion euros, which is an increase of 21% year over year, and an EBIT margin of 14.1%, up 200 basis points. We continue to see a very strong performance from our extractivists, CVS was the key driver in the second quarter, reaching revenues of 879 million euros, an increase of 52%. Even margin came in at 11.2% after 3% in the previous year. Rail market globally is still meaningfully impacted by the pandemic. CVS, as expected, generated revenues of 849 million euros, stable versus previous year and an increase as promised versus the prior quarter by more than 5%. EBIT margin came in at 18.4%. In terms of corporate governance, which is an ongoing focus topic at Knorr Bremse, we managed to shorten our reporting time by one month versus second quarter 2020 and rolled out an employee share program for all 13,000 employees globally in July. Moreover, I would like to take the opportunity to cordially invite you to attend our Capital Markets Day on 29th of November, 2021. We will come back on this topic at a later point. Based on the overall good results in the first half of 2021, we confirm our guidance for full year 2021. Let's have a look at the current market situation and business outlook for both divisions on chart 3. Last year the rail market was moderately affected by the pandemic and this year the recovery is still slow and more protracted. While general market fundamentals are considered to be intact and long-term growth drivers remain unchanged, we see ongoing shifts of projects both in OE and aftermarket. We expect this development to remain during the year. Flona persistently results in less rail traffic and fewer trains on the tracks, which affects the whole rail aftermarket business. We saw last year that ridership levels recovered with decreasing infection rates, but at this point in time, it is difficult to forecast when we will return to normalized levels again. Nevertheless, we do not have to record any cancellations. Overall, 2021 is another corona year for rails, but we believe Q1 should have been the weakest quarter for RVS. In Q2, we started to recover already. The degree of business improvement should speed up gradually in the second half of this year. Proof of this are very good order intakes announced by our OEM customers for the past quarter, which will also reach us with some delays. Overall, we are not happy but also not concerned about the rather slow recovery in the first half of the year. due to the promising long-term growth drivers of the rail industry. Additionally, we also expect long-term that global investment programs supporting rail infrastructure and covering losses of rail operators will mitigate the negative impacts of corona. On the truck side, trade markets have continued to be strong and utilization rates of trucks remain on high levels. Demand is high, but truck OEMs have seen several production disruptions and production capacities are limited due to the ongoing supply shortages, predominantly in the field of semiconductors. However, due to the fact that the production of semiconductors has not improved yet, and distributed inventory levels have deteriorated, we expect the situation to remain tense in the second half of the year and to continue in the first half of 2022. The strong ongoing recovery is also seen in solid truck production rates, especially in Europe and North America, while China, after several months of very strong growth, started to normalize on a solid level. Truck production rates for 2021 will depend predominantly on the development of the supply side. However, market research companies currently mirror the strong underlying demand by forecasting significant increases in Europe and North America overall in 2021. We share this opinion. Let me continue with Chart 4 and the operating highlights of those divisions. We will reach a very important milestone in our climate strategy already by the end of 2021. We expect to become CO2 neutral. Thanks to our climate action measures and supported by high quality green energy certificates. They're going to increase the proportion of electricity from renewables that we use, which is why Knorr-Bremse has signed an offsetting agreement with the Berlin-based Climate Protection Organization This is an important step on the way to reduce our CO2 emissions in absolute terms by 50% until 2030. After two decades of worldwide use, Knorr Bremse celebrated the 100,000th delivery of the world's best-selling metal brake control system, CubeControl. we celebrated the official start of our steering production in Thailand. The new plant is an important step to match rapid market demand in Southeast Asia and increase KB's presence in the Asian region. Just recently, we announced that KB and Alstom extended their framework agreement of hydraulic brake systems for Citadis channels for another five years. Having started in the last quarter of 2020, Knobremse is supplying break-in as well as entrance systems for 69 Citadis light rail vehicles. The extension marks another joint achievement in the long-standing partnership between Alstom and Knobremse on the Citadis platform. You see, Alstom sticks to our long-standing partnership even after they made two smaller acquisitions in the field of rail-breaking. Coming to our newest acquisition, EWAG. EWAG is the world's leading supplier of sanitary systems for regional and high-speed trains, with over 100,000 installed units worldwide. With the acquisition, we expand into an attractive market segment in rolling stock and enhance our position as a global systems provider. EVAC has clearly a USP of quality leader, which is reflected in solid EBTA margins above 10% on adjusted levels. Its business model is based on an effort-like strategy, like KB strategy, and EVAC enjoys a high aftermarket share of 40% of revenue. We expect this market segment will be characterized by above-average growth opportunities in the coming years. Reliable integrated sanitary systems are an operationally critical component for train operators and necessary for train availability. Yet all of us have had the experience in this regard when it doesn't work. EVEX fits very well to KB's business model and we can leverage its global reach under the bigger umbrella of RVN. With this, I would like to hand over to my colleague Frank.

Thank you, Jan, and a warm welcome from my side as well. Thank you for joining us today. Let's talk about briefly our numbers of the first half year 2021 on page 6 before diving into the details of the second quarter. Despite ongoing global uncertainties due to the corona pandemic, Nordrems' overall performance and resilience was once more proven by very good financial During the first six months of 21, revenues came in at 3.4 billion euros, which is 12% higher year over year. The EBIT margin reached 14.5%, an increase by 150 basis points. The free cash flow of 108 million euros was more than 120 million euros better than last year and led to a cash conversion rate of 31% in the first half year. Let's have a look at the quarterly results on page 7. Overall, our revenues and profitability were even better than our first quarter results of this year. Compared to the previous year, order intake increased significantly by 58% to 1.8 billion euros. The order book grew once again by 18% to a new record level of almost 5.2 billion euros. Revenues increased by 21% to 1.7 billion euros and EBIT margin grew by 200 basis points to 14.1%. Free cash flow could be improved to 131 million euros in quarter two, resulting in a very solid cash conversion rate of 77% in for a year. We dive deeper into our order intake and order book on chart eight. Compared to the same period last year, order intake on group level increased significantly by 58% to €1.8 billion in Q2 2021. On an organic basis, the increase was even higher at around 65%, as we were facing again FX headwinds of nearly €80 million. Accordingly, the book-to-bill ratio was again above 1, like in the first Q2 2021, reaching 1.04. The development of the order book at the end of the second quarter was particularly pleasing as it rose for the fourth quarter in a row. It grew very strongly by 18% to 5.16 billion euros. This new record figure provides good confidence and is the foundation of our continuously positive outlook. The increase of order book was strongly driven by CVS, which almost doubled its backlog year over year. Let me continue with the revenue development on chart 9. Revenues on group level in the second quarter 21 increased by 21% to 1.73 billion euros. Organic growth was even better with an increase of 25%. Europe continued its growth path and posted an increase of 35% year over year. With a 47% share, it still accounts for the biggest part of our total revenues. North America strongly rebounded and revenue in this region increased by 38%. The revenues in the APEC region slightly decreased year over year after strong demand in the second quarter of 2020. The reduction was basically driven by China. Let me continue with the development of our profitability on chart 10. Our EBITDA margin improved by 90 basis points year-over-year to 18.1%, driven by good operating leverage despite headwinds from corona-related costs in CVS and less contribution from the attractive APEC region in RVS. The aftermarket revenue share decreased year-over-year by 3 percentage points to around 35%, mainly driven by the stronger OE business in our CVS division. Nevertheless, in absolute figures, our aftermarket business increased by more than 50 million euros or 9% to 599 million euros. The overall EBIT increased by over 40% net to 244 million euros despite continuous FX headwinds. The EBIT margin came in at 14.1% after 12.1% in quarter two, 2021. An outstanding increase predominantly benefiting additionally from a very disciplined fixed cost management with even slightly decreased depreciation levels. At the same time, our earnings per share rose by 60% to 1.02 Euro in quarter two, driven basically from a better financial result and a reduction of minority. Let's continue on chart 11. In the past quarter, we continued our investments in future technologies, increased capacity where it is needed and in maintenance. Nevertheless, we managed carefully and in a disciplined manner our investment projects. Absolute capex therefore remained on a stable level in quarter two versus previous year. In relation to revenues, CAPEX decreased from 4.7% to 3.9%. At the end of June, net working capital stood at 1.13 billion euros. This is a size decrease compared to the previous year despite a 20% increase of our revenues. This was only possible due to our stringent net working capital management as we were able to reduce the scope of sales by 15% from 70.5 to 59.3 days. In the current fiscal year, we expect that net working capital should be on an overall higher level again in absolute terms due to the expected sales growth. Annualized operating ROSI significantly improved by 20% from 22.2% to 26.7%. This strong improvement was supported from the before-mentioned profitability and is slightly burdened by additional M&A fixed assets that we took on board, as Jan just outlined. Let me give you a short overview about the development of our strong balance sheet KPIs as of June on chart 12. Considering the uncertain economic environment, we focus on maintaining a high level of stability and flexibility. Nevertheless, by the end of the second quarter, we had already repaid 100% of the 750 million euros bilateral credit lines that we had drawn because of Corona in the year 2020. Therefore, on a year-over-year basis, we were able to reduce our gross debt by 34% to 1.8 billion euros. Net debt slightly rose to minus 200, decreased to 202 million euros. As a consequence of those deleveraging measures, the good cash flow, And our dividend payment, which was contrary to previous year, one month in advance, our group's liquidity was only 29% lower, reaching 1.6 billion euros. The very strong resilience of our balance sheet and the good development of our business activities also continuously confirmed by the rating agencies. Moody's rates us at A2 and Standard & Poor's with A. Let me continue with our free cash flow on Sharpe 13. Free cash flow in quarter two nearly tripled and came in at 131 million euros, which is roughly 84 million euros better compared to the previous year's quarter, and 154 million euros higher than in the first quarter of this year. The good development is driven by good earnings as well as disciplined working capital management. We consider this performance as remarkable and see this as a proof that our focus and efforts regarding cash flow management are bearing fruit. Consequently, the cash conversion rate defined as the pre-cash flow before M&A divided by profit after tax nearly doubled and improved significantly from 41% last year to 77%. Let's move on to the divisional view starting with RBS on slide 14. In the second quarter of 2021, order intake of the rail division was at 737 million euros, a decrease of 7% in total and a minus of 4.7% organically year over year. Quarter over quarter, order intake was up 3% as expected. Relatively slow recovery of order intake was driven by the ongoing impact of the pandemic on the rail market overall. We still face postponements of projects, but strong order intake by our customers, as Jan pointed out, lead to a better development in future quarters. Considering the lead time for RVS that we usually have. The lion's share of the shifts currently occurred in China, high-speed trains and aftermarket, as well as metro in the APAC region overall. Europe and North America are developing on a solid basis, both in OE and the aftermarket business. Europe continues to be our strongest and most stable rail market with large orders in the second quarter of 2021. In our home region, rail operators benefit from a number of government and municipal support measures which will also have a positive impact on us. We expect RBS will gain significantly more orders in the second half of 2021. As we have already pointed out, Q1 should have been the weakest quarter in 2021 with a slight recovery in the second quarter, while half year two should see further recovery. Book-to-bill ratio in quarter two consequently came in slightly lower at 0.87 compared to 0.93 a year ago. The order book, on the other hand, increased marginally to 3.5 billion euros. Let's move to sub-15. In the second quarter of 2021, RVS recorded revenues of 849 million euros stable year-over-year. Organically, it increased by 2%, but this improvement was offset by FX headwinds. Compared with the first Q21, the division, as forecasted, achieved an increase of 5%. As mentioned before, we strongly believe that the first Q21 was the weakest for RBS, followed by a better Q2 and further improvements in Q3 and Q4. RBS recorded stable revenues for OE and aftermarket business in the second quarter of 2021, year after year. The driver for this development was Europe, which grew at double-digit rates in both OE and aftermarket. North America and APEC, on the other hand, had to record declines. The aftermarket share of revenue was stable year over year as well as quarter over quarter at almost 45%. Nevertheless, the stretch of maintenance cycles in China also remains due to ongoing restrictions following Corona. Most operators still have a lower number of trains in service, respectively a much lower utilization since the beginning of the pandemic, and therefore currently need less service and spare parts. The key markets are affected to different degrees, strongly depending on the respective situation. has seen a pleasing development driven as well by some catch-up effects with the year-over-year growth of 15%. Overall, this region accounted for more than 50% of RVS total revenues in the second quarter of this year. Europe is continuously our stronger region in terms of revenues. Asia, the second largest revenue contributor of RVS, is still not back to normalized levels due to the ongoing impact of the pandemic. The biggest impact came from China, where we had to record declines, especially in the high-speed and the metro sectors. The metro segments Year-over-year revenue decline in the second quarter was as large as the positive development in the first quarter. A clear sign of the lumpiness in the rail industry when it comes to quarterly figures. In North America, we see positive signs in terms of freight rail traffic and decreasing number of rail vehicles in depots. But it will take some time before this will have a positive impact on our business. Accordingly, we still have to recall declines in OE and aftermarket in the second quarter. Even though the revenue recovery in the second quarter was somewhat smaller than expected, this trend should accelerate in the second half of the year, driven by the OE business and the rather stable share of aftermarket business. The profitability of RVS decreased versus previous year's quarter, which had benefited from immediate and very effective corona countermeasures with a volume of roughly 20 million euros, as well as negative effects. Please also keep in mind that our second quarter 2020 was driven by strong pull-in effects and was profitability-wise also one of the best, or the best quarter of the year 2020. The third driver was the revenue decline in the APEC region, which is usually margin-appreciative for RVS. Based on that, EBIT of RVS came in at 156 million euros in the second quarter 2021, EBIT margin decreased from 19.9% to 18.4%. The EBITDA margin decreased from 24% to 21.8%. Compared with the first quarter of 2021, EBITDA margin improved by 10 and EBIT margin by 40 basis points. Let us continue with the development of our truck division on slide 16. Coming orders of CVS were once again outstanding, a clear highlight of our second quarter results overall. At 1.07 billion euros, the overall figure basically was tripled compared to the previous year, driven by extremely strong underlying demand. In the past quarter, demand continues to be strong across Knorr-Bremse's key regions on the back of high transport volumes and high freight rates. The demand in Europe and North America should stay strong, but it will presumably be more impacted by supply chain issues in the quarters ahead. CAC saw flat development driven by, as we told you before, for example, the China 6 regulation and therefore respective pre-buy effects. In China, demand was strong in quarter one and at the beginning of quarter two. However, both May and June volumes already slowed down. As expected, quarter one should have been the best quarter for CVS in 21. Quarter two was also very strong, but supply issues should have a greater impact on demand in the second half of the year. We expect the second half to be significantly below a half year one figure. The order book of our truck division amounted to 1.66 billion euros at the end of June, which is remarkably 88% higher year over year. The order book of CVS therefore ranges well above our pre-corona levels. As a consequence, book to bill stood at 1.22 in the past quarter. Let's move on to slide 17. CVS posted 879 million euros in revenues in the second quarter 21. Compared with last year's figures, this is an increase of 52% on an organic level, even plus 59%. CVS saw positive development in all channels, such as OE business and aftermarket business, in all three major regions, e.g. Europe, North America and APEC. The share of aftermarket sales decreased from 29% in the previous year to 25%, driven by the extraordinary growth in our eBiz. Nevertheless, in absolute numbers, aftermarket was up by 50 million euros or 31%. In the second quarter of this year, CDS achieved an EBIT of 98 million euros, which is significantly higher than a year ago. The EBIT margin, or return on sales, amounted to 11.2% compared to 3% one year ago. Besides this strong development, profitability was basically burdened by higher corona-related costs for freight and higher material costs for semiconductors. In total, these costs amounted to around 20 million euros in the past quarter. For the full year 21, we currently expect these costs to move up further. Last but not least, I would like to give you an update on our guidance. For full year 21, on group level, we confirm our guidance given in March and continue to expect revenues between 6.5 to 6.9 billion euros, an EBIT margin between 13 and 14.5 percent, as well as an EBITDA margin between 17.5 and 19 percent. Commonly, there are good reasons to reduce these bandwidths at this point of the year. However, as outlined, several uncertainties, e.g. due to corona, are still high in both business fields as well as in the respective revenue channels. Also, the experience of the development in the second half of last year teaches us rather to be cautious. We expect the following divisional full-year development in 21 compared to the prior year. For CVS, a significant revenue growth with a significant margin increase. For RVS, a slight revenue growth and margins almost stable compared to last year's levels. With this, I hand over back to Jan.

Let's move to slide 19 of the presentation, and as mentioned at the start of the presentation already, we will conduct a Capital Markets Day at the end of the year to give you an update on our strategy, our divisional priorities, and a deep dive of our value drivers. I cordially invite you all, also on behalf of my colleagues on the Executive Board, to this event on the 29th of November. In which format this event will be held, we will decide in the next few weeks. Hope for a physical exchange, but have to follow the Corona situation very closely. Health and safety remain key priorities for Knorr Bremsen. Either way, it will be possible for you to participate virtually. All look forward Let's conclude our presentation on page 20. Q2 2021 was overall a solid quarter. We achieved these good results under ongoing challenging conditions. We would like to take this opportunity to thank our employees for their contributions. Their hard work has paid off. We will continue to need a motivated, hard-working team in the coming months to master all the other challenges that lie ahead. I look forward to that. This year, and maybe even beyond, we will still be faced with a pandemic, and as a consequence, we also assume that the tense supply situation will continue to accompany the truck division for some time. Here, Knoll-Bremse feels strongly positioned and are ready to react quickly to all market conditions. They also benefit from having two divisions that are active in businesses with different economic cycles. CVS has demonstrated its robustness and strength with continuous market outperformance and well-managed business operations despite headwinds from the supply side. In addition, underlying demand remains very strong. RVS is right now impacted more by Corona, especially by weaker market conditions. The market trends of green mobility and urbanization are fully intact. With that, I'll turn the call back to the operator to begin with the Q&A session. Thank you.

Dear ladies and gentlemen, we will now begin our question and answer session. If you have a question for our speakers, please dial 01 on your telephone keypad now to enter the queue. You can ask a question. If you find a question and it requires a turn to speak, you can dial 02 to cancel your question. If you are using speaker equipment today, please lift the handset before making your selection. One moment please for the first question. And the first question, regular of the bank. Your line is now open, sir. Please go ahead.

Hi, good afternoon, everyone. Thank you for taking my question. Just one thing, and I'm not reading too much into this. You talked about last time sort of seeing a recovery in sort of ridership levels. I think you gave the figure sort of 2023, but you sort of, I think the message here is things remain more uncertain. Is that sort of now a shift in sort of looking at things a bit more bearish or negatively on sort of rail ridership globally or hasn't really changed?

Yeah, thank you very much for this question, which is one important one since it drives and determines to some extent what happens in the aftermarket. So the picture there is quite different. If you look at, for example, France, their ridership is already back to normal. If you look at other countries like, for example, and I'm currently looking, Germany, we have minus 10% right now. In the UK, for example, the levels are more around minus 50%. So that tells you, that the situation is very, very different in the different countries, very much dependent on how the COVID pandemic develops and unfolds. And, yeah, that's the current situation. And, you know, at the end of the day, that's something that pretty much determines how ridership in the future is going to look like. Obviously, vaccinations, they also play a role. So that's the overall picture that we're seeing here.

Okay, so you're not necessarily... Your view hasn't sort of changed on that in terms of since you last came, in terms of you're seeing things to be stretched out in terms of recovery. You're sort of seeing that change over the last few months.

Yeah, we said that things might take a little bit longer to recover. We're seeing countries that are faster now in terms of their recovery, and that's just... mentioned as one example, France, but also Germany, where it's pretty close to pre-corona situation, but other countries like the United States, by the way, another one, minus 15, so their recovery went quite strong. UK is a little bit lagging behind, so I I would say things are moving towards pre-COVID levels with some, let's say, low-degree two-digit numbers below pre-COVID time.

Thank you. And then just sort of staying on the topic of rail for my second question, looking into sort of China and sort of this sort of competitive dynamics there, How are you sort of seeing that both again on the high speed in the metro and how are you sort of seeing yourself placed for that sort of going forward?

Yeah, if you look at China and our business in China, it should be noted that our business in China has moved in the last couple of years already from a very much high speed driven kind of market participation into something that's pretty much leaning towards the metro business. So if you look at high speed, our current percentage of business is more in the range of a little bit more than a low single digit number. So to speak, metro is already in the range of roughly 40% and aftermarket 40%. So it means that a very strong part is really driven by a quite robust aftermarket business, and Metro, as we all know, is also a business that's pretty much decided on by a provincial government, and decentralized decision-making is an important part there. So that's kind of the structure that we have in our Chinese business at this point in time.

Perfect. Thank you very much.

The next question received is from Akash Gupta of JP Morgan. The line is now open, sir. Please go ahead.

Yes. Hi. Good afternoon, everybody. I have two questions as well. The first one is on RAINN, and we saw first half of the BINOS 0.8 case, and I guess you are guiding for some recovery in the second half. And do you think we should be able to finish the year with one times book to bill or giving some push out in China and giving some travel restriction there and indecently because of COVID outbreak? Do you think there is any risk that this book to bill might come down below one times for rail business for the year?

Thank you, Akash. Frank speaking. Take your question. We do strongly believe at this point in time that we have good chances to reach a book-to-bill that is on the level of one. This is what we are of course currently targeting and we should, as we outlined already in a qualitative manner, we should see good order intakes in the second half of the year, significantly above the levels of the very first half of this year. And with increased revenues, we should be able to come to that level for the full year of the book-to-fill you were asking. So it was based on my question. My answer was based on that question, full year of book-to-fill above one.

Thank you. And my second question is on second half margins versus first half margins. If I look at last four years, then on an average, second half margins are around about 90 to 100 basis points higher than first half. And I don't know whether there is any seasonality there. But looking at this year and given these raw material headwinds that started coming in in Q2 and might be lasting in second half, can you comment on second half margin improvement versus first half? Could it be possible or not? we are more likely to see stable development on profitability level. Thank you.

Yeah, Akash, thank you. I mean, you're mentioning already the right point. I think in this year, 2021, we have slightly different situation given explicitly the topic that you mentioned. We do think that we will see uncertainties on the semiconductor side influencing our revenues on the CVS side in the second half of the year, which would mean that we can't achieve the operating leverage that we had in the first half of the year. So due to that effect alone, we see a slight pressure on the martens on the truck side And the second point is also that those special costs that I referred to, like increased freight costs as well as material costs for semiconductors that we, to a large extent at this point in time, purchase from brokers should also be higher in the second half of the year, as they basically only occurred in the second quarter, in the first half year. So it should be higher in the second as well. And then you also have to see that, especially the second quarter in 2021, you were asking only about 2021. So those two major aspects, I would say, are the driving forces behind the situation that we see a rather lower margin on the second half of the year from today's perspective. Thank you.

You're welcome, Akash.

The next question received is from Lucy Carrier of Morgan Stanley. Your line is now open, madam. Please go ahead.

Thank you, Dustin, gentlemen, and thanks for taking my question. I have two questions. I will go one at a time. The first one is, to some extent, a bit of a follow-up on Akash's question, but maybe in slightly more general terms. When you think currently about the dynamic in your backlog, so kind of what has been, you know, executed from now, how do you think in terms of the balance of raw materials, supply chain constraints, potential delays that you could see maybe in CBS if supply chain constraints or kind of continuing? Especially, and I guess my question brings us a little bit more as we go into 2022, How do you assess the quality of the backlog versus maybe what you have seen the previous year?

So, I think first statement is, and then Frank might want to add to that, is that in our outlook, we have a very balanced view on opportunities and risks, and these risks also contain the quality of backlog. let's say, supply chain challenges that we might or that we will continue to face in the second half of the year. And therefore, this commitment and the clear view that we stick with our guidance here contains both elements, the opportunity and the risk side thereof. Talking about 2022, I think it's kind of common sense in the automotive market as well as in the CVS market worldwide that the semiconductor shortages will probably continue to accompany us for the next couple of months and probably even beyond the end of this current calendar and fiscal year because the capacities on the semiconductor side cannot quickly be updated and increased on the supply side, and therefore we'll have to live with shortages in the medium term.

And may I continue? Basically, we are not seeing a change of the underlying demand that is out there on the truck side. that the market is intact and that basically Europe will grow when it comes to two world levels of 2022. From a TCR point of view, North America should be able to grow. We think Japan should be able to grow. India should be able to grow. and the only region that potentially is supposed to be going down even slightly further is China, as we discussed already also quite several times. We do think that the book-to-bill ratio that we would achieve on the CBS side should be significantly above one, but below the levels that we saw in the second quarter, So that overall gives us quite confidence that the major market growth is intact. Needless to say, we do somehow assume that some of the orders that we saw and see in the year 21 already might be some safeguarding, some pull ahead orders from some of our customers in order to be well stocked, so to say. but the general trend we think is very healthy.

Thank you. I just can have a quick follow-up on the battery quality. In the obvious size and in regards to the mix, how do you see the mix evolving versus the previous year? Because I seem to share the sense that you expect Europe to continue to be growing much faster from the mix and I'm just, you know, curious about what's the potential impact around profitability level.

If you look at the TBRs, and I assume that this is the rationale behind your question, let me quickly grab Lucy, were you asking in regards to CDS or to RAIL?

No, to the RAIL side, on the RAIL side. Apologies, I wasn't clear.

Lucy, look, the thing is that, I mean, we have outlined, so to say, that currently we see rather stronger, in relation to an original perspective, rather stronger growth rates in the European business than on the APEC business, as we just presented, and given that, so to say, we do see that on the order book side, there is a slight positive up a trend for the European share. We do know that they also said that the APEC business is basically aggressive, but it's not that dramatically, so to say, that you would have to have for future years out of our existing order book a significant fear out of that. But we see the shift towards Europe, yes. And yes, the Asian Pacific business is rather effective compared to the European one.

Maybe just one addition going forward. We have to also keep in mind that currently the aftermarket business is pretty much on the right side affected by the COVID pandemic since ridership is still affected despite the recovery that I was just talking about. and therefore maintenance cycles are stretched and overall train utilization is lower. So this aftermarket business is therefore a little bit drawn back in terms of the underlying and with COVID disappearing that should also make its way out of all of the numbers and patterns. Obviously depends on the way how the pandemic evolves.

Thank you very much. My second question was more related to a comment I think you maybe have made this morning during the press call regarding the M&A strategy and saying that in the future you will be more prudent around this M&A strategy. Maybe it's a bit semantic, but are you able to kind of explain, you know, precisely what you mean by a bit more cautious?

you know, at the end of the day, I would like to remind again that, as we all know, we put in the past and we will put in the future very strict KPIs to any M&A activity that will execute and this is around value creation. So it needs to create any kind of activity in that regard needs to create value for our shareholders and for the company as such and therefore this is the major point why we also refrained from the opportunity that we have been evaluating in the recent past because it didn't meet our requirements as far as value creation is concerned. going forward and EVAC is probably a very good example of what we have in mind as the first priorities for M&A, which is acquiring companies that have a close affinity to our current business and add value in terms of high margin, a strong aftermarket business component and kind of a sticky business that really you know, fits well with our business model. So that's obviously our first priority. And, you know, we will all obviously look for opportunities that present themselves, but always under this kind of KPI precondition that opportunities would have to meet in order to be seriously considered formalized.

Thank you very much.

Good afternoon.

Thank you. Three areas, pricing, productivity and a follow-up on M&A. Could you just give us a sense of to what extent you're able to compensate for the pressures on the cost side on the various issues you've highlighted with better pricing either around OE in CVS and RVS or particularly in aftermarket? And also, given the pressures that we've discussed around CENIs and logistics and also more materials in many areas, to what extent are you able to adjust or accelerate productivity actions to further compensate? It's always historically been a very strong point of the company. So that's those two. And then on M&A, a couple of things. Where are you on the arbitration processes with Bosch and reaching an agreement on the purchase of the minorities that are outstanding, which I think you now have an obligation to purchase? and what is the pipeline for M&A looking like alongside the recent deal that you've announced? Thank you very much. Okay.

Yeah, thank you, William. Let me start with the first question. Yes, you're right. We have currently certain issues, and basically one is the high trade costs, that we are having which is also a headline consisting of additional freight costs to say like container freight, etc., some coming out of kind of uncoordinated processes in these semiconductor times like special air freight and stuff like that. you have certain inefficiency as the next topic of course increase in running the plants. You can't always predict when the respective shifts should happen and whether they can be happening on time. Sometimes you have to run extra shifts over the weekends on a Saturday and Sunday with some additions then to the salaries. to mention three here, and the other is raw material. That we start from the back. Raw material, as Jan first outlined, we do have, unfortunately, good price clauses basically in our contracts with the customers that allow us to basically spill over the respective cost increases that we see in our profit and loss. towards the customers. This sometimes has, it's called sliding clauses until a certain threshold is reached for several weeks or sometimes several months. You have to, of course, be sitting in your account and this is a rather minor amount that we are facing this year, really minor ones. The bigger one is the freight cost and the additional cost for the semiconductors and there the measures are based, so the countermeasures on one side would be the glide forces that would allow us to spill the stuff over in regards to raw material. For the other cost we are discussing with our customers in order to that the customers also pay their fair share. Those negotiations are running. We have seen the first results already in the second quarter. In the last month of June, we already got the first reimbursement, but we expect more to come and, of course, also more costs to come. And as I said, it's maybe from customer to customer different whether the one assumes a fair share to be 50%, the other would say maybe 40, 60. We have a certain assumption for our full year and we are striving very, very hard with our procurement and sales department in order to reduce on the one hand side the cost for the purchasing colleagues and on the other hand, to get more reimbursements in on the customer side. That's, I think, one important thing. Nevertheless, whatever is then met in our books at the end of the day, in order to compensate for that, we are running additional productivity programs on the one hand side, on the more production-oriented areas as well as on administrative areas in order to best possible compensate for all those issues that we are having. And as you rightfully said, the cost discipline and the running these kinds of cost measures is one of the strengths of Knorr Bremsen and this is what we are currently doing. Can we offset everything? I don't believe so. There will be a net amount at the end of the full year 2021 that we will be having in our books. That is what we currently assume, and that's what's baked in our guidance, of course, already. Second question is in regards to Bosch, and the fact is, that we have not reached an agreement. You maybe know from our statements in March that we had to get into talks with Bosch in order to find a solution and the fact is that we have not finalized, so to say, with a positive ending these talks. So there is a second arbitration proceeding that was just started in July in regards to the 379 million euro, which we have in our books as a liability.

Thank you very much. And the pipeline of additional deals, either in CVS or RVS, a feel for how you're developing the bolt-on strategy?

Yeah, what we're currently having in our pipeline is indeed a target that would exactly fit into what you just called bolt-on strategy. So that's what we're primarily currently looking at.

Okay, thank you. Sorry, one final follow-up which relates to China RVS. Can you just, sorry to come back to this, can you just share your thinking on the development of revenues for RVS China in H2 around metro, high-speed and aftermarket?

Yeah, thanks for the question. Obviously, CJ is one. We do, from today's point of view, rather think that the revenue development half year one to half year two is somehow on a stable basis. This is what we currently anticipate. And we also do think that this is also true for the region in regards to profitability, so no change in profitability for the region, but somehow stable revenues half year one compared to half year two.

Thank you very much for your time. Very helpful. Thank you. You're welcome.

The next question receives it from Alfred Glaser of Auto BSS. The line is now open. Please go ahead, sir.

Yes, hello. Thank you for taking my question. I got two as well. My first one is on the truck division CVS. Could you explain a bit more what you expect in terms of revenues in the second half of the year compared to the second half of last year? What are the different factors and what kind of growth rate would come out of this? And I will ask my second question afterwards, please.

Thanks Alfred. I think our current plan is to at least somehow be on a similar level like we have had in quite good and progressing quarter three, quarter four of last year 2020 should be slightly excessive. And this is what we currently think with all the uncertainties that are around there in regards to the supply chain as I outlined. But you see that it's significantly lower than the first half year.

All right. And how would you see business in Europe and North America in the second half of the year compared to last year?

I would say in Europe would be roughly seeing that on similar levels roughly. North America on higher levels. Yeah, that's basically the biggest. And I mean, Asia Pacific region as well on somehow similar levels.

I think I would like to make one comment from an overall macro perspective. We see that, and you're probably all aware of that, that there was a kind of pre-buy effect in China starting with Q3 last year and extending its way into at least the beginning of Q2 this year. And we'll see the TPR in China in Q3 and Q4 coming back to normal levels, still good levels of production. In principle, as far as the demand is concerned, and then a positive market dynamics in both Europe and the United States. So that's kind of the macro picture that we have seen on the demand side. What kind of the demand can be fulfilled is obviously dependent on the semiconductor supply situation, so that we have to keep taking these two factors in principle as a multiplying effect into account.

Thank you for these additional comments. I have another question which pertains to M&A. There has been actually a bid announced on Schaltbau in the rail space. What is your take on this? Do you think the Schaltbau might have a fit with Knorr Bremse? And what do you think about the proposed price for this takeover?

As far as I understand it, in the last couple of days it has been announced that the buyer is identified and that the deal is in fact done. That's according to what I know and what we heard out of the market in the last couple of days. So that would be my take on it. I think private equities are not mistaken.

Yeah, it seems, but maybe it's not the final saying in that story.

Yeah, that's what we know about it.

All right. Thank you very much.

And the next question is from Iris saying, Your line is now open, madam. Please go ahead.

Well thank you, good afternoon everyone and thank you for taking my questions. I've got three, two are on the rail division and the third one is more a housekeeping question and I guess I will go one at a time. So my first question is your comment about still delays in large orders for rail and maybe could you give a bit more color on do you mean the slower orders more coming from the OEMs customers that you have or it's slower from the rural operators, or maybe it's because of the different geographic mix, because compared to your European OEMs customers, then you have a higher exposure to Asia-Pac, and looks like it's relatively slow in that region. I think it would be very helpful for you to give a bit more additional color, just for us to reconcile the difference, older than non-mix we are seeing from you, and versus some of your European rural OEM players.

Thank you. Right. So the large order delays that mainly come from Asia Pacific and there is order shifts on the high speed side as well as on the middle side in China as we're seeing it right now. And then another area where orders are being shifted out is India, which is obviously very strongly affected by the pandemic. So that's all pertaining to the OE side. Obviously, other shifts here and there throughout the world that are somehow in connection with COVID. When it comes to aftermarket business, that's something that is sometimes OE business if the aftermarket business goes through the OE, but it's in some cases also the end customer, meaning the rail operator that would be involved you know, directly ordering the aftermarket business and service business for that. Kind of a mixed picture there.

Understood. That's very helpful. And maybe again on the real division and on the revenue side for the four years, I appreciate that the four-year guidance hasn't been changed, but I think in early this year, the guidance or the comments for the rail division revenue growth is for it to be like higher OE growth versus a flagship aftermarket growth picture. And do you think it is still going to be the case as you see it now for the four-year? Because from what I can see of that, the OE and aftermarket development here today isn't too different with even a slightly higher decline in OE than off market?

Thank you for that question Iris. You're indeed right that in my speech just some 30 minutes ago I did give you a qualitative picture of how we see the reminder of the year or the full year and this differs from what we have told you in March as we know it better now we're some four months more into the year and we said for rail so far that we expect solid growth that's what we said in March solid growth and only slight margin improvements And now we rather think about a slight growth, which is 0 to 4 point something percent, and only stable, rather stable, almost stable margins. So this is a changed situation that we think, as Jan also pointed out in his speech, that we see the recovery on the China side slower than initially expected. But at the same time, what I also did mention, we changed the forecast, so to say, the qualitative guidance for CVS upwards. We talked about solid growth and solid margin improvement, and now we're talking about significant growth and significant margin improvement, which is, according to our definition, well above 10%. And on the margin side, it means more than 1.5 percentage points of profitability increase.

Thank you for the call. It's very helpful. And my last question is on the ERP system, because I recall that there has been an ongoing, long ongoing program. And can you give us an update on how is it going and when it's going to be finished?

Yeah, thank you. Thanks for such a question as well. It's running well, I would say. We have some 10 months to go until Easter of 2022. We will be going live. This plan has not been changed over the last 14 months that I'm now with the company. So it's really running well. The colleagues at Snowbanks are doing a good job. We are in a budget with our spending and time and quality, I would say, and we have chosen due to the migration efforts the Easter weekend of 2022 always to have the go-live.

Okay, great. Thank you, Mr. Weaver. Thank you.

Thank you.

And the last question for today is from Alexander Hauenstein of the Z-Bank. The line is now open, so please go ahead.

Yes, hello. Thanks, Alexander Hauenstein. Two questions left from my side. First of all, with regard to your comments on the semi-influence on the first half of 2022, I mean, is this going to be read from our side as a message that 2022 consensus expectations of $1.4 billion are probably too high? I mean, how comfortable are you with this kind of consensus and what's your way of thinking? I know you're probably not getting the guidance yet, but is this a hidden message maybe that we might have to look into later? our assumptions on that front or how should we think about it. And the other question would be more general on M&A. I mean, based on your experiences during the Hela process, what are your key takeaways and learnings for your future M&A plans here which you could share with us, please? Thank you.

So let me start maybe with the first part of your question. I'm not 100% sure whether I got the message completely right. Let me try and then you tell me whether I'm totally mistaken. My, let's say, indications in regards to the semiconductor situation that this will linger on somehow, it might also linger on towards 2022 and the book-to-bill situation I described somehow. and the TPRs that I mentioned as to be expected, not in any kind of meaning had the intention somehow to, so to say, adjust your estimates for the year 2022. Not at all. Not at all. No. Not at all. Okay.

Yeah, this was exactly the question. This was kind of a hidden link to getting people to rethink about that. It seems not to be the case.

Thank you. Thank you as well.

The second question is confirmed. Let me comment on this. I think the key learning for us is that we need to communicate and explain our M&A strategy and also maybe our strategy overall better to the capital market. Our approach here has been always a value-based M&A strategy, a value-generating-based M&A strategy, and has also in this process that you're referring to been always a value-based M&A strategy and evaluation. And that's why at the end of the day, having first assumed value generation in this particular opportunity, refrained from further pursuing it because it did not meet our expectations in that regard. And therefore, we are going to invite you to this Capital Market Day on the 29th of November in order to explain to the capital markets and the community our M&A strategy and our strategy in general in a greater level of detail. And of course, on the way there, we'll continue to communicate to the financial community in order to make it ongoingly clear how we specifically move. And that's, I think, the most important learning that you've been asking about.

Okay. Thanks a lot. Looking forward to the event. Thanks.

Hey, so thank you very much for all your questions. We hope you have a lovely summertime and looking very much forward to talking to you thereafter. So have a nice weekend and thanks and bye-bye.

Thank you. Bye-bye. Bye-bye.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.