Knorr-Bremse AG

Dear ladies and gentlemen, welcome to Knorp Wembley full year and Q4 2021 telephone conference with CEO Dr. Jan Maastricht and CFO Frank Weber. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulties during the conference, Please press star key followed by the zero on the telephone for operator assistance. May I now hand you over to Andreas Spitzer, Head of Investor Relations, to lead you through this conference. Please go ahead.

Thank you, operator. Good afternoon as well as good morning, ladies and gentlemen. My name is Andreas Spitzer, Head of Investor Relations of Knobremse AG. I want to welcome you to Knobremse's conference call for the preliminary results of Julia 2021. Today, Dr. Jan Rosig, our CEO, and Frank-Marcus Weber, our CFO, will present the results of Knorr-Bremse followed by a Q&A session. The conference call will be recorded and is available on our homepage, www.knorr-bremse.com, in the Investigation section. Here you can find today's presentation and later a transcript of the call. It is now my pleasure to hand over to Dr. Rosig. Please go ahead.

Thank you, Andreas, and welcome, everybody, and thanks for joining us today. As usual, I will start with an overview about the highlights before Frank dives into the details in our Outlook for 2022, followed by a Q&A session. 2021 was a turbulent year, full of challenges due to the pandemic, but thanks to the outstanding execution of the entire Knorr Bremse team, we mastered it very well. We delivered good profitability and improved all financial KPIs significantly, not only in the past quarter. In full year 2021, we generated revenues of 6.7 billion euros, up 9% and an operating EBIT margin of 13.6%, 40 basis points higher year over year. With these results, we fully achieved our fiscal year 2021 guidance. Most importantly, our order book is at record level and underlines the strong market fundamentals in the rail and truck industry. CVS was the key driver of 2021, with a revenue increase of 20% and EBIT margin improvement by 240 base points, despite the challenging supply situation in the truck industry. RVS generated flat revenues at an EBIT margin of 18.1%, slightly above expectations after another challenging year for the rail industry with project postponements. In Q4, business activity clearly improved as promised with a very strong order intake following a book to bill ratio of 1.49. This results in a book to bill ratio of 1.05 for the full year. In 2021, On the basis of unaudited and preliminary numbers, we have reached the important goal of achieving carbon neutrality at Knorr-Bremse sites thanks to our own climate action measures and supported by high-quality green energy certificates. We are also fully on track to reach another important environmental goal of halving our CO2 emissions by 2030. We at Knorr-Bremse aim to use all possible levers to contribute to decarbonization, above all with our ambitious environmental efforts and our product portfolio, but also by tying our goals and efforts to financial commitments. So we adapted ESG targets in the short-term incentives of the management, human remunerations from 2022 onwards, and just recently issued an ESG syndicated loan tied to our sustainability rating. Let's move now to chart number three. As mentioned, we have fully achieved our fiscal year 21 guidance. Revenues of 6.7 billion euros are within the range and profitability with 13.6 is even slightly above our target. Over and above that, two important pillars of our equity story could be proven again in fiscal year 21. We grew faster than the markets and profitability showed a higher level of resilience. The high focus on cash and cash conversion rate, as mentioned, has paid off as well. We achieved a strong free cash flow of 600 million euros and a very solid cash conversion rate of 92%. In terms of corporate governance, we further shortened reporting timelines and managed to publish the preliminary figures eight days earlier this year. Increased EPS and stable ROCE at stolid level underline Knorr Bremses' superior business performance as well. Let me continue with chart 4 and the highlights of our rail division in 2021. As rolled out at the capital market stage three months ago, Knorr Bremses' strategic path consists of our traditional business and the expansion in new growth markets. Our operational highlights are a clear proof of this strategy. In 2021, RVS won major international contracts with all large OEMs around the world. Besides many others, I would like to highlight the large metro contract with Stadler in Berlin and the major Citalis equipment contract with Alscom. Both are long-standing customers of our rail division and their awards are a clear sign of continuation of our strong relationships. With the exposition of EVAC in June 2021, we expanded into the attractive market segment sanitary systems of trains and enhanced our position as a global system provider in rolling stock. Also in the area of new growth markets, we can repost progress. We won our first contract in the area of digitalization such as a cooperation agreement with Deutsche Bahn for sharing data from train operators and a data analytics contract with Siemens for remote condition monitoring of the air conditioning system of regional trains in the UK. Our partnerships with the major global OEMs are better than ever, not least due to the high innovation standards that Knorr-Brenzl provides. We at Knorr-Bremse aim for new sustainable solutions and digitalization is becoming increasingly important. Therefore, we are expanding our R&D activities, including our involvement in startups like Railnova. This company is the leading supplier of railway telematics solutions and maintenance workflow software to the railway industry. Digitalization in the rail freight business also offers great potential for us. I will come to this at a later point again. Let me proceed to chart 5, with the highlights of CDS, which follows the same approach of traditional business and the expansion in new growth markets. Our efforts in 2021 overall focused on enlarging our positions in e-mobility and automated driving. In order to meet the strong demand in China, the truck division expanded manufacturing capacities there. As market leader, we continue the strategic operations on automated manual transmission, advanced driver assistance, and highly automated driving with Dongfang. With a global scalable brake control system, we have created a next generation technology and a strong, flexible platform for our customers also laying the groundwork for automated driving. In April, 2021, we signed a new major supply contract worth approximately 1 billion euros with one of the largest European OEMs. Among the extension to cover serial deliveries of current braking and air treatment systems, also a new supply contract providing GSBC as well as the global scalable air treatment system. In terms of new business, we won the first big contract with our electric power steering solution for Knorr Bremse. I will elaborate on this topic later. To drive e-mobility, we founded the e-cubator to bundle know-how of 60 specialists last year. In this context, I would like to mention the successful launch of our e-compressor rotary VW. It is scalable to variable e-truck air requirements and has taken a market leader position within a short period of time with several business awards won so far. This technology will continue to strongly support our content per vehicle growth. In both divisions, we are pioneers in the respective megatrends and also like to engage with young companies and startups to enter new business fields. In 2021, we invested in the startup AutoBrains, which supplies video perception technology for realizing systems solutions for advanced driver assistance and automated driving. Let me continue with an overview of the markets on chart six. The global rail market was clearly affected by COVID, which was mirrored by less rail traffic in 2021. Nevertheless, general market characteristics are fully intact and market drivers long-term are unchanged. The biggest rail market for RDS Europe remains to be a strong growth driver now and in the future, based on our strong market share, especially in brake systems. The ongoing low ridership levels around the world burden the overall dynamics in the OE and aftermarket business, which is the reason for ongoing postponements of projects. Throughout the current year, we expect a sequential recovery demand after two quite difficult years which should lead to a book-to-bill ratio of above 1 for RBS in fiscal year 2022. The rail market is increasingly affected by supply issues, cost headwinds from components and raw material price increases this year compared to last year. On the truck side, underlying demand in Europe and North America currently is strong and utilization rates of trucks remain on high levels, due to the high global freight and transportation needs. So far, the CDS team has well managed the crisis. Nevertheless, the situation remains tense for semiconductors, components, raw materials, and in the area of logistics. In addition, we are feeling the challenges of general inflation. Several production costs touched and planned shutdowns from OEMs caused by supply issues negatively affected truck production rates in Q4. The Chinese truck market, as expected, remains on low volumes since the introduction of China 6 in July. This is also not expected to recover anytime soon. In the coming quarters ahead, we expect that the global demand for trucks will continue to be higher than supply for the industry. Therefore, the development of the global truck production rate until year-end 2022 will depend heavily on the development on the supply side. In general, however, we expect a positive trend in Europe and North America. In China, however, the truck production is expected to be lower in 2022 versus 2021. But Knorr-Brenner should be able to outperform this development again. On chart seven, I would like to share our confidence for a solid development in the rail industry in 2022. As mentioned, rail was hit hard by the pandemic so far, which is also visible in the order books of the major European OEMs. Please keep in mind that RVS generated roughly 50% of its revenues in Europe. Shortly before the outbreak of the pandemic, the order backlog of our biggest customers in Europe amounted to around 100 billion euros. In the first year of the pandemic, this backlog has decreased only slightly. No cancellations and a clear positive sign from the rail operators for the long-term demand for train capacity. Then there was a significant recovery over the last year. Our customers' order backlogs rose to new highs. Please note that there are usually a 9-18 month free time between our customers and us. Accordingly, we expect our order intake to develop well in the further course of 2022. With this, I would like to hand over to my colleague, Frank Weber.

Thank you, Jan, and welcome everybody from my side as well. Let us get into the numbers for the full year 2021 before we look into quarter four in more detail later on. The performance and resilience of Nordremse in 2021 in such a difficult economic environment confirmed the special robustness of both of our businesses once again. Nevertheless, Knorr Bremse was not fully immune to some negative impacts caused by the pandemic, even though to a significantly lesser account than others, and ended the year with overall good figures. Order intake was up by 13% to 7.3 billion euros. The order book also grew once again by 12% to now new record levels of almost 5.6 billion euros and the book-to-bill ratio of 1.09, a more than solid basis for the expected development this year and our future growth path. Group operating EBIT margin could be improved by 40 basis points to 13.6%. This strong development of profitability was driven by efficient cost measures and the strong business performance in CVS and RBS. High focus on cash preservation measures led to a strong free cash flow of 600 million euros and the cash conversion rate of 92%. Let me give you a short overview about the development of Nordrems' balance sheet KPIs, the backbone of our superior financial profiles on chart 9. Considering the uncertain economic development last year, it was important for us to maintain a high level of stability and flexibility in financial terms. While at the same time, we deleveraged the company from higher levels driven by COVID, end of 2021, our gross debt to EBITDA reached a ratio of 1.15 and our net debt to EBITDA of minus 0.09. In all our efforts, we try to maintain a healthy level of equity, which finished the year with 2.43 billion euros and represents a strongly increased equity ratio of roughly 34%. The beginning of the pandemic in 2020, we drew credit lines of 750 million euros, which we fully repaid by the end of the first half of 2021 already. Additionally, we paid back a bond of 500 million euros in December 21st. Therefore, we were able to reduce our gross debt by 38% to below €1.4 billion. Liquidity reached a level of almost €1.5 billion after more than €2.3 billion a year earlier due to the before-mentioned deleveraging measures. The strong resilience of our balance sheet and the good development of business activities are also confirmed by rating agencies. Moody's rates as A2 and Standard & Poor's with A. Let's continue on chart 10. Nordremse's high profitability on invested capital, strong working capital management, and prudent investments resulted again in an outstanding return on capital employed of 25%. It was almost stable versus prior year, supported by and due to increased EBIT, which mitigated a slightly increased working capital, which was basically driven by revenue increase and FX effect. Earnings per share could be strongly improved by 26% year over year, underlining the high quality of our business and the success of our measures to fight the headwinds also below the line, like financial results and tax results improvements. Therefore, in combination with our dividend policy of 40-50% of net income, creation of shareholder values through high return on invested capital and earnings per share is key to us. Further details on our dividend proposal for 2021 will be announced with the release of our annual report at the end of March. Let's move to chart 11. On operating level, EBIT could be improved by 40 basis points to 13.6% and operating EBITDA remained almost stable at 17.9%. We consider this as a good development despite the headwinds from the pandemic through net extra costs of roughly 65 million euros in CVS alone in 2021 and a slightly decreased aftermarket share. On a reported basis, Group EBIT amounted even higher to 920 million euros at a margin of 13.7%. Please keep in mind that this includes negative one-time expenses for severance payments at TIPE and three locations in North America to Mexico in the amount of 11 billion euros. Both topics concern our RBS division. On the other hand, the sale of real estate in Berlin generated a positive book gain of 19 million euros. Let's move to chart 12, our stringent efforts and strong focus on free cash flow payoff. Free cash flow in full year 2021 amounted to 600 million euros at a cash conversion rate of 92%, which is on top level in the industry. Free cash flow in 2019 and 2020 were extremely strong due to very focused capital spending in the crisis and, among other things, strong COVID-related cash preservation measures. Levels closer or above 200 are not sustainable due to the investment phase we are currently in. Going forward, we will continue our efforts for future growth and respectively will increase CapEx and R&D. But we will continue to keep a close eye on cash flow and steer for a cash conversion rate of 80 to 90%. So you can see my promise to focus more on free cash flow paid off for the second year in a row. Let me continue on chart 13. Technological leadership is the key to our business success, which is why we continue to invest into future technologies in the past quarter. CapEx in 2021 amounted to 376 million euros, which is 5.6% of revenues and therefore stable versus prior year. Quarter 4 figures of 163 million euros were higher, mainly driven by investments in IT and capacity. Going forward we are fully committed to investing 5-6% of our revenues on an annual basis. R&D spending in relative terms remains stable at 6.4% year over year and in absolute figures slightly increased to 431 million euros in line with our slightly increased target ratio of 6-7% of revenues. Networking capital at the end of December. stood at €876 million versus €746 million at the end of 2020, also in line with our targets and driven by revenue growth, M&A and FX effects. Let's move to chart 14. We want to shape the future for future for sustainable transportation and are 100% committed to reduce our CO2 emissions aspirationally as good as we can. Our ambitious climate targets have reached one extremely important milestone, the carbon neutrality at Knorr Bremse sites globally as of the year end 2021, on the basis of our preliminary unaudited figures. We are happy to have achieved this important step but are not planning to lean back. We are fully on track with our goal to halfen our CO2 emissions by 2030 and we are able to reduce already more than 65% in 2021 versus 2018. Some products and the share of pre-manufactured products should also support the spread of the circular economy. Environmental leadership and further decarbonization is crucial to Knorr Bremse's long-term strategy. We want to further improve our reporting in this aspect as well. In our sustainability report, which will be published in May, we will report scope 3 figures for the first time as well as TCFD qualitatively. Knorr Bremse recruits and develops a diverse workforce and supports their careers with resources such as the Knorr Bremse's women's associations, women at KB, and trainings designed to develop leadership opportunities. We are committed to hire, develop, and promote and ensure that our employees worldwide represent diversity in the global community. In 2021, Knoll-Bremse increased the share of women in leading positions from 13% to 14%, and the overall share of women at KB from below to even above 20%. In order to let our employees participate in Knorr Bremse's future success, we rolled out the Heinz Hermann Thiele Employee Share Program last year, which currently stands with a very high participation rate of 25% globally. In addition, we want to strengthen sustainability aspects in our financing as well. Just recently, we placed 750 million euros ESG-linked syndicated loan, which was closely tied to our performance in three major ESG ratings, ISS, SAM, Ubiquisam, and Sustainalytics. Let's continue with the quarterly figures on page 15. The performance in the last quarter of 2021 was remarkable. Compared to last year, order intake increased solidly by 8%, to 2.2 billion euros. Revenues were 8% higher, reaching 1.7 billion euros, while operating margins, as expected, decreased to 11.8%, driven by an unfavorable product and regional mix, as well as higher R&D expenses. In addition, we had to face higher inflation. Free cash flow was strong and reached 303 million euros in the last quarter alone. Let's continue on page 16. Compared to last year, order intake on group level increased by 8% to 2.2 billion euros in quarter 4. This strong performance was driven by RBS. The book-to-bill ratio reached 1.32 in the end. The development of the order book was again pleasing and reached a new record level of 5.6 billion euros, which represents a 12% increase compared to the previous year's quarter. This level is a strong foundation for our outlook into 2022 and our future growth. Let's continue with the quarterly top line figures on page 17. Revenues on group level increased by 8% to 1.7 billion euros. As in the previous quarters, Europe remains to be the strongest driver with an increase by roughly 12%. and generated the largest contribution of all regions with a share of 47% of all our revenues. North America also developed favorably with an increase of nearly 10%. As anticipated, the APEC region saw only a slight increase of 2.0% driven by China with minus 9%. Let me continue with the profitability development on chart 18. As already anticipated, operating EBIT decreased year-over-year by €972.1 million. The operating margin, or return on sales, decreased by 240 basis points, predominantly driven by ongoing headwinds from COVID-related costs for CVS and an unfavorable product and regional mix, especially for RBS. COVID-related cost pressure will continue to be a burden in 2022, Our clear goal is to mitigate it by our pricing power, aftermarket resilience, and other cost measures as much as possible. I will continue on chart 19 with a deeper look into RBS. After several customer-related postponements and push-outs in previous quarters, we expected and promised a strong order intake in quarter 4, and we delivered. RVS won contracts worth 1.28 billion euros, up 17% year over year and reaching a record. Book-to-bill ratio was even at 1.49 versus 1.41 in the previous quarter of 2020. Order book also rose by 4% to a record level of 3.88 billion euros by the end of December. Once again, our empirical evidence is given, rather a long-term view is important when talking about the order intake and revenue situation of our rail division. Europe and North America were the key drivers for this development, but also APEC without China contributed. China is still characterized by project delays and a slower recovery of the market, which is also expected to continue in the current quarter. We also expect an increase in all the intake of RVS and the target book-to-bill ratio of above 1 in the current fiscal year. Like last year, the development in the second half of the year should be stronger than in the first half. Let's move to chart 20. In quarter 4.21, RVS recorded revenues of 857 million euros. which is an increase of 11%. All core regions of the rail division contributed to this strong development, with Europe being the strongest driver. In terms of profitability, as anticipated, operating EBIT declined by 6% to €156 million, at a margin of 18.2% after 21.3% in the fourth quarter of 2020. Absolute operating EBITDA was flat year over year and reached 195 million euros, which resulted in a margin of 22.7%. Profitability of RVS was impacted by four factors. Change of accounting principles regarding provisions of a Norris contract, which is a one-timer and amounted to a burden of 8 million euros. The product mix. namely a higher share of non-brakes business and a lower aftermarket share in Europe. Regional mix with a lower share of the aggressive Chinese business, higher costs from inflation. Please keep in mind that we have accrued severance payments for Kipe and our U.S. freight business due to our relocation from U.S. to Mexico. Both topics amounted to 11 million euros, which are excluded on operating levels. In 2022, we expect that RVS should be able to generate more revenues in the second half of the year compared to the first half. Based on this revenue development, RVS should then also be able to show higher margins in the second half of 2022 compared to the first half. Let's continue with the truck division on slide 21. At €968 million, order intake was almost stable versus the very strong fourth quarter of 2020 and 39% higher quarter over quarter. This development was very pleasing and mirrors the still strong underlying demand in the market. Europe and North America continue to see high market demand due to increased freight rates and shortages in transport capacity resulting in truck operators both replacing old trucks and expanding their fleets. The demand should stay strong for some time. In APEC, the development of order intake remains on low levels driven by China, after implementation of the new emission standard China 6 in July 2021. In terms of order intake in 2022, we expect half year 2 as well to be stronger than half year 1. The order book of our truck division amounted to 1.7 billion euros at the end of 21, which is remarkably 34% higher year over year. The order book level of CVS reached new record levels. Book-to-bill was 1.15 in the fourth quarter. Let's move on to slide 22. CVS posted 841 million euros in revenues in 2014. As of last year's figure, this is an increase of 6%. In Europe and North America, revenues developed positively despite COVID-related supply issues which impacted the whole truck industry in both regions. Revenues in the APEC region declined year-over-year. The share of aftermarket revenues increased in all major regions on a year-over-year and quarter-over-quarter basis. In quarter 4, CVS achieved operating EBIT of 63 million euros, which is 19% lower than the same quarter in the previous year. EBIT margin amounted to 7.4% compared to 9.7 a year ago. Operating EBITDA developed similarly to operating EBIT, reaching 101 million euros in the margin of 12%. We consider this as solid development, keeping in mind ongoing net extra costs of around 15 million in the fourth quarter again and tough comparisons from quarter four 2020, which strongly benefited from one-off COVID savings and extraordinary China demand. Additionally, we have ramped up R&D investments towards e-mobility and highly automated driving. On the positive side, operating leverage and cost measures mitigated the negative impact by these cost topics for our truck division. In the current year, we expect CVS to post higher revenues in half-year 2 compared to half-year 1 of 2022. Net extra costs in 2022 are expected to decrease compared to 2021. Best guess would be a level of around 40 million euros. It should be rather front-end loaded. move to the potentially most interesting side for many listeners, our guidance for the year 2022. The outlook for 2022 is under the disclaimer of a somehow stable geopolitical and macroeconomic environment, no further setbacks from COVID or other exogenic shocks and stable FX rates year over year. At the same time, we expect ongoing shortages of semiconductors and bottlenecks in the supply chain for both divisions, which should be more front-end loaded in 2022 and then rather normalized. We can confirm the first indications given in November last year for 2022. We expect revenues between 6.8 to 7.2 billion euros, which suggests a growth of around 4 to 5 percent at the midpoint. The second half of the year should develop more strongly than the first half. The operating EBIT margin is expected in a range of 12.5 to 14%. In such scenarios, we expect that CVS would be able to improve its margin. The RBS development will depend on how much the second half of the year will make up for the low rail traffic at the beginning of the year and how the rail market will develop in general. Our main margin drivers for 2022 will be on the truck side, lower COVID-related net extra costs in 2021 compared to 2022. The burden should be more front-end loaded, higher R&D costs throughout the year, operating leverage driven by revenue growth, cost measures against inflation, and price increases on the OE and aftermarket business side given our strong pricing power. On the rail side, we expect cautious market outlook in China, which should have a particular impact in the first quarter driven by Chinese New Year, the Olympics and strict COVID rules with flood closures by some of our customers. In the rest of the year, the development in China might then be better, especially in the OE segment. A very positive expected growth in Europe will offset much of this margin development. Please keep in mind that the expected regional mix in 2022 should be overall margin dilutive for RBS. Inflation of the input cost will definitely be higher in 2022 compared to 2021, but we have initiated cost measures to mitigate the burden. In addition, we will work hard to increase prices for our OEE and aftermarket customers also given our pricing power that we are having. We expect a range of €560 million of free cash flow and this should be in a range of our strong 80-90% target range over the years to come. Overall, we are fully on track for our mid-term financial targets. The megatrends in both the rail and the truck segments remain strong and are the tailwind for our operational development this year and in the coming years. Thank you very much for your attention. I will hand over to Jan again.

Thanks Frank. Let's move to slide number 24. Here, digitalization in the rail industry is a big opportunity for the whole rail industry in the years to come. In Europe, for example, we see considerable additional revenue potential through the digitalization of the rail freight traffic by the introduction of the so-called digital automated coupler for the DAC if approved by government. 450 to 500,000 freight rail cars in Europe, many of them are very old, need to be equipped with a DAC. The total market volume amounts to 7 to 9 billion euros stretched over many years. This digitalization step is also a very efficient driver of decarbonization of the transportation industry in Europe as it enables the share of rail freight to increase from 18% to 30%. RVS is well positioned with its stack solution to benefit from this trend, and we are confident to catch the fair share of this additional revenue potential. Let me continue with the growth opportunity of CVS on page 25. E-mobility and automated driving are the big topics which will change the truck markets most in the next five years. We at Knorr-Brenze will be one of the most important enablers in this development. One big step on the way there is the electric power steering, which CVS is currently developing. This fully electric solution is a future-oriented key technology in the field of steering. It not only forms the basis for advanced driver assistance systems and automated driving, but also enables a reduction in fuel consumption and CO2 emissions thanks to its power on demand principle. We have just recently announced that from 2025 CVS will supply EPS systems for the entire commercial vehicle fleet of a leading global truck manufacturer with an order value of over 300 million euros. This is only the beginning. We are among the top three steering manufacturers for truck globally and we are on the way to set standards. Let me conclude with the top priorities 2022 we set for us in the management team. Quality and innovation have been the foundation of our success in the past and we will drive this USP further in order to increase market share and drive market outperformance across all regions. 2022 will remain challenging in terms of COVID but we monitor all developments intensely and will react quickly if necessary. We continue to strengthen the cornerstones of our equity story, growing stronger than both markets, profitable revenue growth, and strong free cash flow. Efficient capital allocation is important to us, and we stick to our clear M&A strategy, focusing on value creation for our shareholders. We continuously watch out for opportunities and review our own businesses to create maximum value. We want to further strengthen corporate governance at Knorr Bremse, challenge ourselves and our environment, and make our contribution to a sustainable and green economic development. On behalf of the whole management team, I would like to thank all employees, business partners, and customers for the great work in a challenging year, always having customer focus in mind. With this, I would like to thank you very much for your attention, and we will start the Q&A session now.

We will now begin the question and answer session. If you have a question for all speakers, please dial 0 and 1 on a telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question is answered before it's your turn to speak, you can dial 0 and 2 to cancel your question. If you're using speaker equipment today, please lift the handset before making your selection. One moment, please, for the first question. We have a first question. It's from Sven via UBS. The line is now open for you.

Yeah, good afternoon. Thanks for taking my question. The first one is on the margin offer for 2022. I mean, you said already what you said on revenues is quite consistent with what you said back in November, but the margin guidance isn't, at least at the low end. And I was just wondering over the last weeks what has led you to have a lower expectation here because the raw material pricing situation was already quite intense. Back in November, supply chain was intense. You were probably not expecting much of an improvement in the first half. And also, I would have also expected that, you know, in the old days of KB, that if something like that happens, you would massively intensify the cost-cutting measures and be tougher on pricing to compensate that. So I'm still a bit confused what happens here. Thank you.

Thanks, Sven, for your question. Maybe I'll start taking over. Nothing fundamentally has changed. I mean, you do actually properly reconcile that we were also quite outspoken in regards to inflationary pressure already as our capital market day. and this will come so not of a surprise at all for us to say so let me narrow it down to some points that somehow have changed or developed one thing is that our fourth quarter came inside the battle so I mean comes from back then guidance 13 to 13.5% and the midpoint of 13.25 somehow went up to roughly 13.6 which is one element but I don't want to discuss too much about technicalities but content wise let me say we just have lowered or widened the range that we initially had on our tables for the year 2022 given all the uncertainties out there. That's basically the major point. So instead of maybe going for 13% to 14% or something like that, we decided to go a little bit lower given all the uncertainties out there. And those are one thing. The question, of course, in February lies still within to what extent can you... get the price increase you intend for all e-business, especially not so much aftermarket business, but for all e-business in both divisions throughout the year, how much can you really pass over all the cost effects to the customers? That's one thing. The second thing is that in regards to the supply chain situation, the freight especially is a little bit, so to say, increased. in the CVS division and also on the rail division most recently. So we first have anticipated to get a significant tailwind out of reduced freight costs in the year 2022 compared to last year's level. This gap has lowered a little bit, so we still do see, at least in the very first half year, some maybe up to 40 million euro of freight costs. We have to remember we had 65 in the last year and on the rail side we also over the last month see increased tensions on the supply chain and the respective countermeasures that are needed there with air freight and freight additional cost as well. Maybe not to that extent, but maybe also some 20 to 30 million euro would add up there. So these two things are hopefully in the long run only temporary things as we expect them not to last on for maybe beyond 2022 in that extreme. But those are the things and also we have to say that there are signals out looking at the Chinese market for rail in the very first quarter. The metro situation and the high speed train situation that is not overly encouraging. Let me put it this way that this will come and also on the TPR side when it comes to heavy duty trucks in China. I think Volvo stated that we see it similar. Maybe only a volume of a million heavy-duty trucks will be seen in the year 2022. So those three aspects, I would say, in a nutshell, somehow led us to the situation that we widened the range and widened it on the lower side of the range.

Yeah, thank you. Thank you for that. And maybe just as a follow-up to what you said on China, your RAIL, the RWS guidance that you mentioned earlier, does not assume any major improvement in China as far as the COVID restrictions are concerned and also not really penciling in any additional RAIL stimulus that is being likely put on in the next couple of months.

Yeah, that's indeed the case. We're currently seeing that the investment pattern in China in general, as far as market is concerned, is going to stay probably on the same level for high speed as last year. So some 50 high speed trains probably going to be put into operation there. We see a reduction on the metro side, however, compared to last year. that doesn't contain any extra stimulus programs that the government in China might decide on, but which is currently not being indicated.

Okay, thank you for that. And maybe the final question is just, obviously there was a major article in the German press today about Knorr-Brenz, and I'm not going to pick on too many things out of this article yet, but I was just curious, because it was mentioned that there is quite a heavy delay on the transfer of the shares to the foundation on the one hand, and also that there would be a more central approach to running the divisions at KB in the future. It would be interesting if there's anything you can share on this.

Yeah, there is no aim to change. Let me start with the foundation first. And it's true that the shareholders and the executor of Mr. Thiele's last rule initially intended to set up the foundation by the end of 2021. Due to a variety of difficult tax and legal issues, the establishment of that foundation has been delayed. And in the ongoing review, we are currently unable to estimate exactly when the necessary approvals for the establishment of the foundation will be granted. As far as the steering of the structure and Knorr-Brenze as such is concerned, there's no intention to change the decentral profit and loss responsibilities within the company that we have today and also the regional setup. This is something where Knorr-Brenze has been successful with this kind of approach in the past for the last decades, and there is no intention to change that. Of course, we are looking at improvements in three areas that we've been laying out and talking about in the past quite extensively as well. It's on the governance side where we want to introduce common processes and professional ways of doing things. And also in areas like IT, HR, there's a common kind of way of doing things being looked at and that's what we want to implement as a group. And then we're also looking for synergies in order to do things more efficiently within the group. But as I said before, there's no intend to change the profit and loss responsibility of the division and to all the regional kind of P&L that we introduced and that we have been successfully running for a long time.

Thank you for the call, Jan, and thank you also, Frank. You're welcome, Sven.

The next question is by Visek Eta of Citi. The line is now open for you.

Thank you very much, everyone. Good afternoon. So I've got a couple of questions on pricing following up on some of the comments there. So you highlighted pricing negotiations with customers. Your backlog coverage is pretty strong given the strength of orders. So could you maybe just elaborate a bit on those negotiations with customers? And maybe could you also quantify the pricing assumptions within the revenue guidance, so what pricing contribution is embedded within that? Thank you.

So first of all, let me comment qualitatively before Frank, then we'll shed some light on more details. We are obviously in existing contracts with our customers for material, for commodities. We have surcharge mechanisms in the contracts. For other areas, we need to change contracts. We have to address our customers for example semiconductors or a major portion that we see right now in our numbers and in terms of cost inflation and logistics, there's no regulation in the contract and therefore we need to approach and we are approaching our customers with the very clear message that we need to increase our prices in order to cater for these topics. and that's done very systematically right now. You might imagine that there are ongoing and very intense discussions that we need to undertake here, but this is on the way and this is being done, and that's why Frank also said that we see that over time the effect of these negotiations will kick in, so there's kind of a delay in there.

Thanks, Sam. Vivek, I would say you should roughly assume some maybe 2% of our revenues that would be stemming from price increases all over the globe. But please keep in mind, as we have two very heterogeneous businesses, so to say, when it comes to the way of doing business, project business on the rail side and We will approach those customers completely in a different way. We have those individual projects. For some, you can do something in individual negotiations. For some, we would have the price writing clauses intact. It's globally, regionally different, and it's from customer to customer, of course, completely different. And don't assume, so to say, like you would see in some B2C businesses, I don't know, a pricing freeze starting on the 1st of February, 2% on each and everything. But to shed some light on your question, roughly that range of 2%. that we would expect, and needless to say, we have, of course, also done something already in 2021, especially looking at aftermarket, but the bigger chunk will now come also with the OE customers.

That's very helpful. Thank you. Could I just have a quick follow-up? You mentioned regional differences. I mean, could you give us any follow-up on what those regional differences are? Thank you.

Well, it depends, of course, on the respective customers that you would have in different countries. And the standards of contracts with some customers in some regions are different. In some contracts, you do have, for example, price writing clauses where you would have certain months of delay until you are able to charge several costs. to the customer for some customers. You don't have those. You initially have to go into the dialogue. So, I mean, these kinds of differences, as each and every project, especially on the rail side, a completely different one. For example, in the United States, looking at NIAP, you would basically have a large extensive automatically those price-siding clauses in trade, whereas in other regions you don't. That's an example.

And countries where a lot of the goods are imported obviously suffer more from logistics additional costs than other countries where we have direct production. So that's kind of business structure-related differences.

And not all the costs that the suppliers now would come knocking on the doors are the ones that are immediately covered in the respective contracts. Neither of our contracts with them, nor in our contracts with the customers. So it would be an individual approach and customer by customer. Understood. Thank you very much.

You're welcome, Vivek. The next question is by Akash Gupta, JP Morgan. The line is now open for you.

Yes, hi, good afternoon, everybody, and thanks for your time. And my first one is on component shortages topic. If you can provide an update on what you are seeing, particularly on the rail side. I think truck side is very well understood, and we have seen comments from some of your suppliers, but I'm more keen to know any updates you can provide on rail side where some of your customers said they are watching tight supply and whether that could be a headwind in the course of 2022.

Yeah, on the radar side, Akash, thank you for that question. We have only limited impact of the supply shortages in 2021 and almost no big impact on revenue development. In the last months, we see that the impact by supply shortages is strongly increasing. So far, we haven't seen negative consequences for our customers. These supply issues exist in the specific fields that we're seeing in the CVS arena as well. It's electronics, it's plastics, it's even sometimes small key parts that play all of a sudden a prominent role. And of course, it's an increase in commodities in pricing. So general inflation is also something that kicks into this business as well as opposed to last year. and provides a situation to be managed.

Thank you. And my second question is on CVS margin development in Q4. So if I look at your revenues, you've grown from 785 in Q3 to 814 in Q4, but the margins there were down by almost 300 basis points. I mean, you flagged 15 million of additional costs, but I suppose those costs would have been in third quarter as well. So, maybe if you can explain what was the factors behind weak margin in Q4 versus Q3, and if you look at sequentially in Q1 to Q2, what can we expect there?

Akash, thank you. Yes, we have seen, either if you look to Q4 2020, a reduction on the margin side, but also if you look to the previous quarter, a reduction on the margin side. And that is basically driven by a weaker second half of the year by a very strong reduction on the market development in China. As one thing, we have increased costs for R&D on the CVS side, as we have also outlined with the content at the CMD in detail, what we intend to do, and those are things that will come later on. Then we will harvest in revenues to come. We have an increase also on the depreciation side, also based on capital expenditures in the past, which is increasing quarter over quarter, so to say. And we have slightly negative impact also on the product mix side, and this can also happen from quarter to quarter at this point in time, I would say. Those are the major, as they end in, you have a certain also in the truck business kind of normal kind of cost seasonality that then hits the bottom line in the end that is always kind of higher overall cost in a fourth quarter of the year somehow.

Yeah, I would say

Going into the first quarter, we should be with those impacts that we just in general discussed in regards to our 22 guidance overall and the aspects that are, so to say, a burden for us going forward should not be to a large extent, change the number. We do think it should be in that range of what you have seen in the fourth quarter, being rather stable going into the new year. But it will be challenging to keep that profitability level due to the cost increases coming in and partially a time lag existing. towards the price spillover to the respective customers.

So, stable to a slight, I would say, profitability going into the first quarter.

Thank you.

The next question is by Ben Ugo, Morgan Stanley. The line is now open for you.

Good afternoon, everyone. I hope that all is well. I had a couple. First of all, I just wanted to think about the cadence of the orders coming in in RVS. I like the chart that had the sort of order backlog position over the last couple of years since COVID. And obviously, you're going to have a pretty decent sales pattern today. over the course of the year, but my question is really to do with the order intake. You said that book-to-bill is going to be above one times in RDS for the course of the year, but obviously you're going to have a fairly slow start in China. Do you expect basically to maintain one times plus over the course of the year, or is this a case of your orders are going to be slow for the first half and then really good in the second half. So that was my first question. Secondly, on the RVS margin, if we look at the margin in the fourth quarter, keeping it simple, it's come down from 21% to 18%. And you've given us a breakdown between part of it was China, part of it was aftermarket share, part of it was lower margin business or lower margin product areas. How much of that 3% is simply down to the China mix effect? Or is the majority of it due to China mix? Or are they kind of evenly split between those three buckets? Those are my two questions. Thank you.

Yeah, Ben, let me start with the first one. It's, you know, if you look at the rail business, it is generally... very difficult to predict when certain and individual orders come in. So there's a general rule of thumb to say when the order intake goes, comes in at the OE and it takes 9 to 18 months until it finds its way into the books of suppliers like Snowbranches. But that can be shorter or longer and therefore it is kind of a smearing effect. I would say across the quarters as far as order intake is concerned. And therefore, it makes only a limited sense in the rail business to look at the order intake on a quarterly basis rather than make sense to look at it, let's say, on a rolling kind of average kind of mechanisms. now looking at this the big order index that I was referring to and the increases here on the OSE side happened sometime in the second half of 2021 and just adding another 9 to 18 months to it that would then at the end of the day point at a time frame somewhere between middle of end of next year and into 2023 when this would somehow materialize. But, you know, how to predict when this exactly will be?

Understood. Just on that point, though, when you look at the tender funnel today, is that tender funnel, that order pipeline, is that still as big as it was? Is it bigger? Is it smaller? Just I'm just trying to – what I'm not worried about, but we want to make sure that we don't have an air pocket on your orders for six to nine months. I want to make sure I'm not misunderstanding.

No, no. I think, you know, the pipeline, also as far as big projects in Europe and North America is concerned, is healthy and is quite in order. So, you know, it might be that one or the other quarter is going to be slow. But then, you know, there will be other quarters like now, or quarter four, that still will fill the orders at hand again. And therefore, you know, there's no worries on our side that the market in general would not be intact. To the contrary, we're seeing encouraging signs to similar programs in the US, in North America, in Europe. The clear intention to increase the rail contribution to freight from 18% to 30% in Europe, so all of this requires investment and activities and that yields to, as we also pointed out at the capital market day, a 3% to 4% growth per annum continuously in the next years to come and we don't see any different view on the market compared to what we've been communicating by then. Understood. Thank you. Frank will comment on this.

Taking part of your question, I would say like this. First of all, the fourth quarter of 2020, if you look into the most recent years, it's been nearly the high point of profitability in rail. We had some close to 25% EBITDA margin and some 21%. But nevertheless, you are right. I just wanted to keep this in mind, so to say, for us all. To your concrete question, I would somehow say from 100%, I would say 40% is the regional mix effect driven by China, the China mix effect. Some 25%, 25, 30% is the breaks, non-breaks effect, the product mix effect. and the rest is some of several cost headwinds, like we had this provisioning, the 8 million of the provisions, we have additional costs in the system currently because we are moving the business from North America to Mexico, so we are ramping on the one side down, but still have the people on board, at the same time we are ramping the people up in Mexico, in Acuna, All in good faith with a clear net present value of this move. But temporarily we have double costs, so to say. And we have towards the year and also as Jan just outlined also, the increased trade situation and supply chain constraints and costs in that regard. So this is the third pillar with also some 30%. So 40-30-30. That's how I will somehow split up 100%.

That's very useful. Thank you very much. I'll pass it on.

Of course. Thank you.

The next question is by Gael de Pre, Deutsche Bank. The line is now open for you.

Thanks very much. Good morning. Good afternoon, everyone. First, could you give us an indication on the overall cost exposure to gas and electricity costs? Then secondly, on pricing, could you also give us some color on the price realization you had in Q4? And given that everybody is looking kind of sold out due to limited supply, do you actually see less people now bidding on the various projects than perhaps compared to pre-pandemic level? And does it fundamentally change the pricing dynamics in the marketplace, you think? Something that would make it easier really for you to push up prices even more. And certainly, given the the structural trend towards digitalization, electrification, and so on and so forth. Do you see today more or less energies between RVS and CVS than before?

Okay, let me maybe tackle your first question. So overall, if I would use the headline of energy cost, I would say Knorr Bremse is below 100 million euro. in the range of 80 to 90 million euro all in, so to say. This includes electricity, gas, oil, and that stuff, so to say. If we look at only electricity and gas, I would say it's maybe half of that. So 50 million maybe would be that range that we are having globally. So the exposure, so to say, isn't huge. I mean, every penny hurts, needless to say, but it's for 50 million euro.

Price realization is a topic that obviously we are pushing through right now very, very systematically. The obvious situation of shortages on supply and also let's say the general supply situation and inflation situation helps to put arguments together for price increases. However, as you can imagine, this is always a very intense discussion that needs to be executed in order to get to the increases. in the case of existing contracts. In other cases where there's new awards or new contracts situation is different and there we can of course right in the beginning make sure that the right cost structure is in there. Third question was considering the fact that there's a supply issue, less people bidding, we are not seeing a lessened or a lowered intensity in the market and in the competition. There is no competitor who is currently not bidding. That I wouldn't see as a situation and I think the supply situation at the end of the day is being considered by the market and also ourselves as something that will balance out after a certain period of time will be longer with us than we probably all expected but there will be a kind of a balance reached and at least in the medium to long term hard to predict when this will happen and we don't see at this point in time that any competitors have been moving out of their activities or have lowered their bidding activities. Pricing realisation and pricing dynamics, I think I alluded to that already. Digitalisation and electrification. Certainly there is common platforms, common knowledge and common kind of know-how and people profile that's being needed in Knollbremse to build up digital platforms. to make usage of data and, you know, do data analytics based on artificial intelligence. That's something where we see synergies within Knorr Bremse as a company. On the other side, obviously, there is, by the way, also, as far as Data Lake is concerned, we use a common IoT platform within Knorr Bremse. We just structured a Data Lake offering that internally that Knorr Benz is using across the board. So you see we can leverage our scale here to develop the tools for our divisions once and then use them across the board. So I would assume my judgment on this would be that we rather see more synergies here across the company than less and that's what you have been asking for.

Thank you very much. That's very helpful.

The next question is by Markzek of Stiefel. The line is now up for you.

Thank you for having me. Just another question on logistics costs. If I'm right, you said that you expect logistics costs to come down in 2022 versus 2021. Now, if I listen to what the, let's say, major logistics companies like Maersk and these we have said, they expected rate costs will actually be up this year with last year on average, even if, let's say, spot rates come down later this year. So, what makes you sure that you can dodge that development if you have lower logistics costs this year than last year? That's my first question. Thank you.

Yeah, Mark, I mean, good question and also very helpful to clarify here if there's misunderstanding in the room. I didn't talk about spot rates to come down. I said in our planning, which is, of course, based on the respective logistics streams that we would have and we would use and how we see a stable production on our side or at the supplier side, that our planning shows that overall freight costs should come down for Knorr Bremse and this is a result of multiplying the respective freight volume with the respective spot rates that we would anticipate so that's important to understand and we expect somehow that overall need to come down from 65 million freight and I include now for the sake of explanation here also some broker parts in that figure 65 million we expect that to come down maybe to levels of 40 million on the truck side whereas the freight cost should on the rail side maybe go up from this year it was rather minor so this year I mean 21 was rather minor 15 million around that should go up to maybe 30 million euro so let's say last year we had 80 million then together both divisions and next year it would be or this year it would then be rather both together 70 yeah so overall we would reduce Yeah, that overall exposure for us, but that doesn't mean that the spot rates would necessarily go down. We see them rather stable to slightly increasing spot rates. Thank you.

That's perfectly answered my question. Then another one, maybe more housekeeping, but on the digital automatic coupler, If I look this up, there's like one major project from Germany or the EU, the DAG4 EU project, and there are a couple of DAG producers listed, web techs, for example, but not you guys. Could you just give me a bit of color how far you are on this project and how you Yeah, how will you compensate for the later start than, for example, Optic and Tezos? Thank you.

Yeah, thank you very much for this question. The DAC, sort of digital coupler, is something that has not been approved as yet for Europe as a rollout, so it's something where politics are deliberating as to whether this is going to happen or not. We strongly believe that this is a real necessity in terms of making freight transport on the rail side more efficient and get this European target of moving from 18 to 30 percent Therefore, this topic is completely new for each and every market participant. There's one or the other who moved in earlier. We are on the way of developing a digital coupler for the freight industry. We'll have the first samples available during the course of this year, but at the point in time when this test started, we did not have a coupler available from Knorr Bremse. but that will happen sooner, it will happen early enough to have a product portfolio that is highly competitive in place once the rollout would start and therefore we are very confident that in case a positive decision will be taken that will be one of the important market players since they are very established in that industry, they have a long-term experience in the rail industry and we have all the basics in there to be successful in the market as well.

Thank you.

The next question is by Sven via UBS. The line is now open for you.

Yes, one follow-up question, please, and that was on the order intake question from Ben earlier. Because when you look at last year, obviously, you had an extreme skew to Q4, right? More than ever, basically. And you also referred to the OEM orders, which I think have already been quite good before the second half of last year. And I was just wondering if I could get a guidance for Q1 order intake for rail out of you, basically, because last year it was a very low number. And with all the things you mentioned, should we still expect that number to be down or how should we think about the Q1 orders given that the quarter is halfway through?

Frank will go to the numbers quickly, but what I would like to again emphasize is for the rail business, the look into a quarterly order intake makes limited sense. We need to look into a row of quarters and then accumulate. And I think the important message here is that we have an all-time high in orders on hand. Then the projects will come over time. There will be a quarter where we'll have little. Then there will be a quarter where we'll have a stronger order intake. So it really comes in a lumpy way and is not as kind of distributed across the world into little projects as we've seen that in other businesses. And I think that's just important to note. This view on quarterly order intake is something that doesn't really reflect the business and the way it's being conducted in a proper way. Look at the orders on hand. That's, I think, the more appropriate picture, even if I understand this question completely that you're raising. And now, frankly.

Everything that Jan said, I fully sign off as well here, but you raised this question and I mean, I can shed some light on how January went. January went 10% off last year. I think that's Books are closed for January, so I'm pretty sure on that. So it looks better as far as we are in February right now than previous year's first quarter. But keep in mind, like Jan said, I mean, you could have push-outs again now in March and all the figures collapse again, and then there you have a great April or something like that. But January is 10% better than last year.

Thanks for that. And I mean, the lumpiness is just the point that last year we had like three quarters in a row where rail orders were quite weak. And then it really took the fourth quarter and I was really looking more for steadiness maybe this year. And even if one or the other quarter is still a bit lumpy.

Fully understood the background of your question and appreciate it.

And a priori, it looks rather more stable this year than it did last year. But, yeah.

Very good. Thank you.

You're welcome.

The next question is by William Matthew Kepler Chevreux. The line is now also open for you.

Yes, good afternoon. Thank you for the time. My question really relates to during the call. You've discussed on a number of occasions that looking to 2022, there will be notable differences between performance of each of the divisions in H1 compared to H2. As you work through the challenges of executing the order backlog, improving prices, managing the supply chain, and the other associated factors relating to mix both regional and product versus aftermarket. To what extent can you give us a bit more shape on how you expect within your guidance the first half to play out in each of the divisions with respect to growth and profit development in comparison to the second. It seems like we should expect a continued downward trend in margin development in RBS and perhaps even in CDS before a second half recovery, but could you put some shape on that a little more please?

Yeah, what we're seeing right now is that we, on the CVS side, have the effect of still a relatively low demand in China due to the fact that the pre-buy effect last year took place because of the Euro or China 6 introduction. There's still some 150,000 trucks out there in the field that need to be sold. and they would obviously be deducted from new trucks being built and therefore TPR in China right now in the first two quarters is going to be affected by that and then probably these trucks will be sold and out in the field and we expect then that this doesn't affect the market anymore. In North America and in Europe, we still see a very high demand in terms of trucks, so that this is just being curbed by the supply situation right now. So there's more demand than what can be delivered, and it depends pretty much on the situation on the supply side, when and to what extent truck production rate will then grow in both North America and Europe in fact due to this constraint that we have there. So if you just sum up things that would then suggest that second half would then be stronger from a TPR perspective than the first half of 2022. On the rail side, pretty much a lot of things depend on COVID and the rollout of the activities. And there we see and expect a continued kind of improvement quarter by quarter, at least from today's perspective. We're seeing that in an undistorted environment. As we said before, provided that political circumstances are not overriding too much here.

So maybe, William, from my side, some additional comments. If we look at revenues and if we look at, at the same time, profitability, and if we look at RVS and CVS in a nutshell, it sounds very unsophisticated what I'm saying now, but we should have the quarter one to be the worst, quarter two to be better, quarter three to be better, and quarter four to be the best. As I said, it sounds like unsophisticated, but that's just a simple result, and that is true for both divisions, for each and every division. That's just the situation currently.

Thank you. I appreciate it. It's a complex business geographically and market perspective, but thank you for the One follow-up would relate to a question on net pricing around the OEM business. And again, it probably requires a gross simplification. But when you think about your ability to adjust pricing within the framework of your contracts in CVS and RVS with OEM customers, and then you look at the RMI or the cost changes you're planning, do you... Do you think you'll achieve a positive net pricing in 2022 or do you think that there's going to be a lot more work required on the productivity side to maintain your goals for profit improvement?

I think that's a perfect question or very good question, let me say. I think we touched upon that already at the CMD or myself at least in my presentation. It will not be a positive net effect purely out of pricing. It will not be enough. And we have to do cost efficiency measures, negotiations with our suppliers in addition and seek every way and means in all areas of the company in order to keep the gross margins here in the way we want them to go and not be diluted. And this is not our intention and this is not what Knorr Bremse stands for. And one of your colleagues previously mentioned in the old KB, so to say, we would turn around each and every stone, be assured. We're also doing so. And not just starting now. This is what I indicated at the CMD as well. The company is working for roughly 100 million of cost efficiency measures each and every year. But we need additional pricing euros, so to say, to compensate all those cost increases that we are facing. So that's a long answer to your question, but the short answer is no, not. It will be negative. And the negative effect will be offset by our cost efficiency measures that we are doing.

But I think it's also important to state that with negative price effects we've been living for a long time. Usually in the automotive industry, also in the commercial vehicle industry particularly. There's a clear expectation that efficiencies kick in and that products are getting built and manufactured in a more efficient way, resulting in rather cost or pricing reductions on an annual basis. So that's not new to us. different to what we had in the past is these very strong inflationary effects that counteract our activities and the price increases that we're seeing across the board in all different areas and that's where we need to really address the customer and say that's something we cannot and we will not carry on our books. It's something that needs to be handed over to to our customers in order to create a sustainable situation. And that's the background to what Frank just said.

That's super. Thank you very much.

There are no further questions for the moment. And with that, I would hand back to Andreas Spitzauer.

Thank you very much for all your questions. We hope you stay healthy and safe and enjoy the afternoon. Looking forward to connecting with you next time. Thank you and bye-bye.

Thank you so much.

Thank you. Bye-bye. Ladies and gentlemen, thank you for attending. This call has been concluded. You may disconnect.