Knorr-Bremse AG

Thank you, Operator. Good afternoon, as well as good morning, ladies and gentlemen.

My name is Andreas Spitzauer, Head of Investor Relations of Knorr Bremse AG. I want to welcome you to Knorr Bremse's conference call for the Q1 2022 results. Today, Frank Weber, our CFO and Bremse's head of CVS, will present the results of Knorr Bremse, followed by a Q&A session, which will be also joined by Dr. Jürgen Wilder, head of the RVS division. The conference call will be recorded and is available on our home page, www.knorr-bremse.com, in the Investor Relations section. You can find today's presentation and later a transcript of the call. It is now my pleasure to hand over to Frank. Please go ahead.

Thank you, Andreas, and welcome everybody to our conference. We appreciate you joining us today. Today's call is made up of two parts. First, I will present the highlights of the last quarter, and my colleague, Bernd Spies, who is newly introduced into the management board, will introduce himself. Afterwards, We look forward to your questions and comments. Needless to say, Bernd is already here, as well as my colleague Jürgen Wilder, and we all three will be available for the Q&A session. On chart two, I put together the key takeaways for today. First, despite all market challenges such as supply chain issues, inflation, the war in the Ukraine, the market demand and the mega trends in rail and truck continue to be strong. Second, we have a clear action plan to fight increased input costs. Third, we are prepared to face all economic uncertainties around us. Fourth, walk the talk. We follow our focused M&A strategy, which we presented at the Capital Markets Day in November of last year, and also don't shy away from divestments. We confirm the operating guidance before the direct negative impact by the war in the Ukraine. I will provide more details about those five topics during my presentation. But for now, I would like to hand over to Bernd.

Well, thank you, Frank. And welcome to everybody on the phone. I'm happy to introduce myself. And meanwhile, you probably see the slide on the screen. That's the beta of a 56-year-old man who's been all his life in automotive industry. I have been the last nine years with Knorr Bremse amongst the first eight years I was heading as the chairman of the European system for commercial vehicle systems. During this time, I was leading the board, mainly responsible for global sales and controlling quality aftermarket amongst other business unit topics. Since March 12th, I'm heading the Commercial Vehicle Systems Division, and I'm happy to do that in the Executive Board of Knorr Bremsen. Yeah, as I said, I have a long-standing background in the automotive world, also the truck industry, having worked for Robert Bosch for 17 years in different divisions and different countries, and amongst them three years as head of commercial vehicle systems for one business unit. Also, before I joined Knoblenze, I was five years in the board of Hella, responsible for global sales. And for sure that might raise some questions regarding my involvement in the HeLa project last year. That's why I would like to proactively bring that up. The project was initiated by the executive board back then in line with the relevant committee of the supervisory board. I was brought to the project as a member of the due diligence team of course, being one of the key members in that team. The team very quickly came to the conclusion that Hella did not fit to Knorr Bremse or commercial vehicle systems, and I'm absolutely convinced that this was the right decision that was taken back then. Overall, I would say the truck division of Knorr Bremse is well positioned with product portfolio, current strategy, and strongly benefiting from the megatrends like e-mobility, autonomous driving, or digitalization. And also, I'm very convinced that with the colleagues around the globe, also our product portfolio, our R&D capabilities, I have everything on board to further develop commercial vehicle systems into a successful future. maneuvering through the current market challenges, geopolitical turbulences, and inflationary headwinds, as well as technical changes and requirements. The truck industry continues to grow as the need for smart and green transport solutions increases. And we are in a strong position there and can lead the transformation of our industry towards a more sustainable future. Our products and services are a key factor in this respect. So, having said that, I'm happy to be part of the executive board and look forward to working closely with my colleagues, Claudia, Frank, and Jürgen. With this, I hand back over to Frank.

Yeah, thanks, Bernd. We are glad to have you on board, needless to say. Now, dear analysts and investors, allow me to walk you through our current market environment on chart four. Let me start with a view on the rail market. we see that the underlying demand in both OE and aftermarket business is quite high. Europe remains the strongest contributor to this development, and North America offers good opportunities too. The Chinese market is challenging, and I will dive deeper into this topic later in the presentation. Overall, we are confident that we will see a subsequent improvement in the global rail industry throughout the year, also benefiting from increasing ridership levels as a consequence of decreasing infection rates and less restrictions. The overall rail market fundamentals are strong and intact. In the course of the year, we expect demand to remain healthy, which should also be reflected in a book to bill ratio above one. However, supply chains are also very tight in the rail industry. Inflation is noticeable. The truck market also experiences ongoing strong demand. Truck production rates in quarter one in Europe and North America were quite stable year over year with a positive outlook throughout 2022, while China remains weak as expected. The war in the Ukraine and the zero COVID policy in China clearly do not ease the ongoing tight supply chain situation and the already high raw material prices. In the coming quarters, we expect that global supply chains remain uncertain. Content per vehicle is one of the key drivers of CVS revenues, which is independent from economic cycles. The good development of content per vehicle was strongly visible in quarter one and will continue to be an important pillar of CVS growth strategy, supported by our market-leading air disc brakes, electronic brake systems, as well as air treatment systems. All in all, the global environment is tough, but the underlying markets we are operating in are robust and KB is well positioned to fight those challenges. Let's have a look on the key financials of the first quarter at a glance on chart five. Overall, quarter one was a challenging quarter, but as expected and planned. Nordbremse generated almost stable revenues of around 1.7 billion euros and an operating margin of 10.9% in the first quarter, which are impacted by both divisions. CVS posted revenues of 895 million euros at 8.5 operating margin and RVS 775 million euros in revenues, resulting in an operating EBIT margin of 15.7%. I will go into detail in the divisional slides. FX supported the development on the revenue side, but did not positively impact the EBIT side. Free cash flow in the first quarter was minus 231 million euros. The very positive highlight of the quarter clearly was the strong order intake of 2.1 billion euros, a 17% increase versus prior year, a clear proof of the strong underlying demand. Order book was up 18% to 6 billion euros. At Easter, we successfully completed the global system conversion to IFRS as promised in quality, time, and in budget. As a result, after a certain phase of stabilization, we will be able to report earlier in the future. Let's move to chart six. CapEx in quarter one with 64 million euros were on a rather lower level and will increase in the course of the year. Among many different activities this year, I believe quite interesting projects will be the expansion of our Indian rail footprint as well as our capacity for brake pads. In addition, we will invest in the relocation from the US to Mexico on the rail side In CVS, the focus is, for example, on supplier tooling or the expansion in China to safeguard our future growth. Due to the uncertain economic environment, we have increased the level of inventory to support our customer deliveries in these difficult times, as well as to mitigate disruptions in the supply chains best possible. Our policy, customer first, is important to us, and has been a cornerstone of our success in the past, especially in the COVID phase. Therefore, we go for and accept a higher level of net working capital in absolute numbers and in days short. Secondly, higher inventory also enable us to support higher expected revenues in the upcoming quarters. Consequently, and also additionally affected by a lower EBIT contribution, ROSI came in at roughly 18%. Let's move to chart seven. Free cash flow was minus 231 million euros in the past quarter. Traditionally, free cash flow is weaker in the first quarter, and this year is no exception. An important driver for this development was the before-mentioned buildup of inventory intentionally. The past quarter, therefore, developed as expected, and in the coming quarters, this important KPI for us will improve, driven by increasing profits and less or no more further increasing on the inventory side. We have implemented stringent measures, and I'm fully convinced to reach a free cash flow of about 500 million euros in the full year 2022. Let's have a look on the divisional performance in quarter one, starting with RBS on chart eight. After a very good quarter four, order intake of RVS was again remarkably strong and the most notable highlight in the first quarter of 2022. It increased by more than 50% to 1.08 billion euros. This development was driven by basically all regions. The order book also increased by more than 15% year over year to 4.2 billion euros. This level provides a good visibility and is the basis for the revenue growth we expect for RVS on a full year basis this year, but also 2023. Nevertheless, the rail industry is still strongly impacted by COVID restrictions and supply chain issues, as well as ongoing postponements of projects, especially in China. The book-to-bill ratio in quarter one stood at 1.39. Let's move to page nine. We had already pointed out in February at our full year results that quarter one will be the weakest quarter of the year. The revenue and margin development in RBS was therefore as anticipated. Revenues amounted to 775 million euros, a slight decrease by 4%. RBS recorded declining sales in the OE business, primarily driven by the APEC region. The aftermarket business in absolute terms remained stable while the share increased slightly from 44 to 46% in the first quarter. This development is solid, despite the fact that many rail operators still have a lower number of trains in service compared with the time before the pandemic. an important market for KB with unchanged future potential was affected more than in previous quarters due to the development in China and its accretive margin contribution. The restriction related to the Olympics, the extended Chinese New Year with plant closures of our customers and the lockdowns due to the new zero COVID policy since March 2022 strongly affected the development of the last quarter. In North America, we recorded an overall increase in the OE business with a flat aftermarket development. We expect a sequential quarterly improvement from now on and expect that in 2022, overall, RVS revenues should grow solidly, predominantly driven by the OE businesses in Europe and North America. The aftermarket demand should increase, too, strongly depending on the development of rail traffic and travel restrictions, especially in China. The EBIT margin of RBS in the past quarter reached 15.7% after 18% a year ago. The main influencing factors of this development was the regional mix, meaning the much lower profit contribution from China to accretive business in China, especially driven by lower revenues as well, as higher inflationary costs year over year. In the coming quarters, especially the second half of this year, we will benefit from price increases to our customers and a slightly better development in China. I would like to dive deeper into China rail on chart 10. I know it's an important topic for you as well, and I would like to provide more information today. Quarter one was super tough. China put extensive zero COVID measures in place to guarantee smooth Olympics and Paralympics. It went into strict lockdowns in several major cities in March, which of course had an impact on the business we are doing there. Furthermore, several companies like CRRC prolonged furloughs in their production hubs around Chinese New Year for a few weeks. Our rail division was unable to fully decouple from these trends in China and based on that recorded significant double digit declines in revenues overall in the past quarter year over year. However, it is also important to highlight that we have been able to defend our market position in the aftermarket business well and have recorded rising sales in this segment in the past quarter. The long-term fundamentals in China are intact. New high-speed tracks are built, and the focus of the Chinese government to reduce CO2 emissions is unchanged. We expect some recovery of the rail traffic once the zero-COVID policy eases. Nevertheless, given the current political COVID measures in China, the market remains very volatile and characterized by quite low visibility. Investments in additional capacity in the high-speed and metro market are not expected to see a strong recovery in the short term. So what are our measures to fight this weak environment? We will expand our aftermarket footprint further in China to be closer to our customers. We have implemented an efficiency program to reduce cost. And most important, we will continue to convince in the market with quality and innovation of Knau Bremsen. Let us continue with the development of our truck division on slide 11. Incoming orders of CVS came in at 1.03 billion euros, which is a decline of just 5% compared to the record year level last year. Book-to-bill was well above 1, reaching 1.15. The positive development was mainly driven by Europe and North America because of favorable market conditions in the transportation industry. In terms of order intake in 2022, CVS has probably already seen its strongest quarter for order intake. We do not assume a demand trend reversal on a full year basis, but component shortages on the supplier and customer side will . The order book of our truck division amounted to 1.83 billion euros at the end of March, which is again remarkably 25% higher year over year, even considering the very strong quarter one of 2022 with a great China demand. And again, new record level. This is the basis for our positive outlook for the remaining year. Let's move on to slide 12. CVS posted 895 million euros in revenues in the first quarter, a slight increase year over year and a good result considering supply chain disruptions overall and issues in China. In Europe and North America, CVS saw a positive development in all channels. The APEC region still ranges on rather weak levels after the China 6 introduction in China last year and the zero COVID measures in quarter one on top. The share of aftermarket sales increased from 24% in the previous year to 28% in the last quarter. In absolute terms, aftermarket increased by a strong 37 million euros. As mentioned before, in terms of revenue development on the full year basis, CVS should be able to post a solid increase year over year, mainly driven by a stronger expected second half of 2022. Currently, this positive outlook very much depends on an improvement in the supply chain globally and somehow a catch-up of truck production rate in China in the second half of the year. In the first quarter of this year, CVS achieved an EBIT of 76 million euros, which is 34% lower year over year. The EBIT margin amounted to 8.5% compared to 13.1% a year ago. This margin development was highly affected by a lost operating margin from China, the cost pressure from inflationary and supply chain headwinds. DBS was able to increase prices successfully already and continues its negotiations with its customer base. Please keep in mind that the effect of increasing costs that leads to increased prices will occur with a certain time lag and will be rather back-end loaded in the year to come. In addition, the expansion in R&D was also reflected in the margin development. We expect that in terms of profitability, the second quarter could be on a comparable level versus the first quarter. The second half should then be better. Let's move to job 13. Since the presentation of our full year results 2021, the main topic globally is Russia's war in the Ukraine. Our hearts are with all people being affected by this catastrophe, and we hope that the fights will come to an end as soon as possible. We at Knorr Bremse do everything we can to support all affected colleagues, families and communities. We have made significant financial donations and have offered KV facilities and apartments to refugees. We also joined the initiative Job Aid for Ukrainian Refugees, not only giving the Ukrainian refugees the possibility to work at , but also to support the integration of Ukrainians in Germany. There are also many examples of our colleagues going on and beyond that in order to support the victims of this war, e.g. with fundraising activities or voluntary works as translators. From a business perspective, we have reduced all Russian activities to a bare minimum. We only fulfill our existing contracts regarding our Russian business in OE and aftermarket insofar as this is permitted under law sanctions. Following these sanctions, we only supply products and components that are used for civil applications. We don't generate additional new OE business. And we also decided to exit the joint venture with Kamaz. The impact of the war cannot be fully assessed at this point in time, but our direct exposure in Russia on a full year basis amounts to around 200 million euros in revenues and an impact of 50 to 80 basis points roughly on an EBIT margin per year. Now, Bremse has a high level of localization, meaning that we do not ship or receive much from Russia or the Ukraine. We continue to monitor the ongoing situation very closely and have set up a task force team to do so continuously, as well as that we will provide an update on this topic at latest when we present our quarter two figures in summer of this year. Let's move to page 14. Like all other companies currently, we are also facing strong inflationary headwinds in rail and truck. To fight these, we have defined a clear action plan that is already being implemented. Our so-called PCPP program, profit and cash production program, is a joint effort within the Knorr Bremse Group that supports the other measures taken. In particular, price increases, supply cost defense, and cost optimizations in general across the group. Overall, we have initiated measures this year through price increases for our customers and cost measures that are expected to generate a total of up to 250 million euros. We have already achieved good results with our aftermarket customers in terms of price increases. This is also the case with some of our OE customers, and we are currently in the middle of negotiations with the rest of our customer base. The clear target of Knorr Bremse is, with its pricing power as innovation and market leader, to mitigate all cost increases via pricing measures, but as mentioned, with time delays between the cost increase and the pricing effects. Our long-lasting relationships are also a good foundation for our confidence in the remaining negotiations. These price increases are planned to have a positive impact on our earnings with a slight time lag during the year 2022. We therefore expect higher profitability in the second half of 2022. On chart 15, I would like to give you an update on our outlook. We confirm the operating guidance for the fiscal year 2022, first given on February 24th. At present, it is not yet possible to fully and conclusively assess the financial impact of the Russian war in Ukraine. Accordingly, no direct negative effects are included in the guidance. This means that revenues and profitability in Russia are in the guidance still fully incorporated. We continue to expect revenues between 6.8 to 7.2 billion euros, an operating margin of EBIT between 12.5 and 14%, and a free cash flow between 500 and 600 million euros. If you were to deduct the direct impact of the Russian business from the operating guidance, then based on current estimates for a full year, you would end up roughly in the middle of the revenue range and would have to deduct then the 50 to 80 base points from the middle of the EBIT margin range I have just given. We will give you an update and narrow the guidance as in previous years with the release of our quarter two results in summer. Let me summarize the current situation and our positioning on chart 16. Global supply chain constraints and global supply chains are disrupted. Inflationary pressure is high. The influence of the pandemic continues and the war in the Ukraine is from a business point of view a major challenge. We at Knorr Bremse have the operational and financial strength to master this critical environment as we have proven in the past. Firstly, we have a clear action plan to fight the inflationary across the whole group that consists of three pillars. First, increase prices among our customers in aftermarket and OE segments. Secondly, procurement to defend proposed supplier cost increases. And thirdly, we are implementing cost measures in all regions across the group to safeguard our profitability further. We learned from the past year and are active on the M&A side in regard to adding new bolt-on acquisitions to our business. At the same time, we are reviewing our existing portfolio and will actively and consequently act if parts of the business are not up to our strategy or profitability aspirations. All M&A activities follow our gear strategy communicated last year in November at the Capital Market Day, meaning no second halide. The rock-solid balance sheet of Knorr Bremse not only offers great flexibility to our strategic actions, but also is a strong foundation to master the challenges ahead. Let me finish my presentation with chart 17. As said, And an important part of our M&A strategy is to review our portfolio regularly as well. As a result, we have decided to start the sales process of Keeper Electric, which is consolidated within RBS. Keeper's operating results were predominantly negative in the past and significantly dilutive to the strong underlying margin profile of RBS. In addition, we see limited long-term opportunities of key pay within our core business. Therefore, we believe that we are not the right owner of this asset. For the short to medium-term profitability of RVS, we expect a positive impact of 60 to 90 basis points on the RVS operating EBIT margin towards 2025. With that, I'll turn the call back to the operator in order to begin with the Q&A sessions jointly with my colleagues, Bernd and Juergen. Thank you very much.

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to wire signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions.

And we'll go first to Sven Ware with UBS.

Yeah, good afternoon. Thanks for taking my questions. The first one is on your pricing that you just went through. And I guess we appreciate the agility that you show. I was just wondering, What about the order backlog? Are you also trying to reprice the existing backlog in trucks and in rail, or does it only refer to the new orders? That's the first one. Thank you.

Yeah, I can start with that. It's Juergen here. Yes, the question is yes and no, or the answer is yes and no, basically. But there is, in some contracts we have, and a good chunk of contracts we have, for example, pricing that will be in retrospective adjusted based on indices and material price indices that is adjustable and we will adjust that, but there might be a certain time lag since that is usually done at the end of the year and therefore it is not, so to say, time-wise simultaneously. The other one is, of course, we have also in our existing backlog, some service parts, which generally also we have it, it's a little easier to adjust those. And also then, of course, when it comes to service business, that is also shorter cycle business, which we get additional orders in for this year, for example, that are turned around. And therefore, we have already adjusted the prices. So, Yes, the answer is we can do that partially as I just explained.

Yeah, this is Bernd answering for truck. Our price requests and compensation requests are on the table of every OEM since beginning of the year. It covers the full year or including what we have delivered. And at the end, it's the result of the negotiations on how we

go out of this request but it's a clear yes we want to be compensated for the full year yeah thanks for the details maybe as a follow-up especially on the rail side does it mean that now all the new or let's say almost all new orders have these indices because we just talked only about the backlog but can you change that now for the new contracts

Yes, for sure. There's a discussion going on with each and every customer that we are especially going into the future where there's heightened insecurity in terms of how prices will develop. That is negotiated with the customers that we incorporate that and that we get more or less mitigate that risk going into the future.

Very good. Thank you. And maybe also follow up for you, Dr. Wilder, on the RVS side, because in the slide deck on page 10, you mentioned that in China, the market share is under pressure, which sounds maybe more severe than it is. So maybe it would be helpful if you could quantify, you know, what your market share has actually done in Q1.

Well, I mean, for Q1, we have to say we had some special impacts there. and I would not draw general conclusions out of market shares, first of all. I mean, what happened in Q1? The aftermarket business was suffering much less than the OE business in Q1. It was suffering a little bit because we had less ridership in the metro side, and there were cancer trains on the high-speed side, as you can imagine. For example, between Beijing and Shanghai, with those lockdowns that we had, there was way reduced traffic, sometimes only 40% or even currently only 40% of the long distance trains are in operations. We will see that impact also over the course of the year to a certain extent in the service business. But worse so, what happened in the OE business during the Q1 is during Chinese New Year and with the Olympics, As Frank said earlier, there were the car builders sent everybody on furlough. The trains were not built. They were not delivered. And therefore, we had very, very weak OE business while service business for the time being was held up. But that doesn't necessarily mean market share loss because there was no demand in the market. on the OE side in the first quarter. We expect that that will change, of course, now going forward, and it changed already because some of the car builders started to produce again, but we might see some delayed impact also on the service business.

Okay, understood. Thank you for that. And maybe the final question, if I may, is just – in terms of the new CEO. Now we have Mr. Spies on board, but I was also wondering if we could expect an announcement of the new CEO maybe until the upcoming AGM. I know it's not you hiring the new CEO. I should probably ask the supervisory board, but anything you can share with us would be appreciated. Thank you.

Yeah, thanks when somehow needless to say expected that question. I mean, that process, as you rightfully pointed out, is led by the supervisor report. It's a professor as we are in very, very close alignment with Mr. plus. So, they both are ending that process. We have a presidential committee, as you know, in place, and that will take the decision whenever the process is ready. We hear somehow that the process is running good and smooth. So, that's all we can, from our point of view, say in that regard. We expect it to be well-handed with the supervision of Mr. Ploss, so to say.

Okay. Good to hear.

Thanks to all. Thank you.

We'll go next to Ingo Scheichel with BNP Paribas.

Thanks for taking my question. The first one would be on your full year and Q2 guidance. I think on full year, of course, it's a very complex situation, so understandable that you make a few assumptions there. Just want to understand that we will, of course, have to translate your guidance and all the assumptions into let's say, a base case assumption, what your profit margin this year is going to be. I think you explained quite well to us how to get from the midpoint, how to deduct the Russia impact. That's clear. But just wondering on China, because you're also saying your assumptions do not yet fully incorporate, let's say, the COVID-related upcoming lockdowns. So if we say midpoint, minus 50 to 80 for Russia gets us to 12.5. I guess we have to deduct even more for the China lockdowns, and including those, we are closer to 12, or would you rather say The China-related stuff is already an ordinary course of business and will be offset by the other effects. And on the Q2 guidance, I would be curious to know whether you can give us a hint whether you would expect both divisions to have similar margins in the second quarter or whether one could see another drop of the margin compared to Q1.

Absolutely. Thanks for the question. Let me maybe start with the latter half of your question that maybe also shed some light already on the first half. We do expect that we have reached the low point of our profitability in this first quarter. already considering basically everything that we know in regards for potential full-year environmental developments. So, margins should improve as we move along in the new year. They will slightly improve towards quarter two and improve then again in quarter three and towards the end. what we see at this point in time based on our analysis and the plans that we also have decentrally very much aligned. In regards to, and that should then also tell you that our margins will grow coming from the 11% roughly that we have in this third quarter in order to come to you. You mentioned the midpoint of our guidance. And this is already baking in, of course, our assumptions in regards how the market's market demands would develop. But of course, do we know everything at this point in time? Clearly not, but with our disclaimer that we have been given on the right side of this chart that you're potentially also referring to, we do not mean that every further lockdown that happens in China or some other demand that is coming up in North America or anything will dramatically change the guidance that we have been given. We fully think that we have, to the best of our knowledge, as of this point in time, anticipated everything in what we were just saying. This disclaimer basically means, I don't know, let's take for example, if there would be another geopolitical issue with China and Iran, and if sanctions would come up, for China, such as they have been coming up for Russia, then of course the guidance would not be of existence anymore. That's the only thing that we mean in that regard. So what you were referring to, the midpoint of the guidance, is with the best of our knowledge, even though given the yearly development towards December, we do expect some slightly higher TPRs in China heavy duty truck compared to the first half year level. And as Jurgen also outlined, we do expect that the business in China is getting better than the levels we have seen in the first quarter.

That's also the assumption.

And that's also the assumption, right?

Okay, yeah, that's very helpful. Thanks for providing such a detailed framework in uncertain times. Can I also ask a question on the CVS segment? And I think it's great that Ben Spieth is already available for questions at this early stage, at least of his current position. And I think you make very clear points that you don't need another header, that you are, I think, not under pressure to do deals. But I wanted to understand a bit more how you, let's say, expect the strategic process to evolve from here. Because even if you're not under pressure, Competitors have consolidated a lot. There have been big M&A transactions among your competitors in the last few years. So leaving aside automotive suppliers and other things that you should not acquire and which is appreciated, do you think there's a need for more technology-driven M&A or at least for a comprehensive review of the portfolio you've got or are you based on your very comprehensive experience in the sector already based on what you know, confident that the current ecosystem set up with certain corporations and so on is superior to the setup that some of your competitors have chosen. And in that context, it would also be nice to hear your view on the synergies between the CVS and RBS segments.

Yeah. Let me start with the competitive landscape. For sure, there is movements going on at the moment. There's consolidation going on. Majority of this consolidation is driven out of technology backgrounds. The ones are missing access to vehicle dynamics. The others are missing access to electronics capabilities. And I have to say, we actually have everything in-house. We have the dynamics in-house. the capabilities to fully spec and fully develop electronic system. The only difference compared to us is we use partners for production. Our electronics verticalization is basically limited and we use partners, which makes us actually competitive and agile. And so far I see not a clear need to merge with anybody unless there is clear advantages in synergies, in capabilities that we don't have in-house. And we are in a process to constantly monitor the market. We constantly look at potential targets. We assess them. We check for synergies. And there's more to come. You will hear from us. But it's no need and no desperate move into any direction. Neither size nor technology is needed on our end.

Okay. We'll definitely stay tuned for those updates. And do you see those clear advantages and synergies in the current setup with RVS?

We are developing synergies. They are, let's say, to a certain extent already harvested. And in other areas like connectivity and other topics, there is more to come. Digitalization is also one topic where we see synergies. Product-wise, we on and off use exchanges between our both divisions. Truck started, for example, and it was actually the start of a great adventure, very successful adventure. with electric compressors that were used from the rail division. Meanwhile, we are the market leader in electric compressors and have a boosting future in front of us. And those synergies will come more and more. However, it's, let's say, at the end of the day, it's still two different different technologies, different cycles, and different divisions. But we will constantly check for synergies here as well.

Okay, great. Yeah, thanks for the answer. We're looking forward to the updates and content relations on your role.

Thank you very much.

Very happy about it.

We'll go next to Akash Gupta with J.P. Morgan.

Yes. Hi. Good afternoon, everybody.

My first question is on Russia. I mean, thanks for providing the update. I guess if I understood you right, then basically you are saying we have to take Russia out. You would be towards the midpoint of the guidance range on revenue and towards the low end of the guidance on margins. Is that correct interpretation? And then maybe a follow-up to that would be, if you have to completely withdraw from Russia, like we see some of other companies are doing in the sector, can you tell us what could be the total cost in terms of write downs and maybe you need to pay some severance or other costs? That's question number one.

Yeah, thanks, Akash. Fully right, understood. And this is what we intended to say. we would, with the best of our knowledge, so to say, end up in the ballpark of the lower end of our guidance. Absolutely right. But you have to understand also, Akash, that's why we're not including, so to say, precise figures in the guidance yet. For example, if you take our 550 people that we have in Russia, you need to take certain decisions on whether you, so to say, get rid of or reduce the number of headcount in the respective countries that has to follow certain assumptions that you do. And unless this is not finally clear what you can do and what you are not allowed to do, you can't make those decisions. That is the reason why I ask for a little bit of, so to say, time until we can fully calculate those numbers, but fully right understood. In total, when it comes to the assets that we are having with and in Russia, all in, so to say, We talk about roughly 120 million euro, and this exposure number of roughly 120 million euro is also containing accounts papers that we have at this point in time. And according to your question, this would be an exposure if you would consider from this second on, none of the existing projects running businesses would be paid any more at all, not just to give you a clue on that. So the total number of assets is roughly 120 million euros.

Thank you.

And my second one is on inflationary pressure. So when I look at slide number 14, where you have given some data on the countermeasures, maybe the first one is that. these 250 million, is that incremental to what you had in 150, or that is the gross amount? And secondly, is this 250 million countermeasures, is that enough? So basically, can we say that this 250 million could also be a proxy of the hedge winch from inflationary side that you might be experiencing?

Yeah, thanks, Aakash. Right, first of all, it's a year-over-year figure, so basically, Somehow we saw and did fight for inflation in 2021 in the amount of roughly 150 million overall. And additionally on top in the year 21 to 22 comes 250 million on top as additional cost pressure, which we are trying to fight with roughly 60% on the pricing side and maybe some 40% on the cost side. and this is what we are striving for have we baked in everything let's see this is the best of our knowledge in regards to all the respective raw materials in regards to all the indirect materials in regards to the personnel cost in the different countries where we are operating so we have to wait and see but this is the best estimate and whether this is enough Half an answer I've been given, and the other answer is that the measures in order to compensate for those 250 is a daily fight of the two colleagues that are sitting with me at this table here. And clearly, the customers tell us this is enough to strive for. But needless to say, we want to long-term compensate basically via pricing only. all the cost increases. But this is a situation here that is focusing on 2022. And as we have time delays between cost occurrence in the P&L and the revenue occurrence of price increases after a negotiation, you would have a certain delta in between that you would need to fight with other measures. And we have pointed out on cost measures here. Hope that explains your question, Akash.

Yes, it does. Thank you very much.

You're welcome.

Thanks very much, everyone. Good afternoon. I have two questions. I'll take them one at a time. The first is on the aftermarket in CVS. It looks like it's been growing strongly for several consecutive quarters now. For how long do you expect this growth to persist, and do you see any risk of normalization, perhaps in 2023? Thank you.

I'm a bit more careful now with my forecast, to be honest.

This is Ben here. Our planning assumptions were that in 22, second half of the year, we'll see relaxation on this situation. This has changed, and it has changed because, first of all, the assumptions of the industry were too optimistic. Second, now we have a war and all the sanctions system around the globe. including all kind of impacts in supply chains. I'm for sure do not forecast much of a relaxation for 2022. 2023, we'll have to make up our mind in the second half of the year, to be honest.

Okay, understood. Second question is on rail. On the last call, you highlighted increased tensions in supply chain on rail. It sounds like those have persisted. Can we be clear, would you say overall that in rail, at least outside of China, these have deteriorated further from the last call, or are they as bad, so staying on the same sort of level of disruption? Thank you.

Yeah, no, I would say, I mean, it hasn't gotten much better. I would say that way. It has at most stabilized, and it's not, I would say, a... It's not that we see that in only specific parts. We see that also in C parts or so across the board, and we are really struggling to keep up. But the good news is really, despite the situation, we don't get much complaints or almost no complaints from our customers that we deliver late or that we don't deliver, which is good news and bad news at the same time. The good news is We are probably better than other suppliers in terms of keeping up with the deliveries. Bad news is it might also have some downstream impact in terms of delivery of vehicles into the market when other parts are missing. So, yes, we are struggling with that. We are struggling with that. But by and large, we can really say that we fulfill the needs of our customers.

Thank you very much.

Thanks very much. Good afternoon. Regarding the 250 million euros countermeasures you've mentioned, how does it compare to the cost inflation you've seen so far in Q1 on an annualized basis? So that's question number one. Question number two, if I take 60% of that, so it implies price rises of only about 2%. So can you comment about this, please? I mean, because it looks fairly low, at least compared to the price increases we've seen elsewhere at so many other industries so far.

Thank you. Thanks, Scott. First of all, I would say in regards to the quarterly distribution, it's very difficult to answer why, because we have two characteristics of businesses. We have a rail business, which is kind of a project business where you can't just easily in the bookkeeping that you have cut to like cutting coupons and compare one quarter with another in regards to inflationary effects because each and every project is basically a different one and each and every quarter consists of a completely different structure and a different customer in the end. That's important. So it's difficult to divide, so to say, yearly figures then also into quarters. I would roughly say, we were discussing that, I would roughly say it's a fourth Roughly, it's roughly a fourth of what you see. So not very sophisticated, this answer. But you have to keep in mind that already last year, we did have some first increases in the very first months of the year for freight cost increases, for increased costs for semiconductor via broker parts. So keeping that into consideration, I would say it's a fourth. Secondly, whether this is enough or not enough, as I said, it's a full year basis, the 60% you have to keep in mind. So that means if the negotiations, if you started and have an agreement with the customer to increase the prices as of To make it simple, as of 1st of July, and you can only agree upon price increases for the latter half of the year, then you have to double basically in order to come to an annualized effect. So we think roughly 140, 150 million of pricing increases. to have it in the P&L of this year, given the fact that we are already in the first quarter or beyond the first quarter, is a tough one for us. As Jürgen also outlined, not each and every contract can't be opened up so easily. And even those where you would have the ability to open it up, you first have to reach a negotiation result in the end. But open for my colleagues also to join in. So it's more on an annualized basis. It's much more than the 2% that you mentioned. First of all, and second of all, I just wanted to say it's not that easy.

Maybe just a few comments to add. You also should consider, I mean, if you say, okay, it's not too much, it's only 2% or something like that. I mean, the dynamics there in the project business, in the rail business, Of course, it's not only that the order is locked in between us and the customer. In many cases, also the material is already locked in between us and the supplier, so to say. It also, of course, helps short-term to keep those prices stable. Of course, we have the concern that not everything like that is covered, and there's other price increases that are to come. And therefore, the fastest way to increase prices is really on the spare parts, which we have dedicated initiatives. And then we go through the contracts where we have possibilities to increase. But what I can say is there's probably to a certain extent also a cost increase that is delayed where we have the possibility to bid new contracts and incorporate it. And then in retrospective, with the indices work, so over time, I fully support what Frank already said, that is that all of those cost increases, we should be able to pass it through to our customers. That's our business model, and I don't see a reason why it should get, in large scales, get stuck with us.

Yeah, I can add from the truck side, same aspiration. We don't want to be stuck with the cost increases that we have to suffer from. Also, we have long-term contracts with customers but also with suppliers, so not every supplier is increasing prices at the same time. And this, all price level modifications that we suffer from, they are in our claim in front of our customers. What this makes in total in a map is what we see here. But there's no reason to be worried that we are somewhere not forwarding what we are suffering from.

Okay. Thank you very much.

Do I have time for a follow-up? Yes.

Yes, please. Go ahead.

Yeah, well, thanks very much. I'm asking because I attended Alstom CMD yesterday, well, virtually, but one of their building blocks to improve their competitiveness and performance is to integrate vertically a bit more some of their core components in particular brakes. So what's the risk that this verticalization pattern that we've started to see at CRC in China, now Alstom, so basically your two largest customers. I mean, what's the risk that it will impact your ability to price up in the future, in particular in the aftermarket segment?

I see that risk rather limited. I mean, first of all, As to Remse, I mean, what they integrate is on the component level, we are keen on selling systems. That's one of the things. I mean, if you refer to, for example, Eber and Flaretex that they have acquired, then those are rather products also for niche application, not for the broad applications as we have that they are. in a rather small revenue scheme. And by the way, I mean, it's not that this is new or so. I mean, there's always an alternative sourcing also with other suppliers, other customers, I mean, on those specific components. We are used to that already for years. I don't think that that affects our business model largely. We have just recently had good I mean, over the past year, good strategic discussions also with Alstom discussing how we participate in their platforms and things like that, which I don't want to disclose the details, of course, but that gives me a lot of hope for the future that our share of business also with those customers, we do that because there's a new tendency will not decline, let me put it that way cautiously.

Okay, very clear. Thanks very much.

Next to Andre Kukin with Credit Suisse.

Hi, thanks for taking my questions. Firstly, can I just follow up on the Russia size? Because you gave the revenue size and also the margin contribution, so that would have to come out if Russian business hypothetically stopped. That kind of implies about 8% profit contribution from Russia on my calculations. Is that right?

Let me put it this way. We have been given a profitability range of Assuming certain cost counter actions and I would say in a nutshell at this point in time, the Russian business is a very accretive business for us at Knorr Bremse. And with that, I would like to leave it at this point in time, but somehow you can triangle around the figures being given, but it's a very accretive business for us, right?

Got it. Thank you. The main question really is about China manufacturing situation. Could you just give us an update on your current status of whether you've been able to manufacture across the country in the second quarter, given the lockdowns in April and how that's developing that now things are unlocking?

Yeah, I mean, when it comes to our manufacturing, we could continue. But as I said, It was especially in the first quarter and to a certain extent, certainly also in the second quarter, there is a weakness on the demand side because the car builders were basically shutting down their plans for an extended period over Chinese New Year and the Olympics and also then drawn out a little bit because of the COVID situation. But it's not that we cannot deliver because our plans would be closed.

Yeah, same on the truck side. We've been constantly delivering. There is, of course, a cool down in the market as before mentioned. But the plants are working full steam according to requirements.

Thank you. And very final one, just on the inventory build that you saw in Q1, can I just – check it off, check whether there was any potential benefit to the margin from that overproduction or not.

No, there was not. On the contrary, there was, as I outlined before, a slight negative FX effect only out of elimination for the elimination process for some of the inventories? No, the answer is no.

Good to take off. Thank you very much for your time.

Yeah, you're welcome.

We'll go next to Mark Zeck with Stifel.

Hey, thank you for having me. I'm afraid just one question left for me. We've heard from Foslo today that they've got quite some troubles to pass on customers, and they singled out Deutsche Bahn, who seems to be like rock steady in refusing to accept any price increases from suppliers. Could you maybe elaborate a bit on your relationship with Deutsche Bahn, why you think that you don't have the same problems with this major customer?

Mark, one request. Could you ask the question again because the connection wasn't there. It was a price increase regarding Deutsche Bahn, but from which company?

Yeah, so we heard today from Foslo that they have trouble to pass on price increases and they singled out that Deutsche Bahn is one of the companies who is like refusing to accept any price increases from suppliers. And I was wondering, given that Deutsche Bahn is one of the major customers as well, if you experience the same thing with this major customer or not?

Well, obviously, I cannot comment on the fossil situation. But I would generally not single out, especially, let's say, one of those customers that Foslow might have named that is impossible to have any discussions. Maybe I'll leave it there.

Okay. Thank you.

And once again, if you'd like to ask a question, that's star 1 on your telephone keypad.

Okay, so in case there are no further questions, thank you very much for your time. And if you have further questions, please reach out to the IR team. We wish you a healthy and nice afternoon and looking forward to talking to you next time. Thanks and bye.

Thank you. Thank you. Bye-bye.

This does conclude today's conference. We thank you for your participation.