Knorr-Bremse AG

Good day, ladies and gentlemen, and welcome to the Knoll-Bremse AG Q322 conference call. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to Andreas Spitzdauer, Head of Investor Relations.

Thank you, Operator. Good afternoon, as well as good morning, ladies and gentlemen. My name is Andreas Spitzdauer, Head of Investor Relations of Knoll-Bremse AG. I want to welcome you to Knorr Bremse's conference call for the third quarter 2022 results. Today, Frank Weber, our CFO, will present the results of Knorr Bremse, followed by a Q&A session, which will be joined by Dr. Jürgen Wilder, head of RVS, and Bernd Spieth, head of CVS, as well. The conference call will be recorded and is available on our homepage, www.knorr-bremse.com, in the Investor Relations section. Here you can find today's presentation and later a transcript of the call itself. It is now my pleasure to hand over to Frank.

Please go ahead. Thank you, Andreas, and welcome everybody to our quarter three conference call. Thank you for joining us. Today, we will talk about the operational developments of the last quarter and the guidance for 2022. Afterwards, Jürgen Wilder, head of RDS, Bernd Spieth, head of CDS, and I look forward to your questions. Let's kick it off on chart two with our key messages. On October 13th, we announced that Marc Listerzea will join the executive board of Knau Bremse as CEO on January 1st, 2023. The whole leadership team is very much looking forward to having him on board soon. We are strongly convinced that Marc is a great additional member and he will complete our team, especially due to his international background and strong industrial experience. I respect Mark very much and have already worked with him for several years. Overall, the underlying market demand by end customers in both rail and truck remains strong in all markets, excluding China, which is still facing significant market weaknesses. Overall, the activity in most regions continues on a good level, primarily driven by the focus on emission reduction and the need for additional transport capacities. There is an increase uncertainty about the global macroeconomic development. Geopolitical headwinds, but also higher input costs and ongoing supply chain disruptions leads to an ongoing challenge for all market participants. We at KB are making very good progress with our price increases and all other cost measures to pass on our cost headwinds. In addition, our low vertical integration and strong localization strategy is very supportive in the current environment. I strongly believe that we have the necessary strength to face all current and future headwinds. Sustainability has a high priority for Knorr Bremse. Thus, we decided to further expand our sustainability efforts by committing to extend the company's climate targets also to value chain processes. In this context, we are aiming to join the Science-Based Target Initiative, SPTI, in early 2023 to set the framework for our decarbonization efforts. This scope 3 commitment is also part of the €700 million sustainability link bond that was issued in September. Last but not least, we confirm our guidance for the full year 2022. On chart 3, I want to share our market view with you. Looking at the rail market, we see that the underlying demand in most regions in both OE and aftermarket business continues to be high. visible in a continuously good order intake. Ridership levels and rail traffic are recovering slowly, but steadily driven by the overall COVID situation easing. As a result, the tender development in the industry is also very pleasing, which results in high order books of our global OEM customers. This is a good foundation for further recovery in the quarters ahead. The market in China continues to be weak, with low investments in rolling stock. Nevertheless, the higher investments in the rail infrastructure will also lead to higher demand for trains. Europe remains the strongest rail market for RBS, but also North America continues to be a solid contributor. Both markets will be driving our growth in the foreseeable future. Overall, we are confident that we will see a subsequential improvement in the global rail industry in the coming years and quarters. We expect demand to remain solid, which should also be reflected in a book-to-bill ratio above 1 for the full year 2022. The supply chain in the rail industry remains tense and inflationary headwinds are part of the game, which will stay for some time. The truck market also faces ongoing demand, good demand. Truck production rates in Europe and especially North America in the last quarter developed positively year over year. This trend should continue throughout 2022, only potentially limited by managed order books of our customers. Truck production rates in China continue to be weak as expected, but I would like to highlight that CVS again grew above market-driven above the market, driven by content per vehicle, and we will continue to do so. For the full year 2022, we have now reduced our expectations for the production of heavy-duty trucks in China to around 620,000 units. Nevertheless, long term, the market should provide attractive growth opportunities. As soon as the market recovers, we will benefit due to our leading market position and the unbroken trends of higher technology and demand for quality trucks. The situation in the global supply chain has improved over the past month, but is still unstable and characterized by disruptions and unpredictability. But we continue to see slight improvements recently compared for the first half of the year 2022. Our input costs are an ongoing challenge for the whole industry, and we see that some suppliers are under strong financial pressure. Regarding pricing discussions with our customers, we continue to make good progress. CVS was able to successfully finalize the first wave with all customers, which is beneficial for our profitability in the coming quarter. We also expect the frequency of price discussions to increase in the future and represent some kind of new normal. Aftermarket business benefits from high utilization rates and increasing mileage. This trend should continue as well. In September, we participated at the most important fair, showing our exciting new products and innovations and received superb feedback. Therefore, I would like to hand over to my colleagues Juergen and Bernd to speak about their experiences meeting our customers and the media.

Thank you Frank and hello everybody. I'm Jürgen Wilder, head of RVS and I hope everyone is doing well. Let's have a look at chart number four and our presence at the Innotrans in Berlin, which is the world's largest rail fare that took place again after four years due to the COVID situation with a tremendous number of visitors and also great feedback that we have received. Given today's clearly defined climate targets, there is an increasingly pressing need for sustainable transportation of people and freight by rail. Rail is and remains the most eco-friendly mode of mass transportation. It is currently in an evolutionary transformation and the industry is becoming increasingly interesting. The main topics we presented at the Innotrans Fair were Traffic flow, so supporting capacity increase within existing steel and concrete, and that pays into avoiding investments into additional steel and concrete in order to increase the capacity of the network. Train operations and maintenance, which pays into lowering lifecycle costs, which becomes increasingly important when it comes to tender criteria and awards in the market. smart solutions and applications, as well as ecological footprint. With these topics, we are the frontrunner to address the rail sector industry trends. My personal highlight also was our new digital automated coupler that we have developed in record time. The new electric contact coupler will support end-to-end power and data alliance on freight trains. This will significantly reduce the time needed to assemble freight wagons and at the same time noticeably increase flexibility. Both are important for increasing the share of transport by rail. Longer term, this is a decisive step forward in the development of automated system solutions for digital freight transportation. We also showed, for example, new solutions in DOORS or HVAC that increase passenger safety and provide solutions for the growing hygiene demands. These are just a few highlights and a few examples of the portfolio that we presented at the InnoFrance that I wanted to share with you. And with that said, I would hand it over to Bernd Spieth.

Thanks, Stephen, and welcome everybody from my side as well. This is Bernd Schwie speaking, head of Knoblenz's truck division. I would like to also share some insights about the recent commercial vehicle care, auto mechanica, and IAA transportation. First, to start with, we see us and our products as enablers for highly automated driving. by being the experts for truck motion control. We are best in class in coordinating interactions of actuators for vehicle dynamics and will further strengthen our position with our newest developments in the pipeline. We showcase redundant ready systems like our state-of-the-art all-electric power steering, our redundant global scalable brake control, GSBC, or our power management system. They will all play a key role in the field of driver assistance and highly automated driving and e-mobility. Our GSPC forms the basis for a completely scalable system and is currently requested by all leading manufacturers and AI companies as a basic system for brake control. Here we have invested in time in a platform that will carry us on for the next 10 to 15 years. Second, our customers were delighted by our solutions to further push e-mobility. As experts of compressed air, we received excellent feedback for our e-compressor solution and we strongly believe that air will remain in the truck of the future. Furthermore, we introduced our new brake hardware, Synapt Compact, giving through the compactness a design freedom to our customers and a reduced weight of 12 kg per axle. At Autometallica in Frankfurt, we presented our extended range of aftermarket products and services. With our Brake Drag Torque Reduction System, supporting the controlled release of brake pads from brake discs, we minimized friction. We even won the Innovation Award in the Part 10 Technology Solutions category. Another important topic was, of course, our recent acquisition of 55% of Kocharli's which will strengthen our connectivity portfolio and will pave the way to condition monitoring and predictive maintenance. It was highly valued in a discussion with our customers. Summarized, we see us in a strong position with the right portfolio to further extend our growth based on a special and focused development area. In my view, both fairs showed that we are on the right track Traffic safety, automated driving, e-mobility, and connectivity are the dominant industry trends in the next 10 years and beyond. CVS will be one of the key players with our focus and market-leading portfolio. Now, hands back to Frank.

Thanks for the insight, colleagues, and let's now move on to the details of our third quarter on Chart 60. Port Emlyn generated significantly growing revenues of around 1.8 billion euros, which were up by 13% versus the previous year. Our operating EBIT came in at 11.3% and is showing an improved trend versus the previous quarter. CVS posted revenues of 938 million euros at 9.2 operating margins. and RBS 855 million euros in revenues, resulting in an operating EBIT margin of 15.6%. We were able to narrow the profitability gap to last year over time in the last quarter as targeted. A fixed effect supported the development of revenues and EBIT, but did not support the EBIT margin. Free cash flow in quarter three was already significantly better than in the two previous quarters, turning positive as expected by reaching 38 million euros. Our intake of 1.9 billion euros was much higher year over year, and our order book with 6.9 billion euros reached a new record high. This foundation strengthened our confidence for high utilization rates well into 2023. Let's move to chart 7. CapEx. in the last quarter with 85 million euros was slightly higher year over year in absolute terms and even slightly below our guidance range in relative terms. As usual, capex spending should increase in the fourth quarter. Networking capital, like in half year one, is still accepted on higher levels by us, as current uncertain times with all existing supply chain constraints require safety stocks and higher flexibility, sometimes even explicitly requested by our customers. In such times, we are clearly prioritizing delivery capability over optimized inventory levels. The industry currently faces delegated challenges and we position ourselves as a strong and reliable partner. Therefore, we temporarily will accept higher stock levels and accounts receivables. In the fourth quarter, we will reduce networking capital as we have done in previous years as well. At the same time, We also see that our customers are putting more focus on cash management, which also leads to postponement of payments. Important here to mention is that we do not see any risk of general defaults. At the end of the last quarter, ROSI amounted to 16.1%, affected by both reduced operating EBIT and higher working capital. Let's move to slide 8 and towards the free cash flow situation. Free cash flow at 38 million euros was much lower compared to the previous year's level. The improvement quarter over quarter should continue and result in much better free cash flow in the fourth quarter. The higher net working capital was the main reason for the third quarter development and clearly limited the turnaround of the free cash flow situation so far. After several tough COVID years, higher input costs as well as higher inventory levels to fight supply chain disruptions we see that some suppliers and customers react stronger to the increased challenging business environment. This does not meaningfully affect our operations today, as we have a very broad and localized supplier base, but this probably affected our free cash flow to a certain extent. Let me be very clear. It's not a question of whether we received the payments, but at what exact time. Let's have a look on the divisional performances in quarter three, starting with RVS on chart nine. Order intake of RVS was solid after three outstanding quarters, each above a billion euros. In the third quarter, RVS posted an increase of more than 18% to 877 million euros year over year, mainly driven by our strongest growth region, Europe, again, despite the lack of Russia. The order book also increased by more than 40% year-over-year to 4.8 billion euros, a very solid foundation for our factory loading in the quarters ahead. The book-to-bill ratio in quarter 3 was at 1.03. Let's move to page 10. Revenues amounted to 855 million euros, an increase by 6% year-over-year and higher compared with the second quarter 2. RVS recorded flat revenues in the OE business overall, but the aftermarket business was up 14% year-over-year, driven by all regions and overcompensating the OE development. The aftermarket share increased from 45% in the third quarter 2021 to 48% in the last quarter. This development is remarkable and underlines the resilience of our business system once again. China As mentioned, continues to face a reduction of investments in rolling stock and a very slow recovery from economic challenges. Accordingly, the OE business was lower year over year, while aftermarket developed favorably and more than made up for the OE decline. In North America, we recorded extremely strong sales in the freight business. Overall, we expect a further quarterly improvement and anticipate that in 2022, RBS revenues should grow, including some acceleration in the fourth quarter. Operating EBIT of RBS in quarter three reached 15.6% after 17.6% a year ago. The main influencing factors of this development were the regional mix with lower profit contribution from China, missing a creative Russian business, as well as higher inflationary costs. These higher input costs could be only partly offset by higher OE pricing due to longer contract duration so far. On the other hand, RVS has been very successful in increasing aftermarket prices and implemented cost measures contributed positively. Compared to quarter three, we do not expect RVS EBIT margin to increase in the current quarter. The main driver for this should be a less favorable revenue and profit mix in the APEC region. Let's continue with trucks on slide 11. Incoming orders of CVS amounted to 1 billion euros, which is a remarkable increase of 44% year over year, especially remarkable since most of our customer base still limit their order books towards end customers. Demand in Europe and North America remains very strong, driven by the continuing high demand in the transport industry, which led and still leads to pent-up demand. APAC, especially driven by China, remains weak, but please keep in mind that this is solely market-driven due to the ongoing zero-COVID policy and missing political stimulus. We expect a recovery next year and CVS will strongly benefit from this recovery, in addition to the content-per-vehicle growth already happening in China. The order book of our truck division reached 2 billion euros at the end of September, which is an increase by 30%, reaching a new record level. Book to bill in quarter 3 was 1.07. Let's move on to slide 12. CVS posted 938 million euros in revenues in quarter 3. which is an increase of 20% year over year and again a very strong result, considering ongoing supply chain disruptions and the very weak market situation in China. Revenues in the past quarter also benefited from the price increases that were introduced and customers have ordered higher volumes from us due to our very good delivery performance, meaning our customer first strategy clearly pays off. In Europe and North America, CVS saw positive development in all channels, OE as well as aftermarket. The APEC region dominated by China still ranges on a very low level after the China 6 introduction last year and the additional industry slowdown driven by the zero COVID policy. India, on the other hand, keeps developing on strong levels. The utilization of fleets and demand for used trucks continues to be high, driven by the driving demand for spare parts and services. Consequently, the share of aftermarket revenues increased to almost 30% quarter over quarter. I would also like to mention that the Kojali acquisition is closed and its financials will be consolidated starting from November 2022. With this move, we clearly strengthen our aftermarket business and its data-driven opportunities, which are very accretive for us, like also Ben Dunn has mentioned. CVS should be able to further post-solid revenue growth in the current quarter and finish the year with a strong performance. This positive outlook is fully founded on a strong underlying track market. In quarter 3, CVS achieved an EBIT of €87 million, which is a slight improvement year over year, but nicely up versus the previous quarter. The EBIT margin amounted to 9.2% compared to 10.8% a year ago and 8.1% in the previous quarter. This margin development was still affected by the lower contribution from China as well as Russia and continuous inflation. We expect the further improvement of the margin in the fourth quarter as CVS concluded the first wave of price negotiations with all customers already and other measures are bearing fruit as well. On chart 13, we confirmed the operating guidance for 2022. We continue to expect revenues between 6.9 to 7.2 billion euros, an operating EBIT margin between 10.5 and 12%, and free cash flow between 300 and 500 million euros for 2022. From today's point of view, our free cash flow guidance could be slightly ambitious, as the before-mentioned supply chain constraints linger on, and the current industry focus is on tighter cash flow management. This could lead to continued necessity of higher inventories and some delays of payment, especially towards the end. We are doing our very best within that environment and expect to be rather at the lower end of the free cash flow range. Please note that this guidance is based under the assumptions outlined on the right side of page 13. Let's finish with some closing remarks on page 14. We consider Knorr Bremse to be a very strong and resilient company. We have a strong business set up, and the financial backup to master all current and potential future headwinds. Our aftermarket business and high localization degree supports our resilience. Our market leadership is fueled by very innovative and convincing product portfolio. And it is the basis to grow stronger than the rail and truck market. We focus on improving margins not only with pricing actions, but also by carefully selected M&A activities like Gojali, We are reviewing and optimizing our existing portfolio as we aim for with Kipe as just one example, and we will continue to do so. With this, I would like to thank all colleagues, employees, and business partners for their outstanding efforts and contributions in these globally challenging times. And with that, I turn the call back to the operator to start the Q&A session. Thank you so much.

Thank you very much. Ladies and gentlemen, we will now start the Q&A session. If you would like to ask a question, please press 9 and star on your telephone keypad. In case you wish to withdraw your question, press 9 and star again. And the first question comes from Selvaja UBS. Please go ahead with your question.

Yes, good afternoon. Thanks for taking my questions. The first question is on the order intake outlook. For the remainder of the year, you had very strong track orders, obviously. In Q3, which I guess might have been a bit more back-end loaded, I was just wondering if the strength you might have seen in September has actually then continued. In Q4, and we should see a similar level also for the fourth quarter, and likewise on rails. I know it's a very lumpy business, of course. This time the order intake has been a bit lower. I was just wondering what the pipeline looks like for the current quarter.

That's the first one.

Thank you. Sven, thank you so much for your question.

Let me start with the overall picture, so to say, for the group. As you rightfully said, it's kind of a lumpy thing, of course, always looking at order intake on a quarterly basis for us, and especially in a rather long-term oriented business like we have in RDS even more so than in the truck. We do see that this third quarter is on a level that we should be also able to achieve in the fourth quarter in regards to order intake. From a group point of view, I think this is the right way to look at it. Already, of course, I always have to say that we need to see that it's kind of a lumpy thing. But we would expect somehow similar levels on order intake in the fourth quarter like we have seen somehow around in the third quarter. I think that's a fair judgment and that holds true for basically both divisions.

Yes. Yep. I confirm that. Okay. Thank you for that guidance. And the second question I have was just obviously on China. I know you had an update on China only in August for the mid and long term. But, of course, you know, I think we had two developments in the meantime. I think on the one hand, I think the number of high-speed trains that are supposed to be delivered next year has been revised up from 60 to 80. And secondly, obviously, everybody's now talking about reopening. And wouldn't you think that, you know, both development at the margin could still be helpful for you? I mean, I know it's still the metro business, which is one of the bigger businesses that might be a bit more difficult, but I would still think on the high speed and maybe on the service side, there would be some benefit of that. Thank you.

Thank you, Sven. First of all, to put things into perspective, talking about high speed and looking at the revenue share of high speed that we have in China, and we talked about that a lot around quarter two, this isn't the biggest chunk of our revenue generation overall. So it's only a minor part of our Chinese business. We have 10% of our revenue in China coming from high-speed business. So, yes, it helps the 20 additional or 15, 16 additional high-speed trains, but that wouldn't move the needle in that dimension that you would be seeing it significantly in our figures, bottom-line results. I think, yes, you are also right that there is a slight improvement that we see maybe on the ridership side. In China, this is true. Quarter 3 was significantly better in ridership than it was in the second quarter. But also here, please keep in mind that not immediately increased ridership levels. take its toll in our top line performance. So there is a certain time delay, needless to say, also for aftermarket revenues to cope with the increased ridership levels. But also when it comes to quarter four, we don't see really that the ridership levels should be going up further than quarter three. That's at least currently the look, how we see things. And I ask, of course, always also Jürgen to add some additional comments if you like to, Jürgen. But that's the way we generally see it, I think.

Most of it has been checked by Frank. You're right. I mean, we see a little bit of an uptick of high-speed trains. Not where it used to be. It used to be more like in the 200 ranges per year. That might come back in a few years to come, but not short term. We don't believe so. And I also agree with your judgment that you said, I mean, part of the question that the metro side, the recovery is a little delayed compared to that.

Okay, that's fair. Thank you both. I mean, it's probably fair to say that it stops being a headwind next year, right? I mean, it was a headwind now for quite a number of quarters But that would at least stop, I guess.

Well, now that I'm going to compare to where we are now, I would see that that way, yes.

Okay. Thank you, Frank. Thank you, Jürgen. You're welcome, Sven.

And the next question comes from Ingo Schacher, exam BNP Paribas. Please go ahead with your question.

yeah thanks for getting my question and i think in your remarks already made a few positive of course optimistic comments on the expected volume development for next year pointing to a few pockets of improvement so wondering if you're also assuming that you get a scenario where you can achieve maybe a low single top line growth what that means for your profitability expectation without being too specific on that one i guess we're hoping which might end up somewhere between this year's level of 11 and last year's of 13, maybe in the middle at around 12. Just wondering whether that's directionally a view that you would share or whether you think we are missing certain factors such as pretty steep later cost inflation or further price erosion in China.

Thanks, Ingo. And I was clearly expecting that question. I mean, last year, Around that time, clearly, we gave some qualitative indications in regards to the upcoming year, that it was a bit of a different situation. We had the CMD in November last year, and we wanted to give you some guidance in between five years ahead, time horizon and today's perspective. This year is a little bit different. I mean, time steps are really... led to even more uncertainty in the market out there. All the additionally incoming macroeconomic volatility that we all know and been talking of since the beginning of the year, we did shy away from doing so. This time around, please understand that we do clearly see, I think that is well aligned within our company that we see markets growing. We see in both divisions the markets growing, not on tremendous levels. You have just recently also seen the UNIFE study, so to say. We do expect markets to grow. You know our promise of Knorr Bremse with our excellent products to outperform the markets somehow. I hope that is, at least for the time being, so to say,

acceptable for you we will come out at the beginning of the year already in february and shed some detailed light on our guidance for 2023. yeah thanks it's fully on the search and of course it's kindly just last year we won't push you into an early outlook every year but anyway we wanted to try um maybe one other question on on your um governance related aspects maybe on both, on the new CEO, of course, he's not yet on the job, but you probably know him from the time that he's on the truck, so just wondering whether you already have a view, or whether there's an official message as to why, I think one thing that is obvious is that he has more of a truck background, how we should read this, whether we should interpret this as meaning that you see more strategic opportunities and more strategic development potential on the truck side, or whether it's just a coincidence that you picked the truck person because that happened to be the best candidate available and in that context then you can also briefly comment on some of the I think discussions around the stake of the Thiele family and if it is true that that sort of not the entire thing might end up in the foundation how we should treat this and whether I think the party said that the Thiele family was committed to maintaining a high stake in Knorr-Banzer, whether this commitment is also applicable to Julia, to the field as an individual, or whether any previously made statements do not apply to Julia, to the field.

Yeah, thanks for that additional question, a more tricky one, and maybe three questions in one, but I'm happy to try and answer that best possible. First of all, of course, I know Mark since quite some time, former days as a colleague and as my CEO then for two years at least in Dynatracks Asia. You said you have chosen, I mean, you obviously mean the supervisor report because I have not chosen him. It's the supervisory board that made the decision. I was not involved in that process and I assume also none of the other colleagues here at the table, but I do think that just looking at the background of Mark, so to say, being a very international person, being a very very good industrial person that is very knowledgeable in regards to the industry, not necessarily talking about drug only, but I think it's about the industry knowledge that was at the forefront of any decision making. That was important. I think he's strategically a smart guy. I do think that he also has strong implementation skills. So he's not only strategically well-educated, but also kind of a strong leader and a strong implementer in times. And I think that maybe led to the decision, but that I can only assume somehow. I think we always said, and when you asked me or your colleagues asked me in previous meetings what this guy should have, we always said kind of industry background and the deep understanding of the industry is important. And we always said it doesn't really matter whether it's more a truck guy or more a rail guy. And he also knows clearly that he is in the CEO role and doesn't have to follow up on on truck things and leave at the side the rail things. So he knows he is the CEO of Knorr Bremse Group, existing of both divisions, and I'm sure that he will focus on both and not only on one, so to say. In regards to the share of the Thiele Foundation, the share of the Thiele family, the executor of the last will in regards to the Knorr Bremse shares, we have Still the message out there that the executor of the last wish of Mr. Thiele doesn't need to sell shares in order to pay the inheritance tax. So there is no pressure coming from that one. That statement was already true and out there in the market once the Lufthansa shares were sold back in the day. So that is the last. so to say, information that we got since the unfortunate passing of Mr. Thiele. We always felt and got messages from the Thiele family and the executor of the last wish in regards to stability and continuation for Knorr Bremse and no signs of selling any kind of shares, but it's definitely a matter, a private matter of the Thiele family and the executor of the last vision. I can't tell you exactly what they would be going to do in the future.

Okay, thanks very much. You're welcome.

And the next question comes from Vivek Mehta, Citi. Please go ahead with your question.

Thanks very much, everyone. Could I just ask on your business in Russia, do you have any latest strategic thoughts that you could share with us on what you want to do with that business? Thank you very much.

Thank you, Rebecca. I mean, nothing has changed in regards to our last detailed discussions about our stance on Russia and our actions we have been taking. We have been shutting down the joint venture that we had with Kamal on the truck side. We are not doing any kind of OE business anymore and not acquiring any kind of new orders for the OE business. We are still delivering on the spare parts side, on the aftermarket side, what we are obliged to do, given some old contracts that we have in order not to run. into any significant gains there. We have dramatically shut down the business and reduced the business. We talked about the revenue, dramatic revenue loss out of that. Decisions that we have been taking already in the second quarter, I think, and it's unchanged the situation.

Okay. Thank you very much. You're welcome. Thank you, Vivek.

And the next question comes from Karin Chan, Credit Swiss. Please go ahead with your question.

Hi, thank you very much for taking my question. If I may ask a question on volume versus price close, if you could provide us a little bit more colour on the split from two, that would be great for both rail and truck. And then also the second question is on more networking capital. I understand that you provide quite some colour on Q3, but for Q4 and full year, if you could provide us more colour, especially on account receivable, that would be very helpful. And I understand that there's kind of uncertainty from customer payments in Q4, but if any more colour on that, that would be great. Thank you.

Yeah, thanks for the question. May you please, the first half of your question, volume, price, shed some light on this. What do you exactly mean in regards to 2022?

Yes, in regards to Q3, Q4, or 2022, what's the contribution from volume versus growth? Is that something that you could give us?

Yeah, I would say the growth figures that we are aiming for, you know, is our guidance range that we have just been reconfirming. So if you take as an example, so to say, the midpoint of the guidance range, then potentially the best guess, if I may say so, not indicating much more details than just the range. And if you look at that growth level compared to last year's figures, you should see that we have around 200 plus, maybe 220, somehow around that. They are off price measures. Yeah. And I think that is a pretty precise answer to your question. Then if that was the question, the 220 we expect in a year-over-year situation to achieve revenue growth by pricing. And the rest is then in the end basically volume, mix, of course, and also FX driver in there. But that is the price component. Looking at working capital, I mean, yes, we have been, and if you look at our balance sheet also by the end of last year, you see that we have significantly been increasing, especially since the Russian war, when Ukraine started our inventories. We have been increasing our accounts receivables, which, by the way, is coming from a December standpoint, where usually a lot of Asian customers especially wait for quite some time and then finally pay in December. There's also a tremendous increase coming from December 31st, that is, to nowadays. But I would say we have roughly 200 plus. million increased accounts receivables and we have some 300 plus increased inventories and we are intending of course to reduce significantly both towards quarter four end Meaning December again, as you rightfully said, we can somehow not always be 100% sure whether, especially when it comes to potentially also Chinese customers that usually pay very late at the end of December, that all payments finally come in. In the previous years, they did so. And we, of course, work closely with our customers in order to make sure that they do so again. But finally, it's not under our control in the end. And that's what I was mentioning. So there's a significant amount of reduction that we plan in the fourth quarter coming from the levels that I just mentioned.

Thank you very much for that.

You're welcome.

The next question comes from Mark Beck. Steve, please go ahead with your question.

Thank you for taking my question. Just one quick one on RVS. I guess you said that you don't expect, let's say, large improvement in margin RVS. Could you maybe elaborate a bit on when you expect, let's say, blank price clauses or efficiency measures to really kick in for RVS that we see in improvement over here? And can you maybe also touch on how negotiations with Deutsche Bahn and SNCF are coming out, if I'm right, especially Deutsche Bahn was kind of a difficult customer this year in taking or accepting price increases. Has this changed or is it still a tough nut to crack?

Thank you. Well, maybe I want to refer to that question now. You know, I mean, first of all, as we said before, I strongly believe, and that never changed, that over the course of the time, we'll clearly recover all those cost increases that come from inflation. You just need to keep in mind that it takes a little bit of time because there are different types of, let's say, contracts. So, first of all, we have a share of the business that is... like aftermarket spare parts that are ordered basically when they are needed. Some of them have frame contracts. And those parts of business we did and we can quickly adjust in terms of pricing. So reflecting the cost basis. And then there is, of course, especially OE contracts. that is tied to specific project contracts where you specifically agree with the customer basically to deliver a certain system or certain amount of systems for a specific train contract and they stem from basically sometimes previous inflation times and that is very hard to adjust, of course. because you would run into other liabilities if you just would not deliver on those. So, to give you a number of reported growth out in 2022, the majority of the contracts in that specific subsequent basically is fixed through contracts that will be lower than already next year. Next year we're talking about, let's say, 35 to 40% of the business that was already fixed basically in 2021 or before, and then subsequently less and less. So, as you can see, it will take to end of, let's say, 2024 until we completely recover, but we will completely recover. And the specific questions Deutsche Bahn and SNCF essentially The same system applies for that as well. When it comes to spare parts and things like that, we are also able to increase those prices there.

Thanks very much. The next question comes from Akash Gupta, JP Morgan.

Please go ahead with the question.

Yes, hi, good afternoon, everybody. Thanks for your time. I joined the conference call a bit later, so apologies if this has been already answered. But my question was on free cash flow. If I look at the nine-month free cash flow, you have minus 229 guidance for the year 300 to 500, which would imply 529 to 729 million in free cash flow due for I think you already mentioned the comment that CapEx will go up in Q4. So can you indicate what are the moving parts behind the guidance range, and if it's fair to expect you might be leaning towards the lower half, lower end of the range rather than upper end of the range? Thank you.

Akash, I take that one. Indeed, I commented on this already in my speech and in a question as well. Nevertheless, I tried to make it short and summarize it. I really said that given the current still ongoing or lingering on situation of the supply chain constraints and all that stuff, we rather see this as a necessity to keep somehow a certain level of safety stock, flexibility kind of stock in our books for quite some time. Nevertheless, we aim to reduce, but as a matter of that, we rather think that the guidance range for 300 to 500 is getting more and more challenging, so we thought it's a good, so to say, indication for you to guide you towards more the lower end of that range. That was what I was saying before, and then one colleague in regards to what kind of levers we would have within our working capital and how to get there over the last three months of the year and the two big elements that we are putting measures upon is on the one hand side accounts receivables and inventory levels and both in the dimension of probably 500 million euros. So that would be then towards the low end. of that guidance range, but this is the tremendous effort that we are striving for, looking at all the uncertainties out there, the more intensified cash flow management that also the customers are applying, and so that is the situation. So strong efforts in the fourth quarter in regards to inventory levels and accounts receivables.

Thank you. Thank you, Markus.

At the moment, there seem to be no further questions. If you would like to ask a question, please press nylon star on your telephone toolpad. And we have a question from William. Please go ahead with your question.

Yeah, good afternoon, gentlemen. Thank you for the time. Three questions. The first, I suppose, goes to Bernd. But could you provide an update on or share your view on the strengths and capability of your partnerships within CBS to address the elements of perception and decision alongside your actuation capabilities to provide a full line platform towards the autonomous truck of the future? Do you think that you have all of the relationships required or are there areas that need to be strengthened? That's the first question. The second relates to perhaps more detail for Jürgen, if you would share your view on the volume outlook for OE in this RBS going into 2023? I mean, you have a lot of visibility with the backlog. I mean, should we be thinking about Europe up five or ten in terms of volume going into next year? And the last is perhaps more of a step back and thinking about the changing complexity of the geopolitical landscape. Can you share some thoughts on you know, if the company is very happy with the footprint, the manufacturing footprint and the supply chain relationships, or perhaps whether, you know, there's a necessity to shift over the next years towards more onshoring in certain regions. Thank you.

Yeah, good questions. Bernd here. Let me start with the topic of partnerships. And if you had asked that question three years ago, we would have probably come up with a, a list of capabilities and partnerships that we need to collect together and surround ourselves with in order to be a full service provider for automated driving. The time has changed and many companies have learned their lessons on how much effort is baked into such a system in the future. And we will focus on our capabilities. And our capabilities is the vehicle motion, the brake control, the actuation systems, brakes, steering, but also controlling the dynamics of the truck. And that we have in-house. And that's what we have actually changed over the last fairs on the IEA predominantly with our customers. It's very much welcome. We provide the full redundancy in the truck for all these actuators. We are good partners to the AI companies, but we don't need them in our, let's say, close proximity. They can be partners, they can be customers. And that makes us very flexible in that surrounding and makes us a most welcome partner at the moment for the OEs when they go down that path.

Eddie, on your questions regarding OE growth, I mean, overall, yes, globally, we would see an OE growth, despite the fact that we see, as you know, Russia, as you just discussed, and China being a little bit more slavish. I mean, the growth comes to a large extent from Europe. That is true, overcompensating those other things. There are some limiting factors, some regions in Europe, for example, If you look at UK also, then there was in the past 10 years a lot of new OE business that is flattening a little bit, but there are other regions in Europe are growing faster. The question always will be good order entry that we also have seen, as we have reported, there's of course with the supply chain always a little bit of a risk when that turns into safe. Also with the car builders, we are depending a little bit on that. That also needs to be counterweight a little bit. And then your last question is the footprint. I think we are well positioned in terms of geopolitical situations. We always have put a lot of emphasis to be largely and increasingly independent in the individual region. That's what we have also in the past few years has had a continuous focus on and implemented actions towards that and that pace of I think now or depending on the scenarios what will happen in the future.

If I may add to that what Jürgen just rightfully said, one other perspective that over the last few years, especially being hit by COVID-19, being hit by the semiconductor situation and the issues later on, we have experienced very successful supply chain throughput times and not massive disturbances in our own processes, given that local for local approach, that decentralized approach of our supply chain and our own operational footprint. And we also do hope that it would further support us. Think about just energy, whatever worst cases you could paint on the wall. We have, for example, in Germany, a revenue share of 25% in the top in the sales, but only 10% of our global workforce in assembly work in Germany. So we're pretty happy with that, so to say, global approach and decentral approach of local for local with high local content in that market that helped us, and we believe that will also help us in the future.

Thank you, Frank. Just one follow-up, if I may. You had very insightful comments about the pricing delays or the realization of pricing OE in rail with your customers there. I mean, could you share some similar thoughts about the success in achieving indexation plus, if you like, increases in pricing across your CVS customer base on those platforms?

Yeah, of course I can. And to be honest, the results that we have showcased today are heavily depending on our success here. We have now concluded the first wave of negotiations with all customers. All channels are covered. And in the meantime, we are already preparing the next wave and that has all been announced to the OEs. They are prepared to it. They know it's coming and After, let's say, a longer period of negotiations, we expect now much more and much shorter settlement on this.

Thank you very much. Thanks a lot. Good afternoon. Thank you.

The next question comes from Gerard Ray, Deutsche Bank. Please go ahead with your question.

Thanks very much. Good afternoon, everybody, and thanks for squeezing in. I wanted to follow up on the pricing question, and I apologize in advance, but I'm afraid I missed part of what was said previously on the topic. But did I understand correctly that the pricing realization is around 3%? Is this correct? And could you provide maybe a bit more color on the order pricing dynamics maybe for both RVS and CVS? in a more quantitative way as well. So that's question number one. Question number two is around RVS backlog, which is clearly much higher than usual, around 18 months of revenue equivalent, but lead times are obviously also much longer than normal. So I was wondering if you could give us some indication on What is the share of this backlog, which is actually due for conversion next year? Thanks very much.

Gail, if I may start quickly and then hand over, of course, to the colleagues who know much more details. You're right, if you just mathematically take my, so to say, 200 million plus, in correlation to the 7 billion of revenues that is the simple math so to say which I do as well discussing with my colleagues needless to say but I mean the reality of what are the underlying contracts in OE business, in rail, in truck and aftermarket, in rail, in truck and looking at different channels that you would have, for example, in aftermarket with the OE channel and the independent aftermarket channel. And then seeing the different countries you're operating in and the different customers, their market strength, our market strength, our market share in specific markets, it's getting complex and complex. You can do that in a simple math and then you would end up with roughly three point something percentage points on the seven billion. That's right. But I mean, the colleagues shed a little bit more light, but we understand how diverse the respective contracts are that are in place.

Yeah, I mean if you talk about contracts and price increase contracts, some contracts basically are more or less let's say frame contracts, so where you agree If there's certain volume in the future of a specific car type, so to say, that we are the preferred supplier there, and there's some also agreed pricing on there. And with those contracts, we can sometimes have the discussions with the customers, and we have them in order to maybe increase them. And there's specific project-based contracts where we have, so to say, clearly defined delivery times for very specific systems, a quantity of that for specific projects that are delivered from a car builder to a customer. That follows pretty much a scheme that also the car builders currently are a little bit suffering from the customers, the price discussions with the customers. They are very, very difficult. That's generally fixed. Some of those contracts, when they are longer running, have some price increase clauses depending on some indices that is generally at the end of the year reviewed and therefore also adjusted. We also benefit from those. And then there's the share of the business that is mostly in the service business where it is more about spare parts and other spare parts. That's obviously the easiest part to increase prices, and that's what we also are doing. So I think we need to differentiate those and not just calculate a price increase number in percent across the board because it's very different in those individual categories. You also had the question, I think, regarding RBS in terms of increased backlog and how much is locked in basically for next year. Also there we need to differentiate, first of all, between regions. In Europe it's higher than in Asia because the lead times are much higher in Europe than in Asia, for example, especially in China. That has traditionally always been the case. It's nothing unusual. And then on the OE side, it's rather high. It's, let's say, generally more than 60%, 70% at this time around the year, whereas on the aftermarket side, it's rather low. And that's how it's kind of distributed, I would say.

On a truck side, maybe a bit more light, you have to distinguish the different channels, independent aftermarket, aftermarket at all. We have used all our pricing power to the limit of the price elasticity. We didn't want to lose orders there and give it away to other participants, which we didn't, and did a good recovery there. On the OEM side, if you look at different materials that we are buying and using, there are already material processes in place. Those clauses have certain raises which kick in after a certain time limit. We have opened every contract that we had and have renegotiated every contract, either in certain payments, in certain new recoveries. I can confidently look into the future about our costs that we will have and what we already had. And our customers have welcomed our way forward, how we did it, how we made it transparent, but also how persistent we were in getting it done.

Very useful. Thank you very much.

Thank you again.

And the next question comes from Carmen Tan, Credit Suisse. Please go ahead.

Hi, thank you very much for taking another question from me. I've just got a very quick one on your pricing dynamics again. So you mentioned that in 2023, you've got roughly 35% to 40% of the sales from your 2021 price contracts. And then in 2024, that will be better, which these contracts will be fully pricing up. So the question is, what percentage will this number be for 2022 versus the 35% to 40% for 2023, please?

I mean, first of all, those numbers are mainly applied to Europe. since I just also mentioned that the lead time and coordination are much different. And also, I mean, so applied in the general business in North America, but for 2024, the number is much lower than that. It's not like 35, 40%. It's more to the extent let's say between

10, 16, around that, maybe to 20, depending on where you look at directly.

Sure, thank you very much.

And if I may squeeze another one on raw material. Given that you hedge on raw material, do we expect any kind of impact on margin in 20C, given that you might be hedging at a relatively high level of raw material price this year? Is there any issue on that?

First of all, if you allow, we are not hedging on raw material. First of all, we are only hedging currencies. Second of all, our direct exposure in regards to annual volume of buy for raw material is less than 2% of our overall annual volume of buy direct raw materials that we would purchase. Needless to say, the vast majority of our purchasing value comes, the raw material comes in via subcomponents, so to say, components and pre-manufactured material. So we rather have an indirect impact in the end in our material cost. And there is, of course, the situation different from cast iron to aluminum to plastics. what have you, there are, so to say, different situations or phases we are currently in, in regards to their pricing. I would say on the overall average, we have not yet seen average 22 numbers, which are below the average 21 number, even though in the last four or five months, the prices have come down basically for iron, for steel, for aluminum, plastics, rubber, but in regards to average price levels, not yet on the full year level or below the full year levels of last year. So I hope that did shed some light on your question.

Sure. Thank you very much for that.

You're welcome.

If there are no further questions, I would like to hand the floor back to Amir Spitzel for the closing remarks.

Thank you, operator. Yeah, thanks for your questions, and we hope you have a great afternoon and looking forward to talk to you next time. Thanks and bye.

Thank you very much. Bye.