Knorr-Bremse AG

Good morning, as well as good afternoon, dear ladies and gentlemen. I hope all of you are very fine. My name is Andreas Spitzauer, Head of Investor Relations of Knorr Bremse, and I want to welcome you to the conference call regarding our preliminary results for 2024. Today, Mark Listosea, our CEO, and Frank Weber, our CFO, will present the numbers and later discuss the numbers with you. The conference call will be recorded and is available on our homepage in the Investor Relations section. Here you can find today's presentation and later transcript of the call. It is now my pleasure to hand over to Markus Zusea.

Many thanks, Andreas. Thank you. Ladies and gentlemen, I would like also to welcome you most sincerely to our capital market call. But before presenting our preliminary figures and discussing last year's financials, I would like first to say a few personal words about last year. I'm positively impressed by the company that I have now the privilege to lead for the last year as a CEO. Right in the beginning, I described my initial impressions mentioning our employees' expertise and strong commitment to performance. Since then, I have visited many of our locations worldwide and met with many employees in person, and my initial impressions have been additionally reinforced. Today, I can sense the willingness to change things across the entire company, and that is world-class. On the executive board, we have defined a clear list of priorities that we want to tackle together. This particularly includes cultural change at Knollbremse. We are in the midst of a transformation that calls for clear management and goals, as well as new freedom to unleash entrepreneurial spirit. To this end, we have revised our leadership principles, which we will now be actively implementing throughout the company jointly with all management staff. With our Boost 2026 program, we have initiated steps to give our company even more power in the future. But more about this in a moment. We have already achieved a great deal in a short space of time as Knorr-Bremse team. While other companies are reporting poor figures and had to announce layoffs, especially in Germany, Knorr-Bremse is telling a convincing story with historically high, strong earnings. At this juncture, I would like to express my sincere gratitude to all colleagues who have made this possible with their commitment and their work. Let me now begin with the main economic messages concerning the previous year. 2023 was another tough year. Despite global and geopolitical challenges, Knobloch-Renze achieved all of its ambitious goals. One of the most important achievements we improved our profitability. This pronounced resilience is not merely wishful thinking, but can be seen now in black and white in our figures. Our order books and order intakes, as well as our revenues, reached new historically highs and records. Our rock-solid balance sheet gives us the basis for weathering the numerous economic challenges. Presented last year, our Boost 2026 program is fully on track with preliminary measures already implemented. With the disposal of Keep Electric, we have already taken first steps towards streamlining our portfolio. As you and we can see, we don't just talk, but also act. And we are headed in the right and heading into the right direction. Cost discipline is a top priority for us. We turn everything and every euro over twice before we spend it. On slide three, we summarized some of Knorr-Bremse's operational highlights this year. Important technical achievements as well as large project wins in both our rail and truck division underline a successful year. Let me give you a few examples. At the end of last year, Knorr-Bremse commenced mass deliveries of the new generation intelligent electronic trailer braking system. Co-developed with Kochali, the intelligent service system permits diagnostics to be performed on trailers fitted within the ITBASX system. In addition to renowned companies and research institutes, Knorr-Bremse is working as a prime development partner on putting autonomous trucks on the road. Last year, the Project Atlas L4 project passed preliminary milestones. Among other things, the safety-relevant subsystems for the onboard power steering and redundant braking systems required for the Level 4 architecture were successfully tested. Knobramse is also driving forward the digital transformation in rail transport. At the beginning of 2024, we launched a suite of intelligent products for network passenger and freight trains in conjunction with our associate Nexiot, allowing customers to benefit from improved train availability, operational efficiency and punctuality thanks to intelligent data evaluation. Our cube control system is already the most frequently installed brake control system on rail worldwide. After intensive development, we presented the new cube control last year. This is an intelligent platform that networks numerous elements of the braking system even more intelligently. At the beginning of my term of office, I said how important openness and transparency in the company are. Together with our managers, we defined our new leadership principles last year, setting out how we want to lead the people in this company in the future, with the courage to act entrepreneurially, with trust and, most important, in a team spirit. Working together on the Executive Board, we jointly initiated this cultural change and made great progress. This entails the culture of accepting Eros as well as the rollout of a worldwide diversity strategy together with a transparent remuneration system that we want to introduce step by step at all locations in Germany. On slide four, I would like now to turn to our BOOST 2026 strategy program and show you where we currently stand on slide four. When I joined Knorr Bremse a year ago, I quickly realized that this company knows exactly what it is capable of and where it stands. The unanswered question, however, was where should Knorr Bremse go from here? We have now provided the answer to this question with Boost, which defines a clear joint target. The most important goal is to secure a global technology and market leadership as the basis for constantly improving our profitability and at the end, at the same time, opening up new future markets for us. Or, in other words, I think Frank likes this most, margin and profit is king. And how do we plan to achieve this? First of all, by cleaning up. We will implement brownfield measures, also known as housekeeping, as we first want to put our house in order. The measures that this entails include optimising the portfolio and investment portfolio, as well as boosting the attractive aftermarket business in our favour. This provides the underpinnings for our resilience and profitability in the future. In a nutshell, brownfield means doing the things where we are already doing, but even better in the future. Let's now turn to slide 5 to discuss the financials of the year 2023. In 2023 Knorr-Brenzer generated record sales of 7.9 billion euros, representing growth of around 11%. Both divisions were able to achieve significant growth and contribute equally to the group's development. Europe and North America in particular recorded strong growth, but also the recovery in China had a positive effect. Our operating EBIT margin benefited from operating leverage or introduced efficiency measures and successful pricing actions. Accordingly, the EBIT margin rose to 11.3%, including Keepa, despite strong inflationary headwinds. Thanks to those successfully priced negotiations and efficiency measures, our truck division in particular was able to increase by around 100 basic points compared to 2022 and achieved an operating EBIT margin of 10% for the year. Our rail division had a rather challenging financial year, though the inflation ending 23 at 14.3, around 60% points low and below the previous year. Saying so, we will come to the fourth quarter where we will see that the deepest point we have already crossed. We are now seeing much higher margins also in rail than we have seen by beginning of last year. So, having said that, we are now at the turnaround. And due to our countermeasures, we are on a good way to proceed. Order intake and backlog also achieved strong results, underlining the robustness of our markets. I'm particularly pleased with the strong improvement in cash flow. We were able to improve the development in free cash flow from quarter to quarter last year, achieving an outstanding Euro of 488 million alone in quarter four. Overall, free cash flow for the full year 2023 amounted to 553 million euros. Free cash flow was driven in particular by a significant improvement in EBIT and the successful implementation of the Collect program to optimize networking capital. Let's bring these results and our financial goals in 2023 into context on page six. To make it short, in the past financial year, we were able to achieve all of our targets for sales, the EBIT margin and the free cash flow. Additionally, we were able to reduce networking capital efficiency by improving the scope of days from 57 to 51 days and improved return on capital employed from 16.8 to above 20%. Let us now take a look at the market overview for rail and truck. Looking at the rail market, we can see that underlying demand is very strong in all regions, something that is reflected in the consistently good order intake. On a especially gratifying note, the aftermarket in China in particular is continuing to benefit from rising ridership levels. Tendering in the sector remains strong, resulting in persistently large order books for global OEM customers. The portfolio of legacy orders heavily infected by inflation has shrunk considerably. The truck market also benefited from continued strong demand in 2023, particularly in Europe and North America. The truck production rate in this period was high in both regions and in fact very high in China as well. This year we anticipate somewhat slower growth in the truck production rate in China, in particular but see opportunities for growth in content per vehicle as well as our service business. We agree with the market assessment of our major truck OEM customers. in Europe and North America for this year. But we are also prepared if these two markets potentially have to recut clients, we will take appropriate countermeasures to safeguard our profitability. I would now like to hand over to Frank, who will outline the preliminary financial figures for the past fiscal year. Frank.

Thank you, Mark. Thank you, Mark. And also a warm welcome from my side. Let's dive directly into our balance sheet on slide eight. One of our top priorities is and remains to maintain a superior financial profile, being rock solid and providing a high level of flexibility at the same time. That means that we have a high focus on a strong equity level represented by almost 3 billion euros and a very good equity ratio of 37% at year end. Our liquidity also stood at more than 1.4 billion euros at the end of 2023, despite redemption payments of almost 120 million euros. Consequently, net debt could be reduced by 14% to 627 million euros. This led to a net debt to EBITDA leverage of 0.5, which is also a further improvement by more than 20% year over year. Overall, we consider our balance sheet as a solid backbone for operations. At the same time, it is much healthier compared to many other industrial players in the current environment of elevated interest rates and sometimes tougher market conditions. Also, our credit ratings with A3 and A- remain on a very good level, underlining our strong resilience. Let's move to slide nine. With 370 million euros representing 4.7% of our revenues, we have invested in our organic growth in 2023 once again. It was slightly higher in absolute terms year over year, but lower in relation to revenues. With that, we reached the lower end of our targeted range of 5-6%, a level we also prefer going forward. Networking capital was strongly reduced versus the third quarter of 23 and remained stable year over year despite an 11% revenue increase. This underlines what's important to us, namely the improvement of our capital efficiency. We reduced the scope of days significantly by around 10% from 57 to 51 days. This result was fueled by our successful networking capital optimization program COLLECT We took action across all working capital areas, in particular achieving significant improvements in claim management, which led to higher customer payments, and we were also able to reduce inventories very significantly from 57 to 52 days. As a result of improved EBIT and the before-mentioned Networking Capital measures, our ROSI increased from 16.8% to 20%, as Marc already explained. Please bear in mind that ROSI will become even more important for Knorr-Bremse in the future as we plan to include this capital efficiency KPI in our bonus system. On slide 10, I would like to provide you more details regarding our free cash flow. We could improve free cash flow sequentially last year, reaching an outstanding 488 million euros in the last quarter alone. Overall, free cash flow came in at 553 million euros on a full year basis, reaching the upper end of our guidance. It was driven by a significantly improved EBIT as well as by the before-mentioned working capital measures. We are glad that we have come back to a strong free cash flow level. As you all know, one of my favorite KPIs is the cash conversion rate. It reached 93% thanks to a strong second half year and especially a remarkable quarter four. As promised, we are back even slightly above in our target range of 80 to 90%, a level we would also like to achieve in 24. Despite all measures in customer receivables and inventories, we still took care of a solid supply security for our customers. This customer-first strategy is a cornerstone of our operational success. The before-mentioned project COLLECT, which is made up of cross-divisional teams such as direct, indirect purchasing, logistics, supply chain, as well as sales and after-sales, will continue this year. The purpose of Collect is to systematically improve KB's network and capital efficiency, and we are not done yet. Let's move to the development of the fourth quarter. Overall, we are very satisfied how we finished the year 23. We achieved what we planned and delivered on our promises. Revenues in Q4 increased by 6% to almost 2.1 billion euros. Our operating EBIT margin benefited from operating leverage, our implemented cost measures, as well as our successful price negotiations. It increased solidly by 70 base points to 12.3%. the best result in the last nine quarters. Order intake was down by 7% year over year, nevertheless reaching more than 2 billion euros in that quarter, which is a strong figure in the current business environment. The decrease is mainly driven by RVS, where we must take into account the extraordinary strong prior year figure. However, order book slightly increased by 3% to a new record level of 7.1 billion euros. This level will support a high degree of capacity utilization in the upcoming quarters. As mentioned before, free cash flow amounted to 488 million euros, resulting in a cash conversion rate of extraordinary 247% in the quarter. Let's take a closer look at the divisional performance in quarter four, starting with RVS on side 12. In terms of order intake, RVS recorded roughly a billion euros. This is a strong figure, but compared to previous year, which was extremely strong at 1.16 billion euros, a decline of 14%. At this point, I would like to remind you of the general lumpiness of orders in the rail sector. Not every quarter can be above a billion euros. which is a level we posted in the last five quarters. Please note that since the fourth quarter of 2022, orders have returned to the same good level of profitability as before the period of high inflation. Order intake decreased in North America and in Europe. In contrast, the aftermarket developed positively. Nevertheless, the book-to-bill ratio was one. The past quarter was the ninth quarter in a row which posted a book-to-bill level of one or above. As a result, order backlog reached 5.1 billion euros, an all-time high at year-end levels. The order book gives us very good confidence for the quarters ahead and underlines the very good rail development overall, especially in Europe and the APEC region. Let's move to slide 13. Revenues of RVS in quarter four amounted to a billion euros, an increase by 5.6% year over year, despite ongoing FX headwinds. Organically, we even increased revenues by 9%. The growth rate is again fully in line with our communicated long-term growth targets. Increasing OE business in Europe and North America as well as the stronger aftermarket business in all regions supported this development. APEC also recorded growth. Especially the development in China is particularly pleasing with increasing high-speed and metro business as well as an increase in aftermarket. In quarter four, aftermarket share in RVS was up to 51% by three percentage points. Our operating EBIT margin increased solidly by 70 base points to 14.8% in the fourth quarter. This development was fueled by our operating leverage, our efforts to fight inflationary headwinds, pricing actions, as well as by the increased share of aftermarket. Let's continue with our truck division on slide 14. Auto intake in the CVS division amounted to more than a billion euros, a strong figure considering the slightly tougher environment in the truck industry. Demand was very good in APEC, which compensated the slightly weaker markets in Europe and North America. Especially the Chinese market recovery further continued. Order book with almost 2 billion euros at the end of 23 was on a very high level, almost stable year over year. In 2024, order intake is expected to decrease in Europe and North America after a strong 23 overall. China is expected to post a stable to slightly higher order intake year over year. We also expect that our development in the first half of 24 should be stronger than in the second half of the year. Let's move to slide 15. Revenue development in CVS was positive once more, growing 6% to more than 1 billion euros. In this respect, the last quarter reached a new record level of revenues. Main drivers for this were the strong truck production rates, especially in APEC, as well as the benefit from price increases. Organically, revenues grew even higher by 8%. OE business in Europe and North America as well as APEC increased. Aftermarket business was up in Europe, North America and China. Its revenue share overall was almost stable at 28% year-over-year. Similar like for order intake, we also expect a stronger development of revenues in half-year 1-24. Operating EBIT of our CVS division improved to €118 million and 16% higher year-over-year. Consequently, the operating EBIT margin improved from 10.1% to 11% in the fourth quarter due to the successful implementation of our efficiency measures as well as higher customer pricing. In addition, we were able to harvest the fruits of the good integration of Kojali, the acquisition in the aftermarket business, which also supported our profitability in that quarter. Overall, I'm very happy about our strong quarter four results and the strong team spirit within Knorr Bremse. With that, I hand over to Marc for the 24 guidance and an update of our boost program.