Knorr-Bremse AG

Hello and a warm welcome to Knur Bremse's first quarter 2024 results call. Today's speakers are CEO Marc Listerseer and CFO Frank Weber. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. I would now like to hand over to Head of IR, Andreas Spitzauer.

Thank you, Operator. Good afternoon as well as good morning, ladies and gentlemen. I hope all of you are very fine. My name is Andreas Wittsauer, Head of Investor Relations. I want to welcome you to Knorr-Bremse's conference call for the first quarter results of 2024. Today, Martin Cissea, our CEO, Frank Weber, our CFO, will present the results of Knorr-Bremse, followed by a Q&A session. The conference call will be recorded and is available on our homepage, www.knorr-bremse.com, in the Investor Relations section. You can find today's presentation and later transcript of the call. It is now my pleasure to hand over to Marthis de Fea. Please go ahead. Many thanks, Andreas. Welcome, everybody, to our call regarding the results for the first quarter 2024. We want to keep the call rather short as it is a busy reporting day and we are cautious of your time. So, let's allow me to walk you through the highlights on chart number two first. In the first three months of the year 2024, Knorr Render had an excellent start, both operational as well as from a financial point of view. Our boost program is fully on track. With the sale of Jeep Electric and Safety Direct in quarter one, we reached important milestones regarding routing. On the M&A side, we recently announced the acquisition of Alstom's North American Signaling Business, which is a good example for our portfolio strategy. Low-performing assets out and good-performing ones in. In addition, I would classify this acquisition as a signature move for our greenfield approach. Unchanged is the uncompromised continuation of our dividend policy to distribute 40-50% of earnings to our shareholders. Therefore, we pay and will pay a dividend per share of 1.64 euros just a few days ago for last fiscal year. Thanks to a solid performance in the recent quarter, we confirm our full year 24 guidance of the closing of the sticking deal, which we expect during summertime we will include this asset in our guidance and will provide an update. That means this asset deal so far is not included. On page number three, I want to walk you through the major topics of the announced acquisition, focusing on the strategic rationale. As you all know, we have been sharpening our M&A guardrails last year. Rails, with its resilient market growth, secretive aftermarket business, and high profitability, is an important value driver for KB. The acquisition of the second business will not only further strengthen our rail division, but also our exposures to the real market overall. What do we get on board via this exposition? The portfolio of Alstom Signaling Business in North America incorporates products such as interlocking units including level crossings, frame deflection and commutation devices or on-board frame control products. These types of products are characterized by high safety standards something we have been familiar with for a long time. The business is particularly attractive due to its market-leading position in the control, command, and signaling segment, and, specifically, its high aftermarket revenue share, which is why it fits perfectly to our existing rail division. Although it will be entering a new market within the rail industry in North America, we have already known its customers, the so-called Class 1 for decades. What does it mean for Knoll Brothers? The expansion into signaling in North America is a step of transforming RBS from a system supplier of rolling stock only to a system supplier for the whole rail ecosystem. We know that we also strongly focus on digitalization and connectivity. Signaling will add data revenues to our business, plus opening up new perspectives for profitable growth, technological expertise, and future digital business models. The deal is a tangible step into our strategic direction to transform Claude Rensselaer in total and, very importantly, it will create additional value from day one. In addition, the deal enables us to further diversify our revenue and profit generation from a regional point of view. What are the next steps? The antitrust process started and we expect to close the deal in summer 2024. But it needs to be said, obviously, this process is not fully in our own hands. There are still people who will come around 1,000 new employees at CloudLambda and start the integration into RVS. All in all, the exposition underlines the efforts of our Boost 2026 program. We want to carve out diluting businesses and want to add value-added businesses to our portfolio. Frank Weber will give more details from the financial perspective later. Coming to slide number four. This is a used format which you well know. Let's have a quick look at the current market environment on Charlotte. For real demand stays solid as expected. Especially in Europe, our largest market, sees high order intakes driven by the continuation of the green mobility strategy in many countries. but also other regions such as Asia, and specifically China, are developing fine and should see a solid 2024 overall. The same accounts for North America. Aftermarket development is favorable to remember improved ridership level. But last, not least, pricing of new OE contracts is quite supportive, counterbalancing inflationary hazards. On the other hand, product production rates started to normalize across many of the CV's markets as expected. The past quarter nevertheless, development was still on a good level. On full year level, we believe the decrease of production rates in Europe could exceed 10% year over year. In North America, the potential decrease should be lower than in Europe, but the number of produced trucks should be still below last year's level. The market in China developed nicely, including some growth potential driven by exports into Southeast Asia. We observe the developing and development in the truck market closely and we will be able to react quickly to all changes if necessary, especially in Europe. On page number five, let's turn to this page, the first financial highlight of quarter one, 2024. Revenues amounted to almost two billion euros, representing a growth of around three to four percent. Rail saw a significant increase of more than 12%, while truck revenues decreased slightly, nevertheless to a much lesser extent than anticipated and still above 1 billion of euros. Operating highlight of the quarter was the development of profitability. Operating average margin benefited mainly from more efficiency measures and better pricing. Accordingly, the margin rose to 12.1%, which is an increase of 210 basic points, higher than last year's quarter results. Board intake was very strong again, with Sports Division posting more than 1 billion euros each. Book-to-bill ratio rose, respectively, at 107. Order backlog increased organically by 226 million euros to 6.7 billion euros, which represent a good level of visibility for the quarters ahead. Please bear in mind that the order backlog has been reduced by around 560 million euros following the deconsolidation of people last week. Pre-cash now in quarter one was at minus 95 million euros, a strong improvement versus last year's level. Please keep in mind that this development was expected and follows typical patterns of our business over the year. Quarter one is always the weakest, and quarter four is always the strongest quarter in terms of free cash flow generation. I would like now to hand over to Frank, who will outline the financial figures in more detail. So, please, Frank. Thanks, Mark, and hello, everyone. Let's continue on slide six. amounted to 72 million euros, representing 3.6% of revenues. It was slightly higher in both absolute and relative terms year-over-year, but well below our targeted range of 5-6%. Networking capital is slightly reduced year-over-year by 1.51 billion euros, which means our measures were again effective and helped to reduce the scope of days by two days, or nearly 3% versus the prior year. We continue to take action across all working capital areas, in particular, further reducing inventories via our ongoing networking capital optimization program called Collect. Our free cash flow, as Mark mentioned before, was minus 95 million euros. It significantly improved by over 100 million euros versus the prior year's quarter, driven first by further successes of Collect, which primarily aims to reduce inventories and accounts receivables, and secondly, also an increase if it supported this improvement, needless to say. The whole year of free cash flow guidance is unchanged, and we feel confident to reach our target also for this year. As a result of improved EBIT and the before-mentioned networking capital measures, our ROCE increased significantly from 15.9% to 19.7%. Let's take a closer look at the divisional performances in quarter 1, starting with RVS on slide 7. In terms of order intake, RBS recorded 1.06 billion euros. This is a remarkable figure despite a strong prior year quarter driven by Europe. Again, at this point, my usual reminder is that rail contracts are characterized by a general lumpiness and not every quarter can be above a billion euros. In the past quarter, we benefited from a major order with a volume in the higher double-digit million euro range in Europe, which was originally supposed to be booked in the second quarter. Pricing of new orders have returned to the same good level of profitability since quite some time, compared with the time before inflation started to increase rapidly. Order intake increased in Europe, offsetting a slightly lighter development in the APEC region and North America. Book-to-bill ratio stood at 1.1. At the same time, it was the 10th quarter in a row with a book-to-bill ratio of above 1. As a result, order backlog grew organically by more than 6%, reaching 4.7 billion euros, which gives us a very good visibility going forward. For the quarters ahead, we expect a continuation of good order momentum, and we should see a book-to-bill ratio of above 1 on a full-year basis as well. Let's move to chart 8. Revenues of RVS in quarter one amounted to €964 million, an increase by almost 13% year over year, despite ongoing FX headwinds. Organically, the division even increased revenues by 17%. Increasing OE business as well as a better aftermarket business in all regions, including China, supported this strong development. As a result, our aftermarket revenue share in RBS reached 52%, which is stable on a high level over the year. Operating EBIT margin increased significantly by 200 base points to 15.1%. This development was fueled by better pricing, operating leverage, lower conversion of legacy business, improved revenue mix, as well as our boost efficiency mesh. Let's continue with our truck division on slide 9. Auto intake in the CVS division once more amounted to more than a billion euros, a decline of roughly 11% compared with very tough cops. Nevertheless, the past quarter was strong considering the tougher environment in the truck and trailer business right now. Demand in South America and APEC was up, but as expected the markets were weaker in Europe and North America. Order book with almost 2 billion euros at the end of March remains on a high level and only marks a small decline versus 23 so far. As mentioned during our quarter 4 results call at the end of February already, order intake in 24 is expected to decrease in Europe and North America after a strong 23 overall. China is expected to post the stable to slightly higher order intake year over year. In total, this should lead to a better development for CVS in the first six months for 2024 compared with the upcoming second half. Let's move to slide 10. Revenues in CVS were slightly down by 4%, but with more than 1 billion euros still very solid. This development was mirrored basically in all regions, except for South America. At the same time, our aftermarket share increased from 28% to 30%. Operating EBIT of our CVS division improved significantly by almost 17% year-over-year, reaching 111 million euros in quarter one. Consequently, the operating EBIT margin improved from 9.0 to 11.0%. The main drivers of this development were higher prices, which we were able to achieve with our truck customers year-over-year, our strict efficiency measures, and also Cochali continues to remain a good value contributor to the business. Overall, I'm very happy about the excellence for the one result of both divisions within the given environment. Referring to Mark's outline on the U.S. signaling business, let me just add the financial rationale and the mid-term financial implications of this acquisition on chart 11. Overall, we see this move as an accretive addition to our business that really contributes to the KB main DNA elements, which include, first of all, the support of our strong rail business. Signaling North America will make Knorr Bremse much more rail-ish again, as RVS revenue share will pass the 50% mark going forward again. Rail is a resilient business with attractive future growth potentials for us and high margins due to the safety-critical nature of our product, a clear value driver for us. Secondly, high profitability levels. We defined in our financial M&A guardrails that we would only buy assets that are value-added and margin-aggressive to Knorr Bremse, the latest mid-shop. Signaling North America fulfills this criteria and supports our focus on increasing profitability in the context of our boost program. Thirdly, a high aftermarket share. Signaling North America comes with a large chunk of aftermarket business. Completely, a lot of spare parts business and modernization. RBS, a creative aftermarket share, will therefore further increase. We also appreciate the shift of regional distribution and therefore balancing our business with this deal. Increasing the North American share and reducing the dependency from other regions is a clear improvement and therefore also a risk reduction going forward. In its last fiscal year, which just finished end of March this year, revenues of Alstom Signaling Business North America amounted to around 300 million euros with an EBIT margin of around about 16%. Therefore, the acquisition price of 630 million euros in total represents an acquisition multiple of roughly 13 times EBIT, which is, from our perspective, very appealing. As a reminder, currently KB stands at roughly the same EBIT multiples with a lower margin. Additionally, we believe that this asset has the ability to grow mid-single digits and also improve profitability mid-term. This improvement will not be linear, but should progress step-by-step as it's also a project business. Overall, we believe Signaling North America is a great addition to our business and look forward to transforming KV's rail business successfully into the future. With that, I'm handing over to Mark again.

Thank you, Frank. Let's go to the page 12.