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.

On chart 12, I want to highlight one topic that we have been working on intensely at Knorr Bremsen, which is very important not only to me and my colleagues, but to the whole team, and that is the culture of change. Taking needs to develop into a more modern company, being innovative and agile without losing its important DNA of being focused and efficient. I want people to think out of the box, still being part of the team, and sticking to what was agreed. In the past month, we therefore implemented a speak-up in theatre culture into our everyday work. I'm proud of the team spirit of Knorr Brampton and look forward to continuing to improve. Additionally, the annual general meeting has approved a change of the bonus and remuneration system of Knorr Brampton. The impact of profitability and cash will increase, which I guess is also very important to our shareholders. At the same time, it was important to give the company clear goals. The entire management team implemented this with the Who's program. We now have a common goal and motivate our employees and teammates with clear direction and transparent communication. Looking forward, we want to be measured by the quality and speed of execution of the measures we implement to improve our companies. Last page. Number 13. I would like to make it short and crisp. We confirm our full year 2024 guidance after a strong first quarter. We continue to expect revenues in the range of 7.7 to 8 billion euros, an operating profit margin of 11.5 to 12.5, and a free cash flow between 550 and 650 million euros. We want to update our guidance of the publication of the Quarter 2 results and hopefully also take into account our new sibling business in North America. Thank you very much for your attention. We are looking forward to your questions from now on.

So, ladies and gentlemen, if you would like to ask a question now, please press 9 followed by the star key on your telephone keypad. In case you wish to cancel your question, please press 9 followed by the star key a second time.

Please press 9 and star now to state your question. And the first question comes from Sven via UBS.

Over to you.

Yep, good afternoon. Thanks for taking my questions. The first one is on the Alstom deal. And Mark, I was hoping you could educate me a bit more on signaling because my understanding was that you kind of find the conventional part of us from the US signaling business. And I was just curious, what is the part that you're not buying? Is that part even more digital? Is that something you need to acquire going forward from somebody else? And just really like to get a better understanding between the difference in like conventional and non-conventional signaling, if there is any.

Oh, that's a question.

So, to make it very short, we buy exactly the whole operation without some hertz in North America. We call it conventional because the data analytics and everything what is beyond is not included because it is not existing. That has to be asked by us. And this is where we see the transformational potential of this asset. So far, I think you are aware of our booth navigator, where we cluster every potential asset on three dimensions. Number one dimension is the x-axis, the horizontal one, whether this is a creative business or not. This one is a creative. Number two is the Y, that's the technological and also the market itself. where we say we have an access now to a market which so far was not accessible by above. Second, the profit pool of these perspectives accessible now for a market is very promising. It's in the range of 15 to 20 plus percent. which so far was not applicable for us. Number three, and that is the most important thing, and this is why we advise also always conventional, is that this access has a massive transformational impact on us if we play it right. And that means not only to play other regions, it displays it if we play this on a more service-oriented, data-oriented, because we have no access to data, We can work with the data and we can convert the data to services which can be packaged. And that's exactly where we say this is so far not done. This is what we want to do with it.

What's driving the 5% CAGR for the Alphan business? Is there any regulation change or what's driving the 5%?

This is the normal expectation, which we have roughly 50,000 Stellwerke. And from the 50,000 Stellwerke which we have in America, established over the last 60 years, we are the number one supplier of any form of overhauling and maintenance. That means we have a ratio of 3,500 to 4,000. are stations to be overhauled. This is the base for our after sales business, which we say where we will focus. On top of that, we have a project which is so far not finalized and signed, but we are very positive and our take rate is above 75%. which is called encore business. And this encore would give us a massive increase in revenues and also in profitability because the profitability was secured by the sales side. So having said so, we have incorporated the overhauling. We have seen it from the last year. So we just extracted it in the future. This is the 5%. Plus we have a potential which we see with this, and eventually by the end of the year we know more that the project is realizing as we expected, and then this 5% would be really the baseline.

Second point, that was on the truck cycle, because we all know it's hard to predict what's going to happen, but is it fair to say that the kind of, let's call it, outperformed gap you had in Q1, which I guess is based on content, which is based on the regional hedge, whatever happens to the truck cycle, that you're confident to maintain this?

Ben, you're talking about the margin that we are having with a significant increase in the first quarter.

No, Frank, I'm sorry. I meant the growth of the funds. I mean, you're clearly doing better in the truck order index than the markets.

Yes, both.

We have to say we really enjoy our shareholding in Cofali, which is over proportionally winning in Europe. That's a fact. The business is relatively small, but the possibility of this business is significant. So, to be very clear here, this asset is a massive part of our growth, and it shows the future is not only content for vehicles, but also the overhauling, the maintenance, and the professionalization of the maintenance. So, this is factor number one. Factor number two, we have, you have seen that we have a slight decrease in our revenues, and what we have done is, we have increased focused very, very much on our costs, internal costs. That means to be more efficient, to have a better turnover per person, and to focus now on that, this is to have the break-even of our CVS business now more and more in focus. That means we have very rigorous variables to come up with better margins. Now you can say, oh, this is eventually contradicted by the current market developments, where we are very, very careful and we are also a little bit, you know that, a little bit more conservative than our customers. And we already said in October last year that we don't see the year 2024 exceeding the year 2023 when it comes to European production rates. And having said so, we already prepared ourselves for everything what is coming from the market. So that means you can see we increased our profit margin by 280 coins by, in Europe, in fact, stagnating market. And that's the result out of it. Can we keep this for the next? If we get a lower market, we can't say, but we are prepared. And that means we are very, very well prepared for any form of cyclicality of this market.

Thank you.

The next question comes from Akash Gujba. JP Morgan, please go ahead.

Yes. Hi, good afternoon. I have two as well, please. The first one I have is on your expectation of rail business in China. With the recent data points that we got out of your Chinese customers suggesting some uptick in demand for new equipment in China, and I'm wondering if you can provide your thoughts on how do you see the market developing after somewhat slower Q1? And on the same topic, what shall we expect on margins? Because historically, China has been margin-accurative in jail. So how should we see the margin development for this segment if we're seeing a good Chinese recovery? That's the first one to start with.

This is fine for you. I think this... It's answered by a friend, right? I try my best. Which is always better than mine. Thanks, Akash, for the question. We see a good development in the Chinese market for aftermarket as well as for the OEM business. We do currently assume that high speed should have some growth potentials in the year 24, even after quite some good numbers in 23. We do think that METRO or eBusiness stays on a similar level like we had in 23 and we see our aftermarket to grow within 24 as expected. The ridership levels as, so to say, the fueling force behind our aftermarket business has been recently quite good as well. So if you look at the first quarter, there was a year-over-year up of more than 20% on the ridership levels, as well as in urban, as well as for the high-speed trains. So that is a good starting point for the year to come. If you take into account then a certain kind of lead time when this ridership then turns into revenue to us, we have a good belief in the second half of the year, 2024 as well in that regard. On the margin side, yes, China is accretive for us and will stay accretive. Of course, in the very long term, as we many times discussed, Dakash, we do have pricing issues, of course, over the next 10 years, so to say, but it will always stay very accretive for us as a business.

Thank you. And my follow-up question is on change in bonus system. Maybe if you can elaborate on what were the KPIs before and I think now you're focusing more on profitability, but maybe what was the KPI before and what sort of changes you have implemented and also how many people in organization and at what level are they covered by this new change in bonus system policy? Thank you.

I guess we have for the short-term incentive system not changed the KPI, but just enlarged the weight of the profitability policy. Now to 35%. So we have not changed the KPIs, just the weight of them towards profitability. For the long-term incentive, we have also added ESG component with 25%. And we added also a profitability component. The return on our invested capital is now included as well with 25%. And this concept of SPI and LTI, the incentive scheme, covers the first, second, and third line of all managers within the company.

Thank you. You're welcome.

The next question comes from Vivek Mida, Citi. Please go ahead.

Thank you very much, and good afternoon. I have two questions. Another one on signaling. You've stated your intention to become a system supplier for the whole of rail. What's the next steps on the strategy to expand in signaling beyond this, such as into new regions? Given the barriers to entry, is there any possibility of organic growth, or will it have to be through acquisition? Thank you.

Very good question. Thank you for that. I try my best to answer it as much as I am allowed to do, because otherwise we make the potential assets more inexpensive, which we don't want to do. So organically, to be very clear, A, first we have to make sure that everything what is in our existing portfolio has to be bundled. Because, you know, we have shareholding in Celexon, we have shareholding in Celisco. Celisco is owned by us by 100%. And there's some overlap content-wise and functionality-wise, which we will now bundle, and which is called a COC. This means we will create a business unit first. The independence of the signaling business in America will stay, but we will do, of course, we will do streamlining and purchase. We will do the classical things in IT and HR and so on and so on. Don't bore you with that. But the potential there is that we can easily increase the profitability level of the asset by doing just some frown-faced house-working. Besides growing into, in America we would not need anyone to grow further, so this would be purely organic. If we now speak about countries like South Africa, if we speak of Australia, speak of South America, signaling in the North America would be the hub for it. And so far it was not in the strategy of the current owner, to explore export markets that massively. So this is coming now where I call it organic 2.0. Now we speak about two regions which we could address, and that is Europe and Asia, especially China. China we will first observe before we have here any conclusions. In Europe, of course, we have to make sure that the signaling systems, the functionalities are similar, but the system itself is completely different to the ones which is in Europe. So that means in order to explore exceed our market reach, we have to consider seriously also non-organic laws in this area.

Understood. Thank you. My second question is a follow-up on the cultural change. You've talked about improving the internal processes. Can you maybe expand on how the culture needs to change around pricing and how you deal with your customers and how that needs to change to get the right return for your technology? Thank you.

I would allow us to split this, so first I try to answer it, and eventually Frank, he looks at me a little bit like, oh, what is this? I think it's a good question, Vivek, because we have a certain form of reputation when it comes to pricing that we are very stubborn, very stiff. I am afraid to tell you, especially our clients, this will not change. But what will change is how communicating we are. That means transparency has to open up also to the external. It has to be understood what we're doing, why we're doing it, and it has to be predictable what we're doing, which was in the past, sometimes eventually, sometimes a little bit erratic, but we will focus on that so that we are not only a very good player in this area, but we are also an agreeable area in this area. So the... But all the cultural change you can imagine is coming to a price. So even when we have 80-90% of our top managers leaving and also supporting us, we will have to make sometimes a hard call. Some people eventually decide for themselves that it's not the way they want to go. Because that means we are more self-reflecting and that means you have to be more argumentative. and less authoritarian and this is something which will happen more and more in the next months and also in the next years to come that the authoritarian character of our leadership principle is going fading away hopefully completely and our argumentative is growing and speaking in positive critics um hopefully this gives you an idea what we are struggling or dealing now with it's not struggling it's really a very entertaining journey but um Eventually we asked the CFO how he feels it and what do you think about it? I potentially come to the same conclusion, otherwise it would be even worse, of course. But looking at it from a different angle, you know the company is a very entrepreneurial company. It's a very decentralized organization that we are having which gives us a hell of a lot of strength and gives the entities out there in the world a lot of strength and the way they are acting in regards and have been acting. And this proof over the last two to three years in regards to pricing was really kind of tough and successful in the end. This will not change because we will not give up on any of the DNAs that our company is built up in regards to entrepreneurship. So I don't expect a cultural change. Maybe, so to say, the ways and means how to get the result through in the end might change a bit over time. But we are outcome-oriented as a company, and this will not change. Thank you very much for your help.

You're welcome.

The next question comes from Gail Debray, Deutsche Bank. Please go ahead.

Thanks very much. Good afternoon, everybody. My first question is on the divestment program. With the truck production rates coming under pressure now, this likely makes the process of selling loss-making businesses exposed to the truck market a bit more challenging. So I guess the risk I see is that some of the discussions you have could become rather protracted now. Is it useful if you could talk a bit about this and perhaps provide any color on the discussions you might have with the potential buyers? And the second question is a quick one on the signaling business you've just acquired. You mentioned that you could potentially receive a large contract by your end, I think. Could you perhaps talk a bit about this, whether you will need some specific one-off investments to deliver this unusually large contract, or whether all the costs have already been covered by Alstom before?

Yeah, thanks, Gaël. Let me start with the first part. Maybe you know that we have been so far delivering what we promised in regards to the sale of assets. We have been saying to you that towards summer when we do our second quarter disclosure, we'll give you some updates in regards to what's potentially new on the selling decision side from our side. So we don't think that that was it. Like we indicated, In that process that we are running currently, the environment is weaker than it was one and a half years ago, a year ago, but we don't see in the sales process currently a lot of headwinds given the fact liquidity is still there, so to say, the potential buyers that we're talking to seem to have the refinancing capabilities So it looks like, okay, in the truck side, those assets that are on the plate, no significant headwinds at this point in time. But we have to carefully watch this, of course. Yes, just to add to you, Frank, what is also very clear, and we are not doing only this for CVS, we are doing the same for RVS as well. CVS in core the two-thirds revenues of CVS have a profitability which is exceeding currently 50 to 60%. So we have a third of the business which is far away from this level. So that means CVS itself can be super profitable. The question is how do we fix it? Then you split the third into two. Then you can say from this third, even a third is not contributing currently at all. And that is something which we focus now to have measurements, to have KPIs, to have a tracking tool, and also to use Excel. Yes, we do. And we can say, you're right, it could be a wrong time or not the best time to sell this effort, but... the better we make this effort, the more we get an attraction by the market. So that means it's not only a downside, it's also an upside. Because every effort which we are now focusing on is getting better, it's not getting worse. That's for the question number one, just an add to what Frank said. Number two, the project itself is relatively big. The project itself, if I'm right, runs between five to seven years, and it has a potential, the amount of this project is roughly two times of the normal revenue of the business of our picture, our signaling business. The profit of this could be also extremely double-digit, And the invest that you ask for, how much invest is needed to get it, it's relatively small. And it's not bringing us to any situation where we have to go up front. This kind of project would really pay in from the very first beginning. And of course, the premium, the top situation would be after three to four years. And that's most I can tell you. Otherwise, I think, and everybody's nodding and look at me very seriously. I should not say more to you. Just one precise addition that we get it clear. The basic investment we would need to do there is R&D work, engineering capacity, which according to the contract, which is on the table, should be charged to the customer via cost plus method. So there is no, so to say, hit up front in the P&L or in the cash flow statement out of that project, so to say, up front.

Okay, that's great. Thanks very much. You're welcome.

The next question comes from Alexander Virgil, Bank of America. Over to you.

Yeah, thanks very much. Good afternoon, gentlemen. I wonder if I could ask one question just on free cash flow, Frank, cadence through the year, I guess. Just thinking about how we go from the minus 95 to the guidance for the full year. I appreciate that it's often pick and loaded. I just wondered if you could give us a sense for... for timing, even some sort of indication would be helpful. And then if I could just follow up, I missed your comment on the LTIP weighting. If you could just give me those numbers again. I've got 25% on ROIC, but that was all I got.

Thank you. Yeah, let me start with the second first, because that might be a quick one. Yeah, the long-term incentive being now consists of three components. 50% of the LTI is shareholder value. 25% is ROC, Return on Invested Capital, and 25% is ESG. 25%. Then to your question in regard to the free cash flow. We had a good start into the year, or let me put it this way, not as bad as it usually starts. Since Decades for Knorr Bremse with the 95, we expect that somehow the second quarter could be already around zero. Third quarter should be slightly positive and fourth quarter significantly positive. That is the way to look at it.

Thank you very much. Thank you. Okay, as you see, there are no more questions. Thank you very much for your time.

If you have further questions, please contact us and have a great afternoon. Thanks and bye.