Knorr-Bremse AG

Good afternoon, ladies and gentlemen, and welcome to the Knorr Brink, the agent conference call regarding the Q2 2024 results. 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 your host, Andreas Spitzauer, Head of Investor Relations. Please go ahead.

Thank you, Operator. Good afternoon as well as good morning, ladies and gentlemen. I hope all of you are very fine. My name is Andrea Spitzow, Head of Investor Relations. I want to welcome you to CronoBremse's conference call for the second quarter results of 2024. Today, Marius Zesea, our CEO, and Frank Weber, our CFO, will present the results of CronoBremse, followed by a Q&A session. The call will be recorded and is available on our homepage www.canada.com in the next relation section. You can find today's presentation and later a transcript of the call. It is now my pleasure to hand over to Marcus Lucea. Please go ahead.

Thank you, Andreas. Thank you. Welcome, everyone, to our call regarding the financial results for the second quarter of 2024. Let's start with chart number two. As usual, I will start with an overview of the highlights before Frank dives into the details, followed by a Q&A session. Let's take a look at the key messages from today on chart two. Number one, Knoll-Bruns' outperformance in the billion since the beginning of the year has been remarkable. For rail, we continue to see strong demand across all regions and a positive margin strength. Despite the weakening truck market, CVS's latest results confirm its remarkable robustness, which is an integral part of its business model. Last year, I presented our Booth 2026 program for the first time. One year later, I am very pleased to inform you that we are fully on track. Later, I will provide more details on the measures we have successfully implemented so far. Number three, with the contract extension of branch fees as a member of the executive board, the Supervisory Board of Governors has ensured further... continuity in the leadership team. Bernd is responsible for the track division and he will continuously drive the success of it. The entire executive board team works extremely well together. The situation that Dr. Bernd did not have always in the past and it helps us achieve our goals quickly. Last but not least, we raised our guidance for 2024 and our three future hours on performance in both divisions. In the second quarter, in the positive outlook for the rail division, the second half of the year, 2024. So, let's please move to chart number three. The progress of our growth and efficiency program, Boost 2026, which we launched one year ago as a 30-day update, is very successful. The most important goal is to return Brock Mensah to its former strength and beyond. That is why we are not only focusing on cost and efficiency, but also want to further boost our possible growth. The basis for this is to secure global technology, market leadership, positioning in the rail and truck market. At the same time, we are striving to expand into new growth areas and existing and new markets. To achieve these ambitious goals, we have set up 150 specialized working groups around the world. These teams are strategically located across the different regions and consist of experts from various disciplines to optimize processes and structures. Today, we would like to focus on some of them. Number one, increased capacity in best-cost countries. KD has been specifically centralized for decades. This means that local management is close to our customers and has a very high level of P&L responsibilities. For the next phase of efficient growth, we are now systematically expanding our production sites close to our customers, like Poland, Mexico, and India, as few examples could be named. Number two, aftermarket. Cofar is a wonderful company. Compared to our expectations at the beginning, the corporation, the company has developed better, and the integration into KD has gone extremely well. What are our next steps and goals? Today, roughly 15,000 diagnostic tools from Kohane are used in workshops worldwide. We would like to leverage these unique gateways to further increase the number of applications here. And second, Kohane is the key market in Europe. We see good growth opportunities around the U.S. and other markets, too. Number three, in order to reduce complexity in the rate of cost, we would increase the number of legal entities further. Beginning of 2023, the number was at 126. Now, at the end of 2024, we expect 100. Number four, in an increasingly connected and competitive business world, optimizing processes is crucial to success. To meet these requirements, we are expanding our global business services platform, GBS, by centralizing functions such as finance, accounting, human resources, or procurement, we can leverage economies of scale and significantly reduce our operating costs. At the same time, we want to be flexible and take local conditions into account. That is why we are currently focusing on our four GBS hubs in Czechoslovakia, Czechia, for Europe, India as our global hub, and for the APAC region, Mexico for North America, and as well, so too, for China. Coming to chart number four. Part of Boost is Brownfield, a federal efficiency program which targets business units with total revenues of 1.4 billion euros. In Brownfield, there are fixed pressures included, which are already defined and mostly implemented for entities which combine their revenues of roughly 700 million. Compared to the EBIT margin in 2022, we expect these measures to lead to a margin increase by 70 base points by 2026, as part of the overall 200 basis points improvement, which also includes selling initiatives. For CVS itself, boost material includes structural material cost levels, such as value analysis, value engineering, international realignment of the supply address, and an optimized supply chain management concept. Global responsibilities, the realignment of the CVS organization, will lead to simplification of interfaces and responsibilities to streamline and accelerate key processes. In addition, accountability will be ensured for a clear global definition of workers, capabilities, and interfaces. R&D optimization, CVS, strengths, and USPs are based on innovative and customer-oriented products. We want to maintain this. At the same time, we want to reduce retail specialties, more consistently terminate and successful projects, and achieve our growth targets with our existing R&D team of today. For RVS. At RVS, we always see potential for improvement in the areas of inventory, pricing, and China. Especially in China, cost reduction is a slightly declining OE business. Longer term and further expansion of the growing aftermarket business. As previously mentioned, we want to further expand our production footprint in countries with a good cost structure and no further expander will even reduce the number of employees in high-cost countries. We will take restructuring measures in business areas where we want to benefit from growth opportunities in the long term and we do not yet fully meet our target. We do not expect high one-off costs, but rather want to make use of staff fluctuations. Chart number five. Let me explain the current status of our sell-in program in more detail than in chart four. Overall, we want to lift the EBIT margin additionally by around 130 basic points until 2026. This together with the 70 is combining to 200. This is what we said. This is what we do. That's the difference with promises. We don't promise. We just execute what we say. That's something which I would like to highlight before we speak about something like promises. We have finally identified and decided all the business units that we want to sell. Their combined annual revenues amount to slightly more than 700 million euros. The first basket mainly includes business from the truck division, and the second basket is more focused on rail. Following the sale of Hepler and Safety Direct, two further companies are in the sales process currently. One of them is GT Emissions Systems, which we informed you over the last two days. Thereafter, the following units to be sold are larger in terms of revenues, which entail a longer carport process. Accordingly, we expect the clothing to take place more towards 2025. and even 26. Overall, we are fully on track with our sales program and looking forward to seeing more institutions in the next years to come. Chart number 6. Let's have a quick look on the current market environment. Here we see rail in Europe and North America is experiencing solid growth in both OE and aftermarket currently and going forward. Growth in Europe is supported by the unbroken political will to make the mobility of the future greener and more sustainable. For example, there is a significant push to replace obsolete sleeves, which will further fuel demand for new rail vehicles and related infrastructure. China's rail market is performing well this year, particularly in the aftermarket, which benefits from last year's push-out of rain-diminishing topics. Additionally, the high-speed segment continues to receive decent support from the government because ridership levels of today are above the pre-coronavirus. Globally, OEMs are reporting higher order books, indicating a robust demand for new rail vehicles and equipment. The pricing of new contracts in rail remains favorable, which is a clear margin driver for RDS. The rail industry continuously faces supply chain challenges, particularly at the level of small specialist suppliers in the industry. As you know, we have hundreds of them. These issues can cause delays and increase costs, but efforts are ongoing to mitigate these disruptions through better planning and flexible sourcing. But as you know, for us, the delivery fidelity is key of our success. So this is always to keep in balance with our network and capital. The total number of passengers in trains in the full year 2024 is expected to be higher than last year, so it has to be expected to be a very positive trend also in the year 2025. In the second quarter of 2024, the production rate, especially in Europe, remained significantly lower year over year, while the price sense of CVS was supported. In North America and China, production rates were only declining slightly or stagnating. On a full year level, we believe the decrease of production rates in Europe, CBS, will exceed 10% over the year. In North America, the potential decrease should be lower than in Europe, but still negative, slightly negative. The market in China develops promising but makes, including growth momentum driven by exports, especially into Southeast Asia region, but a weak domestic market at the same time. We observe the development in the stock market closely, and we are able to react quickly to all challenges, if necessary, especially in Europe. Going to chart number seven, let's move to an overview of our first half year KPIs for 2024. Almost all major financials move higher year over year. Most important for me and us was that the operating unit margin It's up by 107 basic points, 12.3. In the first half, 2024, well supported by a boost efficiency program. You remember we spoke about EBIT margin, which is exceeding 14% by 2026. We started at 11.1 in 2023, and now we are half through the 12.3. So it looks very, very promising that we will reach what we set. In addition, order book remains on a very high level with 6.8 billion. It provides good visibility and confidence for the quarters ahead regarding neutralization rates. Please, this is always a crucial keeper because that was last year included. First-hand C-Cash law for the first half of the year has reached 64 million euros positive, a strong improvement versus last year where we still were, at this time of the year, negative. I would like now to hand over to Sam for more financial insight regarding our second quarter.

Thank you, Mark, and welcome also from my side. Let's turn to Chart 8 to discuss the financial highlights of our second quarter. Our auto intake was again very strong with 2.1 billion euros. I guess this is a remarkable achievement by both divisions, taking into account the tougher market environment in many business segments of kept goods companies and also this challenging truck production rate currently. Book-to-bill on group level was respectively at 1.06%. Revenues amounted to over 2 billion euros despite disposals and FX headwinds. Rails saw a significant increase of more than 10% organically, while trucks faced a decrease of 5%. The first operating highlight of the quarter was clearly the development of our profitability. Operating EBIT margin benefited mainly from good operating leverage in RBS, our efficiency measures and better pricing. Accordingly, the margin rose to 12.5%, which is 140 basis points higher than a year ago. Both divisions contributed to this profitability improvement. As a result, we increased the upper end of our margin guidance. The second highlight was the free cash flow, which grew year over year and came in at 158 million euros. With that, we were able to break even already in the second quarter of the year, achieving 64 million euros in the first half of 2024. Please keep in mind that this development was expected and follows the typical pattern for us throughout the year. Quarter one is always the weakest, and quarter four the strongest quarter in terms of our free cash flow generation. Let's move to chart nine. CapEx in the past quarter amounted to 65 million euros, representing 3.2% of our revenues. It was lower in absolute terms and on a similar level in relation to revenues year over year. In the upcoming quarters, the ratio should increase again, and we expect on a full year basis a CapEx to revenue ratio of 5 to 6%. Networking capital was stable year over year, reaching 1.55 billion euros despite the significant revenue increase. Therefore, and more importantly, the positive trend of improved scope of days in the first quarter compared to the previous quarter continued. This shows our efficiency measures are taking effect and the turnaround in net working capital is continuously successful. We take action across all working capital areas, in particular further reducing inventories, especially safety stock via our optimization program Collect, in order to increase our capital efficiency further. Our free cash flow, as mentioned before, was 158 million euros. It significantly improved versus prior year level, driven by better earnings, the success of our collect program, as well as less capital expenditures. As mentioned in the past already, we seek to improve the cash generation also throughout the year within the quarters in order to de-risk our quarter four cash generation necessities. With these further interim year improvements, we feel very confident to reach our free cash flow target also for this year. As a result of improved EBIT and the improved capital efficiency in the company, our ROSI increased significantly from 16.6% to 20.2%. With a ROSI of more than 20%, we are back in the range we have set ourselves as a target. Let's take a closer look at the divisional performances in quarter two, starting with RBS on chart 10. In terms of order intake, RBS recorded 1.14 billion euros in the past quarter. It was particularly interesting that all regions contributed to this positive development, a clear sign that the good demand in the rail segment is based on many pillars. We expect that RVF should achieve a comparable level of order intake in the second half of this year as in the first half. Growth was particularly strong in the Asia-Pacific region. Here, order intake rose in India in the OE segment and in China in the aftermarket segment. Hook-to-bill ratios stood at 1.12%. in the second quarter, which means RBS posted the 11th quarter in a row a book-to-bill ratio of above 1. For the second half of the year, we expect the book-to-bill ratio to stay above 1 as well. Order backlog remains at a high level, reaching €4.9 billion. In organic terms, each year excluding HIPPE, in the second quarter of 2023, the order backlog rose by 8% year-over-year. The high order backlog provides a strong basis for the second half of the year and beyond. Let's move to chart 11. Revenues of RBS in Q2 amounted to more than a billion euros, which represents a new record level in that quarter. It increased by 6% year over year. Organically, the division even lifted its revenues by 11%. Rather flashish OE business overall was strongly outperformed by a strong aftermarket business. As a result, our aftermarket revenue share in RBS even reached 55% in the second quarter. From a regional point of view, our revenue growth was remarkable in the Asia-Pacific region and in North America. Europe kept a very good level year over year. Operating EBIT margin recorded an increase of 90 base points to 15.6%, driven by operating leverage. Improved pricing of new contracts and a lower share of legacy business further supported this development. In addition, a positive revenue mix driven by a higher aftermarket share and first benefits of the boost efficiency measures impacted the operating EBIT margin positively as well. In the current quarter, profitability of RVS should stay at this good level. Let's continue with our truck division on Chart 12. Order intake in CVS amounted to almost a billion euro, a decline of roughly 5% compared to last year. The positive order development in North America was not able to counterbalance the weaker market situation in Europe and a bit in Asia-Pacific. In particular, the trend of incoming orders in Europe was negative, which had already been indicated in the recent communication from our OAM customers and, needless to say, also expected from us starting in Q2. Nevertheless, book-to-bill reached almost 1 billion in the past quarter, a stable development compared with the last year. Order book with almost 2 billion euros at the end of June remains on a high level and only marks a small decline year-over-year so far. Developments in the second half of 2024 are expected to face considerable challenges in North America and Europe in particular, although the market in North America is holding up better than in Europe. Our expectations indicate that the truck production rates are expected to fall significantly in the second half of 2024 year-over-year. We assume that the book-to-bill ratio will be below 1 on a full-year basis. However, we are very well prepared to overcome these challenges. In general, the flexibility in our facilities is high. For example, temp workers represent 10 to 15% of our workforce in the production plants in Europe, which we can lay off quickly if necessary. Secondly, all major plants in Europe are prepared and ready to introduce short-term work within weeks. Price increases, which we achieved, are fixed and will counterbalance shortfalls of volume. Aftermarket business contributes more than 30% of revenues in Europe and in North America, which is also greatly supporting our resilience. Last but not least, our boost program targets also structural costs, which already mitigated some of the negative impacts. Please bear in mind that we are not in a crisis mode, but we are very well prepared for a likely negative market development as expected in the months ahead. Let's move to Chapter 13. For the second quarter, we noted for CVS only a slight decrease in overall revenues. The division posted revenues of almost 1 billion euros, showing a decline of only 5% year over year. CVS achieved even slightly rising revenues in the aftermarket business in the region. OE revenue, on the other hand, declined slightly in all regions except for South America. In the European market, our revenues have experienced an 8% decline due to the weak demand in both the truck and the trailer segment. Alone, the truck production rate declined by 18% at the same time. Despite these challenges, the aftermarket segment was solid and delivered 35% of total revenues in the region. In the course of the head, we expect that aftermarket should provide some stability to the region's overall performance and that our outperformance of the market via content per vehicle continues and supports our resilience of the company. Operating EBIT of our CVS division amounted to 112 million euros in the past quarter, up 14% year over year. As a result, the operating EBIT margin improved by 190 base points from 9.3 to 11.2%. The remarkable increase of our EBIT margin is based on a combination of achieved prices, a higher aftermarket share, and positive effects from our efficiency measures. These targeted measures have supported our profitability, and we are best positioned for the second half of the year, in which we expect an EBIT margin of only moderately less than 10%. With that, I hand over to Marc again.

Thank you, Frank. In the last year, we have made remarkable improvements with the implementation of our BOOST program, which has led to this significant turnaround. These developments are a clear proof that we are on track to achieve an average margin of more than 14% latest in full year 2026. We always said it will not be a back-end loaded and rather a linear development towards 2026, despite the anticipated weakness in the truck market so far, we fully delivered on that path. Our positive development in the rail division, which is reflected in significantly improved margins, is particularly remarkable. We are all well positioned in the rail market, and we are very, very confident that RVS achieves its share of profitability, respectively, even more than 16.5%. From a current point of view, and due to the weak truck production rates in Europe, the margin target of above 13.5% in full year 2026 in the truck division looks more ambitious, but we have enough more cost measures in our toolbox and growth message, and a strong market position, and plenty of ideas to drive the performance of CVS and of CVS to achieve the margin target. On chart number 15, our last one, we will again speak about the guidance 2024. I want to finish with the confirmation of all race guidance for 2024 in charge. Fifteen major assumptions have been changed, and I'm blind on the right side of this chart. For the full year 2024, we expect revenues of 7.7 to 8 billion euros, an operating EBIT margin of 11.5 to 13, and a free cash flow between 5.50 and 6.50 million euros. Respect the closing of the signaling deal end of August, which is part of the green field, and best to our knowledge, there are no obstacles to finalize the deal. After the closing latest of the release of our quarter 3.24 results, will integrate this new asset in our guidance for the full year 2024. Revenues of KB Groups will be up by roughly 100 million euros, and the EBIT margin will increase marginally this year as a minor integration cost will be required. Overall, this is the first step of our greenfield strategy, and it looks extremely promising. And thanks for your attention so far. Frank and I look forward to your questions now.

Ladies and gentlemen, if you would like to ask a question, please press 9 and the star key on your telephone keypad. In case you wish to cancel your question, press 9 and the star key again. Please press 9 and the star key now to state your question. And the first question goes to Sven Weyer from UBS Detroit.

Yeah, good afternoon. Thanks for taking my question. The first one is regarding the updated strategy program now that you rightly said one year into it. I was just wondering what you think were the things that have surprised you positively in terms of the things that you have achieved. What are maybe the things where you think it's a bit lagging behind? And then also when you talk about going back to old strength and especially beyond, what are maybe some of the things that have encouraged you more? That's the first one. Thank you.

Let me maybe start with that and then Mark. I think what surprised me the most is the real intrinsic eagerness of the whole organization to basically engage with the BOOST strategy program. It was in the past years not seldom the case that not every part of the organization was really behind some hold out going forward but the whole organization on rail as well as on the truck side is fully behind the program and that's what you ultimately need as a buy-in for such a strategic program and that was something that I was very pleased to see and maybe on some more content what you liked and so far and what you didn't like Mark leave it up to the CEO I think to give some insight yeah what is obvious the

Business concept is absolutely rock solid. The products and the multi-positioning are better than I expected, not only in rail but also in truck. I think we have a lot of areas for improvement, which surprised me a little bit, especially in areas where I didn't expect it. When it comes to standardization of processes, when it comes to standardization of product development processes when it comes to R&D allocation of hours. Here I am surprised that we have this kind of room for improvement, which I didn't expect. Where I am negative, I wouldn't say there's very, very few negatives. I was surprised how many units we have here, how connected or disconnected some of the units are to each other. I think the good message for you as an investor and an analyst is that by having found this kind of, let me say, surprises, we can help ourselves. And as one of your colleagues, the self-healing and the self-helping potential of the company seems to work. And the good thing is, yes, we can. This is not rocket science what we can do here. There's a lot of improvements to be easily done. And it's just a question of consequence and also of pressure to address it in a way that the people are really picking up this topic. So long story short, the company is a very, very good company, but there's a lot of potential to make the company even better. So that means without any fancy things and fancy measures, we can get on a much better level than I expected it. So that's in a very short sentence. And at the beginning of last year, I was told that 14 should be our target. And I was saying, okay, let's do it. I must say that 14 is a very low, low target for such a company because with the internal potential already, we can reach that.

Yeah, sounds like an intermediate goal. Thank you for that. The second question is just following up on, Frank, what you said on auto intake. Rail, much appreciated on that. I was just wondering, you know, given the obvious marked concern around the truck market, how you kind of had exit rates in June, entry rates in July on auto intake. I mean, do you see kind of a cliff there, or is this reducing in a relatively orderly fashion what you see there?

The good news, I would say, Sven, and thanks for that question, is that we don't see a cliff. We have even seen, but that's also a bit specific, in North America we have even seen an increase of order intake compared to the same time around last year. You can argue now that North America last year in the second quarter was a bit weaker after a very good order intake quarter, quarter one. So we see a solid development, I would say, given the market situation we're in. Keep in mind that the market itself in the second quarter was 18% down in production rate compared to last year in Europe. and it was nearly 10% down in North America. Given that market situation, we see a rather stable kind of development going forward in terms of order intake.

Thank you. Much appreciated.

You're welcome. And the next question goes to Akash Gupta from J.P. Morgan. Please go ahead.

Yes, hi, good afternoon, and thanks for your time. I got two as well. The first one is on CVS. Again, you had very good margin due to reaching at highest level in almost 12 quarters, and you are indicating some decline in the market driven by the drop production rates. So when you look at your comment, we get that you receive highest level of decline in Europe than elsewhere. A question I have is on the regional profitability of the segment. Is it fair to say that European business could be more profitable than other businesses, which is why there is a mechanical effect on margin coming from lower European volumes? Because when I look at your commentary on cost optimization, you sound quite upbeat in your ability to reduce cost in line with market volumes. So any kind of European productivity would be the first one to start with.

First of all, Europe for us is also the center of all is for us the technology hub and the center of all R&D activities across the globe. And not all R&D is allocated to all the entities around the world because a lot of the fundamental development stuff within the region. That's why it's not Europe for us in truck is not China or Asia Pacific in rail with a very accretive margin. You should rather see the European margin or profitability level on a global basis on the average level. So it's not a very accretive margin. region that we are having here is more in the midfield, so to say, and then the group average for the track division. That's how I see it, and that's why basically a downswing doesn't overwhelmingly hit us on the bottom line side. It does hit us, of course, but not overwhelmingly

Thank you.

And my second one is on RVS, where you can tell us about where are we on the legacy backlog and coming from the orders you received before the inflation shock, and how shall we think about the facing of the remaining legacy backlog between second half of this year and 2025?

Thanks for the question. We have since quite some time not talked about it. It's, as we always said, 500 to 600 million euros that we expect as revenues out of these legacy companies this year. I would say, of course, given, so to say, the timeline of these contracts, we see a bit more of that in the first half of the year already, a bit less in the second half of this year. So if you take 550 as an average between 500 and 600, so assume maybe around 300 more in the first half year already happened, and second half year less. than 300 million, and then next year we assume some 200 to 300 million in 2025, so only half of that what we have been suffering then in the year 2024 to occur next year. But half year two, a bit less than in half year one.

That's what we assume. Thank you, Frank. You're welcome, Akash.

And the next question comes from Gilles de Brey from Deutsche Bank. Please go ahead.

Yes, thanks very much. Good afternoon, everybody. I have two questions, too. The first one is on the 70-bit targeted organic margin improvement. Maybe that would be useful to understand how much is expected to come from CVS and how much from RVS and what's been the level of achievement so far in 2024. That's question number one. And then the second question is about RBS specifically. I think I remember in the past You had previously indicated that obvious orders of $1 billion or more were not to be expected every quarter. Now it seems that you're guiding for about $1.1 billion for both Q3 and Q4, at least on average. So is it fair that you've upgraded your views on the sell market? Thanks very much.

Yeah, thanks for the two questions. Number one, it's rather simple, but that's the matter of the pure facts behind it. The 70 bits on the fixed program is half-half. It's both RVS and CVS. It's on the CVS side, I would say, a bit more back-end loaded because one entity, bigger entity on the CVS side, needs a bit of carve-out preparation, I think, like Mark already indicated. So that's a bit coming later. That also explains a bit the answer that out of the 70 BIPs, I would say we are a bit behind the purely linear path. But on the other hand, I think we have on the other 200 bits of operating leverage and other efficiency measures very well track records so far over the last one year or one and a half years. So we are very well in line with the linear approach overall to improve our margin from 11 to 14, as you can see. last year in June, where we stood at 11. Now we're at 12.5, which is already, I think, quite an achievement, which is a bit ahead of the linear curve overall. Second question is not an increase of our expectations for the RDS development. We expected a strong development of our division there. I think it's more the usual warning to everybody kind of saying it's a project business that we have with rail. We have big projects at times. And not every quarter is developing rather linearly like in a product business. That's why we are usually saying don't draw conclusions from the first quarter to the second and from the second automatically to the third. But as the sheer perspective goes on the second half of the year, we are pretty comfortable that we will not have this big ups and downs, seeing the detailed projects that are sitting in our books. So that's to distinguish both the general, so to say, expression mark of us usually behind the project business, and that is not a linear kind of order intake situation. It might go up and down a bit. And the other thing is the concrete situation that we are in now in 24, and that, so to say, indicates a good level of other intake to come also in the second quarter.

Second half, sorry for that. Thank you. You're welcome, Gerhard.

And the next question goes to Ben Inglow from Oxcat Analytics.

Please go ahead. Maybe he's muted on his telephone.

Yes, thank you for that. Hi, guys. Thank you very much for taking the question. I had a couple. The first is just very high level. On the sort of macro climate and the customer conversations that you're having, If I listen to what companies have been saying in the last week or so in reporting, we're hearing a lot of companies talk about customer hesitation, projects being pushed out, political uncertainty, particularly in the U.S., but I think it is broader than that. And I guess my first question to you is, are you sensing or have you sensed any of that at all in the last couple of months, i.e., In terms of talking to your CVS or RVS customers, is there any change in tone or is it still very much business as usual?

Okay. Besides the extreme enlightenment of the German government, our customers are relatively stable. So we don't see, especially in the businesses, of rail, we see a certain form of indifference to what is going on. And in terms of trucks, there's META trends, and you know, after we have seen a very good truck market in Europe for the last three, four years, it's more than logic, and it is more related to the age of the fleets and trade on the streets than whether some politicians or some, you know, people mind to say how it's going, how it's not going. So in real, we see a very, very limited impact on the actual politics because the major trends are still valid and nobody will question it. In trust, we are seeing, especially in Europe and America, that the markets are very, very sensitive more to the supply chain issues than to anything else. And when it comes to politics, Besides, as I said, the excitement about the general government, there's very, very little remorse on this topic.

Thank you, Mark. It sounds fair to say that people aren't, it's not like you've suddenly got a call from the division to say everybody's applying the brakes or not just to coin the pun, but nothing like that. There hasn't been a sudden stop in the last month or so?

Absolutely not.

Absolutely not. Okay. Thank you. And my second one is, you know, congratulations on some of these margins. On the truck side, at 11%, there are a lot of moving parts, if I think about the second half, between volume, price, aftermarket. I guess my question for Frank is, am I correct to assume that there is no, even with volume being weaker, there's no reasonable scenario where the CVS margin goes back to the first half 20 or battle below the 9% levels that we were seeing in the first half of last year, i.e. that you are, that sort of downside, if you like, is capped?

I don't think that there are so many ingredients, so to say, volatile for the second half of the year. I basically only see volume and the volume is driven by the market. And even there, I basically see only, so to say, Europe and maybe North America volatile. as kind of volatile, so to say. With that given and the conversions that you know from us kind of given, that's why I said moderately below 10. This is what could be expected, not more. This is our belief. If it comes to a catastrophe in the market, can never rule out that also maybe nine-ish would be the number, but that's not something that we anticipated this point in time. So in a nutshell, I would say, yes, you are right. I would say something moderately below 10. If the market deterioration comes as we expect it to be, if it's getting significantly worse, then, of course, it's a different story. Then we have to reevaluate. But that's nothing we plan for. Understood. That's very helpful. Thank you. You're welcome, Ben.

And the last question is a follow-up, and it goes to Akash Gupta again.

Please go ahead. Yes, hi. Thanks for taking my follow-up. I have one follow-up on the guidance. You increased the margin guidance top end by 50 basis points. And when we look at your first half operating margin, 12.3%, it is roughly in line with the midpoint of the new margin guidance, or maybe slightly ahead. When you look at your second half margin commentary, you are implying CVS margins below 10%, more moderately below 10%. So does it mean that if you have to hit the top end of the guidance of around 13%, we are going to see a substantial recovery in RVS? Or maybe if you can explain the math on what can take you to more like 13% margin for VR.

Thank you. No, you're not so wrong in that regard, absolutely. That is clear, also mathematically pretty clear. So the reason why we have also increased the upper end is because of the good rail performance, so to say. And if it wouldn't be, so to say, the uncertainties of the truck market in Europe, then we would have maybe even lifted the corridor the given corridor that we had so far but we wanted to be on the safe side just referring to the question from Ben so if anything comes weaker than expected in truck in Europe in the market that's why we have left the lower end so to say at the level where it was but it's clear yes to what you asked rail should be performing better going forward

Thank you.

You're welcome, Akash. Okay. The last question.

Yes, just a second. And we have a last question from Holger Schmidt from Diensten Bank. Please go ahead.

Hi, good afternoon everyone. Thanks for taking my questions. I have two. You mentioned a significant decline in the drug production rate in Europe. And to what extent do you expect this to impact your price setting in CVS going forward? That's the first question. And the second question moving to North America. Again, the background of the new EPA emission regulation. I expect it to come in 2027. How do you think about the likely pre-buying in North America? What kind of impact could it have? And when do you expect it to start?

I take the first and then Marke and myself will figure out who takes the second. It's clear, so to say, that in a market that is booming, the flexibility to accept certain price levels is potentially higher than a market that is going downward. made our negotiation in 2022 and in 2023 with two big waves with all the customers. We have fixed the prices going forward. We expect them to be sustainable. The right of each and every customer, so to say, to come back at a certain point in time. We expect that this will happen in the future. It's nothing that is on the table at this point in time. We are prepared for that because we also suffered in the past and that's why we have risen the prices. We have not risen the prices because we felt like this. but it has a clear reason and that's why you can expect from us that we will be very, very, very hesitant if anybody is knocking at our door in that regard. The second question, maybe I start, even though Mark is technically more advanced in potentially answering this question. We do expect that APAR regulations, the greenhouse regulations kicking in in 2027 in North America should lead to a pre-buy effect. We expect that to come in 26, earlier, maybe towards the end of 25, in a noticeable manner that the industry can feel. Not earlier, unfortunately not earlier, but that's the way we think. We think that the fleets need to, so to say, prepare over at least 12 to 16, 18 months to bring their fleets up to speed, but not more, not earlier.

Okay, thank you very much. You're welcome.

Thank you very much for your participation. We wish you a great summertime. I hope you'll be on vacation. Have a good time there. When you come back in September, we will participate at the Innotrans and at the IRI truck. So if you want to meet us there, reach out and have a good time. Thanks a lot.

See you.

Thank you.