Knorr-Bremse AG

Good afternoon, ladies and gentlemen, and welcome to the Q3 2024 results call of Knorr Bremse. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation. Let me now turn the floor over to your host, Head of Investor Relations, Andreas Witzel.

Thank you, Opelika. Good afternoon as well as good morning, ladies and gentlemen. I hope all of you are very, very fine. My name is Andrea Spitzau, Head of Congratulations of Knorr-Bremse, and I want to welcome you to today's conference call regarding the third quarter results of 2024. Today, Martin Sesea, our CEO, and Frank Rehmer, 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.dash.com. Thank you, Andreas.

Welcome, everybody, to our call for the financial results of the first quarter of 2024. Let's start with package 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. First, let's take a look at the key messages from today. Number one, Knoll Brands is in good shape. This is the result of a great team effort. Thank you to all the colleagues worldwide. RVS is progressing very well. Its ongoing strong order intake, fueled by good demand in all regions, and the positive trend continues. CVS shows solid resilience in a weak truck market reflected in its good possibility. Improvement measures show first effects. Second, boost 2026 assets are continuing. The free assets already sold, the next sales process kicked off as well, and the closing of the KB signaling deal in North America continued. We are fully on track and happy about the good dynamics of our program. Efficiency measures have boosted in both positions and we are very confident to reach our targets in 2026. Number three, we were able to secure long-term financing. We issued a dual-branch bond amounting to €1.1 billion, including our first green bonds. With the proceeds, we strengthened our position as a trailblazer of sustainability and green mobility for our customers. We financed the acquisition of KB Signaling and we will refinance existing liabilities to make Turing in 2025. The bond was four times oversubscribed and surprising the strong demand and confidence in our company in terms of many global challenges. Number four. At the recent fairs, EIA, Transportation and Insurance, Knorr Branswick could once again more demonstrate its innovation and quality power. Customer industry and capital market feedback was equally quite positive and encouraging for our people who are shaping the future of sustainable and green mobility. Last but not least, number five, we slightly increase our revenue. slightly increase our guidance for 2024 after closing the deal of KB Sittling in North America. So, let's come to page number three. Let's have a look on that, and our present at the Eno Funds in Berlin, one of the world's biggest and largest rail fairs, as well as the IAA in transportation, and also the world's largest fair for trucks. Let's start with the rail fair. Rail is and remains the most eco-friendly mode of mass transportation. Given today's clearly defined climate targets, there is an increasingly higher need for sustainable and green transportation of people and freight. Rail is the enabler to achieve these ambitious goals, and this was clearly evident at the trade fair. The main topics we presented at Indotrans were zero-step boarding, more and more a topic to watch. Problem-free boarding and disembarking enable smooth traffic flows, which are necessary to cope with the increasing traffic volume and to fulfill the operator cycle requirements. Personal highlight was the demonstration of our electro-mechanical braking system. The technology provides high efficiency, which promises to support total cost of ownership for rail operators. because Renze is in the driving seat and is the innovator number one here. Looking at the IAA transportation, where commercial vehicles impress market and customers with not only a fully sustainable boom, but also we are a leading product portfolio. Commercial vehicles lead, Mexico Economica stays sustainable, Working in close partnership with all our OEMs, CVS has developed the technologies and products required for the necessary electrified autonomous and digital solutions. We showed a broad range of safety-critical solutions in response to transformative industry trends at the fair. These include zero-emission solutions to support e-mobility, redundancy concepts for automatic driving, and new product and business models based on digitalization. Our solution regarding electronic power steering, which supports two of the most important developments of the truck industry, electrification and automatic driving, was remarkable. But I also want to mention the introduction of our new electromechanical braking system, EMVS, boosting multiple advantages in terms of insulation space, noise emission and precise control. Plus, it is future-oriented and future-driven. Slide number four. Let's have a quick look at the current market environment. Rail in Europe and North America continues to experience good growth in both OE and aftermarket. Demand for new rail vehicles is unbroken and rail OEMs need innovative modular energy efficient products that RVS can provide. Especially in Europe, we continuously see that no given government budget for rail products is cut or canceled in favor of any other government targets. China's rail market continues to perform quite well this year, particularly in the aftermarket, which benefits from last year's push out of maintenance topics and the fact that some trains are in the overhaul cycle currently. The high speed segment also developed better than expected this year. while Metro remains on a stable level. It seems like that the rail market in China experiences a slightly different quarterly development this year as far as we see it impacted by some pull-in effects in quarter 2 and 3 already from the current quarter to come. For 2025, we expect some normalization of high speed and aftermarket again. Globally, all the books of Railway and Sostelia elevated, underlining robust demand for new rail vehicles and equipment. The pricing of new contracts and rail remains favorable, which is a clear margin driver for RBS. Ridership levels in financial year for year 24 are expected to be higher versus last year. Now to our trucks. Truck production rates, especially in Europe and North America and China, in Q3 declined year-over-year as expected. On the other hand, pricing for CVS was supportive year-over-year after introduction of higher levels last year. On a full-year level, we believe that truck production rates in Europe will be significantly and North America moderately lower year-over-year. The truck market in China should perform better and is expected to stay flat year-over-year, supported by higher export volumes. We observe the development of the track mark closely. We'll be able to react quickly to all challenges if necessary. In Europe, we implemented full-time work in one plant so far. By the way, in our biggest. The cyclical downturn in Europe and North America is nothing what we are surprised to see. and it has developed as expected. According to our current assessment, it should continue until at least the first half year of 2025, but then be over in the second half year 2025. I would now like to hand over to Frank, who gives you now more insights about the financial results of our quarter number three in 2024. Frank. Thanks, Mark, and a big welcome also from my side. Let's turn to slide 5 to discuss the financial highlights of the third quarter. Auto Inc. was again very strong with more than 1.9 billion euros, a very good achievement by both divisions, considering a weak truck market overall and ongoing challenges in many economies around the world. Up to build on group level was at 1.02. Revenues amounted also to over 1.9 billion euros. Whales saw a very good increase of around 7%, while trucks did face an expected decrease of around 9%, whereas, an example, the corresponding market in Europe went down roughly by 25%. Highlight of the quarter was the development of our profitability. Operating EBIT margin benefited mainly from good operating leverage in RBS, our efficiency measures, and better pricing in both divisions. Accordingly, the margin rose to 12.3%, which is 80 basis points higher than a year ago. Whale contributed to this development with very strong figures, while FAC margin decreased as expected. Free cash flow improved further and came in at €184 million. Please keep in mind that this free cash flow development follows a typical pattern throughout the year. Through one, it always reaches, and through four, strongest in terms of our free cash flow generation. The two quarters in between should show a rather sequential improvement. Let's move to slide six, please. CapEx in the past quarter amounted to 80 million euros, representing slightly decreasing year-over-year. In the upcoming quarter, CapEx in absolute terms and the ratio should increase significantly, and we expect the CapEx to revenue a ratio of 5 to 6 percent a two-year basis. Networking capital increased by 169 million euros year-over-year, driven by the acquisition of KB Signaling solely. Without this effect, networking capital even slightly decreased. As you can see, we continue to 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, Scope of days without KPI signaling also improves year over year, as a matter of fact. Our free cash flow, as mentioned before, was 184 million euros in the past quarter. It is a lower figure prior to last year, driven by the cash flow problems and the fact that we improved this KPI already in quarter one and quarter two of this year. As a result, on a nine-month level, free cash flow increased by nearly 200 million euros from 65 million to 248 million euros, well supported by the before-mentioned Collect program, as well as by Better Earnings. We are confident to reach our free cash flow guidance for the full year. As a result of improved EBIT and the improved capital efficiency, our ROCI increased significantly from 17.8% to 18.6%, without KB signaling even to 19.9%. This figure represents a good development and is already very close to our target of more than 20%. Let's take a closer look at the division of performance in the third quarter, starting with RBS on Prime7. In terms of order intake, RBS recorded more than 1.1 billion euros in the past quarter, hosting a growth rate of around 10% year-over-year, organically almost 13%, despite FXX. Growth was particularly strong in the Asia-Pacific region. Here, all the ETH grows, especially in India in the OE segment and in the Chinese aftermarket. North America also grew nicely, while Europe declined. As a reminder, RAIL is a project business and projects do not follow linear patterns, so RAIL OE does not go so well with quarterly payments. We expect RVS should be able to post an order intake of a billion euros in the current quarter as well. Book-to-bill ratio stood at 1.13 in quarter 3, which means RVS reached a book-to-bill ratio of about 1.12 quarters in a row now. We expect a book-to-bill ratio of around 1 in the current quarter, leading to about 1 for full year 2024. Order backlog remains at a very high level and well above 5 billion euros. In organic terms, meaning apples to apples, excluding HIPAA and KB signaling in the third quarter, the order backlog rose by around 9% year over year. The high order backlog provides a strong basis well into 2025 and beyond. Let's move to slide 8. Revenues of RVS in the third quarter amounted to €995 million, which represents an increase of almost 7% year-over-year. Organically, this division even lifted its revenues by a strong 10%. Both OE and aftermarket business grew on group levels year-over-year. As a result, our aftermarket revenue share in RVS even reached 52% in the third quarter. From a regional point of view, revenue growth was supported by all major regions. This is an encouraging sign as our growth is based on multiple pillars. In Europe, without the market business overcompensating slightly declining OE sales, North America and APEC regions recorded strong decreases in both sales. China saw growing revenue in the Specially high speed and aftermarket in particular benefits from, as far as we see it, pull forward effects from the current quarter into the second as well as the first quarter. In the coming quarters, we therefore expect some normalization in this regard. Operating EBIT margin recorded an increase of 160 base points to 16%, driven by operating leverage and efficiency measures of our boost program. 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 impacted the operating margin positively as well. In the running quarter, we expect that profitability of RVS should be lower compared to the third quarter, given the project business characteristics of the business itself and some pull-forward effects as mentioned before. Let's continue with our truck division on chart 9. Auto intake in CVS amounted to 823 million euros, a decline of roughly 14% compared to last year. Among others, also driven by negative is ethics effects. All regions have had weak truck markets. Weak auto intakes from Europe came in as expected, while North America developed slightly better than expected. Book-to-bill reached 4.9 in the past quarter, and the order book, with more than 1.8 billion euros at the end of September, remains on a good level and well above the long-term average. Order intakes in the fourth quarter are expected to face ongoing challenges, especially in North America and Europe. Although the market in North America is holding up better than in Europe, our expectations are based on lower truck production rates, which many customers also indicate for the fourth quarter. We assume that the book-to-bill ratio will be well below one on a full year basis. Overall, orders in the current quarter should be only slightly higher compared with the third quarter. However, we are very well prepared to overcome these challenges. Let me walk you through some of the options and measures. High flexibility of our sites and facilities. For example, temp workers generally represent around 10 to 15% of our workforce in the production plants in Europe, which we can lay off quickly if necessary. Following the weakening market, we reduced temporary workers in CVS by around 10% already year over year. Secondly, all major plants in Europe are prepared and ready to introduce short-term work schemes within weeks. Currently, short-term work is introduced in one German plant, as Mark mentioned before, already since May in Berlin. Compared to many of our customers, we still have higher capacity utilization rates in our plants. Thirdly, full-year effects of price increases from last year are fixed, which will be counterbalancing shortfalls of volumes. Fourthly, aftermarket business contributes more than 30% of our revenues in Europe and North America and is well supporting our resilience. Last but not least, our boost program targets also structural costs and further efficiency measures, which already mitigated some negative impacts. Please bear in mind that we are not in a crisis mode, but we are well prepared and will continue to do so for a likely further negative market development in the months ahead. Let's move to chart 10. Revenues declined by 9% to €915 million. This development was as expected and a solid performance in such a challenging environment. OE business and CVS, as expected, decreased in all regions, mostly in Europe, followed by North America. Aftermarket business, on the other hand, remained stable in all regions. In the European market, our revenues have experienced a 15% decline due to weak demand in both the truck and the trailer segment, with truck production rate declining by 25% in the quarter at the same time. The stable aftermarket, which generates around 40% of European revenue and the growth in content per vehicle, were the main reasons for the strong outperformance of the market, a clear sign of the division's resilience. North America has a better, with only a mid-single-digit decline. Operating EBIT of our CES division amounted to 91 million euros in the past quarter, down around 15% year-over-year, organically around 13%. As a result, the operating EBIT margin declined by 60 base points to 10%, partially also due to FX headwinds. The good resilience of our EBIT margin is based on a combination of achieved price increases, good aftermarket business, and positive effects from our efficiency measures. We continue to expect an operating EBIT margin only slightly below 10% for the second half of 2024, meaning that the quarter 4 could be slightly below the 10% level. With that, I hand over to Mark again. Thank you, Frank. So let's have a look at our guidance for the full year 2024 on slide 11. Major assumptions are unchanged and outlined on the right side of this chart. In full year 2024, we expect still a revenue range of 7.8 to 8.1 billion euros, an operating average margin between 11.5 and 13%, and a free cash flow between 550 and 650 million euros. After closing the deal on heavy signaling, the guidance now includes roughly 100 million euros in revenues. Operating average margin is unchanged due to ongoing uncertainties in the truck market, integration costs of around 10 billion euros for the M&A transaction, and uncertainties regarding the timing of some larger projects in RBN. Nevertheless, we consider the midpoints of our margin guidance to be very realistic. Slide 12. Let me finish with our first thoughts on next year on organic level. The overall rail market will be solid in 2025. As a result, RVS should benefit from the positive trend due to its market innovation leading position with an expected revenue growth mid-season next year. We are a partner of choice for many rail OEMs and operators globally. In 2025, we expect some positive dynamics, especially in Europe, North America and India. China should continue to be an important market and value contributor to RBS. Nevertheless, 2024 is a better than normal year for us in this market, driven by higher demand in high speed and in the aftermarket businesses. By pent-up demand and the fact that many trains are currently in an overall cycle, in 2025 we expect some normalization in China, which should be affected as well in the local top line. Besides further execution of our boost strategy, including cost and efficiency measures, we focus on our biggest growth markets in Europe, North America and India, the North continent into 25 and expect mid-single-digit revenue and solid operating EBIT margin growth for R&S. Truck cycle, on the other hand, should still be challenging. In 25, they expect truck production rates in 25, especially the first half of the year, to stay on comparable levels, if not slightly below 24, and believe that the second half of the year should be stronger than the first. Thanks to our pricing activities done in the past, efficiency measures done in the present and in the past, cost measures we continuously do, and as well as increasing of the market business operating, EBIT margins should be on a flat level with a slight impulsion. Revenues are expected to develop flat to slightly growing next year. With that, I would like to thank you for your attention. Frank and I are looking forward to your questions.

Thank you very much. Thank you very much. Dear ladies and gentlemen, if you wish to speak a question, you can now start on your telephone.

One moment for your first question, please. The first question is from Sven Bayer, UBS.

Please go ahead.

Yeah, good afternoon. Thanks for taking my questions. The first one is just on the guidance for 2024, the margin guidance. I mean, you just stated that you're very confident to reach the midpoint of the margin targets. And I was wondering, keeping the margin target as it is would seem a bit inconsistent with that confidence, because I guess to get to the low end, quite a few things that have to go wrong. To get to the high end, quite a few things have to go right. But why didn't you just then narrow the margin range if you're so confident with that? That's the first one. Thank you.

Yeah, thanks, Ben. Thanks for your question. As you rightfully indicated, we usually keep ranges, so to say, by clearly having in mind that the midpoint is what we're usually focusing at once we're doing it. We have risen that range. the midpoint of that range since quarter two, which we still believe in that we can do better than what we scored around summertime. This is a given. Yeah, you can rightfully argue why, so to say, the goal is that big and that Harry Kane is just five meters in front of the goal. So to say it should be easy, so to say, to hit that goal. But I would say... There are still uncertainties out there, and I agree with you. We might be not falling to the lower end of the guidance and might also not touching the upper end of the guidance. Please keep in mind, let us focus on somehow the midpoint of it with a bit of the indication, seeing what we said towards RVS business and CVS business in the fourth quarter. that it might be a bit weaker in the fourth quarter than in the quarters ahead. So maybe slightly below the midpoint is what we are currently seeing, given all the uncertainties that are still out there. Let's not, so to say, talk around that. So that would be my answer, Sven. Hopefully you understand our range still that openly.

No, and I think it's fair that you gave more quantification around the midpoint, and I think we can live with that. Thank you, Frank. Second point, as I may, on the 2025 slide, and thanks very much for providing that insight so early. I think that's really helpful in these uncertain markets. The questions I just have is on the truck side. I mean, you do assume no revenue had been here, right? Even though, I mean, of course, it's no second half weighted here. But the thing I'm just wondering about is when I think about your 2026 margin target for CBS, it's still quite a bit to go and you wouldn't make too much progress next year on that. I don't assume you're really happy with that. So is there anything you can do to accelerate the progress? Anything in your hands you can do on that? Thank you.

Thanks, Ben. Also, fair question. I think we always kind of mentioned that given the 26 targets we laid out one year ago, nearly one and a half years ago, we said it's a bit more aspirational, so to say, to go for that truck target margins than going for the rail target margins. As we outlined also several times since we said that whatever happens, we are very confident that Knorr-Brunswick overall will achieve the 14%, above the 14%. But it might be the case that rail maybe delivers more and trucks delivers a bit less. Did we bake in back in the days a lot of growth or support? support elements from the truck market. No, we didn't. Back in the days, we baked in some one percentage point of growth, obviously, on the truck side. I mean, obviously, now things are a bit different. Markets are significantly down in the two major markets for us, but this is not the real explanation because also in 26, you should then see some pre-buy effects in North America. So, overall, I would say, I'm not unhappy with the development of truck at all, but there is a good, so to say, progress that we still expect towards 2026. And you can be assured that we don't leave any stone unfurled in order to get the max out of truck. But it might be below the 13.5, but expect there to be more than the 16.5.

Is it maybe also that on next year, the first half revenues will be down, obviously, and the operating leverage on the way down is maybe also lower than on the way up in the second half, and that maybe keeps you a bit more restricted on the margin improvement overall next year? Is that maybe also fair point?

That's also a clear fair point, understanding the business, how it works, yes.

Cool. Thank you, Frank. Yeah, you're welcome.

Thank you very much. We are moving on to the next question. Next question is from Akash Gupta, TP Morgan. Over to you.

Yes. Hi. Good afternoon, everybody. I got two as well. The first one is on the truck business. So when I look at your slide on operating profit bridge and revenue bridge, and then when I calculate your operating leverage or drop through in the business, I get to around mid-teens percentage points, which is quite remarkable. The question I have is that is this something that could be sustainable in Q4, or was there anything that helped or impacted? So maybe any comment on the drop-through that we should expect in the business going forward. Thank you.

Thanks, Akash, for acknowledging this. This is, of course, a big wishful number. If we could have this all the way down when things are going sour, that would be fantastic. Needless to say, as you know, Akash, we have also, so to say, tailwinds due to the massive price adjustments that we made that help us year over year to soften such dropshifts. It's getting weaker quarter by quarter, so to say, just as a mathematical model, as you know, these price support measures. So maybe not the same amount, maybe a bit weaker. That drop through could be in the fourth quarter.

Thank you. And my second question, which is more of a housekeeping question, is for your guidance on 2025 margins. So you mentioned that There can be solid growth in margins in grain and flat to slight growth in trucks. So can you read flat to slight as like 0 to 50 bps and solid growth means 50 or more? Like anything that you can help us to quantify what you are, how you are defining the slight growth and solid growth? Thank you.

Yes, it was very important for me once I came here that we have some kind of aligned vocabulary that we're always using exactly right what you're saying. This is, so to say, our definition of the wording, so to say, up to 50 base points and above 50 to 150 base points, so to say. I think that's what we said. And also to connect your question a bit with something I forgot to mention with Sven's question, this is organic, so to say, development that we, of course, see. We have not baked in for a specific year of 2025 an effect out of a disposal.

And maybe just lastly, a quick follow-up on your disposal plan in CVS. Given the weakness in truck market, are you waiting for some kind of recovery in the market so you may get some better price and that could be reason behind some delays that might be intentional or is this not something you are considering?

Thank you, Akash. First of all, we're not having any delays in the progress. It's rather the opposite. I think we're a bit ahead of the plan when it comes to the execution of our active portfolio management. So very clear, no delays here. We're not waiting here for the one or the other million, so to say, in, let's say, talking about smaller numbers. It's also important for us that we are able as a company to focus on the right things, and there it doesn't, in the end, be believed. strategically matter whether we make a million or 500,000 of proceeds more by waiting for the next month to come as we are using a lot of capacities and skillful people in managing, observing and restructuring businesses. That's of utmost importance for us to focus everything that we have in this company on the businesses, so to say, that perform best and where we can get the best margin out, and that's why we are not delaying anything or waiting for better market conditions in order to get a bit more out of the proceeds.

Thank you. You're welcome, Markus.

Thank you very much, also from my side. The next question is from Gail Debray, Deutsche Bank. Over to you.

Thanks very much. Good afternoon, everybody. Can I ask firstly about RBS and about the size currently of your Chinese rail business? Is it about 650 or 700 million, something like this? And more importantly, what has been the growth rate so far in your Chinese RBS business in 2024? That's question number one, and maybe I'll go one after the other.

Yeah, thanks for your question. I mentioned also already, I think over the last month, several times that we are a bit better doing than what we told you all strategically, what we expect from the Chinese market when we did lay out our plan. I think it was in quarter two of 2022. where we indicated that maybe 650 would be the low point somewhere in time and then recover somehow towards 700 for mainland China revenues. We are a bit better than that. We are above 700 million. And I think this is showing that the purely reverse is behind us in China, and we are benefiting right as we speak a bit, of course, from very good demand out there on the high-speed train, you know, the high-speed train, so to say. Fossil is clearly mentioned in the five-year plan. We see a good demand here currently of high-speed trains being built, and we see very good, as one of the only countries in the world, we see ridership levels that are significantly above the 2019 levels already, which is supporting our aftermarket. And they are just looking at all the situations. We do identify that there must be some pulse head effects already happening since around summertime. So that's a bit that's supporting us. should be coming back to a bit of a normalization going into the next month to come. But I think this, somebody has not muted. I think here it's annoying. Okay. So it's a good level above 700 that we are currently having given all those aspects that I mentioned. To be very precise, in China we are targeting 790 million of revenues, which is showing that the There's someone still in the line. Either you get on mute or you get out.

It's from Gail's side, actually. So, Gail, could you please mute yourself? That would be amazing. Thank you.

Thanks, Gail.

So, the dooming messages which eventually were said about China in 2022, they don't come through or they don't realize. Also, you can see it's in the mix of the business between OE business and after-sales business. We see also in the OE business that we are more and more considered by the metros, and we are still considered very heavily by the high speeds. So that means it seems to be that our unique selling proposition in China is succeeding, and it seems also that in the next years to come, there is no indication that China is contracting. What is important for you is that our dependency from China, also from rail, is significantly lower than it was in the past. So we are going down from something which was in the range of 46% now in the range in the 30s, which is, I think, for you more important because that shows that our dependency cluster, so the so-called clustering, is now getting more and more global. This is the reason why we are massively expanding into the American business. And please keep in mind the number that Mark mentioned as the target, including also export businesses, not the mainland China figure alone. But the mainland China figure is also above 700, as I said before.

Understood. Thanks very much. And the second question is about CVS. And with volumes obviously being under severe pressure now, could you talk a bit about the pricing environment

Yeah, as you can imagine, Gail, I mean, and that is the reason also why we did the waves of price negotiations the way we did it. We planned them to be concluded before the first signals of market downstream occurred. It's more difficult, of course, to ask for price increases in a situation where markets are going down. So we concluded everything already towards the end of 2023 that we would be ready, so to say, to harvest it. Of course, the one or the other customer is now aiming to gain a bit back what he gave to us as price adjustments, but you can be assured that we will not be easily giving away any kind of prices that we have negotiated very hard over a certain period of time. But it's, of course, a bit tougher than it used to be over the last few years. That's pretty clear. But we are not, we have not increased the prices to a strange amount, we have gotten our inflation back, so to say. And why should there be any reasons if inflation is not, so to say, turning negative? Why should we easily give back any price point? So we will be pretty stiff, as you know from SnorBremse. Can't guarantee anything exactly, but we will be very stiff on giving back anything.

Thank you very much.

Thank you very much. Moving on to the next question, but before that, dear ladies and gentlemen, if you wish to state a question, please press 9 and star, and you're totally ready. The next question is from Vivek Nitta of Citi. Over to you.

Thank you very much, everyone, and good afternoon. My main question is a part on the rail business. So on slide 12, you say that you expect stronger growth in the aftermarket than equipment. At the same time, you've highlighted that aftermarket is one of the contributors to that pull-forward effect in China. So that would appear to imply quite a strong growth in the aftermarket outside of China, what is it that's giving you that visibility and that confidence that the aftermarket is going to exceed OE growth? Is it certain projects or overall timing? Thank you.

Thanks. First of all, I think what we mentioned in regards to the pull ahead effects regarding quarter two, quarter three, should give you a bit a better understanding of the year 24 itself, how this is functioning, where usually the pattern is more that the Chinese aftermarket business is a quarter four centric one with very good, so to say, demand in the fourth quarter. This time around, it looks like a bit more in the second quarter, third quarter. So this kind of pull ahead effect is something that is really important to understand the dynamics of 24. Looking at the overall year, year over year, then going into 25, we, of course, so to say, do think that aftermarket should grow. We have already nowadays a very bigger growth in aftermarket than in OE. You know, we understand basically in our databases where our brakes in the past have been built into all the vehicles. We know exactly, so to say, when to expect them for production. let's say, given empirical evidence for repair work, for maintenance, and when the overall cycles kick in, and giving that knowledge, database knowledge of our projections of the usage of these trains, We are pretty happy with that development that we see into 2025 also in our market. And that makes us confident, given that empirical evidence and the projections out of the real usage of these trains.

Understood. Thank you. And my second question is just a quick clarification. You mentioned around 10 million integration costs for KB signaling, if I heard you correctly. Has any of this already been booked or will all of this be booked in the fourth quarter? Thank you.

No, a bit. Thanks for the question. A bit is already, of course, sitting in the quarter three numbers and the rest to become in quarter four, but also a bit maybe in 25. We just started the PMI end of August. Officially, we kicked it off. beginning of September, and the PMI phase will take up to a year. So also integration costs in 2025 might be occurring, and whether it will be exactly 10 or 15 or 8, not so sure at this point. I would think about roughly 10 million, but maybe potentially spread over quite some time.

Understood. Thank you very much.

A lot IT-based, by the way, you know. Thank you.

Thank you also for my time. Currently, the last question comes from Tori Fangman, Bank of America. Please go ahead.

Cool. I hope you can hear me. Thanks for taking my question. I've got two questions left. First, just... One more on the signaling integration. Could you just give us a quick update, how is it going, and maybe any aging of synergy, how we currently see this coming through?

Thank you. Thanks for the question. I think we found after the day after closing kind of highly motivated, very skillful management team. nice clients, efficient clients, very well organized, systematically working team, so to say, so we're pretty happy with the deal. No significant issues that we have seen so far, so it looks pretty good. We're pretty happy with that deal. It was never a synergetic case, if you remember and if you read through our old, so to say, explanations about the strategy and signaling that we're having. We might find synergies along the way, though, but this is not the reason why we got hold of the Alstom signaling business. It was a strategic move that we made. Yeah, we might find synergies along the way, looking at their plans. They have five sites. these days that they're operating in North America. We do have five sites as well in rail. Whether we run with 10 plants then into the future, this is, I think, of course, needs to be questioned. I don't think so. But these synergetic moves won't move the needle. It's a strategic deal that we have made here.

And I think that's Okay. Thank you. Can you still hear me? Sorry.

Yes, yes. Perfect. Then my last question would be more like a clarification or a bit more color on the CES side of your business. Could you maybe speak about during Q3, was it just like overall a week quarter or did you saw like a sequential worsening from July to September? And then as a bit of an add-on here, I think you spoke about In H1, you would see basically further headwinds, but then in H2, you would see the track size where you're growing again. So what would be the picture for the overall 25-year conclusion for you?

Thank you. I think I'm just taking notes. Within the third quarter, there was not a specific pattern between the month of July, August, and September. Somehow similar. I mean, August may be a bit weaker. This is in the nature of the game. Usually, you have plant closures with the customers. That's the best way to kill fixed costs, of course, if you're an OEM, to have longer plant closures than just wiping out the one or the other shift. Needless to say, that's why August is always a kind of awful month, usually, but not a spectacular pattern besides that. in the first quarter. Coming to 25, that is just a technical thing, you know. Quarter one and quarter two in 24, the comps, which are the comps, had still quite okayish markets in Europe and North America. And if we talk about now what's the full year expectation for 2025, and if we say what we said, somehow flattish development of the markets going from 2024 full year into 2025 full year, then it's quite logical. Then the first half year compared to the first half year of 2024 is more on the negative side in terms of half year over half year, and the second is market related, then maybe a bit better than the half year of 24. That's how we see 25. Roughly speaking, for the full year, markets somehow plus, minus a bit, somehow flattish. But then quarter over quarter, quarter one and quarter two, rather minus in terms of growth, and quarter three and quarter four, rather plus. So that's the way we see things at this point in time. Yes, and overall, Mr. Fangman, it's more important to get the fixed costs now under control because that's the time to do it. Now, the first quarter was good, the second quarter was bad, and the first quarter of 2025 looks not so promising. But that's normal cyclicality. If you don't use the cyclicality to raise your level of profitability, then you have wasted a chance. So that's exactly what we don't want to do. This is why we focus very, very much now in lowering the fixed cost. And to your question in terms of the quarter, if you really want to know it, July was strong, August was weak, and September was strong. So there's no downward trend in the quarter. So we could say September was much better than August.

Very well, Mr. Thank you so much. You're welcome.

Thank you. And then we also have a follow-up question of Gail Debray, Deutsche Bank. Over to you, Gail.

Thanks very much for the opportunity again. I just wanted to get a bit of clarification, maybe if you could elaborate on the supply chain problems with the specialist suppliers for the rail industry ultimately not being yet overvalued.

Yeah, thanks. It's gotten better, I think, since months. It's gotten better, but not yet at that good level like you would have with, so to say, the bigger slot kind of suppliers. We still have with some of the specialists some issues that lead to the fact that we are sitting on a bit more inventory that usually would be needed. Also for some electronic stuff, usually you have to place them last time by orders. so to say, in order to get at all the supply security over time. So there are a bit more difficulties in that business than we are having on the truck side. But it hasn't worsened. On the opposite side, it's gotten a bit better. But we wait for the time until we significantly can move it into also inventory reductions on our side. Nothing to dramatically worry about. It's getting better, but not on that good level like we see already on the truck side, the supply chain.

But is it mainly about electronics or is there any specific component as well?

No, it's also, it goes across the floor, I would say. We have B parts affected, C parts affected, even some rubber parts at times. So it's basically of everything a bit.

Understood.

Thanks very much. Yeah, you're welcome.

Thank you. We have more questions in the Q&A session. The next one is from Holger Schmidt of Dietzer Bank AG.

Hi, good afternoon, everyone. Thanks for taking my question. The first one is from signaling. As far as I remember, you were in negotiation about a larger project. I think the amount is something like 600 to 700 million. What is the probability that you will get it and how many competitors are in the bidding process? And that's the first question. And the second question is on the truck side. One of your key competitors in the truck business said that Friedrichshafen continues to struggle. Do you see any change in their behavior and what are the chances for you?

Thanks, Oliver. First of all, I know that we before mentioned the bigger project on the Alstom or KB signaling side. It's indeed a bigger project. Revenue dimension is around 600 to 700 million US dollars over certain years, needless to say. Not a one-off kind of, but over several years. The process is still ongoing. As you know, it's always municipalities. And in that case, seeing just the pure dimension, you understand it's even more than just one municipality dealing with that. It's still in the works. Nothing concluded that. In the beginning it was, or let's say right from the start when we were in the due diligence of KB Signaling, it was mentioned that around wintertime there should be first conclusions in regards to the tender being made. At this point in time, we don't know exactly when this will happen with larger municipalities. You never exactly know. It can easily be also only around springtime or summer of next year. We don't have a clear indication yet when exactly a decision will be made. To how many, so to say, other parties are involved in that tender, we can't give you details. We know it's one or two. Others that are involved in that, we should be in a preferred position in the tender process, but the outcome, we don't know at this point in time. On the truck side, the major competitor, ZF, has not over the last year since they were acquired, since WAPCO was acquired by ZF, they have not acted irrational and we don't see that these days as well. So it's all very rational what's going on in the market, how we understand things and negotiations and contacts with our OEMs. Nothing spectacular that happened recently.

Okay, thank you.

You're welcome.

Thank you very much. And now we are also having a follow-up from Akash Gupta, DP Morgan. Over to you, Akash. Thank you.

Yes, hi. Thanks for taking the follow-up. And that is basically your U.S. business. Can you share some light on your U.S. business manufacturing and how much of the business is relying on imports? And let's say if we see a scenario where there may be a flood situation tariffs on all the imports coming in the U.S., does that give you a relative competitive advantage, or does that give you a competitive risk, so to speak, by looking at your competitors' production base in the U.S.? Thank you.

Yeah, Akash, let me start with the latter end of your question. I mean, we are true believers in a decentralized organization, a decentralized entrepreneurial field organization of Nordbremse. We rely on and we strategically believe in high local content in the respective market, which gave us a competitive edge during the times of supply chain problems, during the last recent years with Russian war over Ukraine, etc., you name it. So we believe in that. We have very high localization rates in the US. You, by law, have to reach at least 62.5, if I'm not mistaken. We are, needless to say, fulfilling that and are even far beyond this 62.5 of localization. So we can easily adapt. from 70 to 75 in case it's opportunistic at times, depending on what regulations might come out. But we will not shy away from the general pattern of being in the market, for the market, and drive the business entrepreneurially decentralized. No reason to shy away from that. So, Frank, are we prepared for Donald Trump? Yes. With us, not who else. Good.

Thank you. You're welcome.

Thank you very much also from my side. With that, I would like to close the Q&A session since there are no more questions in the queue. And I'm handing the floor back over to you.

Thank you all for attending. Thank you. Bye-bye. Awesome.

Thanks a lot.