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.