Knorr-Bremse AG

Good morning, as well as good afternoon, dear ladies and gentlemen. I hope all of you are very fine. My name is Andreas Spitzhauer, Head of Investor Relations at Knorr Bremse. I want to welcome you to the conference call of today, where we will present the preliminary results for 2024. Today, Mark Listerseyer, our CEO, and Frank Weber, our CFO, will present the numbers and later discuss the numbers with you. The meeting will be recorded and will be available on our homepage in the Investor Relations section. Here you can find today's presentation as well. It is now my pleasure to hand over to Mark Listerseer.

Many thanks, Andreas. Ladies and gentlemen, I would also like to welcome you to our capital market call for our preliminary full year 2024 results. Allow me to mention a special highlight this year at the beginning. We are celebrating an important birthday this year. Knorr Bremse will turn 120 years. Georg Knorr founded Knorr Bremse in Berlin 120 years ago. He started out in a modern factory with just 165 employees. Today, 120 years on, we operate worldwide and we are the mobile market leader. George Knorr laid the foundation. Heinz Hermann Thiele shaped the company. And thanks to his effort, made it the world market leader. The entire Knobramser team will continue on this successful path. Our clear priorities are sustainable growth, profitability, and value creation. In 120 years, we have grown steadily, aligned our portfolio with market demands, and responded flexibly to changes. But at our core, we have always remained true to ourselves. We're innovative. We act as entrepreneurs. We want to get things done. That is what has made us who and where we are. In this connection, I'm also pleased that I can continue to drive and shape the future of Knob-Ramsay together with my executive board team. As you know, my contract was recently extended by five years. I give my thanks to Reinhard Ploss and this entire supervisory board for their confidence in me and look forward to continuing working together closely and trustingly. Let me now begin with the key messages of today. The war in Ukraine, multiple crises and economic challenges, these were the topics that continued to impact our business last year. Nevertheless, with our resilience, strength and entrepreneurship, we have proven that we can be successful even in difficult environments. Especially in these economical and globally geopolitical tense times, we are more than satisfied with our business performance. At the same time, we have secured Long-term refinancing with our latest successful bond issue, which included our first green bond. A rock-solid balance sheet gives us the basis we need for the future. We have achieved strong results overall with record order books, which give us a solid foundation for this year. Our rail division delivered record levels for revenues in order book. In addition, rail once again accounted for a share of revenue of more than 50%, thus creating an important basis for the entire group's profitable growth. Our truck division generated a double-digit return despite the extremely difficult market situation it currently has to contend with. That is a strong performance. We responded to the market weakness at an early stage by taking countermeasures. That enabled us to secure results. We are fully on track with our Boost 2026 strategy program and it is announced have implemented important measures as part of our brownfield activities, including the successful streamlining of our portfolio with the sale of our four companies. As a result, we have already carved out more than 60% of the planned revenue volume. Our brownfield activities, our housekeeping as well, as we call it, also includes strict cost discipline and permanent questioning of existing processes and structures. The result is a significant improvement in profitability when operating free cash flow that reached the highest level in our 120 years company history. Ladies and gentlemen, let us now take a look at our financial targets for 2024. We were able to achieve or even surpass all our targets for revenues, EBIT margin, free cash flow in the past fiscal year. Our record order book, our low leverage and high liquidity confirm our strong resilience and show that we are in top financial shape. At the same time, they are the foundation for sustainable growth. Let me continue with an overview of our boost program on slide five. We have set out to accomplish a lot under this strategy program, which we launched in summer of 2023. After all, we want to be substantially quicker, more efficient, and develop greater strengths. Our boost program is clearly aligned to creating added value. All the initiatives must contribute to this goal. Our profitability has top priority. We have implemented more than 1,000 measures globally with great success. We are reducing our costs, we are streamlining our product portfolio and at the same time we are investing in digitalization and automation and have also launched first AI initiatives in order to benefit from the new opportunities. We are also investing in profitable new business fields such as the rail signaling technology business in North America. The acquisition of KB Signaling from Alstom in September 2024 opens up new opportunities for Knorr-Brenze in the highly promising North American market. The successful entry into the attractive and high-margin signaling technology business means we can push ahead with creating our own value added and generate sustainable growth with new and digital solutions. At the same time, we are also increasing our share of revenue in the more stable and more profitable rail business and reducing our dependency on the cyclical truck market. In addition, we were and we are currently conducting an intensive strategic discussion in evaluating how Knorr Brunser should be positioned in the future. We are not shying away from any option and in general I do not want to rule out a possible expansion of business. Our focus on increasing value and sustainable profitable growth is and will remain very clear. Our portfolio measures with a total revenue volume of 1.4 billion euros are shown on slide 6. As part of that, we are challenging all of our business areas, in particular those that deliver relatively weak results. Wherever the analyzers indicated that we are not the best owner of a particular line of business, we initiated a consistent separation process or launched a firm turnaround plan. We are aligning everything towards ensuring sustainable value creation. We have made great strides in optimizing our portfolio over the past year with a clear focus on core competencies and performance. Four units have already been successfully sold since the beginning of 2024. Keep Electric from the Rail Division and Safety Direct GT Emission Standards and Shepard from the CVS Truck Division. Two further SALIT processes have already been initiated. We expect that the SALIT measures will increase our operating EBIT margin by around 130 basic points by 2026 versus 2022. A comprehensive program of fixed measures is also underway and is delivering greater efficiency worldwide. And here, too, we always focus on where we can become faster and more agile. Where can we become even better where we're already good at? Where are talking and tackling, in some cases, of outdated structures and where our previous branches were not sufficient. We're making adaptations quickly and flexibly. Fail fast. As part of that, we had to make adjustments in many areas, bundle areas of responsibility, centralize group White House, and also optimize our global footprint, always with the aim of making our company more powerful, more cost-conscious, and more agile and more modern. In addition to the efficiency programs we have successfully launched to date, we are already looking beyond 2026. That is why we have expanded our optimization measures globally. The clear assignment of global responsibilities, the prioritization of projects, or efficient controlling are just some of the measures that support our goal of improving margins under the BOOST program. Furthermore, Additional sustainable efficiency measures, such as expanding global shared services or strengthening sites with low cost levels, will also increase Knobb-Bremse's profitability beyond 2026. Let me now give you a few examples from our operating business to show you where we were particularly successful last year on slide eight. At product level, we made a brilliant impression this year, particularly on the stages of the leading trade fairs, Auto Mechanica, Innotrans, and IAA Transportation, where we demonstrated our technological solutions to international experts and aroused the interest of our customers with numerous innovations. Our rail division again captured important contracts in 2024. Among other things, Knorr-Bremse will equip at least 246 city-linked streetcars from Stadler with system solutions that will be responsible for providing our comprehensive aftermarket services for 22 years. This makes Knorr-Bremse a key equipment partner for Stadler in a long-term and large-scale mobility project. Knorr Bremse will also fit 42 further regional trains with braking, entrance and sanitary systems for Alstom. This is another large follow-up order from the platform partnership between Alstom and Knorr Bremse, under which train fleets in several European countries are already being equipped. In 2024, our truck division successfully pressed ahead with streamlining its portfolio in order to concentrate even more strongly on its core competencies moving ahead and to make its business even more focused and profitable. As already briefly mentioned, this included the sale of the safety direct product line, the sale of GT emission systems, a leading supplier of emission control systems for diesel engines and commercial vehicles, the disposal of Shepard, a manufacturer of commercial vehicle steering systems in the North American market, which was another important milestone. Let us now take a look at the current market situation for rail and truck, as well as our market expectations for the year. 2025. Looking at the rail market, we can see that underlying demand is very strong in all regions, something that is reflected in the consistently high order intake and record order books. Thanks to research in passenger numbers in most countries, both in the aftermarket and the OA segment, the rail division made a significant contribution to the good overall result. We assume And we plan that demand will remain strong in the current fiscal year, reflected in an expected book-to-bill ratio above one. Our customers' order books are full, and that makes us optimistic about the outlook for the current fiscal year. The backlog of old orders, which was heavily affected by inflation, has been largely handled, as said. Overall, the inflation-related effects on our business have thus been minimised. As expected, the current market environment in the truck division is difficult in the three major regions of North America, Europe and China. We expect the market environment to remain weak in the first half of the year. We assume there will be an increase in the truck production rates in the second half of the year and therefore a recovery of the market in the US, Europe and China. This assessment has been indicated in many discussions with customers. In the current year, we see growth opportunities in the aftermarket, business in particular, and we have high hopes that Kohali will continue to perform very well. In this challenging market situation, we are using the time to further optimize our costs and structures at the truck division with efficiency and foresight in order to strengthen and future-proof our business. I would now like to hand over to Frank, who will outline the preliminary financial figures for the past fiscal year 2024. Frank, please.

Thank you very much, Marc. And welcome also from my side. Let's now turn to slide 10 to discuss the financials for the full year 2024 first. Knorr Bremse generated revenues of almost €8 billion, more or less a stable development on reported level year-over-year and slightly up in organic terms. On a divisional level, RVS more than compensated for CVS market-driven top-line performance last year. From a regional point of view, the APEC region and South America contributed to the revenue increase, while Europe and North America reported a decline. Our operating EBIT margin benefited from a strong bottom line improvement in rail, a good regional mix, very good aftermarket in rail, operating leverage in general, as well as our boost efficiency measures. Accordingly, our group's EBIT margin rose by 100 base points to 12.3%. The development of rail's EBIT margin was particularly pleasing, seeing an increase of 130 base points to 15.6%. Important reasons for this increase in profitability in 2024 was the good aftermarket business as well as the closing of the price-cost gap, which will also be supportive for this year. CVS was able to increase its EBIT margin as well by 40 base points to 10.4%. This was a great achievement considering the weak truck market especially in Europe. A strong demonstration of CVS resilience. Auto intake and backlog also achieved great results. Stable levels year over year and ranging only slightly below record levels. This development underlines KB's outstanding position in both markets. The strong improvement in cash flow is a major highlight of 24. We were able to improve the free cash flow quarter over quarter last year again. Overall, free cash flow for the full year came in at 730 million euros. a historical record figure if you exclude non-operating proceeds which we had in the year 2019. We promised to improve the cash flow and we strongly delivered. I would also like to thank all colleagues, business partners and customers for the great collaboration and dedication in the last year. Let's continue our path on the way to new strength together. Let's now focus on our balance sheet on slide 11. A top priority of my finance policy is and was and remains a superior financial profile, especially important in times of uncertainty like nowadays. In addition, it provides a high level of flexibility for our strategic goals and operations at the same time. A strong level of equity remains important to us. At year-end 2024, Knorr Bremse reached a level of more than 3 billion euros and a good equity ratio of 32%. Slightly down year-over-year, but higher in absolute terms. The slight decline of the ratio is purely driven by the pre-financing of the 25 bond maturity of 750 million euros. Without that, the equity ratio would have remained at 35%. Our liquidity increased significantly to 2.3 billion euros. This is driven by the issuance of a dual tranche bond amounting to 1.1 billion euros in September, including our first green bond. With the proceeds, we strengthen our position as a trailblazer of sustainability and green mobility for our customers. We financed the acquisition of KB Signaling and, as already mentioned, we refinanced existing liabilities in the amount of 750 million euros, maturing in September of this year. Consequently, net debt increased by 45% to 912 million euros, leading to a very comfortable net debt to EBITDA leverage of 0.7%. Our credit ratings with A- and A3 remain on a very good level with a stable outlook underlining again our strong financial profile resilience. Let's move to slide 12. CapEx in 2024 amounted to €350 million in relation to revenues, roughly 4.4%. This is 20 base points and €80 million below previous year. Following several years of higher CapEx, we adjust the target range of CapEx to revenues going forward from originally 5% to 6% to now 4% to 5%. The reason for this is that quite a few projects have now been completed with revenues kicking in over time and it is important for us to increase CAPEX capital efficiency further, which we are driving also with footprint optimizations globally. Regarding R&D expenses, we will target a ratio towards 6% mid-term after 6-7% in the past years. The reduction will be done especially in the truck division. Also here, revenues should kick in and we focus on R&D portfolio streamlining. Reported net working capital increased by 164 million year-over-year, solely driven by the acquisition of KB Signaling. Without this effect, net working capital would have been nearly on the previous year's level. The slight increase in scope of days year-over-year is driven by the strong market downturn in CVS, especially in half-year 2, which we couldn't fully equalize in the supply chain at the same time. We continued to take action across all working capital areas, in particular further efficiency improvements on the inventory side via our collect program. Despite all measures in customer receivables and inventories, we still took care of a rock-solid supply security for our customers, but could not completely decouple from the market. As a result of improved EBIT and capital efficiency, our ROSI increased from 19.5% to 20.8%, without KB signalling even to 21.2%. This figure represents a good development and is fully in line with our target of more than 20%. Thanks to our strong financials, we can both provide a solid return as well as a growing dividend to our shareholders and at the same time invest in future products and system solutions, strengthening our competitive positioning. I would like to provide you more details regarding our free cash flow on slide 13. We could improve the free cash flow sequentially last year, reaching 482 million euros in the last quarter alone. Overall, free cash flow came in at 730 million euros on a full year basis, the best figure ever in the 120 years history of Knorr Bremse. If we consider 2019 numbers had a massive positive sale and lease back effect. The improvement of free cash flow was driven by a higher and qualitatively good EBIT, lower capital expenditures, lower tax payments, as well as by the before-mentioned networking capital measures. We were able to basically improve in all relevant dimensions. A very important KPI derived for us is the cash conversion rate. In 2024, it reached 113% in operating terms, adjusting it even downwards for negative non-cash one-timers that burdened our net income. This is an extraordinary figure, well above the 96% in 2023 and again well above our target range of 80-90%. Let's move to chart 14. Also in 24, we consequently focused on integrating ESG into our business operations and processes, value chain activities, and our decision-making. This is not only reflected in our strong ESG ratings in 24, but displayed by the positive development of some KPIs, such as the reduction of CO2 emissions for scope 1 and 2, as well as the respective emission intensity by 20%. With the publication of our Green Finance Framework in September, even prior to the issuance of our Green Bond, we are continuing our journey to integrate sustainability into our financing structure. The framework strengthens our sustainability goals and supports Knorr Bremses' efforts in promoting sustainable mobility and decarbonisation of our own operations. It enables us to issue green finance instruments to finance eligible green projects which occur in the form of CAPEX or OPEX. Let's turn to slide 15 to discuss the financial highlights of the fourth quarter specifically. Auto intake was again very strong with more than 2 billion euros for RVS, down 7% organically year over year, which was driven by the truck markets as expected. Revenues amounted to almost 2 billion euros and as in the three previous quarters, book-to-bill ratio was again above 1%. An important and good support for our future capacity utilization. Operating margin amounted to 12.2%, almost on the same level as in the previous year. Rail contributed to this development with very strong figures, while truck margin decreased as expected. Free cash flow improved further and came in at 482 million euros as mentioned and it followed the typical pattern throughout the year. The first quarter is always the weakest and the fourth quarter usually the strongest quarter in terms of our free cash flow generation. In 2025, we do expect a similar development. Let's take a closer look at RVS performance on slide 16. In terms of order intake, RVS again recorded more than 1.1 billion euros, posting a growth rate of around 12% year over year, thanks to the KB signaling acquisition. Leading to that, the growth was particularly strong in North America, while Europe as well as APEC remained stable. China declined slightly as expected. Current rail demand is still very strong and should continue throughout the whole year, with half year one stronger than half year two. Consequently, for the current quarter, we expect that RVS should be able to post an order intake well above 1 billion euros, driven again by some larger orders. Book-to-bill ratio stood at 1.05, which means RVS reached a book-to-bill ratio at or above 1 for 13 quarters in a row now. Again, a new record in KB's history. In 2025, we expect that rail's book-to-bill ratio should also be above 1. As a result, order backlog reached new record levels with more than €5.4 billion in organic terms, meaning excluding keep and signalling, order backlog rose by 8% in Q4, year over year. The high order backlog provides a strong basis for us going into 2025 and the years beyond. Let's move to slide 17. Quarter 4 revenues amounted to 1.07 billion euros, an increase of 7% year-over-year. Our aftermarket business grew in every region year-over-year in the fourth quarter. As a result, its very profitable revenue share increased to 57%. From a regional point of view, revenue growth was fueled by North America, while Europe and APEC remained stable or almost stable. In Europe, good aftermarket business almost fully compensated the slightly declining OE sales. North America recorded strong increases in both segments driven by KB signaling. APEC region saw OE decline while aftermarket grew. China also saw growing revenues in aftermarket and declining OE business as expected after very strong Q2 and Q3 results, which included even some pre-buy effects. We believe China should face some normalization in high speed and aftermarket demand this year. Nevertheless, our Chinese revenues should stay flat year over year, even taking into account the good developments in the year 24. Operating EBIT margin recorded an increase of 80 base points to 15.6%, driven by operating leverage as well as efficiency and a lower share of legacy business. On top, a positive revenue mix driven by the before-mentioned high aftermarket share impacted the operating margin positively. In Q1, we expect that profitability of RVS should be slightly up quarter over quarter. For the full year 2025, the operating margin of RVS should be well above 16%, including an improvement over the course of the quarters this year. Let's continue with our truck division on chart 18. Auto intake in CVS amounted to 887 million euros, a decline of roughly 15% year over year, but 8% higher quarter over quarter. All major regions had to deal with weaker truck markets overall. CVS couldn't escape these market developments, and given the dimension, was also unable to fully offset them with other content per vehicle. Weak order intakes from Europe, North America and APEC came in as expected, while China posted higher numbers. Book-to-bill reached 0.97 in the past quarter and our order book with more than 1.8 billion euros at the end of December remains on a good level and well above our long-term average. Auto intake in the current quarter is expected to show only a slight improvement quarter over quarter as the truck demand is still challenging. Nevertheless, the start into the year was quite promising. Going forward, we expect a rather sequential pickup of truck demand, which should then be reflected in the development of our order intake along the year. However, we are prepared for different scenarios. As a reminder, let me walk you through some of our measures again. High flexibility at our sites and facilities for temp workers, short-time work at European plants if necessary, robust pricing, Resilient aftermarket business, which represents significantly more than 30% of revenues in Europe and North America. And last but not least, our operational and structural cost optimizations via our BOOST program to counterbalance the market challenges ahead. Let's move to slide 19. Revenues declined by 14% to €919 million. This development was expected and a solid performance in such a challenging environment. OE business in CVS, as expected, decreased in all regions except South America, mostly in Europe, followed by North America. Aftermarket business, on the other hand, saw more robust and saw a stable development in North America and even slightly increased in Europe and APEC. In the European market, our revenues have experienced a 19% decline due to the weak demand in both the truck and trailer segment, with heavy-duty truck production rates declining over 30% in the fourth quarter alone, year over year. Higher aftermarket, which generates nearly 40% of our European revenues, and our disciplined cost measures were the main reasons for the strong outperformance of the market. A clear sign of resilience again. Same picture for APEC, where CVS could also outperform the decline in truck production rate of minus 6%. Revenues in North America also declined, mainly driven by OE business. But CVS was also able to show resilience here if you take into account the decrease of heavy duty truck production rate by around 10% in the same quarter. Coming to the bottom line, our operating EBIT of our CVS division amounted to €87 million in the past quarter, down around 26% year-over-year. As a result, the operating EBIT margin declined by 150 base points to 9.5%. The lower margin was mainly impacted, as explained before, by the market-driven operating leverages as well as the regional mix. Our supportive pricing strategy, the success of our efficiency measures and the higher share of revenues in the aftermarket were in total unable to fully offset all these enormous negative market effects. For 2025, we expect almost flat revenues compared with the reported figures for 2024. This development will be supported by a stable aftermarket business and our content per vehicle growth, but at the same time be impacted by the two disposals with more than 200 million euros of revenues that we have sold as mentioned before. As a result, CVS then should be able to reach an operating margin of around 11%. we expect the current quarter to be the trough of the year on or only slightly above the margin of the previous quarter. But that profitability should increase steadily in the following quarters. CVS development is subject to certain truck market recovery in half year two. With that, I hand over to Mark.