Knorr-Bremse AG

Good afternoon, ladies and gentlemen, and a warm welcome to Knob Ramsey's Q2 2025 earnings call. 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, Andreas Pitzauer, Head of Investor Relations.

Thank you, Operator. Good afternoon as well as good morning, ladies and gentlemen.

I hope all of you are very fine. My name is Andreas Pitzauer, Head of Investor Relations. I want to welcome you to Knorr-Bremse's presentation for the second quarter results of 2025. Today, Marcus De Beyer, our CEO, and Frank Weber, our CFO, will present the results of Knorr-Bremse, followed by a Q&A session. The conference call will be recorded and is available on our homepage, www.knorr-bremse.com, in the Investor Relations section. It is now my pleasure to hand over to you, Marcus De Beyer, the coordinator.

Many thanks, Andreas. Ladies and gentlemen, welcome to our capital market call for the second quarter 25 results. Let's start with the key takeaways for today on page two. Now, Bramble continues to be in good shape. Yes, we do. The billions and sin in execution and challenging times continue to be the keystones of our house. I would like to highlight our very strong aftermarket business. Once again, 47% of our total revenues which helps to counterbalance economic volatility and protects our profitability. Our strong market positions globally and our diversified revenue mix also support our results now and hopefully going forward. The ad continues to be very strong. With an average margin of 16.5, more to come in the past quarter, our rail division has already achieved its target margin for 2026, 18 months earlier than originally planned. We are proud to have reached this milestone and congratulations to our rail colleagues. The sequential margin improvement of CVX, reaching more than 10%, is remarkable, considering the tough truck market in North America currently. A resilient aftermarket business, but also the implementation of stringent cost measures, supported this achievement. In the years ahead, 26, 27, 28, both the rail and truck industry should benefit from the announced German stimulus program, as well as from the European defense initiatives regarding the investment in infrastructure, Our rail division expects first orders already in 2026 and 2027 to come, while trucks should benefit indirectly from strong economic growth in both Germany and Europe. U.S. tariffs are continued to be monitored closely by our teams. We are confident to fully part on these extra costs via price increases to our customers, some with a certain time delay. Please keep in mind that this is the current assessment. Potential changes on the mood of Mr. Trump and terrorist interns of timing and race are uncertain today. Booth is fully on track. As the cargo process of the outstanding RBS targets were almost complete, potential investors will be contacted after the summer break and will still expect signings by the end of the year. We confirm our operating guidance for 2025. Since the original guidance for 2025 was issued in February, the euro has significantly strengthened against many other currencies and against all the experts' judgment that we will see parity. We have taken this development into account and are now assuming the current exchange rate, which will have an impact on the expected revenue development in 2024. 5. It's purely translatorish. As we are almost exclusively affected by translation effects, our EBIT margin and cash flow expectations for this year remain completely unchanged. Let's go to number three. Have a look on the market situation of rail and truck. Looking at the rail markets, we can see that underlying demand remains strong in all regions. also reflected in good audit intakes and fully and full audit books of RVFs and its customers. They believe that demand will remain strong in the coming quarters to come, leading to an expected book-to-bill ratio of above 1 on a full-year basis.

We also comment. The market development in China is strong on a high level this year.

We welcome this progress, which is quite supportive for profitability as well. Truck markets show a mixed picture currently, as you all know and as you have already heard from our customers. Europe shows signs of recovery with stable truck production rates. The first half of the year has developed better than expected. This is also mirrored by good capacity utilization rates in our European plant and the fact that we have neither short-term work nor reduced shifts. For the second half, we expect a stable market demand in Europe. Same for the Chinese truck market, which is expected to develop stable this year as well. The North American market is the big black box currently. because it's erratic. Truck production rates in the second quarter were down significantly, and the expected recovery for the second half of the year is rather unlikely at this point of time. Nevertheless, we do not expect further deterioration or a stable development in the second half of the year compared to the first half. Currently, our North American customers are taking days off and slowing down. Production lines in the factories, on the other hand, they are acting rationally, and only slightly reducing their workforce. Expect to have a clearer picture after their usual summer holidays. The better than originally expected development in Europe cannot fully compensate the weaker than expected development in North America. Nevertheless, every crisis presents opportunities. This market downturn in North America will eventually come to an end and will then meet a lower break-even point on our side. This is the paw of housekeeping. Be prepared for everything what comes. And the lower the break-even is, the better is the positive impact of a returning market. That's what we are going for. Now, page number four. Please turn to that page. And we look at the good financials of the second quarter. All the intake achieved a strong result, more or less stable at 2 billion euros. The declining track was almost fully compensated by profitable business and intake from rail. Knollbrands generated revenues of 2 billion euros, a stable development year over year. Organically, we posted an increase of 1%, RBS compensated for serious market-driven top-line decrease. Our operating profit margin benefited as well from rail performance, in particular from a strong after-market business, operating leverage, our boost efficiency measures, and KB signaling contributions. Consequently, operating EBIT margin increased by 60 basic points year-over-year. Free cash flow amounted to 146 million euros. Due to some cost opportunities, we announced restructuring costs of 75 million euros this year. Consequently, EPS in quarter 2 amounted to 87 cents, affected by restructuring costs of 28 million euros. For the full year, we expect €3.50 to €3.60. The portfolio optimization and instructional measures have a one-time impact, the bottom line last year and will this year. As a result, earnings will improve quite meaningfully, next year benefiting from a stronger asset base and lower break-even points. I'm proud of our teams maneuvering KBs successfully through challenging times and also interesting times with a lot of opportunities to come. With this holy word, I hand over to Fred. Thanks, Mark, and hello, everybody. Let's move on to slide five. CapEx amounted to 63 million euros, which represents in relation to revenues 3.1%. Spending in absolute terms decreased by 2 million euros or 10 base points year over year. This development is fully in line with our strategy to optimize CapEx spending following our lowered target range for CapEx to revenues of 4% to 5%. There will be some acceleration of investments in the second half of the year. We have further improved our networking capital efficiency again by two days versus prior year. Including KB Signaling, we are now at the level of 1.5 billion euros in 67.6 days. This step forward is clearly based on the success of our Collect program, including improvements in all major networking capital categories. quarter over quarter, respectively inventory, accounts receivables, and accounts payables. Despite acquisition driven higher capital employed working capital, ROSI nicely increased from 20.2 to 21.3%. You know that ROSI has a high priority for us with a target of more than 20%, a level which we are planning to exceed in the coming quarter driven foremost by a higher level of profitability. Free cash flow amounted to 146 million euros despite negative ethics effects. Consequently, the cash conversion rate was nicely higher, reaching 96%. With that quarterly cash generation, we are roughly 100 million euros ahead of last year's year-to-date amount. Let's take a closer look at the RBS performance on slide 6. In terms of order intake, RVS recorded a very strong quarter once again, residing in almost 1.3 billion euros. This represents a growth of around 13% year-over-year, supported by good organic development as well as via the acquisition of KB Signaling. The organic growth rate stood at 8%. Rail demand overall remained strong, also supported by the APEC region, ex-China and Europe. As mentioned in previous earnings calls and based on the outstanding tenders in the market, we assume a stronger half year one compared to half year two, this regarding order. Nevertheless, for the current quarter, we expect that RVS should be able to post an order intake slightly above a billion euro again. As usual, I want to remind you to please keep in mind that rail is a lumpy project business and does not fit well into quarterly reporting structure in terms of order intake and lead time. Book-to-bill ratio stood at 1.17, which means RDS reached a book-to-bill ratio at or above 1 for 15 quarters in a row now. Order backlog increased by around 14%, reaching a new record level with more than 5.5 billion euros. The high order backlog and the good quality of it provides a strong basis for the rest of the year and beyond. Let's move to slide 7. Quarter 2 revenues amounted to 1.1 billion euros, an increase of 9% year over year, also positively impacted by KB signaling. On an organic level, the increase was 4%. Our aftermarket business developed nicely in Europe and North America, resulting in a strong aftermarket share of 59%. From a regional point of view, revenue growth was fueled by all regions. In Europe, both OE and aftermarket business grew nicely. Also, North America strongly increased its aftermarket business, driven by KB signaling, while OE business significantly decreased year over year, given the weak freight market in the U.S. The APEC region saw a stable OE and a growing aftermarket business. China also grew nicely in OE, while aftermarket was slightly down year over year. Keep in mind that the second quarter in 2024 was a particularly strong quarter in aftermarket business due to pent-up demand and some pull-ahead effects back then. The recovery of ridership, which started in 2024, still continues. We are quite happy about the development in China, especially in high-speed local business and the aftermarket. So far, there are still no signs of a better metro market. We improved our operating EBIT margin by 90 base points to 16.5%. driven by the positive aftermarket development, operating leverage, a strong performance of the accretive APAC region, as well as the positive contribution by KB Signaling. In the current quarter, we expect a book-to-bill ratio of around 1. The EBIT margin of RVS should be flat or slightly higher quarter over quarter. On a full year level, the operating margin is still expected to be well above 16%. Let's continue with the truck division in chart 8. Order intake in CVS amounted to 820 million euros, a decrease of 17% year-over-year, which was expected given the divestments we made and the weak North American Class 8 truck production rates. In organic terms, orders only decreased by 5%. On a year-over-year level, quarterly order intake in Europe was slightly and in North America significantly down. The APEC region overall slightly grew, benefiting from a good development year over year in China. Auto intake in the current quarter should be able to increase mid to high single-digit quarter over quarter supported by Europe. The North American market remains very difficult to fully assess at this point in time. Book-to-bill reached 0.92 in the past quarter. Our order book of more than 1.77 billion euros at the end of June is 10% below the previous year's level. Adjusted by our two investments of GT and Shepard, it was organically a minus 3. Let's move on to chart 9. Revenues. declined to 895 million euros, which represents minus 10% driven by the divestments of GT and Shepard and only minus 2% in organic terms. This development was as expected and represents a solid performance in such a challenging environment. OE business in CVS decreased as expected in all major regions, predominantly driven by lower market demand and Fx. only Europe was able to post a slight reduction. Our aftermarket business performed better than OE, including an almost flat development in Europe and an increase in APEX driven by China. However, both regions were unable to fully offset the double-digit decline in North America. In the current quarter, we expect that CDS total revenues should stay around the same level of the past quarter, so no real growth impulses here. Coming to the bottom line, operating EBIT of our CVS division amounted to 92 million euros in the past quarter, down around 18% year-over-year, but up compared with the first quarter of this year. As a result, the operating EBIT margin declined 90 base points year-over-year to 10.3%, but up 80 base points quarter-over-quarter. The lower margin was mainly impacted by lower volumes and an unfavorable regional mix, which could not be fully compensated by benefits from our boost measures and the higher aftermarket revenue share. I would like to mention as well that a double-digit EBIT margin is a good achievement, considering the very weak but still accretive North American market. Profitability should slightly improve in the current quarter compared to quarter two, supported by stable markets in Europe and steady demand in North America at the low level. In addition, we expect to see more benefits from our cost measures and aftermarket. Overall, we are confident to successfully fight current market challenges with our long-term measures, as well as our short-term measures in North America, our robust pricing power, and our resilient aftermarket business. On a full year base, CVS should be able to reach an operating margin above previous year.

With that, I hand over to Mark again. Thank you, Frank. Welcome. Let's have a look on our guidance for the end of the year on page 10. Main message, we confirm our operating guidance.

Solely due to translation foreign exchange effects, we have adjusted our review outlook for this year. In case the dollar ratio to the euro will change or the renminbi, we will see the controversial effect. So it's not a reduction of our revenue in operation. It's only because it is, we are a European company, it's noted in Euro.

So, therefore, we have done it, not for any other reason.

The operating average margin is not impacted by any of this. It stays between 12.5 and 13.5. Free cash flow, we esteem, and we see between 7 and 800 million euros. Compared to the first announcement of the guidance back in February, our expectation regarding RVS has slightly increased. For CVS, we are more conservative about the North American market, and our guidance does not incorporate any recovery in this market in the second half of the year, so we see it flattish. Nevertheless, group level guidance regarding possibility in free cash flow remains unchanged, and seeing the QI already gone, we are very positive to reach it. Thanks a lot, and thanks to the team. Thanks for your attention, and now we're available for your questions.

Thank you very much. So, dear ladies and gentlemen, If you would like to state a question, please press 9 and the star key on your telephone keypad now to enter the queue. I repeat, the combination is 9 and star. To cancel your question again, if it has been answered by another speaker, please press 3 and star key. But for now, please press 9 and star. All right, there are a couple of questions incoming. One moment for the first question, please. The first question comes from Sven Beyer of UBS.

Over to you, Sven. The floor is yours.

Good afternoon. This is Sven from UBS. Thanks for taking my questions and doing the call. The first one is on the Boost program. I was just wondering, obviously it's been now up and running for a while. seems to go really well. I was just wondering if this allows you also to look into additional structural measures and if that's the case, whether you could also give us an example and let us know when it would be the right time to speak about this more comprehensively. That's the first one. Thank you.

Thanks, Ben. Good to hear you. Yeah, I think we have very initially back some one and a half years ago when we kicked off somehow made, chosen the sequence to do first, so to say, the brownfield and greenfield stuff and later on go for some more structural footprint discussions. We have, as you know, in the meantime used the perfect storm kind of what's going on in the industry and elsewhere in order to also negotiate through some footprint discussions already now. And so that's what you see reflected in the 75 million. We are going for some footprint adjustments basically in regards to Europe. shifting some production from Germany to Poland, shifting some production to Czech, shifting production from Austria to our campus in India. Those are some structural measures we are intending to do and are already nowadays preparing for that, which is really a strategic move, nothing that we would need to do in order to achieve our mid-term guidance, but very strategic move. We have been pursuing already those. Those are some examples, if I would say so. So basically shift more from high-cost countries into low-cost countries and bring together some efficiencies in terms of synergetic moves.

Yeah, thanks for that, Karla. That's helpful. The second question I had was just because you also mentioned the German stimulus benefits. But I guess to benefit more from that, you probably have to increase your infrastructure exposure, like in signaling that you did in the U.S. And obviously, I guess the signaling deal, the Gojali deal, have all turned out to be highly accretive, as we could also see now in the quarter again on signaling. We see big rail merch in the U.S. We see WAPTEC being active. So do you feel you have to do something to... to react to that, to increase your exposure also to the German stimulus, or are you still looking to do deals outside the two divisions?

Thanks also for that one. So first of all, I think the potential stimulus program, not only in Germany, but also European-wide has, I would say, more phases, kind of like the test. infrastructure element. It also depends whether there are some, of course, GDP stimulus measures included. So it should be by far more having an impact on us than just on the pure extension of railway infrastructure or the expansion of modernization of streets or what have you. So we're pretty well We are doing pretty well with that plan, even though they are not concrete enough in order to write home on it. But we feel pretty comfortable there. It's nothing that we would have a revenue impact all of a sudden in a quarter by 500 million or something like that. It's a very smooth, continuous, and sustainable support of the underlying market that we are seeing for many years to come. And that's it. We are not back off, so to say, in regards to anything that should be done. And organically, we will always keep in mind and very clearly strive for that financial guardrails we have been given ourselves. We are not doing something nasty kind of and irrational. We have a strict scheme of what we are searching for in terms of targeted businesses and margin profiles that those businesses should have. so nothing also on latest competitors moves in regards to M&A, nothing where we would be, so to say, in a defensive position at all.

But I'm feeling you make good progress on further deals, given that it's been a while since the Alstom won. Do you feel you're going ahead well in that regard, or is it difficult to find good targets?

Yeah, first of all, I mean, given the financial guard range that I just outlined that you know well, it's needless to say that it's more difficult to find suitable targets on the truck side of things. On the right side, still opportunities out there, you know, and this has not changed, I would say, over the last two, two and a half years that we have somehow done 10 plus targets on a regular basis on the table, whether we are in the process, ahead of the process, or thinking about it strategically only, so we still have opportunities. in certain dimensions in the field of aftermarket, in the field of digitalization, in the field of platform business suitable for our aftermarket ecosystems or digitalization of things. And this is something where we also, I would say, not in a hurry, but we're carefully looking at those and this is the situation, I would say.

It's clear, thank you, Frank, and also for the clear quarterly guidance for Q3 for both divisions. That's much appreciated. Thank you.

Yeah, thank you very much, Sven.

Thank you very much also from my side. The next question comes from Akash Gupta of JP Morgan. Please, over to you.

Yes, hi, good afternoon, and thanks for your time. I got two as well. The first one is on margins. I mean, you talked about the segment margin expectations for Q3, but I was just wondering if we can answer you some color and what shall we expect for corporate costs, because I see that corporate costs in Q2 was a bit lower than what we had in both Q1 as well as Q2 last year. So shall we expect this roughly 10 million run rate for the rest of the year, or do you think it should come back to the levels that we have seen before.

Yeah, thanks, Akash, for that. Obviously, So to say you have quite an amount of intercompany charges always when it comes to headquarter costs. So always expect for the full year number that's 60, 65 million euros roughly for the full year. That's a number we feel comfortable about. That means roughly that we are on a level of an average like 15 million euros, plus minus then at times. So this is something that you would see ongoingly, and sometimes you have a quarter where you've charged a bit more out than on the others, but that's roughly the number to take into consideration.

There may be a follow-up on full-year margin guidance. You did 12.6% margin in the first half, and I think you're indicating slightly better margin in Q3. Do you think we still have a reasonable probability of ending in the upper half of the range, i.e., 13% to 13.5%? Because your guidance is still quite wide, and given the progress on first half, I just wanted to understand how do you feel about full year guidance and where you might land based on your anticipation for second half?

Yeah, thanks for that question, Akash. I think it's, as always, kind of we try to set the guidance ranges in order that we feel pretty comfortable with what we are planning in regards to the midpoint. of those ranges, nothing to add on this. Obviously, some things need to turn out a bit better in order to be on the upper side, and some need to come out a bit worse to be on the lower side of things. But we feel comfortable with the midpoint of things.

Thank you. And my second question was on RVS. You had a good book to win of 1.2 times in the first half, and That is an acceleration from book to bill you had in the past couple of years. The question I have is that how should we think about phasing of these strong orders into revenue? Are there several orders with longer duration that will have limited impact on the, let's say, next 12-month revenues? I'm just wondering if you can talk about timing of acceleration in organic sales growth given in the past half we had only 3.8% which looks somewhat lackluster compared to what your rail customers are reporting in recent quarters. Thank you. Yeah.

Yeah, thanks. Also here, a very fair question. As always, the order intake and the duration of those orders that sit in our order book are quite significantly different between rail and truck, whereas the CVS orders usually are scheduled for the next 12 months, so to say give and take. We talk about, even in cases for some projects, several years on the rail side, on the project business side. And it's plenty, of course, of those projects sitting in our order book. So yes, the answer is yes. It's to quite some extent also a widespread timeline until those projects really turn out to be revenues on the rail side. Our order book is so good, the timing transparency is also so good that we feel totally comfortable to achieve with that existing order book situation that we are having today, as well as the newly, on a daily basis, newly incoming orders on our side, as well on the OE side of things. that we should be able to keep our market share and therefore achieve fully our mid-term growth targets of 5% to 6% CAGR for the rail business. This is definitely nothing that we see endangered here and fully, fully loaded, I would say.

Thank you, Frank. You're welcome. Thank you very much.

The next question comes from Gail Debray of Deutsche Bank.

Over to you. Good afternoon, everybody, and thanks very much for taking my question. Can I start with the bridge, the EBIT bridge for the LVS division? I mean, what's striking here is the contribution from M&A, you know, 21 million contribution to EBIT for only 76 million of revenues. I mean, it does imply a margin of around 28%, right, which looks much higher than the 16%-ish level I had in mind for the Alstom signaling business. So why is the accretive impact from M&A so positive? That's question number one.

Yeah, very generally speaking, we are – Totally happy, so to say, about the business that we have acquired and the way it developed. The management team has done so far a fantastic job. We have not changed a single person in the management team, fully dedicated, fully committed to the company. It's just great to look at how they work. And, yes, the underlying business, as a result, is really doing great. Do we have, it's a project business as well to some extent, it's not only aftermarket business, so you also have here a big part of seasonality and therefore, yeah, don't multiply the results for this first half year and for this quarter. um by for the quarter by four or for the half year by two if you look at the second half here the number already sorry if you look at the full first half here the number of the 28 already comes down So you see a bit that the second quarter was an extremely well-run quarter. For the full year, we expect that we even slightly overachieve what we intended the business to reach, but not a margin of about 20% already. We are aiming to improve it constantly further, but it's seasonality. A simple and short answer would be seasonality effects.

Okay, understood. And then, I mean, if I look now at maybe the same kind of bridge at the group level, so I calculated that the margin benefited from around 100 bps of positive portfolio effects, so both positive, I mean, positive for both RVS and CVS, and then it implies obviously that the margin would have been on 12.1%-ish in the second quarter without the various M&A activities. I know they are part of the job, right? But nevertheless, on an underlying basis, it appears that the margin trajectory is not exactly positive yet, and that it is still down on a year-on-year basis by about 40 pips or so. So I guess my question is, it'd be great if you could comment on the cost-cutting activities you know, potentially on the amount of savings that have been achieved so far in the first half and what's expected in H2, maybe also going into 2026, you know, for us to better appreciate the underlying margin trajectory?

First of all, it's a combination of, of course, the significant headwinds that we see organically, be it, quarter over quarter in the second quarter or even for the full half year when it comes to truck and at the same time the quite positive really organic moves that you see on the rail side. But we also need to see that part of the positive developments on the rail side is also driven by the acquisition of signaling like we intended it. And that even brought us to a level where we were originally expected to reach only in 26 already. So keep in mind, of course, the one is significantly reduced. and the other is improving and i mean organically organically this is not a huge upswing in in terms of profitability as those two things to some extent balance each other out look at the sheer reductions that we see in the market in north america which is an accretive margin a very accretive margin market for us on the truck side, where we have a significant reduction year over year. So this is the situation. We have to face it, that the two businesses are not kind of running synchronized when it comes to the macros of it.

Well, I get it that it was pretty challenging in trucks, but But even for RVS, the organic drop-through is pretty dynamic this quarter.

If you just look quarter over quarter, like I said, we had last year a very strong Chinese quarter two. If you remember, we had the discussion here with quite some questions on that very strong quarter two in China, which is something that is definitely not repeating itself this year around. We said we had some pull ahead effects already in the second quarter, which turns out to be true. We're coming to the third quarter and to the first quarter. fourth quarter of 24. So expect to see a better organic conversion moving into quarter three and quarter four for rail.

Okay, okay. That sounds pretty great. So a better organic conversion in Q3 and Q4, but do you also expect to see a step up in organic revenue growth for RBS in Q3 and Q4 compared to H1?

I guess this should be a level that should be higher than the 4%. Okay. Thanks very much. You're welcome.

Thank you. We are moving on to the next question. The next question comes from Royan Mackie of Kepler School.

Please go ahead.

Hi, good afternoon, Frank, Mark. Thanks for the time and for the presentations. A couple of questions, probably more higher level. You know, the balance sheet's really strong, and I wonder if you could just talk conceptually about the strategic flexibility you have to develop the portfolio in terms of theoretically what sort of leverage rate you could take it to. And building on that discussion, perhaps, and what I think Sven had asked earlier, perhaps touching on where you see, you know, live opportunities to expand the portfolio, perhaps driving into that digitalization and service segments that you've flagged before that are adjacent to your business, and also how you're progressing with the divestment, the final divestments that you had on the table as part of one of the later stages of the boost program. Thank you.

Thanks, Will. Totally different angle now. That's good. So strategic flexibility. I mean, we have currently net debt to EBITDA leverage of around 0.6, so to say. We have always, or I have always said that I feel totally, totally comfortable with one. No worries at all. Even above one, to some extent, is for me absolutely no issue if the right target comes along, fulfilling the criteria that we have set. So this is a bit the way we are thinking. We have no issue with slightly one, slightly above one, if the right target comes along. So we still have some opportunity. That is the first answer. The second is, I mentioned it already, I think it was Sven, somehow indicating that we have certain target areas to do something in terms of M&A. anything would be coming along definitely we are a resilient company based on the strong aftermarket that we're having so the aftermarket area for both divisions is definitely a focus field where we're looking at to expand our ecosystem in that regard is definitely something the digitalization of Businesses, be it OE products, but also aftermarket products on the digitalization side is something where we're pretty much interested. We have also opportunities to expand our signaling business, of course, more globally, which could then also be something where we find bits and pieces here and there. And we always said that if we would want to do something in that regard, we would need some acquisition because we don't have the complete set of knowledge, respectively, products at hand. So those are, I would say, some three, four life examples that I can give you. Third element, how are we? I can't even read my own handwriting. We have basically some... some 60% of everything we have initially planned achieved as of now. Now it's been quite for some months on our side in regards to investments. The last one was in January. So we have some 300 million roughly, nearly a bit less than 300 million still to go, out of which we have one bigger, let's say, bigger animal on the plate currently, which is part of the rail business. It's not the brake business. It's not the door business. So this business is in the production side pretty much integrated into the other businesses. So that means in North America, in Europe, in Spain, as well as in Australia, we have We have to do carve-outs, technically do some carve-outs. That takes a bit of time. We are on plan to approach investors after summer break. we should be able to start that, but it took a bit of time to divide the FTEs from one packet to another and to carve out entities ready. So, in fact, it took a bit of time. We knew it took a bit of time and we hope that we can sign it towards the end of the year. This is still the plan, and this is the big chunk, and with that, we would be even able to overachieve the 700 million that we originally indicated.

That's wonderful. Thank you, Frank. My second sort of area of questioning was perhaps in a couple of buckets around gross margins. I wonder if you can just speak to a couple of questions. Firstly, how would you describe the gross margin development in the backlog for rails? Should we expect that as that backlog converts, it becomes accretive to the underlying profitability? And secondly, with regard to gross margins in CVS, or more generally, in this downturn across the European and North American markets, have you seen any change in the level of gross margin, perhaps due to tariff costs or other factors, or looking towards your 13.5% goal Are we basically is that dependent on volume and operational leverage?

First of all, I'm not 100% sure whether I understand the question regarding RVS. Pretty clear we have had difficult times in 22. and 23 regarding the high inflation situation where we had the significant cost pressure where at the same time couldn't pass on to the full expense to the customers on some of the contracts, but all the other intakes that came in, I would say, starting from the beginning of 2023, all have the same good margin quality that we had in the past, plus, of course, the strategic necessity on top targets that we should need to have in Wales. So all the new incoming orders since we countersteered after we got hold of the inflation situation, is totally covering that target expiration of future RBS margins. Or was that your worry still? We still have that margin, or we have again that margin quality. We only had a drag of a year where we had difficulties back in 22. On the CVS side, no, pardon?

No, absolutely. No worries with Knoll Brands. The detail of the opportunity, yeah.

Yeah, okay. On the CVS side, no structural changes except also back in the days, of course, for the high inflation times, we had raw material increases and all that stuff, but that's all kind of normalized and already state-of-the-art kind of. But we have a bit of temporarily sitting tariffs in the PNL, even as we speak, which has, so to say, a phasing effect. It's not something that we intend to swallow, and we will work very hard in order not to swallow it ultimately, but it's still sitting. It's still sitting in our P&L, as we speak, maybe for two months, three months, four months, depending on the lead time of the certain products. But overall, we are trying very, very hard, and this is what we intend to do, to pass over all the tariff costs to the customer. And the fourth element, second element of your third question, of course, when we announced the boost program in June, summer of 23, the assumptions for the market in truck were roughly that from 23 onwards towards 26, they should be rather stable to 1% increase CAGR. That's what we discussed plenty of times. So we didn't plan for a big growth of the truck markets, not at all. But, of course, we didn't plan for a reduction of 10 to 20%.

This is also true, no? Okay.

Yeah, you're welcome. And that's why we always said the 13.5 is maybe more difficult to achieve.

All right.

Thank you very much. Ladies and gentlemen, I just repeat once the combination. Nice. Moving on to the next question. It is from Lucas of Jefferies. Please, Mr. Brown, go ahead.

Good afternoon, everyone. I have a first question just on that point on tariffs. Can you talk a little bit about, you know, the headwinds you have on the margin, that is, related to tariff and kind of the difference between rail and trucks there. It's pretty small, the business there, but it would be interesting to understand the hedging from tariff there.

Yeah, Lukas, thank you very much for that one. We've been pretty blunt, I think, with you all since the beginning of that discussion. We are since decades, I would say, a company that's very decentrally organized. We always went there where the markets are. We are having high localization rates basically in the countries we serve. and therefore we are not pulling the localization rabbit out of the head just now as the tariff discussion starts. So this is part of the DNA of Knorr Bremse ever since. And I told at the beginning of the year when it all started that we maybe have an exposure on tariffs of 200 to 250 million euros. 250 million euros I think is somehow the dimension. It's a bit more on the truck side than it is on the rail side. That's the color I can give to that number. And now it's about what are the commodities. Ultimately, once there is an agreement there or not there, this is what we will see in the end. Like I said before, we have for a half year now, so basically four months, it's the end of March and it's the second quarter, we have some nearly 10 million euro sitting in our P&L. Temporarily, as I said, temporarily, this is the effect that we have so far in four months.

Okay, thank you. It's understood.

And then the second one was just on U.S. trucks. Can you provide a bit more details on your discussions with customers at the moment? And specifically, is one of the issues tariffs and the uncertainty around it and the difficulty maybe on pricing new trucks and making sure that they're ready to produce? Also, the general question. macro uncertainty related to that, because obviously we're getting more clarity on Paris, there are several deals that are being signed and to an extent that's removing a little bit the headwind, but do you think the underlying market outside of that uncertainty is also weak? Thank you.

Thanks, Lukas. With all the topics we are facing in an industry, we're happy that we don't have to deal with the pricing of the customer's trucks. So that's one topic that we don't care about as our priority number one. But joke aside, let me see it this way. It's extremely difficult to predict how the situation in the class 8 and class 6 to 7 is, of course, also relevant for us, but the biggest chunk is class 8, how the market will really develop. So many determinants out there who would increase, reduce those levels. We see retail stock levels at quite a big number. It's more than 90,000 trucks, if I'm not mistaken, already there. It's a bit of a similar situation like we had towards the end of last year. I think it was October, November, when also there were quite some high stock levels, which then resulted in lower production. Long story short, so many ingredients, we think about roughly the truck market for Cloud 8 should be on the level for the full year of 250,000 units, give and take. 5,000 units more or less doesn't move really the needle, so that's roughly the dimension. We have roughly seen half of it already in the half year one, and so similar dimension roughly in the second half of the year. That's the situation. The closure days of plans for the customers are not excessive, as we can see, compared to previous years. Only one of our customers is closing down in July and August, more than 10 days. It's only one. And the others are in between five to eight days, as far as we know, at this point in time, according to our EDI systems. We see, yes, that order intakes are quite significantly down in the U.S. compared to last year's quarter, too. But so many things around influencing that market, we still see a lot of uncertainty out there. Everyone you ask basically gives you a bit of a different answer. That's our guess at this point in time.

Perfect. Thank you. And one last follow-up on I know that obviously the situation is difficult but is there any still kind of discussion around EPA changes and whether these are still coming or not or any way your customers are preparing for that or is it no longer the topic at all? Thank you.

Yeah, also here it couldn't get more controversial if you just listen to some of the OEMs, which I don't name now, but the one is saying he still believes in some EPA pre-buy and even already in 2025. The others are saying not even in 2026. And I have to admit the OEMs should be much closer, of course, to it, to those emission effects, so to say, that are deleted or reduced in aspiration. I don't know about these 30 adjustments that potentially should be made to the IPA regulations. We don't know the details there. But we have anyhow not or never said that we expect any revenue impact for us in the year 2025. So it's not of relevance anyhow whether there is something coming or not. it would only be a surprise if something would come in 25. But we don't believe that. And without the 26, let's wait and see how the discussions will go and the clarifications will go.

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

Moving on, the next question is from Holger Schmidt of DZ Bank, A.D. Please, Mr. Schmidt, go ahead.

Good afternoon, everyone. I have two questions. When you acquired Althorn Signet, you talked about a potential larger project center. I think the volume was 600, 700 billion. Is this project still in the market? Has it been canceled or just been postponed? And then the second question is on the Global AI Center in January. What kind of impact do you expect this to deliver? And when can we expect a positive impulse out of it?

Sorry, please forgive me, the second was about Chennai. Okay, okay, okay. Let me start off with the first. You know that a bit of difficult political times we have since quite some months. And the situation in regards to the timeline of the project, that project in North America, not necessarily the US, but North America, is still not clear. There have been delays over months due to political circumstances, which is out of our control, completely out of our control. So we can't say at this point in time It's still delayed and discussions are ongoing, but it's still not clear whether it kicks in at the timing that we agreed within the SPA. So it still needs a bit more time still, and the $600 million to $700 million for all the other listeners was always a mighty year. of course, the integral of the mighty years in regards to revenue potentials that we saw back there for that one. The second question is on our AI center. We are striving, you know, that we have been always and we are still striving, of course, on the one hand side, synergetic moves within the group, wherever we can grab them. At the same time, of course, for the latest and greatest in regards to technology and the combination of those two aspects is the creation of that hub in Chennai, combination of rail and truck artificial intelligence and innovation center that we are doing. We have so far had certain bits and pieces here and there, and we are doing a combined approach now with the Chennai office. and more even to come. I mentioned to several of the colleagues already at conferences, of course, that we are doubling down in India. You know that Mark mentioned that as well already a year ago. We believe in India, we believe in the growth potential of India in both divisions, and so we have agreed to spend nearly 100 million euro, so to say, in the extension of our footprint in India over the years. And there is quite something to come still for us in order to really harvest everything that we have in India as a potential, as I said, for both divisions. So it's just a start into our doubling down in India, what we have seen here.

Okay, thank you. A follow-up on the large ball check here. I mean, it's not going to kick in in the time agreed. Do you get some kind of compensation?

Yes, Oliver, good question. Yes, it's exactly the way you described it. It's regulated in the SPNA, what would happen in that case. Okay. 30 million US dollar that we would get back, which is somehow the net value of the project overall that we would get.

Okay, thanks a lot. Yeah, you're welcome.

Thank you very much. Moving on to the next question. The next question is from Torrey Fundland, Bank of America.

Over to you. I hope you can hear me. Good afternoon.

Thank you for taking my question. I just once more have to come back to the North American truck outlook. So if I understand correctly, you expect the truck production in line with H1 in North America. But as I see it, most truck OEMs have recently announced layoffs in the region, seemingly looking to reduce their production rate. Has this come up with your recent discussions with them, or is there any reason why there's a difference in the view? Thank you.

Thanks, that's not a contradiction at all. We have also reduced our workforce in North America accordingly. Maybe the one is a bit faster than the other or the other way around. I don't want to touch on this, but we have also adjusted our workforce structure. Usually, we have some 10% to 15% always this kind of flexibility in the plan. Basically, kind of in a nutshell, a global number, 10% to 15% is the flexibility we have, consisting of temps and some other flex time workers, and we have done the same thing. So, both messages, I would say, are not contradicting each other.

But you're not planning to reduce the production value, just So you can have still the same production, basically, with fewer people in the factories.

Yes.

Yes.

The current production, we're not producing the same amount like we have produced last year. That's obvious because the market is down. But as of today, looking into the future of the year, we keep that production compared to last year's lowered number of people on the shop floor. And in the management as well, and the white-collar as well.

Needless to say. Okay, well, thank you. Yeah, you're welcome. Thanks a lot. Next question is from Vlad Zagievsky of Barclays. Please, have a seat.

Yes, gentlemen. Good afternoon. Thank you very much. First question is on China Rail business, please. In 2023 strategy presentation, you expressed your real revenue in China to bottom at around 650 million euros this year. Could you update us what are you now expressing in terms of China revenue this year based on what you have seen recently and how this new expectation is compared to this 650 million previous year?

Thank you, Vlad, for that question. Vlad, I hope that your target share price is correlated to the 650s or a tenth of the 650s. Maybe with the news I give you now, we have potential to increase it. You are right, Vlad, fully right. We have given the very difficult years of 21 and 22 where we have been taken out of the market to a large extent. We have been losing market share. The Evergrande situation kicked in, the real estate market complications, all that kicked in and our assumptions going forward back in the days where that the market should normalize for us on a very stable level in China, mainland China. of around 650 million, maybe even a year that it could go down to 600. That was the rationale behind it, given a not increasing metro market and even a stable kind of high-speed market going into the future. The situation now is that the high-speed business is doing better than we expected it to do back in the days. We thought that maybe 100 to 150 high-speed trains should be built a year. Going into the future, we are now at the level of roughly 240, 250 high-speed trains a year. We are having a better aftermarket. than we expected back then. The ridership levels in China is still the only country in this world where ridership levels nowadays are exceeding 2019 numbers by far. So they are more than 20-25% higher than what we had in what China has seen. in 2019, so better ridership levels and better high speed brought us to levels which are now, I would say above 700, close to 750 million when it comes to mainland China alone. So that's the situation, I would say. So maybe $100 million up compared to what we back then thought driven by those two things. At the same time, metro is a bit weaker, the metro market, so no increase yet due to real estate market coming back. So fits the situation there. If that's okay for you, Vlad, then also go into more details.

That's great. That's super helpful. I appreciate you sharing this. If I can also ask you about the books deal at rail, obviously as you mentioned, 15 quarters of F1 very solid and consistent performance over here, which is great to see. Would you be able to give us some color of how this order intake at rail is split between new equipment order and service order? Is this split roughly consistent with what we report in reading this or backlog duration in one part or the other is expanding faster?

First of all, like I said, the book-to-bill ratio is significantly above, not a steady state, of course. We always, and this is the clear plan, and also looking at the tenders that are out there in the market, something slightly above 1.05%. is something that we would need going into the future when it comes to achieve our revenue case for the business. Just not that anybody is worried if there would be a quarter where all the intake book to build is not that fantastic like it used to be. It doesn't have to be. We don't know how to get the production capacity if it would continue with 1.2 going into the future. The split of all the intake is roughly in a similar dimension like you see on the revenue side of things between OE and aftermarket. That's also somehow the split of order intake.

Super helpful. Final quick question from me. Obviously, you have seen consistent increase in share in aftermarket in rail, I would say pretty much since 2019, when new equipment revenue has been broadly flat and aftermarket grew quite a bit in rail. Is it the trend you expect to continue? Or there is a point when new equipment growth starts. So I would be following aftermarket growth in RAIL.

Dear Vlad, there was a bit of a noise in the line. Can you repeat again which trend I see changing or confirming it?

Yeah, absolutely, Frank. So the question is on the split of revenues in RAIL between new equipment and aftermarket. So aftermarket has been growing the share in overall RVS revenues pretty much since 2019, while the absolute euro-million level of new equipment revenues in rail has been broadly stable for the past five, six years. So the question is, is there a point when new equipment starts to outgrow aftermarket within the revenue mix, or aftermarket will continue to gain chassis?

Thank you. Thank you. Obviously, it's a mix. It's a heterogeneous product mix that we're also having, and we're helping also, of course, as you know, the regions. So we have the brake business, we have torque business, and we have also HVAC business. And we are, of course, strategically striving to grow our aftermarket a bit stronger than the OE business. That's the strategic target that we are having. Of course, OE should grow as well. That's clear, but aftermarket a bit stronger. We have achieved, of course, a stronger aftermarket growth in the past. This will now be the challenge to go into the future. To keep the OE business stable is definitely not... the strategy to go into the future, we expect growth on the OE side as well as on the aftermarket side with a bit better growth rate on the aftermarket side.

Super clear. Frank, thank you very much.

You're welcome, Vlad.

Thanks a lot. At the moment, there are no questions in the queue. So, ladies and gentlemen, last call. Please press 9 and star if you have a question. Well, there seem no more questions to the inquiry. So with that, I'm closing the Q&A session and handing the floor back over to the host.

Thank you very much. Thank you very much. We wish you a very nice summer holiday break and looking forward to meet you and talk to you next time.

Thanks and bye. Thank you. Bye-bye.