Transcription

Knorr-Bremse AG - Earnings Call Q1 2021

{EV00123643} - {111 Min}

14 May 2021

Knorr-Bremse AG - Earnings Call Q1 2021

{EV00123643} - {111 Min}

PRESENTATION

00:00:01 Andreas Spitzauer

Good afternoon, as well as good morning, ladies and gentlemen. My name is Andreas Spitzauer, our Head of Investor Relations of Knorr-Bremse. I want to welcome you to Knorr-Bremse's conference call for the first quarter 2021 results. The webcast and conference call will be recorded and are available on our homepage, www.knorr-bremse.com. in the Investor Relations section. Here, you can find today's presentation and later a transcript of the call. It is now my pleasure to hand over to Dr. Jan Michael Mrosik, our CEO, and Frank Markus Weber our CFO. Please go ahead, Dr. Mrosik.

00:00:39 Dr. Jan Michael Mrosik

Thank you very much. And I would like to welcome everybody to our conference call today. I really appreciate you joining us today and I hope that you and your families, in these very difficult and unusual times, remain healthy and safe. Today's call is made up of two parts. First, I'd like to present the highlights of last quarter and then I'll hand over to my colleague, the CFO, Frank Weber. He will provide more details of the financials in the first three months, followed by the guidance for 2021 and some final remarks. And afterwards, as usual, we look forward to your questions and comments.

Allow me to walk you through the Group's highlights of the first quarter 2021 on chart number 2. Knorr-Bremse generates revenues worth of EUR 1.7 billion, which represents an increase of 6% organically and an EBIT margin of 14.9% in the first quarter, which is up 110 basis points year over year. We continue to see a very strong recovery in the truck markets. CVS, our truck business, benefitted greatly from this development and it was our key driver in the first quarter, reaching record revenues of EUR 886 million, which is an increase of 22% year over year. The corresponding EBIT margin came in at 13.1% which is also a significant improvement compared to last year's level of 10.4%. Our rail business developed as expected in the first quarter 2021. There we expected that the first quarter would be probably the weakest in the year. And it generated revenues of EUR 805 million, which is a decrease of 7% year on year organically. And that's an EBIT margin of 18%, which is, despite the top line development, an improvement of 50 basis points versus the previous year's quarter.

ESG is a very important topic at Knorr-Bremse, as we have highlighted several times already in the past. To underline this priority, at the upcoming annual general meeting next week, a proposal will be put to the vote that 20% of the short- term management bonus will be dependent on ESG in the future. I would also like to highlight that we have taken further steps since the beginning of the year to strengthen our corporate governance. In a moment I will provide more details exactly on this topic.

With that, let me continue with chart number 3. We know and understands that the topic of Mr. Thiele's legacy is very important for the capital market. Therefore I would like to give you an update on this. The signals we received from our anchor investor, the Thiele the family, including Julia Thiele-Schürhoff, after the passing away of Mr. Thiele, are characterized by stability and continuity. This can be seen by the joint press release which was published a few weeks ago by the Thiele family together with Knorr-Bremse, which was stating that the 59% stake in Knorr-Bremse is to be

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transferred to a family foundation. The creation of this foundation is now being initiated. Julia Thiele-Schürhoff, the daughter of Mr. Thiele, will continue her mandate as Supervisory Board Member, which she has held since 2016 already. As a visionary entrepreneur, Heinz Hermann Thiele placed the management of the company in the hands of external managers almost 15 years ago. The company is led by a highly experienced supervisory board and a management team, which will continue Knorr-Bremse's successful course. The important element of the aforementioned stability is the extension of the mandate of our Supervisory Board Chairman, Prof. Dr. Mangold, by two years. This period should be sufficient to find and induct a suitable successor for him. Dr. Sommer, a former CEO of ZF Friedrichshafen, will take over Mr. Thiele's mandate after the upcoming AGM. He has many years of industry experience and in-depth knowledge of the trucking industry. With Dr. Claudia Mayfeld having joined the executive board on May 1, 2021, we are very happy to have another very experienced manager complementing our management team at Knorr-Bremse, and the extension of female leadership with Knorr-Bremse will be very supportive for the whole company.

Turning to the next chart on slide number 4, I would like to give you an overview of the current market situation and the outlook towards year-end. Overall, we see a continuing strong market recovery in the trucking industry and that the underlying market fundamentals in rail are unchanged. The rail market does not face any cancellations of projects. But what we see is postponements and shifts of tenders that are still ongoing. This development is also reflected in the financials of our customers, the rail OEMs, so original equipment manufacturers. In addition, the rail industry has also not experienced any meaningful supply shortages, driven by the fact that not many mass products are used here, customization is very pronounced, and there is a very broad and locally focused supply industry. COVID-19 persistently results in less train traffic and fewer trains on the tracks, which affects the whole rail aftermarket business. However, due to the large fixed cost base of train operators, it makes financial sense for them to use at least 80% of trend capacity to generate a contribution margin. In addition, there is an explicit political will to keep public transport running during the pandemic. Shifts in demand in APEC, especially in China and India, but also partially in the EU, are putting pressure on the rail market currently. Nevertheless, we expect long term that global investment programs specifically for rail transport will support demand. The main keywords here are global decarbonization plans, the Green Deal in Europe and ambitious infrastructure programs in the EU, as well as in the US. Nevertheless, regarding ridership, we do not expect that pre-COVID-19 levels will be reached before 2023.

Coming to the truck markets, which experienced a very pleasing demand currently, key sales markets of our truck division in Europe and North America have continued their significant recovery paths, showing strong truck production rates despite first impact from the challenging supply situation. The current Chinese truck market remains a class of its own, supported by good underlying demand and pulling effects from the second half of 2021. If you keep in mind that, as of next July, it is planned to introduce the new China 6 emission standards, it will result in a probable decline of market demand here because investments have been pulled forward due to this effect. The development of the truck production rates in Europe and North America until year-end will depend heavily on the development of the shortages on the supply side. However, market research companies currently expect truck demand in Europe and North America to increase significantly overall in 2021. And we share this opinion, so that overall we expect across the year an increase in demand of truck production rates overall. So that's the underlying overall effect for 2021.

Chart number 5, let's have a look at that and see what these market environments mean for our divisions. We will start with rail. The order intake development Q1 2021 was rather low, which was fully expected in that sense. The main drivers have been contracts in the rail industry are very difficult to put into quarterly courses. They often span several

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months and tend to be lumpy sometimes. Tender activity is more pronounced in the second to fourth quarters in 2021. Knowing this, we are not concerned about the rather weak performance in the past quarter. Additionally, after a strong order intake in Q4 2020, we already anticipated the Q1 2021 order intake to be weaker, which we communicated already during the presentation of our fiscal year 2020 results in March. A lower intake was recorded in all regions, but predominantly in the Asia-Pacific region, especially China - high-speed and aftermarket - but also in India, and particularly LHB coaches, where the drivers reported a hit. We expect a better development of RVS order intake, still depending on the unknown COVID-19 impact. Nevertheless, we expect that the full-yearbook-to-bill ratio should be above 1.

The aftermarket business is still affected by the lower rail traffic. Please keep in mind that the number of trains in service is more important than the actual ridership. Trains that run on tracks or return to service after breaks must meet all regulatory obligations. Therefore, trains must be maintained regularly. Despite the fact that the number of trains on tracks is at a solid level, it is lower compared with the situation pre-pandemic. This continuously impacts our service and spare parts business. In addition, rail operators in China extend overhaul cycles, also as a result of lower mileage of high-speed trains driven since the pandemic started last year. On the positive side, countries which see fewer infected people monitor a significant uplift in train utilization. We believe that the aftermarket business will improve when the tensions from the pandemic will decrease, and rail mobility returns to normality.

I would now like to turn to China, a topic on which we always receive many questions from you. Overall for the Chinese government, train transport is an important pillar for the nationwide mobility of the population. Accordingly, the country is investing in the expansion of rail network and in new trends. Even China is not immune to the effects of COVID-19, and after years of sometimes extreme growth rates, we are seeing a normalization in many areas. The rolling stock industry in China is getting mature and the country is adapting to the market conditions of other countries, an expected normal and healthy development. Knorr-Bremse has a strong market position in China, and we are one of the few non-Chinese suppliers in the rolling stock industry. Obviously, our products can make a lasting impression in terms of quality, and above all, innovation. The two-circuit policy in China exists and will remain. However I believe RVS is well positioned, and we are aiming to find creative answers to deal with these imponderabilities.

Moving to our truck division on page 6. The first quarter has seen an extremely positive development, driven by strong demand in Europe, the US and China. A strong freight market with high transport volumes means that the transportation industry renews and expands fleets to fulfill increasing demand, which is expected to continue in Europe and North America until year-end 2021. In China we expect, as previously said, a significant slowdown of the truck production rate following the introduction of China 6 mentioned before. Last year China was the only large market which saw production rates going up. Please keep in mind that this regional outlook for the remainder of the year will also be heavily dependent on future developments in the COVID-19 pandemic. Content per vehicle is one of the key drivers of CVS and is not really impacted by cycles. Due to the extraordinary increase of truck production rates in Q1 '21, the good development of content per vehicle was less visible, but content growth will continue to be an important pillar of CVS's future growth path.

The global shortage, especially of semiconductors, had already a noticeable effect on our truck business in the last quarter. But we were able to keep the impact low by introducing measures very early. In addition to the semiconductor crisis, however, we also see that the supply of other components, such as metal, plastic, has become more difficult. This

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is a condition that usually occurs during cyclical recovery phases, and our truck division is very experienced in dealing with such circumstance. In the coming quarters, we expect the global supply chains for semiconductors and other components to remain uncertain. The semiconductor situation, in particular, should not change quickly. Accordingly, we expect CVS's second, but even more pronounced the third quarter and potentially beyond, to be negatively impacted. Nevertheless, we still expect solid sales growth for our truck division for the full year. The COVID-19 pandemic continues to create uncertainty, and it can still lead to additional restrictions that could impact us both in our rail and our truck divisions, our business partners and our customers. Knorr-Bremse is very closely monitoring the situation and is prepared to act quickly, if necessary.

Let me now continue with page number 7 and the operating highlights both of our divisions. To prepare our truck division for the coming generations of the e-vehicles, we have launched the Group's internal so-called incubator, as an agile think tank. Sixty in-house and external specialists work on innovative, future-oriented solutions at Knorr-Bremse's Munich and Budapest locations. CVS announced to enlarge its Dalian plant in China to meet the ongoing booming truck demand there. The start of the production is scheduled for December 2022. CVS has signed a major contract with one of the world's leading global truck OEMs, worth EUR 1 billion, to continue the long-term partnership with this customer. The new supply contract was signed for a new generation of braking and air treatment systems, which use the next- generation technology developed by Knorr-Bremse, the so-called Global Scalable Brake Control system and the Global Scalable Air Treatment system. On the other side, RVS won two major contracts, which will be executed together with Stadler, one multi-system order in Berlin to equip 606 metro cars, and one in Atlanta for 254 metro cars. In my view, one order is particularly noteworthy with regard to potential future business models in the aftermarket sector. Knorr-Bremse has signed a framework agreement with Deutsche Bahn, which will enable our rail division to develop projects based on condition-based maintenance of rail vehicle fleets. Data-driven projects like these open up the opportunity to participate continuously in related cost savings of our customers. With this, I would like to hand over to my colleague Frank, CFO of Knorr-Bremse.

00:20:28 Frank Markus Weber

Thank you very much, Jan. And a warm welcome from my side as well. Thank you for joining us today despite the fact that this day we have chosen is a bridge day. I do already apologize in advance for that. Let us talk about the numbers on page 8 now. Considering the ongoing challenging economic environment around the world, our quarter-one finances once more confirm the robustness of our business model. Given that, we do believe we have achieved a superb performance overall. Nevertheless, KB was not fully immune to the still-ongoing impacts related to the pandemic. Order intake increased significantly by 13% to EUR 1.8 billion. The order book improved once again by 9% to a new record level of almost EUR 5.1 billion. Revenues increased by 4%, to EUR 1.7 billion, and margins grew by 110 basis points. EBITDA margin was up from 17.8% to 18.9% and EBIT margin or return on sales from 13.8% to 14.9%. Please note that we will focus more on EBIT than EBITDA from this year onwards. Free cash flow could be improved versus the previous year but with EUR −23 million still slightly negative, resulting in a cash conversion rate of −13% versus −43% in the previous year.

Let me dive deeper into our order intake and order book on chart 9. Compared to the same period last year order intake on group level increased significantly by 13%, to EUR 1.8 billion in quarter one. On an organic basis, the increase was

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Knorr-Bremse AG published this content on 19 May 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 19 May 2021 15:21:05 UTC.