Knorr Bremse : Transcription of the Q1/20 Conference Call of Knorr-Bremse AG

Transcription

Knorr-Bremse AG - Earnings Call Q1/ 20

EV00107902-90 Min

28 May 2020

Knorr-Bremse AG - Earnings Call Q1/ 20

EV00107902 - 90 Min

PRESENTATION

00:00:00 Operator

Dear ladies and gentlemen, welcome to the call for the earnings of Q1 2020 of Knorr-Bremse AG. At our customer's request, this conference will be recorded. As a reminder: All participants will be in a listen-only mode. If any participant has difficulty hearing the conference, please press star key followed by 0 on your telephone for operator assistance. Today's conference will be led by Bernd Eulitz, CEO, Dr. Jürgen Wilder, Member of the Board and Head of RVS, Dr. Peter Laier, Member of the Board and Head of CVS, and Andreas Spitzauer, Head of Investor Relations. May I now hand you over to Andreas Spitzauer. Please go ahead, Sir.

00:00:43 Andreas Spitzauer

Thank you, operator. Good afternoon as well as good morning, ladies and gentlemen. My name is Andreas Spitzauer, Head of Investor Relations of Knorr-Bremse AG. I want to welcome you to Knorr-Bremse's conference call for the release of the first quarter 2020 results. As a reminder, the conference call will be recorded and is available on our home pagewww.knorr-bremse.comin the Investor Relation section. Here you can find today's presentation and later, a transcript of the call. It is now my pleasure to hand over the call to Bernd Eulitz, our CEO of Knorr-Bremse, Jürgen Wilder, Head of our Rail Division, and Peter Laier, Head of our Truck Division. Please go ahead, Bernd.

00:01:28 Bernd Eulitz

Thank you, Andreas. Dear ladies and gentlemen, I warmly welcome you to our conference call for the first quarter results of Knorr-Bremse in 2020. First of all, I would like to present the highlights of the first three months of 2020, followed by a more detailed explanation, especially on a divisional level. Thereafter, my two colleagues in the executive board, Jürgen Wilder und Peter Laier, would like to give you an update on the current Covid-19 situation and its divisional effects, before I conclude with a summary. Overall, Knorr-Bremse's start into 2020 was actually very sound, despite the well-known market turbulences. First and foremost, our financial results have been solid in both our rail and truck divisions. The increasing sales in the aftermarket business and its positive impact on our profitability is an important proof of our resilience. We started early with countermeasures against the impact of Covid-19 and implemented them quickly. In this respect, our European and American operations benefitted greatly from the experience of our Chinese colleagues. On the financial side, Knorr-Bremse is very solidly positioned. We further increased our liquidity, which enables us to manoeuvre the company safely and confidently through these difficult times. In addition, this solid financial basis enables us to take advantage of any opportunities as they may arise.

Let me continue with chart 3 and our KPIs in the first quarter 2020. Knorr-Bremse's start into 2020 was obviously not as we, or anyone, would have expected considering the Covid-19 pandemic. Nevertheless, our performance was still very solid and showed a high level of resilience, especially when compared to our peers and other segments in the industrial goods industry and pure play automotive. Let me take you through the most important KPIs. Orders received were at

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€ 1.6 billion, a decrease of 16% compared to the same quarter last year. Reasons have been first effects of the Covid-19 pandemic, especially in China, as well as the already expected weaker demand dynamics in the truck market. In addition, the timing of contract awards in the rail division, influenced by the year over year development. You will remember, we reported a very strong order intake in Q4 2020. Having said that, with €4.7 billion, our order book was almost stable compared to the previous year, which gives us a good visibility for this challenging year. RVS supported this development with an increased order book. At €1.6 billion revenues decreased by 7.3% or by -€128 million compared to the first quarter of last year. This development was driven predominantly by CVS. Our EBITDA margin consequently decreased from 19.0% to 17.8% in Q1/20. Given the current adverse economic and market environment, we consider this to be a very solid level of profitability.

Let me dive deeper into our results on chart 4. Order intake on group level at the end of March 2020 declined by 16% to €1.59 billion compared to the same period in the previous year. This development was partly supported by the FX developments and the integration of the Hitachi steering business last year. On the other hand, Powertech is not included in the Q1/20 figures. Our book-to-bill ratio in Q1/20 remained solid, reaching 0.98. The development of the order backlog in the first quarter of 2020 was particularly pleasing. Compared with the previous years and the previous quarter's figures, the development of the order backlog has been almost stable. It reached €4.65 billion end of March 2020.

Let me continue with our revenue development on chart 5. In the first three months of 2020, revenues on group level decreased by -7.3% or in absolute numbers by -€128 million to €1.63 billion. On an organic level, we saw a decline of 7.9%. The revenue development overall was positively driven by dynamics in the APAC region, which showed a much more stable development despite early Covid-19 pandemic effects over February in China. This development was foremost driven by the truck division and the fast recovery from plant shutdowns. In Europe and North America, we recorded significant declines in revenues. As expected, the reasons for this are the declining truck production rates of the truck OEMs, which could not be offset by the positive revenue development in rail in Europe. The revenue development in April was challenging. The Covid-19 pandemic and the associated lockdowns of customer plants had a significant negative impact on our revenue development in Europe and North America. On a group level, we recorded year-on-year revenue declines of more than 40% in both regions. Fortunately, we saw a slightly positive year-on-year sales growth in APAC, including China. Overall revenue in April closed around 30% below last year, but with positive EBITDA, with positive EBIT and a positive cash flow. May should be on a similar level as most OEMs are back in production, but still at lower levels.

Let me continue with the developments of our profitability on chart 6. In the first three months of 2020, group EBITDA was €290 million after €334 million in the previous year quarter. The EBITDA margin amounted to 17.8% after 19.0% in the previous year. This decrease mainly resulted from volume effects of a declining group OE business, with corresponding impacts on the operating leverage. This margin impact was mitigated by high-margin earning contributions from growth in the aftermarket business. The aftermarket share increased from 31% in the first quarter of 2019 to 37% in the first quarter of 2020. In absolute figures, aftermarket increased by 11% to €603 million. This increase was supported by both operating divisions. The group's EBIT of €224 million also saw a volume-related decline of € 51 million. At 13.8%, the EBIT margin was below the previous year's level of 15.6%. The higher deviation compared to the EBITDA of the previous year quarter comes from higher depreciation due to increased investment activities. In summary, we consider Q1/20 to be a solid proof of Knorr-Bremse's business model in the currently challenging market

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environment.

Now, turning to Slide 7. Our free cash flow in the first quarter 2020 was negative, reaching -€61 million. The year-on-year decline is due to lower profitability, higher capital expenditures and the US$12 million payment for the settlement agreement of a class action lawsuit in the US. In addition, please keep in mind that our free cash flow was quite strong in the fourth quarter 2019. Therefore, we had a different starting point regarding cash flow at the beginning of this financial year. Analysed ROCE was impacted by lower profitability as well, but with 26.7% well above most other companies in the capital goods sector. While we have initiated a CapEx management program, we still see an increase of €19 million to invest in future growth options in both divisions. For example, we continued to expand the capacity for air disc brakes in North America and invested in measures to increase the level of automation in our plants. Also, investments were made in software development for our steering business and R&D to prepare our competitiveness post Covid-19.

We are very pleased that all regulatory approvals and requirements for the acquisition of the steering system manufacturer Sheppard in the US have now been met. We expect the closing of the deal within the next few days. This acquisition will transform Knorr-Bremse into one of the world's leading steering system manufacturers for commercial vehicles. And together with our leadership in the brake business, we are now in an even stronger system supplier position to set new standards in the industry.

Let's move on to the divisional view, starting with RVS on Slide 8. In the first quarter of 2020, order intake of rail vehicle systems were down 16% to €874 million. This decline was no surprise after the very strong performance in Q4/19. I would like to remind you that developments in the rail industry, with its long cycles, do not go well with quarterly reporting. There are always fluctuating large orders in individual quarters, which make comparisons difficult. Projects and rail are generally independent of seasonality or cyclicality. In addition, the Covid-19 pandemic also led to a limited decline in RVS order intake in Q1/20, as the first effects were felt in China. In the current discussions on economic support programmes to counter the negative financial consequences of the pandemic, we are seeing initial government considerations to promote the rail industry. Should these become more tangible, RVS would certainly benefit. Overall, we believe that the existing long-term trends in the rail industry hold true despite the current uncertainty. While the order intake level in the first quarter of 2020 in Europe was similar to the level of the first quarter 2019, North America showed a significantly lower demand in the freight sector, locomotives and the aftermarket, due to lower utilisation rates of existing vehicles resulting from lower transport volumes. The book-to-bill ratio developed accordingly to the lower order intake. It moved from 1.14 in the first quarter of 2019 to 0.98 in the first quarter of 2020. The order book, on the other hand, increased by 6.6% compared to the same period of the previous year, which provides good visibility for the rest of the year. We assess the order backlog of our rail division as very solid and do not expect any order cancellations. We do see selective shifts of tender bidding processes.

I am now moving on to the revenue and profitability slide of the rail division on chart 9. In the first three months of 2020, RVS recorded revenues of €892 million, which decreased by 2.1% year over year and was flat on an organic basis. Europe was the growth engine of the division in the first quarter, supported by the good development in the aftermarket. In North America, on the other hand, we recorded overall a decline. Lower revenues in freight and locomotives could not be mitigated by the positive trend in the service business. APAC, including China, also declined overall. The lockdowns in Q1 had a negative impact on most revenue segments like high speed and the aftermarket business. On RVS group level, noticeable growth in the aftermarket business compensated for the weaker OE business. Respectively, the

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aftermarket share increased further in the first quarter of 2020. The development of RVS profitability in the first quarter of 2020 was mainly affected by the lower revenue in the profitable APAC region and a less favourable project mix. The positive contribution of our implemented cost measures could mitigate some of the margin decrease. EBITDA for RVS came in at €186 million in Q1/20 and was down 7% compared with last year. The EBITDA margin fell from 21.9% to 20.9%.

On Slide 10, I would now like to continue with the development of our trucks division. The order intake for CVS was €750 million in Q1/20, which is decrease of 17 % year on year and of -22 % on an organic level. This development was expected and reflects the normalisation of the European and North American truck market after a period of strong growth. In addition, there were first negative effects of Covid-19 on demand in both regions. In APAC, the development of order intake in the first quarter of 2020 was stable year on year, well supported by the acquisition of the Hitachi steering business. The order book of our truck division amounted to €1.1 billion at the end of the first quarter 2020, which is a decrease of 19% year on year. Compared to Q4/19, so before the Covid-19 crisis, the order backlog decreased only by -1.9%, which can be called almost stable, especially under the current conditions.

Let's move on to Slide 11. Our key message here is that Knorr-Bremse managed to outperform the truck production rate-induced downturn across all regions. Our CVS division posted €736 million in revenues for the first quarter 2020. Compared with last year's figures, this is a decrease of 13% and on an organic level of -16%. While this development is not pleasing, it also shows that we clearly outperformed the global truck production rates, which showed a 27% decline. The revenue development of CVS in every major region strongly outperformed the respective truck production rate year on year in the first quarter 2020. This clearly shows our market strength as well as the support from growing content per vehicle and aftermarket as well as market share gains. Driven by a lower truck production rate in Q1/20, customer demand was lower in the European and North American truck markets, which led to lower OE revenues. Besides the mentioned expected market slowdown in March, OE revenues were already affected by Covid-19 impacts. In the APAC region. Covid-19 negatively impacted our revenue development in Q1/20. But we gained market share in China, where CVS is now the market leader. Overall, and like rail, the truck division reported a very gratifying development of its aftermarket business, which grew year over year 10% to €211 billion in the first quarter of 2020. In Q1/20, CVS achieved an EBITDA of €108 million, which is 24% down compared to the same period of the previous year. The EBITDA margin amounted to 14.6%, compared to 16.6 % a year ago.

In context to the current environment, this is a good performance of CVS, also when compared with our peers. It was supported by our sales mix, our fast-implemented cost adaptation and cash measures, and in general, the quick reaction to the Covid-19 pandemic by our Task Force Team. With this, I would like to hand over to my colleagues now, first Jürgen Wilder, Member of the Executive Board and Head of our Rail Division. So Jürgen, please go ahead.

00:20:28 Jürgen Wilder

Yes, thank you very much, Bernd. I warmly welcome you, dear ladies and gentlemen, to our conference call for the first quarter results of Knorr-Bremse in 2020. On the next two charts, I would like to give you an update on the Covid-19 situation and the concrete effects on the rail division. And let's start with chart 13, with the impact on our customers. On

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