Knorr Bremse : Transcription of the Q3 2022 Conference Call

Transkript - Knorr-Bremse Q3/22 conference call on November 11, 2022 (Presentation and Q&A)

Presentation

Frank Weber, CFO Knorr-Bremse

Introduction

• Thank you, Andreas, and welcome to our Q3 conference call. Thank you for joining us!
• Today, we will talk about the operational developments of the last quarter and the guidance for 2022. Afterwards, Jürgen Wilder, Head of RVS, Bernd Spies, Head of CVS, and I look forward to your questions.

Chart 2

• Let's kick it off on chart 2 with our key messages:
• On October 13, we announced that Marc Llistosella will join the executive board of Knorr-Bremse as CEO on January 1st, 2023. The whole leadership team is very much looking forward to having him on board soon. We are strongly convinced that Marc is a great additional member and he will complete our team, especially due to his international background and strong industrial experience. I respect Marc very much and have already worked with him for several years.
• Overall, the underlying market demand by end customers in both rail and truck remains strong in all markets, excluding China which is still facing significant market weaknesses. Overall, the activity in most regions continues on good levels, primarily driven by focus on emission reduction and the need for additional transport capacities.
• There is an increased uncertainty about the global macroeconomic development. Geopolitical headwinds but also higher input costs and ongoing supply chain disruptions lead to an ongoing challenge for all market participants. We at KB are making very good progress with our price increases and all other cost measures

to pass on our cost headwinds. In addition, our low vertical integration and strong localization strategy is very supportive in the current environment. I strongly believe that we have the necessary strength to face all current and future headwinds.

• Sustainability has a high priority for Knorr-Bremse. Thus, we decided to further expand our sustainability efforts by committing to extend the companies climate targets also to value chain processes. In this context, we are aiming to join the Science Based Target Initiative (SBTI) in early 2023 to set the framework for our decarbonization efforts. This Scope 3-commitment is also part of the 700 million euros sustainability-linked bond that was issued in September.
• Last but not least, we confirm our guidance for the full year 2022.

Chart 3

• On chart 3, I want to share our market view with you.
• Looking at the rail market, we see that the underlying demand in most regions in both OE and AM business continues to be high, visible in a continuously good order intake. Ridership levels and rail traffic are recovering slowly but steadily driven by the overall Covid-situation easing. As a result, the tender development in the industry is also very pleasing which results in high order books of our global OEM customers. This is a good foundation for further recovery in the quarters ahead.
• The market in China continues to be weak with low investments in rolling stock. Nevertheless, the higher investments in the rail infrastructure will also lead to a higher demand for trains.
• Europe remains the strongest rail market for RVS, but also North America continues to be a solid contributor. Both markets will be driving our growth in the foreseeable future.
• Overall, we are confident that we will see a subsequential improvement in the global rail industry in the coming quarters and years.
• We expect demand to remain solid, which should also be reflected in a Book to Bill ratio above 1 for full year 2022. The supply chains in the rail industry remains

tense and inflationary headwinds are part of the game, which will stay for some time.

• The truck market also faces ongoing good demand. Truck production rates in Europe and especially in North America in the last quarter developed positively year-over-year. This trend should continue throughout 2022, only potentially limited by managed order books of our customers. Truck production rates in China continue to be weak as expected BUT I would like to highlight that CVS again grew above market driven by content per vehicle and will continue to do so. For the full year 2022, we have now reduced our expectations for the production of heavy duty trucks in China to around 620,000. Nevertheless, long term the market should provide attractive growth opportunities again. As soon as the market recovers, we will benefit due to our leading market position and the unbroken trend of higher technology and demand for quality trucks.
• The situation in the global supply chain has improved over the past months but is still unstable and characterized by disruptions and unpredictability, but we continue to see slight improvements recently compared to the first half of 2022.
• Higher input costs are an ongoing challenge for the whole industry and we see that some suppliers are under strong financial pressure.
• Regarding pricing discussions with our customers, we continue to make good progress. CVS was able to successfully finalize the first wave with all customers, which will be beneficial for our profitability in the coming quarters. We also expect the frequency of price discussions to increase in the future and represent the some kind of "new normal".
• Aftermarket business benefits from high utilization rates and increasing milage. This trend should continue as well.
• In September, we participated at the most important fairs, showing our exciting new products and innovations and received superb feedback. Therefore, I would like to hand over to my colleagues Jürgen and Bernd to speak about their experiences, meeting our customers and the media.

Chart 4 - Dr. Jürgen Wilder, Head of RVS

• Thank you, Frank, and Hello everybody. I am Jürgen Wilder, head of RVS and I hope everyone is healthy and well.
• Let's have a look at chart 4 and our presence at the InnoTrans in Berlin, the world largest rail fair.
• Given today's clearly defined climate targets, there is an increasingly pressing need for sustainable transportation of people and freight by rail.
• Rail is and remains the most eco-friendly mode of mass transportation. It is currently in an evolutionary transformation and the industry is becoming increasingly interesting than ever before.
• The main topics we presented at Innotrans fair were
  o Traffic flow - supporting capacity increase within existing steel and concrete and that pays into avoiding additional investments in concrete and steel in order to increase the capacity of a network
  o Trains operations & maintenance - lowering life cycle costs which becomes increasingly important regarding tender criteria and awards in the markets
  o Smart solutions & applications as well as ecological footprint
  o With these topics we are the front runner to address the rail sector's industry trends
• My personal highlight was our new Digital Automated Coupler. The new electric contact coupler will support end-to-end power and data lines on freight trains. This will significantly reduce the time needed to assemble freight wagons and at the same time noticeably increase flexibility. Both are important for increasing the share of transport by rail. Longer term this is a decisive step forward in the development of automated system solutions for digital freight transportation.
• We also showed new solutions in doors and HVACs that increase passenger safety and provide solutions for the growing hygiene demands. These are just a few highlights and examples of our portfolio that we presented at the Innotrans that I wanted to share with you.
• With this I would like to hand over to Bernd now.

Chart 5 - Bernd Spies, Head of CVS

• Thanks Jürgen and welcome everybody from my side as well. This is Bernd Spies speaking, head of Knorr-Bremse's truck division.
• I would also like to share some insights about the recent commercial vehicle fairs
  "Automechanica" and "IAA Transportation".
• First, we see us and our products as enabler for Highly Automated Driving by being experts for Truck Motion Control. We are best-in-class in coordinating interactions of actuators for vehicle dynamics and will further strengthen our position with our newest developments in the pipeline.
• We showcased redundant ready systems like our state-of-the-artall-electric power steering EPS, our redundant global scalable brake control GSBC or our power management system. They will all play a key role in the field of driver assistance, highly automated driving and e-mobility.
• Our GSBC forms the basis for a completely scalable system and is currently requested by all leading manufacturers and AI companies as a basic system for brake control. Here we have invested in time in a platform that will carry us for the next 10-15 year.
• Second, our customers were delighted by our solutions to further push E-Mobility. As experts of compressed air, we received good feedback for our e-compressor solution and we strongly believe that air will remain in truck of the future. Furthermore, we introduced our new brake hardware SYNACT COMPACT leaving through the compactness a design freedom to our customers and a reduced weight of 12 kg per axle.
• At Automechanika in Frankfurt we presented our extended range of aftermarket products and services. With our brake drag torque reduction system, supporting the controlled release of brake pads from brake disc to minimize friction, we even won the innovation award in the "Parts & Technology Solutions" category. Another important topic was our recent acquisition of 55% of Cojali, which will strengthen our Connectivity portfolio and will pave the way for Condition Monitoring and Predictive Maintenance. It was highly valued in the discussion with our customers. Summarized, we see us in a strong position with the right portfolio to further extend our growth based on special and focused development areas.
• In my view both fairs showed that we are on the right track. Traffic safety, automated driving, e-mobility and connectivity are the dominant industry trends in