Knorr-Bremse AG (KBX) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to Knorr-Bremse Full Year and Q4 2021 Telephone Conference with the CEO, Jan Mrosik; and CFO, Frank Weber. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Andreas Spitzauer, Head of Investor Relations, who will lead you for this conference. Please go ahead.

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 preliminary results of full year 2021. Today is Dr. Jan Mrosik, our CEO; and Frank Markus Weber, 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 home page, 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. Mrosik. Please go ahead.

Yes. Thank you, Andreas, and welcome, everybody, and thanks for joining us today. As usual, I will start with an overview of the highlights before Frank dives into the details and our outlook for 2022, followed by a Q&A session. 2021 was a turbulent year full of challenges due to the pandemic, but thanks to the outstanding execution of the entire Knorr-Bremse team, we mastered it very well. We've delivered good profitability and improved all financial KPIs significantly, not only in the last quarter. In full year 2021, we generated revenue of EUR 6.7 billion, up 9%, and an operating EBIT margin of 13.6%, 40 basis points higher year-over-year. With these results, we fully achieved our fiscal year '21 guidance. Most importantly, our order book is at a record level and underlines the strong market fundamentals in the Rail and Truck industry. CVS was the key driver of 2021, with a revenue increase of 20% and EBIT margin improvement of 240 basis points. Despite the challenging supply situation in the truck industry. RVS generated flat revenues and an EBIT margin of 18.1%, slightly above expectations after another challenging year for the rail industry with project postponements. In Q4, business activity clearly improved as promised with a very strong order intake following a book-to-bill ratio of 1.49. This results in a book-to-bill ratio of 1.05 for the full year. In 2021, on the basis of unaudited and preliminary numbers, we have reached the important goal of achieving carbon neutrality at Knorr-Bremse sites. Thanks to our own climate action measures and supported by high-quality green energy certificates. We are also fully on track to reach another important environmental goal of halving our CO2 emissions by 2030. We at Knorr-Bremse aim to use all possible levers to contribute to decarbonization. Above all, with our ambitious and environmental efforts in our prior portfolio but also by tying our goals and efforts to financial commitments. So we adapt the ESG targets in the short-term incentive of the management remuneration from '22 onwards and just recently issued an ESG syndicated loan tied to our sustainability rating. Let's move now to Chart #3. As mentioned, we have fully achieved our fiscal year '21 guidance. Revenues of EUR 6.7 billion are within the range, and profitability with 13.6% is even slightly above our target. Over and above that, 2 important pillars of our equity story could be proven again in fiscal year '21. We grew faster than the market and profitability for the high level of resilience. The high focus on cash and cash conversion rate, as mentioned, has paid off as well. We achieved a strong free cash flow of EUR 600 million and a very solid cash conversion rate of 92%. In terms of corporate governance, -- we further shortened reporting timelines and managed and publish the preliminary figures 8 days earlier this year. Increased EPS and stable ROCE at solid level underlying Knorr-Bremse superior business performance as well. We continue with Chart 4, and there're highlights of our Rail division in 2021. As rolled out at the Capital Markets Day 2 months ago, Knorr-Bremse's strategic path consists of our traditional business and the expansion in new growth markets. Our operational highlights are a clear proof of this strategy. In 2021, RVS won major international contracts with all large OEMs around the world. Besides many others, I would like to highlight the large metro contract with Stadler in Berlin, and a major Citadis equipment contract with Alstom. Both are long-standing customers of our Rail division and their awards are a clear sign of continuation of our strong relationship. With the acquisition of EVAC in June 2021, we expanded into the attractive market segment sanitary systems of trains and enhanced our position as a global system provider in rolling stock. Also in the area of new growth markets, we can repose progress. We won our first contract in the area of digitalization, such as a cooperation agreement with Deutsche Bahn for sharing data from train operators and a data analytics contract with Siemens for remote condition monitoring of the air conditioning system and regional trains in the U.K. Our partnerships with a major global OEMs are better than ever, not least due to the high innovation standards that Knorr-Bremse provides. We, at Knorr-Bremse aim for new sustainable solutions and digitalization is becoming increasingly important. Therefore, we are expanding our R&D activities, including our involvement in start-ups like Railnova. This company is the leading supplier of rail world telematics solutions and maintenance workflow software to the railway industry. Digitalization in the rail freight business also offers great potential for us. I will come to this at a later point again. Let me proceed to Chart 5 with the highlights of CVS, which follows the same approach of traditional business and the expansion in new growth markets. Our efforts in 2021 overall focused on enlarging our positions in e-mobility and automated driving. In order to meet the strong demand in China, the truck division expanded manufacturing capacities there. As a market leader, we continue the strategic operation on automated manual transition, advanced drivers' assistance and highly automated driving with Dongfeng. With the global scalable brake control system, we have created a next-generation technology and a strong flexible platform for our customers, also laying the groundwork for automated driving. In April 2021, we signed a new major supply contract worth approximately EUR 1 billion with one of the largest European OEMs. Among the extension to cover serial deliveries of current braking and air treatment systems, also a new supply contract providing GSBC as well as the global scalable air treatment systems. In terms of new business, we won the first big contract with our electric power steering solution for Knorr-Bremse. I will elaborate on this topic letter. To drive E-mobility, we founded the e-Cubator to bundle know-how of 60 specialists last year. In this context, I would like to mention the successful launch of our e-compressor Rotary Vane. It is scalable to variable e-truck air requirements and has taken a market leader position within a short period of time with several business awards won so far. This technology will continue to strongly support our content per vehicle growth. In both divisions, we have pioneered in the respective megatrends and also like to engage with young companies and start-ups to enter new business fields. In 2021, we invested in the startup Autobrains, which supplies video perception technology for realizing system solutions for advanced driver assistance and automated driving. Let me continue with an overview of the markets on Chart 6. The global rail market was clearly affected by COVID, which was mirrored by less rail traffic in 2021. Nevertheless, general market characteristics are fully intact and market drivers long term are unchanged. The biggest rail market for RVS Europe remains to be a strong growth driver now and in the future based on our strong market share, especially in brake systems. The ongoing low ridership levels around the world burden the overall dynamics in the OE and aftermarket business, which is the reason for ongoing postponements of projects. Throughout the current year, we expect the sequential recovery demand after 2 quite difficult years, which should lead to a book-to-bill ratio of above 1 for RVS in fiscal year '22. The rail market is increasingly affected by supply issues, cost headwinds from components and raw material price increases this year compared to last year. On the truck side, underlying demand in Europe and North America currently is strong and utilization rates of trucks remain on high levels due to a high global freight and transportation needs. So far, the CVS team has well managed the crisis. Nevertheless, the situation remains tense for semiconductors, components, raw materials and in the area of logistics. In addition, we are feeling the challenges of general inflation. Several production costs cuts, touch plant shutdowns from OEMs caused by supply issues negatively affected truck production rates in quarter 4. The Chinese truck market, as expected, remains on low volumes since the introduction of China 6 in July. This is also not expected to recover anytime soon. In the coming quarters ahead, we expect that the global demand for trucks will continue to be higher than supply for the industry. Therefore, the development of the global truck production rate until year-end 2022 will depend heavily on the development on the supply side. In general, however, -- we expect a positive trend in Europe and North America. In China, however, the truck production is expected to be in 2022 versus 2021, but Knorr-Bremse should be able to outperform this development again. On Chart 7, I would like to share our confidence for a solid development in the rail industry in 2022. As mentioned, rail was hit hard by the Panamax so far, which is also visible in the order books of the major European OEMs. Please keep in mind that RVS generated roughly 50% of its revenues in Europe. Partly before the outbreak of the pandemic, the order backlog of our biggest customers in Europe amounted to around EUR 100 billion. In the first year of the pandemic, this backlog has decreased only slightly, no cancellations and a clear positive sign from the rail operators for the long-term demand for train capacity. Then there was a significant recovery over the last year. Our customers order backlogs rose to new highs. Please note, this the usually that they are usually a 9 to 18 months lead time between our customers and us. Accordingly, we expect our order intake to develop well in the further course of 2022. With this, I would like to hand over to my colleague, Frank Weber.

Thank you, Jan, and welcome, everybody, from my side as well. Let us get into the numbers for the full year '21 before we look into quarter 4 in more detail later on. The performance and resilience of Knorr-Bremse in '21 in such a difficult economic environment confirmed the special robustness of both of our businesses once again. Nevertheless, Knorr-Bremse was not fully immune to some negative impacts caused by the pandemic, even though to a significant lesser account than others and ended the year with overall good figures. Order intake was up by 13% to EUR 7.3 billion. The order book also grew once again by 12% to now new record levels of almost EUR 5.6 billion and a book-to-bill ratio of [ 1.09], a more than solid basis for the expected development this year and our future growth path. Group operating EBIT margin could be improved by 40 basis points to 13.6%. This strong development of profitability was driven by efficient cost measures and the strong business performance in CVS and RVS. High focus on cash preservation measures led to a strong free cash flow of EUR 600 million and a cash conversion rate of 92%. Let me give you a short overview about the development of Knorr-Bremse's balance sheet, KPIs, backbone of our superior financial profile on Chart 9. Considering the uncertain economic development last year, it was important for us to maintain a high level of stability and flexibility in financial terms. While at the same time, we deleveraged the company from higher levels driven by COVID end of 2021, our gross debt to EBITDA reached a ratio of 1.15x and our net debt to EBITDA of minus 0.09x. In all our efforts, we try to maintain the level of equity, which finished the year with EUR 2.43 billion and represents a strongly increased equity ratio of roughly 34%. At the beginning of the pandemic in 2020, we grew credit lines of EUR 750 million, which we fully repaid by the end of the first half of 2021 already. Additionally, we paid backup bond of EUR 500 million in December '21. Therefore, we were able to reduce our gross debt by 38% to below EUR 1.4 billion. Liquidity reached a level of almost EUR 1.5 billion after more than EUR 2.3 billion a year earlier due to the before-mentioned deleveraging measures. The strong resilience of our balance sheet and the good development of business activities are also confirmed by rating agencies. Moody's rates us A2 and Standard & Poor's with A. Let's continue on Slide 10. Knorr-Bremse's high profitability on invested capital, strong working capital management and prudent investments resulted again in an outstanding return on capital employed of 25%. It was almost stable versus prior year, supported by and due to increased EBIT, which mitigated a slightly increased working capital, which was basically driven by revenue increase and FX effects. Earnings per share could be strongly improved by 26% year-over-year, underlining the high quality of our business and the success of our measures to fight the headwinds also below the line, like financial results and tax results improvements. Therefore, in combination with our dividend policy of 50% of net income, creation of shareholder value through high return on invested capital and earnings per share is key to us. Further details on our dividend proposal for '21 will be announced with the release of our annual report at the end of March. Let's move to Chart 11. On operating level, EBIT could be improved by 40 basis points to 13.6%, and operating EBITDA remained almost stable at 17.9%. We consider this as a good development despite the headwinds from the pandemic through net extra cost of roughly EUR 65 million in CVS alone in 2021 and slightly decreased aftermarket share. On a reported basis, group EBIT amounted even higher to EUR 920 million at a margin of 13.7%. Please keep in mind that this includes negative one-time expenses for severance payments at Kiepe and 3 locations in North America to Mexico in the amount of EUR 11 million. Both topics concern our RVS division. On the other hand, the sale of real estate in Berlin generated a positive book gain of EUR 19 million. Let's move to Chart 12. Our stringent efforts and strong focus on free cash flow payoff. Free cash flow in full year 2021 amounted to EUR 600 million at a cash conversion rate of 92%, which is on top level in the industry. Free cash flow in 2019 and 2020 were extremely strong due to very focused CapEx spending in the crisis, and among other things, strong COVID related cash preservation measures. Levels close or above 100 are not sustainable due to the investment phase we are currently in. Going forward, we will continue our efforts to -- for future growth and, respectively, will increase CapEx and R&D. But we will continue to keep a close eye on cash flow and steer for cash conversion rate of 80% to 90%. So you can see my promise to focus more on free cash flow paid off for the second year in a row. Let me continue on Chart 13. Technological leadership is the key to our business success, which is why we continue to invest into future technologies in the past quarter. CapEx in '21 amounted to EUR 376 million, which is 5.6% of revenue and, therefore, stable versus prior year. Quarter 4 figures of EUR 163 million were higher, mainly driven by investments in IT and capacity. Going forward, we are fully committed to investing 5% to 6% of our revenues on an annual basis. R&D spending in relative terms remained stable at 6.4% year-over-year, and in absolute figures slightly increased to EUR 431 million, in line with our slightly increased target ratio of 6% to 7% of revenues. Net working capital at the end of December stood at EUR 876 million versus EUR 746 million at the end of 2020, also in line with our targets and driven by revenue growth, M&A and FX effects. Let's move to Chart 14. We want to shape the future for future -- for sustainable transportation and 100% committed to reduce our CO2 emissions aspirationally as good as we can. Our ambitious climate targets have reached one extremely important milestone, the carbon neutrality at Knorr-Bremse's sites globally as of the year-end 2021. On the basis of our preliminary unaudited figures, we are happy to have achieved this important step, but are not planning to lean back. We are fully on track with our goal to halven our CO2 emissions by 2030, and we're able to reduce already more than 65% in 2021 versus 2018. Some products and the share of remanufactured products should also support the spread of the circle economy. Environmental leadership and further decarbonization is crucial to Knorr-Bremse's long-term strategy. We want to further improve our reporting in this aspect as well. In our sustainability report, which will be published in May, we will report Scope 3 figures for the first time as well as TCFD qualitatively. Knorr-Bremse recruits and develops a diverse workforce and supports their careers with resources such as the Knorr-Bremse Women's Association, Women at KB and training designed to develop leadership opportunities. We are committed to hire, develop and promote and ensure that our employees worldwide represent diversity in the global community. In 2021, Knorr-Bremse increased the share of women in leading positions from 13% to 14%, and the overall share of Women at KB from below to even above 20%. In order to let our employees participate in Knorr-Bremse's future success, we rolled out the Heinz Hermann Thiele employee share program last year, which currently stands with a very high participation rate of 25% globally. In addition, we want to strengthen sustainability aspects in our financing as well. Just recently, we placed the EUR 750 million ESG-linked syndicated loan, which is closely tied to our performance in 3 major ESG rating: ISS, SAM, RobecoSAM and Sustainalytics. Let's continue with the quarterly figures on Page 15. Performance in the last quarter of 2021 was remarkable. Compared to last year, order intake increased steadily by 8% to EUR 2.2 billion. Revenues were 8% higher, reaching EUR 1.7 billion, while operating margin, as expected, decreased to 11.8% driven by an unfavorable product and regional mix as well as higher R&D expenses. In addition, we had to face higher inflation. Free cash flow was strong and reached EUR 303 million in the last quarter alone. Let's continue on Page 16. Compared to last year, order intake on group level increased by 8% to EUR 2.2 billion in quarter 4. This strong performance was driven by RVS. The book-to-bill ratio reached 1.32 in the end. Development of the order book was again pleasing and reached a new record level of EUR 5.6 billion, which represents a 12% increase compared to the previous year's quarter. This level is a strong foundation for our outlook into 2022 and our future growth. Let's continue with the quarterly top line figures on Page 17. Revenues on group level increased by 8% to EUR 1.7 billion. As in the previous quarters, Europe remains to be the strongest driver with an increase by roughly 12% and generated the largest contribution of all regions with a share of 47% of all our revenues. North America also developed favorably with an increase of nearly 10%. As anticipated, the APAC region saw only a slight increase of 2.0% driven by China with minus 9%. Let me continue with the profitability development on Chart 18. As already anticipated, operating EBIT decreased year-over-year by 9% to EUR 201 million. The operating margin or return on sales decreased by 240 basis points, predominantly driven by ongoing headwinds from COVID-related costs for CVS and an unfavorable product and regional mix, especially for RVS. COVID-related cost pressure will continue to be a burden in 2022. Our clear goal is to mitigate it by our pricing power aftermarket resilience and other cost measures as much as possible. I will continue on Chart 19 with a deeper into RVS. After several customer-related postponements and pushouts in previous quarters, we expected and promised a strong order intake in quarter 4, and we delivered. RVS won contracts worth EUR 1.28 billion, up 17% year-over-year and reaching a record. Book-to-bill ratio was even at 1.49x versus 1.41x in the previous quarter of 2020. Order book also rose by 4% to a record level of EUR 3.88 billion by the end of December. Once again, our empirical evidence has given rather a long-term view is important when talking about the order intake and revenue situation of our rail division. Europe and North America were the key drivers for this development, but also APAC without China contributes. China is still characterized by project delays and a slower recovery of the market, which is also expected to continue in the current quarter. We also expect an increase in order intake of RVS and target book-to-bill ratio of above 1x in the current fiscal year. Like last year, the development in the second half of the year should be stronger than in the first half. Let's move to Chart 20. In quarter 4, '21, RVS recorded revenues of EUR 857 million. which is an increase of 11%. All core regions of the Rail division contributed to the strong development, with Europe being the strongest driver. In terms of profitability, as anticipated, operating EBIT declined by 6% to EUR 156 million at a margin of 18.2% after 21.3% in the fourth quarter of 2020. Absolute operating EBITDA was flat year-over-year and reached EUR 195 million, which resulted in a margin of 22.7%. Profitability of RVS was impacted by 4 factors: Change of accounting principles regarding provisions of onerous contracts, which is a one-timer and amounted to a burden of EUR 8 million. The product mix, namely a higher share of non-brakes business and the lower aftermarket share in Europe. Regional mix, with a lower share of the accretive Chinese business, higher cost from inflation. Please keep in mind that we have accrued severance payments for Kiepe and our U.S. freight business to our relocation from U.S. to Mexico. Both topics amounted to EUR 11 million, which are excluded on operating level. In 2022, we expect that RVS should be able to generate more revenues in the second half of the year compared to the first half. Based on this revenue development, RVS should then also be able to show higher margins in the second half of 2022 compared to the first half. Let's continue with the Truck division on Slide 21. At EUR 968 million, order intake is almost stable versus the very strong fourth quarter of 2020, and 39% higher quarter-over-quarter. This development was very pleasing and mirrors the still-strong underlying demand in the market. Europe and North America continued to see high market demand due to increased freight rates and shortages in transport capacity resulting in truck operators, both replacing old trucks and expanding their fleets. The demand should stay strong for some time. In APAC, the development of order intake remains on low levels driven by China. After implementation of the new emission standard, China 6 in July '21. In terms of order intake in 2022, we expect half year 2 as well to be stronger than half year 1. The order book of our truck division amounted to EUR 1.7 billion at the end of '21, which is remarkably 34% higher year-over-year. The order book level of CVS reached new record levels. Book bill was 1.15x in the fourth quarter. Let's move on to Slide 22. CVS posted EUR 841 million in revenues in the fourth quarter. Compared with last year's figure, this is an increase of 6%. In Europe and North America, revenues developed positively despite COVID-related supply issues which impacted the whole truck industry in both regions. Revenues in the APAC region declined year-over-year. The share of aftermarket revenues increased in all major regions on a year-over-year and quarter-over-quarter basis. In quarter 4, CVS achieved operating EBIT of EUR 63 million, which is 19% lower than the same quarter in the previous year. EBIT margin amounted to 7.4% compared to 9.7% a year ago. Operating EBITDA developed similarly to operating EBIT, reaching EUR 101 million and the margin of 12%. We consider this a solid development, keeping in mind ongoing net extra cost of around EUR 15 million in the fourth quarter and tough comparisons from quarter 4 2020, which strongly benefited from one-off cost COVID savings and extraordinary China demand. Additionally, we have ramped up R&D investments towards e-mobility and highly automated driving. On the positive side, operating leverage and cost measures mitigated the negative impact by discussed topics for our truck division. In the current year, we expect CVS to post higher revenues in half year 2 compared to half year 1 of 2022. Net extra cost in 2022 are expected to decrease compared to 2021, best guess would be a level of around EUR 40 million, which should be rather front-end loaded. Let's move to the potentially most interesting slide for many listeners, our guidance for the year 2022. The outlook for 2022 is under the disclaimer of a somehow stable geopolitical and macroeconomic environment, no further setbacks from COVID or other exogenic shocks and stable FX rates year-over-year. At the same time, we expect ongoing shortages of semiconductor and bottlenecks in the supply chain for both divisions, which should be more front-end loaded in 2022 and then rather normalize. We can confirm the first indications given in November last year for 2022. We expect revenues between EUR 6.8 billion to EUR 7.2 billion, which suggests a growth of around 4% to 5% at the midpoint. The second half of the year should develop more strongly than the first half. The operating EBIT margin is expected in a range of 12.5% to 14%. In such scenarios, we expect that CVS would be able to improve its margin. The RVS development will depend on how much second half of the year will make up for the low rail traffic at the beginning of the year, and how the rail markets will develop in general. Our main margin drivers for 2022 will be: On the truck side, lower COVID-related net extra costs in 2021 compared to 2022. The burden should be more front-end loaded. Higher R&D costs throughout the year, operating leverage driven by revenue growth, cost measures against inflation and price increases on the OE and aftermarket business side, given our strong pricing power. On the rail side, we expect cautious market outlook in China which should have a particular impact in the first quarter driven by Chinese New Year, the Olympics and strict COVID rules with plant closures by some of our customers. In the rest of the year, the development in China might then be better, especially in the OE segment. The very positive expected growth in Europe will offset much of this margin development. Please keep in that the expected regional mix in 2022 should be overall margin dilutive for RVS. Inflation of the input costs will definitely be higher in 2022 compared to '21, but we have initiated cost measures to mitigate the burden. In addition, we will work hard to increase prices for our OE and aftermarket customers also, given our pricing power that we are having. We expect the range of EUR 560 million of free cash flow, and this should be in a range of our strong 80% to 90% target range over the years to come. Overall, we are fully on track for our mid-term financial targets. The mega trends in both the rail and the truck segment remained strong and are the tailwinds for our operational development this year and the coming years. Thank you very much for your attention. I will hand over to Jan again.

Thanks, Frank. Let's move to Slide #24. Here, digitalization in the rail industry is a big opportunity for the whole rail industry in the years to come. In Europe, for example, we see considerable additional revenue potential through the digitalization of the rail freight traffic by the introduction of the so-called Digital Automated Coupler, or the DAC, if improved by government -- if approved by government. 450,000 to 500,000 freight railcars in Europe, many of them are very old, need to be equipped with the DAC. The total market volume amounts to EUR 7 billion to EUR 9 billion stretched over many years. This digitization step is also a very efficient driver of decarbonization of the transportation industry in Europe as it enables the share of rail freight to increase from 18% to 30%. RVS is well-positioned with its DAC solution to benefit from this trend, and we are confident to capture a fair share of this additional revenue potential. Let me continue with the growth opportunity of CVS on Page 25. E-mobility and automated driving are the big topics, which will change the truck markets most in the next 5 years to 10 years. We at Knorr-Bremse will be one of the most important enablers in this development. One big step on the way there is the electric power steering, which CVS is currently developing. This fully electric solution is a future-oriented key technology in the field of steering. It not only forms the basis for advanced driver assistance systems and automated driving, but also enables a reduction in fuel consumption and CO2 emissions thanks to its power on demand principle. We have just recently announced that from 2025, CVS will supply EPS systems for the entire commercial vehicle fleet of a leading global truck manufacturer with an order value of over EUR 300 million. This is only the beginning. We are among the top 3 steering manufacturers for truck globally, and we are on the way to set standards. Let me conclude with the top priority of 2022 we set for us in the management team. Quality and innovation have been the foundation of our success in the past, and we will drive this USP further in order to increase market share and drive market outperformance across all regions. 2022 will remain challenging in terms of COVID, but we monitor all developments intensely and will react quickly if necessary. We continue to strengthen the cornerstones of our equity story growing stronger than both markets, profitable revenue growth and strong free cash flow. Efficient capital allocation is important to us, and we stick to our clear M&A strategy, focusing on value creation for our shareholders. We continuously watch out for opportunities and review our own businesses with -- to create maximum value. We want to further strengthen corporate governance at Knorr-Bremse, challenge ourselves and our environment and make our contribution to a sustainable and green economic development. On behalf of the whole management team, I would like to thank all employees, business partners and customers for the great work in a challenging year, always having customer focus in mind. With this, I would like to thank you very much for your attention, and we will start the Q&A session now.

[Operator Instructions] We have the first question. It's from Sven Weier, UBS.

The first one is on the margin outlook for 2022. I mean, you said already what you said on revenues is quite consistent with what you said back in November. The margin guidance isn't at least at the low end. And I was just wondering, over the last weeks, what has led you to have a lower expectation here? Because the raw material pricing situation was already quite intense. Back in November, supply chain was intense. You were probably not expecting much of an improvement in the first half. And also, I would have also expected that in the old days of KB that if something like that happens, you would massively intensify the cost-cutting measures and be tougher on pricing to compensate that. So I'm still a bit confused what happens here.

Yes. Thanks, Sven, for your question. Maybe I'll start taking over this. Nothing fundamentally has changed. I mean, you do actually properly reconcile that we were also quite outspoken in regards to inflationary pressure already at our Capital Market Day, and this will come, so not of a surprise at all for us to say. So let me narrow it down to some points that somehow has changed or developed. One thing is that our fourth quarter came in slightly better, so, income from back then guidance, 13% to 13.5%, and the midpoint of 13.25% somehow went up to roughly 13.6%, which is one element, but I don't want to discuss too much about technicalities. But content-wise, let me say, we thus have lowered or the widened the range that we initially had on our table for the year 2022 given all the uncertainties out there. That's basically the major point. So instead of maybe going for 13% to 14% or something like that, we decided to go a little bit lower given all the uncertainties out there. And those are one thing. The question, of course, in the February lie still within, to what extent can you get the price increase you intend for OE business? Especially not so much aftermarket business, but for OE business in both divisions throughout the year, how much can you really pass over all the cost effects to the customers? That's one thing. The second thing is that in regards to the supply chain situation, the freight especially is a little bit, so to say, increased in the CVS division and also on the Rail division most recently, so we first have anticipated to get a significant tailwind out of reduced freight costs in the year 2022 compared to last year's level. This gap has lowered a little bit, so we still do see in the -- at least in the very first half year, some may be up to EUR 40 million of freight cost. We had to remember, we had EUR 65 million in the last year. And on the rail side, we also, over the last months, see increased tensions on the supply chain and the respective countermeasures that are needed there with air freight additional cost as well. Maybe not to that extent, but maybe also some EUR 20 million to EUR 30 million would add up there, so these 2 things are hopefully in the long run only temporary things as we expect them not to last on for maybe beyond 2022 in that extreme, but those are the things. And also, we have to say that there are signals out looking at the Chinese market for rail in the very first quarter, and the metro situation and the high-speed train situation that it's not just overly encouraging. Let me put it this way, that this will come. And also on the TPR side when it comes to heavy-duty trucks in China, I think Volvo stated that we see it similar, maybe only a volume of 1 million heavy-duty trucks will be seen in the year 2022. So those 3 aspects, I would say, in a nutshell, somehow led us to the situation that we widened the range and widened on the lower side of the range?

Yes. And maybe just as a follow-up to what you just said on China. So what your rail -- RVS guidance that you mentioned earlier, does not assume any major improvement in China as far as the COVID restrictions are concerned, and also not really penciling in any additional rail stimulus that is being likely put on in the next couple of months?

Yes, that's indeed the case. We are currently seeing that the investment pattern in China in general, as far as market is concerned, it's going to stay probably on the same level for high speed as last year. So some 50 high-speed trains probably going to be put into operation there. We see a reduction on the metro side, however, compared to last year. That does -- and any extra stimulus programs that the government in China might decide on, but which is currently not being indicated.

Okay. And maybe the final question is just, obviously, there was a major article in the German Press today about Knorr-Bremse, and I'm not going to pick on too many things out of this article here. But I was just curious because it was mentioned that there is quite a heavy delay on the transfer of the shares to the foundation on the one hand, and also that there would be a more central approach to running the divisions at KB in the future. Would be interesting if there's anything you can share on this?

Yes, there is no aim to change. Let me start with the foundation first. And it's true that the shareholders and the executor of Mr. [ Teles Lars ] will initially intended to set up the foundation by the end of 2021. Due to a variety of difficult tax and legal issues, the establishment of that foundation has been delayed, and in the ongoing revenues, we are currently unable to estimate exactly when the necessary approvals for the establishment of the foundation will be granted. As far as the steering of the structure and Knorr-Bremse as such is concerned, there is no intention to change -- decentral profit and loss responsibility within the company that we have today and also the regional setup. This is something where Knorr-Bremse been successful with this kind of approach in the past for the last decades, and there is no intention to change that. Of course, we are looking at improvements in 3 areas that we've been laying out and talking about in the past quite extensively as well. It's -- on the governance side, where we want to introduce common processes and professional ways of doing things. And also in areas like IT, HR, there's a common kind of way of doing things being looked at, and that's what we want to implement as a group. And then we're also looking for synergies in order to do things more efficiently within the group. But as I said before, there's no intent to change the profit and loss responsibility of the division and to all the regional kind of P&L that we introduced and that we have been successfully running for a long time.

The next question is by Vivek Midha of Citi.

So I have had a couple of questions on pricing, just following up on some of the comments there. You highlighted pricing negotiated with customers. I think your backlog coverage is pretty strong given the strength of orders. So could you maybe just elaborate a bit on those negotiations with customers? And maybe, could you also quantify the pricing assumptions within the revenue guidance? So what pricing contribution is embedded within that?

So first of all, let me comment qualitatively before Frank then will shed some light on more details. We are obviously in existing contracts with our customers where for material, for commodities, we have surcharge mechanisms in the contracts. That -- for other areas, we need to change contracts. We have to address our customers. For example, semiconductors or a major portion that we're seeing right now in our numbers and in terms of cost inflation is logistics. There's no regulation in the contract, and therefore, we need to approach and we are approaching our customers with the very clear message that we need to increase our prices in order to cater for these topics, and that's done very systematically right now. You might imagine that they are ongoing and very intense discussions that we need to undertake here. But this is on the way, and this is being done. And that's why Frank also said that we see that, over time, the effects of these negotiations will kick in. So there's kind of a delay in there.

Yes. Thanks, Jan. Vivek, I would say we would roughly -- you should roughly assume some maybe 2% of our revenues that would be stemming from price increases all over the globe. But please keep in mind as we have 2 very heterogeneous businesses, so to say, when it comes to the way of doing business, project business on the rail side and [ individual ] business on the truck side, we will approach those customers completely in a different way. We have those individual projects. For some, you can do something in individual negotiations. For some, we would have price sliding clauses intact. So it's globally, regionally different and it's from customer to customer, of course, completely different. And don't assume, so to say, like you would see in some B2C businesses, I don't know, a price increase starting on the first of February, 2% on each and everything. But to shed some light on your question, roughly that range of 2% that we would expect. And needless to say, we have, of course, also done something already in 2021, especially looking at aftermarket, but the bigger chunk will now come also with the OE customers.

That's very helpful. Can I just have a quick follow-up. You mentioned regional differences. I mean, could you give us any color on how those -- what those sort of regional differences are?

Well, it depends, of course, on the respective customers that you would have in different countries, and the standards of contracts with some customers or in some regions are different. In some contracts, you do have, for example, price sliding clauses where you would have certain months of delay until you are able to charge several costs to the customer. For some customers, you don't have those, you initially have to go into the dialogue. So I mean, these kind of differences as each and every project is, especially on the rail side, a completely different one. For example, in the United States, looking at [indiscernible], you would basically have, to a large extent, automatically those price sliding clauses in place, whereas in other regions, you don't. Just as an example.

And countries where a lot of the goods are imported obviously suffer more from logistics, additional costs than other countries where we have direct production. So that's kind of kind of business structure-related differences.

Yes. And not all the costs that the suppliers now would come knocking on the doors are the ones that are immediately covered in the respective contracts. Neither of our contracts with them nor in our contracts with the customers, so it would be an individual approach and customer by customer.

The next question is by Akash Gupta, JPMorgan.

And my first one is on component shortages topic. If you can provide an update on what you are seeing particularly on the rail side? I think truck side is very well understood, and we have seen comments from some of your suppliers. But more keen to know, any update you can provide on rail side where some of your customers said they are watching tight supply, and whether that could be a headwind in the course of 2022?

Yes. On the rail side -- Akash, thank you for that question. We had only a limited impact of the supply shortage -- of supply shortages in 2021, and almost no big impact on revenue development. In the last months, we see that the impact by supply shortages is strongly increasing. So far, we haven't seen negative consequences for our customers. These supply issues exist in the specific fields that we are seeing in the CVS arena as well as electronics, in plastics. It's even sometimes small [ C-pods ] that play all of a sudden a prominent role. And of course, it's an increase in commodities in pricing. So general inflation is also something that kicks into this business as well as opposed to last year, and it provides a situation to be managed.

And my second question is on CVS margin development in Q4. So if I look at your revenues, you've grown from EUR 785 million in Q3 to EUR 840 million in Q4, but the margins there were down by almost 300 basis points. I mean, you flagged EUR 15 million of additional costs, but I suppose those costs would have been in third quarter as well. So maybe if you can explain what was the factors behind weak margin in Q4 versus Q3? And if we look at sequentially in Q1 2022, what shall we expect there?

Akash. I mean, yes, we have seen -- either if you look to quarter 4 2020, a reduction on the margin side, but also if you look at the previous quarters' reduction on the margin side. And that is basically driven -- that weaker second half of the year by a very strong reduction on the market development in China as one thing. We have increased costs for R&D on the CVS side as we have also outlined with the content at the CMD in detail, what we intend to do. Those are things that will come later on, and then we will harvest in revenues to come. We have an increase also on the depreciation side, also based on capital expenditures in the past which is increasing quarter-over-quarter, so to say. And we have slightly negative impact also on the product mix side, and this can also happen from quarter-to-quarter at this point in time, I would say. So those are the major -- [indiscernible] you have a certain also in the truck business kind of -- normal kind of cost seasonality that -- then hits the bottom line in the end that is always kind of higher overall cost in the fourth quarter of the year somehow..

And then any experience to be going into Q1 like...

Yes. I would say, going into the first quarter, we should be with those impacts that we just, in general, discussed in regards to our '22 guidance overall and the aspects that are, so to say, a burden for us going forward should not, to a large extent, change the numbers. We do think it should be in that range of what you have seen in the fourth quarter being rather stable going into the new year, but it will be challenging to keep that profitability level due to the cost increases coming in, and partially a time lag exists towards the price spillover to the respective customers. So stable to slightly negative, I would say, in terms of profitability going into the first quarter.

The next question is by Ben Uglow, Morgan Stanley.

I had a couple. First of all, I just wanted to think about the -- the cadence of the orders coming in RVS. I like the chart that had the sort of order backlog position over the last couple of years since COVID. And obviously, you're going to have a pretty decent sales pattern over the course of the year, but my question is really to do with the order intake. You've said that book-to-bill is going to be above 1x in RVS for the course of the year, but obviously, you're going to have a fairly slow start in China. Do you expect basically to maintain 1x plus over the course of the year? Or is this a case of your orders are going to be slow for the first half, and then really good in the second half. So that was my first question. Secondly, on the RVS margin, if we look at the margin in the fourth quarter, keeping it simple, it's come down from 21% to 18%. And you've given us a breakdown between -- part of it was China, part of it was aftermarket share. Part of it was lower margin business or lower margin product areas. How much of that 3% is simply down to the China mix effect? Or is the majority of it due to China mix? Or are they kind of evenly split between those 3 buckets? Those are my 2 questions.

Yes, Ben, let me start with the first one. It's -- if you look at the rail business, it is generally very difficult to predict when certain and individual orders come in. So there's a general rule of thumb to say when the order intake goes, comes in at the OEs, then it takes 9 to 18 months until it finds its way into the books of suppliers like Knorr-Bremse, and -- but that can be shorter or longer, and therefore, it's kind of a smearing effect, I would say, across the quarters as far as order intake is concerned. And therefore, it makes only a limited sense in the rail business to look at the order intake on a quarterly basis. It rather makes sense to look at it, let's say, on a rolling kind of average kind of mechanism. And now looking at this, the big order intakes that I was referring to and the increases here on the OE side happens sometime in the second half of 2021. And just adding another 9 to 18 months that would then, at the end of the day, points at a time frame somewhere between middle of next year, end of next year and into 2023 when this would somehow materialize. But hard to predict when this exactly will be.

Understood. Just on that point though, are you -- when you look at the tender funnel today, is that tender funnel, that order pipeline, is that still as big as it was? Is it bigger? Is it smaller? Just -- I'm just trying to -- what -- I'm sort of not worried about, but we want to make sure that we don't have an air pocket on your orders for 6 to 9 months. And I want to make sure I'm not misunderstanding.

No, no. I think the pipeline also, as far as big projects in Europe, North America is concerned, is healthy and it's quite in order. So there's -- it might be that the one or the other quarter is going to be slow, but there will be other quarters like now or quarter 4 that will fill the orders at hand again, and therefore, there's no worries on our side that the market, in general, would not be intact to the contrary. We're seeing encouraging signs to stimulus programs in the U.S., in North America, in Europe, the clear intention to increase the freight -- the rail contribution to freight from 18% to 30% in Europe, so all of this requires investment and activities and that yields to, as we have also pointed out at the Capital Market Day, a 3% to 4% growth per annum continuously in next years to come, and we don't see any different view on the market compared to what we've been communicating by then.

Understood. So the second...

Yes, Frank will comment on this.

The second part of your question, I would say like this. First of all, the fourth quarter of 2020, if we look into the most recent years, it's been nearly the high point of profitability in railways. Some close to 25% EBITDA margin, and some 21%. But nevertheless, you are right. I just wanted to keep it at this line, so to say, for us all. To your concrete question, I would somewhat say from 100%, I would say 40% is the regional mix effect driven by China, the Chinese mix effect. Some 25% -- 25%, 30% is the brakes -- non-brakes effect, the product mix effect, and the rest is some of several cost headwinds like we had this provisioning, the EUR 8 million of the provisions. We have additional cost in the system currently because of we are moving the business from North America to Mexico, so we are ramping on the one side down, but still have the people on board. At the same time, we are ramping the people up in Mexico in Acuna, all in good faith with a clear net present value of this move. But temporarily, we have double cost, so to say. And we have towards the year and also the -- as Jan just outlined also, the increased freight situation and supply chain constraints and costs in that regard. So this is the third pillar, with also some 30%. So 40%, 30%, 30%, that's how I would somehow split up 100%.

That's very useful. I'll pass it on.

Next question is by Gael de-Bray, Deutsche Bank.

First, could you give us an indication on your overall cost exposure to gas and electricity cost? Then secondly, on pricing, could you also give us some color on the price realization you had in Q4, and given that everybody is looking kind of sold out due to limited supply, do you actually see less people now bidding on the various projects than perhaps compared to pre-pandemic level? And does it fundamentally change the pricing dynamics in the marketplace, you think? Something that would make it easier really for you to push up prices even more. And thirdly, given the structural trend towards digitalization, electrification and so on and so forth. Do you see today more or less synergies between RVS and CVS than before?

Gael, let me maybe tackle your first question. So overall, if I would use the headline of energy cost, I would say Knorr-Bremse is below EUR 100 million, in the range of EUR 80 million to EUR 90 million all in, so to say. This includes electricity, gas, oil and that stuff so to say. If we look at only electricity and gas, I would say it's maybe half of that, yes, so EUR 50 million maybe would be that range that we are having globally. So the exposure, so to say, isn't huge, yes. I mean, every penny hurts, needless to say, but it's some EUR 50 million, per annum, of course.

The price realization, that's a topic that obviously we can -- we are pushing through right now very, very systematically. The obvious situation of shortages on supply and also, let's say, the general supply situation and inflation situation helps to put arguments together for price increases. However, as you can imagine, this is always a very intense discussion that needs to be executed in order to get to the increases in the case of existing contracts. In other cases where there's new awards or new contract situation is different, and there we -- of course, right in the beginning, make sure that the right cost structures in there. Third question was considering the fact that there's a supply issue or less people bidding, we are not seeing a lessened or lower intensity in the market and in the competition, so there is no competitor who is currently not bidding. That's -- I wouldn't see as a situation. And I think the supply situation at the end of the day is being considered by the market and also ourselves as something that will balance out after certain period of time, will be longer with us than we probably all expected. But there will be a kind of a balance reached at least in the medium to long term, hard to predict when this will happen. And we don't see at this point in time that any competitors have been moving out of their activities or have lowered their bidding activities. Pricing realization and pricing dynamics, I think I alluded to that already. Digitalization and electrification. Yes. Certainly, there is common platforms, common knowledge and a common kind of know-how and people profile that's being needed in Knorr-Bremse to build up digital platforms, to make usage of data and do data analytics based on artificial intelligence. That's something where we see synergies with Knorr-Bremse as a company. On other side, obviously, there is -- by the way, also as far as data lake is concerned, is we use a common IoT platform within Knorr-Bremse. We just structured a data lake offering internally that Knorr-Bremse is using across the board. So you see we can leverage our scale here to develop the tools for our divisions once and then use them across the board. So I would assume -- my judgment on this would be that we rather see more synergies here across the company than less, and that's what you have been asking for.

The next question is by Marc Zeck of Stifel.

Just another question on logistics costs. If I'm right, you said that you expect logistics costs average to come down in '22 versus '21. Now if I listen to what the, let's say, major logistics companies like Maersk and [indiscernible] the expected freight costs will actually be up this year versus last year on average, even if, let's say, spot rates come down later this year. So what makes you sure that you can dodge that development if you have lower logistics costs this year than last year? That's my first question.

Yes, Marc. I mean, good question and also very helpful to clarify here if there's a misunderstanding in the room. I didn't talk about spot rates to come down. I said in our planning, which is, of course, based on the respective logistics streams that we would have and we would use and how we see a stable production on our side or at the supplier side, that our planning shows that overall freight cost should come down for Knorr-Bremse, and this is a result of multiplying the respective freight volume with the -- with the respective spot rates that we would anticipate. So that's important to understand. And we expect somehow that overall need to come down from EUR 65 million freight. And I include now, for the sake of explanation here, also some broker parts in that figure. EUR 65 million, we expect that to come down maybe to levels of EUR 40 million on the truck side. Whereas the freight cost should -- on the rail side maybe go up from this year, it was rather minor. So this year, in '21 was rather minor, EUR 15 million around -- that should go up to maybe EUR 30 million. So let's say, last year, we had EUR 80 million then together both divisions. And next year, it would be -- or this year, it would then be rather bought together EUR 70 million, yes. So overall, we would reduce that overall exposure for us, but that doesn't mean that the spot rates would necessarily go down. We see them rather stable to slightly increasing spot rates throughout the year.

That clearly answered my question. Then another one, maybe a bit more housekeeping, but on the Digital Automatic Coupler. If I look this up, there's like one major project from Germany or the EU, the DAC for EU project, and there are a couple of DAC producers listed. [indiscernible], for example, and some others, but not you guys. Is it -- could you just give me a bit of color how far you are on this project? And how you -- how will you compensate for a later start then, for example, uptake and then the others?

Yes. The DAC, so the digital coupler, is something that has not been approved as yet for Europe as a rollout, so it's something where politics are deliberating as to whether this is going to happen or not. We strongly believe that this is a strong -- there is a real necessity in terms of making freight transport on the rail side more efficient, and get this European target of moving from 18% to 30% really implemented. Therefore, this topic is completely new for each and every market participant. There's one or the other who moved in earlier. We are on the way of developing a digital coupler for the freight industry, and we'll have the first samples available during the course of this year. But at the point in time when this test started, we did not have a coupler available from Knorr-Bremse, but that will happen soon and will happen early enough to have a product portfolio that is highly competitive in place once the rollout would start. And therefore, we are very confident that in case a positive decision will be taken, that will be one of the important market players since we're very established in that industry. We have a long-term experience in the rail industry, and we have all the basics in there to be successful in the market as well.

The next question is by Sven Weier, UBS.

Yes. One follow-up question, please, and that was on the order intake question from Ben earlier. Because when we look at last year, obviously, you had an extreme Q2, Q4, right, more than ever, basically. And you also referred to the OEM orders, which I think have already been quite good before the second half of last year. And I was just wondering if I could get a guidance for Q1 order intake for rail out of you basically? Because last year was a very low number, and with all the things you mentioned, should we still expect that number to be down? Or how should we think about the Q1 orders given that the quarter is halfway through?

Frank will go through the numbers quickly, but what I would like to again emphasize is for the rail business, to look into a quarterly order intake makes limited sense. We need to look into a row of quarters and then accumulate. And I think the important message here is that we have an all-time high in orders in hand. Then projects will come over time. There will be a quarter where we will have a little, then there will be a quarter where we'll have a stronger order intake, so it really comes in a lumpy way and is not as kind of distributed across the world into little projects as we're seeing that in other businesses, and I think that's just important to note. This view on quarterly order intake is something that doesn't really reflect the business and the way ours is being conducted in a proper way. Look at the orders on hand is, I think, the more appropriate picture. Even if I understand this question completely that you're raising. And now, Frank.

Yes. Everything that you said, I fully signed off as well, clear, but you raised this question. And I mean, I can shed some light on how January went, and January went 10% above last year. I think that's -- books are closed for January, so I'm pretty sure on that. So it looks better as far as we are in February right now than previous first quarter. But keep in mind, I again said, I mean, you could have pushed out again now in March and all the figures collapse again. And then there, you have a great April or something like that, but January is 10% better than last year.

And, I mean, the lumpiness is deeply understood. It's just the point that last year, we had like 3 quarters in a row where rail orders were quite weak and then it really took the fourth quarter, and I was really looking more for steadiness maybe this year. And even if one or the other quarter is still a bit lumpy.

Sven, fully understood the back end of your question and appreciate it.

And [indiscernible], it looks rather more stable this year than it did last year, but yes.

The next question is by William Mackie, Kepler Cheuvreux.

Yes. My question really relates to during the call, you've discussed on a number of occasions that, looking to 2022, there will be notable differences between performance of each of the divisions in H1 compared to H2 as you work through the challenges of executing the order backlog, improving prices, managing the supply chain and other associated factors relating to mix, both regional and product versus aftermarket. To what extent can you give us a bit more shape on how you expect within your guidance, the first half, to play out in each of the divisions with respect to growth and profit development in comparison to the second? It seems like we should expect a continued downward trend in margin development in RVS and perhaps even in CVS before a second half recovery. But could you put some shape on that a little more, please?

Yes. What we're seeing right now is that we, on the CVS side, have the effect of still a relatively low demand in China due to the fact that the pre-buy effects last year took place because of the euro or China 6 introduction. There's still some 150,000 trucks out there in the field that need to be sold, and they would obviously be deducted from new trucks being built. And therefore, TPR in China right now in the first 2 quarters is going to be affected by that, and then probably these trucks will be -- will be sold and out in the field. And we expect then that this doesn't affect the market anymore. In North America and in Europe, we still see a very high demand in terms of trucks, so that this is just being curbed by the supply situation right now. So there's more demand than what can be delivered. And it depends much on the situation on the supply side, when and to what extent truck production rates will then grow in both North America and Europe, in fact, due to this constraint that we have there. So if you just sum up things that would then suggest that second half would then be stronger from a TPR perspective than the first half of '22. On the rail side, pretty much a lot of things depend on COVID and the rollout of the activities. And there, we see and expect -- continued kind of improvement quarter-by-quarter. At least from today's perspective, we're seeing that in an undistorted environment. As we said before, provided that political circumstances are not overwriting too much here.

So maybe, William, from my side, some additional comments. If we look at revenues and if we look at the same time, profitability, and if we look at RVS and CVS in a nutshell, it sounds very unsophisticated what I'm saying now, but we should have the quarter 1 to be the worst, quarter 2 to be better, quarter 3 to be better and quarter 4 to be the best. That's -- as I said, it sounds like unsophisticated, but that's just a simple result, and that is true for both divisions. For each and every division, that's just the situation currently.

I appreciate it's a complex business and geographically, an end market perspective. But thank you for the shape. One follow-up would relate to a question on net pricing around the OEM business. And again, it probably requires a gross simplification. But when you think about your ability to adjust pricing within the framework of your contracts in CVS and RVS with OEM customers, and then you look at the RMI or the cost changes you're planning, do you -- do you think you'll achieve a positive net pricing in 2022? Or do you think that there's going to be a lot more work required on the productivity side to maintain your goals for profit improvement?

I think that -- perfect question or a very good question, let me say. I think we touched upon that already at the CMD or myself, at least in my presentation will not be as positive net effect purely out of pricing. It will not be enough, and we have to do cost efficiency measures, negotiations with our suppliers in addition and seek every ways and means areas of the company in order to keep the gross margins here in the way we want them to go and not be dilutive. This is not our intention, and this is not what Knorr-Bremse stands for. And one of your colleagues previously mentioned in the old KB, so to say, we would turn around each and every stone. Be assured, we're also doing so. And not just starting now, so to say, this is what I indicated at the CMD as well. The company is working for roughly EUR 100 million of cost efficiency measures each and every year. But we need additional pricing euros, so to say, to compensate all those cost increases that we are facing. So that's a long answer to your question, but and the short is no. It will be negative, and the negative effect will be offset by our cost efficiency measures that we are doing.

But I think it's also important to state that with negative price effects we've been living for a long time. Usually in the automotive industry, also in the commercial vehicle industry particularly, there's a clear expectation that efficiencies kick in and that products are getting built and manufactured in a more efficient way, resulting in a rather cost or pricing reductions on an annual basis. So that's all new to us. What is -- obviously very different to what we had in the past is very strong inflationary effects that counteract our activities, and the price increases that we're seeing across the board in all different areas. And that's where we need to really address the customer and say that's something we cannot and we will not carry on our books. It's something that needs to be handed over to our customers in order to create a sustainable situation. And that's the background to what Frank just said.

There are no further questions for the moment. And with that, I would hand back to Andreas Spitzauer.

Yes. Thank you very much for all your questions. Yes, we hope you stay healthy and safe and enjoy the afternoon. Looking forward connecting with you next time. Thank you, and bye-bye.

Thank you so much.

Thank you. Bye-bye.

Ladies and gentlemen, thank you for attendance. This call has been concluded. You may disconnect.