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

Thank you, operator. Good morning as well as good afternoon, dear ladies and gentlemen. I hope all of you are very fine. My name is Andreas Spitzauer, Head of Investor Relations at Knorr-Bremse. I want to welcome you to the conference call of today, where we will present the preliminary results for 2024. Today, Marc Llistosella, our CEO; and Frank Weber, our CFO, will present the numbers and later discuss the numbers with you. The meeting will be recorded and will be available on our home page in the Investor Relations section. You can find today's presentation as well. It is now my pleasure to hand over to Marc Llistosella.

Many thanks, Andreas. Ladies and gentlemen, I would also like to welcome you to our Capital Market call for our preliminary full year 2024 results. Allow me to mention a special highlight this year at the beginning, we are celebrating an important birthday this year, Knorr-Bremse will turn 120 years. Georg Knorr, founder of Knorr-Bremse in Berlin, 120 years ago, he started out in a modern factory of just 165 employees, today, 120 years on, we operate worldwide and we are the global market leader. Georg Knorr laid the foundation. Heinz Hermann Thiele, shape the company. And thanks to his effort, made it the world market leader. The entire Knorr-Bremse team will continue on this successful path. Our clear priorities and sustainable growth, profitability and value creation. In 120 years, we have grown steadily aligned our portfolio with market demand and responded flexibly to changes. But at our core, we have always remained true to ourselves. We're innovative. We act as entrepreneurs, we want to get thing done. That is what has made us who and where we are. In this connection, I'm also pleased that I can continue to drive and shape the future of Knorr-Bremse together with my executive board team. As you know, my contract was recently extended by 5 years. I give my thanks to Reinhard Ploss and this entire Supervisory Board for their confidence in me and look forward to continuing working to get closely and trustingly. Let me now begin with the key messages of today. The war in Ukraine, multiple crisis and economic challenges, these were the topics that continue to impact our business last year. Nevertheless, there was resilience, strength in entrepreneurship. We have proven that we can be successful even in difficult environments, especially in this economical and globally, geopolitical tens times, we are more than satisfied with our business performance. At the same time, we have secured long-term refinancing with our latest successful bond issue, which included our first green bond. A rock solid balance sheet gives us the basis we need for the future. We have achieved strong results overall with record order books, which give us a solid foundation this year. Our Rail division delivered record levels for revenues and order book. In addition, Rail once again accounted for a share of revenue of more than 50%, fast creating an important basis for the entire group's profitable growth. Our Truck division generated a double-digit return despite the extremely difficult market condition. It currently has to contend with. That is a strong performance responded to the market weakness at an early stage by taking countermeasures. That enabled us to secure our results. We are fully on track with our Boost 2026 strategy program, and it is announced have implemented important measures as part of our brownfield activities, including the successful streamlining of our portfolio with the sale of our 4 companies. As a result, we have already carved out more than 60% of the planned revenue volume. Our brownfield activities or house keeping as well, as we call it, also includes strict cost discipline and permanent questioning of existing processes and structures. The result is a significant improvement in profitability, but operating free cash flow that reached the highest level in our 120 years company history. Ladies and gentlemen, let us now take a look at our financial targets for 2024. We were able to achieve or even surpass all our targets for revenues, EBIT margin free cash flow in the past fiscal year. Our record order book or low leverage and high liquidity confirm our strong resilience and show that we are in top financial shape. At the same time, they are the foundation for sustainable growth. Let me continue with an overview of our Boost program on Slide 5. We have set out to accomplish a lot under the strategy program, which we launched in summer of 2023. After all, we want to be substantially quicker, more efficient than develop greater strengths. Our Boost program is clearly aligned to creating added value. All initiatives must contribute to this goal. Our profitability has top priority. We have implemented more than 1,000 measures globally with great success. We are reducing our costs, we're streamlining our product portfolio and at the same time, we are investing in digitalization and automation and have also launched first AI initiatives in order to benefit from the new opportunities. We are also investing in profitable new business fields, such as the Rail Signalling and Technology Business in North America. The acquisition of KB signaling from Alstom in September 2024 opens up new opportunities for Knorr-Bremse in the highly promising North America market. The successful entry into the attractive and high-margin signaling technology business means we can push ahead with creating our own value added and generate sustainable growth with new and digital solutions. At the same time, we are also increasing our share of revenue in the more stable and more profitable Rail business and reducing our dependency on the cyclical Truck market. In addition, we were and we are currently conducting an intensive strategic discussion and evaluating how Knorr-Bremse should be positioned in the future. We're not shying away from any option. And in general, I do not want to rule out a possible expansion of business. Our focus on increasing value and sustainable profitable growth is and will remain very clear. Our portfolio measures with a total revenue volume of EUR 1.4 billion are shown on Slide 6. As part of that, we're challenging all of our business areas, in particular those that deliver relatively weak results. Wherever the analysis indicated that we are not the best owner of a particular line of business, we initiated a consistent separation process or launched a firm turnaround plan. We are aligning everything towards ensuring sustainable value creation. We have made great strides in optimizing our portfolio over the past year. There's a clear focus on core competencies and performance, 4 units have already been successfully sold since the beginning of 2024. Keep electric from the Rail division and safety direct GT emission standards and Sheppard from the CVS Truck division. To further sell it, processes have already been initiated. We expect that the solid measures will increase our operating EBIT margin by around 130 basis points for 2026 versus 2022. A comprehensive program of fixed measures is also underway and is delivering greater efficiency worldwide. And here, too, we always focus on where we can become faster and more agile. Where can we become even better where we're already good at, where are talking and tackling in some cases, of outdated structures and where our previous branches were not sufficient, we are making adaptations quickly and flexibly, fail fast. As part of that, we had to make adjustments in many areas, bundle areas of responsibility, centralized group-wide tasks and also optimize our global footprint. Always with the aim of making our company more powerful, more cost conscious and more agile and more modern. In addition to the efficiency programs we have successfully launched to date, we are already looking beyond 2026. That is why we have expanded our optimization measures globally. The clear assignment of global responsibilities, the prioritization of projects or efficient controlling, adjust some of the measures that support our goal of improving margins under the Boost program. Furthermore, additional sustainable efficiency measures such as expanding global shared service or strengthening sites with low cost levels will also increase Bremse's profitability beyond 2026. Let me now give you a few examples from our operating business to show you where we were particularly successful last year on Slide 8. At product level, we made a brilliant impression this year, particularly on the stages of the leading trade fairs Automechanika, InnoTrans and IAA transportation, where we demonstrated our technological solutions to international experts and arose the interest of our customers with numerous innovations. Our Rail division again captured important contracts in 2024, among other line of things, Knorr-Bremse will equip at least 246 -- 246 CITYLINK streetcars from Stadler. Reception solutions will be responsible for providing us comprehensive aftermarket services for 22 years. This makes Knorr-Bremse a key equipment partner for Stadler in a long-term and large-scale mobility project. Knorr-Bremse will also fit 42 further regional trains of breaking entrants and sanitary resistance for Alstom. This is another large follow-up order from the platform partnership between Alstom and Knorr-Bremse under which train fleets in several European countries are already being equipped. In 2024, our Truck division successfully pressed ahead. We're streamlining its portfolio in order to concentrate even more strongly on its core competencies moving ahead and to make a business even more focused and profitable. As already briefly mentioned, this included the sale of the Safety Direct product line, the sale of GT Emission Systems, a leading supplier of emission control system for diesel engines in commercial vehicles. The disposal of Sheppard, a manufacturer of commercial vehicle steering systems in the North American market, which was another important milestone. Let us now take a look at the current market situation for Rail and Truck as well as our market expectations for the year 2025. Looking at the Rail market, we can see that underlying demand is very strong in all regions, something that is reflected in the consistently high order intake and record order books, thanks to researching and passenger numbers in most countries, both in the aftermarket and the OE segment. The Rail division made significant contribution to the good overall result. We assume the plan that demand will remain strong in the current fiscal year reflected in an expected book-to-bill ratio above 1, our customers' order books are full, and that makes us optimistic about the outlook for the current fiscal year. The backlog of all the orders, which was heavily affected by inflation has been largely handled as set. Overall, the inflation-related effects on our business has thus been minimized. As expected, the current market environment in the Truck division is difficult in the 3 major regions of North America, Europe and China. We expect the market environment to remain weak in the first half of the year. We assume there will be an increase in the Truck production rates in the second half of the year, and therefore, a recovery of the market in the U.S., Europe and China. This assessment has been indicated in many discussions with customers. In the current year, we see growth opportunities in aftermarket, business in particular. And we have high hopes that Cojali will continue to perform very well. In this challenging market situation, we are using the time to further optimize our costs and structures at Truck division with efficiency and foresight in order to strengthen and future-proof our business. I would now like to hand over to Frank, who will outline the preliminary financial figures for the past fiscal year 2024. Frank?

Thank you very much, Marc, and welcome also from my side. Let's now turn to Slide 10 to discuss the financials for the full year '24, first. Knorr-Bremse generated revenues of almost EUR 8 billion, more or less a stable development on reported level year-over-year and slightly up in organic terms. On a divisional level, RVS more than compensate for CVS market-driven top line performance last year. From a regional point of view, the APEC region and South America contributed to revenue increase, while Europe and North America reported a decline. Our operating EBIT margin benefited from a strong bottom line improvement in Rail, a good regional mix, very good aftermarket in Rail, operating leverage in general as well as our Boost efficiency measures. Accordingly, our group's EBIT margin rose by 100 basis points to 12.3%. The development of raise EBIT margin was particularly pleasing, seeing an increase of 130 basis points to 15.6%. Important reasons for this increase in profitability in '24 was the good aftermarket business as well as the closing of the price cost gap, which will also be supportive for this year. CVS was able to increase its EBIT margin as well by 40 basis points to 10.4%. This was a great achievement considering the weak Truck market, especially in Europe, a strong demonstration of CVS resilience. Order intake and backlog also achieved great results, stable levels year-over-year and ranging only slightly below record levels. This development underlines KB's outstanding position in both markets. The strong improvement in cash flow is a major highlight of '24. We were able to improve the free cash flow quarter-over-quarter last year again. Overall, free cash flow for the full year came in at EUR 730 million, a historical record figure, if you exclude nonoperating proceeds, which we had in the year 2019. We promised to improve the cash flow, and we strongly delivered. I would also like to thank all colleagues, business partners and customers for the good collaboration and dedication in the last year. Let's continue our path on the way to new strengths together. Let's now focus on our balance sheet on Slide 11. A top priority of my finance policy is and was and remains a superior financial profile, especially important in times of uncertainty like nowadays. In addition, it provides a high level of flexibility for our strategic goals and operations at the same time. A strong level of equity remains important to us. At year-end '24, Knorr-Bremse reached a level of more than EUR 3 billion and a good equity ratio of 32%, slightly down year-over-year, but higher in absolute terms. The slight decline of the ratio is purely driven by the prefinancing of the '25 bond maturity of EUR 750 million. Without that, the equity ratio would have remained at 35%. Our liquidity increased significantly to EUR 2.3 billion. This is driven by the issuance of a dual tranche bond amounting to EUR 1.1 billion in September, including our first green bond. With the proceeds, we strengthened our position as a trailblazer of sustainability and green mobility for our customers. We financed the acquisition of KB Signaling. And as already mentioned, we refinanced existing liabilities in the amount of EUR 750 million maturing in September of this year. Consequently, net debt increased by 45% to EUR 912 million, leading to a very comfortable net debt-to-EBITDA leverage of 0.7. Our credit ratings with A- and A3 remain on a very good level with a stable outlook underlining, again, our strong financial profile resilience. Let's move to Slide 12. CapEx in '24 amounted to EUR 350 million in relation to revenues, roughly 4.4%. This is 20 basis points and EUR 80 million below previous year. Following several years of higher CapEx, we adjust the target range of CapEx to revenues going forward from originally 5% to 6% to now 4% to 5%. The reason for this is that quite a few projects have now been completed with revenues kicking in over time. And it is important for us to increase CapEx, capital efficiency further, which we are driving also with footprint optimizations globally. Regarding R&D expenses, we will target the ratio towards 6% midterm after 6% to 7% in the past years. The reduction will be done especially in the Truck division. Also here, revenues should kick in and we focus on R&D portfolio streamlining. Reported net working capital increased by EUR 164 million year-over-year, solely driven by the acquisition of KB Signaling. Without this effect, net working capital would have been nearly on the previous year's level. The slight increase in scope of days year-over-year is driven by the strong market downturn in CVS, especially in half year 2, which we couldn't fully equalize in the supply chain at the same time. We continue to take action across all working capital areas in particular, further efficiency improvements on the inventory side via our collect program, despite all measures in customer receivables and inventories, we still took care of a rock-solid supply security for our customers could not completely decoupled from the market. As a result of improved EBIT and capital efficiency, our [ ROCE ] increased from 19.5% to 20.8% without KB Signaling even to 21.2%. This figure represents a good development and is fully in line with our target of more than 20%. Thanks to our strong financials, we can both provide a solid return as well as a growing dividend to our shareholders, and at the same time, invest in future products and system solutions, strengthening our competitive positioning. I would like to provide you more details regarding our free cash flow on Slide 13. We could improve the free cash flow sequentially last year, reaching EUR 482 million in the last quarter alone. Overall, free cash flow came in at EUR 730 million on a full year basis, the best figure ever in the 120 years history of Knorr-Bremse. If we consider 2019 numbers, had a massive positive sale and leaseback effect. The improvement of free cash flow was driven by a higher qualitatively good EBIT, lower capital expenditures, lower tax payments as well as by the before mentioned net working capital measures. We were able to basically improve in all relevant dimensions. A very important KPI derived for us is the cash conversion rate. In '24, it reached 113% in operating terms, adjusting it even downwards for negative noncash onetimers that burdened our net income. This is an extraordinary figure well above the 96% in 2023 and again, well above our target range of 80% to 90%. Let's move to Chart 14. Also in '24, we have consequently focused on integrating ESG into our business operations and processes, value chain activities and our decision-making. This is not only reflected in our strong ESG ratings in '24, but displayed by the positive development of some KPIs such as the reduction of CO2 emissions for Scope 1 and 2 as well as the respective emission intensity by 20%. With the publication of our green finance framework in September, even prior to the issuance of our green bond, we are continuing our journey to integrate sustainability into our financing structure. The framework strengthens our sustainability goals and support Knorr-Bremse efforts in promoting sustainable, mobility and decarbonization of our own operation. It enables us to issue green finance instruments to finance eligible green projects, which occur in the form of CapEx or OpEx. Let's turn to Slide 15 to discuss the financial highlights of the fourth quarter specifically. Order intake was again very strong with more than EUR 2 billion, for RVS down 7% organically year-over-year, which was driven by the Truck markets as expected. Revenues amounted to almost EUR 2 billion and as in the 3 previous quarters, book-to-bill ratio was again above 1, an important and good support for our future capital -- capacity utilization. Operating margin amounted to 12.2%, almost on the same level as in the previous year. Rail contributed to this development with very strong figures, while Truck margin decreased as expected. Free cash flow improved further and came in at EUR 482 million, as mentioned. And it followed the typical pattern throughout the year. The first quarter is always the weakest in the fourth quarter, usually the strongest quarter in terms of our free cash flow generation. In '25, we do expect a similar development. Let's take a closer look at RVS performance on Slide 16. In terms of order intake, RVS again, recorded more than EUR 1.1 billion, posting a growth rate of around 12% year-over-year. Thanks to the KB Signaling acquisition. Leading to that, the growth was particularly strong in North America, while Europe as well as APEC remained stable. China declined slightly as expected. Current Rail demand is still very strong and should continue throughout the whole year with half year 1, stronger than half year 2. Consequently, for the current quarter, we expect that RVS should be able to post an order intake well above EUR 1 billion, driven again by some larger orders. Book-to-bill ratio stood at 1.05 which means RVS reached a book-to-bill ratio at or above 1 for 13 quarters in a row now. Again a new record in KB's history. In '25, we expect that raise book-to-bill ratio should also be above 1. As a result, order backlog reached new record levels with more than EUR 5.4 billion in organic terms, meaning excluding [ KB ] and Signaling order backlog rose by 8% in quarter 4 year-over-year. The high order backlog provides a strong basis for us going into '25 and the years beyond. Let's move to Slide 17. Quarter 4 revenues amounted to EUR 1.07 billion, an increase of 7% year-over-year. Our aftermarket business grew in every region year-over-year in the fourth quarter. As a result, it's very profitable revenue share increased to 57%. From a regional point of view, revenue growth was fueled by North America, while Europe and APEC remained stable or almost stable. In Europe, good aftermarket business almost fully compensated the slightly declining OE sales. North America recorded strong increases in both segments driven by KB Signaling. APEC region saw OE decline while aftermarket grew. China also saw growing revenues in aftermarket and declining OE business as expected after a very strong Q2 and Q3 results, which included even some pre-buy effects. We believe China should face some normalization in high speed and aftermarket demand this year. Nevertheless, our Chinese revenues should stay flat year-over-year, even taking into account the good developments in the year '24. Operating EBIT margin recorded an increase of 80 basis points to 15.6%, driven by operating leverage as well as efficiency and the lower share of legacy business. On top, a positive revenue mix driven by the before-mentioned high aftermarket share, impacted the operating margin positively. In Q1, we expect the profitability of RVS should be slightly up quarter-over-quarter. For the full year '25, the operating margin of RVS should be well above 16%, including an improvement over the course of the quarter this year. Let's continue with our Truck division on Chart 18. Order intake in CVS amounted to EUR 887 million, a decline of roughly 15% year-over-year, but 8% higher quarter-over-quarter. All major regions had to deal with weaker Truck markets overall. CVS couldn't escape these market developments. And given the dimension was also unable to fully offset them with other content per vehicle. Weak order intakes from Europe, North America and APEC came in as expected, while China posted higher numbers. Book-to-bill reached 0.97 in the past quarter and our order book with more than EUR 1.8 billion at the end of December remains on a good level and well above our long-term average. Order intake in the current quarter is expected to show only a slight improvement quarter-over-quarter as the Truck demand is still challenging. Nevertheless, the start into the year was quite promising. Going forward, we expect a rather sequential pickup of Truck demand, which should then be reflected in the development of our order intake along the year. However, we are prepared for different scenarios. As a reminder, let me walk you through some of our measures again, high flexibility at our sites and facilities for temp workers, short-time work at European plants, if necessary, robust pricing, resilient aftermarket business, which represents significantly more than 30% of revenues in Europe and North America. And last but not least, our operational and structural cost optimizations via our Boost program to counterbalance the market challenges ahead. Let's move to Slide 19. Revenues declined by 14% to EUR 909 million -- EUR 919 million. This development was expected and a solid performance in such a changing environment. OE business in CVS as expected, decreased in all regions, except South America, mostly in Europe followed by North America. Aftermarket business, on the other hand, saw more robust and saw a stable development in North America and even slightly increased in Europe and APEC. In the European market, our revenues have experienced a 19% decline due to the weak demand in both the Truck and Trailer segment with heavy-duty Truck production rates declining over 30% in the fourth quarter alone year-over-year. Higher aftermarket, which generates nearly 40% of our European revenues and our disciplined cost measures were the main reasons for the strong outperformance of the market, a clear sign of resilience again. Same picture for APEC, where CVS could also outperform the decline in Truck production rate of minus 6%. Revenues in North America also declined, mainly driven by OE business, but CVS was also able to show resilience here. If you take into account the decrease of heavy-duty Truck production rate by around 10% in the same quarter. Coming to the bottom line. Our operating EBIT of our CVS division amounted to EUR 87 million in the past quarter, down around 26% year-over-year. As a result, the operating EBIT margin declined by 150 basis points to 9.5%. The lower margin was mainly impact as explained before by the market-driven operating leverages as well as the regional mix. Our supportive pricing strategy, the success of our efficiency measures and the higher share of revenues in the aftermarket, where in total unable to fully offset all these enormous negative market effects. For '25 we expect almost flat revenues compared with the reported figures for '24. This development will be supported by a stable aftermarket business and our content per vehicle growth. But at the same time, be impacted by the 2 disposals with more than EUR 200 million of revenues that we have sold, as mentioned before. As a result, CVS, then should be able to reach an operating margin of around 11%. We expect the current quarter to be the trough of the year on or only slightly above the margin of the previous quarter. But that profitability should increase steadily in the following quarters. CVS development is subject to certain Truck market recovery in half year 2. With that, I hand over to Marc.

Thank you, Frank. Now let's have a look at our guidance for '25 on Slide 20. Based on the assumptions outlined on the right side of the slide, we expect the following full year 2025, a revenue range of EUR 8.1 billion to EUR 8.4 billion despite more than EUR 200 million of this investment last year. Operating EBIT margin between 12.5% and 13.5% and a free cash flow between EUR 700 million to EUR 800 million. This outlook fully supports the target for 2026 that we set in our strategy update. We're absolutely on track, and we will deliver on our targets. We have had a good start to the new fiscal year so far, which fully supports our outlook. Ladies and gentlemen, as you can see, we have systematically implemented what we set out to do a year ago. We are delivering on what we announced. We have made great strides forward in our transformation. But as a global market leader, we are not fully satisfied with what we have achieved yet. In 2025, we want to implement the next level of our Boost strategy program, which clearly focuses on sustainable and profitable growth. Thanks a lot for your attention. Thank you. Thank -- Andreas?

[Operator Instructions] We are starting with the first question from Akash Gupta of JPMorgan.

Good afternoon, Marc, Frank and Andreas. My first one is on Rail industry where you describe current situation, you are no longer mentioning supply chain problems with specialist supplier for the Rail industry that you previously mentioned. So maybe if you can elaborate, is this all addressed? Or is this maybe less of a problem than what it used to be and whether you able to overcome with duplication of supply chain? Or is it the same suppliers now back on track on the delivery commitments?

Yes. Thanks, Akash. I mean to set things straight. It was never a really huge issue like it was on the Truck supply chain side some 2 years ago. It was always a completely different situation. We felt the need to mention it that not after CVS gotten basically back to 99% of all fine level that there is still a bit of issues on the Rail side it has gotten further better this low amount of noise, I would say, on the supply situation. It has gotten better again. And it's, as always, a very low disruption only for us. So it's not of that importance, but it has gotten still better.

And my second question is on your Boost Brownfield fix-it. So in sell-it part, you disclosed that you have achieved progress like based on the 4 entities that has been sold, you have achieved 80 basis points margin improvement versus 130 basis points that you targeted, while you have not given any comment on where are we reaching the 70 basis points margin improvement from fix-it. So any color, any granularity on where we should be by end of the year on reaching the 70 bps by -- that you target by end of 2026?

Thanks, Akash, you're right. On the fix-it side, we have promised from 2022 to '26 to get to 70 basis points. And I would say roughly at this point in time because it's not so easy to calculate it, because some of the assets in the meantime have been sold. So they account for the first year kind of under the fix-it. And so it's a bit complicated. But I would say roughly at 50% level, we are currently and we should be at 2/3 level of this moving into '26. So by the end of this year, the precise answer to your question would be roughly 2/3 of that 70 bps we would have achieved.

Then the next question is from Sven Weier of UBS.

They also relate only around Slide 5 in terms of the improvement measures. The first question I have is should we understand that your fix-it measures should be mostly completed by the end of 2027. And then you could potentially reach your new margin target in 2028 at the earliest? Or should we expect that to carry on still longer so that the earliest opportunity would be a bit later. And the second question is really on the R&D side. And as Frank, you mentioned you go down to 6% from roughly 6.5%, mean is that improvement then mostly on the Truck side, so you would be improving the Truck R&D ratio by 100 basis points and bring that in line with the Rail division.

Yes, thanks Sven. First question in regards to fix-it. I mean there -- I would say there are 2 elements to that fix-it side, as you can see some parts of the fix-it program overall that are kind of precisely focused on getting the right portfolio together in terms of performing assets and performing companies. And I would say there you're perfectly right that we expect everything so to say, to be brought to a well-performing level by '26 so that these measures should conclude by then. In regards to -- when it comes to global footprint optimization, this is something that is, for example, never ever ending. This is, of course, the ultimate task for each and every management on a regular basis, look at where the markets are developing, are we close enough to the customers, et cetera. So this is something where we might now do a bit of bigger moves over the next 2 years, but this is something that is something that is very sustainable as the nature of the topic is a rather strategic one, you have to permanently somehow adjust your organization and act to the current situation. So I would say most of it, yes, but some topics would linger on beyond 2026, it's the nature of the game. The second topic is it was important for us to mention clearly that we try to bring the ratio down as we also expect to grow, this is, as a consequence, doesn't mean we cut down on R&D costs, not at all. So in a growing -- with growing revenues for the group, we will still be investing in R&D in the future, but relatively less. On the Truck side, you're perfectly right. The biggest efforts we do currently around the portfolio prioritization, we do in Truck and bring those levels the ratio below the levels of RVS to have the most efficient capital allocation that's possible in regards to the future investments. And by the way, same is true for CapEx as well. As I'm not hearing [indiscernible] was that okay, Sven?

Sorry, I'm here. Can you hear me?

Yes.

Yes, sorry for that. No, just a quick follow-up on my first question in terms of 2028 being the first potential year of kind of a new margin target because the question was really around are you done by the end of 2027 then mostly? And optimistically speaking, 2028 could be such a level? Or should we break ourselves for something bigger than this?

I take that, '26 will be the year, where we first meet the lower line of our EBITDA funnel. So 14 is, for us, the understanding that over the future cycles, we never want to be falling above -- below the 14. In order to reach that, we have to get to a much higher level in '27, '28, '29. We cannot say now in which here. But in order to be very clear, we see ourselves volatile between a 14 and other number, which is quite higher. And that's our aspiration. So '26 is not the end of the story, '26 is just the full milestone of the story. When you we're asking, what is the end of the story? There is no end of the story. Our aspiration is to compete in industrial good assets in the market. That is our aspiration. Our aspiration is not to be just at 14, as flash in the pan and then go back to another way, this is not. Our understanding is very clear, and this is why in the first step, first 3 years, first step is we want to be very, very clear with our brownfield. But everything what comes down more and more and you see it on the slide with greenfield has to contribute to secure the 14 and to reach much higher. So when you ask what is in our target margin in '28? There is no target margin. There's a target funnel to reach. And this target final starts with 14 as a low level and everything above is then also our target. So it can be that in 2028, we will be much higher or it could be, but we have not a target, where we say and that's it and that we have to secure. It's an aspiration, it's a journey, and it's a full wording, where we don't have defined so far the end of the funnel.

[Operator Instructions]. Moving on to the next question, it is from Gael de-Bray of Deutsche Bank.

Good afternoon, everyone. Look, the first one is a kind of a strategic related equation. I can see the greenfield measures appear to be very focused on RVS, while at the same time, you're talking about reducing CapEx and R&D intensity for CVS. So is the combination of CVS and RVS under the same roof, still the right combination, the right strategic approach for Knorr-Bremse? And then I have a second question around Rail spending. I know you're guiding for a book-to-bill above 1. So it seems perfectly fine for this year. But there is always a time lag between what your customers, the OEMs see and what you see yourself? Just my question here is, have you seen any early sign that the constraints around public budgets in Europe and potentially the ongoing shift towards more defense spending could eventually have a toll? Could have a negative impact on the Rail spending at some point?

So to the second question, we haven't seen anything. And what happens in the future and whether Mr. Putin will be the best friend of Mr. Trump, which nobody has foreseen yesterday, and seems to be, today, the fact of the union, we cannot predict. But one thing for sure, our urbanization strategy is working. The trend is a fact, especially in areas which are mainly in Asia, we will see a trend towards trains. And we see also orders coming, huge orders coming from Asia more and more to our customers, and we are prepared to take it. So the answer is very clear. We don't see shift, we don't see any form of shift from public spending to military, which is to our disadvantage. Your first question was -- I think it's all question. Why do you have Trucks, when Rail runs so fine? And then are you still having in mind to keep the 2 divisions together. Yes, we have because Truck is massively contributing in terms of contribution in terms of cash, in terms also of balancing, when it comes forms of joint efforts. It comes to cost in SG&A. We couldn't afford it with Rail alone. It would also harm our Rail margins if we would not stick together. Now you can ask rightly should not be that the synergies, can you quantify the genesis? I cannot quantify the synergies in bps, but I can tell you, I would guess 100 at least in its favor of Rail and also for Trucks. So long story short, Truck and Rail, very good. So in the last year, 2023, there were 50-50, this year it's 55-45 in terms of revenue. It could be that this year we see a 60-40. This is nice because the margin in Rail is higher and in Truck is not. But what you will see in 2026 that the Truck is picking up massively, Truck is cyclical. And what we have to see, and we want to see that is by lowing down now the breakeven of Truck significantly over the next 12 months. We will see ourselves in a very good position when in 2026, the Truck markets are coming up. And then we will see ourselves in a good position where we see much better margins than we see today. So long story short, the 2 divisions are cooperating perfectly. We see synergies more to come, especially when it comes to IT and AI, where the differences in purchasing the differences and accounting, the differences are vanishing more and more away, and with the right attitude, we can also leverage and also exploit this kind of synergies.

The next question is from William Mackie of Kepler Cheuvreux.

A couple of questions. It seems to me that it's a very large and important question about considering a new leg to Knorr-Bremse which would significantly shift the balance from your core businesses and impact our thinking for your investors. So maybe just to start off, can you at least open the box and share a little of your thoughts about where this discussion on new leg is going, how it's being debated at the Supervisory Board level and what sort of efforts are thinking you have at your leadership level, please?

Okay. Thanks for that question. So the third leg, the myth, which is now accompanying for the last years. First, if you would plan it we would not tell you, sorry to say because you would destroy the prices of potential assets. Second, it could be also an organic growth, which is already starting in which when it comes to a certain form of threshold, we'll make them public. Third, if it comes to a moment that we think that the ownership of the management of that is better allocated in an independent unit, then we will do it. But currently and for the next months to come, we have no plans to go for a third leg. We have no plans to announce a statement that one of our internal units is big enough to stay alone or in terms of management allocation to stay separately. That means 3 times later eventually, I don't tell you or we don't tell you because we don't want to poison our prices. And third, it can come from within.

Very clear message. The second, which I'm sure is more tactical and to the pleasures of volatility created by Trump that you mentioned, tariffs. Can you just maybe update us on your current tactical thinking around tariffs where the group is exposed to relevant cross-border flows of value-added and how you may have to adjust if worst-case scenarios unfold?

Yes. Thanks, good question. I mean you know the history of this company and how this company developed over decades. We are a decentral organized company. We are where the customers are, we are where the markets are, we have a lot of high local content in most of the areas, which suited us very nicely in the times of the supply chain disruption. We have not changed that approach and we are even fostering that. So we are already on a very high level of local content in the respective markets, including North America. If we take the value add that we are driving in North America and the materials we are, so to say, sourcing from North America and compare that with the levels that we are importing from abroad, we are above levels of 70%. So on a very good level, if you also what we think the competition and others are doing in that market. So we are pretty comfortable. Do we have a remaining exposure? Yes, of course, as we do have important materials coming from Asia, from Europe into North America, a bit also for Mexico, a bit from Canada, but not a lot, not huge numbers that you should expect. And needless to say at the basis, we know we have full transparency upon. It's just about the factor that would be applied in case, if anything would be applied as a tariff that's then, of course, up to the political decision. We have a good transparency. Our local content levels are high. So I think we're pretty comfortable in a pretty comfortable situation.

Next question is from Lucas Ferhani of Jefferies.

I have 2 questions, if you do them one at a time. The first one is on the restructuring adjusting the production footprint. Can you give us a bit more view on what are the regions where you're looking at making some of those changes and how you got to the EUR 50 million in Germany? And is it kind of severance kind of packages and that would be mostly related to Truck or is there also things you can do on the production repricing in Rail. And also it seems to be kind of an ongoing discussion around whether these other happens or not? Do you have a timing in mind? Are you waiting to see maybe how H2 unfolds before kind of launching this restructuring?

Yes, I start with the timing. This timing has nothing to do with development of half year 1 or half year 2. And I try also make the bridge now to Marc, who also needs or wants to say something in that regard. So it doesn't depend on the quarterly development of the market. We are taking the actions as we see a strategic need. I think we clearly outlined that we don't need to do these measures in order to get our '26 targets achieved, definitely not it's about the strategic thinking and the strategic optimization of the company way beyond '26 so it has nothing to do with the half year 1 or whether half year 1 is a bit better than previously thought or something like this, this is really independent. It is a strategic need and something that we see. And before I hand over to Marc, I'll just tell you once more even most of the measures, I would say, are at least half of the measures of the 50 you mentioned will be in the Rail segment. Especially there you can see the strategic thing is we have, by far not yet on a level where we say we have reached the ultimate that Rail can deliver. So we are even thinking about footprint restructuring things also in Rail to boost Rail even beyond where they could be next year. So I think that's a good thing, and we're, of course, thinking about the region of Europe, where we do have some production facilities in countries that are maybe not the highest -- the best competitive ones in the world, but Marc will tell you a bit more on that. Just that you know, it's not Truck restructuring only as an ocean immediate need. It's about a strategic thing that we're doing.

So I jump into that. And first of all, absolutely right what Frank said. Mr. Ferhani, I would say the following. The breakeven of the 2 divisions are not efficient, they are too high period. The personal costs are too high, the location footprints are not optimized, they are now started to be optimized, the engineering footprint is not optimized, they will be optimized. All of that is not only a reduction. This is a reshuffling. This is a reshuffling of capacities. It could be strengthening in some areas, it could be a weakening of other areas and also indications. #2, all the restructuring, which is taking place is now on both sides of [indiscernible]. So that means we will see it in Trucks, we will see it in Rail, and we will see it also in the headquarter. So we have a lot of things to do, especially when it comes to IT. So the IT is also part of the restructuring. So that means what are we doing, for what are we paying, for what are we not paying in the future and have we ever really levered the synergies of both of the unities, we don't have. So this is very clear. So beside that, we will strengthen our focus because as you rightly know, EUR 1.5 billion of the EUR 3.78 billion of Trucks is generated out of America, right? So a good 1/3 of our business, more than that is in America. In Rail, we were before our acquisition, we were just EUR 300 million to EUR 400 million, out of EUR 4 billion, so nearly 10%. Now with the acquisition of EUR 300 million, we are now in the range of EUR 700, EUR 700 is still not enough to be rightly allocated in the region. So that means we are relatively strong in Rail in Asia. We're relatively weak in Truck in Asia. We are relatively strong in Rail and Truck in Europe, and we are relatively unrepresented in America with Rail. So that gives you an indication where we have to grow and where we have to go. And why do we that? Because exactly as the colleague of you has asked, I think William [indiscernible] asked that. Do we have any issues with potential tariffs with potential awards and tariffs? Of course, it could cause some irritations. Of course, we have already proposed and prepared ourselves for the last 2, 3 years to be not dependent from any President, not from any President. But to be very clear America and American market is extremely interesting for us. Why is that? The market is semi protected against Chinese contenders, which the European market is not. So you can imagine why also our competitors make a very, very good margin in America, and that's exactly where we want to be also, not only in Trucks, but also in Rail. In Asia, we are extremely well located in China, with our Rail operations, but also here, we have to be very clear. We have to be self-autonomous when it comes to any forms of tariff wars and we are working on that. In terms of Trucks, we are relatively weak in China, we're relatively weak in India. That has to be addressed, it has to be changed. What is good is that we could see already self healing capacities in Japan, where we're merging and sizing -- rightsizing the operations, which we have in Truck and everybody was telling us that they cannot make any money out of Japan and you can tell you since 12 months we're doing it. We are making money out of Japan with Japanese customers, and it is a very good market for us. So it can be done, sometimes even without an acquisition. Hopefully, this gives you a little bit of insight how we think.

And the second one on Rail. The first part would be just on the signaling expansion that you talked about. Can you tell us a bit more how you want to do it to Europe and also going into digital? Obviously, that's in the deal it's mostly focused on the conventional portfolio. So how do you kind of make that move? And the second one is just on the -- the Rail was talking about slightly declining sales, I think, in the equipment side in Europe and China. Just wondering why are we seeing maybe some kind of weakish volume in OE given with quite strong kind of order trends or maybe just their lumpiness?

I don't know where you got the numbers. In China, we see -- we bond. Yes, in 2023, we had only 100 to 120 high-speed trains. Last year, we have seen 240 high-speed trains only in China alone. So the good thing in China is that our Chinese customers are reflecting to our high superior quality and also to our technology superiority ground. So that means we see very good penetration in metros. We see very good unsold REIT coming, and they come back to us when it comes to high-speed trains. So we can't see any form of deterioration of the Chinese market, which I remember in 2022 and 2023, this was part of the story that we have an end of this party, yes, that is why. But it is now normalizing. And I think we got very well acquainted with the normalization of the Chinese market, and we have very good connections to our customers, especially in Rail, where we see a high appreciation of technology, high appreciation also of our quality and on-demand supply. So in China, I would slightly disagree with your question or let me say your statement. In terms of the rest of the Rail business, where we see ourselves increasing on the digitalization. The thing is relatively clear, we are getting more and more requests that's not only the braking control system, but also the technology, which is required by more and more providers. They want to have more answers. They want to have more services, which can be provided by first-tier suppliers, which we are. In terms of signaling, there's even a German and European request to us to step into this business. So we have your reputation. This reputation is taken, and it's also granted, if you would enlarge our product scope. So that means you're right when you say in America, you have a first step taken. Now what step is the rest of the world? We will be very careful because we have a reputation to lose. So whatever we do in this area, will be step by step and it could be organic and it could be also unorganic be significant. Another question is, do we have an idea? Yes, we have more than an idea. And it's very clear that our next focus is the affiliated countries in America like Australia, South America, South Africa that are the countries which can be easily supplied by our services and also our product services solutions from America. But when it exceeds this market, it's very clear, we need another step to take.

Then the next question is from Ben Uglow of Oxcap Analytics.

It's actually kind of similar to the one before. But then Marc, I mean, the point that you make about China you're guiding to flat revenues. And I guess that's the question, unless high speed is going down significantly or there's something differentiated on ridership. Why wouldn't revenues be better this year in China? That's my first question.

Ben good to hear you again, first of all. I mean we -- our flattish development guidance for China is not new. I mean, as Marc outlined, the high-speed numbers, but metros are on a very difficult level. I mean ever since Evergrande happened in China and the real estate markets went down south. There has not been a significant demand out there. It's a lumpy figure over the last years around 5,000 metros each and every year, where in the past, we had $7,500 or even more. And there, we have to be a bit careful, when it comes to the expectations for the metro market going into the future. That explains one thing that offsets a bit on the high speed side of things.

Understood. Understood. And then a follow-up for I guess, well -- for either is the market or, let's call it, the downside of the section, is that there aren't that many available decent assets in the Rail. And if you want to grow inorganically rather and you've got a great stepping stone significant building block with the Alstom Signaling transaction, that's great. But it's not going to be that straightforward. The pipeline is not that easy. Did you agree with that? Is that correct or not? And to what degree has the Alstom Signaling acquisition kind of opened up that world to you? Has it become easier to identify new targets?

The first question I would like to answer, no, they are targets. And the second is, yes, it's easier as experts on your side to define and to identify potential assets, which are accretive to our overall business.

So we should expect that when you're making decisions, whether inorganic and organic, there are avenues to explore in the next 1 to 2 years. It's clear.

Yes.

The next question is from Tore Fangmann, Bank for America.

2 from my side as well. Just one of the -- you have expectations around the recovery in CVS slipped to the right a little bit and look a little bit more apparent in North America, despite the orders actually being a bit better. And is there any view from your side on prebuying here? And then secondly, could you tell us a little bit about how much of the growth comes from the content per vehicle? And do you expect this to accelerate with the new Truck model launches over the next quarter or years?

Yes, thanks for the question. First of all, recovery, I wouldn't say it slipped to the right side. I think all the conferences I've been over the last months, I've always been when I was able to do so, I did draw even a picture of how we see the market somehow, and we saw that there will be a draft and it's getting better, we think within 25 over the quarters. So that still kind of remains intact. And as you also know, the stock levels -- the inventory levels of the OEMs have been reaching quite a high level by the end of quarter 3, levels came down from 90,000 units now by Q2 production -- production reduction down to a level of 80,000. The longer-term average over the previous quarters have always been around 60,000 to 65,000 in the North American market. So there's a bit of a risk in there, which we also need to first consider, when we talk guidance going into the future. And we see a bit of a risk, so to say, and that's why we have given the guidance, we have given it that also production is not immediately jumping up and that's our guidance. In regards to prebuy, we also stick to what we have always said in that regard, we do think that only at the very end of '25 we might see a first order intake as Tier 1 supplier, the first signals of a prebuy not earlier. I don't think that the fleets would need 2 years to replace their fleet to go for the maximum potential of prebuys, but maybe rather 1.5 years, and that would imply that the first suppliers maybe get order intake uprise towards quarter 4 not earlier. Content per vehicle, I think a good question as well. Do you also see in the guidance that we have been saying that basically, in a nutshell, CVS will have stable revenues year-over-year, almost stable revenues year-over-year, EUR 210 million go out because of these investments. So you can say that we are compensating EUR 200 million basically in the wider terms with content per vehicle I would say, fully on track with what we said so far. So that looks good compensating for the divestment.

Okay. As we see there are no other people who want to ask questions. Thank you very much for participating today. We wish you a great spring, which hopefully comes up soon. Thanks everyone, bye-bye.

Thank you. Bye-bye.