Edited Transcript of KBX.DE earnings conference call or presentation 11-Mar-20 12:15pm GMT

2019 was another year marked by the strong operational execution of our strategy. We consistently divested unprofitable units. We increased the aftermarket contribution to 35% across the group. We continue to sharpen the focus of our M&A activities on growth and innovation.

And with regard to the last bullet point on the slide, please allow me to thank my colleagues, Ralph Heuwing, Peter Laier and Jürgen Wilder for their very strong support during my start and my onboarding at Knorr-Bremse.

As you learned last week, we have found an excellent successor to Ralph Heuwing in Frank Markus Weber from Daimler AG. Ralph will leave us at the end of April. And with the arrival of Mr. Weber on August 1, our Executive Board will be completed again. In the interim periods, I will additionally take on the tasks of the CFO.

Allow me to sum up some of the highlights of the past year. We won major international projects, both large and small, including several systems for Alstom’s new high speed train and a multiyear contract to supply 3 million actuators in the truck sector in Europe. With our investments in Railnova and RailVision, we’ve made important steps in the ongoing ticket digitalization of our system solutions. And the celebration of Mr. Heinz Hermann Thiele’s 50th anniversary with the company actually has shown us and has shown you again the passion, the commitment and determination that enabled him to make this company what it is today, the global market leader for braking systems in the rail and the truck industry. And important to mention time and time again, we are not operating in the automotive industry. And today, more than ever, the fundamental difference between the development of the passenger car and the truck industry is particularly striking.

So when we look at our results across the company, our dynamic results for 2019 actually confirm our solid business model. Order intake was up by almost 1% to EUR 7.1 billion, and we benefited from a very strong quarter 4 here. The order book grew again by 2.8% to almost EUR 4.7 billion, a strong and good starting point for a challenging year 2020. 2019, Knorr-Bremse increased revenues by 4.8% to EUR 6.9 billion. The Rail and Truck division boosted their revenues by 5.6% and 3.8%, respectively. Once more, we improved our EBITDA margin. Reported earnings grew to 19.8%, and operating earnings grew to 18.8%. Respectively, we achieved our guidance well for 2019 despite a challenging market environment in the truck business. In the Rail division, we even exceeded our target margin. Naturally, the division is benefiting from the high demand for sustainable transport and can gain further market share with its systems solutions. In an increasingly complicated market environment, the Truck division demonstrated the resilience of its business model. Contributing to this was a good aftermarket business and increasing content per vehicle and early efficiency measures. The aftermarket business has also recovered after several weak quarters.

With this, I would like to hand over to Ralph to take us through the details of quarter 4. Over to you, Ralph.

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft – CFO & Member of Executive Board [4]

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Yes. Thank you very much, Bernd, and also warm welcome from my side as well.

Let me continue with the financial results of the fourth quarter, starting with Page 9. Despite the challenging environment, order intake in the fourth quarter improved substantially year-over-year and even more strongly when compared to the third quarter of ’19. On group level, it was up 10.2% compared to the same period last year and reached EUR 1.9 billion. The organic increase in the quarter was 8.6%, a great finish at the year — at the end of the year, providing a strong base for 2020. Our book-to-bill rate of 1.18 in the fourth quarter was very strong compared with 0.92 in the third quarter 2019 or 1.07 in the fourth quarter of 2018.

In the Rail division, as discussed in previous quarters, order intake fluctuates with influence from large orders. For the 12-month period, however, order intake in Rail grew at 5.8%, in line with our midterm expectations.

In the CVS division, after the pronounced drop in the order intake in the third quarter last year, the rebound of October continued and led to a moderate full year decrease of 4.9%. We remain confident about our positive midterm outlook for both divisions. This assessment is based on our solid backlog and the industry dynamics driven by megatrends, urbanization, mobility and the global goal to reduce our carbon footprint. The order book of EUR 4.7 billion at the end of the year was 2.8% higher compared to last year’s level. This provides a visibility of more than 8 months.

Let me continue on Page 10 with our revenue strength. During the fourth quarter, revenues on group level was stable year-over-year supported by favorable FX development. Top line on group level came in at EUR 1.6 billion. With this development, we reached our full year 2019 guidance in absolute terms. As anticipated, CVS revenue development was affected by the lower number of trucks produced both in Europe and in North America. Our Rail division, however, fully compensated for this in the fourth quarter. The Asia Pacific region continued to grow strongly in both divisions, reaching an overall increase of 25%. The other regions have been impacted mostly by the Truck cycle.

I will continue about the development of our profitability on Chart 11. On a reported level, we finished the year with very strong EBITDA margin of 21.3% driven by a book gain from the sale and leaseback transaction of EUR 45 million in the past quarter. We had already announced this during November. Operational EBITDA in the last quarter of 2019 reached EUR 304 million compared with EUR 320 million in the previous year. The year-over-year decrease was primarily driven by the continued slowdown in the truck market but also by an adverse effect in FX and some one-off charges at group level. We had additional restructuring costs of EUR 3.1 million for the closure of the Wülfrath plant in Q4 2019 on top of the EUR 16.4 million we had recognized by the third quarter of 2019. This finance charge was necessary in concluding negotiations with the workers’ council. Accordingly, operational EBITDA margin reached 18.7% in Q4 compared with 19.8% in the Q4 of 2018. On a full year basis, we delivered an operational EBITDA margin of 18.8%, which is fully within the guidance range of 18.5% to 19.5%. You can find more details on this in the backup section of our presentation.

Let me now continue with the divisional view on Slide 12 with the Rail division. In the fourth quarter of 2019, order intake of RVS was significantly up by 21%, fully driven organically. Unlike the second or third quarter of 2019, in a year-on-year comparison, this time, the order lumpiness was in our favor. In the fourth quarter of 2019, we were awarded some big contracts for passenger coaches like in Northern Africa, where we won a double digit million euro order, or in Eastern Europe for more than EUR 20 million. We also received the first orders of the contracts for the TVG — TGV from Alstom which we had announced in September of 2019. Demand in Asia Pacific was strong and not only driven by China but by India and Australia, too. Our Rail business in North America reflects a weaker situation in the freight markets. Within our OE mix in this region, freight represents more than 46% of revenue, but on a group level, it is only 4% of revenue. Our book-to-bill ratio strongly improves to 1.32 compared with 1.04 in the previous quarter and 1.14 for the same period last year. At the end of December 2019, the order book reached EUR 3.6 billion, which provides a visibility of almost a full year of revenue.

Moving on to revenue and profitability for the Rail division on Chart 13. In the past quarter, revenue increased by 4.3% to EUR 865 million, the sale of Powertech reflected for the first time in this number. Hence, organic revenue was actually up by 4.5% — excuse me, by 5.4%. Revenue in the aftermarket and service business was nicely up across all regions. In total, it grew approximately 10% in the fourth quarter year-over-year. Our strong growth in the aftermarket overcompensated the OE development, which was predominantly impacted by the project-related timing of revenue recognition. In Europe, top line decreased in the OE parts of the business. On a subsequent level, subsegment level, the main drivers were high-speed and metro. Locomotives contributed positively.

In Asia Pacific, OE revenues were up even stronger than the aftermarket, especially the passenger segment is again worth mentioning but metro and regional commuter, too. On the other hand, we experienced weaker developments in the field of locomotives.

In China, in particular, the higher utilization of trains and an increasing number of high-speed trains entering the first phase of overhauls were important drivers for the market — for the continuous growth in our aftermarket business. As a result, our aftermarket and service revenue grew by more than 10% year-over-year. The second biggest revenue driver was the OE metro segment in China, which has already doubled in the size compared with the high-speed segment.

In the region North America, revenues benefited from good demand for our aftermarket and services business, mitigating again lower revenues from OE. Within OE, freight segment effectively contributed to lower revenues year-over-year.

Given the favorable project mix and higher share of aftermarket revenues but also thanks to the discontinuation of the Powertech losses, fourth quarter of ’19 operating EBITDA margins bounced back strongly compared to the previous quarter and even surpassed the previous Q4 2018 margins.

Let’s now move on to the Truck division with Chart 14. As we all know from recent months and quarters, our customers, the truck OEMs, recorded significantly — significant declines in their own order intake beginning last summer. The U.S. truck market was particularly affected by this development. Our own order intake reflected this with a strong correction in the third quarter of 2019. However, as already explained in November, the situation started to improve. From today’s perspective, Q3 looks as if own order decline was exaggerated. Subject to the effects of COVID-19, we expect the underlying demand situation to normalize in the coming months. We also expect the European truck market to remain tight in the coming months and quarters ahead.

Order intake for the division was EUR 771 million in the fourth quarter of 2019, only 3% down compared with the fourth quarter of 2018 on nominal figures and 7.1%, down organically. This decrease in order intake was driven by Europe and the U.S., while China surprisingly showed a rather positive momentum. At the end of the year, the order book of our Truck division stood at 1.13, expectedly down 17% compared to the year-end of 2018 but almost unchanged compared to the previous quarter. This provides visibility of 4.1 months of revenue.

Let’s move on to Page 15. CVS posted revenue of EUR 756 million for the fourth quarter. Compared with last year’s figure — or previous year’s figure, this is a decrease of 5.2%. Organically, revenue declined by 9.7% versus the same period last year. We outperformed North America’s and European — the European truck production rates declines, thanks to the constant increase in market share gains. In China, our fourth quarter revenue grew more than 50% compared to a TPR growth of 26%. In the context of declining OE revenues, our aftermarket ratio as a percent of total revenue picked up quite strongly. We believe that the destocking in the aftermarket workshops and amongst the OEMs that we experienced for the — for a few quarters might have come to an end, and revenues have started growing again. Q4 2019 revenue development in Europe was burdened by pre-buy effect in the first half due to the introduction of intelligent tachometers. Additionally, the market reached a more normalized level after strong demand in the last couple of years. In the last quarter, CVS achieved an operational EBITDA of EUR 113 million and operating margin of 14.9% compared with 16.3% a year ago. The main driver of the decline in profitability was, of course, the negative operating leverage resulting from the decline in revenues. However, at less than 20% for the like-for-like business, i.e., outside of Hitachi and the Wülfrath plant closure, it was an expected level. The successfully implemented cost efficiency program and the release of temporary workers across European and North American plants had a positive effect on the bottom line and helped contain the impact of the market situation.

Overall, the fourth quarter of 2019 was in line with our expectations with regards to the decline in sales and efficiency measures. From today’s perspective, the measures introduced are efficient for CVS to achieve our 2020 target, provided, of course, that COVID-19 does not leave major traces.

Summing up our quarterly and full year performance. I’m very pleased we delivered what we promised for the first full year since our IPO in October of 2018. With this, I’d like to return back to Bernd.

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Bernd Eulitz, Knorr-Bremse Aktiengesellschaft – Chairman of Management Board, CEO & Director of Employment Relations [5]

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So thank you, Ralph.

Before I move on to our guidance on Page 17, I’d like to address the coronavirus and what it means for our business. Our top priority has been our employees. In January, we took the first steps to protect them. A central task force was set up. Our employees in China were supplied with the respiratory marks, and first rules for conduct as well as travel regulations were implemented. We are in permanent contact with all of our employees and partners in China and other countries to ensure that we are up to date with the latest developments and we react quickly and decisively when necessary. Currently, only one employee, a field service engineer in Germany, has tested positive and is being catered to by medical services. Luckily, there has been no connection to office, so it remains an isolated case up to now. Our plants in China have all resumed production, and more than 80% of our employees are back to the sites. On average, production has returned to 80%, up to 90% of target capacity by today.

Of course, it is still too early to comment on the overall impact of the virus on our business. However, what we can say is that in February itself, the first full month affected by the outbreak of the virus, sales in China was around EUR 60 million below our budget, which is actually very reasonable. From today’s perspective, we are confident that we can make up for this shortfall by the end of the year, also thanks to the economic stimulus provided by Chinese authorities. You might have read that the Chinese authorities have issued early orders for additional locomotives and investments into high-speed trains.

With respect to our supply chain, our consistent effort to localize and our approach to dual sourcing has proven worthwhile. Up to now, our supply chain has not been affected, and we have not had to let down any customer. We continue to take a very positive view on our business in China and obviously, we’ll further expand our commitment in China. Naturally, we are closely monitoring developments worldwide and obviously, currently, with a greater focus on Europe and the U.S.

If I move to Chart 18, let’s look into what we expect in 2020. As usual, the outlook for 2020 is under the disclaimer of the political and macroeconomic environment and, this time, obviously extended by the effect of the COVID-19 virus on the world economy. For Rail, we are expecting good growth mainly in the passenger segment and the aftermarket sales as our installed base continues to grow. For Truck, we anticipate a slightly lower truck production rates with a regional variation between North America, Europe and Asia, weakest in North America with potentially down to 20% to 30% relatively to 2019.

With the help of our cost efficiency programs and the aftermarket business, we will counteract. Despite the weaker environment, we increased investment in research and development to drive tomorrow’s technologies in e-mobility and autonomous driving.

We move to Slide 19. We, therefore, expect a stable fiscal year in 2020 despite the lower truck production rate. In figures, we are forecasting revenues between EUR 6.5 billion and EUR 6.9 billion and an operating EBITDA margin in the range of 18% to 19%. In case the recovery from the virus in China continues the way we see it right now and the economy does not spiral into recession, we feel we should be able to manage the year well.

Now after presenting all these figures, I would like to now give you an outline of our strategic initiatives. Knorr-Bremse’s vision is strongly shaped by the people who work for and with Knorr-Bremse. We are shaping the mobility of tomorrow and driving innovations for sustainable system, solutions and mobility. With our products and our corporate responsibility, we are helping to solve the great challenges of our society. This motivation has driven our employees for many years and is actually the great legacy of Mr. Thiele, and it shows no sign of fading. On the contrary, the role that the company can and must play in our society is growing in importance, and we address this with enthusiasm.

On Slide 23 — 22, the corporate strategy was formulated and communicated roughly 1.5 years ago for the IPO in 2018. Since taking over as the CEO in November last year, I’ve engaged in many discussions and have come to the conclusion that Knorr-Bremse’s positioned exactly as it should be and works on the right topics. So, respectively, there will be no revolution in strategy but rather a continuous process of evolution along the development of our markets. Our corporate strategy is geared to the major megatrends of urbanization, sustainability, digitalization and mobility. We will continue to extend our innovation leadership while further developing and leveraging our global presence. Expanding our profitable aftermarket business and continuing to improve our efficiency will play a decisive role here. And of course, we will continue to work on our efficiency and control our costs closely. We aim to achieve organic growth of between 4.5% and 5.5% with an EBITDA margin expansion of 150 basis points relative to 2017 up to 2022, as we have promised in our IPO.

We’ll move on to Chart 23. In order to prepare for future growth, through research and development, we once more increased our efforts, our expenditure for research and development for 2020. 12,000 patents and more than 3,600 employees in R&D speak for themselves. That’s more than 10% of our workforce focused on innovation. Let me talk about 2 examples to illustrate this.

The first one comes from the truck area. And you’re well aware, we bought into steering business, and there is a very strong logic for that. For autonomous driving in the Truck segment, it is essential to full and redundant control of the driving dynamics. With the integration of steering systems in Germany in 2016, Hitachi in Japan in 2018, the joint venture with Dongfeng in 2019 and Sheppard in 2020, somewhere in the next 3 months, we have expanded our portfolio by steering expertise for trucks and are now a strong #2 in the global markets. By combining braking, steering and intelligent control, we now master the entire driving dynamics of a truck. It’s all about safety. Thanks to our system competence and the sophisticated modular system of the new global, scalable, electronic brake control, we’re able to meet the high requirements for redundancy and safety in road traffic. we thus meet the mandatory requirements for autonomous driving. Accordingly, we are working with various partners on automated driving functions up to fully automatic driving. Alongside e-mobility, this is the major future topic in the truck industry.

We move on to Rail. In the Rail segment, I would like to address a whole portfolio of developments in the aftermarket sales. We call this field RailServices. As the global market leader for braking systems, we have an exceptionally broad installed base in rail vehicles on all continents. We supply them with reworked components and even completely new technologies. Our modernization and digitalization solutions thus lead our customers into the future. With a train service life of up to 40 years, our service ranges from the replacement of obsolete components to replacement of third-party components to the complete overhaul of e.g. trams. With new technologies, these then enter the next 20 years of operation. The division is also benefiting greatly from growing demand to make existing solutions viable for the future, e.g. through e-mobility, retrofit solutions for diesel locomotives and digital solutions.

Let’s move to Chart 26. I would like — now like to highlight a part of our corporate strategy that was previously maybe placed a bit more in the soft category but is now coming sharply into focus. We recognize climate change as one of the most pressing challenges of our time. As an industrial company operating worldwide, we at Knorr-Bremse attach great importance to climate protection and aim to make a significant contribution to achieving climate neutrality. After 10 years of our corporate responsibility initiatives and 5 years of our first climate strategy, we have renewed our commitment with a new ambitious climate strategy that forms part of an ESG excellence initiative. We commit to halve our CO2 emissions by 2030. In addition, we will become climate neutral as early as next year, 2021, as one of the first major industrial companies. These targets are in line with the requirements derived from climate science to limit global warming to a maximum of 1.5 degrees Celsius in accordance with the Paris climate convention. To reach these targets, Knorr-Bremse intends to halve the CO2 emissions caused by the energy consumption of its plants and offices worldwide and its vehicle fleet by 2030. This equates to an average reduction of 4.2% per year compared to the baseline of 143,000 metric tons of CO2 emissions in 2018. Furthermore, starting next year, we will minimize CO2 emissions by purchasing green electricity and offsetting the remaining amount with high-quality certificates.

Also, our products are making a vital contribution to climate protection. By definition, our Rail division operates in a sector that benefits from the expansion of public transport and efforts to shift freight traffic from road to rail. And also our Truck division makes a considerable contribution to reducing CO2 in production and fleet consumption. Even today, 9% of our revenues are achieved largely, thanks to our ability to return products to the production cycle we are remanufacturing and overhauling. International rating agencies such as EcoVadis, MSCI and ISS-oekom, and last week, actually, the new DAX 50 ESG have assessed this and confirmed it by awarding high ratings to Knorr-Bremse.

Let me give you a few examples on the next page, Chart 27. This actually shows how we have managed to reduce the CO2 emissions of the whole life cycle of our products, from production through operations through recycling and then disposal where necessary. You see that we were able to significantly reduce the CO2 emission up to 50% of some of our products. But let me also point at a very interesting innovation, and that shows how our engineers look at things. On the right-hand side, it’s the active caliper release. It’s a small but very sophisticated device that ensures that the brakes open completely and there’s no friction. And this mechanism helps the operator to save 1% of its fuel consumption, obviously, again, contributing to reducing CO2 emissions around the world.

On the last slide, Chart 28, let me conclude by returning to the promise of our IPO. Provided that the political and macroeconomic environment remains stable, we had announced average organic growth of 4.5% to 5.5% over the period on average. And we have committed to an EBITDA margin improvement of 150 basis points from 2017 onwards to 2022. And despite the current truck production rate downturn, we consider this forecast to be tenable and confirm our medium-term forecast.

With this, I would like to end my presentation and hand back to you, Andreas.

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Andreas Spitzauer, Knorr-Bremse Aktiengesellschaft – Head of IR [6]

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Yes, thank you, Bernd. Happy to open to now start the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Ingo Schachel of Commerzbank.

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Ingo-Martin Schachel, Commerzbank AG, Research Division – Head of Equity Reseach [2]

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My first question would be on your strategy in steering, which seems to play an important role in your strategy update. The way you illustrate it in your Slide 24 with the fourth missing parts that are coming to play, it looks like you’re trying to suggest that Sheppard is the last asset you needed to complete your portfolio on the steering side. What should we expect as the next steps? I mean do you need more bolt-on acquisitions? Do you have everything you need and now go for more greenfield CapEx to tap the geographic markets where you’re not yet strong? Or is it just really about smaller steps, incremental R&D and so on now? What’s happening from here?

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Bernd Eulitz, Knorr-Bremse Aktiengesellschaft – Chairman of Management Board, CEO & Director of Employment Relations [3]

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So Sheppard is — well, first of all, thank you, Ingo. Sheppard is an important acquisition because it opens the U.S. market. You need to keep in mind that in the U.S., the trucks have a different design with the long snout that basically caters to a different geometric design of the steering components. With buying Sheppard, we opened into this market and we get a significant market share. Now we are present in all key markets around the world. Now we are in the process of integrating the steering with the braking system. And I can share with you that at our test sites, for example, Arjeplog in Sweden, where we test trucks on ice, these systems are already in operation, and we can show to our customers how the redundancy works and how the integration works. So that was an important step. Now what we are doing with the acquisitions, clearly, we’re upgrading quality, we’re upgrading production to the level of Knorr-Bremse’s requirements, which is well perceived and highly appreciated by our customers. But I think that was a very important major step to complete the steering acquisition strategy. And I believe that our company announced this approach roughly 2 years ago as a string of pearls approach.

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Ingo-Martin Schachel, Commerzbank AG, Research Division – Head of Equity Reseach [4]

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Okay. And the second question would be on the margin target and 150 basis point margin expansion in the midterm. If we compare your margins today to where they were at the time of the IPO, the rail vehicle system segment has already made lot of progress or effectively already achieved 150 basis points improvement, and commercial vehicle has not. So from here, do you see margin upside in both segments, or would you say RVS is already where it should be and can lean back and now it’s up to commercial vehicles to deliver. Where do you see the margin upside from here?

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft – CFO & Member of Executive Board [5]

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Yes, Ingo, I think leaning back is not our philosophy. We see upside potential across Rail, Truck and also the other line in our P&L. On Rail, with continued growth and a continued increase in aftermarket share, as we announced, we believe that over time, there will be further upside. On Truck, coming out of the truck of this year, we believe that this will also strengthen our profitability, also benefiting from the cost measures. And then we, of course, also have some extraordinary items in the other categories at group level which we expect not to repeat in the future. So all these will contribute to the strengthening of margin towards 2022.

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Ingo-Martin Schachel, Commerzbank AG, Research Division – Head of Equity Reseach [6]

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Okay, that’s very clear. And maybe just as a quick housekeeping question to finish. On the last call, you spoke about the conversion of your ERP systems from German GAAP to IFRS to be finished before Easter or before you leave the company. Is that still the time line? Or would that happen a bit later?

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft – CFO & Member of Executive Board [7]

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Yes. We are — this is this is a project which stands on several different legs. We have already made significant progress. We are confirming the reporting dates for the year 2020 as we had put them on our website. But this will not be finished on Easter. We will continue to work on this also over the course of this entire year into next year. We’ve for example, already improved our POC calculation and automated that. We have accelerated the report processing. And we — because we have found that we can still further align our chart of accounts across the different companies, 150 companies, we’ll need a bit more time during the course of 2020 to complete those efforts. So you can expect that reporting dates of 2021 will be a further acceleration from those dates which we published for 2020 of this year.

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Operator [8]

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Our next question comes from the line of Iris Zheng of Crédit Suisse.

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Xiaolu Zheng, Crédit Suisse AG, Research Division – Research Analyst [9]

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Bernd, Ralph and Andreas, I’ve got a few. Shall we go one by one. I guess, my first one is on trucks. The order intake was very much stronger than consensus, at least than what we had. And could you maybe comment a bit more on this and how this turned out, say, against your original internal expectations in Q4 and if it was ahead of your expectations as well? And could you maybe point is to areas which have outperformed in Q4 versus your expectations?

And secondly, just on the most recent conversations you’ve had with your OEM customers, what are they saying? I mean more like in January and February after situations have changed a bit?

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft – CFO & Member of Executive Board [10]

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On the order intake, Iris, you will remember that in the Q3 presentation, we had exceptionally also showed October, because we needed to put the Q3 order intake reduction into context. It was a very weak third quarter, and we believe this was a more of onetime correction, cleaning up orders between ourselves and our customers. You will also remember that the same happened in a pretty pronounced manner at the OEM level, 1 or 2 quarters before, yes? So we showed already that October was a lot stronger than the average of the 3 months before. And that actually continued throughout the rest of the year. And as I said, I think in hindsight, one can say the swing — the downswing was a bit too pronounced in the third quarter for this to be sort of an indicator for the times to come. Our guidance, which we had already indicated to in November, we keep and confirm based on our customer conversations. The year had started solidly. But of course, what is unknown is whether there will be a demand slump following a reduction in transportation activity going back to the virus spread. This, I think, nobody can answer precisely at this point in time.

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Xiaolu Zheng, Crédit Suisse AG, Research Division – Research Analyst [11]

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This is very helpful. And the second one is on Rail. Firstly, just on China, so is it possible that you could share maybe how much your Rail business in China grew in the quarter because the full report before report is not out yet. And because you mentioned aftermarket is up 10%, and it will be good to know how much — how OE has performed as well.

And secondly, can you maybe comment a bit on what you are seeing in the market on both high-speed rail and metro side? And how you think you have performed against the market?

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft – CFO & Member of Executive Board [12]

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Yes. Our Asia Pacific Rail business grew double digit in the fourth quarter. And it also was a strong region for the full year. Within Asia, China performed very nicely. But as I said earlier, India and also Australia also performed very solidly. So we are basically continuing the story that has happened for the last 3 quarters and don’t see any particular change. And as far as aftermarket is concerned, that was also a good development in the fourth quarter, but I think I mentioned that some of the OE segments grew even faster than aftermarket.

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Xiaolu Zheng, Crédit Suisse AG, Research Division – Research Analyst [13]

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Okay. Very helpful. And secondly, on margin, because it looks like for 2020, if we just take the midpoint of the margin guidance, then it’s slightly lower than what we had in 2019. And that’s after the disposal of Powertech and also like a gradual phaseout of the general contracting business, which should be a tailwind for the margin. So on underlying business, I mean, is there any product mix and regional mix we should think about?

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft – CFO & Member of Executive Board [14]

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Well, let me first start by saying that the full year of 2019 and, in particular, also the fourth quarter, was above our expectation in Rail, yes? You saw this. It’s a fact. And therefore, of course, it doesn’t mean that things will continue from this level onwards. As we had highlighted already in the commentary on the third quarter, we said margins also move up and down with project mix, and this is a fact. So if you consider the fourth quarter in Rail to be bit out of the ordinary, then the base from which we see 2020, I think it gets more normal. That’s the first point. Second point is we also will increase our efforts on both R&D and on IT in order to push our innovation agenda and to become more efficient. We don’t want to save on this at the expense of the future. So there will be, in some way, a load on the margin coming from this part. Then we also — we tend to be cautious. I think this is important to highlight. We tend to be cautious, just knowing that project mix changes over time. And then I think there’s one final point. I don’t want to stress it too much, but I think it should be understood. Our strong revenue development in those boom years of 2014, ’15, as those come into overhauls and so on, that is a positive for the aftermarket, but it also means that some provisions which had been built during that time have been released step by step. And this has been supportive for the margin. And of course, at some point, because of the lower revenue in ’16, ’17, we don’t see the same effect ever in the future. So this is also one aspect to be understood.

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Xiaolu Zheng, Crédit Suisse AG, Research Division – Research Analyst [15]

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This is super helpful. Can I just follow up on that? Just you mentioned on the increase in IT and R&D spend. Is there a way we could quantify what is the magnitude of the impact, like in basis points terms, if possible? And secondly, I mean if it is possible, is it possible to quantify also the margin impact from the provisional releases from the previous years?

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft – CFO & Member of Executive Board [16]

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So on the first question, I think that we can speak more clearly, I think, in the range of EUR 10 million of additional spend that we are planning. On the second, that’s actually hard to say because it depends on whether we are able or not to release that provision, yes? And that is a question of whether there are any warranty cases or not. It may or may not have an impact. I just wanted to explain the phenomenon.

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Operator [17]

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Our next question comes from the line of Akash Gupta of JP Morgan.

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Akash Gupta, JP Morgan Chase & Co, Research Division – Research Analyst [18]

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My first question is a follow-up on medium-term margin guidance. And I’m wondering if you can help us with the phasing of this approximately 180 basis points margin improvement that you will need from midpoint of 2020 guidance to — in the next couple of years to reach to your 150 basis points midterm margin guidance? So that’s question number one.

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft – CFO & Member of Executive Board [19]

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Yes, I think I had provided already an answer to this in — towards Ingo Schachel. So if we assume that in the year ’21 and ’22, how Bernd is able to show the requisite growth in order to fulfill the 4.5% to 5.5% top line ambition, and we do assume that. We don’t have any reason not to. Then of course, there will be operating leverage. There will be aftermarket increase, as I said earlier. There will be the benefit of the cost containment or cost efficiency programs on the truck side. And after every downturn, we tend to see a nice margin increase because we come of it in a leaner way. And we are bearing also some cost in the AG level in the other line. So those are the main aspects. And we are here to explain our expectation for 2020 and we’ll be more articulate on ’21 same time next year.

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Akash Gupta, JP Morgan Chase & Co, Research Division – Research Analyst [20]

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Yes. And my question was more about like if you get a similar level of growth in ’21 and ’22, is there any reason why margin improvement in 1 year should be higher or lower than the other, given all the cost-cutting actions that you are taking in place?

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft – CFO & Member of Executive Board [21]

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I think the best assumption is actually to take the midpoint for ’21 towards ’22. I think there’s no particular front- or back-loading in this assumption, yes? As I said, when you get more volume on a leaner structure, you really benefit pretty quickly with a nice positive operating leverage. And that should — depending on the time of recovery on Truck, that should be already visible next year. But I don’t think there’s any particular aspect that would push either the effects forward or backward.

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Akash Gupta, JP Morgan Chase & Co, Research Division – Research Analyst [22]

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My second question is coronavirus and the Q1 expectations. So you talked about EUR 60 million revenue impact in February. And I would assume there would be some impact in March as well given you have not recovered to full production rate. And at the same time, if you look at your outlook for global truck production and comparables in 2019, it seems that the decline in truck production in first half could be much higher than second half. So my question overall is that like if you can tell us the impact of coronavirus in China, how much of the EUR 60 million will be splitting to Truck and Rail; and b, outside of China, is it fair to assume that Q1 would be — Q1 or maybe first half would see higher declines compared to second half, particularly in Truck business?

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Bernd Eulitz, Knorr-Bremse Aktiengesellschaft – Chairman of Management Board, CEO & Director of Employment Relations [23]

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So in China, the business, I would say, 2/3 would be Rail, roughly 1/3 would be Truck. Rough assumption because the Rail business is significantly larger in China than the Truck business, although the Truck business is growing strongly there. That’s why the stimulus that the Chinese government is triggering obviously plays into the growth of our business directly. Obviously, we will see a weaker quarter 1. That’s clear. But we do see at least the Chinese business returning to what we had planned for in quarter 3. And then it depends on the development and the way China is addressing things right now, it actually looks very positive, whether we can recover what we’ve lost in quarter 1 in this year. But what is still very uncertain is the development in Europe and the U.S. Obviously, there’s a lot of news flow right now with difficult reactions at the stock markets. The question is how severe that’s going to be. The truck production rates we’ve put into our guidance already show a wider interval than we would normally guide. And they reflect the uncertainty of our key customers, of the large OEM producers. And I think that, on the other hand, gives us a bit more room in the guidance to be on the safe side. So for now, obviously subject to no huge recession or anything, we feel our guidance is very reasonable. We do want to be careful. We don’t want to be bullish. But on the other hand, we’re not in desperation. Does that help?

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Akash Gupta, JP Morgan Chase & Co, Research Division – Research Analyst [24]

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And my final one is on net debt. I know you will provide full details with the annual report. But for modeling purposes, can you indicate whether the company finished the year with net debt position or net cash position?

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft – CFO & Member of Executive Board [25]

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Yes, I’m pleased to say net cash.

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Bernd Eulitz, Knorr-Bremse Aktiengesellschaft – Chairman of Management Board, CEO & Director of Employment Relations [26]

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I think our problem of negative leverage is potentially going to continue.

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft – CFO & Member of Executive Board [27]

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Yes. But we will pay a dividend, so that will correct the situation.

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Operator [28]

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Our next question comes from the line of William Mackie at Kepler Cheuvreux.

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William Mackie, Kepler Cheuvreux, Research Division – Head of Capital Goods Research [29]

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A couple, please. Firstly, on the CVS or on commercial vehicles, the assumptions that you’re providing for the market development are very — are identical, actually, to the initial guidance you provided at the time of the Q3 figures. But with the incremental insights that you’ve gained from the development of market demand in each of the regions, can you perhaps throw some additional color on where your expectations for the year are — where they’re developing relative to the guidance you’ve given in each of the regions with respect to volume at CVS?

The second question comes back again to the Rail outlook. I mean, you’ve given an aggregated Rail outlook. But actually, when we look at the rate of growth in the OE and the aftermarket business in 2019, the OE growth, as you highlighted, was lower than expected due to project timing. It seems that we should expect a significant acceleration in 2020 as those projects come back on stream across Europe. And also, as you discussed the stimulus effects in China. So maybe you could talk to the respective growth expectations around aftermarket and OE and Rail.

And then lastly, a great performance with respect to cost and — management to minimize the negative operational leverage in CVS. Perhaps you could just discuss again some of the contingency planning that is underway across the business to further mitigate costs in light of a challenging first half with volumes in — across the CVS business.

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft – CFO & Member of Executive Board [30]

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Yes. I think I should take those, Will. So the CVS guidance, yes, you’re right, we are basically confirming — I wouldn’t call it repeating, we’re confirming the ranges that we had given in November, which, now in the first couple of months, talk to for — our customers. Some have given us stronger indications. Some have given us weaker indications. On aggregate, we feel that we are pretty well positioned with those assumptions. Of course, what that doesn’t factor in is a, let’s say, a serious reduction in transportation activity. So this assumes that those plans which our customers have are going to be executed. And those plans are basically, on aggregate, confirming our views. And also by region. Maybe one aspect, we had really a quite strong quarter in China in 2019, last quarter. And it will be interesting to see how quickly the demand side is going to recover there as well. But there is — there are good reasons for China to continue its positive development.

Your question around OE and aftermarket mix on Rail. So first of all, the rail aftermarket share altogether for the full year was about 42% compared to 40% — basically 41% in the year before. And the OE business, the comment on project delays was mostly focusing on Europe. Yes? So there are projects which are going to show more revenue developments in the year 2020. So it is, I think, not unreasonable to assume a higher growth rate in 2020 compared to 2019, in Europe, in particular. I think the range of the guidance on a like-for-like basis is somewhere between 2% and 8% growth, so let’s say, on average, 5%, which also fits very well with our medium-term expectations. And I would say the progress on the aftermarket share towards 42% is actually maybe a little bit ahead of where we thought we would end, thanks to — if I want to call it that way, thanks to the OE development. But that also means that maybe the share of aftermarket won’t grow that much in the year ’20, more than maybe in the year ’21, ’22 on our way — all the way to 45%, which we had announced already in the fall.

And then on the contingency plans, on truck in particular. So I think, generally speaking, trucks is, of course, more exposed to demand fluctuations than rail. And therefore, we are always prepared to take action, let’s say, if there’s a lower occupancy at our factories. We haven’t fully utilized our opportunity to reduce temporary workers. We have, of course, started to reduce, but we haven’t fully utilized it because it wasn’t necessary. We have not even started to utilize the short work weeks, but we have prepared for it. So there are several levers which we are fully prepared to take but which we haven’t had to take yet. And even in the worst of scenarios, if demand crashes strongly, we know what to do. We have — I think we’ve explained it also in our capital market event in London, Peter Laier explained, we have contingency plans for minus 20%, minus 30%, minus 40%, and we know what to do. And this may also include temporary plant closures and things like that. This is all thought through, and I think Knorr-Brems is known, as I said earlier, not for hesitating but for taking action quickly.

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William Mackie, Kepler Cheuvreux, Research Division – Head of Capital Goods Research [31]

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Great. One final follow-up relates just to Italy. I understand you have around 500 people and 3 sites in Italy. Maybe if you can, could you just throw light on how you see developments in that country. Perhaps it’s a canary in the coal mine for what is to come.

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Bernd Eulitz, Knorr-Bremse Aktiengesellschaft – Chairman of Management Board, CEO & Director of Employment Relations [32]

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Well, Italy, right now our plants are in operation, so no downturn, no shortages of supply chain or anything. Obviously, we’re tracking that very well. We’ve applied the same stringent regulations about business travel and the like as we have for the whole company to protect our employees and to protect the production. Up to now, all stable. And I think it depends on how long the virus spread continues in Italy. And just beyond what we see today, to be honest, anything else is a guess. But I feel we are well prepared for the situation and right now are faring well with it.

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Operator [33]

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And we have one final question in queue. That’s from Vivek Midha of Deutsche Bank.

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Vivek Midha, Deutsche Bank AG, Research Division – Research Associate [34]

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I have a couple. Just following up on the coronavirus situation. So firstly, thanks very much for the EUR 60 million figure you gave. Within the hit and particularly within Rail, is that primarily OE or is that some aftermarket hits as well in that number? And secondly, you talked about reaching maybe 80% to 90% capacity again within China and the potential normalization of the supply chain in the near future. Could you maybe comment on where your suppliers stand right now? Are they also at similar kinds of capacity again?

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Bernd Eulitz, Knorr-Bremse Aktiengesellschaft – Chairman of Management Board, CEO & Director of Employment Relations [35]

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So I mean, first of all, with respect to the question, whether it’s OE or aftermarket, I mean, the Chinese government managed the situation the same for basically all businesses in the same province. So it’s across the board. It covers the OEM, the aftermarket. The first step the government did was to extend the new year’s break by 1 week, and that applied to all suppliers and all customers. So basically, everybody was, if you will, in the same boat. That basically answers the question. I think we see it across the board, and we will see a catch-up, especially in Rail, I would assume latest in the second half of the year as the Chinese government will put a lot of focus on fulfilling the 5-year plan and just making sure they don’t fall behind too much.

The same systematic applies to our customers and to our suppliers inside China. So you can assume that they all are on a similar ramp-up. And especially with respect to our supply chain, obviously we’re in very close contact with our suppliers. So we have good visibility on what’s happening. And so far, everybody is in a very similar process as we are. After the plants, we’re allowed to restart somewhere around 11 or 12 of February. We had our workforce come back into the plants. By the way, we kept our office workforce working from home just to limit any risks. And then those who had traveled inside China to visit family were asked to stay at home for 2 weeks for quarantine, so a lot of the plant started up with, let’s say, 40% of their workforce and ramped up basically day-by-day as the employees fulfilled the quarantine requirements. And today, we’re significantly above 80% of our workforce back at plants, quite a few plants already significantly above 90%. So the recovery is happening. And with the workforce coming back, our production was ramped up very fast. My assumption is that by end of April, we should be back to what we would have planned for as a normal production rate. And then we need to see what happens in the months beyond that. But hopefully, we’ll see a bit of a pickup and recovery efforts from our customers, and that should help us fill the gap.

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Operator [36]

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We have one final question come through just whilst this was being answered. That’s from the line of Iris Zheng from Crédit Suisse.

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Xiaolu Zheng, Crédit Suisse AG, Research Division – Research Analyst [37]

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I just have one quick follow-up and just on the truck side to understand just for the sales. So just so let’s say, because some OEMs, truck OEMs, they do find that there have been some supply chain bottlenecks. And so if that happens, and let’s say your customers are not able to deliver their trucks to their customers, then would this have any impact on your sales or as long as you are able to deliver, then you are covered by your agreements?

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Bernd Eulitz, Knorr-Bremse Aktiengesellschaft – Chairman of Management Board, CEO & Director of Employment Relations [38]

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I mean, obviously, if they were to hold their production, that would reduce our supply to that supplier. But it depends on how long that happens. And again, I’d like to point out the fact that for our guidance, we put a quite wide interval for the truck production rate that, within the normal effort, should actually capture most of the effect. At the moment, we would get a bit more cautious was if there was a significant recession in Europe or the U.S. as a result of other effects hitting this. But I think the wide interval we have for now should cover any effects we see as of now. The rest depends on what the economy does. And I think it’s far too early to speculate on that.

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Operator [39]

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Thank you. And as there no further questions, I’ll hand back to our speakers for the closing comments.

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Andreas Spitzauer, Knorr-Bremse Aktiengesellschaft – Head of IR [40]

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Yes. Thank you very much for your questions. I wish you a great morning, afternoon and stay healthy. Thanks, and bye.

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Bernd Eulitz, Knorr-Bremse Aktiengesellschaft – Chairman of Management Board, CEO & Director of Employment Relations [41]

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Thank you. Bye-bye.

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Operator [42]

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This now concludes the conference. Thank you, all, very much for attending. You may now disconnect your lines.