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Edited Transcript of KBX.DE earnings conference call or presentation 7-Mar-19 1:00pm GMT

Preliminary 2018 Knorr Bremse AG Earnings Call

Mar 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Knorr Bremse AG earnings conference call or presentation Thursday, March 7, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Klaus Deller

* Ralph Heuwing

Knorr-Bremse Aktiengesellschaft - CFO & Member of Executive Board

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Conference Call Participants

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* Akash Gupta

JP Morgan Chase & Co, Research Division - Research Analyst

* Lucie Anne Lise Carrier

Morgan Stanley, Research Division - Executive Director

* Markus Mittermaier

UBS Investment Bank, Research Division - Co-Head of European Capital Goods Research for EMEA and Executive Director

* Philippe Lorrain

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Vivek Midha

Deutsche Bank AG, Research Division - Research Associate

* William Mackie

Kepler Cheuvreux, Research Division - Head of Capital Goods Research

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the Preliminary Financial Report Fiscal Year 2018 of Knorr-Bremse AG. At our customers' request, this conference will be recorded. (Operator Instructions). May I now hand you over to Mr. Klaus Deller, CEO, who will lead you through this conference. Please go ahead, sir.

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Klaus Deller, [2]

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Thank you, [Mr. Frinika] and welcome, everyone, to Knorr-Bremse's Preliminary Full Year 2018 Results Call. I'm Klaus Deller, CEO of the company. With me is my colleague, Ralph Heuwing, our CFO, who will take you through the detailed financials after I have finished. I hope you all have in front of you our full year results presentation, which has been published this morning on our Investor Relations website. I will run you through the first few slides, which give you a brief overview of the operational and financial highlights during the past year. Ralph Heuwing will then give you a more detailed perspective on the financial performance of our company. At the end, I will explain our guidance for 2019, wrap up and open the floor for your questions.

So let's get started with Slide 3 and our full year highlights. One of our highlights, of course, was our IPO on October 12, 2018. In the midst of a rather challenging market conditions we were able to carry through a successful listing. I'll give you a few observations on the transaction on the next slide. In the meantime, just ahead of our listing, the 3 most important trade shows in our industry took place, Innotrans for rail vehicle systems and the IAA, the Automechanika for the truck systems. One is OE show and the other one, the aftermarket show. As always, we showcased -- I'll showcase our latest products and systems, which were very well received. More on that in a minute as well.

Let's talk about our full year results. Before I do, let me remind you that these numbers are preliminary and unaudited. We will provide full disclosure of our audit's financials and publish our annual report on April 30 of this year. Let me first underline that we fully delivered our full year guidance 2018, especially revenues of EUR 6.6 billion to EUR 6.7 billion and an EBITDA margin of 17.5% to 18.5%. Currency adjusted, our group revenues were up by more than 10%. Our reported revenues rose by 7.5% to EUR 6.62 billion, most of it organic, outgrowing our underlying markets and above our midterm corridor, around 5% organic growth revenue.

Our reported EBITDA for the group came in at EUR 1.18 billion, 5.6% above previous year. Adjusted EBITDA, and Ralph will explain to you what we mean by that, was just under EUR 1.2 billion, which corresponds to a margin of 18%. Both businesses in all regions contributed to this result.

Our rail business grew by 6.2%, or 8.8% in local currencies, and generated an EBITDA margin of 20.0%, that's 40 basis points higher than previous year. Our truck business showed very strong growth of 9.3%, or 12.7% in local currencies, and a margin of 16.4%, which is 100 basis points lower than 2017. The main reason for this drop was the base effect resulting from the extraordinary Q4 margins in 2017. Additionally, we faced some headwinds as the rest of the industry. Ralph will go into that in more detail later. Our annual order intake exceeds EUR 7 billion for the first time ever. With that, our order book grew by 9.2% over the year-end 2017, providing a strong visibility for 2019.

Our guidance for the full year 2019 is in line with the midterm targets for the 2021/'22, which we had already released in our IPO prospectus. We expect revenues between EUR 6.8 billion and EUR 7 billion, which translates to a growth rate between 3.8% and 6.9% after eliminating disposals, and an EBITDA margin between 18% and 19%, which is 15 basis points higher than our 2018 guidance.

Over to Slide 4. Fundamentally -- moving over to Slide 4. We -- I'm sorry, I got a little bit mixed up, so it carries ahead. Replacement of a volume nearly EUR 4 billion at an issue price of EUR 80 per share, we were the second largest IPO in Germany in 2018 and the biggest IPO for family-owned business ever in Europe. Our free float is now just under 30%. The remainder of the stock continues to be held by Mr. Thiele and his family. Our stock has been outperforming both markets and sector indices since our listing, and as a result, Knorr-Bremse was admitted to the index 2 days ago, which, of course, shows us this pride.

But let's go back to what we have been up to last year on Slide #5. Fundamentally, our mindset is to actively want to shape the global megatrends that we have identified as useful to us: urbanization, digitalization, equal efficiency and automated driving. This, of course, we apply to both our divisions, CVS and RVS. Let's talk about CVS first. Here, steering is one of our most important strategic areas. On the road to automated driving, we are expanding our expertise to be able to map the 2 main actuators in the truck, the brake and the steering system.

During 2018, we invested both in acquisitions and the expansion of partnerships, the takeover of Hitachi Automotive Systems, and there, the steering business for commercial vehicles. In December 2018, we significantly strengthened our expertise in steering systems for commercial vehicles and therefore, our capabilities in the area of highly automated driving and driver assistance systems. This area is of enormous strategic importance to the industry and therefore to us because it allows us to influence the total cost of ownership for fleet operators by reducing total operating cost of trucks by up to 1/3. We expect to see technology adoption for trucks a lot sooner than for cars. Additionally, the acquisition of Hitachi Automotive Systems, and there, the commercial vehicle steering system, is important building block in our steering strategy and gives us access to the Asian market for steering systems.

We also expanded our partnership with Dongfeng, one of the most important truck manufacturers in China for compressors and compressed air. Moreover, we conducted a strategic framework agreement with First Automotive Works (sic) [First Automobile Works] Jiefang, one of China's leading truck manufacturers covering brakes, automated gearboxes and control systems, and automated driving. Finally, I would like to mention that we formed a partnership with Continental for the development of a complete system solution for highly automated driving.

Moving to rail vehicle system. The market for rail vehicles, the system concept, is even more pronounced and established than in the truck sector. For this reason, we have further strengthened our expertise in friction materials through the acquisition of intellectual property rights for the development and manufacture of friction materials for the rolling stock and industrial applications in Federal-Mogul. But the active management of our portfolio also means constantly reviewing our decision and profitability, so after due consideration, we also divested several businesses last year. We sold Sydac, that's the driving simulator business, that we held in Australia to [opt out] in Australia, and we divested rail overhaul and vehicle modernization business in Sweden and in the U.K. Both divestments will have positive margin impact in 2019 and the subsequent years.

So after this introduction, let me now hand over to Ralph Heuwing, who will explain our 2018 financials in more detail to you.

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft - CFO & Member of Executive Board [3]

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Yes. Thank you, Klaus, and hello, everybody. Let's turn to Page 6. Klaus has already given you an overview of our numbers for the full year 2018, so let me just comment on the fourth quarter briefly.

You will remember that the fourth quarter 2017 was a particularly good one for Knorr-Bremse, so we were always going to be up against tough comps for the final quarter of 2018, but it turns out, it more than matched our 2017 Q4 performance. Our reported revenues for the fourth quarter rose by 1.8% on the same quarter last year. Our order intake for the fourth quarter dropped slightly, but for the year, we are still up 5.2%. And as Klaus said, we exceeded the EUR 5 billion mark for the first time.

Let's look at Slide 7 and our EBITDA and EBIT. Our reported EBITDA margin came out at 17.8%. As you know, we try to focus on clean financials and avoid adjustments where we can, but you will agree that in this particular case, an adjustment is warranted. Our majority owner, and [after] the IPO, our full owner, reimbursed EUR 15 million of IPO-related costs to the company, but because he was the full owner, as was determined, that this reimbursement does not go through the P&L but straight into equity on the balance sheet. This adjusted EBIT margin, assuming the credit to our P&L where also the corresponding IPO costs were accounted for, hence amounts to 18.0%. The increase was achieved in spite of a lower share from our aftermarket business in spite of material cost inflation you will have heard from all of our industry peers, and in spite of the supply chain constraints, especially in the CVS segment that you are also very familiar with from the reporting season.

Finally, a word on the effects from disposals of our rail maintenance and simulator business in Sweden, the U.K. and Australia in order to give you a realistic baseline for our future performance. While these disposals had, as such, no immediate EBITDA effect, the businesses concerned did generate an operating loss of EUR 11 million on revenues of EUR 68 million. Adjusted for these 2 components, our operating EBITDA margin in 2018 came in to 18.4%.

Our EBIT largely mirrored our EBITDA development, and we show on the next slide adjustments we made for the effects mentioned above. The key difference, of course, is the consideration of disposal losses and the EBIT figure. We will disclose our net profit at the end of April, but based on EBITDA and EBIT development, we expect it to be clearly above last year's or 2017 year level. Based on this assumption, we expect that we will be able to adhere to our stated dividend policy and payout between 40% and 50% of the IFRS group net income.

I would like to skip Slide 8 and go straight to Slide 9, in order to take a look at our regional developments. The main message is all regions contributed to our growth last year. Our European business showed strength and resilience throughout the year. Revenues rose by 6%, significantly above market. Main regional drivers in Asia were India and China. Revenues in the region increased by 5.4%. Remarkably, our Chinese truck business also grew despite the decreasing transaction rates in this country. North America was particularly dynamic last year, as you all know, outperforming the market in both divisions, but remarkably also in CVS. Revenues grew by 13.5%. And in South America, we are seeing signs of recovery from a low base.

Let's now go to Page 10 to take a look at our R&D spending during 2018. Our commitment to expanding the technological boundaries of our system is undiminished, and our efforts in R&D continue. We spent 5.5% of our group revenues on R&D last year. The ratio decreased somewhat from the 2017 figures, thanks to a stronger-than-expected revenue growth. In the RVS division, we focus on the development of our next-generation brake valves design and a more sustainable air conditioning and door systems.

On CVS, our engineers concentration is on driver assistance and automated driving systems as well as our scalable brake control systems. The brake control systems contain an innovative open architecture that makes full use of the scope offered by modern software architecture and powerful highly scalable processors. With harmonized components and integrated functions, the system reduces development and assembly cost for vehicle builders and facilitates intelligent networking with various vehicles -- different vehicle systems. It offers an ideal platform for driver assistance functions by providing the central elements and the kind of efficient redundancy architecture required for highly automated driving. Our end of year headcount, on the right-hand side of the page, for the year grew but below our revenue growth. We are now employing about 29,000 people around the world.

Let's move on to our divisions on Slide 11. Our 2008, RVS EBITDA margin was 20%, so basically, 40 basis points above 2017. The combination of operating leverage, stringent cost measures allowed this improvement despite the operating loss in our disposal assets. Our margin came very close to the remarkably good fourth quarter of 2017. Our EBIT margin for the year was 16.9%, which is 80 basis points above 2017. In Europe, revenue growth was driven by the locomotive, regional and commuter, and metros businesses. In Asia, the Indian OE business and the Chinese rail services grew particularly strongly. In North America, the freight business showed a positive development.

Let's have a quick look at our order situation in RVS on the next page. Our order intake during the year was up 7.4%, which gives us a very encouraging book-to-bill ratio of 1.1, higher at the end -- than at the end of 2017. Our order book, therefore, stands at just over EUR 3.2 billion, an increase of 11.7% on prior year. This translates into a visibility for almost an entire year.

So worldwide OE truck business. Please move to Slide 13. Klaus also told you that our truck business grew by an outstanding 9.3% last year, driven by high production rates of 6% globally and continued content growth. In 2018, we faced some of the same issues as all of our competitors, in fact, all companies in the capital goods space. Higher material costs, tariff effects and a severely constrained supply chain provided headwinds to our profitability. Still, our fourth quarter sale is at the level of the first 9 months. However, an extraordinary fourth quarter of 2017 provided very tough comps and hence, our EBITDA margin declined on a year-on-year basis. The reasons for the strong Q4 margin in 2017 had been a rather favorable mix between OE and aftermarket business as well as a higher capitalization of R&D expenses. Europe showed resilient above-market growth. China also grew despite the decreasing TPR in the country, and North America grew in line with a very dynamic market in the region.

A quick look at our CVS order situation shows a solid 2.7% increase of our order intake last year. Europe and North America also showed a solid picture. In Asia, content growth was the main driver. Our order book is up 3.6% and gives us 5 months of -- worth of visibility, slightly, but not disconcertingly, down from last year. Given the strong growth we saw in our OE business, the trend in revenue composition we talked about at our Q3 result has continued.

Let's have a closer look at our aftermarket on Slide 15. While our aftermarket business continued to grow in both segments, the trajectory was flatter than in our OE business. And therefore, the share of aftermarket revenues diminished to 33.8% from 35.3% in 2017. Adjusted for the asset disposal, our RVS aftermarket grew by 5.8% in 2018. As a result, aftermarket revenue contribution to total RVS revenues dropped by 2 percentage points to 40%. Our CVS aftermarket, on the other hand, grew by 2.3% by gaining market share from competitors. Its contribution to total CVS revenues dropping by 1 percentage point to 27%. Adjusted for FX headwinds, we consider the growth as healthy. Our growth initiatives in this business will continue in 2019, especially in the area of remanufacturing.

Let me wrap up our financials before I hand you back to Klaus for his concluding remarks and, of course, our outlook for 2019. Looking at all these numbers, I conclude that we have fully delivered on the guidance that we set out a few months ago. Revenues and profitability are within the range. And from today's perspective, we expect all the other KPIs to also confirm our guidance. On this basis, we are confident in our ability to propose an attractive dividend to the AGM in June, with 40% to 50% of our IFRS group net profit range we have set ourselves last year. A good 2018 positions us well for the midterm targets we have set ourselves for the 2021-2022 time range.

Before I hand over to Klaus, I would like to mention that we are delighted to announce the arrival of a permanent Head of Investor Relations. Andreas Spitzauer, who many of you may already know from his past positions at Kuka and Osram, will join us on the 1st of April. So thank you very much for your attention, ladies and gentlemen. Klaus, back to you.

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Klaus Deller, [4]

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Thank you much, Ralph. So before I come back to our financial expectations for 2019. Let me make a few qualitative remarks about what we expect to happen in our rail and truck markets this year and beyond.

Looking at our group as a whole, the global megatrends that underpin both our businesses are very much alive, and we continue to strive to position ourselves as best as we can to take advantage of them. Now our rail business order books are full, and we have a solid project pipeline for OE and aftermarket. We have visibility for almost a year, which is a good foundation for future growth. We've done well in China last year, and we expect to continue to do well there. This was and is true even without a much touted stimulus program. That said, we also expect such a program, at some point in time in the medium-term, to build more rail infrastructure, and after that to buy more trains, which we are all confident that they will need as many subsystems from us as possible. We do not see that recent industry transactions will have a major impact on our competitive position. We already operate in a very competitive environment, and we fully intend to continue our successful efforts. This applies regardless of the economic environment we operate in. I suspect that most of you have seen our investor presentation decks, so you will remember the chart that shows how well we have weathered cycles in the past and how resilient the combination of our rail and truck businesses under one roof is.

In summary, in RVS, we have strengthened our innovation competence last year as well as the prospects to our aftermarket business. So our rail division is well positioned for long-term robust growth both in OE and aftermarket, even if the macroeconomic and political environment turns weaker in the months and years to come.

On this note, let's move over to the truck business on Slide #18. Truck market in the U.S. last year was very strong. We therefore see the correction during Q4 as a healthy normalization and I actually remember saying so at our Q3 results presentation. Our expectation is that the North American market will continue to grow this year, but probably much more slowly. We expect Europe to be flat and Asia to decline temporarily.

For our 2019 revenues, we are not concerned from today's prospectus. Our order book looks good, and our strategy to offer more and more content to our customers to allow them to respond to tightening environmental and safety regulation, to some extent, reduces the impact from the cyclicality of the truck market. That said, in terms of our profitability, we have to acknowledge that material cost inflation and costs associated with the steel's trade supply chain will affect our CVS margin as they do all of our competitors. We will face the situation, as we have always done, we will strictly manage our cost, and we will continue to invest in R&D to secure our technological and market predominance. But in summary, an improvement in the margins is unlikely for CVS in 2019. Let me also underline that the deterioration of the macroeconomic and the political environment would likely have an impact on truck production as well as on our revenues and margins. Our order book, however, shows no signs of that at this point in time.

And now to our financial expectations on Slide 19. I think if we can keep this very short because our 2019 guidance cannot be a surprise for any of you. Last year, we published in our prospectus midterm targets we intend to reach by 2021, 2022 time frame. They imply annual organic growth of around 5% for the group and margin expansion of 150 basis points to around 19.6%. We have inserted these midterm targets on the next slide as a reminder for you. We have reached our 2018 targets, and we are not changing our midterm targets. It is only logical that our 2019 guidance follows a linear interpolation of where we stand today and where we want to be in the '21/'22 time frame. Assuming a stable economic and political environment, we intend to generate revenues in the corridor between EUR 6.8 billion and EUR 7 billion in 2019. This implies a growth corridor of roughly 4% to 7% on our 2018 revenue basis adjusted for disposals. And we intend to achieve an EBITDA margin of between 18% and 19%, 15 basis points higher than our '18 guidance range. As always, beyond revenue growth and margin expansion, we will pay particular attention to cash generation.

I will skip the next slide showing our midterm targets and summarized on Slide 21 before we start discussions. So 2018 was a good year for us. Our IPO was successful, and our share price is performing well. We have maintained our technology leadership in both segments. As a group, we have grown more than 10% and maintained our profitability in a challenging market. Importantly, we have demonstrated resilience of growth and profitability, backed by different economic cycles in both divisions and supported by broad geographical and customer diversification. Our order book, together with our assessment of the immediate outlook of the rail and truck markets worldwide, gives us confidence for a successful 2019. On that basis, we will continue to outspend our competitors to remain the innovation leader of our industry.

Ladies and gentlemen, thank you very much for your attention and [Mr. Frinika], I hand back to you, and would you please open the lines for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question we received is from Lucie Carrier from Morgan Stanley.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [2]

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The first one -- actually before I actually ask my questions, just a clarification on the guidance for the sale of EUR 6.8 billion to EUR 7 billion for 2019, I see you're saying after eliminating disposal, does that include, however, some of the M&A you've done in 2018? I'm just trying to see whether that range is purely organic, and then we should adjust the scope effect or whether this is kind of all in.

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft - CFO & Member of Executive Board [3]

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Yes, Lucie, Ralph here. I can confirm, as we have noticed that this is organic only, so whatever is already in the portfolio at the end of '18 is included in the base. And on that base, we are growing. And whatever has left the portfolio, that's why we are adding the term "eliminating the disposal", is also [for] the base. And so we are growing from that reduced base, which is EUR 68 million less than the reported revenue figure. Whatever M&A, we haven't closed yet. So for example, Hitachi isn't part of it. So as and when that gets closed, which is likely to happen end of this month, we will, of course, adjust that trend upwards by that amount that is being added.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [4]

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Okay. Understood. That's clear. So just to come back maybe on the guidance. I was hoping you could walk us through the steps for the margin guidance because if I look at the comparable pro forma data you have provided for '18, this is 18.4% EBITDA margin when we exclude the disposed assets and also the IPO cost effect, but you're guiding at the midpoint for 2019 at 18.5%, so this is only a 10 basis point expansion. So can you maybe help us to understand a bit better the dynamics in terms of the division or the corporate line here around those assumptions, please?

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

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Yes, Lucie. I think we talked about detailed bridges before. This guidance does reflect that we are maybe entering -- generally entering a phase with increased economic and political risks, and that's why we tend to be more cautious than maybe otherwise. It does include, of course, effect of operating leverage. It does include a likely effect of a higher aftermarket contribution. It does include an effect of further operating improvements in our businesses. It also includes headwinds that we are likely to face. So whether it's a continued supply chain stress that we also faced in 2018, whether it's demand fluctuations that we see in our markets, so those points are also part of our guidance. We do not, I want to underline that, exclude the possibility that we reach what has been the consensus before this call. So that is, of course, entirely part of our guidance range. But we do acknowledge that the fees are maybe getting a bit rougher.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [6]

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And before I go back to the queue, just one question on the CVS margin drop in the fourth quarter '18. Could you maybe break that down in terms of that drop? I mean, how much was cost inflation and supply chain constraints? How much were maybe investment-related or pricing or maybe the lack of operating leverage? Just for us to understand how we bridge from one year to the other.

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

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Well, I can't really confirm that we had a decrease. If we see the sequential development of our margins quarter-by-quarter, we had 16.9% in Q1, we had 16.0% in Q2, had 16.2% in Q3 and 16.3% in Q4. So it was all in a pretty narrow trading range. The difference comes from a strong Q4 in 2017, which we had explained and included several reasons.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [8]

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Sorry if I had missed that, but I mean there is a decrease year-on-year, I'm just trying to understand then what was the benefit that was last year that you didn't have this year. Was it all capitalized R&D for over 400 basis points? Or -- I'm just trying to understand the components.

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft - CFO & Member of Executive Board [9]

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No. Of course, not all of that. That is correct. There was also a mix effect in OE versus aftermarket and the regional mix effect, so there were several very favorable development in the last quarter of 2017, which, as we had also mentioned in the third quarter call, we would have liked to avoid, but it's just what was reported.

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Operator [10]

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The next question here is Akash Gupta from JPMorgan.

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Akash Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [11]

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It's Akash from JPMorgan. I have 2 questions, please. My first question is on cash flow. And I know you have not given any guidance, but maybe if you can help us with the cash flow conversion in 2019? And is there any unusual in terms of higher CapEx or provisions, et cetera, that we should be aware of in terms of holding you back from a good cash conversion? Second one is more a strategic question. After the recent press report that developer is looking to buy Webco, I'm wondering if you can comment on how this changes the competitive landscape and what impact it could have on your strategy. And on that topic, is your partnership with Conti sufficient for your ambition on automated driving? Or would you need to do some add-on M&A or maybe another partnership to maintain your leadership?

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Klaus Deller, [12]

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Akash, let's start from the back. Of course, we are aware of what's written in the papers, and I take it, firstly, as a confirmation and the acknowledgment that, obviously, what we are doing is -- gives rise to others to follow-on that path. And that -- is our partnership with Continental enough? Is our setup in the different regions enough? I say, yes, at the moment. And -- but of course, along the way, if need arises for us to do further acquisitions as we have done with Hitachi Automotive, the steering business system, I would never rule out that we go for further amendments of our portfolio in companies we own, processes we built into our company or partnerships we're going to engage in or expand. So there is, for us, no reason to become nervous or to become irritated through industry developments. It is a highly consolidated industry already. And whether it is Wabtec acquiring GE Transportation or a potential other bigger powerhouse acquiring one of our competitors, that is not a new development. And we are very at ease here. On the -- yes, on the first question, Ralph, I think that's more for you.

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft - CFO & Member of Executive Board [13]

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On cash flow, well, since we haven't released cash flow 2018 yet, this is, of course -- if you ask for '19, then of course '18 also plays an important role. But nevertheless, what do we expect? We expect basically to be in line with the midterm guidance, days working capital to be reasonably constant and the CapEx to be around about 4% of revenue, plus/minus a little give or take.

So given a somewhat lower guidance in terms of revenue growth for the 2019 than '18, the weight on -- of those 2 drivers on our cash flow statement will likely be smaller than it was in 2018. That's, I think, the main point. Other than that, as we said earlier in the call, we will continue a strong focus on cash generation.

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Operator [14]

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The next question here is Philippe Lorrain from Berenberg.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [15]

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Yes. I would start perhaps with a more housekeeping one. You provided the growth in constant currency for the group. Could you highlight a bit more in detail how this developed in each of the segments?

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Klaus Deller, [16]

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Excellent question.

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft - CFO & Member of Executive Board [17]

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Sure. Philippe, we had -- compared with the reported growth in RVS, we had an FX-adjusted growth of 8.8%, so the delta is 2.6 percentage points. And on CVS, compared with the reported growth of 9.3%, we had an FX-adjusted growth of 12.7%. So here, the delta was even 3.4%. And then also, as we mentioned earlier may explain very well why the reported growth in aftermarket looked a little bit weaker, and it actually was quite a bit stronger, if you FX-adjust it.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [18]

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Great. And that leads me directly to the second question which is, it seems like the -- in CVS, your sales growth outperformed the global truck production rates by more than 600 bps, which includes actually these typical annual price erosion. And if I remind -- remember correctly, sorry, the midterm guidance implies something like 400 bps of outperformance. So how do you think about that going forward? Should we expect the outperformance to be sustainably higher than the 400 bps that you were implying at the time of the IPO? And perhaps as well, bearing in mind that we had this raw mats price inflation during 2018 and that you passed through most of that to the clients, perhaps if you could highlight as well in the 12.7% year-on-year, more or less, organic growth that you had in CVS, was there any big impact from passing through the raw mat inflation to the clients there?

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

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Yes. If I may also take that, Philippe. So the outgrowth in truck, yes, it was quite remarkable. But we are not changing our perspective on the medium term expectations. And I think the important driver of the exact figure that it turns out to be is also the geographic mix. If Asia gains an importance over the years, then based on a low content per vehicle, that actually pulls down the content growth, yes? So the regional mix multiplied with the regional content growth gives a different picture year-by-year. And so we're not changing our expectation there. And material price inflation and pass through, yes, as we always said, there is a time gap between when the suppliers increase their prices and when we are able to pass it through to our customers. And so given different quarters, there may be different impacts just given that time lag between the 2.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [20]

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Okay. But it's probably fair to assume that you had somewhat of a pass-through already starting in 2018, and that we will see the rest in 2019 actually [fitting] through?

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

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I think it's a continuous -- it's a continuous move. But I think we've never said we pass through everything. That is not -- it's not -- we're not a boiler that is sitting in the way. We would like to be, to have no remnant cost, but of course -- but that's the -- what sticks with us, we have to manage our own cost and our structures in order to compensate for that.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [22]

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Yes, sure. And I would have one last question. Actually just bouncing back on Lucie's question at the beginning regarding the margin improvement. To me, it seems like if we adjust -- actually take out the scope effects, basically the disposal effects, your margin would have been somewhat around 11% and 18.2% for the full year at group level. I'm just actually squeezing out this EUR 15 million of reimbursement of IPO costs. Could you first highlight whether you had yourself, and to which extent or which size, which amount these costs were, relates to the IPO that flew actually through your P&L as a cost and which were then offset by this EUR 15 million reimbursement that actually came through the statement of equity? Just to understand a little bit better how the margin step-up is going to look like because it's more like 30 bps at least.

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft - CFO & Member of Executive Board [23]

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Yes. We -- as for our account, we had some extraordinary cost of EUR 26 million and out of that, EUR 15 million were reimbursed but didn't end up in our P&L.

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Operator [24]

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The next question here is Vivek Midha from Deutsche Bank.

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Vivek Midha, Deutsche Bank AG, Research Division - Research Associate [25]

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So just one thing on the R&D. So comparing the growth rates in the first 9 months of the year to the full year, growth's only about 1%, which is maybe a bit lower than you might have expected. Could you just give us a bit of color behind that development? And what happened in Q4, please?

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Klaus Deller, [26]

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You mean the growth in the R&D spending?

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Vivek Midha, Deutsche Bank AG, Research Division - Research Associate [27]

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Yes, please.

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Klaus Deller, [28]

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Don't make a mistake and take the -- I mean, of course, it's reported as a figure of current revenue. And we look at R&D, we look at the efforts and the revenues we want to get in a 3 to 5-year time frame. This is when the projects we're working on start to materialize. So that we had an above guidance and above-market growth rate of the top line, I would be rather irritated if the R&D budget would have grown in line with it. Absolutely, it is where we expect it to be, and that is, of course, then a little lower than you put in relation to revenue.

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Vivek Midha, Deutsche Bank AG, Research Division - Research Associate [29]

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Okay, okay. And then would you just give us a bit of color about what sort of cost measures you took in rail this year, particularly in Q4?

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Klaus Deller, [30]

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We have a program, we called it [fitness brakes.] We have -- the brake business is a project business. But even in the project business, you have repetitive actions. And there's effort to standardize stop modules of the brake system, and therefore, go through with lower engineering hours in materializing metro, locomotive, regional and commuter train. Brake system efforts, and that has given us quite a push on, let's say, resource efficiency, that's the biggest push we have in there.

We have -- if you look over the last years, we have shifted the last piece of production in Munich away to Eastern Europe and to China. And these are also effects that we have on the rail business. And of course, the experience we have made now with -- we have started with the brakes since this is, of course, we have -- that's the biggest step in as we will spread that out to our onboard business, to these endeavors that we have taken.

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Vivek Midha, Deutsche Bank AG, Research Division - Research Associate [31]

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Okay. So that's going to be coming through this year as well?

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Klaus Deller, [32]

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This year and 2020. Yes. I mean, what we call [fitness brake] is still the effects -- the biggest effects are still coming through to the next 2 years.

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Operator [33]

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The next question we received is from Markus Mittermaier from UBS.

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Markus Mittermaier, UBS Investment Bank, Research Division - Co-Head of European Capital Goods Research for EMEA and Executive Director [34]

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Two questions, please, from my side. One on CVS, just -- I mean a bit more detail on the truck production rate here. Obviously, great FX-adjusted outgrowth. If I assume constant regional mix going forward, particularly into 2020 when the OEMs opened their order books, what's your sense -- I mean, you're guiding for 400 bps outperformance over the truck production rate. Would -- is it fair to assume that the vast majority of that is U.S. related with ADBs, AMT penetration increases, and that, therefore, if on a year-over-year basis as we open order books into 2020 we see a decline in truck production, that you have that buffer of 400 basis points largely attributable to the U.S. market?

That's question one. And to an RVS, can you just outline historically your experience whenever there was stimulus on the rail side? What's the typical time lag that you see from basically China putting railway into the ground to then order intake at the rail OEMs and then downwards order intake on your side? Just a bit of color there would be very helpful.

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Klaus Deller, [35]

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So yes, should I take turn from the back? You would -- depending whether as to what kind of rail system it is there is on the high-speed in the 5-year plan or it's municipalities for metro systems, we have a rough figure of about 3 years. I mean, if I would take this along those Germany need, I would probably say 10 years, but in China, that's about a much, much speedier development.

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft - CFO & Member of Executive Board [36]

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Yes, on your question, let's say, as to decompose the growth in truck production rate and content growth, I think you are on the right track with your assumption. I mean, we -- this year, as we mentioned, we are not expecting a decline in truck production rates in the U.S., so this will probably have a good contribution to the overall revenue, also in terms of content.

On the other hand, next year, there could be a change in Asia again. And so yes, it will provide lower content per vehicle, but the growth of that content might also be remarkable. So we feel comfortable with the guidance that we already gave at the time of the IPO, what is the medium-term content growth that you can expect. Of course, if you then go into the details, every single OE or OEM has different time scales, every region has their different time scales, so it is an aggregated figure of [600] basis points.

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Klaus Deller, [37]

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If we try to indulge with you and say like the truth that wouldn't hurt. Certainly, if you grow your content per vehicle and then the production rate goes down, I mean, it's harder, but we don't really see the remedy to that situation. But as Ralph said, it is one of the biggest risk mitigators we have in a cyclical business, is that we have an equal content per vehicle through the region, and so the economic cycles around the world can balance each other. And there is still a lot of things to do, especially in China.

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Operator [38]

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The next question we received is from William Mackie from Kepler Cheuvreux.

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William Mackie, Kepler Cheuvreux, Research Division - Head of Capital Goods Research [39]

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Yes. Will Mackie of Kepler Cheuvreux. A couple of questions, please. Firstly, at the top level, when I listen to what you're saying, at the midpoint, on an underlying basis, excluding the dilution from disposals, the margin uplift year-on-year is, however we calculate it, let's say, about, give or take, 40 or 50 basis points, but you've also indicated that you do not expect a margin expansion in CVS this year against the headwinds you've discussed. So it implies perhaps close to a 100 basis point increase in the margin for RVS. And yet both in Q4 '17 and also again in Q4 '18, you have reiterated that the operating margin in the fourth quarter was at an extraordinary level, so implying perhaps not to be repeated. So can you first step through perhaps some of the key elements that will be the main indicator to take rail to the next level of profitability?

And then the second area of questioning would be with regard to the regional developments. I thought it was very interesting to see the Q4 regional split on Page 9 of the deck when you have indicated, as I read it, pre the FX adjustments at least, Asia Pacific revenues were down 13% and North American revenues were up 28%. Those are quite large areas of volatility so -- against the annual trend. Perhaps you could walk through what the main drivers were in those?

And then perhaps as a final point, it comes back to -- I think you may have said to the media this morning, you've talked some of the trends at the start of the year. In reference to my regional comment on Asia Pacific and North America, perhaps you could at least give us an update or first thoughts on how the year has started with regard to order intake. I'm sure the revenue was good given where the order backlog finished at the end of the year. That's quite a lot.

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Klaus Deller, [40]

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We may ask you to repeat some of it, but I guess we'll start.

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft - CFO & Member of Executive Board [41]

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Yes, yes. So once again, on the guidance 2019, I think you are correct in placing the majority of the impact on RVS. There will, of course, be also some impact on the corporate center. So the elimination of certain extra costs that we had in 2018 and '17 will also provide some tailwinds. But what is the basis for the improvement in RVS is, I think, primarily the cost measures that have been mentioned. It's an increasing aftermarket share, which in rail hits, if you will, earlier because of the relatively large growth rate in aftermarket.

It's -- then also our order book, which makes us quite confident that there will be growth, and therefore, operating leverage. So those are, I would say, the most important aspects. And 2018, if we look at the results composition by region and so on, we feel fairly confident that there will be a remarkable or, let's say, a distinguishable margin expansion in 2019. So this was the story on rail margin expansion on the regional spreads in commercial vehicle. You wanted to get more detail on the commercial vehicle or on the overall portfolio?

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William Mackie, Kepler Cheuvreux, Research Division - Head of Capital Goods Research [42]

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The figures on Slide 9 are relating specifically to the overall picture. So if one can break it between the 2, that would be helpful.

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Klaus Deller, [43]

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I think we have consolidated here the 2 together. And the effect in Asia is certainly due to the -- if you look at -- I don't get anything. Asia is great. The effect in Asia is certainly due to a decline in -- on the commercial vehicle side. But these are the revenues. I think we need to look at the breakdown slides, Ralph?

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft - CFO & Member of Executive Board [44]

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No. The Asia had, in the RVS segment, a weaker fourth quarter. And it was also expected to happen when we work through the year. So that was the main impact. And you see also on the chart, which is describing the revenue development of rail, you see that there was a decline in the rail segment.

So -- and on truck where we had a slight improvement compared to the previous year, North America had a big swing driven by commercial vehicles.

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Klaus Deller, [45]

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Actually both. Commercial vehicles, but also in America, all the segments were up: passenger transit, freight transit on the rail side and also the commercial vehicle, of course, rampantly double digit. But I also think we also need to mention on 2017 on the rail side, we had an extraordinary strong fourth quarter especially coming from India. There's also some major revenues coming in from India, and that is showing a little bit of the disparity.

This brings me actually to a statement I repetitively said during the IPO, too. If we start to compare, especially on the rail side, quarters-to-quarters, we will come -- you will arrive at the wrong conclusions. This is a patchy business. That is when orders materialize and then we have from Indian railways, we have a major call, and I can tell you, I was just discussing here over lunch a similar situation, these are orders that come in, all of a sudden, deliver these 2,000 brake calipers within this month, which is for a Western society, more a delivery over a whole year. So this is business we deal with. It's the order intake we have to cope with. I would call it first-world problems. There is such an order intake. And this leads to this patchiness. And this is why I always struggle in our setup of business to compare quarters last year to this year. You can do it, but it's not necessarily the right results or the right conclusions you arrive with.

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft - CFO & Member of Executive Board [46]

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Mainly 4 concrete figures that help you understand the dynamics. RVS growth in North America year-over-year, full year, was 9.3%. CVS growth in North America was 15.2%. So remarkable difference. And in Asia, RVS growth was 4%, 4.1%, and CVS growth was 8.9%. So we have different dynamics in Asia and in North America. And then, of course, then if you look quarter-by-quarter, you don't only have the absolute development, but also relative development versus the quarter of the previous year, which then dilutes a bit an overall understanding.

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William Mackie, Kepler Cheuvreux, Research Division - Head of Capital Goods Research [47]

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That's very, very helpful. And then with just a comment that I think you made to the media to follow-up on, how the year started on order intake?

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Klaus Deller, [48]

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Yes, yes, yes. All that means we have now the 2 data points on -- it's January, February, and we are -- let's say, you we will see us sitting with a smile for these 2 months.

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Operator [49]

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The next question we received is from Ingo Schachel from Commerzbank.

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Unidentified Analyst, [50]

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It's actually [Justine Stein] from Commerzbank. I just want to come back to your Q4 margin in CVS. So I mean I'm completely aware of the fact that we have seen a very high comparison base in the last quarter, in '17, but I still struggle to understand the mix effect OE versus aftermarket because according to my calculation, in the fourth quarter, we have seen an increase of roughly 200 basis points to around 30% aftermarket sales in commercial vehicles. So I'm just wondering what I missed here or what was the reason why that has not hit through on the margin side? Is it rather than a mix effect in terms of regions? And should we expect some of this supply chain bottlenecks or challenges and also the raw material inflation also to have an adverse impact in the first half of next -- of the current fiscal year? So is it fair to assume that there's some 50 basis points also kind of underlying effect, which we should expect to continue?

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft - CFO & Member of Executive Board [51]

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Yes. I mean, we are not yet at the point of providing divisional guidance. We will -- we've reserved that for end of April. And we are not only then guiding divisional top and bottom line, but also some of the other metrics that we are asked earlier. So I'll be a bit cautious here. But it is -- I think we want to make people understand that, generally, the material situation and the supply side -- supply chain situation is a stress to the overall system. And this is because nobody, for the last 3 years or so, has expanded capacities, including most of our setup as well.

So there are extra costs that are related to special freights, there are extra costs to expedite and prioritize production work at our suppliers. There are additional shifts that need to be done at our level. And as long as the truck production rate keeps creeping up, it's not going to go away. It may, however, level off at some point during the year, and in certain regions, also come down for a period of time. So there will be, I think for the next 6 months, probably the same constitution that we had also in the last 6 or 8 or 9 months.

And once again, to your Q4 2017 question, yes, regional mix, R&D capitalization, also within the aftermarket there are some mix shifts in the channels, that all. And maybe also a, let's say, an accounting which didn't always fully allocate perfectly between the quarters and kept certain reserves for the final part of the year that we also discussed in the 9 months call. So those were, I suppose, some of the reasons that led to an uneven distribution of profit over quarters.

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Operator [52]

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The next question we received is a follow-up from Lucie Carrier, Morgan Stanley.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [53]

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Actually, I only have one left. I was just wondering if -- what you have seen most recently in your CVS order backlog, have you seen any type of cancellation or slight changes to the individual orders that have been made? Just curious to understand how firm those orders are within your backlog.

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Klaus Deller, [54]

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Very firm, Lucie. We have -- what we see in that, the visibility we have in the CVS, that is reliable. It's the half year. Look, there have been no major changes in maybe shifting from one month to another, pulling ahead or postponing, but nothing material we see in our order books.

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Operator [55]

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And we received a follow-up of Philippe Lorrain from Berenberg.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [56]

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Actually also only one follow-up. Do you expect any kind of one-off in 2019? Or does the guidance not include any of this when you provide this 18% to 19% range? I'm bouncing back on that because you obviously had EUR 26 million, I think, if I got that correctly, in 2018 as a whole.

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft - CFO & Member of Executive Board [57]

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Well, we may have additional -- or, let's say, not additional, but continued costs of further improving our IT systems around the IFRS conversion that -- that's something that will have some bearing also on 2019. And then around the Hitachi integration, there may be some costs associated with that. And of course, we haven't fully done the purchase price allocation and therefore the associated integration of the assets into our balance sheet. There are some such effects that we will describe as and when they become evident, yes? But other than that, we are not foreseeing anything substantial. We will be forthright in communicating if things change.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [58]

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Okay. But the 18% to 19% range so far does only include these (inaudible) the IT system change and IFRS conversion because of Hitachi are all in the guidance?

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft - CFO & Member of Executive Board [59]

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Yes. Yes, it's not on top or excluded, yes.

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Operator [60]

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(Operator Instructions) We received a follow-up from William Mackie from Kepler Cheuvreux.

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William Mackie, Kepler Cheuvreux, Research Division - Head of Capital Goods Research [61]

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It's on a strategic angle, really. I just wonder if you can update on your thinking about if there has been a change on how the evolution of some of the autonomous driving or assisted driving functions around the vehicle will develop.

It seems that some of the leading OEMs are either continuing to pursue aggressively or stepping back from their pursuit of those elements of their own strategy and maybe looking to system suppliers within their supply chain. And also, you mentioned that we've all seen that, but how that development is progressing with Conti? And I guess alongside that, an update on the relationship with Bosch given their different views on how the industry should have developed in autonomous driving capabilities around steering and braking?

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Klaus Deller, [62]

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William, that's great calling that one question, but I'll start with the beginning. Autonomous driving, absolutely we will remain on the accelerated pedal. Since -- here in CVS, you have a business case. You have a business case of taking a major chunk of cost out by expanding driving time off in a full-fledged version, to take the driver out and have a 30-plus percent cost savings.

So we will continue to develop level 4 autonomous driving systems with the subsystems we have consisting out of steering and breaking. That some OEs have said they go out of platooning and skip level 3 autonomous driving, we fully support and applaud that. It will also leave us more time to get remuneration on cost of level 2 systems. We can develop that further with functions like turning assist and other things.

The partnership with Continental is extremely helpful for us. It's a company that has a top-notch know-how on the sensor and the sensor fusion business, that has a large span of use cases from the passenger car arena which we can build on to apply truck-specific used cases on and make our systems better, and benefit from the scale efficiencies that Continental has in the business they generate.

That's -- I'd say, larger passenger car companies have supposedly, that's what I read, joint efforts in order to decrease, let's say, split -- spread the spending on autonomous driving, it's there for the passenger car vehicles. There is not such a clear business case. There is not really that willingness to pay from the consumer for autonomous driving functions.

So joining forces on an OE level is actually something that the supply industry has been created for, consolidating volumes across OEs. So I say to you, this will be a typical system supplier business supplying automated ability to autonomously move your vehicle. And of course, the fingerprint and the footprint of how that vehicle performs will be with the OE, but as it is with the braking system, it will be with the braking and the steering and autonomous driving. And I think you can also read into that why this area is obviously so attractive also to others, like I said, with supposedly [IM-APCO] or Bosch that have opted -- want to get out of our business, but an update on Bosch, I would hand over to Ralph, who is dealing with the case more directly than me.

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft - CFO & Member of Executive Board [63]

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Yes. I mean, there's basically no news. This is before the arbitration court, and that court is asking for papers from both sides. And it review the question whether or not there is a justified cost for production and also whether or not there is a post-JV noncompete clause. And as mentioned before, the purchase price is not part of that dispute. And so, there's basically no update. Its a process -- it's a work-in-process situation.

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Operator [64]

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As far as there are no further questions, I hand back to Mr. Deller.

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Klaus Deller, [65]

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Yes. Thank you very much for giving us your attention. And for, really, the vivid question session from your side and (inaudible) Ralph and myself are always thrilled to discuss with you, really remarkably well prepared and even though we're only half a year in the market, it looks like -- it seems like you have been with us already for the last 20 years understanding and scrutinizing our business.

We thank you very much, again, for your attention. We will pay full attention to stay within the guidance that we have provided. And we hope if there is exceptions to that, it will only be positive ones. And we're looking forward to joining you again next time wherever we see or hear each other. All the best. Thank you.

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Ralph Heuwing, Knorr-Bremse Aktiengesellschaft - CFO & Member of Executive Board [66]

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Bye-bye.

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Operator [67]

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