Good day, and welcome to the Knorr Bemse AG Earnings Call for Q3 2020. This conference is being recorded. At this time, I would like to turn the conference over to Andreas Bitzau, Head of Investor Relations. Please go ahead.
Thank you, operator. Good afternoon as well as good morning, ladies and gentlemen. My name is Andreas Spitzauer, Head of Investor Relations of Coronavirus AG. I want to welcome you to Morarama's conference call for the Q3 2020 results. As a reminder, the conference call will be recorded and is available on our homepage, www.knorparamuse.com in the Investor Relations section.
Here you can find today's presentation and later transcript of the call as well. It is now my pleasure to hand over the call to Frank Markus Wieder, CFO of KNOBR MSE. Please go ahead, Mr. Wieder.
Thank you, Andreas. Dear ladies and gentlemen, I do warmly welcome you to our conference call for the Q3 results of Nordremsey in 2020. We appreciate you joining us today and hope that you and your families remain healthy and safe. Today's call is made up of 2 parts. First, I will present the financial results of the last quarter, followed by an update on the guidance for 2020 and an initial view on the coming financial year.
Thereafter, together with my 2 colleagues in the Executive Board, Doctor. Jurgen Wilder and Doctor. Peter Leier, we will answer your questions. Before we start the presentation, I would like to say a few words about our employees at Nordbenze. The whole executive board is very proud of the strong engagement, motivation and execution by the team in the last months despite an ongoing challenging environment.
Everyone remains very focused and is highly committed to serve our customers and small brands as good as possible. We think that is outstanding and worth mentioning before everything else. We are continuing to focus on health and safety as number one priority at Snobrenzy for our colleagues, our customers and our business partners. So let me start with the main topics of the Q3 on Chart 2. In the Q3 2020, again, Financials were strong in both divisions, and Knoebremse was able to give an impressive demonstration of its superior performance and the high level of resilience.
In CVS, we saw a strong market recovery and managed to outperform the market once more. Our RBS division also approved its resilience driven by a stringent implementation of the defined measures. In terms of earlier reporting, we now made considerable first progress on our path. Compared to the same quarter in 2019, we already achieved by 8 days. As mentioned before, earlier reporting and the IFRS migration will be a core focus of Norbremze going forward, more to follow in 2021.
Last but not least, I'm happy to inform you that Doctor. Jan Brozig, Currently, Doctor. Jan Michael Mrozek, currently COO of Digital Industries at Siemens, will be joining the executive management team of Norbremsee as of January 1, 2021. The whole leadership team is very much looking forward to having him support very soon. We believe that he is a great addition, and we will now complete our team.
Let me continue with Chart 3 and the market development in the 3rd On the rolling stock side, global markets further recovered in the last month. The whole rail industry was spared from cancellations, but we still see postponements, which will have an impact on the revenue development of RBS in 2020 and also in 2021. Overall, OEM production capacities in almost all countries further improved to more normalized almost pre COVID-nineteen level. But we are still in the midst of the COVID-nineteen pandemic and have to monitor the impact of the currently rising number of infected people basically all over the globe very closely. Stimulus packages with promising links to green mobility are in planning in several countries, which strongly supports the mood the expectations within the rail industry.
The aftermarket business is also affected by the pandemic to a certain extent. We have seen pull ins from second half of twenty twenty into the first half of the year due to the rapid COVID-nineteen development at the beginning of the year. Due to the ongoing restrictions and lockdowns over the past month, a low ridership in trains is recorded as passengers make adjustments due to social distancing. Nevertheless, we have realized encouraging signs of improvement ridership due to lower number of infected people during summertime. Unfortunately, number of people in trains decreased, again, recently because of the increasing number of infected people.
After the very negative impact of the COVID-nineteen pandemic on the demand for trucks availability of production capacities in the Q2 2020, markets for our truck business strongly recovered in the last month. All major markets, for example, North America, Europe and China, significantly improved and short term short time work consequently could be suspended. China, where we saw record levels of truck production rates in the second quarter, still shows solid performance, which is expected to be ongoing for the rest of the year, supported by pull in effects from 2021. The ongoing pandemic still challenges the whole industry and significantly increasing infection rates could influence the currently positive truck demand and therefore, must be watched very closely. Let us proceed to Chart 4.
I will walk you through the most interesting recent events at Norbremsee in quarter 3 especially. We launched a new €3,000,000,000 debt issuance program in order to increase our financial flexibility quickly, if needed. In October, we paid back €250,000,000 out of the €750,000,000 which we drew at the beginning of the COVID-nineteen crisis because the negative financial impact by the pandemic was less than expected so far and also beyond. The Rail division won a major contract from Siemens for entrance systems for 94 underground trains in London. In addition, it has prolonged the contract with Bombardier regarding the maintenance of braking systems on track locomotives by 5 years.
RBS announced that it will equip 30 high speed ICE trains for Deutsche Bahn with an option of additional 60 trains. In order to meet the strong demand, the truck division expands manufacturing capacity in China by building a new plant and continuous strategic cooperation on automated manual transmission, advanced driver assistance and automated driving with Dongfeng. Our spearhead in the North American truck market, Bendix, acquired full ownership of Bendix Beiser Foundation Break LLC, a joint venture formed with Dyna in 2004. Let me continue with the financial highlights overview on a 9 months basis before diving into the details of the 3rd quarter results. On Chart 5, you can see the summary of the key figures 9 months year to date.
Considering the uncertain economic environment around the world in this very unusual year, Norbrem's overall performance and resilience since the beginning of the year been remarkable. The numbers confirm the special robustness that is embedded in Knorr Bremsel's business model, even if some segments are more affected by the crisis than others. Nevertheless, KB's results were negatively affected by the pandemic, too, even though to a significantly lesser extent than other companies in the industrial sector. During the 1st 9 months of 20 revenues came in at €4,600,000,000 14% lower year over year. The EBITDA margin reached strong 17.5%, the upper end of our full year guidance for 2020.
The free cash flow of €169,000,000 saw a sharp decline versus the previous year's period, Especially the Q1 2020 was weaker than 2019 and even negative. But free cash flow improved strongly in the last quarter, and we expect so also in quarter 4. Let me continue with an overview of the financial highlights of the Q3 on Chart 6. Overall, COVID-nineteen still had an impact on business development in the past quarter. Even though performance has already improved significantly compared to quarter 2 2020, order intake was at €1,600,000,000 for the group, And our order book of €4,500,000,000 remained on a high level and provides good visibility for the coming quarters.
At €1,500,000,000 revenues decreased by minus 10% compared to the Q3 of last year, driven organically by both RBS and CVS, but also FX headwinds were recorded. Our EBITDA margin, nevertheless, decreased only slightly from 18.3% to 17.5% in quarter 3, which we consider to be a very good level of profitability. It is a further proof of our resilient business model at KNOBRIMBLE. The free cash flow in the 3rd quarter amounted to €182,000,000 and was up by nearly 10% compared to the previous year's level. Our cash conversion rate reached 129 percent point.
Let me dive deeper into our quarterly results on Chart 7. Other intake on group level increased by 4% to EUR 1,630,000,000 compared to the same period in the previous year. On an organic basis, the increase was even higher at around 6%. Compared with the development in the Q2 of 2020, in which we still had to recall the decline in order intake almost a third year over year, the performance in the past quarter was extremely strong. This result was mainly driven by CVS, which was positively affected also by a lot of pent up demand in Europe and in North America after a very sharp decline before.
Our book to bill ratio in quarter 3 was positively impacted as well, reaching 1.06 versus 0.92 in the previous year's quarter. The development of the order book at the end of the Q3 was particularly pleasing, Despite the ongoing impact of the pandemic compared with the previous year's order backlog, it increased by 1.2% to €4,460,000,000 This level is only 5% below pre COVID-nineteen, which we showed at the end of 2019. Let me continue with our revenue development on Chart 8. In the quarter July to September 2020, revenues on group level decreased by minus 10% or in absolute numbers by minus €178,000,000 to €1,540,000,000 On an organic level, we saw organic development was better with a decline of only 7%. Compared with the development in the Q2 of 2020 with the revenue decrease of more than 20%, The drop in quarter 3 more than half year over year.
As in the Q2, the APAC region must be explicitly mentioned. It entered the COVID-nineteen pandemic first, but this region was able to continue the good recovery from the previous quarter. As a result, APAC was able to grow by 1% year over year and kept the solid demand across all 3. The regions North America and Europe recorded double digit sales declines in the Q3 year over year, But these decreases were significantly lower than in the previous quarter. Nevertheless, North America still stood at minus 23 percent versus the levels of 2019.
Let me continue with the development of our profitability on Chart 9. In the Q3 of 2020, group's EBITDA was €260,000,000 after €313,000,000 in the previous year's The EBITDA margin amounted to 17.5% after 18.3% in quarter 3 2019. This slight decrease continuously resulted from CVS. Volume effects of a declining OE business with corresponding impact on the operating leverage and by a lower aftermarket share. Compared with the Q2 of 2020 with an EBIT margin of 17.2%, we were able to post already an increase in the last quarter again.
The margin impact of declining OE business was predominantly mitigated by cost initiatives in both divisions and on group level, which continued in the Q3 2020. We were already able to reduce some of the measures in the past quarter as the demand situation recovered faster than expected in some segments. For example, RBS was already able to end short term work in July, and CVS ended short time work at the end of October. The aftermarket share slightly decreased from 38% in the Q3 of 2019 to 36% in the Q3 of 2020 in absolute figures, too. Aftermarket was not immune to the effects of the pandemic a decrease of 15% to EUR 551,000,000 This Decrease was driven by both divisions.
The group's EBIT of €195,000,000 also saw a decline of €55,000,000 which is less than half of the loss we did face in the Q2 year over year. At 12.7%, The EBIT margin was below the previous year's level of 14.6%. The higher deviation compared to the EBITDA of CVSE year quarter comes basically from higher depreciation due to increased investment activities. In summary, we consider quarter 3 2020 to be a good proof of Nordben's business model in the continuously challenging market environment. Turning to Slide 10.
We have initiated a CapEx management program in the recent months and watch ongoing spending very closely. In the Q3 2020, we realized first effects from these measures. Accordingly, investments did not only increase slightly compared to the previous year In relation to sales, investments were above our target range of 4.5%. We expect that with increasing sales, we will again be in this range of 4% to 5%. A substantial amount was invested in future growth options for both divisions.
We continue to expand the capacity for air disc brakes in North America to support our market leading position in this segment. We also made strategic investments in further software development for our global steering business and continue to invest what's necessary in technology and innovation. Net working capital at the end of the past quarter showed an increase to almost €1,200,000,000 The year on year increase was around €100,000,000 which is less than in the second quarter where we had a plus of €150,000,000 year over year. This development was mainly driven by measures to ensure the ability to supply our customers. Our corporate policy, customer first, is very important to us and has been a cornerstone of our business success for decades.
Accordingly, we have kept a higher level of inventory to support our customers in those difficult times and prevented a potential disruption of their supply chains as well as granted longer payment terms for some customers. As a consequence, we also accepted a higher level of working capital. Nevertheless, we are continuously working on further optimizations and will reduce our working capital during the last quarter, but we'll still be prepared for a quick ramp up of our business in the Q1 of the year 2021. Annualized operating ROCE was impacted by both lower EBIT and increased working capital, but still with 22.2%, well above most other companies in the capital goods sector. On Chart 11, I would like to continue with the cash flow KPI.
Our free cash flow in the Q3 2020 reached EUR 182,000,000, which is 10% higher compared to the Q3 2019. It is more than 3x higher compared to the Q2 of 2020. The significant increase is predominantly driven by stronger profit quality of our underlying projects and products and effective countermeasures regarding cash preservation, such as optimization of CapEx and inventory, but also on reduced tax prepayments in regards to the tax authorities. Based on the ongoing installed measures and driven by a normal seasonal pattern, e. G.
Projects tend to be finished at year end, We expect free cash flow to be significantly strong in quarter 4 2020 as well. As mentioned in the second quarter the cash conversion rate is a very important KPI for me and for us. As a reminder, our definition is free cash flow before M and A in relation to the net income. In the Q3 2020, Knob Ramsey reached a cash conversion rate of 129%, following 90% in the previous quarter and 41% achieved in the Q2 2020, while it was strongly negative for the 1 with a minus of 43%. On Chart 12, I would like to give you an update of the overall impact of the COVID-nineteen pandemic on our 2 businesses.
Our Knoblentse team is very closely monitoring the market situation and is prepared to act quickly if necessary. Overall, we have seen a good market recovery in the Q3, but in the rail both in the rail, but even more so in the truck industry. The major rail markets in Europe and APAC have further recovered. Even though pre COVID-nineteen levels have not yet fully been reached, we have faced any we have not faced any cancellation of projects, but several projects are still subject to shifts and postponements. Therefore, also order intake, revenues and earnings might fluctuate from quarter to Ridership remains again on lower levels, but the development in the recent months was encouraging.
The long haul passenger traffic of Deutsche Bahn in Germany, for example, was down to 15% to 20% at the peak of the first wave of COVID-nineteen compared with the pre corona timing. In the summertime, this level improved to around 75%. Currently, Germany, like many other countries, is in the middle of a second major lockdown wave. Accordingly, the capacity utilization of trains in the German long distance passenger traffic is again down to around 20% of the pre corona level. This development shows us that passenger numbers on trains will recover very quickly when the impact of the pandemic is reduced.
What does this mean for our Rail division? Our suppliers have showed a stable development in recent months and have more or less returned to pre crisis levels. Our own plants currently are at high capacity utilization and productivity as well. The key sales markets of our Truck division have recovered significantly from the lows and are still showing continuously ongoing improvements. Currently, our U.
S. Customers are back to approximately 90% of pre COVID levels and the European ones on levels of 90% to 100%. Towards the end of the quarter, transport activity was back on roughly the same level as a year ago in most markets. The Chinese truck market remains a class of its own with a market development on a high level, even after record levels in quarter 2 of 2020. Japan and India further recover on a moderate level.
In order to meet the increasing demand of the industry, we have taken precautious measures with our suppliers and at our own plants, e. G, securing the parts supply and increasing the safety measures at our own production plant even more. Let's move on to the divisional view, starting with RBS on Slide 13. In the Q3 of 2020, order intake of Rail Vehicle Systems was at EUR 726,000,000 a decrease of 24% in total and 20 on an organic basis. Impacts by the pandemic, which led to tender shifts and postponements, were the main driver for this development.
Besides, I would like to remind you once more that developments in the rail industry with its long cycles do not go well with quarterly reporting, so to say. There are always fluctuating large orders in individual quarters, which make comparisons difficult. The is difficult. The low order intake in the Q3 of 2020 also resulted from a major order in Germany in the amount of significantly above €100,000,000 which Quip Electric was not able to sign. In addition, there was the postponement of the €20,000,000 contract in Taiwan.
We firmly believe that RBS order intake in the Q4 2020 will be meaningfully higher than in the last quarter. The book to bill ratio developed accordingly to the lower order intake and moved from 1.04 in the Q3 of 2019 to 0.88 in the 3rd of 2020. The order book, on the other hand, increased by 3% year over year and finished the 3rd quarter at €3,400,000,000 This level of order book is only 5% below the record level we have achieved in recent years. It provides a good visibility for the revenue development in the coming quarters, and it shows the overall stability of our business. I'm now moving on to the revenue and profitability of the Rail division on Chart 14.
In the Q3 of 2020, RBS recorded revenues of 822 €1,000,000, which only decreased by minus 5% organically year over year, but minus 10%, including FX and M and A effects. RBS recorded slightly declining sales in both the OE and the aftermarket business in the Q3 of 2020 year over year. As already mentioned in our last call, RBS recorded pull forward effects from the second half of 2020 into the first half of the year in the aftermarket segment. Accordingly, revenues in this segment in the Q3 of 2020 were overall around 10% below the previous year's figure. Europe, which was affected by the pandemic, contributed about 40% of the year on year decline in the division sales.
Predominantly, the OE business was by lower revenues for metro and light rail vehicles. The divisional passenger business overall grew, and the aftermarket business mitigated the decline of the European business. APAC, including China, also declined overall, but less than Europe. We see that this region has already recovered significantly from the pandemic. But please keep in mind, it will take time for the process speed to return to normal level.
Almost all revenue segments declined year over year. Despite this, our metro and locomotive business stood out positively, recording growth, particularly in China. In North America, we recorded an overall decline. Lower revenues predominantly in freight could only be mitigated by the development in the service business. The profitability of RBS in the past quarter was certainly remarkable when considering the respective revenue drop.
EBITDA of RBS came in at €178,000,000 in the Q3 2020 and was down only minus 6% compared with last year's level. The EBITDA margin increased from 20.6 percent to 21.6 percent and EBIT margin 2 increased from 17.3% to 17.8%. These margin improvements are also based on the following topics. First of all, the COVID-nineteen measures had a large impact in supporting profitability in this third quarter. Please keep in mind that the measures are predominantly of a short term nature.
Nevertheless, we intend to make the biggest part of it possible sustainable also for further years. 2nd of all, we sold the loss making PowerTech unit, which supports our business beyond Q3 2019. I would like to continue with the development of our Truck division on Slide 15. Incoming orders of CVS were exceptionally strong and one of the highlights of the key figures in the 3rd of 2020 overall. At €902,000,000 the overall figure was 45% higher than in the previous year and fully in line with the organic development.
This development is very pleasing after the severe negative impacts on demand throughout the COVID-nineteen pandemic, especially in Europe and North America. Both regions benefited from catch up effects in the last quarter. In of order intake was again supported by China, already after a record demand in 2020 quarter 2 2020. Japan and India also saw a solid recovery since the very low levels in the first half of twenty twenty. The order book of our truck division amounted to €1,100,000,000 at the end of September 2020, which is a slight decrease year over year.
The order book level of CVS, therefore, has almost reached pre COVID-nineteen levels, among other things also supported by the acquisition of Shepherd. Let's move on to Slide 16. CVS posted €712,000,000 in revenues for the Q3 of 2020. Compared with last year's figure, this is a decrease by nearly minus 11% and on an organic level of minus 10%. In North America and Europe, the decline in revenue in the last quarter was more than half compared to the development in quarter 2 twenty Both regions were nevertheless still strongly affected by the pandemic, but we saw a steady improvement in the general conditions.
The North American truck market also improved in quarter 3, although a little bit lower due to tougher comparable figures last year. The APAC region again recorded revenue growth in the Q3 year over year, well supported by China and market share gains from our commercial vehicles division. The share of aftermarket slightly decreased from 30% in the previous year to 27%, which is due to a very strong OE business in this this quarter 3 of 2020. In the Q3, CVS achieved an EBITDA of €102,000,000 which is significantly lower compared to the previous year, but is a doubling versus the Q2 2020 with only €51,000,000 The EBITDA margin amounted to 14.3% compared to 16.3% a year ago, but also here. Compared to the Q2 2020, it is a margin improvement by almost 600 basis points.
In the past quarter, CVS also benefited from the successfully implemented cost measures. In addition, better capacity utilization supported profitability compared to the Q2 2020. On Chart 17, we compare the regional sales development of CVS with the regional development of TPR. In addition, we would like to give you our assessment of the TPR in the key regions until the end of the year 2020. Basically, we are quite confident regarding the truck industry in the foreseeable future.
CVS once more strongly outperformed the underlying truck production in all major regions and markets year over year in the Q3 2020. The CVS performance, driven by further growth in content per vehicle and market share gains predominantly in the APAC region. Until year end, we expect an ongoing positive trend in truck production rates in Europe and in APAC. The rate in North America should be able to experience a stable development in quarter 4 versus quarter 3. The truck production rates in China are also expected to continue strongly, driven by subsidies to accelerate replacement of vehicles with higher emission standards as well as further governmental support.
Let's move on to Chart 18, which shows our management agenda and things we are on the way to change to support our future development. Please let me dive deeper into 5 rather important topics for us. 1st, as announced in the 2020 conference call, cash flow has and will have an even higher priority at Snow Bransley. In the Q3 2020, free cash flow already improved to €182,000,000 after €48,000,000 in the Q2 2020. In order to underline this focus, we are planning to include free cash flow targets 2 consistently in our management and staff bonus system.
2nd, the world is changing and sustainable management is becoming increasingly important. We see no contradiction here with the interest of our shareholders in contrary. Only those who grow profitable have the freedom to successfully implement sustainability topics. We also see opportunities here. Our Rail division, in particular, is clearly benefiting from the desire for more sustainable and greener mobility.
In order to strengthen the rising importance of ESG topics within SnorBremsey, we are also planning to integrate concrete ESG targets into the compensation package as soon as possible. 3rd, earlier timing reporting is one of the focus topics going forward. We completely changed the setup of our IFRS migration project to strengthen our efforts and ensure respective go live of the project. As an example, we also intend to include the IFRS migration project into the management bonus system. Number 4, as a relatively young company at the Capital Market, we want to rise the capital market thinking and understanding within Snowbremse further.
Therefore, we will expand the stock based long term incentive program for our middle management and implement a share program for all our global employees where Knob Ramsey would subsidize a certain purchase of Knob Ramsey shares of our employees. Last but not least, overall, we believe that Norbremsen has a very efficient and lean overhead and administrative setup. But as in every other company, there is always room for improvement. We want to further optimize our internal processes and digitalize our activities to a higher extent. For example, we are currently organized on a regional basis to be as close to our customers as possible.
Why shouldn't it be possible in the next step for efficient regional locations to take over overlapping administrative tasks on a global level. That is, for example, what we mean with the acceleration of global business services at Knobrances. Let's move on to Chart 19, the outlook for 2020 and for most of you also quite important. Overall, SNABRAMSI performed strongly in the 1st 9 months of this extraordinary year. Our rapidly implemented countermeasures were well able to mitigate the market turbulences in both of our divisions so far.
Due to the positive development in the past 3 months and the expected development in the 4th quarter, We confirm the guidance given in July 2020. Despite the fact that we did face some FX headwinds, especially in last quarter, Subject to further lockdowns due to the COVID-nineteen pandemic and any related negative effects on the cost of business Until end of the year, we continue to expect revenues between €5,900,000,000 6,200,000,000 and operating EBITDA margin between 16.5% 17.5%. Overall, we feel comfortable with the upper end of both ranges. I would like to end the presentation with Chart 20, which gives you our first thoughts for 2021. We are currently in the planning process here at Knorr Premze for the next year.
We should be completed over the next few weeks. So in a nutshell, we would like to share with you our market outlook, our strategic focus and the resulting first high level indications for financials in 2021. For the Rail segment, we expect the passenger market to develop strongly, and the aftermarket overall should only be partially influenced by lower ridership in trains next year. In Europe, we expect more details regarding the Green Deal initiative, which clearly will be positive for the Rail division mid- to long term. On the other hand, we also expect that the autonomous policy in China will continue to grow, which will affect our rail business in the medium to long term as well.
Overall, however, the opportunities in Europe should be much greater than the potentially negative effects in China. According to our initial assessment for 2021, This should lead to a solid increase in RBS revenues as well as even a slight growth of the EBITDA margin. On the CVS side, initial European and North American data for the truck market suggests significantly higher volumes for 20 The development in China should be negatively influenced by pull in effects from 2021 into 2020. The overall aftermarket is expected to recover based on the assumption that transport volumes will recover, too. Our strategic focus in the truck segment will concentrate on further increasing the content per vehicle, further integrating the acquired companies in the steering sector and further expanding of our Chinese business in general.
We currently expect CVS should be able to deliver solid growth in revenues and solid EBITDA margin improvements in 2022 compared to 2020. Once again, these statements do not represent a guidance, but they should help you understand the market and the conditions in 2021 as we see them at this point in time. Please note that these first indications for 2021 are subject to 2 important conditions. 1st of all, a generally stable market environment in rail and truck And second of all, the negative financial impacts of COVID-nineteen are limited and manageable. With this, I would like to thank you very much for listening and for your attention.
Mr. Laiar, Mr. Wilder and myself are looking forward to your questions from now. Thank you.
We will take the first question from Lucie Carrier from Morgan Stanley.
Hi, good afternoon, gentlemen, and thanks for taking my question.
I have
Three questions and I will go one at a time, please. The first one was around kind of the indication you provided very kindly for 2021. Can you maybe help us to think a bit more precisely about the terminology when you look about strong and modest in terms of improvement because I think you may have slightly different meaning for different people. So are you able maybe to provide a range when you talk about strong and modest?
Was that one question or was that already the 3?
It's just one question, please.
Okay. Yes, we As we have said, we don't expect this to be a quantitative guidance at this point in time. As I outlined that we are in the midst of a comprehensive planning process right at this point in time. So we thought a qualitative kind of The explanation would be already helpful for all of us somehow to understand where we are going. Needless to say that we think that solid is better and stronger than Slide.
I think that is very clear. I think slide is for us a lower single digit growth number somehow and solid, therefore, would be better than on these slides.
Okay. Thank you very much. This is helpful. My second question was related to the Rail business. And I guess I have two questions to that.
One is you've mentioned some delay and postponement in terms of the tender activity. Do you have visibility on when those tenders are supposed to be awarded? Is it soon or is it kind of Indefinitely delayed. And then one comment you've made about the ridership being down and impacting your business. It seems to me that few months ago or at the beginning of the COVID-nineteen crisis, we were discussing that the ridership was not that much of an importance.
But what was more important was the number of train on the track rather than the number of people on the train. So is there a change to that in your view? Or Simply, you're expecting the train on the track itself to continue to be quite low because of the ridership?
Yes. I'm happy to take that question. It's Jurgrit, yes. No, there's no change In that interpretation, like we said a few months ago, it is more important, of course, that the trains are running. And we also continuously see the trends running or the ridership is down a little bit.
Of course, we do see an increased cost consciousness, for example, in Asia or China in terms of maintenance and maybe looking forward to stretch a little bit maintenance cycle that might have a little bit of an impact. But The interpretation that you rightfully heard a few months ago That it mainly depends on the trains on the track, and they are running. That is still very valid and will be valid in future also. We have just seen, for example, that there is a certain impact to it, for example, in France. Now With the second wave, there's a little bit of a similar schedule of trains running, and we might see that in other countries as well.
That's the interpretation is correct. Then your first question regarding RBS with the tender activity, Yes, we have a good visibility of when what tenders will be awarded. Of course, there's always a little bit of fluctuation around when will it really happen. We do expect it probably also said we do expect a stronger order entry in the Q4. Then in the Q3, where we had a little weak numbers.
That is also due to like Metro River pointed out earlier, one project, especially for Kiefer, which is which was awarded in Q3, and we were not awarded that order. But I can tell you that, that is always large orders in the 3 digit €1,000,000 range. But I can also say that There is another order in the pipeline where we have very, very good chances to win in the next few weeks. We have already gotten feedback from the customer, but there's always timeline for peers, so we need to wait for that. It will expire basically next week.
And if that goes through, then we would be able in Q4 instead of Q3 to book a major order for Kieper and that will turn around that And if it had been differently, you lose an order, you win an order, if it had been differently, that we had 1 Dusseldorf and not the other one, for example, then Q3 would have been much stronger, and that's how those fluctuations between quarter on quarter are always there. We've also heard, maybe to add that briefly, that also the car builders expect and enhanced order entry over the next half a year and with some delay that then go to sub suppliers like us. And we expect from that also that we see in the midterm an increased order entry level again compared to how we have seen it in the past two quarters.
Thank you very much for the color. I guess my last question was around the free cash flow, very impressive rebound in the Q3 and high conversion. Obviously, the beginning of the year had been a little bit weaker. So when we think about the Q4 that seasonally obviously is always quite strong, How much should we think in terms of what's sustainable in terms of what we saw in the Q3 and what was maybe more of a catch up effect from the previous quarter, which were a little bit more on the low side.
1st of all, I think, yes, you're right. The 1st quarter was rather weak. We usually have the tendency, so to say, to improve or to increase the working capital levels at beginning of the year, and that basically hits then the free cash flow line in the very Q1. That was also this year the reason somehow why this negative results came up. Yes, quarter 3, we had some catch back effects, of course, but also significant cost measures that we have implemented.
And what also needs to be said that the underlying Cash flow richness of the individual projects and products have been quite good. So underlying Good quality of the earnings in the quarter also plays in, in this quarter, which should be definitely sustainable. Yes, I would say, in addition to your question, there were some effects we have also, like all other companies as well, reduced the prepayments to the tax authorities, Germany, North America. So I would say this did help us with maybe a not sustainable amount of maybe €40,000,000 €40,000,000 €50,000,000 Euro. But we despite that, basically think that the free cash flow in the 4th quarter should be at least on this level that we have seen.
Thank you very much.
We
will now take the next question from Svein Vyer from UBS.
Yes. Thank you. Thanks for taking my questions. Good afternoon, gentlemen. The first one is a follow-up on the rail comments you've just made.
And obviously, you're quite confident, it seems, on Q4. So would you be overall happy to expect the book to bill of around 1 for the unit this year. And associated to that, I remember in H1 in the report, you were indicating that you the backlog for the whole group at the end of 2020 to be higher than at the end of 2019, which means that in Q4, your order intake needs to be quite a bit above sales. Is that still your expectation on a group level? That's the first one.
Thanks.
Yes. Let me start With the gray portion, there is indeed, we expect that The Q4 will have, as I said before, a meaningful higher order entry than we had in Q3, which is even above where we see the sales. So there should be a positive book to bill rate in Q4, which then would indeed increase the order book That's what we see today. That's what I indeed would expect. Yes, that will be my answer to your question.
So that's good. Thank you very much, Mr. Veldor. So if this then comes through, coming to your second question, I would then, based on these assumptions, also still confirm what we have written in the second half year report That our order book would then be slightly above the levels of end of December 2019. We can still confirm that.
It would be also that would be also nevertheless than 2 for RBS per se and for the group.
Okay. Thank you for that. And the other one is another rail question. Obviously, you've been mentioning the structural outlook for China, where maybe in the medium to long term, you might lose some share over there. But on the other hand, obviously, we've now seen in Europe, You're constantly winning business from Alstom.
So is that the right impression that you're gaining share in France On the back of these contracts? Or how should we look at that situation?
Yes. I mean, indeed, We'll see that there's a lot of opportunities for us in Europe also in the upcoming years. The European market is actually growing quite a bit. That has something to do with replacement needs. And it's also quite right what you said that we improved our position in France with some of the contracts that we have just recently and also last year 1 there.
So we can participate in a lot of replacement needs in Europe that we currently see. And it's also the right interpretation. I would underline that what you implied that maybe some headwinds that we might see in China because of an enhanced autonomous policy, which was always there, but it might be underlined a little bit because of trade war and also COVID impact is something that we need to watch, that we need to react on also like stretched maintenance cycles that the Chinese for cost consciousness would apply to their fleets. It's compensated by better outlook in Europe that we see. So I would confirm what you implied in your question,
yes. Okay. Thank you, Doctor. Wohler. And the next one is another follow-up from Mr.
Weber. You mentioned that you're happy to confirm more the upper end of the guidance range for this year. And we had a few companies already making some positive comments how trading has held
up in
November despite the lockdowns. So I suspect that is what you're currently seeing as well that there's at the moment still no impact from the lockdowns we saw.
Thank you. Yes, I can confirm that at this point in time, we don't see Any impact? And currently, also don't anticipate in our forecast figures internally any headwinds from that.
Okay. And maybe one final question, if I may, just coming back to your point about the temp costs and how you make them permanent, at least that's the intention. Can you just quantify in terms I guess in Q2, you probably had the maximum temp cost saving. Could you say that relative So that way you're still in Q3 percentage wise, was it still like 80%, 90% of that? And how do you see that developing then for Q4?
Thank you. I think important question when it comes to, of course, also planning discussions internally. We have reached indeed the peak of our savings in the second quarter, as also outlined, with more than €50,000,000 in divisions combined of savings. And we still see a level of 70% roughly out of that in the Q3. But already, as you can see already, significantly lower Then in the Q2 due to some of the aspects I just mentioned, nevertheless, I think there is potential still in there That this number will not completely go down to 0% because you have on the expenses side quite a lot of stuff if If you consider traveling, if you consider consultants cost, etcetera.
So there is quite a lot or even infrastructure cost, if more people are working in home office, So a lot of potential at least in that would be sustainable also for the next Year to come, whether they will be ultimately sustainable, this we have to answer at a later point in time. But there is potential in there to maybe 20%, 30% out of that as my very first guess at this point in time.
But you see another step down in Q4 from the 70%. So does it go down maybe to 50% or what would be the ballpark there?
All part would be maybe 50%, right.
And then 30%, as you said, is then sustainable then in the next year, Okay. So this would be
That's all from my side.
You're welcome.
Thank you very much for that. Thanks.
Thank you.
We will now take the next question from Felicitas Milsmark from Deutsche Bank.
Yes, thank you very much. I have another question on the order intake in rail. I'm sorry. I was just wondering, Do you when I look at your solid growth assumption there, do you expect order intake to return to strong growth in 2021 and basically catch up on those The experiments that you were seeing now that we have the news on the various vaccines? Or does the low ridership still outweigh the better sentiment and you only A slight growth here?
No. We expect to return to higher order entry. I mean, there is In 2021, even as I said before, we expect stronger order entry in Q4. There is different aspects to it. 1st of all, I mean, if you look at the overall order entry this year, then I want to remind everybody that in Q4 2019, we had a really strong order entry, really strong order entry.
And again, I think I said it last time, whether those orders come on 30th December or on the 2nd January or something like that makes a difference to the fiscal year order entry. And then, of course, what I said earlier that It really depends on when and what quarter do some larger contracts. We have always planned for also in our business plan for Kiefer that We win, let's say, one of those large orders in this year that I referred to earlier. Now we have lost first one that was given, so which of course you always prefer to win the first one, which was awarded in the industry, but we have lost it. Now it looks very, very positive that we win the second one that is out there waiting for the appeal.
That is The one thing so if we had one that in Q3 also then the numbers would not look very, let's say, Remarkable or something like that or those questions wouldn't be asked. So it's always the question which quarter you get that. And then of course, what we also See, is that with the COVID-nineteen crisis, there is, of course, a little bit of a delay of tenders and a little bit of a in the spring and that will recover the OEMs report that they expect and receive the in the market and enhance order entry, which will then come down to us in the future. And that's why I would say indeed, we'll see A better year in terms of order entry next year. I have to say, I'm not really nervous about that.
Has something to do with when new orders come in and of course, a little bit of a deal. But the general trend that we see a positive book to bill and continue on our growth path also After this COVID-nineteen crisis, I don't question that. I strongly believe in that.
Okay. Thanks. That's very helpful. And the second question I had was also on Rail. You had very strong margins.
I think you originally actually guided for worse product mix in H2. Can you maybe indicate how you would see this developing going forward? I mean, Basically, why do you expect only slight growth in EBITDA margin in Rail in 2020 despite solid growth in revenue? Is there a certain that comes into mind? Or is that just basically a base effect?
No, essentially, we see already In H2, we see a little bit of a different mix. We have pointed out before what we have seen, for example, in H1 is that we that all the operators kind of were a little scared at the beginning of this crisis that they couldn't keep up their operations. And course, that's their major task to do. They cannot afford to report like Deutsche Bahn or anybody else. And I'd say, we don't have enough spare price or something like that.
So they started an initiative to basically order more spare parts at the beginning of the crisis, which we really benefited from. That's a little counterintuitive because you think once the crisis sets in, it hits us immediately, but it didn't. And we could deliver on those spare parts on the rate side right there. And that's why we had very strong order entry in the first half and the second half, it's a little different because you can imagine that they have built more with Airbus now they need to use it before they buy new ones. And when it comes to the outlook to next year, I mean, don't forget that we had a very strong reaction because we didn't know how this all works out.
We know now much better at the beginning of the crisis with onetime measures on our cost position. So we really get the brakes in spring of this year, and we still benefit from those measures that we have taken. But those are onetime measures. They are not necessarily sustainable. We need to step off the brake a little bit in order to be ready for growth in the future.
That's why we have why we say we see a good growth on the revenue side and more or less slight growth in the margin.
Yes. So
that explains it basically.
Yes, absolutely. And the last question I have is on CVS, When you were talking about taking market share gains in content per vehicle, but especially the market share gains in Asia, from whom do you think you're actually taking that share?
That's a mix, to be honest. This is Peter Diaske. Thanks for the CBS question, by the way. It's On the one side, the market or the content in the vehicle is growing. That's why the market itself is growing.
That is helping us. And we are gaining here maybe over proportionally. And on the other side, yes, we take some share in the market from others, but it's a mix of competitors. It's not only one.
It's not your big competitor, but it might these some lower quality ones?
Yes, yes, exactly.
Okay. Thank you very much.
You're welcome.
The next question comes from Akash Gupta from JPMorgan.
Yes. Hi, good afternoon, everybody, and thanks for your time. My first question is also on RBS. And I'm wondering if you can discuss some market business and particularly the growth rate in a bit more detail. So you said Q3 was down maybe double digit in terms of aftermarket revenues in Yes, and that comes after strong H1.
So maybe if you can tell us how much growth or decline you have seen in rail aftermarket year to date? And what are your current expectations for
If I understood that question correctly, it was how much growth we have seen on the aftermarket, right, this year.
Well, year to date, what's your assumption for Q4, yes?
Yes. I mean the aftermarket so far It's a little down. I mean, we see some decline compared to last year on the aftermarket arena as well. So it is somewhat expected. But it is also regionally quite different.
We see continuously, let's say, rather strong performance or performance like last year, for example, in Europe. But we see, for example, in Asia Let me go down a little bit in the aftermarket business due to 2 reasons. First of all, it was also, Of course, at the beginning of the year, a little bit or now is the impact. As I said, they also ordered from spare parts at the beginning of the year, COVID related. But the other thing is that we have that we face in China A little bit of a tendency that the Chinese rail operators, they stretch the maintenance cycles a little bit by, let's say, 10%, 15%.
And that this cost consciousness they have there that also hits us to a certain extent in supplying spare parts and also services compared to the past few years, that is an impact that some sort of one time impact if you make a decision to stretch those cycles because you have maintained those cars in the past According to recommended schedules by OEMs, which generally are on the safe side and now you optimize it a little bit, we see a little bit of a stretch there. And that's where we mainly see a certain decline. We also see a certain decline in that market related really on the Freight market in North America, because we have seen that the freight market and the logistics market going way down. There's a lot of cars that are in storage. There's a lot of locomotives that are in storage.
And of course, there will be a catch up effect once they get out of storage, back on the track, and they need some service in order to do so. And we see that, Let's say, probably later next year or even after that effect we're setting in North America. And that's how kind of the aftermarket business is distributed. But in Europe, it's rather still rather strong.
Thank you. And my second question is on CVS side. So I mean in your recent investor presentation, you have shown your CVS offering in details. And the question I have is given the way how your some of your customers are developing hydrogen fuel cell powered trucks. Is it fair to say that your entire product offering can be used in hydrogen powered fuel cell truck or are there any components that can't be used or are there any other components that you are working on and you can increase your content In those hydrogen powered trucks?
So that's question number.
Yes. Thanks for the question. I would say in that way. We have a smaller part of our portfolio, but really in comparison to the overall review, neglectable, which is combined with combustion engines. That is EGRs, exhaust, gas recuperation valves and dampers for huge diesel engines.
That's in some maybe double digit million revenue, so small in comparison to the rest. The rest of the product portfolio is usable as well in e mobility trucks. Of the products, but as well those new technologies, fuel cell or battery electric vehicles are giving us growth opportunities. We have introduced for that new R and D center, which we call the EQ beta, where we have the intention to bring somehow 50 engineers together, we are actually maybe, I don't know, between 2030 in there and we'll enhance it there further, which is fully focusing on additional business opportunities in those new vehicles. Giving you some examples where we are already in compressed air in an e mobility vehicle cannot be produced by this classical piston compressors, which are mounted to the combustion engine, need to be produced by new compressor types.
We have This crew compressor successfully introduced into the market by the way technology which we carried over from Rail Division. They use it since decades. We have now developed a new technology, which is called the Rotary Marine compressor, which we are offering on the market and have received first awards for that. So that's typical growth opportunities just to name the one example.
Thank you, Doctor. Nayer. And I have 2 follow-up housekeeping questions. The first one is on Slide number 17. So the truck production outperformance that you have in your revenues versus TPI, is that revenue is only OE?
Does that also include aftermarket?
No, there is the aftermarket included.
And this outlook for truck production, is that sequential or year on year?
Again, can you repeat? I didn't get it acoustically, is it?
So these VAD and these arrow charts that you have for outlook EPR in 2020, Are they sequential or are they year on year?
If that's a yes, So that means this is our outlook basically for the 4th quarter.
Okay. And finally one is on tax rate. I mean for 9 months, we had tax rate slightly below 28%, which is lower than 30% we have in the last few years. So maybe comment on what should we expect for this year and next year, next year, next year?
Yes, you're right. The tax rate is on a level that we currently foresee on below 28%. This is absolutely true. And your forecast the forecast you were asking for is what tax rate I see for the Q4 or for the Next year. Sorry, I didn't get Yes.
I mean, what should we assume for this year and next year models?
Yes. I would basically say for this year, I would assume the just discussed tax rate, as we just 28% slightly below. And for next year, I would expect a higher one at this point in time Coming from the 28 towards the 30 maybe in between somewhere. This is what I currently see.
Thank you.
We will now take the next question from Iris Zheng from Credit Suisse. Good afternoon. Thank you for taking my question. I've got 2 and I will do it 1 by 1. So firstly is on the monthly trends because if my memory is correct, I think in the last call You've mentioned that over the summer, I.
E. July August, the order intake was up at 20% year on year, so very, very strong. Well, if we look at the Q3 results, then it implies a quite significant slowdown in September. So wonder if maybe July August was mainly driven by very strong pent up demand followed by a smaller September. And then how did October November November form if we can have some indications?
Thank you.
Yes, of course. I do remember well. I mean, First of all, I also clearly mentioned that the positive development year over year on group level July August was only driven by CVS, where we mentioned somehow after the 8 weeks order intake that it was somehow up in the range of nearly 50%. I remember that well. And second of all, it's The vast majority of the effect is driven by September and the RBS keypad deal That didn't come in.
So to say, that brought the level significantly down overall and unexpected in Taiwan, as I also outlined already before. So if you take those 2 together, this is basically the explanation. And then in addition, but this is only minor, also some negative FX effects came in, but this is really only minor. But to have the full effect in total. That is the reason why, so to say, the 20% July also in the end ended up with a 4% for the whole quarter.
This is very helpful. And what about October November, if we can give some sort of indication?
Yes. I mean also as already outlined a little bit by We expect definitely 4th quarter to be stronger on the order intake side than what we have seen in the revenues, needless to say, should give us this stronger order book by the end of the year. Yes, it's challenging what we have there In our planning, especially also on the rail side, but we are as Doctor. Wilsner said, we are fighting, so to say, for each and every contract here. For October, I would say it I
mean on the rail side, I can say for October, it was in that context, it was as expected, yes? We expect a strong Q4 and October within that
And for the October month, probably to answer your question indirectly, but October looks Better. On group level, we should be higher than September. And we are higher than in September, so it looks getting upwards again.
Great. And thank you for the indication. My second question is on the rail diversion. And just on because you've mentioned that some of the aftermarket was pushed forward to the first half and therefore has had a negative impact in the second half. But if there's any possibility that we can look at this excluding the Like put forward impact, then the underlying market, how do you see it?
I'm asking this because I think For one of your major customer, a rail OEM, they've mentioned for their service, for example, in the last quarter Q3, their service business grew net to high single digits and they see the market to be pretty much back to the normalized level. And therefore, I just want to have a sense of the underlying market, excluding the What forward demand impact?
If you do allow before Doctor. Wilder also gives you his insight. We have discussed, I think, several times that it's, of course, hard to grasp what the real pull ahead effect really is in the end when it comes to your bookkeeping, yes? So how much of revenue was exactly pulled forward and what not and what was pulled ahead and so on. So it's very difficult then to figure out on the revenue side as well as on the profitability So we are also not doing that to the most detailed account internally as it's Nearly impossible to grasp, yes?
I mean, it's also not that those effects are huge. They are visible, but they are not really used. So it doesn't really suggest that there's a total Remarkable thing going on in the market. It's others may might say that the maintenance market Back to normal. So it also always depends on what you're looking at.
Are you looking at basically the maintenance work that is being put into to the trends that might have been less in the Q2 than in the Q3. But if you look on the other hand then to spare parts, which is the bulk of our aftermarket business, where operators say better to be on the safe side and put them on stock and therefore using them up while the maintenance work is done a little later. I mean, you have all those kinds of dynamics. And like And we've already said that it's really difficult to say exactly what's going on where, but We see on our books that we had a good, especially on the brake side, good orders and also deliveries in Q2, especially on the brakes side. And to a certain extent, those operators are living on that Right now, when it comes to maintenance work and things like that, that might look slightly different.
Thank you. So it sounds like the swing factor here is the spare parts of the business rather than the maintenance part.
Could you repeat the question please, Iris?
Yes, sure. I just want to double check because it sounds like it's mainly the spare parts business that is currently moving the needles or is causing the volatility of the aftermarket. So it sounds like the underlying maintenance business is not having or causing a lot of volatility?
No, I mean, the all I was saying is that, Of course, the bulk of our aftermarket business is still the spare parts business. So if we saw some pull ins into the Q2, we basically refer to that.
We will now take our next question from Alfred Glasser from ODDO.
Yes, hello. Thank you for taking my questions. I had two questions. The first one on Maintenance and Aftermarket Service in Rail. You said previously that some operators are stretching out maintenance in China over longer periods.
Do you see any kind of indications of this also in other countries? And do you think that this might be anyhow sustainable? Or is it just a one off effect? And I'll ask my second question afterwards.
Yes. Okay. I mean, first answer to that, yes, we do see that. I mean, and it has something to do, If you recall how China developed and the way that China developed, there were a lot of new trends that were ordered over the, let's say, past 10 years. They that was expanding that fleet to that extent was also new to China.
And of course, there's an underlying maintenance regime that is kind of also unique for China because the kilometers that those trains run a year is much higher than in other parts of the world. And therefore, of course, when those new trains are ordered, There's always maintenance schedule that comes with it that is basically recommended also by the competitors. They are generally on the safe side. And since there was a lack of experience over the past few decades in China, how this maintenance regime works, Of course, it's also not a surprise that they now start to optimize those maintenance plans to a certain extent. There is a lot of more experience in other parts of the world where this optimization is a constant thing.
So I would not Say no to the question, is that a model for other parts in the world and do we need to see the impact of that in other parts of the world. And the other part of your question was, will that be a one time effect or will that be a continuous effect? I mean, you can only stretch it by so much, yes? That also has its limits. And once you did that and stretched it by, let's say, Do you do a major overhaul after 1,200,000 or let's say after 1,300,000 kilometers that's what we are talking about to be very concrete in those terms.
And you cannot expect it every year by another 100,000 or some point in time. So I would rather say, of course, there is further optimizations going on, but it's more so a one time impact to stretch those maintenance cycles in a continuous impact. But therefore, you can, of course, translate the stretches of those cycles into maybe a little bit of slowdown of the market growth that comes then with it, But it cannot be a continuous trade going on forever.
Thank you. That was very clear. And my second question was actually on cash free cash generation. You indicated in your slides that you will integrate free cash criteria The remuneration of managers throughout the group. Do you think that going forward, This can structurally and permanently improve your cash conversion ratio.
Currently, you're targeting percent to 90% on a recurring basis? And do you think that these measures could improve this target somewhat?
Yes. So first of all, yes, we do believe that by implementing this, we shift even further focus of each and everybody at Knob Ramsey to this important figure of free cash flow. So in the end, we just think it will make it more a pattern, A general pattern at Knob Ramsey to also strive for free cash flow the same way they are striving for good EBITDA margins. It's just bringing it up to the level of importance within the group. Do I then at the same time Intent to raise the targets because of this effect?
I doubt so. But I think we will make The targets or the achievement of our targets then hopefully achieve easier With that additional view on things, but I will not raise the 80% to 90 And I also said last time that I somehow see the floor of KnodRemze at rather levels of 70% to 80%. So in no case, we can imagine a company Knorr Premze to fall below these levels of 70% to 80%. This is what's also out there is, So to say our direction going forward. But long story, short answer, I don't see immediately the effect to link that to a target increase.
But it's hygienically, I think, important to do that consistently. And therefore, we're also not implementing that in the management, middle management bonus system, but comprehensively in the overall management, including board members, middle management and employees. So that's our intention.
Okay. Thank you very much.
Welcome.
As there are no further questions in the queue, I'd like to hand the call back over to your host for any additional or closing remarks.
Yes. Thank you, operator. Yes, thank you for all the questions. We hope that you stay healthy. We wish you a lovely Christmas time as much as possible as is the year.
And we look forward to staying in touch with you going forward. Thank you and bye bye.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.