Good afternoon, ladies and gentlemen, and a warm welcome to Knorr-Bremse's Q2 2025 Earnings Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation. Let me now turn the floor over to your host, Andreas Spitzauer, Head of Investor Relations.
Thank you, Operator. Good afternoon as well as good morning, ladies and gentlemen. I hope all of you are very fine. My name is Andreas Spitzauer, Head of Investor Relations. I want to welcome you to Knorr-Bremse's presentation for the second quarter results of 2025. Today, Marc Llistosella, our CEO, and Frank Weber, our CFO, will present the results of Knorr-Bremse, followed by a Q&A session. The conference call will be recorded and is available on our homepage, www.knorr-bremse.com, in the Investor Relations section. It is now my pleasure to hand over to you, Marc Llistosella. Please go ahead.
Many thanks, Andreas. Ladies and gentlemen, welcome to our Capital Market call for the second quarter 2025 results. Let's start with the key takeaways for today on page two. Knorr-Bremse continues to be in good shape. Yes, we do. Resilience and stringent execution in challenging times continue to be the key strengths of our house. I would like to highlight our very strong aftermarket business once again: 47% of our total revenues, which helps to counterbalance economic volatility and protects our profitability. Our strong market positions globally and our diversified revenue mix also support our results now and hopefully going forward. RVS continues to be very strong, with an EBIT margin of 16.5%, more to come in the past quarter. Our Rail division has already achieved its target margin for 2026, 18 months earlier than originally planned.
We are proud to have reached this milestone, and congratulations to our rail colleagues. The sequential margin improvement of CVS , reaching more than 10%, is remarkable, considering the tough truck market in North America currently. Our resilient aftermarket business, but also the implementation of stringent cost measures, supported this achievement. In the years ahead, 2026, 2027, and 2028, both the rail and truck industry should benefit from the announced German stimulus program as well as from the European defense initiatives regarding the investment in infrastructure. Our Rail division expects first orders already in 2026 and 2027 to come, while trucks should benefit indirectly from strong economic growth in both Germany and Europe. U.S. tariffs continue to be monitored closely by our teams. We are confident to fully pass on these extra costs via price increases to our customers, some with a certain time delay.
Please keep in mind that this is the current assessment. Potential changes on the mood of Mr. Trump and tariffs in terms of timing and rates are uncertain today. BOOST is fully on track as the carve-out process of the outstanding RVS target is almost complete. Potential investors will be contacted after the summer break, and we'll expect signings by the end of the year. We confirm our operating guidance for 2025. Since the original guidance for 2025 was issued in February, the euro has significantly strengthened against many other currencies and against all the experts' judgment that we will see parity. We have taken this development into account and are now assuming the current exchange rates, which will have an impact on the expected revenue development in 2024. It's purely translatoric.
As we are almost exclusively affected by translation effects, our EBIT margin and cash flow expectations for this year remain completely unchanged. Let's go to number three. Have a look on the market situation of rail and truck. Looking at the rail market, we can see that underlying demand remains strong in all regions, also reflected in good order intakes and full order books of RVS and its customers. We believe that demand will remain strong in the coming quarters to come, leading to an expected book-to-bill ratio of above one on a full-year base. [Foreign language] . The market development in China is strong on a high level this year. We welcome this progress, which is quite supportive for our profitability as well. Truck markets show a mixed picture currently, as you all know and as you have already heard from our customers.
Europe shows signs of recovery with stable truck production rates. The first half of the year has developed better than expected. This is also mirrored by good capacity utilization rates in our European plants and the fact that we have neither short-term work nor reduced shifts. For the second half, we expect a stable market demand in Europe. Same for the Chinese truck market, which is expected to develop stable this year as well. The North American market is the big black box currently because it's erratic. Truck production rates in the second quarter were down significantly, and the expected recovery for the second half of the year is rather unlikely at this point of time. Nevertheless, we do not expect further deterioration but a stable development in the second half of the year compared to the first half.
Currently, our North American customers are taking days off and slowing down production lines in the factories. On the other hand, they are acting rationally and only slightly reducing their workforce. We expect to have a clearer picture after the usual summer holidays. The better than originally expected development in Europe cannot fully compensate the weaker-than-expected development in North America. Nevertheless, every crisis presents opportunities. This market downturn in North America will eventually come to an end and will then meet a lower break-even point on our side. This is the core of housekeeping. Be prepared for everything what comes. The lower the break-even is, the better is the positive impact of a returning market. That's what we are going for. Now, page number four. Please turn to that page, and we look at the good financials of the second quarter.
Order intake achieved a strong result, more or less stable at EUR 2 billion. The decline in truck was almost fully compensated by profitable business and intake from rail. Knorr-Bremse generated revenues of EUR 2 billion, a stable development year-over-year. Organically, we posted an increase of 1%. RVS compensated for CVS market-driven top-line decrease. Our operating profit margin benefited as well from Rail's performance, in particular from a strong aftermarket business, operating leverage, our BOOST efficiency measures, and KB Signaling's contribution. Consequently, operating EBIT margin increased by 60 basis points year-over-year. Free cash flow amounted to EUR 146 million. Due to some cost opportunities, we announced restructuring cost of EUR 75 million this year. Consequently, EPS in quarter two amounted to EUR 0.87, affected by restructuring cost of EUR 28 million. For the full year, we expect EUR 3.50 - EUR 3.60.
The portfolio optimization and restructuring measures have a one-time impact, the bottom line last year and will this year. As a result, earnings will improve quite meaningfully next year, benefiting from a stronger asset base and lower break-even points. I'm proud of our team's maneuvering KB so successfully through challenging times and also interesting times with a lot of opportunities to come. With these holy words, I hand over to Frank.
Thanks, Marc, and hello, everybody. Let's move on to slide five. CapEx amounted to EUR 63 million, which represents in relation to revenues 3.1%. Spending in absolute terms decreased by EUR 2 million, or 10 basis points year-over-year. This development is fully in line with our strategy to optimize CapEx spending following our lowered target range for CapEx to revenues of 4% - 5%. There will be some acceleration of investments in the second half of the year. We have further improved our net working capital efficiency again by two days versus prior year. Including KB Signaling, we are now at the level of EUR 1.5 billion and 67.6 days. This step forward is clearly based on the success of our collect program, including improvements in all major net working capital categories quarter- over- quarter, respectively inventory, accounts receivables, and accounts payables.
Despite acquisition-driven higher capital employed working capital, ROCE nicely increased from 20.2% to 21.3%. You know that ROCE has a high priority for us with a target of more than 20%, a level which we are planning to exceed in the coming quarters, driven foremost by a higher level of profitability. Free cash flow amounted to EUR 146 million despite negative FX translation effects. Consequently, the cash conversion rate was nicely higher, reaching 96%. With that quarterly cash generation, we are roughly EUR 100 million ahead of last year's year-to-date amount. Let's take a closer look at the RVS performance on slide six. In terms of order intake, RVS recorded a very strong quarter once again, resulting in almost EUR 1.3 billion. This represents a growth of around 13% year-over-year, supported by good organic development as well as via the acquisition of KB Signaling. The organic growth rate stood at 8%.
Rail demand overall remained strong, also supported by the APAC region, ex-China, and Europe. As mentioned in previous earnings calls and based on the outstanding tenders in the market, we assume a stronger half-year one compared to half-year two regarding orders. Nevertheless, for the current quarter, we expect that RVS should be able to post an order intake slightly above EUR 1 billion again. As usual, I want to remind you to please keep in mind that rail is a lumpy project business and does not fit well into quarterly reporting structure in terms of order intake and lead times. Book-to-bill ratio stood at 1.17, which means RVS reached a book-to-bill ratio at or above one for 15 quarters in a row now. Order backlog increased by around 14%, reaching a new record level with more than EUR 5.5 billion.
The high order backlog and the good quality of it provides a strong basis for the rest of the year and beyond. Let's move to slide seven. Quarter two revenues amounted to EUR 1.1 billion, an increase of 9% year-over-year, also positively impacted by KB Signaling. On an organic level, the increase was 4%. Our aftermarket business developed nicely in Europe and North America, resulting in a strong aftermarket share of 59%. From a regional point of view, revenue growth was fueled by all regions. In Europe, both OE and aftermarket business grew nicely. Also, North America strongly increased its aftermarket business, driven by KB Signaling, while OE business significantly decreased year-over-year given the weak freight market in the U.S. The APAC region saw a stable OE and a growing aftermarket business. China also grew nicely in OE, while aftermarket was slightly down year-over-year.
Keep in mind that the second quarter in 2024 was a particularly strong quarter in aftermarket business due to pent-up demand and some pull-ahead effects back then. The recovery of ridership, which started in 2024, still continues. We are quite happy about the development in China, especially in high-speed local business and the aftermarket. There are still no signs of a better metro market. We improved our operating EBIT margin by 90 basis points to 16.5%, driven by the positive aftermarket development, operating leverage, a strong performance of the accretive APAC region, as well as the positive contribution by KB Signaling. In the current quarter, we expect a book-to-bill ratio of around one. The EBIT margin of RVS should be flat or slightly higher quarter- over- quarter. On a full-year level, the operating margin is still expected to be well above 16%.
Let's continue with the Truck division on chart eight. Order intake in CVS amounted to EUR 820 million, a decrease of 17% year-over-year, which was expected given the divestments we made and the weak North American Class 8 truck production rates. In organic terms, orders only decreased by 5%. On a year-over-year level, quarterly order intake in Europe was slightly and in North America significantly down. The APAC region overall slightly grew, benefiting from a good development year-over-year in China. Order intake in the current quarter should be able to increase mid to high single-digit quarter-over-quarter, supported by Europe. The North American market remains very difficult to fully assess at this point in time. Book-to-bill reached 0.92 in the past quarter. Our order book of more than EUR 1.77 billion at the end of June is 10% below the previous year's level.
Adjusted by our two divestments of GT and Sheppard, it was organically a - 3%. Let's move on to chart nine. Revenues declined to EUR 895 million, which represents - 10% driven by the divestments of GT and Sheppard and only - 2% in organic terms. This development was as expected and represents a solid performance in such a challenging environment. OE business in CVS decreased as expected in all major regions, predominantly driven by lower market demand and FX translation effects. Only Europe was able to post a slight reduction. Our aftermarket business performed better than OE, including an almost flat development in Europe and an increase in APAC driven by China. However, both regions were unable to fully offset the double-digit decline in North America.
In the current quarter, we expect that CVS total revenues should stay around the same level of the past quarter, so no real growth impulses here. Coming to the bottom line, operating EBIT of our CVS division amounted to EUR 92 million in the past quarter, down around 18% year-over-year but up compared with the first quarter of this year. As a result, the operating EBIT margin declined 90 basis points year-over-year to 10.3% but up 80 basis points quarter-over-quarter. The lower margin was mainly impacted by lower volumes and an unfavorable regional mix, which could not be fully compensated by benefits from our BOOST program measures and the higher aftermarket revenue share. I would like to mention as well that a double-digit EBIT margin is a good achievement, considering the very weak but still accretive North American market.
Profitability should slightly improve in the current quarter compared to quarter two, supported by stable markets in Europe and steady demand in North America at a low level. In addition, we expect to see more benefits from our cost measures and aftermarket. Overall, we are confident to successfully fight current market challenges with our long-term measures as well as our short-term measures in North America, our robust pricing power, and our resilient aftermarket business. On a full-year basis, CVS should be able to reach an operating margin above previous year. With that, I hand over to Marc again.
Thank you, Frank. Welcome. Let's have a look on our guidance for the end of the year on page 10. Main message, we confirm our operating guidance. Solely due to translation foreign exchange effects, we have adjusted our revenue outlook for this year. In case the dollar ratio to the euro will change or the renminbi, we will see the controversial effect. It's not a reduction of our revenue in operation. It's only because we are a European company, it's noted in euro. Therefore, we have done it, not for any other reason. The operating EBIT margin is not impacted by any of this. It stays between 12.5% and 13.5%. Free cash flow, we esteem and we see between EUR 700 million and EUR 800 million.
Compared to the first announcement of the guidance back in February, our expectation regarding RVS has slightly increased. For CVS , we are more conservative about the North American market, and our guidance does not incorporate any recovery in this market in the second half of the year. We see it flattish. Nevertheless, group-level guidance regarding profitability and free cash flow remains unchanged. Seeing July already gone, we are very positive to reach it. Thanks a lot, and thanks for the team. Thanks for your attention. Now we're available for your questions.
Thank you very much. Dear ladies and gentlemen, if you would like to state a question, please press nine and the star key on your telephone keypad now to enter the queue. I repeat, the combination is nine and star. To cancel your question, if it has been answered by another speaker, please press three and star key. For now, please press nine and star. There are a couple of questions incoming. One moment for the first question, please. The first question comes from Sven Weier of UBS. Over to you, Sven. The floor is yours.
Yeah. Good afternoon. It's Sven from UBS. Thanks for taking my questions and doing the call. The first one is on the BOOST program. I was just wondering, obviously, it's been now up and running for a while. Seems to go really well. I was just wondering if this allows you also to look into additional structural measures and if that's the case, whether you could also give us an example and let us know when it would be the right time to speak about this more comprehensively. That's the first one. Thank you.
Thanks, Sven. Good to hear you. I think we have. Very initially back some one and a half years ago when we kicked off the BOOST program, somehow chosen the sequence to do first, so to say, the brownfield and greenfield stuff, and later on go for some more structural footprint discussions. We have, as you know, in the meantime, used the perfect storm kind of what's going on in the industry and elsewhere in order to also negotiate through some footprint discussions already now. That's what you see reflected in the EUR 75 million. We are going for some footprint adjustments, basically. In regards to Europe, shifting some production from Germany to Poland, shifting some production to Czech, shifting production from Austria to our campus in India.
Those are some structural measures we are intending to do and are already nowadays preparing for that, which is really a strategic move, nothing that we would need to do in order to achieve our midterm guidance, but very strategic moves. We have been pursuing already. Those are some examples, if I would say so. Basically shift more from high-cost countries into low-cost countries and bring together some efficiencies in terms of synergetic moves.
Yeah. Thanks for that color. That's helpful. The second question I had was just because you also mentioned the German stimulus benefit, but I guess to benefit more from that, you probably have to increase your infrastructure exposure, like in signaling, like you did in the U.S. Obviously, I guess the Signaling deal, the Cojali deal, have all turned out to be highly accretive, as we could also see now in the quarter again on signaling. We see big rail merger in the U.S. We see Wabtec being active. Do you feel you also have to do something to react to that, to increase your exposure also to the German stimulus? Are you still looking to do deals outside the two divisions?
Thanks also for that one. First of all, I think the potential stimulus program, not only in Germany but also European-wide, has, I would say, more phases, kind of like the just infrastructure element. It also depends whether there are some, of course, GDP stimulus measures included. It should be by far more having an impact on us than just on the pure extension of railway infrastructure or the expansion of modernization of streets or what have you. We're doing pretty well with that plans, even though they are not concrete enough in order to ride home on it. We feel pretty comfortable there. It's nothing that we would have a revenue impact all of a sudden in a quarter by EUR 500 million or something like that. It's a very smooth, continuous, and sustainable support of the underlying market that we are seeing for many years to come. That's it.
We are not beggars, so to say, in regards to anything that should be done anorganically. We will always keep in mind and very clearly strive for that financial guardrails we have been given ourselves. We are not doing something nasty kind of and irrational. We have a strict scheme of what we are searching for in terms of targeted businesses and margin profiles that those businesses should have. Nothing also on latest competitors' moves in regards to M&A, nothing where we would be, so to say, in a defensive position at all.
I feel you make good progress on further deals, given that it's been a while since the Alstom one. You feel you're going ahead well in that regard, or is it difficult to find good targets?
Yeah. First of all, given the financial guardrails that I just outlined that you know well, it's needless to say that it's more difficult to find suitable targets on the truck side of things. On the rail side, still opportunities out there. You know, Sven, this has not changed, I would say, over the last two, two and a half years that we have somehow some 10+ targets on a regular basis on the table, whether we are in the process, ahead of the process, or thinking about it strategically only. We still have opportunities in certain dimensions in the field of aftermarket, in the field of digitalization, in the field of platform business suitable for our aftermarket ecosystems, or digitalization of things. This is something where we also, I would say, not in a hurry, but we're carefully looking at those, and this is the situation, I would say.
That's clear. Thank you, Frank, and also for the clear quarterly guidance for Q3 for both divisions. That's much appreciated. Thank you.
Thank you very much, Sven.
Thank you very much also from my side. The next question comes from Akash Gupta of JP Morgan. Please, over to you.
Yes. Hi. Good afternoon and thanks for your time. I got two as well. The first one is on margins. I mean, you talked about the segment margin expectations for Q3, but I was just wondering if you can also give some color on what shall we expect for corporate cost, because I see that corporate cost in Q2 was a bit lower than what we had in both Q1 as well as Q2 last year. Shall we expect this roughly EUR 10 million run rate for the rest of the year, or do you think it should come back to the levels that we have seen before?
Yeah. Thanks, Akash, for that. Obviously, you have quite an amount of intercompany charges always when it comes to headquarter costs. Always expect for the full-year number that's EUR 60 million, EUR 65 million roughly for the full year. That's a number we feel comfortable about. That means roughly that we are on a level of an average like EUR 15 million, plus-minus then at times. This is something that you would see ongoingly. Sometimes you have a quarter where you charge a bit more out than on the others, but that's roughly the number to take into consideration.
Maybe a follow-up on full-year margin guidance. You did 12.6% margin in the first half, and I think you're indicating slightly better margin in Q3. Do you think we still have a reasonable probability of ending in the upper half of the range, i.e., 13%- 13.5%? Your guidance is still quite wide, and given the progress on first half, I just wanted to understand how you feel about full-year guidance and where you might land based on your anticipation for second half.
Yeah. Thanks for that question, Akash. I think it's, as always, kind of we try to set the guidance ranges in order that we feel pretty comfortable with what we are planning in regards to the midpoint of those ranges. Nothing to add on this. Obviously, some things need to turn out a bit better in order to be on the upper side, and some need to come out a bit worse to be on the lower side of things. That's it. We feel comfortable with the midpoint of things.
Thank you. My second question was on RVS. You had a good book-to-bill of 1.2x in the first half, and that is an acceleration from the book-to-bill you had in the past couple of years. The question I have is how shall we think about phasing of these strong orders into revenue? Are there several orders with longer duration that will have limited impact on the, let's say, next 12-month revenues? Just wondering if you can talk about timing of acceleration in organic sales growth, given in the first half we had only 3.8%, which looks somewhat lackluster compared to what your rail customers are reporting in recent quarters. Thank you.
Yeah. Yeah. Thanks. Also here, very fair question. As always, the order intake and the duration of those orders that sit in our order book are quite significantly different between rail and truck, whereas the CVS orders usually are scheduled for the next 12 months, so to say, give and take. We talk about, even in cases for some projects, several years on the rail side, on the project business side. It's plenty, of course, of those projects sitting in our order book. Yes, the answer is yes. It's to quite some extent also a widespread timeline until those projects really turn out to be revenues on the rail side.
Our order book is so good, the timing transparency is also so good that we feel totally comfortable to achieve with that existing order book situation that we are having today, as well as the newly, on a daily basis, newly incoming orders on our side, as well on the OE side of things, keeping that we should be able to keep our market share and therefore achieve fully our midterm growth targets of 5 %- 6% CAGR for the group. This is, sorry, for the rail business. This is definitely nothing that we see endangered here and fully loaded, I would say.
Thank you, Frank.
You're welcome.
Thank you very much. The next question comes from Gael de-Bray of Deutsche Bank. Over to you.
Yes. Good afternoon, everybody, and thanks very much for taking my questions. Can I start with the bridge, the EBIT bridge for the RVS division? What's striking here is the contribution from M&A, EUR 21 million contribution to EBIT for only EUR 76 million of revenue. It does imply a margin of around 28%, right, which looks much higher than the 16%-ish level I had in mind for the Alstom signaling business. Why is the accretive impact from M&A so positive? That's question number one.
Very generally speaking, we are totally happy, so to say, about the business that we have acquired and the way it developed. The management team has done so far a fantastic job. We have not changed a single person in the management team, fully dedicated, fully committed to the company. It's just great to look at how they work. Yes, the business, the underlying business as a result, is really doing great. Do we have, it's a project business as well to some extent? It's not only aftermarket business, so you also have here a bit parts of seasonalities in. Therefore, don't, so to say, multiply the results for this first half year and for this quarter, for the quarter by four or for the half year by two.
If you look at the second half year, the number already, sorry, if you look at the full first half year, the number of the 28% already comes down. You see a bit that the second quarter was an extremely well-run quarter. For the full year, we expect that we even slightly overachieve what we intended the business to reach, but not a margin of above 20% already. We are aiming to improve it constantly further, but it's seasonality. A simple and short answer would be seasonality effect.
Okay. Understood. If I look now at maybe the same kind of bridge at the group level, I calculated that the margin benefited from around 100 bps of positive portfolio effects, positive for both RVS and CVS. It implies, obviously, that the margin would have been only 12.1%-ish in the second quarter without the various M&A activities. I know they are part of the job, right? Nevertheless, on an underlying basis, it appears that the margin trajectory is not exactly positive yet, and that it is still down on a year-on-year basis by about 40 bps or so. I guess my question is, it'd be great if you could comment on the cost-cutting activities, potentially on the amount of savings that have been achieved so far in the first half and what's expected in H2, maybe also going into 2026, for us to better appreciate the underlying margin trajectory.
Yeah. First of all, it's a combination of, of course, the significant headwinds that we see organically, be it quarter-over-quarter in the second quarter or even for the full half year when it comes to truck. At the same time, the quite positive, really organic moves that you see on the rail side. We also need to see that part of the positive developments on the rail side is also driven by the acquisition of Signaling like we intended it to be, and that even brought us to a level where we were originally expected to reach only in 2026 already. Keep in mind, of course, the one is significantly reduced and the other is improving. I mean, organically, organically, this is not a huge upswing in terms of profitability, as those two things, to some extent, balance each other out.
Look at the sheer reductions that we see in the market in North America, which is an accretive margin, a very accretive margin market for us on the truck side, where we have a significant reduction year-over-year. This is the situation we have to face. The two businesses are not kind of running synchronized when it comes to the macros of it.
I get it that it was pretty challenging in trucks, but even for RVS, I mean, the organic drop-through is pretty anemic this quarter.
Yeah. If you adjust the quarter-over-quarter, like I said, we had last year a very strong Chinese quarter two. If you remember, we had the discussion here with quite some questions on that very strong quarter two in China, which is something that is definitely not repeating itself this year around. We said we had some pull-ahead effects already in the second quarter, which turns out to be true when coming to the third quarter and to the fourth quarter of 2024. Expect to see a better organic conversion moving into quarter three and quarter four for rail.
Okay. That sounds pretty great. A better organic conversion in Q3 and Q4, but do you also expect to see a step-up in organic revenue growth for RVS in Q3 and Q4 compared to H1?
Yes, this should be a level that should be higher than the 4%.
Okay, thanks very much.
You're welcome.
Thank you. We are moving on to the next question. The next question comes from William Mackie of Kepler Cheuvreux. Please go ahead.
Hi. Good afternoon, Frank, Marc. Thanks for the time and for the presentations. A couple of questions, probably more higher level. The balance sheet's really strong. I wonder if you could just talk conceptually about the strategic flexibility you have to develop the portfolio in terms of theoretically what sort of leverage rate you could take it to. Building on that discussion, perhaps, and what I think Sven had asked earlier, perhaps touching on where you see live opportunities to expand the portfolio, perhaps driving into that digitalization and service segments that you've flagged before that are adjacent to your business, and also how you're progressing with the final divestments that you had on the table as part of one of the later stages of the BOOST program. Thank you.
Thanks, Will. Totally different angle now. That's good. Strategic flexibility, yeah. I mean, we have currently net debt- to- EBITDA leverage of around 0.6, so to say. I have always said that I feel totally comfortable with one. No worries at all. Even above one, to some extent, is for me absolutely no issue if the right target comes along, fulfilling the criteria that we have set. This is a bit the way we are thinking. We have no issue with slightly one, slightly above one if the right target comes along. We still have some opportunity. That is the first answer. The second is, I mentioned it already, I think it was Sven, somehow indicating that we have certain target areas to do something in terms of M&A if anything would be coming along.
It's definitely we are a resilient company based on the strong aftermarket that we are having. The aftermarket area for both divisions is definitely a focus field where we're looking at. To expand our ecosystem in that regard is definitely something. The digitalization of businesses, be it OE products, but also aftermarket products on the digitalization side, is something where we're pretty much interested. We have also opportunities to expand our signaling business, of course, more globally, which could then also be something where we find bits and pieces here and there. We always said that if we would want to do something in that regard, we would need some acquisition because we don't have the complete set of knowledge, respectively products at hand. Here. Those are, I would say, some three, four live examples that I can give you. Third element. How are we?
Can't even read my own handwriting.
I guess.
Yeah. We have basically some 60% of everything we have initially planned achieved as of now. It's been quiet for some months on our side in regards to divestments. Last one was in January. We have some EUR 300 million, roughly, nearly a bit less than EUR 300 million still to go, out of which we have one bigger, let's say, bigger animal on the plate currently, which is part of the rail business. It's not the brakes business. It's not the door business. This business is in the production sites pretty much integrated into the other businesses. That means in North America, in Europe, in Spain, as well as in Australia, we have to do carve-outs, technically do some carve-outs. That takes a bit of time. We are on plan to approach investors after summer break. We should be able to start that.
It took a bit of time to divide the FTEs from one bucket to another and have the carve-out entities ready. We're on track. It took a bit of time. We knew it took a bit of time, and we hope that we can sign it towards the end of the year. This is still the plan. This is the big chunk, and with that, we would be even able to overachieve the EUR 700 million that we originally indicated.
That's wonderful. Thank you, Frank. My second sort of area of questioning was perhaps in a couple of buckets around gross margins. I wonder if you can just speak to a couple of questions. Firstly, how would you describe the gross margin development in the backlog for rail? Should we expect that as that backlog converts, it becomes accretive to the underlying profitability? Secondly, with regard to gross margins in CVS or more generally, in this downturn across the European and North American markets, have you seen any change in the level of gross margin, perhaps due to tariff costs or other factors? Looking towards your 13.5% goal, is that dependent on volume and operational leverage?
First of all, I'm not 100% sure whether I understand. The question regarding RVS, pretty clear. We have had difficult times in 2022 and 2023 regarding the high inflation situation where we had the significant cost pressure, where at the same time couldn't pass on to the full extent to the customers on some of the contracts. All the other intakes that came in, I would say starting from the beginning of 2023, all have the same good margin quality that we had in the past, plus, of course, the strategic necessity on top. Targets that we should need to have in rail. All the new incoming orders since we countersteered after we got hold of the inflation situation is totally covering that target aspiration of future RVS margins. Was that your worry still? Do we still have that margin? Do we have, again, that margin quality?
We only had a drag of a year where we had difficulties back in 2022 on the CVS side.
Yeah.
No? Pardon?
No, absolutely. No worries with Knorr-Bremse. I just wanted the detail of the opportunity, yeah.
Yeah. Okay. On the CVS side, no structural changes except also back in the days, of course, for the high inflation times, we had raw material increases and all that stuff. That's all kind of normalized and already state- of- the- art kind of. We have a bit of temporarily sitting tariffs in the P&L, even as we speak, which has, so to say, a phasing effect. It's not something that we intend to swallow, and we will work very hard in order not to swallow it ultimately, but it's still sitting in our P&L as we speak, maybe for two months, three months, four months, depending on the lead time of the certain products. Overall, we are trying very, very hard, and this is what we intend to do, to pass over all the tariff costs to the customers.
The fourth element, second element of your third question. Of course, when we announced the BOOST program in summer of 2023, the assumptions for the market in truck were roughly that from 2023 onwards towards 2026, they should be rather stable to a 1% increase CAGR. That's what we discussed plenty of times. We didn't plan for a big growth of the truck markets, not at all. Of course, we didn't plan for a reduction of 10% - 20%. This is also true. No?
Okay. Super. Thanks.
You're welcome. That's why we always said the 13.5% is maybe more difficult to achieve.
All right. Thank you very much. Ladies and gentlemen, I just repeat once the combination.
Oh, okay.
Moving on to the next question. It is from Lucas Ferhani of Jefferies. Please, Mr. Ferhani, go ahead.
Thank you. Good afternoon, everyone. I have a first question just on that point on tariffs. Can you talk a little bit about the headwinds you have on the margin that is related to tariffs and kind of the difference between rail and trucks there? Obviously, rail is pretty small, the business there, but it would be interesting to understand the headwinds from tariffs there.
Yeah, Lucas, thank you very much for that one. We've been pretty blunt, I think, with you all since the beginning of that discussion. We are, since decades, I would say, as Knorr-Bremse, a company that's very decentrally organized. We always went there where the markets are. We are having high localization rates, basically, in the countries we serve. Therefore, we are not pulling the localization rabbit out of the hat just now as the tariff discussion starts. This is part of the DNA of Knorr-Bremse ever since. I told at the beginning of the year when it all started that we maybe have a gross exposure on tariffs of EUR 200 million - EUR 250 million. EUR 250 million, I think, is somehow the dimension. It's a bit more on the truck side than it is on the rail side. That's the color I can give to that number.
Now it's about what are the commodities, ultimately. Once there is an agreement there or not there, this is what we will see in the end. Like I said before, we have for a half year now, so basically, it's four months. It's the end of March, and it's the second quarter. We have nearly EUR 10 million sitting in our P&L. Temporarily, as I said, temporarily, this is the effect that we had so far in four months.
Perfect. Thank you. It's understood. The second one was just on U.S. trucks. Can you provide a bit more details on your discussions with customers at the moment? Specifically, is one of the issues tariffs and the uncertainty around it and the difficulty maybe on pricing new trucks and making sure that they're ready to produce, or also general macro uncertainty related to that? Obviously, we're getting more clarity on tariffs. There are several deals that are being signed, and to an extent, that's removing a little bit of that headwind. Do you think the underlying market outside of that uncertainty is also weak? Thank you.
Thanks, Lucas. With all the topics we are facing in an industry, we're happy that we don't have to deal with the pricing of the customers' trucks. That's one topic that we don't care about as our priority number one. Joke aside, let me see it this way. It's extremely difficult to predict how the situation in the Class 8 and Class 6 to 7 is. Of course, also relevant for us, but the biggest chunk is Class 8, how the market will really develop. So many determinants out there would increase or reduce those levels. We see, yes, we see retail stock levels at quite a big number. It's more than 90,000 trucks, if I'm not mistaken, already there. It's a bit of a similar situation like we had towards the end of last year.
I think it was October or November when also there were quite some high stock levels, which then resulted in lower production. Long story short, so many ingredients. We think about roughly the truck market for Class 8 should be on a level for the full year of 250,000 units, give and take. 5,000 units more or less doesn't move really the needle. That's roughly the dimension. We have roughly seen half of it already in half year one and similar dimension roughly in the second half of the year. That's the situation. The closure days of plants for the customers are not excessive, as we can see, compared to previous years. Only one of our customers is closing down in July and August more than 10 days.
It's only one, and the others are in between five to eight days, as far as we know at this point in time, according to our EDI systems. We see, yes, that the order intakes are quite significantly down in the U.S. compared to last year's quarter two. So many things around influencing that market. We still see a lot of uncertainty out there. Everyone you ask basically gives you a bit of a different answer. That's our guess at this point in time.
Perfect. Thank you. One last follow-up on that point, U.S. trucks. I know that obviously the situation is difficult, but is there any still kind of discussion around EPA changes and whether these are still coming or not, or any way your kind of customers are preparing for that, or it's no longer a topic at all? Thank you.
Yeah. Also here, it couldn't get more controversial if you just listen to some of the OEMs, which I don't name now, but the one is saying he still believes in some EPA prebuy and even already in 2025. The others are saying not even in 2026. I have to admit the OEMs should be much closer, of course, to it, to those emission effects, so to say, that are deleted or reduced in aspiration. I don't know about these 30 adjustments that potentially should be made to the EPA regulations. We don't know the details there. We have anyhow not and never said that we expect any revenue impact for us in the year 2025. It's not of relevance anyhow whether there is something coming or not. It would only be a surprise if something would come in 2025. We don't believe that.
In regard to 2026, let's wait and see how the discussions will go and the clarifications will go.
Perfect. Thank you.
You're welcome.
Thank you very much. Moving on. The next question is from Holger Schmidt of DZ Bank AG. Please, Mr. Schmidt, go ahead.
Hi. Good afternoon, everyone. I have two questions. When you acquired Alstom Signaling, you talked about a potential larger project tender. I think the volume was EUR 600 million - EUR 700 million . Is this project still in the market? Has it been canceled or just been postponed? The second question is on the Global AI Center in Chennai. What kind of impact do you expect this to deliver, and when can we expect a positive impulse out of it?
Sorry, please forgive me, Holger. The second was about Chennai. Let me start off with the first. You know that a bit of difficult political times we have since quite some months. The situation in regards to the timeline of the project, that project in North America, it's not necessarily the U.S., but North America, is still not clear. There have been delays over months due to political circumstances, which is out of our control, completely out of our control. We can't say at this point in time. It's still delayed, and discussions are ongoing, but it's still not clear whether it kicks in at the timing that we agreed within the SPA. It still needs a bit more time.
The EUR 600 million - EUR 700 million for all the other listeners was always a multi-year view, of course, the integral of the multi-years in regards to revenue potentials that we saw back there for that one. The second question is on our AI center. Yes, we are striving. You know that we are. We have been always, and we are still striving, of course, for, on the one hand side, synergetic moves within the group wherever we can grab them. At the same time, of course, for the latest and greatest in regards to technology and the combination of those two aspects is the creation of that hub in Chennai. Combination of rail and truck, artificial intelligence, and innovation center that we are doing.
We have so far had certain bits and pieces here and there, and we are doing a combined approach now with the Chennai office, and more even to come. I mentioned to several of the colleagues already at conferences, of course, that we are doubling down in India. You know that Marc mentioned that as well already a year ago. We believe in India. We believe in the growth potential of India in both divisions. We have agreed to spend nearly EUR 100 million, so to say, in the extension of our footprint in India over the years. There is quite something to come still for us in order to really harvest everything that we have in India as a potential, as I said, for both divisions. It's just a start into our doubling down in India, what we have seen here.
Okay. Thank you. A follow-up on a large project here. I mean, if it's not going to kick in in the time agreed, do you get some kind of compensation?
Yes, Holger, good question. Yes, there is. Yes, it's exactly the way you described it. It's regulated in the SG&A, what would happen in that case. Yes.
Okay.
Just $30 million that we would get back, which is somewhat the net present value of the project overall that we would get.
Okay, thanks a lot.
Yeah, you're welcome.
Thank you very much. Moving on to the next question. The next question is from Tore Fangmann, Bank of America. Over to you.
I hope you can hear me. Good afternoon. Thank you for taking my question. I just, once more, have to come back to the North American truck outlook. If I understand correctly, you expect the truck production in line with H1 in North America. As I see it, most truck OEMs have recently announced layoffs in the region, seemingly looking to reduce their production rate. Has this come up with your recent discussions with them, or is there any reason why there's a difference in the view? Thank you.
Thanks, Tore. That's not a contradiction at all. We have also reduced our workforce in North America accordingly. Maybe the one is a bit faster than the other or the other way around. I don't want to touch on this, but we have also adjusted our workforce structures. Usually, we have some 10% - 15% always, this kind of flexibility in the blocks, basically, kind of in a nutshell, a global number, 10%- 15% is the flexibility we have, consisting of temps and some other flex time workers, and we have done the same thing. Both messages, I would say, are not contradicting each other.
You're not planning to reduce the production there? You can have still the same production, basically, with fewer people in the factories?
Yes. Yes. The current production, we're not producing the same amount like we have produced last year. That's obvious because the market is down. As of today, looking into the future of the year, we keep that production compared to last year's lowered number of people on the shop floor, in the management as well, and white-collar as well, needless to say.
Thank you.
Yeah, you're welcome.
Thanks a lot. Next question is from Vlad Sergievskii of Barclays. Please, over to you.
Yes, gentlemen. Good afternoon. Thank you very much. First question is on China Rail business, please. In 2023 strategy presentation, you expected your rail revenue in China to bottom at around EUR 650 million this year.
Oh, no.
Could you update us? What are you now expecting in terms of China revenues this year, based on what you have seen recently, and how this new expectation is compared to the EUR 650 million previous?
Thank you. Thank you, Vlad, for that question.
He's putting everyone on sale.
M aybe.
He's putting us on sale for the last three years, isn't it?
Maybe. Vlad, I hope that your target share price is correlated to that EUR 650 million or 1/10 of that EUR 650 million. Maybe with the news I give you now, we have potential to increase it. You are right, Vlad, fully right. We have given the very difficult years of 2021 and 2022, where we have been taken out of the market to a large extent. We have been losing market share. The Evergrande situation kicked in, the real estate market complications, all that kicked in, and our assumptions going forward back in the days were that the market should normalize for us on a very stable level in China, Mainland China, of around EUR 650 million, maybe, with even a year that it could go down to EUR 600 million. That was the rationale behind it, given a not increasing mid-form market and even a stable kind of high-speed market going into the future.
The situation now is that the high-speed business is doing better than we expected it to do back in the days. We thought that maybe 100 - 150 high-speed trains should be built a year. Going into the future, we're now at the level of roughly 240, 250 high-speed trains a year. We are having a better aftermarket than we expected back then. The ridership levels in China are still the only country in this world where ridership levels nowadays are exceeding 2019 numbers by far. They are more than 20%- 25% higher than what we had in what China has seen in 2019. Better ridership levels and better high-speed brought us to levels which are now, I would say, above EUR 700 million, close to EUR 750 million when it comes to Mainland China alone. That's the situation, I would say.
Maybe EUR 100 million up compared to what we back then thought, driven by those two things. At the same time, Metro is a bit weaker, the metro market. No increase yet due to real estate market coming back. That's a bit the situation there. If that's okay for you, Vlad, then. Or should I go into more details?
That's great. That's super helpful. I appreciate you sharing this. If I can also ask you about the book- to- bill at Rail, obviously, as you mentioned, 15 quarters of FR1, very solid and consistent performance over here, which is great to see. Would you be able to give us some color of how this order intake in Rail is split between new equipment orders and service orders? Is this split roughly consistent with what you report in revenues, or is backlog duration in one part or the other expanding faster?
First of all. Like I said, the book- to- bill ratio is significantly above, not a steady state, of course. We always, and this is the clear plan, and also looking at the tenders that are out there in the market, something slightly above 1.05, sorry, not 1.5, is something that we would need going into the future when it comes to achieve our revenue case for the business. Just not that anybody is worried if there would be a quarter where our order intake, book- to- bill, is not that fantastic like it used to be. It doesn't have to be. We don't know how to get the production capacity if it would continue with 1.2 going into the future. The split of order intake is roughly in a similar dimension like you see on the revenue side of things, between OE and aftermarket.
That's also somehow the split of order intake.
Super helpful. Final quick question from me. Obviously, you have seen consistent increase in share in aftermarket and rail, I would say pretty much since 2019, when new equipment revenue has been broadly flat and aftermarket grew quite a bit in rail. Is it the trend you expect to continue, or is there a point when new equipment growth starts to outperform aftermarket growth in Rail?
Dear Vlad, there was a bit of a noise in the line. Can you repeat again which trend I see changing or confirming it?
Yeah, absolutely, Frank. The question is on the split of revenues in rail between new equipment and aftermarket.
Aftermarket has been growing the share in overall RVS revenues pretty much since 2019, while the absolute euro million level of new equipment revenues in rail has been broadly stable for the past five, six years. The question is, is there a point when new equipment starts to outgrow aftermarket within the revenue mix, or aftermarket will continue to gain share?
Thank you. Thank you. Obviously, it's a mix. It's a heterogeneous product mix that we're also having, and we're having also, of course, as you know, the regions. We have the brakes business, we have doors business, and we have also HVAC business. We are, of course, strategically striving to grow our aftermarket a bit stronger than the OE business. That's the strategic target that we are having. Of course, OE should grow as well, that's clear, but aftermarket a bit stronger.
We have achieved, of course, that stronger aftermarket growth in the past. This will now be the challenge to go into the future. To keep the OE business stable is definitely not the strategy to go into the future. We expect growth on the OE side as well as on the aftermarket side, with a bit better growth rate on the aftermarket side.
Super clear. Frank, thank you very much.
You're welcome, Vlad.
Thanks a lot. At the moment, there are no more questions in the queue. Ladies and gentlemen, last call. Please press nine and star if you have a question. There seem no more questions to be incoming. With that, I'm closing the Q&A session and handing the floor back over to the host.
Thank you very much.
Thank you very much. We wish you a very nice summer holiday break and are looking forward to meet you and talk to you next time. Thanks and bye.
Thank you. Bye-bye.