Welcome to Knorr-Bremse's conference call for the third quarter 2026 results. The conference is being recorded. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Sophia Kursawe of Investor Relations.
Thank you, and welcome everyone to Knorr-Bremse's third quarter 2026 earnings call. My name is Sophia Kursawe from Investor Relations, and it's a pleasure to have you with us today. CEO Marc Llistosella and CFO Frank Weber will take you through our Q3 results and key developments, followed by a Q&A session that will also be joined by our Head of Rail, Dr. Nicolas Lange. As usual, the call is being recorded, and a replay will be available on our website afterwards. Handing over to Marc, the floor is yours.
Yeah, thank you. I would like to start immediately. Strongest Q3 in five years. Everything what we promised in 2023, we achieved. BOOST is nearing successful completion in terms of time. Delivered on our targets. Profitability has significantly increased, as said, as always. Operational resilience has improved. From the program of BOOST, we are now in the next phase with Growth Beyond. As always said, we have put our focus on the housekeeping for the first three years, and we have always communicated all the respective KPIs, and we have chosen four to five significant KPIs where we felt and we think they are the major lever for our future success. Growth Beyond is now starting from this extremely excellent base. With that, I would like to describe growth a little bit. Some will start rather soon.
The official start of Growth Beyond is by 1st of January 2027. Here we have very clearly in mind that we have, in revenue terms, even this year will be quite good, but if you compare the last numbers of the last four years, our growth was not the most preferred and most looked after item and KPI. As we have said, housekeeping is now the first and most important rule to be fulfilled.
So what we see is, medium-term, we will have not a linear path, and we will come to this later, especially in rail. We'll see that we will face the first really strong impacts in terms of growth with including relatively high profit margin in 2028. Q3 KB Truck by itself was an excellent quarter. It was an excellent quarter for the top line, and it was an excellent quarter for the bottom line.
All our key performance indicators improved significantly. Since five years, we are the first time above 12%, which is very appreciated, and especially the cost discipline and also the personnel cost reduction, where we are now currently in the range of 19%, that leads and led to this excellent result. Truck markets in Europe and in North America were supportive, partially. Even the numbers were not exceeding the numbers which we have seen in 2024, but in 2024, we had not the cost situation, and therefore, we have not reached by far the profitability terms which we have reached now. We had a better market, and we had 200 basis points lower profitability. The self-healing, what you always refer to, is now coming absolutely into place.
That means we can really leverage every form of revenue growth over proportionally in terms of profitability, exactly as we planned it and exactly as we always proposed it. To me, that's the general statements, and then I would like to go with you through the slides which we prepared. On page number three, the highlights on InnoTrans and the IAA Transportation, two of the most important trade fairs in our markets. But I would like to mention also Automechanika, because as you know, we're enlarging our business more and more, especially in trucks, to digital ecosystem. Why? Because this will be the future, and it is highly profitable for the ones which are first in line, and that's exactly what we have achieved with our ecosystem in trucks.
We are first, and we are by far the most, I would say, multi-worth in terms of offers, and that brings us in an excellent position. InnoTrans itself, the highlights were very clear, as we always said, digitalization, data management, rail infrastructure. Highlights for us, the electro-mechanical brake. Here, how trains will brake in the future. We are ready for this shift in the industry, which we know will not happen in the next two, three, four years. It will take longer, but we have the technical solution today. We can offer it, and we are ready to go. Next, digital freight opportunities. The automatic coupler is well-perceived in the industry. Our solution, homemade, housekept by ourselves without any acquisition, is seen as absolutely a benchmark in the industry.
This shows that our R&D is well spent, and it shows that our engineers are well-prepared to go also for enlargement of portfolio and also of products. We are in a technical leading position, which we are very proud of because it was done by ourselves. You see our money for R&D sometimes and often and more is well invested. The industry is on the right track. We don't see any technical showstopper for the digital freight opportunities, and especially other markets will follow. Other markets like China and also Australia and more and more also secondary markets are getting more interested in our digital freight opportunities. The digital freight train seems to get reality faster and quicker than we thought, which is good. Wayside signaling, successful presentation of our signal portfolio.
And also here, very clear message, signaling our acquisition, the biggest of Knorr-Bremse in the last two decades, was extremely successful, and we see already that the signaling part of our American business is contributing massively to our results. KB showed innovative solutions. Being a market leader in North America, our aspiration is also to be more and more seen and perceived in other markets. IAA highlights so far, autonomous driving ready for us, then electric-driven vehicles. Also Chinese OEMs showed many new electric compositions and also solutions. Electrification and the electrification penetration in China is now reaching first time of history more than 40%. It is not for the whole year, but we see that there is a massive shift from combustion engine to electrification and electrified trucks. Personal KB highlights, electric power steering ready to go. First customer we found, second customer we found.
Now it will come more and more to an implementation of absolutely new product to the market. Clear financial benefits for the customers. Also very clear cost of ownership is not only one, we are reducing also the CO2 emission. Here, KB showed high technology leadership and excellence at both fairs, and I say not both, at all the three major fairs. We are well-positioned, excellently positioned, and we see it also in exchange with the customers and clients that we are on the right track. Now we come to page four. Rail overall underlying demand is healthy and long-term growth opportunities are strong and unchanged. If there are questions, we will come to this a little bit later. Customers' order books are close to record levels.
We never have seen more orders in our order book. It is the highest ever in terms of rail, not in terms of trucks, but also the books in trucks are coming up. Passenger, very strong across most markets. Freight, weakness in Europe and North America. Yet that stays still, but we see excellent long-term opportunities for KB Rail by knowing that what I said, the freight automation, what we are more and more going into, this is now picking up because we see when the next cycle in freight comes, we are ready to change also the logic of this market in terms of new opportunities for products. KB shares are strong and stable, and that I think is also an important message because we have risen some of our pricing. We have been very much on the profitability, but we have not lost market shares.
This is really an excellent work of the whole team. North America in trucks, strong improvement of market ongoing. You all see that. We have seen a surprising uprise in the numbers. OEMs and KB are sold out till the end of the year. We are, as you know, the most careful always by these uprisings, and this is why we are being very moderate. We see 2027 to be expected very positive, but this will not lead to a release in our cost reduction programs. EU, slight improvement goes on. We see slightly better momentum in Germany finally. But we see also that, and that is the most important message, we can live with the normal market, and the normal market is for us a very moderate market. Why? Because we have improved significantly our cost position.
Page number five, BOOST has transformed Knorr-Bremse into a stronger, more profitable, and more resilient company. Especially here, the break-even of this company has been reduced, and all of you are aware what break-even means. The fixed cost coverage is now at a much better and much more healthy position than it was three or four years ago. Order book, not to be explained again. You see the best quarter we had since 2020, and before I can confirm as well. Revenues for the quarter better than Operating EBIT margin, we had only one quarter better. That was in 2018. That was the quarter four, where we had 14.7%. Now we had 14.6%. Yes, there must be room for improvement, and that's what we target.
In terms of current return on capital employed, I think this is important for all of us, how efficient we are using the capital which is then given to us. Finally, after four or five years, we are back in the range of 24% above. I think this is an excellent number, and where we can confirm to you, this is now for us the baseline. That means we start from a position of financial and cultural strengths. Page number six. These are the bubble slides. The bubble slides are very clear. Main message here, BOOST strategy paid off and pays off. It's not over. It's an underlier for the future, and this enabled us to be in a strong position. Second highest quarterly EBIT in Knorr-Bremse history, I told you just. Free cash flow has never been as it is today in a quarter.
You really aggregate it for the year, we're in an excellent position of crossing the 500, which means we are really converting our operating profit into free cash flow, which is done. We can invest, we can acquire, we can pay dividends to our shareholders. Truck, all KPIs strongly improved. I'm very proud of it. Nearly 200 basis points in the profit margin, which is excellent. The overall number is 938, which is a good number, and we see that the downturn we have seen the year before is now nearly, I would say, brought at par. The only thing is, you see also the lower numbers of revenue, we can generate much higher profitability. That is what we aimed, that is what we wanted. With this, I would like to hand over to Frank. Frank, it's yours.
Thank you, Marc. Let's move to page seven directly. CapEx amounted to EUR 48 million, which is representing 2.3% of our revenues. We continue to invest in a very disciplined manner. We balance our productivity improvements, maintenance requirements, and targeted growth opportunities, clearly. Full year levels should be closer to the lower end of our targeted range of 4%-5% of revenues. Net working capital declines to EUR 1.49 billion at the same time scope of days, which is the efficiency measure, significantly improved to 66 days, underlining our sustainable focus on working capital management across the whole group. Our free cash flow developed very strongly and reached EUR 238 million in the quarter, which accounts for a cash conversion rate of 129%, respectively, without the tariff repayments, which is a one-off. Nine-month figure at EUR 531 million is also very encouraging.
This increase primarily reflects higher earnings but also improved working capital. The reported nine-month figure includes a positive one-off effect of around EUR 34 million. You remember the EUR 20 million we had in the second quarter plus the EUR 14 million we had now in this quarter, which is related to the reimbursement of previously paid IEEPA tariffs in the U.S. Even without this repayment, we are close to EUR 200 million ahead of last year's level. Return on capital employed increased further to 24.2%, up 300 basis points year- over- year, reflecting the higher profitability driven by our business activities as well as the benefits from our asset-light strategy. Please take into consideration that HVAC is still booked as asset held for sale on the balance sheet. Let's take a closer look at the performance of the Rail division on page eight.
Order intake decreased by 11% and reached around EUR 1.05 billion in the third quarter, resulting in a book-to-bill of 0.94. Keep in mind the nature of reporting the quarter-to-quarter development of order intake in project businesses and try not to read too much into this figure. As we have often discussed, basically each and every quarter since six years, order intake in Rail is lumpy and projects, respectively, tender timing in the market is much more difficult to anticipate, particularly when large projects shift from one quarter to another. Order intake in Rail was below expectations in the quarter, reflecting a combination of postponements of customer orders totaling around EUR 80 million, which are expected to be awarded within the next six months, and one tender we did not pursue due to unfavorable profitability conditions in the end.
Importantly, and that's the result of that, we remain committed to prioritize value over volume and deliberately refrain from pursuing tenders that do not meet our profitability requirements sustainably. As a matter of fact, rail markets overall remain very healthy and continue to be supported by strong underlying market fundamentals like urbanization and the political will in favor of green mobility. Our OEM customers have record order backlogs. With our strong market share, Rail should realize good order intakes with a time lag. For the current quarter, we expect that Rail should be able to post higher orders around EUR 1.2 billion again. Order backlog increased, needless to say, also FX-driven, by 4% to a very strong level of almost EUR 5.9 billion. The high order backlog and its good quality provide a strong foundation well into 2027 and beyond. Let's move to page 9.
Revenues increased by 6% to EUR 1.11 billion in the third quarter, supported by all regions. On an organic basis, growth was around 2%, ranging in this quarter below our anticipated acceleration throughout the year. Organic growth is temporarily diluted by adverse trends in the freight market as well as a weaker Chinese metro market. More details regarding the regions. In Europe, revenues increased by 4%, driven by OE activities, supported by continued strong project execution and favorable market dynamics. North America also delivered solid growth, with contribution mainly from OE business. The APAC region reported revenue growth of more than 10%, supported by continued strength in both business segments. China was slightly up again, driven by the aftermarket business. The quarter was very slightly impacted by the repayment of IEEPA tariffs to customers in North America.
These upcoming reimbursements had a negative effect of EUR 3 million on reported revenues in the quarter, as we booked liabilities for returning cash to customers that we collected before, basically in 2025. According to IFRS, these liabilities need to be booked against revenues. Looking ahead, we expect additional minor revenue headwinds from these repayments over the coming quarters, but really minor. Our operating EBIT margin strongly increased by 70 basis points to 17.7%, driven by foremost the benefits from our BOOST efficiency measures and our operating leverage. This level of profitability achievement is the highest quarterly figure since 2021. Therein, IEEPA only contributed approximately with EUR 5 million to EBIT in the third quarter, and we expect only a further limited contribution, by far not in that dimension over the coming quarters. Neglectable overall.
In the current quarter, we expect that revenues of Rail to reach around EUR 1.2 billion, which would be a solid increase quarter-over-quarter. For the full year, we now expect organic revenue growth to be in the low to mid single-digit range, which is around 3%-4%, and we continue to expect the operating EBIT margin at 17.5%. Looking beyond this year, we currently expect our Growth Beyond programs, which lasts until the end of the BOOST completions at the year-end of 2026, to deliver significant growth over time, especially from 2028 onwards, as Marc already mentioned. This is inherent to the nature of such a growth program. You start with identification, implementation, and at the end, harvesting, which does not result in a linear top-line path towards 2030. This is exactly why Growth Beyond is such an important next step. We have substantially improved profitability through BOOST.
Again, our next objective is to translate our technology leadership and strong market positions into higher growth. Let's continue with the Truck division on page nine. Order intake developed nicely and exceeded the prior year level significantly. KB Truck reached over EUR 1 billion and a book-to-bill ratio of 1.09 in the past quarter. This achievement was driven by all regions, including China. Regionally, Europe was better, also supported by low comps in the previous year, needless to say. In North America, order intake was very significantly higher, driven by the improved market situation. In APAC, order intake increased, well supported by China and other countries in the region. North America especially benefited from the ongoing market recovery. Europe continued to improve, and China showed solid increase.
As a result, our order backlog increased further and now stands at a very healthy level of more than EUR 2 billion, providing also here good visibility for the upcoming quarters. Looking closer at North America, the recovery here is clearly visible throughout the supply chain. What started at the OEM retail sales levels has fully arrived at the tier one production level since end of the second quarter. Production slots are essentially fully booked until year-end. In addition, it will be crucial for the U.S. market that the supply base will hold up with this strong demand. So far, we have not noticed any meaningful shortfalls in the supply chain. Based on what we see today, we remain positive on the market outlook and expect another solid order intake in the range of EUR 950 million- EUR 1 billion in the current quarter.
Overall, our Truck business is developing very well with a significantly improved cost base, supported by strong execution across all regions and improving market conditions. Let's move on to page 10. Our revenues increased to EUR 938 million in the third quarter, a nice step up year-over-year with a significant organic increase. Both business segments contributed to the growth. OE revenues increased by more than 20%, while aftermarket slightly declined. That is logical given that market speed up that we currently see. It is particularly encouraging and worth noting that the OE business has grown in all three major regions during the past quarter. Also worth mentioning is that North America delivered a particularly encouraging OE performance with 50% growth year-over-year. As a result, the operating EBIT was very strong and significantly higher, reaching EUR 116 million.
The EBIT margin also improved significantly to 12.3%, up 100 basis points compared to the prior year quarter. As a result, the combination of a structurally improved cost base and stronger market activity translated into a significant margin expansion in the quarter. Especially the recovery of the market in North America is here supportive. Measures have been implemented particularly rigorously here, and this market is accretive for us in order to generate the operating leverage. Our operations in Europe are also benefiting from the cost improvement measures and are seeing rising margins. While our efficiency measures remain the primary driver of margin improvement, we are increasingly seeing the benefits of operating leverage as volumes recover, particularly in North America. Looking ahead, we continue to see positive momentum in our key markets.
Combined with the efficiency improvement achieved via BOOST, this gives us confidence in the division's ability to sustain attractive profitability levels going forward. Therefore, higher organic revenues should support the bottom line by operating leverage based on the lower cost base that we meanwhile achieved. In the current quarter, absolute returns should be on a similar level quarter-over-quarter. On a full year base, we now expect organic revenue growth for Truck to be mid- to high single digits, respectively around 7%. We continue to expect that operating EBIT margin should be 12% for the full year with the assumption that demand in North America remains strong. With that, I hand over to Marc again.
Thank you, Frank. Let's move to page 11 for the outlook. We are very clear. For the outlook for 2026, we expect a revenue at the upper end of our consensus and also foreseen range.
At the operative profit margin, we see ourselves well in the range. In the free cash flow, we see ourselves absolutely at the upper end of that. With that, we can confirm everything what we have claimed beginning of this year. We had a slight adjustment by mid of this year, and all this adjustment we confirm again. With that, we can go to the next. The next, what we have to do is now, and that means not for next three months or two months to go, but that means for the next coming months and quarters. We have now the right team set up. We have exchanged massively in the leadership team. We had an exchange in the last three years of roughly 50% of the leadership team. We did this on purpose.
It was not always easy, but with that, we have the right base for the next steps to be taken. Number 2, after BOOST, now we have the second pillar, which of our targets, and that is clearly growth, profitable growth, of course. By securing the underlying profitability for the whole business, we are going in new opportunities, market fields, and especially product areas. As already explained in July, we are very clear with growth opportunities. But one thing is also very clear, the profitability is the common layer for the future decisions. Something which is not profitable will have a very difficult stand in this organization, and therefore, we will focus always on the underlier, and that is profitability and capital efficiency. But acknowledging that growth will be now first priority for the next three to five years to come.
With that, I would like to thank you for your attendance and waiting for the questions. Before they come to the questions, I would like to say very personal words. We have seen this morning a certain form of questions we were confronted with, and I would like to have this session to be used straight shooting. Clearly, what is your doubt? What is your concerns? Because most of you, we have worked now together for the last four years. You know us now very well. You know Frank even longer. Everything what we have claimed, we have delivered, I think that you can give us. So if there is any form of question or fundamental question or a more detailed question, we assumed that most of the question will, this time, target to the direction of Rail. Therefore, we have brought Nico into the call.
Nico is ready to shoot, ready to go. I can tell you, Nico was very astonished about what kind of questions came because he was not concerned at all. But perception is reality, and therefore we are here to make sure that your perception becomes the reality we have. Thank you. With that, I hand over to Sophia.
Okay, thank you. We will start the Q&A session now.
All right, ladies and gentlemen, we will now start the Q&A session. To ask a question, please press star nine and pound key on your telephone keypad. If you would like to revoke your question, press star three and pound key, and you can also use the dial-in function in the webcast and raise your hand if you would like to ask a question. The first question is from Sven Weier of UBS. You can speak now.
Thanks for taking my questions. The first one is regarding, Sophia, what you said on the midterm outlook that you expect to step up in the growth for the rail business in 2028. I think you previously, when we had the guidance first, we talked about the backloaded achievement of it. Do you see the rail business growing at around the 7% rate already in 2028? What should we expect for 2027? Is this the same organic growth rate that you guys envisage for 2026? Let's start there. Thank you.
I will hand to Nico. Of course, I have my own saying here, but I think it would be good to have it from the horse's mouth directly. Nico.
Thank you, Marc, and as I already explained also at other occasions, this is a growth program over a couple of years, you know that. As Frank said before, it's in the nature of the business that it's in a certain way end loaded. Particularly on the rail side, things need to materialize into new projects, partly also in rail services. There we will be quicker. Therefore, we see also the first really extended growth already in 2028. If it would be only OE, I would have even said maybe it would have been later, but in rail services, we have a strong pipeline of additional growth potential, which will materialize in 2028. We have a pipeline which is confirming the 7% in average, we have said before over the years.
This means, in 2028, we expect that we reach that level of 7% at least, while we are not reaching it yet in 2027.
Where would you guide us for 2027? Similar clip as this year or better than 2026?
Similar towards a little bit better. That is the expectation for next year.
Understood. My second question is probably also for you, Nico. It is on the rail order intake that you mentioned for Q3. The first part of the question being, is the EUR 80 million included in the EUR 1.2 billion guidance for Q4? The other part of the question I had is, are you generally seeing a more competitive environment, which is why you walk away from this one order? Do these situations regularly happen? Nothing new.
First of all, yes, I was astonished about the reaction because we pointed out over many years that this is a lumpy business, defined not only, but also by singularly larger projects. This quarter we had the effect that a good portion of these projects received a shift. Very late, I have to say, yes, very late at the quarter, but sometimes that happens. From this part, from these mentioned EUR 80 million, we said we expected them to come in the next two quarters, but I expect also the majority of it to come already in the next quarter. Then the other part, I am not seeing a different behavior in competition. We had one project, it was a larger project, which was about the business unit, which is by the way, also one which we have very strongly under observation.
The contractor conditions, be it in price, but not only pricing. It is not always only pricing. Were so that we said we walk away from this order in order to keep our pace with regard to profitability, but also with regard to our risk exposure in the future.
But it is a more singular event, not a new trend.
No, I do not see a new trend. I see in order intake, which you are now very curious about, I see the trends we forecasted for this year, again with deviations from quarter-over-quarter. We see also generally in competition, not a different trend than we have observed during the last, let me say one or two years at least.
Okay. When you say the majority you expect for Q4, that means that it is included in the EUR 1.2 billion, basically.
This part is included, right. Yes.
Yeah.
Okay. Thanks.
Thank you.
Next question is from Meihan Yang at Goldman Sachs. Your line is open now.
Good morning. Thank you for taking my question. I just want to follow up on how much confidence you have for doing the 2028 when there's some project slippage that could happen even quarter on quarter basis. Even assuming that this is based on what Rail OEMs has given you on the sort of pipeline they are seeing. If they say they're going to delay again in 2027 or 2028, would you get some sort of penalty or warranty, like protection against? I'll ask my second question on the truck side. Thank you.
First question to Mei again. If I understood you correctly, the question is if I see out of the actual order intake situation and others, a risk or negative impacts on 2028 on our growth scenario for 2028. In 2028, as I said before, first of all, the rail service additional activities will pick up and show an effect on the revenue growth. The rest is defined by OE projects.
These projects we were talking about now, remember, some of them are only shipments. One of it's one we declined. This will have a very negligible impact. Of course, OE projects are coming two to three years later. This is probably what you're referring to. But then, remember, it's only this one, and we don't see a change in the general trend there.
Got it. Thank you. On the truck side, you mentioned you have sold out your slots in North America this quarter already. Did you do any production ramp-up in 3Q, or are you planning to do some in 2027? Is it more CapEx where you have to hire more people to be able to further ramp up? Is there a sequential upper limit if we see a quite strong, let's say, second quarter 2027 pickup in the trucks production rate? Is there a sequential upper limit that you think you're doable in terms of your capacity ramp-up? Thank you.
Thanks, Mei, for that question. I take it. Unfortunately, we have gone all through a tough time in 2025 in the truck market in the U.S., so we needed to reduce capacities quite significantly. So we have no issue to raise the capacities again, just purely by our people and not investing into anything in terms of bricks and mortar or machining or what have you. It's just flexing the organization up again to the market needs, so we have no worries there at all. The only thing is that you never have fully under control is the supply chain on the tier two, tier three, four level. There might happen something. We don't see anything at this point in time, but that's the only issue we have. Capacity is not our issue in North America and not a requirement that we first have to fulfill.
Got it. Thank you very much.
You're welcome.
Next will be from Gaël de Bray at Deutsche Bank. Your line is open.
Good evening, everybody. Thanks very much. I have two questions as well. Let me start with the first one for RVS. The full-year guidance implies a clear sequential improvement for both revenues and margins in the fourth quarter. What gives you this sort of confidence in the near term?
We are talking about two months left, guys. We have on the revenue side, we have our order book. We have, as usual, some things which are dangling between December and January, but the visibility is, I would say, good enough that we have a good view onto that. On the result side, it is the last quarter of the first three years period of the BOOST project on the rail side, as far as you know. There we are, you can imagine that we are monitoring extremely down to the euro even, if the rest of the measures which have not materialized yet are really materializing as planned. You can be sure that there is enough eye view and enough pressure on that topic as well, which does not mean, by the way, that we will lose that starting from January 1 next year.
This pipeline we have filled in BOOST continues to be there. The efficiency, as Marc said before, will be a continuous focus also on the next year, and we expect to continue that, not under the title of BOOST, because that project needs to come to an end, but we will continue the way of working of BOOST, just the way we did so far.
Okay, understood. The second question is regarding CVS. Could you talk a bit more about the various supply chain challenges in the truck industry around perhaps semiconductors, axles, et cetera, and whether or not this could ultimately impact the CVS orders or revenue performance? Perhaps are you confident, do you feel comfortable with the current consensus expectations for about, I think, 7% organic growth again next year for CVS?
First, I start with the latter half of your sentence. Yes, I'm still confident in regards to the developments there that we would not have a major supply chain issue here. Nothing is that we really see that would be interrupting some of the flows. But clear, some suppliers are already in the allocation mode since quite some time. Production orders in 2025 springtime came in rather late. We talked about that several times, about that discrepancy between what was talked in the market, that the market would go up, and the real orders that were placed in the systems with the suppliers. That did cause some difficulty. We're already behind that kind of initial difficulties in ramping capacities up in the industry.
But you can never close your eyes and have to be always aware that something might happen, but nothing that we see that would endanger anything of our revenues at this point in time. So I'm pretty happy. In regards to 2027, it's difficult to exactly, so to say, predict what's happening North America. We would be, I would say, yeah, I would say it would be easier if we would have a simple EPA regulation in regards to the old and the new engine, so to say. Now we have the ability, as far as we all know, that EPA allows for up to two years to still purchase the old trucks with the penalties being paid by the OEMs. So that's distorting a bit the clear view on what's a pre-buy and what not, and when exactly a pre-buy happens and to what extent.
Now even voices are raised that these two years might be limited to one year only, so that's another difficulty. We, in so to say, bottom line, we are sure that the market next year in North America will be stronger than this year. For this year, we expect around about 385,000 trucks, class six to eight. Next year, it should be higher. What exactly will be the amount? I would say the next weeks tell us, and we will give you a proper expectation in, let's say, representing our view in February. Please give us there a bit of time. For Europe, we see also growth in the market at this point in time towards 2027. What exactly that growth number will be, I'm not sure.
China is at a very high level, so they are rather difficult to assume that this market in China will climb again next year. That is at least our current understanding. Let us wait, please, for January, February, once we meet then for our clear guidance for 2027. The signs look good, I would say, that 2027 will be a better market overall for us. You know our penetration is 40% Europe, 40% North America. That is where the music plays, so to say. China is not important, but those are the two major regions for us.
China is not unimportant, but not that significant.
Yeah.
Thank you very much.
Welcome.
This is from Vivek Midha at Citi. Your line is open.
Much, everyone, and thank you very much for taking the questions. I have two, if I may. My first question is a follow-up on the rail side. Just to get the magnitude, is it possible to quantify how much of the impact on the Q3 rail revenue came from that softer development in freight? Do you have a view as to when the freight market might start to improve? Thank you.
You refer probably to what we have said, and also I have said in the past, that freight is, this year, against the expectation we had in the beginning of this year, slightly, but noticeably. I cannot tell you right now what that meant for the third quarter. Sorry for that. The impact is evenly distributed over the year, I would say. It started pretty early in the year. So it is a, I would say, minor to middle impact, but it's not the one significant. We are making worldwide a freight business of around EUR 300 million, something like that. So if you look into the proportion to the whole market, you can justify how much deviation that makes.
If I just may add to Nicolas, that we all both together only have the yearly numbers, not the quarterly numbers. But if you look at the produced freight vehicles, the North American market is obviously the bigger one, three times bigger than the European market, and that has come down 8% year-over-year compared to 2025 numbers, only around about 25,000 freight wagons being produced, 8% less than last year. In Europe, smaller market than the U.S., but 20% down compared to last year. So these are the numbers that will, with these revenues, affected of course, as examples.
Thank you very much. My second question is on CVS. You've guided for a relatively similar margin in the fourth quarter. I'm just wondering if you could give us a very high level view on the building blocks as we think about profitability into next year. You're talking about the better market. At the same time, you're talking about potentially adding back some costs in order to give yourself more capacity. So is that second half run rate on margin a good indication of where you see 2027 margins in CVS, or do you see further room for improvement? Thank you. Also, bearing in mind the mix, given that North America is better margin for you. Thank you.
Yeah. Thank you for that. Looking, first of all, at where we stand, Q3, Q4 should not be significantly different in terms of the mix of the markets. With continuous cost efficiencies that we are doing, expect a very slightly better margin in Q4, in fact, than in Q3. Yeah. That leads us then in the end to the 12% for the full year. Towards next year, we do not see also a significant change in the mix. As I said before, Europe should be growing to what level ever, but North America should be growing as well. So mix is pretty stable. Therefore, the margin should climb up because we harvest the operating leverage, number one, and we continuously improve with cost efficiency measures going forward. So this would be, in that dimension, that we always talked about an okay-ish market.
It is still not a very good market that we would see next year. That would mean around about 13% is what we basically said in an okay-ish market. So up to 100 basis points of margin improvement is what we are targeting.
That is very helpful. Thank you very much.
You are welcome.
Since we do not have a lot of time left, we would like to only answer one question per person. The next question is from Akash Gupta at JP Morgan. Your line is open now.
Yeah. Hi. My one question is on CVS. There was some chatter at IAA Fair in Hanover about potential delays to implementing these European emission regulation that is coming for trucks. I think maybe one or two years delay to what has been already been proposed. Just wondering if you have any thoughts on that, because I guess that can change quite a bit for your 2030 planning, given you are anticipating 2030 to be down on pre-buy in 2028, 2029. Thank you.
Thanks for that question. That is still rumors. I would say we have not heard anything concrete that it is decided. You remember that we talked heavily about the timing of EU and the unfortunate situation that if the kick in would be according to the initial timing, our year 2030 would be burdened by a weaker European market because the pre-buy would be happening in 2028 and 2029, unfortunately, and not hitting us in 2030. If it is now delayed by one or two years, then we would be in the sweet spot for our 2030 numbers. That is all I can say. It would be then helpful if it is one and a half years delayed, roughly. That would be then the sweet spot for 2030. Did I confuse you? You are not saying anything.
I think you shocked him.
I shocked you.
I had the opportunity to ask one question, and my question has been answered. Thank you.
Okay. You are welcome. Bye.
The next question is from Delphine Brault at ODDO BHF. Your line is open.
Yes, good morning. Thanks for taking my question. It relates to pricing. Can you detail a little bit your price increase by region and by division, and how your price to cost equation has evolved recently?
Delphine, thank you very much for that question. I would not say it is the million-dollar question, but, of course, we are not detailing too much on pricing. We have been having roughly divisional discussions at the time of the high inflation kicking in after the Russian war over Ukraine back in the days, and we are not detailing more in regards to the businesses, the underlying businesses.
Clearly, a tier one supplier, which we are since more than 120 years, is basically year-over-year confronted, first of all, with price reductions from the OEMs. Totally different animal, like in an automotive industry where you just, each and every year, think about how you raise the list prices. Basically, needless to say, I am talking about OE business, not aftermarket, where it is a different story. But we always try to be positive. Year-over-year positive, not from a mindset perspective positive, which we are always.
But figure-wise positive, but I am not giving more details on pricing.
Otherwise, you would be dismissed.
Yeah.
Next question will be from Aron Ceccarelli at Bank of America. Your line is open.
Hello. Hi, good morning, guys. I have a question on rail. I think you talked about the accelerating aftermarket in 2028 and 2027 to be organic growth seem slightly better than 2026. Perhaps it would be good if you can give me a little bit of more color around 2027. What are the main platforms from a regional but also from a product perspective for rail? Thank you.
2027, we basically continue with our successful program as we are doing today. If you are asking about aftermarket, that means that the aftermarket share, we expect at the moment to be similar than this year. We continuously expect to have aftermarket shares in that range above 50%. I said before in other occasions that I do not expect that to rise to extremely high values. We shouldn't do that too much because we also need to care about feeding in new installed base all the time. Again, this next year, we will have a mixture of short-term business out of the rail services and the long-term business out of the OE. What I said with regard to 2028, please don't misunderstand that I'm expecting a higher market on the rail services.
I expect that the pipeline we are filling now, we have started to fill for our Growth Beyond topic, that this starts to materialize, and there all actions which are pointing towards aftermarkets have the chance, and will appear much quicker than those which we are doing, for example, with regard to new product developments where you have first to homologate and all these things.
One thing to add, maybe, the HVAC. Frank mentioned before that at the moment, these numbers are all including HVAC, and from next year, we expect that these figures will be without HVAC.
But there's one thing to add to all of that, because I see in the structure of your questions, the question on rails. First, rail is not soft. Absolutely not. You know better than me, the numbers in 2022, where rail was roughly at 14%-15%. Now we speak about 17.5%-18%. So softness doesn't look like that. Number two, we have now two quarters in a row where we are not very satisfied. We are satisfied, but not very satisfied in the quantity, not in the quality, in the quantity of the order intake. That is taken, yes, and we're working on that, and the next quarters will show that we can also do that. We can address it and we can change it. That we come back not only in the quality of the orders, but then also in the quantity of the orders.
What is more important is that we have a continuous cost improvement on the rail side as we had it and have it on the truck side. Because cost is a fact. Orders are a wish, very often. Orders, we do not have 100% in control. Cost, we have in control. And there, I appreciate the question when it came to the CVS, from your side, where you ask, "Are you now ramping up capacities?" In trucks, we have absolutely diminishing cost increases when it comes to CapEx, when it comes to orders to be fulfilled by people. We will have a flexibility increase because we will go for flex.
We increase our flex times, but we will not invest, and especially we will not put any pressure on our organization, that with a cyclical market, we will have then an over capacity, which in fact, a lot of other industry are having. We are not in this race. So we can supply, we have capacities, very clearly. We have the same on the rail side, wisely invested, wisely prepared for more orders to come, but wise enough not to be on the edge if the orders do not come. Therefore, and I repeat it constantly, the revenue per person, the revenue per FTE, has to improve. Currently with truck, we are at EUR 317,000 per employee. This is by far the best number this company has ever achieved. We were in the range of EUR 220,000, EUR 240,000, even four, five years ago. Four years ago.
That means the efficiency per person is massively increased now by nearly 50% over the last four and a half years in Truck. In Rail, we are not as good as we want because there we are currently in the range of EUR 256,000-EUR 260,000. This is not our aim. This is not what we are happy with. We want to reach here also, and I confirm that with Nico, we want to reach EUR 300,000 per person. Why is that so important? Because it tells you that our break- even is absolutely under control. It is getting even better. With that, we have more space and more area to get in better contribution margins. The market is a fact which we have to absolutely acknowledge, but the cost is something we have under control by ourselves.
I would like to add this always, because this is the key of our success. The key of our success is not only when the market goes up and we go up with. The key success is we are restructuring and we are having our cost under control. That is making the difference. Thank you.
For now, the last question comes from Lucas Ferhani at Jefferies. Your line is open.
Taking the time. Just one last on China. You had a press release a few days ago, I think, on better using the supply chain in China. Can you comment a little bit on what you expect to do there, and is it mainly domestic also for export market? And generally, the situation also on demand when it comes to China and the plan for freight, for example. Thank you.
Lucas, can you please repeat the question? The line was not so good for us, and we could not really understand the question perfectly.
We understood demand in China, but could you specify a bit?
Yes. The question was on China. First part on the supply chain, because you had a press release a few days ago trying to better mobilize the supply chain in the local China market. Is it for the domestic or export market as well? Then generally demand in China in the segments we know and in freight.
Yeah, I can take that. What we did, we did a supplier summit, by the way, the first in China for its kind, and we did also something which is together truck and buses. What we see in China is not only the cost, we see also a massive acceleration of technological innovations. This is, for us, substantial and existential. So far, we were very limited to Chinese products, Chinese prefabricated products and solutions for the world. What we now is, we evaluate this, where we can use it and where it makes sense to use it, not only in cost, but also in terms of fit to the concept. Here we see China really accelerating. China is becoming no longer only the manufacturing hub for the world.
Not only in the industries of trucks and rail, but more and more a known innovator with new solutions, cost-efficient, but also new solutions which could be absolutely of use for our whole business. That is what we did. By the way, you remember we did it last year also in India. We need more suppliers from these regions, and we see it also with our competitors. They are leveraging India, they are starting to leverage China, and this is exactly what we do.
Maybe to add, with the demand in freight in China, I think this was more aimed towards the rail side in China. This is, first of all, a market which is basically not existing at the moment. Freight China rail is a very conventional, old type. They are just replacing old vehicles. Now, with the events prepared over the last two years, but happened in the last three months, I would say, we expect that China is really going towards modernization of this rail freight market. If this starts to materialize already next year, I cannot tell you. We don't have it in our plans. If it comes, it will be an upswing into our plans.
But I can guarantee you that we are behind that, because if somebody in the world will be quick in changing things on a conventional thing like the rail freight market, then it will be the Chinese. Then we will be there with our technology and with our joint venture together with China Railways. We are excellently prepared for that.
Thank you for the questions. We are now closing the Q&A, and with that, I hand you back over to our speakers for closing remarks.
Yeah. Thank you so much. Many questions today. You know Investor Relations is always available for any follow-ups. Reach out to us anytime.