Knorr Bremse AG

XETRA:KBX

Earnings Call Analysis

A Robust Start to 2024

Knorr-Bremse entered 2024 with a strong operational and financial footing. The company successfully implemented its BOOST program, including the divestiture of low-performing assets like Kiepe Electric. This quarter also saw the acquisition of Alstom's North American signaling business, aligning with Knorr-Bremse’s strategy to enhance its portfolio by adding high-performing assets. This acquisition is expected to significantly bolster the company's Rail Vehicle Systems (RVS) division and provide a strong foundation for future growth.

Financial Performance and Projections

Knorr-Bremse reported Q1 revenues of nearly EUR 2 billion, marking a growth of around 3-4%. The Rail division saw significant revenue increases of over 12%, while Truck revenues dipped slightly but remained above EUR 1 billion. The operating EBIT margin improved notably by 210 basis points, reaching 12.1%, driven by improved efficiency and better pricing. The company expects full-year 2024 revenues between EUR 7.7 billion and EUR 8 billion, an EBIT margin of 11.5% to 12.5%, and free cash flow between EUR 550 million and EUR 650 million.

Divisional Highlights

The RVS division showed robust performance with revenues of EUR 964 million, an increase of almost 13% year-over-year, despite FX headwinds. The division also saw an impressive organic revenue growth of 17%. The Truck division experienced a slight revenue decline of 4%, but the operating EBIT improved by almost 17%, resulting in a margin increase from 9.0% to 11.0%. This growth was fueled by higher prices and efficiency measures.

Order Intake and Market Dynamics

Order intake remained strong, with both divisions recording over EUR 1 billion each. The book-to-bill ratio was 107, and the order backlog increased organically by EUR 226 million, reaching EUR 6.7 billion. The company expects to maintain a book-to-bill ratio above 1 for the full year. However, they anticipate a decrease in production rates in Europe by over 10% and a smaller decline in North America. In contrast, the Chinese market's growth potential, driven by exports to Southeast Asia, offers some positive offset.

Strategic Acquisitions and Future Outlook

The acquisition of Alstom’s North American signaling business is expected to strengthen Knorr-Bremse’s market position significantly. This business, characterized by high safety standards and a market-leading position in control, command, and signaling segments, perfectly complements Knorr-Bremse's existing portfolio. The deal, expected to close in summer 2024, is anticipated to create immediate value and aligns with future digital business models. The company plans to update its guidance with the publication of Q2 results, incorporating the new acquisition.

Cultural and Structural Changes

A cultural transformation within Knorr-Bremse is underway, aiming to foster innovation and agility without compromising efficiency. This includes implementing a speak-up and failure culture and revising the bonus remuneration system to focus more on profitability and cash metrics. The company remains committed to distributing 40-50% of earnings as dividends, ensuring shareholder returns remain a priority.

Guidance Confirmation

Knorr-Bremse confirmed its full-year 2024 guidance, highlighting confidence in its strategic initiatives and market positioning. This includes anticipated revenue growth, margin improvements, and strategic acquisitions poised to drive long-term value creation. The company is well-prepared to navigate market cyclicality and capitalizes on emerging opportunities, especially in the rail and heavy-duty truck markets.

Earnings Call Transcript 2024-Q1

[Operator]

Hello, and a warm welcome to Knorr-Bremse's First Quarter 2024 Results Call. Today's speakers are CEO Marc Llistosella; and CFO Frank Weber. [Operator Instructions]I would now like to hand over to Head of IR, Andreas Spitzauer.

[Andreas Spitzauer, executive]

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 conference call for the first quarter results of 2024.Today, Marc Llistosella, our CEO; Frank Weber, our CFO will present the results of the conference followed by a Q&A session. The conference call will be recorded and is available on our homepage, www.knorr-bresme.com in the Investor Relations section. You can find today's presentation and later, transcript of the call.It is now my pleasure to hand over to Marc Llistosella. Please go ahead.

[Marc Llistosella Y Bischoff, executive]

Many thanks, Andreas. Welcome, everybody, to our call regarding the results for the first quarter 2024. We want to keep the call rather short as it is a busy reporting day and we are cautious of your time. So let's allow me to walk you through the highlights on Chart #2 first.For the first 3 months of the year 2024, Knorr-Bremse had an excellent start from an operational as well as from a financial point of view. Our BOOST program is fully on track with the sale of Kiepe Electric and SafetyDirect in quarter 1. We reached important milestones regarding brownfield.On the M&A side, we recently announced the acquisition of Alstom's North American signaling business, which is in a good -- and is a good example for our portfolio strategy, low performing assets out and good performing ones in. In addition, I would classify this acquisition as a signature move for our greenfield approach.Unchanged is the uncompromised continuation of our dividend policy to distribute 40% to 50% of earnings to our shareholders. Therefore, we pay and will pay a dividend of per share of EUR 1.64 just a few days ago for last fiscal year. Thanks to a solid performance in the recent quarter, we confirm our full year '24 guidance of the closing of the signaling deal, which we expect during summertime, we will include this asset in our guidance and will provide an update. So that means this asset deal so far is not included.On Page #3, I want to walk you through the major topics of the announced acquisition focusing on the strategic rationale. As you all know, we have been sharpening our M&A guardrails. Last year, Rail with its resilient market growth, accretive aftermarket business and higher profitability is an important value driver for KBs. The acquisition of the signaling business will not only further strengthen our Rail division, but also our exposure to the Rail market overall.What do we get on board via this acquisition? The portfolio of Alstom signaling business in North America incorporates products such as interlocking units, including level crossings, train detection and communication devices or onboard frame control products. These types of products are characterized by high safety standards, something we have been familiar with for a long time.The business is particularly attractive due to its market leading position in the control, command and signaling segment, and specifically its high aftermarket revenue share, which is why it fits perfectly to our existing Rail division. Although we will be entering a new market within the rail industry in North America, we have already known its customers, the so-called Class 1 for decades.What does it mean for Knorr-Bremse? The expansion into signaling in North America is a step of transforming RVS from a system supply of rolling stock only to a system supplier for the whole rail ecosystem. You know that we also strongly focus on digitalization and connectivity. Signaling will add data revenues to our business, plus opening up new perspectives for profitable growth, technological expertise and future digital business models.The deal is a tangible step into our strategic direction to transform Knorr-Bremse in total and very important it will create additional value from day one. In addition, the deal enables us to further diversify our revenue and profit generation from a regional point of view. What are the next steps? The antitrust process started and we expect to close the deal in summer 2024. But it needs to be said obviously this process is not fully in our hands. Thereafter, we will welcome around 1,000 new employees at Knorr-Bremse and start the integration into RVS.All in all, the acquisition underlines the efforts of our BOOST 2026 program. We want to carve out diluting businesses and want to add value accretive businesses to our portfolio. Frank Weber will give more details from the financial perspective later.Coming to Slide #4. This is a used and format which you now well know. Let's have a quick look at the current market environment on charge, for real demand stays solid as expected. Especially Europe, our largest market sees high all the intakes driven by the continuation of the green mobility strategy in many countries, but also other regions such as Asia and specifically China developing fine and should see a solid 2024 overall.The same accounts for North America. Aftermarket developments, favorable driven by improved ridership levels. But last, not least, pricing of new OE contracts is quite supportive, counterbalancing inflationary headwinds.On the other hand, Truck production rates started to normalize across many of the CVS markets as expected. The past quarter, nevertheless, development was still on a good level. On full year level, we believe a decrease of production rates in Europe could exceed 10% year-over-year. In North America, the potential decrease should be lower than in Europe, but the number of produced trucks should be still below last year's level.The market in China develops nicely including some growth potential driven by exports into Southeast Asia. We observe the developing and development in the truck market closely, and we will be able to react quickly to all changes if necessary, especially in Europe.On Page #5. Let's turn to this page to discuss the financial highlights of quarter 1, 2024. Revenues amounted to almost EUR 2 billion, representing a growth of around 3% to 4%. Rail saw a significant increase of more than 12% while Truck revenues decreased slightly, nevertheless to a much lesser extent than anticipated and still above EUR 1 billion.Operating highlight of the quarter was the development of profitability. Operating EBIT margin benefited mainly from more efficiency measures and better pricing. Accordingly, the margin rose to 12.1% which is an increase of 210 basic points higher than last year's quarter results.Order intake was very strong again with both division posting more than EUR 1 billion each. Book-to-bill ratio was respectively at 107. Order backlog increased organically by EUR 226 million to EUR 6.7 billion, which represents a good level of visibility for the quarters ahead. Please bear in mind that the order backlog has been reduced by around EUR 560 million following the deconsolidation of Kiepe Electric.Free cashflow in quarter 1 was at minus EUR 95 million, a strong improvement versus last year's level. Please keep in mind that this development was expected and for typical pattern of our business over the year, quarter 1 is always the weakest and quarter 4 is always the strongest quarter in terms of free cash flow generation.I would like now to hand over to Frank, who will outline the financial figures in more detail. So please Frank.

[Frank Weber, executive]

Thanks, Marc, and hello everyone. Let's continue on Slide 6. CapEx amounted to EUR 72 million representing 3.6% of revenues. It was slightly higher in both absolute and relative terms year-over-year, but well below our target range of 5% to 6%.Net working capital slightly reduced year-over-year by EUR 1.51 billion, which means our measures were again effective and helped to reduce the scope of days by 2 days or nearly 3% versus the prior year. We continue to take action across all working capital areas, in particular further reducing inventories via our ongoing net working capital optimization program called Collect.Our free cash flow, as Marc mentioned before, was minus EUR 95 million. It significantly improved by over EUR 100 million versus the prior year's quarter, driven first by further successes of Collect, which primarily aims to reduce inventories and accounts receivables. And secondly, also an increased EBIT supported this improvement, needless to say.Full year free cash flow guidance is unchanged, and we feel confident to reach our targets also for this year. As a result of improved EBIT and the before-mentioned net working capital measures, our ROCE increased significantly from 15.9% to 19.7%.Let's take a closer look at the divisional performances in quarter 1, starting with RVS on Slide 7. In terms of order intake, RVS recorded EUR 1.06 billion. This is a remarkable figure despite a strong prior year quarter, driven by Europe. Again, at this point, my usual reminder is that rail contracts are characterized by a general lumpiness and not every quarter can be above EUR 1 billion. In the past quarter, we benefited from a major order with the volume in the higher double-digit million euro range in Europe, which was originally supposed to be booked in the second quarter.Pricing of new orders have returned to the same good level of profitability since quite some time compared with the time before inflation started to increase rapidly. Order intake increased in Europe, offsetting a slightly lighter development in the APAC region and North America.Book-to-bill ratio stood at 1.1. At the same time, it was the 10th quarter in a row with a book-to-bill ratio of above 1. As a result, order backlog grew organically by more than 6%, reaching EUR 4.7 billion, which gives us a very good visibility going forward. For the quarters ahead, we expect a continuation of good order momentum, and we should see a book-to-bill ratio of above 1 on a full year basis as well.Let's move to Chart 8. Revenues of RVS in quarter 1 amounted to EUR 964 million, an increase by almost 13% year-over-year despite ongoing FX headwinds. Organically, the division even increased revenues by 17%. Increasing OE business as well as a better aftermarket business in all regions, including China, supported the strong development. As a result, our aftermarket revenue share in RVS reached 52%, which is stable on a high level year-over-year.Operating EBIT margin increased significantly by 200 basis points to 15.1%. This development was fueled by better pricing, operating leverage, lower conversion of legacy business, improved revenue mix as well as our BOOST efficiency measures.Let's continue with our Truck division on Slide 9. Order intake in the CVS division once more amounted to more than EUR 1 billion, a decline of roughly 11% compared with very tough costs. Nevertheless, the past quarter was strong considering the tougher environment in the truck and trailer business right now.Demand in South America and APAC was up, but as expected, the markets were weaker in Europe and North America. Order book with almost EUR 2 billion at the end of March remains on a high level and only marks a small decline versus '23 so far. As mentioned during our quarter 4 results call at the end of February already, order intake in '24 is expected to decrease in Europe and North America after a strong '23 overall.China is expected to post a stable to slightly higher order intake year-over-year. In total, this should lead to a better development for CVS in the first 6 months for '24 compared with the upcoming second half.Let's move to Slide 10. Revenues in CVS were slightly down by 4%, but with more than EUR 1 billion, still very solid. This development was mirrored basically in all regions, except for South America. At the same time, our aftermarket share increased from 28% to 30%.Operating EBIT of our CVS division improved significantly by almost 17% year-over-year, reaching EUR 111 million in quarter 1. Consequently, the operating EBIT margin improved from 9.0% to 11.0%. The main drivers of this development were higher prices, which we were able to achieve with our Truck customers year-over-year, our strict efficiency measures and also Cojali continues to remain a good value contributor to the business. Overall, I'm very happy about the excellent quarter 1 results of both divisions within the given environment.Referring to Marc's outline on the U.S. signaling business, let me just add the financial rationale and the midterm financial implications of this acquisition on Chart 11. Overall, we see this move as an accretive addition to our business that really contributes to the KB main DNA elements, which include, first of all, the support of our strong Rail business, signaling North America will make Knorr-Bremse much more railish again as RVS revenue share will pass the 50% mark going forward again. Rail is a resilient business with attractive future growth potentials for us and high margins due to the safety critical nature of our product, a clear value driver for us.Secondly, high profitability levels. We defined in our financial M&A guardrails that we would only buy assets that are value-added and margin accretive to Knorr-Bremse, latest midterm. Signaling North America fulfills this criteria and supports our focus on increasing profitability in the context of our BOOST program.Thirdly, a high aftermarket share. Signaling North America comes with a large chunk of aftermarket business, concretely a lot of spare parts business and modernizations. RVS accretive aftermarket share will therefore further increase.We also appreciate the shift of regional distribution and therefore, balancing our business with this deal. Increasing the North American share and reducing the dependency from other regions is a clear improvement, and therefore also a risk reduction going forward.In its last fiscal year, which just finished end of March this year, revenues of Alstom signaling business North America amounted to around EUR 300 million with an EBIT margin of round about 16%. Therefore, the acquisition price of EUR 630 million in total represents an acquisition multiple of roughly 13x EBIT, which is, from our perspective, very appealing. As a reminder, currently KB stands at roughly the same EBIT multiple with a lower margin.Additionally, we believe that this asset has the ability to grow mid-single digit and also improve profitability midterm. This improvement will not be linear, but should progress step-by-step as it's also a project business.Overall, we believe signaling North America is a great addition to our business and look forward to transforming KB's Rail business successfully into the future.With that, I'm handing over to Marc again.

[Marc Llistosella Y Bischoff, executive]

Thank you, Frank. Let's go to the Page 12. On Chart 12, I want to highlight one topic that we have been working on intensively at Knorr-Bremse, which is very important not only to me and my colleagues, but the whole team. And that is a cultural change. KB needs to develop into a more modern company being innovative and agile without losing its important DNA of being focused and efficient. I want people to think out-of-the box, still being part of the team and sticking to what was agreed.In the past months, we therefore implemented the speak-up and failure culture into our everyday work. I'm proud of the team's spirit of Knorr-Bremse and look forward to continuing doing this path. Additionally, the Annual General Meeting has approved the change of the bonus in the remuneration system of Knorr-Bremse. The impact of profitability and cash will increase, which I guess is also very important to our shareholders.At the same time, it was important to give the company clear goals. The entire management team implemented this with the BOOST program. We now have a common goal and motivate our employees and teammates with clear direction and transparent communication. Looking forward, we want to be measured by the quality and speed of execution of the measures we implement to improve from a company.Last page, #13. I would like to make it short and crisp. We confirm our full year 2024 guidance after a strong first quarter. We continue to expect revenues in the range of EUR 7.7 billion to EUR 8 billion, and operating EBIT margin of 11.5% to 12.5% and a free cash flow between EUR 550 million and EUR 650 million. We want to update our guidance with the publication of the quarter 2 results and hopefully also take into account our new signaling business in North America.Thank you very much for your attention. We are looking forward to your questions from now on.

[Operator]

[Operator Instructions]. And the first question comes from Sven Weier, UBS.

[Sven Weier, analyst]

The first one is on the Alstom deal. And Marc, I was hoping you could educate me a bit more on signaling because my understanding was that you kind of buying the conventional parts of Alstom's U.S. signaling business. And I was just curious what is the part that you're not buying? Is that part even more digital? Is that something you need to still need to acquire going forward from somebody else? And just really like to get a better understanding between the difference in like conventional and nonconventional signaling, if there is any.

[Marc Llistosella Y Bischoff, executive]

So to make it very short, we buy exactly the whole operation what Alstom has in the North America. We call it conventional because the data analytics and everything what is beyond is not included because it is not existing. That has to be added by us. And this is where we see the transformational potential of this asset. So far, and I think you are aware of our BOOST navigator where we cluster every potential assets on 3 dimensions. Number one dimension is the exact [indiscernible] the horizontal one, whether this is accretive business or not. This one is accretive.Number two is the why? That's the technological and also the market itself where we say we have an access now to a market which so far was not accessible by a bus. Second, the profit pool of this respective accessible now for us, if ever market, is very promising. It's in the range of 15 to 20-plus percent, which so far was not applicable for us.Number three, and that is the most important thing. And this is why we emphasize also always conventional is that these assets have a massive transformational impact on us if we play it right. And that means not only to play other regions, if we play this on a more service-oriented, data oriented because we have no access to data, we can work with the data and we can convert the data to services, which can be packaged. And that's exactly where we say this is so far not done. This is what we want to do with it.

[Sven Weier, analyst]

What's driving the 5% CAGR for the Alstom business? Is there any regulation change or what's driving the 5% --?

[Marc Llistosella Y Bischoff, executive]

No. This is the normal expectation, which we have roughly 50,000 [ shares CAGR ]. And from the 50,000 shares CAGR which we have in America established over the last 60 years, we are the #1 supplier of any form of overhauling and maintenance. That means we have a ratio of 3,500 to 4,000 stations to be overhauled. This is the base for our aftersales business, which we say where we will focus.On top of that, we have a project which is so far not finalized and signed, but we are very positive and our take rate is above 75%, which is called [ Encore ] business. And this Encore would give us a massive increase in revenues and also in profitability because the profitability was secured by the sales side.So having said so, we have incorporated the overhauling. We have seen it from the last years. So we just extracted it in the future. This is the 5%. Plus we have a potential which we see with this and eventually by the end of the year we know more that the project is realizing as we expected and then this 5% would be really the baseline.

[Sven Weier, analyst]

Second point I had was on the truck cycle because we all know it's hard to predict what's going to happen. But is it fair to say that the kind of, let's call it, outperformed gap you had in Q1, which I guess is based on content, which is based on the regional hedge, whatever happens to the truck cycle that you are confident to maintain this?

[Frank Weber, executive]

Sven, you're talking about the margin that we are having with a significant increase in the first quarter.

[Sven Weier, analyst]

No, I'm not, Frank. I'm so sorry. I meant the gross outperformed. I mean, you're clearly doing better in the truck order intake than the market.

[Marc Llistosella Y Bischoff, executive]

It's both. We have to say we really enjoy our shareholding in Cojali which is overproportionately winning in Europe. That's a fact. This business is relatively small, but the profitability of this business is significant. So to be very clear here, this asset is a massive part of our growth and it shows the future is not only content per vehicle, but also the overhauling, the maintenance and the professionalization of the maintenance. So this is factor number one.Factor number two, you have seen that we have a slight decrease of revenues. And what we have done is we have focused very, very much on our costs, internal costs. But it means to be more efficient. So to have a better turnover per person and to focus now on that, this is to have the breakeven of our CVS business now more and more in focus. That means we have by ceteris paribus to come up with better margins.Now you can say, oh, this is eventually contradicted by the current market development where we are very, very careful and we are also a little bit -- you know that, a little bit more conservative than our customers. And we already said in October last year that we don't see the year 2024 exceeding the year 2023 when it comes to European production rates.And having said so, we already prepared ourselves for everything what is coming from the market. So that means you can see we increased our profit margin by 200 basic points by -- in Europe, in fact, stagnating market, and that's a result out of it. Can we keep this for the next? If we get a lower market, we can't say, but we are prepared. And that means we are very, very well prepared for any form of cyclicality of this market.

[Operator]

The next question comes from Akash Gupta, JPMorgan.

[Akash Gupta, analyst]

Yes. I have 2 as well please. The first one I have is on your expectation of Rail business in China and the recent data points that we got out of your Chinese customers suggesting some uptick in demand for new equipment in China. And I'm wondering if you can provide your thoughts on how do you see the market developing after somewhat slower Q1?And on the same topic, what shall we expect on margins because historically, China has been margin accretive in rail. So how should we see the margin development for this segment if we see a good Chinese recovery? That's the first one to start with.

[Marc Llistosella Y Bischoff, executive]

This is fine for you. I think this is answered by Frank, right?

[Frank Weber, executive]

I try my best before your best, which is always better than mine. Thanks, Akash, for the question. We see a good development in the Chinese market for aftermarket as well as for the OE business. We do currently assume that high speed should have some growth potentials in the year '24, even after quite some good numbers in '23. We do think that metro OE business stays on a similar level like we had in '23, and we see our aftermarket to grow within '24 as expected.The ridership levels as, so to say, the fueling force behind our aftermarket business has been recently quite good as well. So if you look at the first quarter, there was a year-over-year up of more than 20% on the ridership levels as well as in urban as well as for the high-speed trains. So that is a good starting point for the year to come. And if you take into account, then a certain kind of lead time when this ridership then turns into revenues for us. We have a good, also, belief in the second half of the year '24 as well in that regard.On the margin side, yes, China is accretive for us and will stay accretive, of course, in the very long term as we many times discussed, Akash. We do have pricing issues, of course, over the next 10 years, so to say, but it will always stay very accretive for us as a business.

[Akash Gupta, analyst]

And my follow-up question is on a change in bonus system. Maybe if you can elaborate on what were the KPIs before and I think now you are focusing more on profitability, but maybe what was the KPI before? And what sort of changes you have implemented? And also how many people in organization and at what level are they covered by this new change in bonus system policy?

[Frank Weber, executive]

Akash, we have -- for the short-term incentive system, not changed KPI, but just in large the weight of the profitability now to 35%. So we have not changed the KPIs, just the weight of them towards profitability. For the long-term incentive, we have also added ESG component with 25%. And we added also a profitability component. The return on our invested capital is now included as well with 25%. And this concept of STI and LTI, the incentive scheme, covers the first, second and third line of all managers within the company.

[Operator]

The next question comes from Vivek Midha, Citi.

[Vivek Midha, analyst]

I have 2 questions. Another one on signaling. You've stated your intention to become a system supplier for the whole of rail. What's the next steps on the strategy to expand in signaling beyond this, such as into new regions, given the barriers to entry? Is there any possibility of organic growth? Or will it have to be through acquisitions?

[Marc Llistosella Y Bischoff, executive]

Very good question. Thank you for that. I try my best to answer it as much as I am allowed to do because otherwise we make the potential assets more even expensive what we don't want to do. So organically, to be very clear, first, we have to make sure that everything what is in our existing portfolio has to be bundled because you know we have a shareholding in Selectron, we have shareholding in Zelisko. Zelisko is owned by us by 100%. And there is some overlap content-wise and functionality-wise, which we will now bundle and which is called the COC. This means we will create a business unit first.The independence of the signaling business in America will stay, but we will do -- of course, we will do streamlining and purchase. We will do the classical things in IT and HR, and so on. And so I don't bore you with fact, but the potential there is that we can even increase the profitability level of the assets by doing just some brownfield house working.Besides growing in America, we would not need anyone to grow further. So this would be purely organic. If we now speak about countries like South Africa, we speak Australia, speak of South America, signaling in North America would be the hub for it. And so far, it was not in the strategy of the current owner to explore export markets that massively. So this is coming now where I call it Organic 2.0.Now we speak about 2 regions which we could address and that is Europe and Asia, especially China. China, we will first observe before we have here any conclusions. In Europe, of course, we have to make sure that the signaling systems, the functionalities, are similar, but the system itself is completely different to the ones which is in Europe. So that means in order to exceed our market reach, we have to consider seriously also non-organic growth in this area.

[Vivek Midha, analyst]

My second question is a follow-up on the cultural change. You've talked about improving the internal processes. Could you maybe expand on how the culture needs to change around pricing and how you deal with your customers and how that needs to change to get the right return for your technology?

[Marc Llistosella Y Bischoff, executive]

I would allow us to split this. So first, I try to answer it. And eventually, Frank, he looks at me a little bit like, oh, what is this? I think it's a good question, Vivek, because we have a certain form of reputation when it comes to pricing that we are very stubborn, very stiff. I am afraid to tell you, and especially our clients, this will not change. But what we will change is how communicating we are. That means transparency has to open up also to the externals. It has to be understood what we're doing, why we're doing it, and it has to be predictable what we are doing, which was in the past sometimes eventually sometimes a little bit erratic. But we will focus on that so that we are not only a very good player in this area, but we are also an agreeable area in this area.So the -- but all the cultural change you can imagine is not all -- is coming to a price. So even when we have 80%, 90% of our top managers leading and also supporting us, we will have to make sometimes a hard call. Some people eventually decipher themselves that is not the way they want to go because that means we are more self-reflecting. And that means you have to be more argumentative and less [indiscernible]. And this is something which will happen more and more in the next months and also in the next years to come. But the [indiscernible] character of our leadership principle is going fading away, hopefully, completely. And our argumentative is growing and speaking in positive critics.Hopefully, this gives you an idea of what we are struggling or dealing now with. It's not struggling. It's really a very entertaining journey. But eventually, we ask the CFO how he feels it. And what do you think about this?

[Frank Weber, executive]

Yes. I potentially come to the same conclusion. Otherwise, it would be even worse, of course. But looking at it from a different angle, you know the company is a very entrepreneurial company. It's a very decentralized organization that we are having, which gives us a hell of a lot of strength and gives the entities out there in the world a lot of strength in the way they are acting in regard and have been acting and did prove over the last 2 to 3 years in regards to pricing was really kind of tough and successful in the end. This will not change because we will not give up on any of the DNAs that, so to say, our companies build up in regards to entrepreneurship.So I don't expect the cultural change. Maybe, so to say, the ways and means how to get the result through in the end might change a bit over time, but we are outcome-oriented as a company, and this will not change.

[Operator]

Next question comes from Gael de-Bray, Deutsche Bank.

[Gael de-Bray, analyst]

My first question is on the divestment program with the truck production rates coming under pressure now. This likely makes the process of selling loss-making business is exposed to the trucks market a bit more challenging. So I guess the risk I see is that some of the discussions you have could become rather protracted now. So it'd be useful if you could talk a bit about this and perhaps provide any color on the discussions you might have with the potential buyers.And the second question is a quick one on the signaling business you've just acquired. You mentioned that you could potentially receive a large contract by year-end, I think. So could you perhaps talk a bit about this, whether you will need some specific one-off investments to deliver this unusually large contract or whether all the costs have already been covered by Alstom before?

[Frank Weber, executive]

Yes. Thanks, Gael. Let me start with the first part maybe. You know that we have been so far delivering what we promised in regards to the sale of assets. We have been saying to you that towards some when we do our second quarter disclosure, we will give you some update in regards what's potentially new on the selling decision side from our side. So we don't think that that was it, like we indicated. In that process that we are running currently, yes, I mean the environment is weaker than it was 1.5 years ago or a year ago, but we don't see in the sales process currently a lot of headwinds given that fact.Liquidity is still there, so to say, the potential buyers that we're talking to seem to have the refinancing capabilities. So it looks like occasion in the truck side those assets that are on the plate, no significant headwinds at this point in time. But we have to carefully watch this, of course.

[Marc Llistosella Y Bischoff, executive]

Yes. Just to add to you, Frank, what is also very clear, and we are not doing only this for CVS. We're doing the same by the way for RVS as well. CVS in core, the 2/3 revenues of CVS have a profitability, which is exceeding currently 50% to 60%. So we have 1/3 of the business, which is far away from this level. So that main CVS itself can be super profitable. The question is, how will we fix it?When you split the third into 2, then you can say from this 1/3, even 1/3 is not contributing currently at all. And that is something which we focus now to have measurements, to have KPIs, to have a tracking tool and also to use externals. Yes, we do. And we are very -- we can say, you're right, it could be a wrong time or not the best time to sell these assets. But the better we make these assets, the more we get attracted and attraction by the market. So that means it is not only a downside, it's also an upside because every asset which we are now focusing on is getting better, it's not getting worse. That's for the question number one, just an add to what Frank said.Number two, the project itself is relatively big. The project itself, if I'm right, runs between 5 to 7 years. And it has a potential. The amount of this project is roughly 2x of the normal revenue of the business of our Praxair, our signaling business. The profit of this could be also very extremely double-digit and the invest which you asked for, how much investors needed to get it, it's relatively small and it's not bringing us to any situation where we have to go upfront. This kind of project would really pay in from the very first beginning. And of course, the premium, the top situation would be after 3 to 4 years. And that's most I can tell you. Otherwise I think -- and everybody is nodding and look at me very seriously -- I should not say more to you.

[Frank Weber, executive]

Just one side addition that we get it clear. The basic investment we would need to do, there is R&D work, engineering capacity, which -- according to the contract, which is on the table, should be charged to the customer via cost-plus method. So there is no, so to say, hit upfront in the P&L or in the cash flow statement out of that project, so to say, upfront.

[Operator]

The next question comes from Alexander Virgo of Bank of America.

[Alexander Virgo, analyst]

I wonder if I could ask one question just on free cash flow, Frank, cadence through the year, I guess, just thinking about how we go from the minus EUR 95 million to the guidance for the full year. I appreciate that is often back-end loaded. I just wondered if you can give us a sense for the timing, even some sort of indication would be helpful.And then if I could just follow-up, I missed your comment on the LTIP weighting. If you could just give me those numbers again. I've got 25% on ROIC, but that was all I got.

[Frank Weber, executive]

Yes. Let me start with the second first because that might be a quick one. Yes, the long-term incentive scheme now consists of 3 components, 50% of the LTI is shareholder value. 25% is ROCE, return on invested capital, and 25% is ESG, that's at 25%.Then to your question in regards to the free cash flow. We had a good start into the year or let me put it this way, not as bad as it usually starts since decades for quarter 1 with the 95%. We expect that somehow the second quarter could be in already around 0. Third quarter should be slightly positive and the fourth quarter significantly positive. That is the way to look at it.

[Andreas Spitzauer, executive]

Okay. As we see, there are no more questions. Thank you very much for your time. If you have further questions, please contact us, and have a great afternoon. Thanks and bye.

[Frank Weber, executive]

Bye-bye.