Knorr Bremse AG

XETRA:KBX

Earnings Call Transcript 2020-Q2

[Operator]

Dear ladies and gentlemen, welcome to the call for the earnings Q2 2020 of Knorr-Bremse AG. At our customer's request this conference will be recorded. [Operator Instructions]The call will be led by Frank Markus Weber, CFO of Knorr-Bremse; and Andreas Spitzauer, Head of Investor Relations followed by Q&A session together with the other 2 members from the executive board Dr. Peter Laier, Head of CVS; and Dr. Jürgen Wilder, Head of RVS.May I now hand you over to Andreas Spitzauer? Please go ahead, sir.

[Andreas Spitzauer, Head of Investor Relations]

Thank you, operator. Good afternoon as well as good morning, ladies and gentlemen. My name is Andreas Spitzauer, Head of Investor Relations of Knorr-Bremse AG. I want to welcome you to Knorr-Bremse's conference call for the second quarter results of 2020. As a reminder, the conference call will be recorded and is available on our homepage www.knorr-bremse.com in the Investor Relations section. There, you can find today's presentation and later a transcript of the call.It is now my pleasure to hand over the call to Frank Markus Weber, our new CFO of Knorr-Bremse. Please go ahead, Mr. Weber.

[Frank Markus Weber, Chief Financial Officer]

Thank you very much, Andreas. Dear ladies and gentlemen, I warmly welcome you to our conference call for the second quarter results of Knorr-Bremse in 2020. This conference call is very special for me as I'm speaking to you for the first time as the new CFO of Knorr-Bremse.Today's call is made up in 3 parts. First, I'd like to briefly introduce myself. Then I will present the financial results for Q2. And later, I will give you an update of our guidance for 2020. Thereafter, with my 2 colleagues in the Executive Board, Dr. Jürgen Wilder and Dr. Peter Laier, we look forward to your questions and comments.So turning to Chart 2. Let me quickly introduce myself. My name is Frank Markus Weber. I am 51 years old and I just recently moved to Munich with my wife and my 2 children. I have a business and financial background and studied business administration at the University of Tübingen. After a stint at an auditing company, for the past 21 years, I have held various management positions at the Daimler AG overall in the finance and controlling area.The most important tasks after several controlling positions at Mercedes-Benz during my time at Daimler were Head of Corporate Development and Strategy. I was able to gain valuable experience outside the financial sector, but at the same time, I was able to contribute important financial aspects. Head of Transformation and the driving force behind the efficiency program MOVE with the scope of roughly EUR 95 billion cost at the Mercedes-Benz AG. Last but not least, for many years, I was CFO of Mitsubishi Fuso Truck & Bus and later on of Daimler Trucks Asia based in Tokyo, Japan. The experience I gained in these positions supported my entry into Knorr-Bremse very well. I also headed the M&A department at Daimler for the last 4 years.Looking back on my professional career, I have led many different finance departments in the company that has been listed on the stock exchange for DK. It is precisely this experience and knowledge that I would like to bring to Knorr-Bremse to help develop the company's strong entrepreneurial culture [ turbo ].My key responsibilities inside Knorr-Bremse are finance, controlling, IT, legal affairs, Investor Relations and compliance. My focus will be on fostering and enhancing a culture of high performance, ensuring the continued support by the finance department for the development of Knorr-Bremse as the global market leader for braking and other safety-critical systems.I have completed my first 2 months at Knorr-Bremse and would like to share my first experiences with you. I was extremely positively impressed by the following. First, I have been able to get already into a high number of exciting projects. I have found a highly committed and very customer-focused team at Knorr-Bremse. Second, the new colleagues are characterized by a high-performance culture and a strong cost focus in the true sense of the world. Third, at Knorr-Bremse, there are many entrepreneurial people who are located close to the customers all over the globe and have a high level of P&L responsibility.I have also found the following topics that I have potential to improve and on which I would like to concentrate going forward. Earlier reporting standard and it's very important to me. I consider the IFRS migration so far as unstructured and will take care of this going forward. The profitable growth of the company was great so far, but it has to be secured going forward. This means that we have to develop further on both aspects, growth and profitability, at the same time.Our operational excellence needs to be even further enhanced by stringent standardization of processes and organizational alignment. Even more important, we have to improve our conversion rate on the cash side. Cash conversion rate is a very important topic for me. So let me continue with the financials of Knorr-Bremse AG and the highlights of the second quarter 2020 on Chart 3.Following a very sound performance at the beginning of the year, Knorr-Bremse was able to give an impressive demonstration of its resilience, particularly in the face of the market turbulence caused by the COVID-19 pandemic in the first -- in the past quarter. First and foremost, our financial results have been solid in both our rail and truck divisions. The implemented countermeasures against the impact of COVID-19 paid off and supported our operating leverage. In this respect, our European and American operations benefited greatly from the experience of our Chinese colleagues. Our aftermarket business was also affected by the pandemic, but to a much lesser extent compared to the OE business. Accordingly, the sales mix increased significantly in favor of the aftermarket. Overall, we confirm the guidance for 2020, and we feel confident enough to slightly raise the lower bandwidth of the guidance. I will give you more details later on.Chart 4. Let me continue with the market development in the second quarter of 2020. On the rail side, global markets recovered faster than expected. It is especially important to mention that OEM customers have postponed orders in the OE segment, but we have not received any cancellations. Capacity utilization rates at the train manufacturers' plants are again almost back to pre-crisis levels. And in their latest releases, they have tended to publish rather bullish statements. In addition, numerous governments around the world have initiated stimulus packages to provide financial support to the rail industry while promoting green mobility. On the other hand, our sales development is clearly influenced by the postponement of projects, which will have an impact on development of RVS in 2020 and 2021. Long term, however, we do not expect any negative sustainable impact on the division sales development.The COVID-19 pandemic has certainly had a greater impact on the sales markets of our truck division. Nevertheless, all relevant markets, e.g., North America, Europe and China, recovered relatively quickly but at different speeds. In China, new records in truck production figures were already achieved in April and May. In Europe and North America, the recovery is proceeding more slowly but continuously on an upward path. Overall, however, the last 2 regions I have just mentioned should face significantly lower volumes compared to last year. It was therefore important and the right decision to introduce adequate efficiency measures in the truck division at very early stage. I will proceed on Page 5. A lot of things were positively driven at Knorr-Bremse in the past few months. At the Virtual Annual General Shareholder Meeting, end of June, Mr. Thiele, Mr. Enders and Mr. Weimer were elected as new Supervisory Board members with high approval rates. Thereby, the level of know-how and experience in the Supervisory Board increased significantly. The rail division won a major order in Egypt for brake systems with a volume in the mid-double-digit million euro range, a total of around 1,300 passenger cars will be equipped in this populous country until year-end 2022. In addition, during the COVID pandemic, RVS was able to clearly demonstrate its modern and intelligent HVAC systems, which can significantly improve the distribution filtering and cleaning of the air in passenger cars.The truck division was able to secure the previous scope of delivery with Schmitz Cargobull for the future by extending frame contract with an order volume in the upper double-digit million euro range. Knorr-Bremse will continue to supply Schmitz Cargobull with the current dynamic trailer disc brakes in the coming years. The European legislator wants to make road traffic safer. Therefore, a mandatory turning assistant for buses and trucks is planned for new vehicle types from 2022 and for all new trucks and buses from 2024, with a retrofitable turning assistant ProFleet Assist+ CVS makes an effective contribution for the truck manufacturers to meet these requirements.Let me continue with the financial highlights on Chart 6. On July 16, Knorr-Bremse released preliminary results for the second quarter of 2020. The final results are basically in line with the preliminary figures, even slightly better. Overall, COVID-19 had a major impact on our results in the past quarter as the pandemic mainly affected Europe and North America, where Knorr-Bremse generated around 60% to 70% of its sales. Nevertheless, our performance, especially the divisional profitability, was still very solid and showed a high level of resilience.Let me take you through the most important KPIs. Orders received were at EUR 1.1 billion, a decrease of minus 32% compared to the same quarter last year. On the other hand, with EUR 4.4 billion, our order book was only slightly lower compared to the previous year, which is the foundation of our guidance and gives us a good visibility for these challenging times. At EUR 1.4 billion, revenues decreased by minus 23% compared to the second quarter of last year. The development was driven predominantly by CVS. Our operating EBITDA margin consequently decreased, but only from 19.1% to 17.2% in quarter 2. Given the current adverse economic and market environment, we consider this to be a very solid level of profitability and the proof of our resilient business model.Let me dive deeper into our results on Chart 7. Order intake on group level in Q2 declined by minus 33% to EUR 1.14 billion compared to the same period in the previous year. This development was not supported by the FX development or M&A on a net basis. Therefore, the organic development was slightly better with a reduction of roughly 30%. Due to the extensive lockdowns in Europe and North America in April and May, customers of rail and truck were very reluctant to place orders. With the easing of the curfews in June, incoming orders also improved. Our book-to-bill ratio in Q2 was impacted as well, reaching 0.8 versus 0.9 in the previous year's quarter. The development of the order backlog in the second quarter of 2020 was particularly pleasing. Compared with the previous year's figures, the development of the order backlog was only significantly lower. It reached EUR 4.36 billion end of June 2020 and increased significantly beyond quarter 2 towards August.Let me continue with our revenue development on Chart 8. In the quarter April to July 2020, revenues at group level decreased by minus 23% or in absolute numbers by minus EUR 418 million to EUR 1.43 billion. On an organic level, we saw a decline in the same magnitude. Worth mentioning was the development in the APAC region, which entered the COVID pandemic first, but gaining most of the experience how to handle it. As a result, APAC was able to grow by more than 4% year-over-year. The regions, Europe and North America, recorded the greatest -- recorded the greatest impact of the pandemic in the second quarter of 2020. Accordingly, our group revenues held by a clear double-digit percentage.Let me continue with the development of our profitability on Chart 9. In the second quarter of 2020, group's operating EBITDA was EUR 245 million after EUR 350.2 million in the previous year quarter. The operating EBITDA margin amounted to 17.2% after 19.1% in the previous year. This decrease mainly resulted from volume effects of the declining OE business with corresponding impact on the operating leverage. This margin impact was mitigated by contributions from the accretive aftermarket business. The aftermarket share increased from 32% in the second quarter '19 to 38% in the second quarter of 2020. In absolute figures, nevertheless, aftermarket business was not immune to effects of the pandemic and recorded a decrease of 8% to EUR 549 million. This decrease was more driven by CVS. The group's operating EBIT of EUR 174 million also saw a decline of EUR 112 million. At 12.1%, the EBIT margin was below the previous year's level of 15.5%. The higher deviation compared to the EBITDA of the previous year quarter comes from higher depreciation due to increased investment activities. In summary, we consider Q2 2020 to be a rock-solid proof of Knorr-Bremse's business model in the currently challenging market environment.Turning to Slide 10. While we have initiated a CapEx management program and watched spending closely, we realized an increase of CapEx of sales to 4.7% in the second quarter of 2020. Nevertheless, the level of 4.7% is very much in line with our long-term goal to spend 4% to 5% on an annual basis. A substantial amount was invested in supplier tools and future growth options for both divisions. A large part of the increase year-over-year derives from the continued expansion of the capacity for air disc brakes in North America to support our market-leading position in this segment.We also made strategic investments in further software development in our global steering business. Net working capital at the end of past quarter showed an increase to almost EUR 1.2 billion. This development was mainly driven by measures to ensure the ability to supply our customers. Our corporate policy customer first is very important to us and has been a cornerstone of our business success for decades. Accordingly, we have kept a higher level of inventory to support our customers in the difficult times and prevented a potential disruption of their supply chains. As a consequence, we also accept that working capital will be higher in the short term in order to strengthen our long-term customer relationships. Nevertheless, from CFO's perspective, I would like to clearly emphasize that this flexibility towards our customers is all time-limited despite our strong balance sheet, and we are working consistently to reduce working capital over time. Annualized operating ROCE was impacted by lower profitability and increased working capital, but with 2.2 -- 22.2%, well above most other companies in the capital goods sector.On Chart 11, I would like to continue with the cash flow KPIs rather on the bottom line. Our free cash flow in the second quarter 2020 was positive, reaching EUR 48 million after minus of EUR 61 million in the very first quarter of the year. The year-on-year decline is predominantly due to lower profitability and at the same time, slightly higher capital expenditures and increased working capital. Based on measures we started already, free cash flow will improve accordingly in half year 2 of 2020. As mentioned at the beginning, the cash conversion rate is very important to me. My definition of this KPI is free cash flow before M&A, means as reported in relation to the respective net income. The level of slightly above 40% achieved in quarter 2 2020, which we deliberately accepted to cope with the pandemic is not a satisfactory level going forward in normal times. In the long term, I expect Knorr-Bremse should be able to achieve a cash conversion rate of roughly 70% to 80% during a normal growth phase.Chart 12, I would like to give you an update on the impact of COVID-19 on our 2 divisions. Compared to the quarter 1 2020 presentation in which we needed a total of 5 charts for explaining this topic, this time, we believe only 1 chart is necessary. This should also be seen as a sign that we know very well how to deal with the pandemic. Nevertheless, we continue to monitor the situation very closely and are prepared to act quickly, if necessary. With the exception of India, demand in the global rail market segment has recovered significantly, and our customers on the train manufacturing sites have almost returned to pre-crisis levels, although the important customer segment of train operators have not yet reached normal levels again. We see continuous and steady improvements regarding trains in operation and no cancellations of contracts, only postponements so far. What does this mean for our rail division? Our suppliers have also almost returned to pre-crisis level, which also applies to our own facilities. For example, we have ended short time work at RVS in Europe.I would now like to move on to the truck situation. The key sales markets have recorded significantly -- recovered significantly from the lows and are also showing steady improvement month after month. This assessment has been confirmed even after the summer break, our customers have kept their commitments. Similar to the rail side, only India -- India is still strongly affected by the pandemic. This has a corresponding impact on our suppliers and our own plants which also experienced improved capacity utilization, albeit significantly below the prior year levels overall.Let's move on to the divisional review, starting with RVS on Slide 13. In the second quarter of 2020, order intake of Rail Vehicle Systems was at EUR 790 million, a decrease of 11% in total and 7% on an organic basis. This development can be attributed primarily to be lockdowns at our customers as sales activities were significantly restricted. This led to postponement of meetings and contract awards as well as calls from framework agreements affecting the OE and aftermarket business. In July and August, this situation eased considerably again.Next to it, I would like to remind you that developments in the rail industry with its long cycles do not go well with quarterly reporting. There are always fluctuating large orders in individual quarters, which make comparisons difficult. Projects in rail are generally independent of seasonality or cyclicity. All regional markets experienced postponements and lower demand, which could not be compensated by the development in China. The book-to-bill ratio was -- developed accordingly to the lower order intake, but it was flat compared on an annual basis. It moved from 0.92 in the second quarter of '19 to 0.93 in the second quarter of 2020. The order book, on the other hand, increased by 7% compared to the same period in the previous year to EUR 3.5 billion, which provides good visibility for the rest of the year and shows the confidence of our customers in the long-term trends in the rail industry. We assess the order backlog of our rail division as a very solid and do not expect any order cancellations going forward. Nevertheless, we do see selected shifts of tender biddings.I'm now moving on to the revenue profitability for the rail division on Chart 14. In the second quarter of 2020, RVS recorded revenues of EUR 849 million, which decreased by minus 10% year-after-year. Which -- minus 10% year-after-year and only minus 9% on an organic basis. Europe, which was affected by the pandemic mainly in the past quarter, contributed about 70% of the year-on-year decline in the division sales. Both the OE and aftermarket business were affected by weeks of closures of customer plants and depots.In the OE segment, only the locomotives and passenger business were growing. In North America, we have recorded an overall decline. Lower revenues, predominantly in freight, could not be mitigated by the almost stable development in the service business. APAC, including China, also declined overall. The lockdowns had a negative impact on most countries after China in revenue segments like high speed, locomotives and the aftermarket business. The very positive growth of the Chinese metro business, which more than compensated for the development in other customer areas, led to an overall growth in China but not in the entire APAC region.On RVS group levels, noticeably, lockdowns of depots and significantly lower number of trains on the tracks in the second quarter had a bigger impact than the full effects from the second half of 2020. Overall, this led to a decline in the aftermarket business in the past quarter, but this was significantly less than the decline in the OE business. The profitability of RVS in the past quarter was certainly the most remarkable KPI of all of our KPIs. EBITDA of RVS came in at EUR 204 million in the second quarter and was down only minus 6% compared with last year.The EBITDA margin increased from 22.5% to 24.0%. This margin improvement is based on the following topics: COVID-19 measures had the largest share in supporting profitability in quarter 2 2020. Please keep in mind that the measures are predominantly of a short-term nature. We have sold the loss-making Powertech unit by the end of quarter 3 2019. Accretive aftermarket share increase in quarter 2 2020 due to OE postponements and some pull-in effects. Fast recovery in China supported operating leverage in the country. Many of these positive topics arose specifically in the second quarter of 2020 and will only have a limited impact in the second half of the year. Accordingly, we expect a positive overall development of RVS profitability until year-end, but at a more normalized level.Let me finish the rail part with an overview of current market announcements on Slide 15. The rail market is currently still showing a certain degree of volatility. Accordingly, it is still too early to give a longer-term outlook. However, there are some indicators in the market that should support a general positive development longer term. In contrast to the financial crisis in 2009, the rail market is now benefiting from supportive programs around the world, which are being launched by many governments to contain the pandemic. Many of these measures pursue the goal of reducing CO2 emissions, which can be summarized very well under the term green mobility. The rail industry, in particular, can make a valuable contribution in this respect as it has by far the lowest CO2 emissions per passenger and kilometer driven compared to air and road traffic.On the right side of the Chart 15, I have summarized some examples of this. RVS will clearly benefit from the implementation of these measures. But due to the long lead times between the definition of network details and the delivery of our products, we do not expect a significant impact on sales in the next 18 months. But generally, the programs will be positive for our rail division.On Slide 16, I'd like to continue with the development of our truck division. The order intake for CVS was EUR 346 million in the second quarter, which is a decrease of minus 57% year-over-year, more or less in line with the organic development. This development was expected and reflects most of all the strong negative effects of COVID-19 pandemic in Europe and North America. In addition, the underlying demand in both regions further normalized after a period of strong growth in the last few years. In May and June, we saw the first signs of stabilization in both markets, which have continued to stabilize since then. The increases are rather slow but steady. In APAC, the development of order intake was very well supported by record levels in China, driven not only by recovery demand. The order book of our truck division amounted to EUR 880 million at the end of June 2020, which is a decrease of minus 32% year-over-year.Let's move to Slide 17. Our CVS division posted EUR 579 million in revenues for the second quarter 2020. Compared to last year's figure, this is a decrease by minus 34%. Driven by lower truck production rate in the last quarter due to the pandemic, customer demand was predominantly weak in the European and North American truck market. Both top lines, more than 40% lower compared with the previous year's level. The APAC region again recorded revenue growth in the second quarter 2020 year-over-year, well supported by China. Our truck division recorded aftermarket sales of EUR 168 million in the second quarter 2020, a decrease of only 13%. At the same time, the share of sales improved to 22% in the previous year to 29%. In the second quarter 2020, CVS achieved an operating EBITDA of EUR 51 million, which is significantly lower compared to the same period of previous year. The operating EBITDA margin amounted to 8.7% compared to 15.9% a year ago. Considering the 34% drop in sales, this is certainly a good indication of the resilience of the truck division.On Chart 18, I have summarized our expectations regarding further market developments in the most important truck markets. These expectations are also the basis for our outlook up to the end of the year. The key message here is that the revenue development of CVS in every major region strongly outperformed the respective truck production rate year-over-year in the second quarter.Repeat of the outperformances in the first quarter of 2020. This clearly shows our market strength as well as the support from growing content per vehicle and the solid development of the aftermarket business. In the coming quarters, we expect the positive trend in truck production rates in Europe and North America compared with the low levels in the second quarter of the year. In China, which accounted for roughly 1/4 of CVs sales in the past quarter compared with around 10% in the previous year. We expect the truck production rate to continue at a good level. Let's move on to Chart 19. Knorr-Bremse closed the acquisition of R.H. Sheppard and Co on June 1, 2020. The purchase price amounted to USD 150 million. Sheppard is one of the 2 leading manufacturers of steering systems for commercial vehicles in the North American market. With this acquisition, we took the step in becoming a global supplier of commercial vehicles' steering systems by further strengthening our position as a global supplier of integrated steering and braking system -- systems as a basis for driver assistance and highly automated driving systems, following the acquisitions of Hitachi steering business in early 2019. In 2020, we expect a revenue contribution of more than USD 50 million by Sheppard and a target margin of EBITDA breakeven, driven by the COVID-19 pandemic and the fact that the KB way of efficiency is not implemented yet.The analysts and investors, with all that being said, we are convinced that Knorr-Bremse has proven to be very resilient during this very extraordinary year so far. As a market leader with presence in more than 30 countries and high market shares in both divisions, we feel well positioned to shape future trends and continue to set standards. We continuously focus on the expansion of our product and service portfolio in order to drive the business. Based on our standards, we are always working on implementing innovative solutions that deliver clear customer benefits and meet industry-wide standards for safety, efficiency and reliability and best quality.To continuously strengthen our position and to address the industry trends in our 2 major markets, we invest an above-average percentage of our revenues around 5% to 6% in innovation. In our rail division, we are developing solutions that follow the need for increasing the number of trains on existing rail infrastructure, especially against the background of sustainability. We are clearly focusing on the megatrends: Urbanization, sustainability, digitalization and green mobility.In the CVS division, we focus our R&D efforts on future trends, such as traffic safety, emission reductions and e-mobility as well as automatic driving. Operationally and technology, both for RVS and CVS, we face the future with broad chest. For RVS, we believe that we can benefit from future stimulus programs, predominantly in Europe, which will drive green mobility and long term our strong aftermarket business, too. For CVS, we see great potential in the area of driver assistant systems. We expect that content per vehicle will grow -- will continuously grow globally. Our truck division with its innovative product is well positioned to support the truck OEMs in meeting future regulatory requirements. As a result, since the IPO, Knorr-Bremse has purely created value, and it's our goal and duty to continue to do so.Let's move on to Chart 21, my concluding slide and potentially the most interesting one for many listeners. Overall, Knorr-Bremse performed strongly in the very turbulent first half of the year. Our rapidly implemented countermeasures were very well able to cushion the market downturn in both divisions. In the second half of 2020, we expect that the positive market trends will generally contribute, albeit to a moderate extent. For the Chinese truck market, we expect a normalization in half year 2 after a very strong quarter 2 2020. In Europe and in North American region, we see the market recovery ongoing, but still well below last year's level.The rail OE market is almost back at pre-'19 COVID levels which should continue in the second half of 2020. Please keep in mind that there were some pull-in effects in the rail aftermarket business in the first half of 2020. And therefore, we could see slightly lower aftermarket sales in the second half of 2020. We also expect the positive OE aftermarket mix to change slightly with the corresponding impact on the development of revenues and profitability of the rail division in the second half of 2020. We published a new outlook for 2020 together with the preliminary figures at the half year 2020 in July.Bearing further lockdowns due to the COVID-19 pandemic and the resulting negative impacts on the business up to the end of the year, we now expect revenues of EUR 5.9 billion to EUR 6.2 billion and an operating EBITDA margin of 16.5% to 17.5% in the full year of 2020. As you can see, we have slightly raised the lower bandwidth of both KPIs as the market environment and our expectations have continued to improve slightly since July.Last but not least, in these challenging times, we continue to focus apart from cash flow and costs on the people around us. The health, safety and well-being of our colleagues and our business partners remain our first priority. And I would like to acknowledge all of them for their dedicated efforts in this unprecedented quarter.With this, I would like to thank you very much for your attention. And now Mr. Laier, Mr. Wilder and myself are looking forward to your questions.

[Operator]

[Operator Instructions] And the first question we received is from Philippe Lorrain of Berenberg.

[Philippe Lorrain, Analyst]

Philippe Lorrain from Berenberg here. I've got 3 different areas to cover. The first one on CVS, then that would be RVS, and then a bit more general. So I'm going to start with CVS. In the outlook section of the interim report, you mentioned truck production forecast numbers. Are these truck production forecast numbers that you mentioned, the ones that you get from market forecasters or are these your own estimates? And also, are these numbers then used already in your current outlook?

[Peter Laier, Member of Executive Board]

Philippe, this is Peter Laier speaking. Just to answer that. As traditional in Knorr-Bremse, we use inputs from the markets together with own sites and create our own TPRs. So the TPRs, which we have indicated here, are based on official institutes and additional information, which we receive out of different sources, including economists. And we have reflected them in our outlook.

[Philippe Lorrain, Analyst]

Okay. Perfect. So the question that I have here is basically regarding this truck business. How should we think about the content-related growth for this year as a whole? Because you've posted a very strong outperformance in revenue terms versus the specific truck production rates in the different regions in Q2. At the same time, you're just increasing the low end of your guidance range. But if I understand that correctly, the TPR outlook has significantly improved, probably over the past couple of months.

[Peter Laier, Member of Executive Board]

Yes. At first, we need to say, if you look to our business in the related markets, we have the OEM business and the aftermarket business in those markets. So if we compare truck production rates with our business development, we have, as a first part, the resilience of aftermarket, which is helping us in the respective markets. In addition, you're right, we gained market shares, specifically in China, which is helping us. You see that very well with the TPR development on the other -- on the one side and related CVS revenue development. Beside these market share gains, specifically in non-European regions, content per vehicle is helping us, and that is coming mainly from new regulations coming into place.

[Philippe Lorrain, Analyst]

Okay. Perfect. But just to come back to this question on the volumes, I mean, it seems like the volume trend has -- since you published the preliminary numbers for Q2 that it has improved by quite a margin. However, you're not like really turning extremely bullish, if I understand that on the CVS revenue outlook. Is that correct?

[Peter Laier, Member of Executive Board]

You need to take in mind. Look, just to do a short recap of what happened in the last few months. When COVID-19 crisis hit the different markets, what we have seen in our figures, which our orders -- our orders from customers, you could not rely at all on that. So we had to adjust the figures from the beginning. And we are still in a period where the figures in the systems are volatile, not as volatile maybe as in Q2, but they are still volatile. And what you need to have in mind is we have in the moment, the action figures, which we are seeing, we have some bounce back effects due to situation in April we had in Europe and North America and none the truck OE produced results, some few exceptions. So it's very hard to predict the truck production rate for the remainder of the year. And we have taken some increase assumptions into account for Q3. For Q4, it's still a little bit volatile, and we reflect here our own perspective in there by considering as well that we see overall GDPs and in relation to that as well transportation volumes lower than pre-COVID crisis.

[Philippe Lorrain, Analyst]

Okay. So it's not like you are taking that number very strictly, and you just like mathematically increase the whole forecast just because these volumes go up?

[Peter Laier, Member of Executive Board]

No we adjust TPR. And accordingly, the volumes according to our best guess based on the inputs I explained before.

[Philippe Lorrain, Analyst]

Okay. Then the second question on the rail business. So on Slide 15, it seems like you expect the stimulus programs to only help the situation to go back to normal. And also, you mentioned that you don't expect like a major [ up move ] within the next 18 months. I do appreciate that the long-term growth potential for the division perhaps is a little difficult to call, but do you expect still these stimulus programs to, let's say, bring the trend line of the RVS revenue up over time versus the base scenario that we had last year? Or is it more kind of a one-off effect?

[Peter Laier, Member of Executive Board]

Well, it is a little bit of both, so to say. I mean, first of all, you need to keep in mind that the tender cycles and the awards in the rail sector, they are all long term, yeah? They go -- tenders take sometimes a year or something like that to be structured and to get into the market and to be awarded. So short-term reaction in the rail sector is always, at least on the OE market, very difficult. And we also had the times during the months in the second quarter, for example, in Europe, as you might have realized when you took a train or something like that, that those trains were still running, but they were mostly empty, yeah? There were times when you could choose which car you would like to take a seat because they were all empty. You can imagine that, that led to major losses on the operator side. And those stimulus packages to a certain extent, whether it's U.K. or whether it's Germany or other countries, they help to ease that situation because it was so important for also government, let's say, in individual states to keep up that infrastructure running. That costs a lot of money. And therefore, there was a lot of similarly -- stimulus money required. The good thing for us is that also, yeah, if you put it a little black and white that also empty trains need to break. And therefore, there is continued service business and also infrastructure planning. So basically, the procurement of trains is rather long term. I think whether there will be additional trains to be bought are not really dependent on the ridership that we will see over the upcoming years whether that is really going to improve dramatically or not. We have seen, as we pointed out before, also during those crisis months that we could benefit at some point or at some spots even from that because there was a time when operator said, I'm afraid that I'm running out of spare parts. I don't know how the supply chain will develop. So let's basically buy additional parts, and that's also the reason why we benefited in the first half year. But mostly, the question to your answer, whether it will, so to say, secure numbers that we have mentioned before, that's more the case than, let's say, in the next 18 months, additional potential or something like that. That would be my clear answer to that.

[Philippe Lorrain, Analyst]

Okay. And the last question is for Mr. Weber. It's about the free cash flow conversion target. If I remember correctly from the time of the IPO, the target range was more something like 80%, 90%. And if I did understand you correctly, you mentioned something like 70% to 80% in this call today. So I was just wondering whether there has been like a change to any of the items that would be influencing the free cash flow conversion.And the second question here would be as well whether the free cash flow definition will include the lease payments that were previously included in the KPIs prior to the adoption of IFRS 16 since it doesn't seem to me like this is the case right now?

[Frank Markus Weber, Chief Financial Officer]

Thank you very much, Philippe, for your question. I do say, first of all, the ranges 70% to 80%, 80% to 90%, somehow in the same -- similar ballpark. But of course, 10 digit points away from each other. In regards to the definition, I was not considering to, so to say, readjust the strategic targets going forward at a lower level. Just wanted to make sure that somehow and sometimes free cash flow and cash conversion rates are used in different definitions what my internal definition and focus area inside the company definitely is all about. And I will, of course, ensure that there will not be a readjustment that is lowering the aspiration levels of free cash flow generation going forward. I think that's a very important message, so to say.Second of all, in regards to the definition in the end, when it comes to free cash flow, it's basically somehow an all-in figure that you usually look at. And also, I'm not a fan of excluding and adjusting too many items going forward as it makes things too complicated once you want to really completely implement a certain philosophy of KPI steering in the company with the management, with the colleagues and with the employees all over the globe. So I'm rather looking for a figure that is rather simple but fits to the point of having basically all aspects in.

[Operator]

And the next question received is from Sven Weier of UBS.

[Sven Weier, Executive Director and Analyst]

And so the first one would be on your order intake guidance. I saw in the quarterly report that you gave a -- gave an order intake guidance for the year where you basically say you expect the backlog to be up somewhat year-on-year and that the order intake should fall less than revenues. So of course, in the first half, if we had the complete opposite, right, the order intake was more than EUR 300 million lower than the revenue level. So my question would be, of course, this major turnaround in the second half, then is that driven by both divisions? And should we see order intake exceeding revenues in Q3 already? That's the first question.

[Frank Markus Weber, Chief Financial Officer]

Thank you very much for your question. May I answer from my point of view first? To my understanding, we have no guidance anymore out there for order intake for the year 2020. We have just had in since July, the renewed guidance on the revenue side and the EBITDA margin side. And we renewed that for the Knorr-Bremse AG or the group level just now. So we have no order intake guidance. It's, I think, a figure that you referred to from the annual report, which is already from the very beginning of the year 2020.Nevertheless, so to say, let me answer your question content wise. I think, yes, you're right. We have order books currently reaching a level of EUR 4.3 billion. But to tell you, order intakes, looking at the months of July and August, have risen compared to the levels of 2019. So our order book in total has -- was positively impacted, and we are now back by the end of August to a level that is very close to EUR 4.5 billion again. So order intake in July and August was overall some 20% -- was even slightly more than 20% higher than the order intake that we received in the year 2019, which I think is a very strong result and also very strongly driven by CVS. So it's a very good situation. We think we are currently looking at these summer months.

[Sven Weier, Executive Director and Analyst]

Yes. I was referring to the quarterly report and the Page 17 in the middle of it. So if I understand it correctly, there is a guidance on order intake. But yes, let's maybe leave it there. And then as far as your commentary on aftermarket was concerned, the pull-forward effect that you mentioned was a slight one. I mean was that more in Q1? And would you actually expect your aftermarket revenues in Q3 to be lower than in Q2?

[Jürgen Wilder, Member of Executive Board]

Well, maybe I want to answer that. It's Jürgen here. On the rail side, at least I can say that the impact of the crisis on the operators, the first reaction, so to say, very practically speaking is, what they are concerned at the beginning of how do I keep my fleet running, yeah? And that is what impacted them at the end of Q1 and also during Q2. And the second concerns they had was, I'm not sure whether during those crisis how the supply chain will develop, whether I'll be able to get all the spare parts, for example, that I will need when I need them at the time. So there was a time that supported the aftermarket business where operator said, for example, I better put some extra spare parts on the shelf, so to say, than facing the situation later on that I might run out of them and then I'm in trouble. And then there was another impact of it where in the overall business, so to say, there was less utilization of the trains and when you have, so to say, a little bit of a backlog in terms of maintaining those trains, that was a great opportunity to do it at that point in time that also happened during Q2 and partially Q1. And as a result, of course, since we took all kinds of measures in terms of being able to deliver when customers need anything. I think that was a very successful initiative that we had in Knorr-Bremse. We were able to deliver, and we happily delivered, and that was a benefit for our aftermarket business. And then the supply chain maybe did not, let's say, was not as difficult as the one of the other expected it to be. And therefore, those spare parts still partially on the shelf, and the results in the next few months is a little bit that there might be fewer demands on the spare part level for the second half year. So you have a little bit this counterintuitive effect that during the COVID months or the peak of the COVID months, you had a higher demand and later on you have a little bit of a lower demand. Now I'm not saying that, that is a dramatic effect, but there will be an effect that can be noticed, yes? Let's put it that way. That would be my answer to it.

[Sven Weier, Executive Director and Analyst]

But is it an effect you still expect? Or is it something that you've seen now? And now that we are almost at the end of September, have you seen that in July and August basically happening in reality that the demand is lower?

[Jürgen Wilder, Member of Executive Board]

No. We see it to a certain extent a little bit, and we also expect that for the rest of the year to a certain extent. But that is -- that is essentially reflected also in our guidance. That's what was covered in there, to the best of our knowledge, what might happen there.

[Sven Weier, Executive Director and Analyst]

And in CVS, this was not really a major factor?

[Peter Laier, Member of Executive Board]

No. We have seen in regard of aftermarket, a little bit a similar behavior as Jürgen said in specifically the months of May partly. But we see aftermarket being back on a normal -- aftermarket business was, as I mentioned before, for us, the stability factor in Q2. But for sure, you have a situation when transportation volumes come down and we had transportation volume reduction in Q2. You see that as well in aftermarket demand. That's why April was weak. Why is April not so good? Because a lot of garages were closed. So -- and garages are closed due to legislations in different countries, you cannot make so much revenue. And then there is a little bit a kickback effect. But overall, aftermarket, we see stable as well for the remainder of the year. You know there is some seasonality in. So Q3 is usually a strong aftermarket or stronger aftermarket quarter because of the distributors are filling their pipeline for the winter season, and winter season is usually higher aftermarket demand than in spring and summer.

[Operator]

And the next question we received is from Ingo Schachel of Commerzbank AG.

[Ingo-Martin Schachel]

I think the first one would be, despite, obviously, very nice numbers on your CEO search situation, whether you could give us an update on where the process stands, what your impression is or understanding how the process works, whether it's primarily run by Mr. Mangold or whether other Board members like Weimer, Enders are actively involved as well? Yes, just to get a quick update on that one.

[Frank Markus Weber, Chief Financial Officer]

Yes. Thank you very much, Ingo. As we just also talked recently where there is a very professional process -- thought process, which is led by the Chairman of the Supervisory Board, Mr. Professor Mangold, and there is, I think, to my understanding already a long and promising list which will be now narrowed down over the next coming weeks towards a shortlist. And we are, overall, I would say, very convinced that the Supervisory Board will find a good candidate and a proper CEO, and we will let you know as soon as, so to say, the company has found one. Please accept that I cannot elaborate further on that process only to say it's in the professional lens of our Chairman of the Supervisory Board. Thank you, Ingo.

[Ingo-Martin Schachel]

Yes. And maybe just -- and of course, Mr. Weber, we will give you a bit more time before you have to take strong strategic viewpoints on very specific matters, but I guess with background in M&A and in the commercial vehicle sector and, of course, steering systems being very important area of M&A for Knorr-Bremse in the last year, so I was just wondering whether you already have a view on whether the portfolio that Knorr-Bremse has put together is the right one to tackle the, let's say, technology shifts in the future? Or do you think you need to be present in more geographies or with an even stronger market position or maybe even with a broader product offering or deeper product offering in this area?

[Frank Markus Weber, Chief Financial Officer]

Yes. Also I think very good question. What I have found so to say coming to Knorr-Bremse that there is a professional team in very close alignment with the divisions already focusing on not only the organic side of the business and searching and seeking for growth options, but also on the inorganic side, so on the M&A side, we have, I think, a pipeline of more than 140 potential targets screened. And -- but I have to say that our current focus is more on the adjacent businesses side. So the -- currently no silver bullets in regards of the big growth additions to the company, but we are very professionally managing and discussing the, I would say, lower double-digit number of potential targets going forward. You also know that we have a very profound balance sheet and liquidity situation in the company. So the company per se is [ to help ], needless to say, going forward, but there is nothing at this point in time that I would specifically highlight neither on a technology side of things nor on a specific region or a specific division. We are, as a team of 3, very closely studying, discussing and making our decisions going forward on that, taking very serious the growth aspect in both dimensions, organic and M&A wise.

[Operator]

And the next question we received is from Akash Gupta of JPMorgan.

[Akash Gupta, Research Analyst]

I have one question on rail and one question on truck. So maybe if I start with rail, and this is productive. Maybe if you can talk about if you have seen any of your customers and maybe customer's customer or I mean by rail operators who are asking to -- were potentially asking to delay deliveries because of running out of cash. I mean you earlier said some of the customers have received bailout money. But I'm just wondering whether they have received enough money to also cover for their CapEx as well. So anything you would like to add on that front?

[Jürgen Wilder, Member of Executive Board]

Yes. I mean, of course, we have gotten some customer reactions just because of the COVID crisis and the closure of their manufacturing sites temporarily and the schedules of deliveries adjusted. But what we have not really seen is customers approaching us and saying they are short on cash that we need to majorly postpone projects or something like that. As we have said before, we haven't seen any cancellations on orders. That seems to all go rather stable. The disruptions that we might have had in terms of deliveries, they are, for other reasons, they were for very temporary reasons when the workshops and the plants were closed and just trains were not ready for a certain period of time, and it was very different from customer to customer. I would say, some customers were almost not facing any plants, and others, depending also where the plants were, facing, let's say, extended times, extended meaning weeks of plant closures. But by now, they are all up and running, and we haven't heard of cancellations or anything like that because of cash problems.

[Akash Gupta, Research Analyst]

And my second question is for Dr. Laier, and this is on hydrogen. I mean since we last spoke at Q1 results, and there is a lot of hype surrounding hydrogen on both side of the Atlantic. And I'm wondering how this -- excuse me, how this move to hydrogen in the medium to long term would impact your scope of truck side, particularly if you look at your portfolio outside of braking systems? Like, I mean, I think one of the things you got is that these hydrogen trucks going to be quite expensive, so is there any opportunity for you to grow in that side to increase your truck or content per vehicle substantially? Like any thoughts on that front would be great.

[Peter Laier, Member of Executive Board]

Yes. Thanks, Akash. I would like to answer in that way. At first, very general, I think the next decade in -- 1.5 decades in truck industry is characterized by a mix of powertrains. You will see still combustion engines. You will see battery electrics, and you will see hydrogen trucks. Here, we have to distinguish between fuel cell and hydrogen engines. I assume if you talk about hydrogen, you talk about fuel cell. If you look to battery electric vehicles or fuel cells, the only difference is where the energy is coming from as opposed electric driven, and that's why for us and our technologies where we are in, there is no difference. If there is a fuel cell truck or a battery electric-driven truck, you have electric motor. And basis on that, we have some changes in the requirements of trucks. And I think in our last Capital Markets Day, I already showed to you that we are preparing, on the one side, our product portfolio for that, where we are I think very successful with example was, I think, last time our compressor strategy where we have now e-compressors, which we are bringing into the market very successfully, could give you more. And on the other side, as I mentioned, we are investigating growth opportunities in electric motor-driven trucks and buses. For that, we have build up a special activity, which we call the incubator. The incubator is a engineering team, which we separated from their -- the standard approach and activities into separate building. We are building up the team right now to work beside this adaptation of product portfolio on growth opportunities in the e-mobility arena. And we are working and in that regard as well we very close with our customers right now and discussing with them where they maybe are seeing further interactions with Knorr beside the existing product portfolio.

[Akash Gupta, Research Analyst]

But overall, do you see there is an opportunity for Knorr to increase its truck content per truck? Or do you think it to be -- like how do we see content per vehicle opportunity when it comes to both hydrogen and electric vehicles?

[Peter Laier, Member of Executive Board]

In principle, there are -- that depends on the technology changes. So I'll give you an example. If you look to steering, for example, and steering is still hydraulic power steering, as you know, in trucks. So the question is just is the truck industry moving similar like the pass car industries some 10, 12 years ago from hydraulic steering into electric -- pure electric power steering. If so, does that mean that electric power steering is maybe more expensive per unit than hydraulic power steering, then you would see an increase in content per truck. You see there's ifs in there. Yes, there are opportunities to grow content per truck further, yes, but that depends very much on [ convincible ] technology decisions, and those decisions will be taken by the truck manufacturers, maybe together with their system suppliers like us in the upcoming 18 to 24 months. And I just can tell you we are in extremely close discussions with all the customers about those technologies.

[Operator]

And the next question we received is from Alexander Hauenstein of DZ Bank.

[Alexander Hauenstein, Analyst]

Alexander Hauenstein from DZ Bank. I have also 2 questions, please. First of all, let's start with RVS. I would like to come back to the Q3 discussion here. I understand that the reversal of the positive mix and also the product forward aftermarket from Q2 and Q1 is obviously an issue here. My question is, how should we think about the margin development path here for Q3 and Q4? Are we probably looking for similar margin levels in both quarters at around 20 years' level? Or are we going to see, let's say, more of a margin impact on the down side in Q3 versus Q4 or maybe even vice versa and why? Is that possible to give a certain flavor here?

[Jürgen Wilder, Member of Executive Board]

I mean first of all, I would say, the margin development from quarter-to-quarter is like we always won't be tired to emphasize. That really depends on the business mix we see in that quarter, yes? So we see slightly different margins in the 2 quarters, most likely because of the different mix we can see there. But I would really caution to extrapolate from that a certain trend or something like that because it has much more to do with mix effect we see, is it -- also what is -- I mean, as you know, in rail, we have very different portfolio. We have brakes. We have doors. We have HVACs. We have aftermarket. We have all of that. And as you can imagine, they don't have all similar margins in there. They have different margins, and that is not because they are performing very differently, but it is because with those different portfolio elements, you can earn different kind of money in the market, so to say. If I say it's very simple. So -- and it really depends on what the mix will be in a certain quarter. So I would expect slightly different margins in the 2 quarters to come. But I would really caution to derive from that trend or extrapolated into the future or something like that, that would be very difficult.

[Alexander Hauenstein, Analyst]

Yes, I understand that. And that's also where I'm coming from because it's difficult to see whether there will be a relatively sharper drop in margins from almost 24% down to maybe 20%. And then from there on maybe a slight recovery. Or the other way around, it is more of a smooth development going step-by-step a bit more to the downside without, let's say, deriving from that anything for 2021. But yes, that's why I'm asking here. So yes, that's where my question is coming from.

[Frank Markus Weber, Chief Financial Officer]

Yes. Alexander, if you allow and if I may add, Frank Weber speaking, I would not assume that we will have in the second half of the year such a steep decline on the margin -- EBITDA margin side on the rail business based on the descriptions that Dr. Wilder has just given. I would say, as you can also calculate, there will be mix effects in those 2 quarters coming up, but the reduction will not be that significant [indiscernible] steep. Just to be a little bit they are guiding you throughout Q3 and Q4. It will not be 20%. But as he explained, we will have some effects that will occur going forward.

[Alexander Hauenstein, Analyst]

Okay. That is helpful. And then I come to my second question, please. It's also for you, Mr. Weber. I'm wondering, what do you personally see as your most pressing 3 tasks in your new role here? What is the focus on in order to bring Knorr to the next level here?

[Frank Markus Weber, Chief Financial Officer]

Thank you. Very good question. I personally think, number one, very clear, which is the highest priority of us going forward, keeping the profitability level and improving the profitability level going forward of Knorr-Bremse, improving the excellent standard of this company by improving the contribution margins and the cost positions going forward. You know that I've articulated that we want and will improve on our margin side going forward. So this is number one.Number two for me is clearly seek for any kind of growth options that we could find jointly with my colleagues. So grow the company and based on what I just said prior to that profitably grow the company into the future. Third I would say is improve the focus and also the groundwork in the company and throughout the company on cash flow, put cash flow work into focus. And I think the -- we've got a lot of elements that we can trigger here. So if you ask me for 3, this would be the 3 points.

[Operator]

The next question we received is from Iris Zheng of Crédit Suisse.

[Xiaolu Zheng, Research Analyst]

My first question is to Mr. Weber. And let me thank you for the run-through of the first impressions, and those are the key areas of focus. They're really useful. And then if I can check this, at the Q1 presentation, I remember there were some like EUR 200 million measures related to cost and cash, you mentioned. And is it possible for us to get an update on that? And if some of those measures may have been reversed now as situation is turning better.And also on the 2020 guidance, it looks like it's based on the FX of mid of July, and we've had some FX movements since then and wonder what's your latest view on that. I mean, if it is not available, then if we can maybe run less to more on the transactional side of the business, i.e., if we see any further euro against dollar movements, then how that would have an impact on the margin?

[Frank Markus Weber, Chief Financial Officer]

So in regards to the first question that you raised, we have -- and not the colleagues have. I have not done it as I was not part of the company. The colleagues have very early and very decisively started cost programs in both divisions, one roughly with a volume of EUR 130 million and the other roughly EUR 60 million, which you cannot immediately calculate and draw the conclusion that one has only half of the aspiration level than the other because it has a different base. But these are the EUR 200 million that you talked about. Those programs are on very good implementation levels so far. And we already saw a significant amount of positive effects, implemented cost measures, starting in the first quarter already, but specifically also in quarter 2 and quarter 3 and quarter 4 to come. So it will bring us with those respective measures throughout the year 2020 and further things to come partially, of course, as you also know, some of the cost measures, where you would also get the support of the government, like the Kurzarbeit measures in Germany would be measures that would not be sustainable for many quarters or even years. I think that is pretty clear, but the vast majority of the cost initiatives driven by the colleagues and initiated by the colleagues are very good on its way.

[Andreas Spitzauer, Head of Investor Relations]

Could you please repeat the second question, Iris?

[Xiaolu Zheng, Research Analyst]

Yes, sure. Just on the guidance for 2020 because I see on the presentation slides the assumptions are based on the FX rate at the mid of July. I'm just trying to get a view if we use the latest assumptions, then if it's going to have any implications on the margin side?

[Frank Markus Weber, Chief Financial Officer]

No. I think as we are pretty close to what is written there as the date of the assumptions, I think you know we're having also know the hedging situation that we are having. Of course, we have transitionary issues going forward. But we, at this point in time, feel rather comfortable that we will not, so to say, see significant deviations as of now compared to what we considered in end of July when we had the outlook where we based our forecast and guidance upon. So I think to answer your question, at this point in time, I don't see significant change based on that premises that we outlined. So this is pretty close to July.

[Xiaolu Zheng, Research Analyst]

Yes. And if we see any further movement on euro against the U.S. dollar, it's going to have any maybe impact on the margin, just mechanically from your hedging and transactional base.

[Frank Markus Weber, Chief Financial Officer]

You know the business model of Knorr-Bremse due to your experience, potentially even more than myself, I'm just here for 8 weeks, but you know that we have a very global and decentralized footprint of Knorr-Bremse all over the globe. And also in the United States, we have a very high level of value-add in the country or in North America. So the level of natural hedging that we have all over the globe and North America is quite high. So I would -- and based on also the hedging rates, in regards to the U.S. dollar for this year, close to 100% already at Knorr-Bremse. I see a very limited, so to say, impact out of that. And as I just mentioned or you asked before my forecast, currently, we rather think towards the $1.15 direction.

[Xiaolu Zheng, Research Analyst]

Okay. Okay. That's very helpful. And then my next question is on the truck side to Mr. Laier, if I may. So I appreciate that you've mentioned your M&A aspirations, and currently, there is no big maybe deals to be announced at this stage. But if you could maybe give us a like longer-term picture, and what do you see as the -- maybe the end game you see for Knorr as the world is transitioning towards autonomous? And do you think if steering plus braking would be a good enough offering? Or you think in order to maybe get a bigger share, then it will be logical to add some other assets or at the moment steering plus braking is what you're looking for?

[Peter Laier, Member of Executive Board]

Yes. That's rather a difficult question to answer because that means, first, we need to take in consideration how automated driving need to be split up. Automated driving, you have and obviously explaining that with 3 levels, you have the perception level and the level where the truck is looking around and getting a picture of what is going around the truck. Then you have the decision level based on your perception around the truck and the way you want to go forward and the target you want to go for, you decide ways to move and how to move there. And then you have the actuation level where you realize what is coming from decision level. We, as Knorr-Bremse, are coming from the actuation level and the both main actuators to have vehicle dynamics under control is braking and steering. Based on that, we always build our base on that and move that a little bit upwards to decision level where we said we have a special layer of truck motion control, where we have the combination of braking and steering. We have the full vehicle dynamic under control. Based on that, we think we are here in a perfect position with our steering and braking position to participate on the growth opportunities of automated driving. Besides that, you maybe remember that I talked several times about the related so-called redundancy requirements. So in automated driving mode, we need to have the opportunity to move the truck further, even if one of the safety relevant components is failing. You cannot just let it there to stay on the highway on a lane or [indiscernible], we need to move them to the next garage. This redundancy concept was something where we developed heavily on in the last few years. And we have here now a concept with our braking and steering and clever combinations of that which is highly accepted with customers, and we got first awards in that direction as well for redundancy concepts. Based on that, we see ourselves very well positioned for this end game. In regard of systems supply, I clearly want to say that similar like in pass car business, the systems for automated driving will be realized in consortias with different partners in there. And we are getting invited by a lot of those discussions right now that shows our attractiveness and so I'm quite convinced that we are here as well in a good position.

[Operator]

The next question is from Felicitas Bismarck of Deutsche Bank.

[Felicitas von-Bismarck]

I hope you can hear me. One question just, could you give an outlook for your free cash flow expectations for this year or give an indication of the key drivers that you're seeing in H2?

[Frank Markus Weber, Chief Financial Officer]

Thank you, Philippe, if I got your name right. Felicitas, thank you so much. I think needless to say, the second half of the year 2020 will be dramatically better on the free cash flow side than the first half of the year. I think we will still, within the next month, work on the working capital side, on the days of inventory outstanding days, of receivables outstanding or days of sales outstanding. Also on the DPO side significantly, but whether we can achieve the original targets towards the year-end, like in a clean year where you would be able to implement certain product excellences on material management side and the supply chain side remains to be seen. So we're a little bit cautious on that. Also, we have potentially some inventories for Brexit, precautious measures. And so answer is, we will significantly improve on the working capital side compared to the status that we have as of 30th of June. Going forward, that should give us a significant uplift towards the second half of the year. And I think also on the CapEx side, we're still prioritizing the biggest capital expenditures projects throughout the company. So also this should give us some tailwind going forward. So having said this, I wouldn't -- in addition to the losses that we might be facing on the EBITDA side, you might need to deduct some more on the working capital side in order to come to a cash flow delta for the full year. So we will lose on the free cash flow side maybe a little bit more than because on the profitability side, that's more -- more, I don't want to say at this point in time, I don't want to mention the concrete figure, as you know. We are already, I think, pretty precise at an early stage of the year, with July, mentioning our EBITDA and revenue targets or guidance. So I don't want to be more precise or can't be potentially also more precise on those figures. But this would be my direction.

[Felicitas von-Bismarck]

And another question is on governance. And I'm sorry, but I'm struggling a little bit with the understanding what a new CEO could bring to the table that would be considered a good fit for all parties involved. And I'm just wondering if you could give us any indication what he needs to bring, so to say. And like generally -- more generally, maybe are you also considering an internal solution? And might you also even consider a joint leadership solution in that sense?

[Frank Markus Weber, Chief Financial Officer]

Felicitas, if you allow, we ask our IR head to answer that for you, Mr. Spitzauer.

[Andreas Spitzauer, Head of Investor Relations]

Yes. Thank you, Mr. Weber. No, I think what we have shown already last year is that we are even only with 3 Board members are very active, bring forward the company, bring down the costs and drive the company. And as you can see, we are doing so already right now. As you know, the search has started for a 4th Board member. And this is how we would like to move forward. And as Mr. Weber has mentioned before, there's a shortlist. In the next couple of weeks, this will be narrowed down to a small -- from a long list to a short list. And I think we're on a pretty good way. And yes, we have enough things to do here and going forward to the situation and welcome a new CEO once in the future.

[Felicitas von-Bismarck]

Yes. Maybe I can ask it a little bit different. But do you think there's like real room for a separate group CEO next to all of you, like the CFO and the strong divisional head?

[Andreas Spitzauer, Head of Investor Relations]

I think this would be reaching too far right now. I think we have shown that we are working fine, that we have good results, and that's what we're working on. Let's put it this way. We enjoyed then the question when we have the announcement and happy to share with you our thoughts.

[Jürgen Wilder, Member of Executive Board]

Here in the room, next to me, there is a free chair.

[Operator]

The last question for today is from Alfred Glaser of ODDO BHF.

[Alfred Glaser, Analyst]

I wanted to ask you, again, on the business outlook in the railway business. Currently, as you underline, too, there are a few trains running. The occupancy rate is low, too. Do you see a risk there that this is ultimately impacting your aftermarket and service business, having just fewer trains running and therefore, fewer mileage, fewer hours of train usage?And my second question relates to hydrogen in the rail business. Do you see any kind of particular change to [indiscernible] the way you do business or your product offering in that context? And conversely, will you see some new opportunities for either product development or acquisitions related to the emergence of hydrogen-powered trains?

[Jürgen Wilder, Member of Executive Board]

Well, starting with your first question. Do we -- where we see a -- I mean this year, obviously, we already see an impact in terms of sales and also to a certain extent, of course, in order entry based on the COVID crisis. But as I said before, you could think of a model where the biggest impact, first of all, of that is with the operator. Because they feel lack of ridership right away in their revenues that they have. But we are pretty much in most of the countries of the regions back to a certain schedule, maybe a little bit of a synced out schedule in rail operation. And that helps, of course, the development of our business.If you apply a model where you'll see when we'll be back where we were pre-COVID times in terms of ridership, that might take a little while. That might take even another 1.5, 2 years or 2.5 years. It's really hard to predict. But that does not mean really that we see on that same time line the impact because the trains are still running, tenders are issued, further trains are ordered. So we see this short-term impact right now. But we expect that the long-term outlook in the rail business as we pointed out before or so is very, very positive. And CO2 discussion won't go away just because we had a COVID virus, that we'll all come back and that very, very good outlook, mid-term and long-term outlook for the rail business and also for our development.I would say whenever there would be, but I would say there will be a point in time in the future when we will look back and say, okay, there was a COVID -- from a point of view of our business, I'm talking only. There was COVID-19 crisis, but we had pretty much overcome it, and now we are going back on to the growth track. That's what I really see long term.Your second question, hydrogen, if I remember correctly, hydrogen technology, well, obviously, there's a discussion that's still, let's say, in some parts of the world, also Germany, there's, for example, nonelectrified lines, 40% or something like that of the overall rail network. And there's still a lot of diesel locomotives or even some diesel multiple units that are running around those tracks that, of course, with the sensitivity towards CO2 emissions, there's also opportunities for us to -- for example, our people business to put in more modern traction systems, hybrid traction systems in those locomotives or trains, that's also a business that we pursue. Hydrogen, of course, is another trend where the rail industry is experimenting right now with. We need to see where that goes. But the components that we offer towards trains, they are mostly not that dependent on that. So we also serve that market of course, yes. That's how I will answer that.

[Andreas Spitzauer, Head of Investor Relations]

Yes. And those trains still have to be -- need brakes, which we had in our own portfolio.So thank you for everybody taking part of the call. Great afternoon. Unfortunately, we have to conclude because we have to continue with other things to do. We wish a great afternoon and looking forward to staying in touch with you. Thank you very much.

[Frank Markus Weber, Chief Financial Officer]

Bye-bye.

[Operator]

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