Knorr Bremse AG

XETRA:KBX

Earnings Call Transcript 2021-Q2

[Operator]

Dear ladies and gentlemen, welcome to Knorr-Bremse AG's Conference Call to the Second Quarter Financial Results. At our customers' request, this conference will be recorded. [Operator Instructions] May I now hand you over to Andreas Spitzauer, Head of Investor Relations of Knorr-Bremse, who will lead you through this conference today. 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 2021. Webcast and conference call will be recorded, and they are available on our homepage www.knorr-bremse.com in the Investor Relations section. Here, you can find today's presentation and later a transcript of the call. It is now my pleasure to hand over the call to Dr. Jan Michael Mrosik, our CEO; and Frank Markus Weber, our CFO. Please go ahead, Dr. Mrosik.

[Jan Michael Mrosik, Chairman of the Executive Board & CEO]

Thank you, Andreas, and welcome, everybody, to today's conference call. Today's focus is primarily on the business figures for the second quarter as well as on our outlook in an environment that remains challenging before we look forward to your questions and comments. In the second quarter 2021, we continued our recovery from the corona pandemic and again, increased order intake, revenue, earnings and free cash flow, in some cases, even significantly. In the second quarter 2021, Knorr-Bremse generated revenues of EUR 1.7 billion, which is an increase of 21% year-over-year and an EBIT margin of 14.1%, up 200 basis points. We continue to see a very strong performance from our truck division. CVS was the key driver in the second quarter, reaching revenues of EUR 879 million, an increase of 52%. EBIT margin came in at 11.2% after 3% in the previous year. Rail market globally is still meaningfully impacted by the pandemic. RVS, as expected, generated revenues of EUR 849 million, stable versus previous year and an increase as promised versus the prior year -- prior quarter, sorry, by more than 5%. EBIT margin came in at 18.4%. In terms of corporate governance, which is an ongoing focus topic at Knorr-Bremse, we managed to shorten our reporting time by 1 month versus second quarter 2020 and rolled out an employee share program for all 30,000 employees globally in July. Moreover, I would like to take the opportunity to cordially invite you to attend our Capital Markets Day on 29th of November 2021. We will come back on this topic at a later point. Based on the overall good results in the first half of 2021, we confirm our guidance for full year 2021. Have a look at the current market situation and business outlook for both divisions on Chart 3. Last year, the rail market was moderately affected by the pandemic. And this year, the recovery is still slow and more protracted. While general market fundamentals are considered to be intact and long-term growth drivers remain unchanged. We see ongoing shifts of projects, both in OE and aftermarket. We expect this development to remain during the year. Corona persistently results in less rail traffic and fewer trains on the track, which affects the whole rail aftermarket business. We saw last year that ridership levels recovered with decreasing infection rates, but at this point in time, it is difficult to forecast when we will return to normalized levels again. Nevertheless, we do not have to record any cancellations. Though 2021 is another corona year for rail, we believe quarter 1 should have been the weakest quarter for RVS. In Q2, we slightly recovered already. The degree of business improvement should speed up gradually in the second half of this year. Proof of this are very good order intakes announced by our OEM customers for the past quarter, which will also reach us with some delay. Overall, we are not happy, but also not concerned about the rather slow recovery in the first half of the year due to the promising long-term growth drivers of the rail industry. Additionally, we also expect long-term that global investment programs, supporting rail infrastructure and covering losses of rail operators will mitigate the negative impact of corona. On the truck side, freight markets have continued to be strong and utilization rates of trucks remain on high levels. Demand is high, but truck OEMs have seen several production disruptions and production capacities are limited due to the ongoing supply shortages, predominantly in the field of semiconductors. However, due to the fact that the production of semiconductors has not improved yet, and distributor's inventory levels have deteriorated, we expect the situation to remain tense in the second half of the year and to continue in the first half of 2022. The strong ongoing recovery is also seen in solid truck production rates, especially in Europe and North America, while China after several months of very strong growth, started to normalize on a solid level. Truck production rates for 2021 will depend predominantly on the development of the supply side. However, market research companies currently mirrored strong underlying demand by forecasting significant increases in Europe and North America overall in 2021. We share this opinion. Let me continue with Chart 4 and the operating highlights of both divisions. We will reach a very important milestone in our climate strategy already by the end of 2021. We expect to become CO2 neutral. Thanks to our climate action measures and supported by high-quality green energy certificates, we are going to increase the proportion of electricity from renewables that we use, which is why Knorr-Bremse has signed an offsetting agreement with the Berlin-based climate protection organization, Atmosphere GmbH. This is an important step on the way to reduce our CO2 emissions in absolute terms by 50% until 2030. After 2 decades of worldwide use, Knorr-Bremse celebrated the 100,000th delivery of the world's best-selling metro brake control system, CubeControl. Also in June, we celebrated the official start of our steering production in Thailand. The new plant is an important step to match rapid market demand in Southeast Asia and increased KB's presence in the Asian region. Just recently, we announced that KB and Alstom extended their framework agreement of hydraulic brake systems for Citadis trams for another 5 years. Having started in the last quarter of 2020, Knorr-Bremse is supplying breaking as well as entrance systems for 69 Citadis light rail vehicles. The extension marks another joint achievement in the long-standing partnership between Alstom and Knorr-Bremse on the Citadis platform. You see Alstom sticks to our long-standing partnership even after they made 2 smaller acquisitions in the field of rail breaking. Now coming to our newest acquisition, EVAC. EVAC is the world's leading supplier of sanitary systems for regional and high-speed trains, with over 100,000 installed units worldwide. With the acquisition, we expand into an attractive market segment in rolling stock and enhance our position as a global systems provider. EVAC has clearly a USP as quality leader, which is reflected in solid EBITDA margins above 10% on adjusted level. Its business model is based on an asset-light strategy like KB strategy, and EVAC enjoys a high aftermarket share of 40% of revenue. We expect this market segment will be characterized by above-average growth opportunities in the coming years. Reliable integrated sanitary systems are an operationally critical component for train operators and necessary for train availability. Yes, all of us have had the experience in this regard when it doesn't work. EVAC fits very well to KB's business model, and we can leverage its global reach under the bigger umbrella of RVS. With this, I would like to hand over to my colleague, Frank.

[Frank Markus Weber, CFO & Executive Board Member]

Thank you, Jan, and a warm welcome from my side as well. Thank you for joining us today. Let's talk about briefly our numbers of the first half year 2021 on Page 6 before diving into the details of the second quarter. Despite ongoing global uncertainties due to the corona pandemic, Knorr-Bremse's overall performance and resilience was once more proven by very good financials. During the first 6 months of '21, revenues came in at EUR 3.4 billion, which is 12% higher year-over-year. The EBIT margin reached 14.5%, an increase by 150 basis points. The free cash flow of EUR 108 million was more than EUR 120 million better than last year and led to a cash conversion rate of 31% in the first half year. Let's have a look at the quarterly results on Page 7. Overall, our revenues and profitability were even better than our first quarter results of this year. Compared to the previous year, order intake increased significantly by 58% to EUR 1.8 billion. The order book grew once again by 18% to a new record level of almost EUR 5.2 billion. Revenues increased by 21% to EUR 1.7 billion, and EBIT margin grew by 200 basis points to 14.1%. Free cash flow could be improved to EUR 131 million in quarter 2, resulting in a very solid cash conversion rate of 77% intra year. We dive deeper into our order intake and order book on Chart 8. Compared to the same period last year, order intake on group level increased significantly by 58% to EUR 1.8 billion in quarter 2 '21. On an organic basis, the increase was even higher at around 65% as we were facing again FX headwinds of nearly EUR 80 million. Accordingly, the book-to-bill ratio was again above 1, like in the first quarter '21, reaching 1.04. The development of the order book at the end of the second quarter was particularly pleasing as it rose for the fourth quarter in a row. It grew very strongly by 18% to EUR 5.16 billion. This new record figure provides good confidence and is the foundation of our continuously positive outlook. The increase of order book was strongly driven by CVS, which almost doubled its backlog over -- year-over-year. Let me continue with the revenue development on Chart 9. Revenues on group level in the second quarter '21 increased by 21% to EUR 1.73 billion. Organic growth was even better with an increase of 25%. Europe continued its growth path and posted an increase of 35% year-over-year. With a 47% share, it still accounts for the biggest part of our total revenues. North America strongly rebounded and revenue in this region increased by 38%. The revenues in the APAC region slightly decreased year-over-year after strong demand in the second quarter of 2020. The reduction was basically driven by China. Let me continue with the development of our profitability on Chart 10. Our EBITDA margin improved by 90 basis points year-over-year to 18.1%, driven by good operating leverage despite headwinds from corona related costs in CVS and less contribution from the attractive APAC region in RVS. The aftermarket revenue share decreased year-over-year by 3 percentage points to around 35%, mainly driven by the stronger OE business in our CVS division. Nevertheless, in absolute figures, our aftermarket business increased by more than EUR 50 million or 9% to EUR 599 million. The overall EBIT increased by over 40% net to EUR 244 million despite continuous FX headwinds. The EBIT margin came in at 14.1%, after 12.1% in quarter 2 2021 (Sic) [ 2020 ]. An outstanding increase predominantly benefiting additionally from a very disciplined fixed cost management with even slightly decreased depreciation levels. At the same time, our earnings per share rose by 60% to EUR 1.02 in quarter 2, driven basically from better financial result and a reduction of minorities.Let's continue on Chart 11. In the past quarter, we continued our investments in future technologies, increased capacity where it is needed and in maintenance. Nevertheless, we managed carefully and in a disciplined manner, our investment projects. Absolute CapEx, therefore, remained on a stable level in quarter 2 versus previous year. In relation to revenues, CapEx decreased from 4.7% to 3.9%. At the end of June, net working capital stood at EUR 1.13 billion. This is a slight decrease compared to the previous year despite a 20% increase of our revenues. This was only possible due to our stringent net working capital management as we were able to reduce the scope of days by 15% from 70.5 to 59.3 days. In the current fiscal year, we expect that net working capital should be on an overall higher level again in absolute terms due to the expected sales growth. Annualized operating ROCE significantly improved by 20% from 22.2% to 26.7%. This strong improvement was supported from the beforementioned profitability and is slightly burdened by additional M&A fixed assets that we took on board, as Jan just outlined. Let me give you a short overview about the development of our strong balance sheet KPIs as of June on Chart 12. Considering the uncertain economic environment, we focus on maintaining a high level of stability and flexibility. Nevertheless, by the end of the second quarter, we had already repaid 100% of the EUR 750 million by lateral credit lines that we had drawn because of corona in the year 2020. Therefore, on a year-over-year basis, we were able to reduce our gross debt by 34% to EUR 1.8 billion. Net debt slightly rose to minus -- decreased to EUR 202 million. As a consequence of those deleveraging measures, the good cash flow and our dividend payment, which was contrary to previous year, 1 month in advance, our group's liquidity was only 29% lower, reaching EUR 1.6 billion. The very strong resilience of our balance sheet and the good development of our business activities also continuously confirmed by the rating agencies, Moody's, rates A2 and Standard & Poor's with A. Let me continue with our free cash flow on Chart 13. Free cash flow in quarter 2 nearly tripled and came in at EUR 131 million, which is roughly EUR 84 million better compared to the previous year's quarter and EUR 154 million higher than in the first quarter of this year. The good development is driven by good earnings as well as disciplined working capital management. We consider this performance as remarkable and see this as a proof that our focus and efforts regarding cash flow management are bearing fruit. Consequently, the cash conversion rate defined as the free cash flow before M&A divided by profit after tax, nearly doubled and improved significantly from 41% last year to 77%. Let's move on to the divisional view, starting with RVS on Slide 14. In the second quarter of 2021, order intake of the rail division was at EUR 737 million, a decrease of 7% in total and a minus of 4.7% organically year-over-year. Quarter-over-quarter order intake was up 3% as expected. Relatively slow recovery of order intake was driven by the ongoing impact of the pandemic on the rail market overall. We still face postponements of projects, but strong order intakes by our customers, as Jan pointed out, to better develop -- lead to a better development in future quarters considering the lead time for RVS that we usually have. The lion's share of the ships currently occurred in China, high speed trains and aftermarket as well as Metro in the APAC region overall. Europe and North America are developing on a solid basis, both in OE and the aftermarket business. Europe continues to be our strongest and most stable rail market with large orders in the second quarter '21. In our home region, rail operators benefit from a number of government and municipal support measures, which will also have a positive impact on us. We expect RVS will gain significantly more orders in the second half of 2021. As we have already pointed out, Q1 should have been the weakest quarter in 2021 with a slight recovery in the second quarter, while half year 2 should see further recovery. Book-to-bill ratio in quarter 2 consequently came in slightly lower at 0.87 compared to 0.93 a year ago. The order book, on the other hand, increased marginally to EUR 3.5 billion. Let's move to Chart 15. In the second quarter of 2021, RVS recorded revenues of EUR 849 million stable year-over-year. Organically, it increased by 2%, but this improvement was offset by FX headwinds. Compared with the first quarter '21, the division as forecasted, achieved an increase of 5%. As mentioned before, we strongly believe that the first quarter '21 was the weakest for RVS followed by better quarter 2 and further improvements in quarter 3 and quarter 4. RVS recorded stable revenues for OE and aftermarket business in the second quarter of '21 year after year. The driver for this development was Europe, which grew at double-digit rates in both OE and aftermarket. North America and APAC, on the other hand, had to record declines. The aftermarket share of revenue was stable year-over-year as well as quarter-over-quarter at almost 45%. Nevertheless, the stretch of maintenance cycles in China also remains due to ongoing restrictions following corona. Most operators still have a lower number of trains in service, respectively, a much lower utilization since the beginning of the pandemic, and therefore, currently need less service and spare parts. The key markets are affected to different degrees, strongly depending on the respective situation. Europe has seen a pleasing development driven as well by some catch-up effects with a year-over-year growth of 15%. Overall, this region accounted for more than 50% of RVS total revenues in the second quarter of this year. Europe is continuously our stronger region in terms of revenues. Asia, the second largest revenue contributor of RVS is still not back to normalized levels due to the ongoing impact of the pandemic. The biggest impact came from China, where we had to record declines, especially in the high-speed and the metro sectors. The metro segment year-over-year revenue decline in the second quarter was as large as the positive development in the first quarter, a clear sign of the lumpiness in the rail industry when it comes to quarterly figures. In North America, we see positive signs in terms of freight rail traffic and decreasing number of rail vehicles in depots, but it will take some time before this will have a positive impact on our business. Accordingly, we still had to recall declines in OE and aftermarket in the second quarter. Even though the revenue recovery in the second quarter was somewhat smaller than expected, this trend should accelerate in the second half of the year, driven by the OE business and the rather stable share of aftermarket business. The profitability of RVS decreased versus previous year's quarter. which had benefited from an immediate and very effective corona countermeasures with a volume of roughly EUR 20 million as well as negative effects. Please also keep in mind that our second quarter 2020 was driven by strong pull-in effects and was profitability-wise, also one of the best or the best quarter of the year 2020. The third driver was the revenue decline in the APAC region, which is usually margin accretive for RVS. Based on that, EBIT of RVS came in at EUR 156 million in the second quarter '21. EBIT margin decreased from 19.9% to 18.4%, the EBITDA margin decreased from 24% to 21.8%. Compared with the first quarter of 2021, EBITDA margin improved by 10 and EBIT margin by 40 basis points. Let us continue with the development of our truck division on Slide 16. Coming orders of CVS were once again outstanding, a clear highlight of our second quarter results overall. At EUR 1.07 billion, the overall figure basically was tripled compared to the previous year, driven by extremely strong underlying demand. In the past quarter, demand continued to be strong across Knorr-Bremse's key regions on the back of high-transport volumes and high freight rates. The demand in Europe and North America should stay strong, but it will be presumably be more impacted by supply chain issues in the quarters ahead. APAC Saw a flat development driven by, as we told you before, for example, the China 6 regulation and therefore, respective pre-buy effects. In China, demand was strong in quarter 1 and at the beginning of quarter 2. However, both May and June volumes already slowed down. As expected, quarter 1 should have been the best quarter for CVS in '21. Quarter 2 was also very strong, but supply issues should have a greater impact on demand in the second half of the year. We expect the second half to be significantly below our half year 1 figures. The order book of our truck division amounted to EUR 1.66 billion at the end of June, which is remarkably 88% higher year-over-year. The order book of CVS, therefore, ranges well above our pre-corona levels. As a consequence, book-to-bill stood at 1.22 in the past quarter. Let's move on to Slide 17. CVS posted EUR 879 million in revenues in the second quarter '21. Compared with last year's figures, this is an increase of 52% on an organic level, even plus 59%. CVS saw a positive development in all channels such as OE business and aftermarket business in all 3 major regions: EG, Europe, North America and APAC. The share of aftermarket sales decreased from 29% in the previous year, to 25%, driven by the extraordinary growth in our OE business. Nevertheless, in absolute numbers, aftermarket was up by EUR 50 million or 31%. In the second quarter of this year, CVS achieved an EBIT of EUR 98 million, which is significantly higher than a year ago. The EBIT margin or return on sales amounted to 11.2% compared to 3% 1 year ago. Besides this strong development, profitability was basically burdened by higher corona-related costs for freight and higher material costs for semiconductors. In total, these costs amounted to around EUR 20 million in the past quarter. For the full year '21, we currently expect these costs to move up further. Last but not least, I would like to give you an update on our guidance. For full year '21, on group level, we confirm our guidance given in March and continue to expect revenues between EUR 6.5 billion to EUR 6.9 billion and EBIT margin between 13% and 14.5% as well as an EBITDA margin between 17.5% and 19%. Normally, there are good reasons to reduce this bandwidth at this point of the year. However, as outlined, several uncertainties EG due to corona are still high in both business fields as well as in the respective revenue channels. Also, the experience of the development in the second half of last year teaches us rather to be cautious. We expect the following divisional full year development in '21 compared to the prior year. For CVS, a significant revenue growth with a significant margin increase. For RVS, a slight revenue growth and margins almost stable compared to last year's level. With this, I hand over back to Jan.

[Jan Michael Mrosik, Chairman of the Executive Board & CEO]

Thanks, Frank. Let's move to Slide 19 of the presentation. And as mentioned at the start of the presentation already, we will conduct the Capital Markets Day at the end of the year. to give you an update on our strategy, our divisional priorities and a deep dive of our value drivers. I cordially invite you all also on behalf of my colleagues on the Executive Board to this event on the 29th of November. In which form this event will be held, we will decide in the next few weeks. Hope for a physical exchange but have to follow the corona situation very closely. Health and safety remain 3 key priorities for Knorr-Bremse. Either way, it will be possible for you to participate virtually. I'll look forward to the event. Let's conclude our presentation on Page 20. Q2 '21 was overall a solid quarter. We achieved these good results under ongoing challenging conditions. I'd like to take this opportunity to thank our employees for their contribution. Their hard work has paid off. We will continue to need a motivated hard-working team in the coming months to master all the other challenges that lie ahead. I look forward to that. This year and maybe even beyond, we will still be faced with the pandemic and as a consequence, we also assume that the tenth supply situation will continue to accompany the truck division for some time. Here at Knorr-Bremse, we're strongly positioned and are ready to react quickly to all market conditions. We also benefit from having 2 divisions that are active in businesses with different economic cycles. CVS has demonstrated its robustness and strength with continuous market outperformance and well-managed business operations despite headwinds from the supply side. In addition, underlying demand remains very strong. RVS is right now impacted more by corona, especially by weaker market conditions. The market trends of green mobility and urbanization are fully intact. With that, I'll turn the call back to the operator to begin with the Q&A session. Thank you.

[Operator]

[Operator Instructions] And the first question, Obaidullah of Deutsche Bank.

[Arsalan Obaidullah, Research Analyst]

Just one thing and just so I'm not reading too much into this. You talked about last time sort of seeing a recovery in sort of ridership levels. I think you gave the figures of 2023, but you talk of -- I think the message here is things remain more uncertain. Is that sort of now a shift in sort of looking at things a bit more bearish or negatively on sort of rail ridership globally or hasn't really seen that -- things haven't necessarily changed?

[Jan Michael Mrosik, Chairman of the Executive Board & CEO]

Yes. Thank you very much for this question, which is quite important one since it drives and determines to some extent, what happens in the aftermarket. So the picture there is quite different. If you look at, for example, France, their ridership is already back to normal. If you look at other countries like, for example, and I'm currently looking Germany, we have minus 10% right now. In the U.K., for example, the levels are more around minus 50%. So that tells you that the situation is very, very different in the different countries, very much dependent on how the COVID pandemic develops and unfolds. And yes, that's the current situation. And at the end of the day, that's something that much determines how ridership in the future is going to look like. Obviously, vaccinations, they also play a role. So that's the overall picture that we're seeing here.

[Arsalan Obaidullah, Research Analyst]

Okay. But you're not necessarily -- your view hasn't sort of changed on that in terms of since you last came in terms of you seeing things to be stretched out in terms of recovery strategy hasn't necessarily changed over the last few months?

[Jan Michael Mrosik, Chairman of the Executive Board & CEO]

Yes. We said that things might take a little bit longer to recover. We are seeing countries that are faster now in terms of their recovery and I just mentioned as 1 example, France, but also Germany, where it's pretty close to pre-corona situation. But in other countries like the United States, by the way, it's another one, minus 15%. So their recovery went quite strongly. U.K. is a little bit lagging behind. So I would say things are moving towards pre-COVID levels with some, let's say, low degree, 2-digit numbers below pre-COVID times.

[Arsalan Obaidullah, Research Analyst]

And then just sort of staying on the topic of rail, this is my second question, looking into sort of China and sort of the sort of competitive dynamics there. How are you sort of seeing that both again on the high speed and the metro and how you're sort of seeing yourself placed for that sort of going forward?

[Jan Michael Mrosik, Chairman of the Executive Board & CEO]

Yes. If you look at China and our business in China, it should be noted that our business in China has moved in the last couple of years already from a very much high-speed driven kind of market participation. It is something that's pretty much more leaning towards the Metro business. So if you look at time speed our current percentage of business is more in the range of a little bit more than a low single-digit number, so to speak, metro is already in the range of roughly 40% and aftermarket 40%. So it means that a very strong part is really driven by a quite robust aftermarket business. And metro, as we all know, is also a business that's pretty much decided on by provincial governments and decentralized decision-making is an important part there. So that's kind of the structure that we have in our Chinese markets in our Chinese business at this point in time.

[Operator]

The next question received is from Akash Gupta of JPMorgan.

[Akash Gupta, Research Analyst]

I have 2 questions as well. The first 1 is on rail, and we saw first half book-to-bill of 0.88. And I guess you are guiding for some recovery in the second half. And do you think we should be able to finish the year with 1x book-to-bill? Or given some pushout in China and given some travel description there and recently because of COVID outbreak, do you think there is any risk that this book-to-bill might come down below 1x for rail business for the year?

[Frank Markus Weber, CFO & Executive Board Member]

Thank you, Akash. It's Frank speaking to take your question. We do strongly believe at this point in time that we have good chances to reach a book-to-bill that is on the level of 1. This is what we are, of course, currently targeting. And we should, as we outlined already in a qualitative manner, we should see good order intakes in the second half of the year significantly above the levels of the very first half of this year. And with increased revenues, we should be able to come to that level. For the full year, the book-to-bill you were asking. So it was based on -- my answer was based on that question. Full year book-to-bill above 1.

[Akash Gupta, Research Analyst]

And my second question is on second half margins versus first half margins. If I look at last 4 years, then on an average, second half margins are around about 90 to 100 basis points higher than first half. And I don't know whether there is any seasonality there. But looking at this year and given these raw material headwinds that started coming in, in Q2 and might be lasting in second half, can you comment on second half margin improvement versus first half? Would it be possible? Or we are more likely to see stable development on profitability level?

[Frank Markus Weber, CFO & Executive Board Member]

Yes, Akash, thank you. I mean, you're mentioning already the right point. I think in this year, 2021, we have a slightly different situation given explicitly the topic that you mentioned. We do think that we will see uncertainties on the semiconductor side influencing our revenues on the CVS side in the second half of the year, which would mean that we can't achieve the operating leverage that we had in the first half of the year. So due to that effect alone, we see a slight pressure on the margins on the truck side. And the second point is also that those special costs that I referred to increased freight cost as well as material costs for semiconductors that we, to a large extent, at this point in time, purchase from brokers should also be higher in the second half of the year as they basically only occurred in the second quarter, in the first half year. So it should be higher in the second as well. And then you also have to see that especially the second quarter -- you were asking only about 21. So those 2 major aspects, I would say, are the driving forces behind the situation that we see a rather lower margin on the second half of the year from today's perspective.

[Operator]

The next question received is from Lucie Carrier of Morgan Stanley.

[Lucie Anne Lise Carrier, Executive Director]

I have 2 question. I will go 1 at a time. The first 1 is, to some extent, a bit of a follow-up on Akash's question, but maybe slightly more general terms. When you think currently about the dynamic in your backlog, so kind of what has been executed to now, how do you think in terms of the balance of raw materials, supply chain constraints potential delays that you could see maybe in CVS as supply chain constraint or kind of continuing, especially and I guess my question brings us a little bit more as we go into 2022. How do you assess the quality of the backlog versus maybe what you have seen in the previous years?

[Jan Michael Mrosik, Chairman of the Executive Board & CEO]

So I'll take first statement and then Frank might want to add to that is that in our outlook, we have a very balanced view on opportunities and risks and these risks also contain the quality of backlog and let's say, supply chain challenges that we might or that we will continue to face in the second half of the year. And therefore, this commitment and the clear view that we stick with our guidance here, contains both elements, the opportunity and the risk side thereof. Talking about 2022, I think it's a kind of common sense in the automotive markets as well in the CVS market worldwide that the semiconductor shortages will probably continue to accompany us for the next couple of months and probably even beyond the end of this current calendar and fiscal year because the capacities on the semiconductor side cannot quickly be updated and increased on the supply side. And therefore, we'll have to live with shortages in the medium term.

[Frank Markus Weber, CFO & Executive Board Member]

And may I continue? Basically, we're not seeing a change of the underlying demand that is out there on the truck side. We do believe that the market is intact and that basically Europe will grow when it comes to towards levels of 2022. From a TPR point of view, North America should be able to grow. We think Japan should be able to grow India should be able to grow. And the only region that potentially supposed to be going down even slightly further is China, as we discussed already also quite several times. We do think that the book-to-bill ratio that we would achieve on the CVS side should be significantly above 1 but below the levels that we saw in the second quarter. So that overall gives us quite confidence that the major market growth is intact. Needless to say, we do somehow assume that some of the orders that we saw and see in the year '21 already might be some safeguarding, some pull ahead, all those from some of our customers in order to be well stocked, so to say. But the general trend, we think is very healthy.

[Lucie Anne Lise Carrier, Executive Director]

If I just can have a quick follow-up on the backlog quality more on the RVS side in regards to the mix. How do you see the mix evolving versus the previous year because I seem to understand that you expect kind of Europe to continue to be growing much faster, probably the mix. And I'm just curious about what's the potential impact around profitability level.

[Jan Michael Mrosik, Chairman of the Executive Board & CEO]

If you look at the CVR's, and I assume that this is the rationale behind your question. Let me quickly grab this.

[Frank Markus Weber, CFO & Executive Board Member]

Lucie, were you asking in regards to CVS or to rail?

[Lucie Anne Lise Carrier, Executive Director]

No, to the rail side -- on the red side, apologies, if I wasn't clear.

[Frank Markus Weber, CFO & Executive Board Member]

Lucie, look, the thing is that, I mean, we have outlined, so to say, that currently, we see rather stronger in relation on a regional perspective, rather stronger growth rates in the European business than on the APAC business, as we just presented and given that, so to say. We do see that on the order book side, there is a slight positive trend for the European share. We do know that, as I also said that the APAC business is basically accretive but it's not that dramatically, so to say, that you would have to have for future years out of our existing order book, a significant fear out of that. But we see that shift towards Europe, yes. And yes, the Asian Pacific business is rather accretive compared to the European one.

[Jan Michael Mrosik, Chairman of the Executive Board & CEO]

And maybe just 1 addition going forward, we have to also keep in mind that currently, the aftermarket business is pretty much on the rail side affected by the COVID pandemic since ridership is still affected despite the recovery that I was just talking about. And therefore, maintenance cycles are stretched and overall train utilization is lower. So this aftermarket business is, therefore, a little bit drawn back in terms of the underlying and with COVID disappearing, that should also make its way out of the numbers and patterns. It obviously depends on the way how the pandemic evolves.

[Lucie Anne Lise Carrier, Executive Director]

Understood. And my second question was more related to your comment, I think you maybe you have made this morning during the press call regarding the M&A strategy and saying that in the future, you will be more prudent around this M&A strategy. Maybe it's a bit semantic, but are you able to kind of explain precisely what you mean by a bit more cautious?

[Jan Michael Mrosik, Chairman of the Executive Board & CEO]

At the end of the day, I would like to remind again that as we all know, we put in the past, and we will put in the future very strict KPIs to any M&A activity that will execute and this is around value creation. So it needs to create any kind of activity in that regard needs to create value for our shareholders and for the company as such. And therefore, this is the major point while we also refrained from the opportunity that we have been evaluating in the recent past because it didn't meet our requirements as far as value creation is concerned. And therefore, going forward, and EVAC is probably a very good example of what we have in mind as the first priorities for M&A, which is acquiring companies that have a close vicinity to our current business and add value in terms of high margin, a strong aftermarket business component and kind of a sticky business that really fits well with our business models. So that's obviously our first priority. And we will obviously look for opportunities that present themselves, but always under this kind of KPI precondition that opportunities would have to meet in order to be seriously considered from our side.

[Operator]

The next question received is from William Mackie of Kepler Cheuvreux.

[William Mackie, Head of Capital Goods Research]

Three areas; pricing, productivity and a follow-up on M&A. On pricing, could you just give us a sense of how -- to what extent you're able to compensate for the pressures on the cost side on the various issues you've highlighted with better pricing either around OE in CVS and RVS or particularly in aftermarket? And also given the pressures that we've discussed around semis and logistics and also raw materials in many areas. To what extent are you able to adjust or accelerate productivity actions to further compensate? It's always historically been a very strong point of the company. So that's those 2. And then on M&A, a couple of things. Where are you on the arbitration processes with Bosch and reaching an agreement on the purchase of the minorities that are outstanding, which I think you'll now have an obligation to purchase? And what is the pipeline for M&A looking like alongside the recent deal that you've announced?

[Frank Markus Weber, CFO & Executive Board Member]

Yes. Thank you, William. Let me start with the first question. Yes, you are right. We have currently certain issues. And basically, 1 is the high freight cost that we are having, which is also a headline consisting of additional freight cost per se, like container freight, et cetera, some coming out of the kind of uncoordinated processes in these semiconductor times like special airfreight and stuff like that. You have certain inefficiency as the next topic, of cost increase in running the plants. You can't always predict when the respective shift should happen and whether they can be happening on time. Sometimes you have to run extra shifts over the weekends on a Saturday and Sunday, with some additions then to the salaries to mention 3 here and the other is raw material. Let me start from the back. Raw material, as Jan just outlined, we do have, fortunately, good clauses, basically in our contracts with the customers that allow us to basically spill over the respective cost increases that we see in our profit and loss towards the customers. This, at some time as it's called gliding clauses until a certain threshold is reached for several weeks or sometimes several months, you have the cost be sitting in your accounts. And this is a rather minor amount that we are facing this year, really minor one. The bigger one is the freight costs and additional costs for the semiconductors. And they are the measures based. So the countermeasures on the one hand side would be the clauses that would allow us to spill the stuff over in regards to raw materials. Also the other costs, we are discussing with our customers in order to -- that the customers also pay their fair share. Those negotiations are running. We have seen the first results already in the second quarter. In the last month of June, we already got the first reimbursements, but we expect, so to say, more to come, and of course, also more cost to come. And as I said, it's maybe from customer to customer different, whether the one assumes a fair share to be 50%, the other would say, maybe 40%, 60%, we have a certain assumption for our full year and we are striving very, very hard with our procurement and sales department in order to reduce on the one hand side, the cost for the purchasing colleagues and on the other hand, to get more reimbursements in on the customer side. That's, I think, 1 important thing. In order to, nevertheless, whatever is the net in our books at the end of the day, in order to compensate for that, we are running additional productivity programs on the one hand side, on the say, on the more production-oriented areas as well as on administrative areas in order to best possible compensate for all those issues that we are having. And as you rightfully said, this cost discipline and the running in these kind of cost measures is one of the strengths of Knorr-Bremse and this is what we are currently doing. Can we offset everything? I don't believe so there will be a net amount at the end of the full year 2021 that we will be having in our books. That is what we currently assume. And that's what's baked in, in our guidance, of course, already. Second question is regards to Bosch. And the fact is that we have not reached an agreement. You maybe know from my -- you know from our statements in March that we had to get into talks with Bosch in order to find a solution. And the fact is that we have not finalized, so to say, with the positive ending these talks. So there is a second arbitration proceeding that was just started in July in regards to the EUR 379 million, which we have in our books as a liability.

[William Mackie, Head of Capital Goods Research]

And the pipeline of additional deals either in CVS or RVS, a feel for how you're developing the bolt-on strategy?

[Jan Michael Mrosik, Chairman of the Executive Board & CEO]

What we're currently having in our pipeline is indeed the targets that would exactly fit into what you just call bolt-on strategy. So that's what we are primarily currently looking at.

[William Mackie, Head of Capital Goods Research]

Okay. Sorry, 1 final follow-up relates to China RVS. Can you just -- sorry to come back to this, can you just share your thinking on the development of revenues for RVS China in H2 around metro, high-speed and aftermarket?

[Frank Markus Weber, CFO & Executive Board Member]

Yes. Thanks for the question. Obviously, a detailed one. We do from today's point of view rather think that the revenue development half year 1 to half 2 is somehow on a stable basis. This is what we currently anticipate. And we also do think that this is also true for the region in regards to profitability, so no change in profitability for the region, but somehow stable revenues half year 1 compared to half year 2.

[Operator]

The next question received is from Alfred Glaser of ODDO BHF.

[Alfred Glaser, Analyst]

I got 2 as well. My first one is on the truck division CVS. Could you explain a bit more what you expect in terms of revenues in the second half of the year compared to the second half of last year? What are the different factors and what kind of growth rate would come out of this? And I will ask my second question afterwards, please.

[Frank Markus Weber, CFO & Executive Board Member]

Thanks, Alfred. I think our current plan is to at least somehow be on the similar level like we have had in the quite good and progressing quarter 3, quarter 4 of last year 2020 should be slightly excessive. And this is what we currently think with all the uncertainties that are around there in regards to the supply chain, as I outlined. But you see that it's significantly lower than the first half year.

[Alfred Glaser, Analyst]

All right. And how would you see business in Europe and North America in CVS in the second half of the year compared to last year?

[Frank Markus Weber, CFO & Executive Board Member]

I would say, in Europe, would be roughly seeing that on similar levels, roughly, North America on higher levels. Yes, that's basically the biggest. And I mean, Asia Pacific region as well on somehow similar levels.

[Jan Michael Mrosik, Chairman of the Executive Board & CEO]

I think what we -- I think I would like to make 1 comment from an overall macro perspective. We see that as -- and you're probably all aware of that, that there was a kind of pre-buy effect in China, starting with Q3 last year and extending its way into at least the beginning of quarter 2 this year. And we'll see the TPR in China in quarter 3 and quarter 4 coming back to normal levels, still good levels of production. In principle, as far as the demand is concerned, and then a positive market dynamics in both Europe and the United States. So that's kind of the macro picture that we are seeing on the demand side. What kind of the demand can be fulfilled is obviously dependent on the semiconductor supply situation so that we have to keep -- take these 2 factors and a multiplying effect into account.

[Alfred Glaser, Analyst]

Thank you for these additional comments. I have another question which pertains to M&A. There has been actually a bid announced on Schaltbau in the rail space. What is your take on this? Do you think that Schaltbau might have a fit with Knorr-Bremse? And what do you think about the proposed price for this takeover?

[Jan Michael Mrosik, Chairman of the Executive Board & CEO]

As far as I understand it in the last couple of days, it has been announced that the buyer is identified and that the deal is in fact done. That's according to what I know and what we heard out of the market in the last couple of days. So that would be my take on it. I think it goes to private equity, if I'm not mistaken.

[Alfred Glaser, Analyst]

Yes, it seems. But maybe it's not the final saying in that story.

[Jan Michael Mrosik, Chairman of the Executive Board & CEO]

Yes, that's what we know about it.

[Operator]

And the next question is from Iris Zheng of Credit Suisse.

[Xiaolu Zheng, Research Analyst]

I've got 3, 2 is on the rail division, and the third 1 is more a housekeeping question. And I guess I will go 1 at a time. So my first question is on your comment about still delays in large orders for Rail. And maybe could you give a bit more color on do you mean the slower orders more coming from the OEM customers that you have? Or slower from the rail operators? or maybe it's because of the different geographic mix because compared to your European OEMs customers, there you have a higher exposure to Asia Pac and looks like it's relatively slow in that region. I think it would be very helpful for you to give a bit more additional color just for us to reconcile the different order than mix we are seeing from you and versus some of your European rail OEM players.

[Jan Michael Mrosik, Chairman of the Executive Board & CEO]

Right. So the large order delays that mainly comes from Asia Pacific, and there is order shifts on the high-speed side as well as on the metro side in China as we're seeing it right now. And then another, let's say, area where orders are being shifted out is India, which is obviously very strongly affected by the pandemic. So that's all pertaining to the OE side. Obviously, other shifts here and there throughout the world that are somehow in connection with COVID. When it comes to aftermarket business, that's something that is sometimes OE business, if the aftermarket business goes through the OE, but it's, in some cases, also the end customer, meaning the rail operator that would be directly ordering the aftermarket business and service business with us, kind of a mixed picture there.

[Xiaolu Zheng, Research Analyst]

Understood. That very helpful. And maybe again on the rail division and on the revenue side for the full year. I appreciate that the full year guidance hasn't been changed. But I think in early this year, the guidance or the comments for the rail division revenue growth is for it to be like higher OE growth versus a flattish aftermarket growth picture. And do you think it is still going to be the case as you see it now for the full year? Because from what I can see is that the OE and aftermarket development year-to-date isn't too different with even a slightly higher decline in OE than aftermarket.

[Frank Markus Weber, CFO & Executive Board Member]

Thank you for that question, Iris. You are indeed right that in my speech just minutes ago, I did give you a qualitative picture of how we see the remainder of the year or the full year. And this differs from what we have told you in March as we know it better now. We're some 4 months more into the year. And we said for rail so far that we expect solid growth as what we said in March, solid growth and only slight margin improvements. And now we rather think about a slight growth, which is 0 to 4-point-something percent and only stable, rather stable, almost stable margins. So this is a changed situation that we think, as Jan also pointed out in his speech that we see the recovery on the China side, slower than initially expected. But at the same time, what I also did mention we changed the forecast, so to say, the qualitative guidance for CVS upwards, we talked about solid growth and solid margin improvements. And now we're talking about significant growth and significant margin improvements which is according to our definition, well above 10%. And on the margin side, this means more than 1.5 percentage points of profitability increase.

[Xiaolu Zheng, Research Analyst]

It's very helpful. And my last question is on the ERP system because I recall that there has been an ongoing -- long ongoing program. And can you give us an update on how is it going and when it's going to be finished?

[Frank Markus Weber, CFO & Executive Board Member]

Yes. Thank you. Thanks for such question as well. It's running well, I would say. We have some 10 months ago until Easter of 2022. We will be going live. This plan has not been changed over the last 14 months that I'm now with the company. So it's really running well. The colleagues at Knorr-Bremse are doing a good job. We are in budget with our spending time and quality, I would say. And we have chosen due to the migration efforts, the weekend, the Easter weekend of 2022, always to be -- to have the go live.

[Operator]

And the last question for today is from Alexander Hauenstein of DZ Bank.

[Alexander Hauenstein, Analyst]

Alexander Hauenstein. Two questions left from my side. First of all, with regard to your comments on the semi influence on the first half of 2022, I mean, is this going to be read from our side as a message that 2022 consensus expectations of EUR 1.4 billion EBITDA are probably too high? I mean how comfortable are you with this kind of consensus and what's the way of thinking? I know you're probably not giving a guidance yet, but is this a hidden message maybe that we might have to look into our assumptions on that front? Or how should we think about it? And the other question would be more general on M&A. I mean, based on your experiences during the Hella process, what are your key takeaways and learnings for your future M&A plan here, which you could share with us, please?

[Frank Markus Weber, CFO & Executive Board Member]

So let me start maybe with the first part of your question. Not 100% sure whether I got the message completely right. Let me try and then you tell me whether I'm totally mistaken. My, let's say, indications in regards to the semiconductor situation that this will linger on somehow, it might also link on towards 2022. And the book-to-bill situation, I described somehow and the TPRs that I mentioned as to be expected. Not in any kind of meaning, had the intention somehow to say, adjust your estimates for the year 2022, not at all, no, not at all.

[Alexander Hauenstein, Analyst]

Yes, this was exactly the question whether this was kind of a hidden link to getting people rethink about their estimate for next year, but it seems not to be the case. That's good to hear.

[Frank Markus Weber, CFO & Executive Board Member]

Yes. Thank you as well.

[Jan Michael Mrosik, Chairman of the Executive Board & CEO]

Yes, and as far as the second question is concerned, let me comment on this. I think the key learning for us is that we need to communicate and explain our M&A strategy and also maybe our strategy overall, better to the capital markets. Our approach here has been always a value-based M&A strategy, a value-generating based M&A strategy and has also in this process that you're referring to been always a value-based M&A strategy and evaluation. And that's why, at the end of the day, having first assumed value generation in this particular opportunity refrain from further pursuing it because it did not meet our expectations in that regard. And therefore, we are going to invite you this Capital Market Day on the 29th of November in order to explain to the capital markets and the community, our M&A strategy and our strategy in general in a greater level of detail. And of course, on the way there, we'll continue to communicate with the financial community in order to make it ongoing clear how we strategically move. And that's, I think, the most important learning that you've been asking about.

[Andreas Spitzauer, Head of Investor Relations]

So, thank you very much for all your questions. We hope you have a lovely summer time and looking very much forward talking to you thereafter. So have a nice weekend, and thanks and bye-bye.

[Jan Michael Mrosik, Chairman of the Executive Board & CEO]

Thank you everyone, bye-bye.

[Frank Markus Weber, CFO & Executive Board Member]

Bye-bye.

[Operator]

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