Knorr Bremse AG

XETRA:KBX

Earnings Call Transcript 2022-Q4

[Andreas Spitzauer, executive]

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. And I want to welcome you today's Knorr-Bremse call for the preliminary results of 2022.

Today, Marc Llistosella, our new CEO; and Frank Weber, our CFO, will present the results of Knorr-Bremse followed by a Q&A session.

The conference call will be recorded and is available on our homepage, www.knorr-bremse.com, in the Investor Relations section. Here, you can find today's presentation and later a transcript of the call.

It is now my pleasure to hand over to Marc Llistosella. Please go ahead.

[Marc Llistosella Y Bischoff, executive]

Thank you, Mr. Spitzauer. ladies and gentlemen, a warm welcome for this capital market call. This virtual meeting is a first for me in my new role as the Chief Executive Officer. On that note, let me begin by introducing myself to you. My name is Marc Llistosella. I'm full 55 years old, married, father of 6 children, born in Cologne, and I spent most of my career outside of Germany.

As you have noticed, my [indiscernible] is not quite very German. It's more a different one. It's a mix of Spanish, Catalan and [indiscernible]. I spent 20 years -- 28 years of professional experience in the commercial vehicle business, 24 of them with Daimler, started by selling light commercial vehicles in Cologne and took up jobs in sales and strategy in Stuttgart and eventually started a new chapter in India, a place where not many wanted to go back in those days, 2008 and 2009.

I was given a fantastic opportunity to start something from scratch and do it proper. In the shortest space of time, we erected and built a complete truck factory and business system in Chennai and made the BharatBenz brand a success story.

I move on from there to Japan where I worked for Fuso, Daimler's Japanese truck subsidy, and was a lead of Daimler Trucks Asia. Many people had concerns back then to thinking that Japan was too complicated and too difficult to turn it around. However, we turned things around, and we achieved success. The team and myself not only rolled out the first electric truck in series production, but also changed the company's fortunes in terms of [indiscernible].

Frank Weber and myself were already working together back in those days. We have known each other quite a long time. In fact, it's more than 10 years. [indiscernible] executive role as a winter capitalist after that, especially with [indiscernible] and [ Vionic ] since 2018. These are 2 startups that develop electric self-driving trucks, a very futuristic concept, at least with [indiscernible], that I found and find still highly important and interesting.

That concludes my introduction for now. I will now hand over to Frank Weber, who will explain the financial indicators for the previous fiscal year in further detail.

[Frank Weber, executive]

Thanks a lot, Marc. The whole executive team, I can tell you that it's really happy to have you on board with us, and we are forward-looking for strengthening our team together with you.

Let's kick it off with today's key takeaways on Chart 3. We executed on our strategy, and despite many headwinds, delivered solid growth as well as good profitability in 2022. We had and continue to have a high focus on keeping our house clean, with stringent efforts regarding costs, pricing and portfolio streamlining. I would like to take this opportunity to thank all of our employees, customers and business partners. Together, I think we mastered it quite well within 2022.

Order intakes and order books were at record levels and provide great visibility for our foreseeable business activities. A core part of our strategy is to strengthen our activities in data-driven solutions and aftermarket. With 3 successful M&A transactions exactly in those fields in '22, we clearly walked the talk. [ Cojali ], [indiscernible] and [ DSP ] will sustainably support our digital aftermarket business and pave the way for additional profitable growth.

Sustainability also a high priority for Knorr-Bremse, and ESG is an integral part of our daily activities and strategy. In '22, we intensified our efforts in this respect, as can be seen, for example, from the successful placement of our ESG-linked bond and our SBTI commitment.

Last, but not least, we achieved our guidance for the full year '22 with the exception of the FCF figure. Overall, the underlying market demand by end customers in both rail and truck remained strong in all markets.

Even China is now expected to improve slowly but steadily throughout '23. But I want to be honest with you, '23 will be another challenging year.

Chart 4 summarizes some operational highlights of '22 that I would like to share with you, a highlight that the Knorr-Bremse rail fair was the premier of our solutions for digital automated coupler for freight and passenger trains. At truck fairs, Automechanika and IAA, we could demonstrate our leading product portfolio in the field of automated driving, e-mobility and aftermarket products. Especially our innovations like the rotary vein compressor, our global salable brake control and the electronic power steering EPS convinced our customers once more. In '22, RVS, again, one major international contract with large OEMs. I would like to highlight the contract with [indiscernible] to equip 130 [indiscernible] stream regional trains with braking entrance, HVAC and sanitary systems in Germany, and with Siemens to equip further ICE 3s in Egypt. The Hitachi contract for passenger couplers was another big milestone.

CVS also signed many major contracts last year. I would like to mention the truck services contract with [indiscernible] and long-term agreement with a major truck OEM.

We have not only focused our M&A activities on digitalization and data but have also successfully started the test phase for the S/4HANA system that is a very large and essential internal IT project to further exploit our efficiency potentials via standardization in the future.

Let's move to Chart 5. As mentioned, we have achieved our full year '22 guidance with revenues of EUR 7.1 billion and an operating EBIT margin of 11.1%. The margin target was achieved despite additional inflationary cost of roughly EUR 325 million, which we could offset by price measures and other measures via our profit and cash contribution program that we initiated early on in '22.

Despite a very strong quarter 4 cash flow, we could not fully reach our FCF target for the full year due to payment delays by customers. I will provide more details later on.

On Chart 6, I want to share our market view with you. Looking at the rail market. Underlying demand in Europe and North America remains strong driven by governmental support and the unremitting push towards green mobility. The elevated order books of our OEM customers are also proof of this. The market in China seems to be slowly recovering from the 2 very weak years that were mainly driven by the economic challenges and especially the zero COVID policy. The end of this policy is positive for all of us, but it will take several months for the economy to return to normal and show effects.

The biggest concern in the rail segment at the moment is the high inflation as pricing in long-lasting OE contracts is not easily adjustable. It is much easier in aftermarket, but we also have important long-lasting partnerships in mind. We do not want to risk them simply to achieve a positive short-term financial benefit. We expect to be significantly affected by high inflation throughout '23 as around 30% of revenues in full year '23 will be generated from orders stemming from order books of -- before the Russian innovation into Ukraine.

For moral reasons and due to sanctions, we decided to phase out of Russia, a very profitable market for us. The effect must also be taken into account when modeling financial expectations for this year as quarter 1 '22 still saw very good and very accretive business in Russia prior to the war.

The truck market also faces ongoing good demand in Europe and North America. Truck production rates in both regions were stable in quarter 4 quarter-over-quarter and are also expected to be stable or grow slightly in '23.

Truck production rates in China in quarter 4 were weak as we expected, but we should see a significant increase in '23. We will benefit from this recovery due to our leading market position and the good potential for content per vehicle driven by the rather low safety standards and the request for innovative and reliable products.

The situation in the global supply chain keeps improving, but it is still not as smooth as it was before COVID. Inflationary headwinds are an ongoing challenge also in the truck industry. After a successful first round of price increases, we have started the second round already. It should enable us to achieve a better price cost ratio going forward.

Aftermarket business benefits from high utilization and increasing mileage. Our recent Cojali acquisition will additionally benefit from these trends. All in all, demand in rail and truck is holding up nicely given all the difficult business conditions.

Let's now dive into the full year numbers on Chart 7. In '22, Knorr-Bremse generated revenues of EUR 7.1 billion at an operating EBIT margin of 11.1%, while operating EBITDA margin reached 15.4%. Order intakes and order books once more reached record levels and underline the robustness of our markets as well as the visibility going into '23. Free cash flow came in at EUR 220 million. We consider these results to be quite solid despite all the global challenges we face.

Let me give you a quick overview of Knorr-Bremse's rock solid balance sheet. One of Knorr-Bremse's highest priorities is to maintain a high level of flexibility and stability in financial terms. We focus on strong level of equity. This metric came out in '22 at EUR 2.7 billion, representing a stable equity ratio of 34%.

Gross debt increased to almost EUR 2.2 billion due to the issuance of our sustainability-linked bond of EUR 700 million in September at very attractive terms to finance our M&A investments within 2022, including our 20% share buyback from Bosch. From our perspective, the successful bond placement was another acknowledgment of our strong credit profile and business model.

Our net debt-to-EBITDA ended with 0.7 towards end of '22. Liquidity stood at EUR 1.44 billion at the end of '22. Our strong credit ratings, Moody's A2 and Standard and Poor's A were confirmed last year, both underscore the strong resilience of our balance sheet and business activities going forward.

Moving to Chart 9. Innovation and technology leadership are the key drivers for our global market leadership. This is why we continue to invest in important future technologies. Last year, CapEx amounted to EUR 352 million, representing 4.9% of sales. It is both in absolute and relatively lower versus the previous year and at the lower end of our target range of 5% to 6% of revenues. Please be assured that we are not compromising on future investments at all.

R&D spending amounted to EUR 470 million in financial year '22, an increase of EUR 40 million versus prior year, mainly driven by the increase of R&D employees, software engineers to drive our digitalization strategy.

Net working capital increased by EUR 250 million. I will go into more detail on the next chart.

Free cash flow on the full year level reached EUR 222 million, which was much lower compared to previous year's level. Quarter 4 with EUR 449 million, so a very strong improvement versus the previous quarters as well as last year's quarter 4, but it was also a little bit behind our expectations. The development on a full year basis is predominantly driven by reduced earnings and higher working capital. The main reasons for this were customers' payment behavior is currently more [ rigid ] driven by higher interest costs and due to high COVID costs for Chinese cities and municipalities. Let me be very clear, it is not a question of whether we receive the payments, but the exact timing is, to some extent, rather uncertain.

Second, due to the supply chain constraints, we have deliberately and significantly increased our inventory levels to ensure delivery capacity. This customer-first strategy sets us apart and is an important cornerstone of our strong customer-supplier relationship, which also significantly supported our price negotiations with customers so far.

In the course of this year, we aim to reduce these levels again due to an expected easing in the supply chains, but this is somehow a prerequisite. Keep in mind that free cash flow is not a snapshot KPI, but also needs to be seen over a certain period of time. In the last 3 difficult years, our average cash conversion rate was 88%, which is fully in line with our still existing target range of 80% to 90% for the CCR.

Let's move on to Chart 11. Sustainability is a fundamental layer of our business strategy. In '22, we accelerated our activities in the various areas of ESG. First, we are fully on track to hitting our target of [ halfening ] production-related CO2 remission Scope 1 and 2 by 2030. In addition, we decided to expand our climate target to our value chain processes, upstream and downstream Scope 3, and to strive for a validation by the science-based target initiative.

Second, the circular economy is a key lever to reach global climate goals. We already have reached a high share of remanufactured products of above 10% of revenues.

Third, diversity, employee safety and our strong commitment to Ukraine and Ukrainian refugees should be mentioned here as well. In '22, we defined new gender diversity targets of 20% for the management levels and 25% at the global workforce until '27. Employee safety figures were also significantly improved year-over-year.

Last, but definitely not least, I was overwhelmed by the enormous willingness of our employees to help Ukrainians at home and abroad. As I said earlier, sustainability is a fundamental layer of our business strategy. This is also proven by our activities to link financing to ESG.

In '22, we launched an ESG-linked syndicated loan, placed our first sustainability-linked bond in September and implemented our green supply chain finance program in December.

Let's have a quick look at quarter 4 details on Chart 12. Revenues on group level amounted to EUR 1.95 billion, a 15% increase year-over-year and an operating margin of 11.6%, which is a slight increase versus the prior year as well as versus the previous quarter. Orders remained on high levels and once again totaled more than EUR 2 billion. I think this is a very good end to a challenging year and gives us great visibility for the years to come.

Let's jump into the divisional performances in quarter 4, starting with RVS on Chart 13. Order intake of RVS was again remarkably strong with EUR 1.2 billion despite tough comps year-over-year. Book-to-bill ratio in quarter 4 was 1.22. Europe benefited from strong regional and commuter business, but the region was clearly affected by missing Russian business, which was quite high in the previous year.

The main positive drivers in North America were aftermarket and freight as in previous quarters. The order book also increased by 27% year-over-year to a record level of nearly EUR 5 billion. This is an extremely [indiscernible] foundation for the business development in '23 and beyond.

Let's move to Chart 14. Revenues amounted to EUR 949 million, an increase by more than 10% year-over-year. Aftermarket business and OE business supported this development both and were up year-over-year. The aftermarket share increased from 49% to 50% in quarter 4. China was only flattish year-over-year. It benefited from a recovery in the OE business. Aftermarket in the fourth quarter was slightly weaker than compared with the previous year. In North America, we recorded growing revenues strongly driven by aftermarket. Europe was, as expected, the main growth driver supported by improving ridership levels in Europe, generating strong growth in aftermarket business.

Operating EBIT margin of RVS in quarter 4 was 14.1% after 17.7% a year ago. In the past quarter, RVS benefited from growth in revenues, cost measures and price increases in the aftermarket business. In total, we were not able to overcompensate the negative drivers in the quarter, which were loss of the very accretive [ fashion ] business, market weakness of our very accretive China business, headwinds by inflation as price measures do come in with a price lag, negative product mix effects globally. Especially higher input costs could be only partially offset by higher OE and aftermarket pricing as well as cost measures.

OE price increases were limited as they are fixed in longer-term contract periods. Therefore, the price/cost ratio of RVS was negative in quarter 4 '22. We assume that this will also remain the case in this year as around 30% of our revenues in '23 will be generated from orders that we received before the inflation started to rise strongly in the last year.

Let's continue with truck on Slide 15. Incoming orders of CVS amounted to EUR 1.04 billion, which is an increase of 8% year-over-year, a clear proof of the strong underlying demand in Europe and North America. China is finally seeing the first signs of expected recovery visible in plus 10% order intake quarter-over-quarter. Please keep in mind that the extreme high order intakes of the past quarters in CVS are extraordinary and should not remain on such high levels forever. As a result, book-to-bill in quarter 4 reached 1.04. The record order book of our truck division stood at EUR 2 billion at the end of December, which is an increase of 17% year-over-year.

Let's move to Slide 16. CVS posted EUR 1 billion of revenues in quarter 4, which is an increase of almost 20% year-over-year and, again, a very strong result, considering ongoing supply chain disruptions and the weak market situation in China. CVS saw a positive development in both channels, OE as well as aftermarket in all regions.

The utilization rates of truck fleets and demand for used trucks continues to be high, driving demand for spare parts and services at the same time. Due to even stronger OE growth, the aftermarket share of revenue decreased slightly to 29%. CVS should also be able to further post solid revenue growth in '23.

This positive outlook is founded on the strong underlying truck market and the market recovery in China as anticipated. In quarter 4, CVS achieved an EBIT of EUR 101 million, which is a significant improvement year-over-year and is also a very solid increase versus the quarter 3.

The EBIT margin amounted to 10.1% compared to 7.4% a year ago and 9.2% in the previous quarter. EBIT margin in '23 should develop positively with a rather sequential improvement in the course of the year.

On Chart 17, I summarized some countermeasures that we took at KB to fight the challenging business environment. We consider KB as a very flexible corporation that is reacting quickly if needed. In '22, we decided to adjust our portfolio by taking such necessary step as -- steps as the phasing out of our Russian truck business in rail and truck, the divestment of our subsidiary, Kiepe, the sale of our foundry and machining plants, which are part of our steering business in the U.S.

Additionally, we improved our fixed cost base and took immediate measures in China via the closure of one production site in rail as well as layoffs in our CVS plant. In North America, we relocated parts of our rail production from U.S. to Mexico for clear cost benefit. We are now closer to the customers as well.

All these actions are in progress, and once completely finalized, will support our profitability going forward. Nevertheless, economic uncertainties and circumstances remain tough and potentially require further actions going forward.

I want to finish my part with a guidance for '23 on Chart 18. We expect revenues between EUR 7.3 billion to EUR 7.7 billion and operating EBIT margin between 10.5% and 12% and the free cash flow between EUR 350 million and EUR 550 million.

On the right side of the chart, I outlined our main assumptions for this guidance.

Please let me give you some additional comments. Revenue increase at group level in '23 should be driven by both RVS and CVS. We also expect operating EBIT in absolute terms to increase.

Looking at the quarterly development this year. We expect the lowest margin at group level in the current quarter, followed by a sequential improvement over the year. Operating EBIT margin of CVS should moderately -- should be moderately higher in '23 due to the before mentioned pricing negotiations leading to a positive price/cost ratio as well as implemented cost programs.

RVS is expected to face a moderately lower operating EBIT margin impacted by 4 major headwinds this year. First, the product mix, namely a higher share of non-brakes business and potential lower aftermarket share in Europe; secondly, a rather flat Chinese business; third, no more accretive Russian business; fourth, especially high impact by inflation that will only be compensated with a certain delay. As mentioned, 30% of our revenues arise from the order book pre inflation times. After this margin decrease of RVS in '23, we expect a growth in profitability in '24 again.

Back to you, Marc.

[Marc Llistosella Y Bischoff, executive]

Thank you very much, Frank. Based on these figures, I believe that our company will overcome this turbulent and difficult year of success. We know very well that we cannot relax. That's obvious. The times remain very challenging and demand maximum dedication from all of us.

I'm certainly convinced that this uncertainty is the new normal. It is something that we will have to adapt to, and we can do that. What do we plan to do specifically with my colleagues and all the team, I will summarize in the next minutes.

Our plans here are we want to lead Knorr-Bremse to profitable growth by innovation and beyond. To make this happen, we are looking at the 3 most important factors for our success, our 3Ps, products, solutions, people and processes. Put it simply, do we have the right offering, solutions and products for our customers? How do we make our employees ready to meet these requirements? And last but least, what processes and structures do we need in order to be ideally equipped for this future?

When these 3 elements of products, people and processes are perfectly integrated into target vision, this will have a huge positive impact on our old performance. Our employees have clear expectations. After 4 CEOs in a period of 4 years, they are seeking continuity and clear leadership. One of the most important duties for me and the entire Executive Board is, therefore, to ensure continuity and stability in the company's management. That is what I stand for.

Let us look together at what we specifically intend to do.

Next chart, please. This company, Knorr-Bremse, knows exactly where it stands. We know exactly what we do, and I think that is really good.

On the flip side, another thing I continually observe is this. Yes, we know exactly where we stand, but we do not know where we jointly will go. Our divisions have also a clear understanding of where our 2 main markets will develop. However, we do not yet exactly know where, as an overall company, we want to go. We need to develop this shared target vision. I call it the target picture of where our journey will go. We will prioritize the foundational elements, then work on the elements that complement them. This foundation includes designing the target vision for products. It involves us examining and defining what our products should be in the next 10 to 15 years, not forgetting the next 3 years. We want the best products of the highest standards, the solutions that our customers will need in the future. We will make targeted investments in precisely this and expand our technology base.

And why is this so critical for us? Of course, we are profitable. And on top of that, we are the global market leader in technology and market share. We will defend [indiscernible] position under my leadership and extend our lead further as quickly as possible.

The topics of ESG and sustainability were something that we could sell in marketing wonderfully for many years. You would say, look, over here, see how green we are. Those times are gone. Sustainability is here to stay, and that is not up for debate, at least not internally. Companies that only pay lip service to sustainability will not have a place in the future. As a global market leader, we are among the [indiscernible] biggest players. For this to remain the case, it will need to be even more ambitious in the future and develop new ideas. We need to make our products and services more digital, to launch new services models and make money from data rather than only hardware.

The excellent approaches for this, and Knorr-Bremse already has more than 12,000 patents. This is strong. It's a very strong starting point. However, we need to become faster and actively drive our innovation management. This also means learning from mistakes because it's very difficult to develop innovation rapidly without making mistakes. We cannot lead the market without innovating and innovation.

Let's turn to the element of people. Next slide, please. I believe that we can only be strong as one team. We can only achieve our goals if we all know what our share target vision is. At this moment, you could say all CEOs are telling us the same story, but it might be true. In my case, there is another team principle that counts: team comes first. There's no employee of this enterprise, not even myself, who is more important than the team or the company itself that applies to the Executive Board, and we practice this principle throughout the whole company. We already possesses the full potential to achieve all these goals Knorr-Bremse an acknowledged cooperation.

Our employees have enormous know-how, which I was able to experience during my first site visits. However, it also means that we need to lay the foundations for our future processes and the organization now.

Next chart, please. If you look at the world of today, I think we are all aware of one thing: we are in a permanent [ space ] and hard to predict change. This is our new normal. This new normal brings with it ever shorter cycles, high amplitudes and additional risks. To successfully master this state, we need to become faster and more resilient. And for that continuity and stability and leadership are more than ever important to the success.

Leadership is an important constant that we need now Knorr-Bremse to successfully further strengthen our resilience and agility. How are we achieving this? For example, by optimizing our current portfolio, we will closely analyze where we can invest or divest sensibly. Our goal must always be to grow sustainably but increase the company's value. We analyze the entire process landscape and optimize it rapidly if needed. The latter also includes continuing the profit optimization program that Frank already mentioned.

On top of that, we are working further on harmonization, standardization, fields potential to become even more efficient. After having established the foundational elements of our target vision, our next step will be to develop the complementary elements, a target portfolio of growth initiatives that we have embarked on. Our focus will be on further efficient organic growth as well as inorganic growth.

As you can see, we are approaching the task ahead of us in a structured and foresighted manner. We have a clear time line at the time in the end of this process and its 3Ps will create a target vision for the Knorr-Bremse of the future. And we will be able to tell you in summer just what this future looks like.

One thing I can tell you right now already is that we are open to any result from the process. We will have no silence any thoughts, and I think that's very important.

I would also like to thank you greatly for your attention and looking forward to hear your questions. Thank you.

[Andreas Spitzauer, executive]

We will end the webcast now and start the Q&A session in a minute or 2. [Operator Instructions]

[Operator]

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

[Sven Weier, analyst]

And the 2 questions are for Marc. And first of all, wishing you all the best for the new role. Looking forward to work with you. The first one is really what you just said regarding the update you're aiming to give us next summer. I would assume that probably also then refer specifically to the midterm targets that the company had been providing in November 2021. I was just wondering, I mean, on your initial observations, the margin targets that the company has given itself back then, obviously, a bit away from the current profitability. Do you generally feel that this is a margin level that the company like Knorr-Bremse can achieve, and it's only you need to define which steps you need to take in the coming months to get there? Or do you also think that the entire margin target needs to get some further thinking? That's the first one. .

[Marc Llistosella Y Bischoff, executive]

Thank you very much for the welcome. Looking forward also to proceed with you. To say it in a very straight form, midterm, I see the margins more critical than long term because the substance of the company is there. And if you have just a look on the order book of RVS, the good thing is the orders, which we received by 2022, most of them have incorporated the inflation. So that means these orders will lead to the original usable and used margins.

What we have to consider is that everything what is from pre-February 2022 is in terms of EBIT, not in terms of anything else, it could be seen as a burden, but this burden will be smaller by time. And the small it will be and the more -- the other rises up, and therefore, I think the order intake is very significant for the year 2022 to be observed. I think here, we can expect much more and we can expect what we are used to expect from Knorr-Bremse RVS.

In terms of CVS, I can't say this kind of delay, this time shift. This is not because the business is different. And here, I see already that the programs, which Frank and the team have initiated, are coming to -- the fluids are coming up. And I think in CVS, we have a rock solid business, which could get into a range, which is very, very attractive, especially when you go in this segment.

So overall, I would say the operational margin, what you used to know from Knorr-Bremse, it is achievable. It's not easy. It needs hard work, yes, but it can be. And I think that's the most important for the company. There is the substance to get it.

[Sven Weier, analyst]

That's good to hear. The second question is basically about the divisional structure and.

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that you will

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structure makes sense. It's a good cyclical hedge given the different dynamics. Do you see that so far as its own main advantage? Or have you come across other major synergies? Because as a shareholder, I might argue that I could hedge the cycle maybe myself. And I was just wondering if there's anything else that you would name here as a big advantage of the structure.

[Marc Llistosella Y Bischoff, executive]

Thanks for this question. You attempt me already even after 2 months. I must say that the structure so far from just today, especially with the difference in the cyclicality of the business, it's an intelligent strike. And I think it was well prepared and well done by [indiscernible]. Now the question is how we live it, and that means we should not always refer to the cyclicality. We have to see some scales. We have to see some integrating layers. Otherwise, you could easily say, okay, besides the cyclicality, what is it? And that's exactly where I have to find out.

You know the business at least as good as me at least from the reporting point of view that the rail business is a completely different animal to the truck business. And this kind of business has a different business structure and business logic. And I think it makes the company very attractive for talent because it's not only one business logic. It has -- in fact, it has 2 business logics. And that makes it attractive for employees. It makes it attractive for also for investors because it's not only one layer and makes it attractive to grow beyond what eventually is seen on the one -- or in the other dimension.

So overall, I'm more attracted to this kind of setup than I am not. So this gives you just an indication. But as I said, and I emphasize it again and again, there is no ding for border. And every form of critics is taken seriously when it is constructive. And the target is value creation.

[Operator]

And the next question comes from Morgan Stanley, Ben Uglow.

[Ben Uglow, analyst]

My first one is to understand the margin profile in RVS. And I just want to make sure I understand this correctly. So Frank, what you're saying is 30% of your kind of order book at the moment is essentially in Knorr-Bremse's legacy contracts, which are lower margin at pre-February 2022, which have got no escalation clauses. I guess my questions are, number one, is that essentially correct? Number two, if we strip that out, if we take away that 30%, is it fair to assume that the rest of it is back at the old margin? So if I look at where margins were in 2020, 2021, we were looking at high teens numbers, 18% to 19%. So my first question is, excluding that factor, would we be back where we were in 2020, 2021?

[Frank Weber, executive]

Thanks, Ben, for your question. I mean, first of all, let me express it in

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of the RVS revenues that we are generating in '23 is stemming from an order book that is before February 2022. That is the fact, so to say. We have realized already kind of a lot of this order book back then in the year 2022, also with kind of prices from those days, but also with lower input costs on the material side, et cetera. So those margins were under that much stress test, so to say. But the biggest comes with this chunk of 30% and also with the higher input costs in the year '23. It will then, as also Marc said, go down in '24 as this is only a 10% plus, so to say, share of revenues from the old days, and this should bring us then up again in overall profitability. That is the very first.

You also mentioned price [ lighting ] clauses. We had back in the days before the high inflation as well as now in the vast majority of our contracts already price [ lighting ] clauses. We have not only newly introduced with some, but we already had them before. That's why we also did have some positive results in price negotiations in the OE business as well. So that's that answer.

And then coming to what's the remaining part, so to say, whether it is back to the [ once ] reach levels. This is not the case. This is not the case. And I give you one simple reason for that why it's not the case. It's because in the previous years of '18, '19 when we saw the margins peak, it was to an extreme extent also driven by a peak of the cycle in China with extremely accretive margins in China. If we would take that out and normalize China, then I would say, yes.

[Ben Uglow, analyst]

I see. I understand. And we can calibrate the China [indiscernible]. Just to finalize on that point, the China revenue in the presentation you gave, October, November, was supposed to be about 650, about 19% of the division. Is there anything to change that assumption today?

[Frank Weber, executive]

I'm not sure whether I fully understood the question just from this [indiscernible], but I can confirm that also figures that we showed in quarter 2 in regards to our expectations for Mainland China revenues came in on those levels that we somehow forecasted them to be. And yes. Is that -- was that your full question?

[Ben Uglow, analyst]

Yes. I understand the point, Frank. And then final one really quickly for Marc. And I guess you alluded to -- there's been a lot of changes. There's been a lot of CEO turnover, et cetera. I guess what people maybe want to know, certainly, we do here, is what attracted you to this job? If I look back at your resume, you yourself mentioned setting up the business in Chennai and what you've been doing for the last couple of years. It's been very entrepreneurial. I think your background has been as an entrepreneur and investor for the last couple of years. So what brings you to Knorr-Bremse? What do you see as the main attraction on a personal basis?

[Marc Llistosella Y Bischoff, executive]

Thank you, Ben. Yes, you're right, I see myself more than as an entrepreneur than a manager. I think that we have to discuss in the near future. Knorr-Bremse for me is good base, but you can get more out of it. And that is, for me, a change story. And that was in Europe, it was a change story. It was, of course, a greenfield approach. Then Fuso was a change story. It was a brownfield approach. [indiscernible], start-ups, this is also a change, you can say. You change the environment. You change the industry. And Knorr-Bremse is a mixture of that. It is partially greenfield for me because we can do new things, and it's partially brownfields. You can do the things better than you did it in the past. And I think this combination that made it up.

And last not least, to be very honest to you, because it's not always easy to go along with me because I'm a free mind, is that the surrounding circumstances Knorr-Bremse are really a new setup. You have a new Chairman of the Supervisory Board who have, by himself, an exceptionally successful track record with Infineon. So he knows what he's talking. You have a Board, which is new settled with people like [indiscernible] who have very, very much expertise and also growth stories there. Half of the Board itself is a growth story. All of them are representatives or drivers of growth. So with these people, I think it is much easier for us to set up a new tone, and you set up where we want to go, that some things have to be changed. And I think it's a blessing for me. I didn't do anything for that. But these circumstances are completely different than it was 2, 3 or 4 years ago. And that made me think that I could join and that we could do it. And last not least, is Frank. You come newly in a company, and one of your friends is already there settled for the last 3 years. And Frank, as you know, you know him in this regard, eventually better, he's very

[Audio Gap]

[Operator]

And the next question comes from JPMorgan, Akash Gupta.

[Akash Gupta, analyst]

My first question is for Marc. And first, congratulation, Marc, for this role. The question I have for you is that in earlier remarks, you said you are open to any results from the process. Are you hinting that the process, which is currently undergoing in terms of defining the future and strategy and processes, could be quite radical and therefore, in the medium term, we may see Knorr as a somewhat different company in terms of the mix of portfolio than what we see today? So that's the question number one.

[Marc Llistosella Y Bischoff, executive]

Akash, thank you for the question. And the answer is, in short, yes. But change for its change itself will not happen. It's not an eagle shooting show of Mr. Llistosella or whoever. It has to contribute and create value. Why do I say that? The last 20 years, this company had a lot of unorganic growth, right? So the question for me is, what is the contribution in terms of value creation of this unorganic growth? And we are really going deep dive here. What kind of premises were set? What kind of results were expected? And why did it not happen?

In fact, to make it very short, I have a first indication that on the M&A process, Knorr-Bremse is not as good as in product solutions. So this gives me an indication, and Frank is already on it, that we have really to look on this. And this is the ugly truth, and we have to phase the ugly truth that eventually, our aspirations were high, but our post merger integration capabilities were not that high. And here, we have to start. Admission is the first step for improvement. If we don't admit, we cannot change. The change has to come especially from the attitude. When I try to hide and I try to give excuses, I will not make it better. And especially when we acquire companies, it has to be very clear. Is this dilutive? Is it something on the long term, which is adding value? Is it small enough to be covered by the others? Or is it too big to be compensated by the others? And these questions, though, they've always answered before we do

[Audio Gap]

[Akash Gupta, analyst]

And my second question is for Frank. I mean there is big hope on China recovery in rail given the ridership is picking up and also the faster-than-expected COVID restriction that we have seen in there. And you are guiding for flattish China business. And my question to you was that, internally, what's your expectation in terms of recovery of China. Do you think it could be more '24? Or is it beyond '24? And do you also see a potential upside risk that given it's China and if things go right, we might see some upside in late 2023, which is not currently part of your forecast?

[Frank Weber, executive]

Thanks, Akash. First of all, what we indicated in Q2 in regards how we see in the midterm the Chinese market and our revenues in that market, I think, basically still holds true. So there are not so big, so to say, growth drivers. But for sure, the zero COVID policy that is now abolished should bring the ridership levels back to normal, will not immediately happen, will not happen overnight. It will take some time until we see effects as well then also on the supply chain side, which mightn't have a global impact -- positive global impact for us all.

We do think that this -- there is something that somehow is growth expectation that could come earlier than initially expected. So there is an upside potential, I would say. There is as well, I think, a rather [indiscernible] loaded kind of recovery expected. It should not happen within the first months immediately. As you know, it's usually first comes ridership levels, then come more trains on the tracks. The depots get freed up, so to say. New orders then for OE business would come in. This is kind of the mechanism, how it would run. And this would take a certain time until it could come up. And if that development is really getting rock solid in China, there could be within the -- of course, the guidance range, there could be an upside potential on this year. That's clear.

[Akash Gupta, analyst]

And maybe just to summarize, you are basically saying that because any potential recovery would be back-end loaded, which is why you are not currently including in the guidance, but there could be some upside if that comes towards the end of the year? .

[Frank Weber, executive]

Yes. Towards the end of the year, then -- and so putting us then going into '24. This is what we rather currently think. As things are not changing with that effect down to our P&L, so to say, in terms of top line that quickly.

[Operator]

And the next question comes from BNP, Ingo Schachel.

[Ingo-Martin Schachel, analyst]

My question would be also to Marc and a follow-up on the acquisition philosophy. I think you already mentioned the point with regards to acquisition targets that could be a return on sales dilutive. Just wanted to understand what your philosophy is when it comes to high growth, lower margin assets. Are you looking for Knorr-Bremse to be a high margin or double-digit margin company for the sake of it? Or could you also imagine by tapping growth fields that Knorr-Bremse might end up being a higher growth, but only high single-digit margin company in the long run? If you add certain new segments and on the EBIT on new segments, maybe you can also clarify whether you've already identified certain markets that -- or end markets that would be of interest for you or definitely rolled out when it comes to potentially adding new pillars, new segments.

[Marc Llistosella Y Bischoff, executive]

Thank you for the question, Ingo. I take one question out of it or I try to structure it. Which targets will be allowed to be dilutive, let's say it so. Targets, which have existing business, targets for the significant size of revenue and cash flow are not permitted in our philosophy or my philosophy to be dilutive because if we have the belief that we can do the business better than the original management, then sorry to say, I haven't seen this in the track record so far. I would like to have a proof of this.

If the company is small but innovative like a startup or someone like the Cojali and other acquisitions or shareholdings, which we have received last year, here, we have a vertical increase of our products. So the [indiscernible] horizonal matrix. Everything what is horizontal, that is from the existing business in very adjacent fields, they have to carry themselves. If they don't do it, we should not touch it because it's -- we don't have the resources. We have the money, but we don't have the resources. That is, for me, a clear fact. We don't have it like other companies that can spare 100 people for 2 years. We cannot. So that means it has self-containing.

In terms of vertical growth, when it comes to new technologies, when it comes to data, monetization of data, then I must say, we have still -- and that's a question of philosophy, we see here a potential growth, not eventually in the next 3 years, but in the next 5 years. And then profitability comes.

And if you'd ask me -- describe me the segments, if you go conventional, then India is a horizontal increase of our business, by ourselves, by a higher market penetration, by growing with the markets. If we go for Africa, which will come sooner or later, of course, compared to China, it's insignificant of size, but it'll be significant of growth, then [indiscernible] of our current products adapted to customer needs into these markets.

When it comes, for example, to Cojali or when it comes to [indiscernible], then we have companies where we can add. We can add functionalities. We can go beyond what we are offering so far. And here, the margin structure and the business logic is new, and it's new to us, but it's eventually even new to the market. And if this is the case, it makes sense to invest. It makes sense to be there for 3 to 5 years. But it makes no sense to go in something, which is already in the market who's not performing well.

Here, I would expect a massive turnaround plan in advance. And sorry to say, I have seen so many turnaround plans. And before we touch this, we should make sure that we are doing our homework at our own because here is a certain form of potential in this company before we go beyond and we please other companies.

[Operator]

And the next question comes from Citi, Vivek Midha.

[Vivek Midha, analyst]

I have 2 questions. So my first question is for Frank. Within the 2023 guidance, could you maybe give us an indication on the breakdown between volume and price within the organic revenue growth?

[Frank Weber, executive]

Yes. Thank you, Vivek, for this question. I would say you have seen that we indicate -- or have best signals available for another inflation kicking in towards '23 driven by energy cost basically and personnel cost developments around the globe of roughly EUR 300 million, similar ballpark like it was in the year 2022 and also our clear -- crystal clear target to compensate for all of that within the year with price and cost measures like we have done last year. So for this year, you could expect there is a certain kind of spillover going into '23 from the price measures of last year, just looking at the full year effect then of those measures. So we should be able to see, I would say, another year-over-year 3%-plus price increase, which is reflected in the top line growth. So if you deduct that, you end up with the remaining organic kind of element of the top line growth.

You have to keep in mind that also we guide figures, of course, including FX effect. As we move into '23, there is also a slight burden FX wise going into the new year. So you have to add this then up again in order to come to the organic figure out of that you are seeking for, yes, but 3% plus roughly. Overall globally, all business elements is somehow the price increases that we would aim for.

[Vivek Midha, analyst]

Very helpful. My second question is on the restructuring charges you've taken in Q4, particularly [indiscernible] on Russia. Could you give us any indication of the cost savings arising from these measures? When you expect these to be kicking in, whether it's, say, '23 or '24 and so on?

[Frank Weber, executive]

Yes. You're welcome. Very valid question. I mean, needless to say, the Russian -- so to say, there is no payback in that regard on the Russian write-offs that we have done, unfortunately, yes. This is the case. It's just write-offs that we have been doing in assets and inventory levels. That's clear.

On the other [indiscernible] project, it's already starting. It has been already starting towards, I would say, end of the year. As you have seen, project, for example, some , which is the relocation from North America to Mexico for some rail operations, already slightly moving in into figures of 2022 and should be full year effective in '23.

When it comes to the Chinese saving potentials, I would say they start with beginning of the year '23 to kick in. It's, on the one hand side, with rail. It's a joint venture that we are having. So it needed certain kind of alignment also with the other shareholder in order to kick those off. So it should come in starting in '23 and then move into full year effect in '24.

[Operator]

And the next question comes from Deutsche Bank, Gael de-Bray.

[Gael de-Bray, analyst]

My questions would be for you, actually, Marc. Really wanted to know what you learned in the past 2 months of being with the business. Is there anything materially different from what you thought it would be when you accepted the job?

And secondly, could you perhaps elaborate on your current perception of the group's pricing strategy and organization? I mean do you find it agile enough, flexible enough? I mean what's your take on the relationship between the group's very strong R&D investments on the one hand and the pricing development on the other hand?

[Marc Llistosella Y Bischoff, executive]

Thank you. What I did not expect is the competence on the top management. Now you can say, oh, what do you want to say with that? Do you have other experiences in other groups? And I must just say yes. The competence level of the top management is extraordinarily deep. It's wide. You have a lot of intelligence. What is different is there is a willingness to work together, but you have to explore it with them. And this is the same with the Board. The Board has carried this, which, if they would turn together in one direction, I think they could much, much achieve more than what they have passed, especially in the last 2, 3 years. I think they were a little bit influenced by the external effects, influenced by the external gossip and whatever came to them.

I think I did -- first to answer your question clear, the competence level is extraordinary. And number two, the disturbance, which was perceived, was, from my point of view, I underestimated it.

Now second question. My current perception of the group's pricing strategy, I think, and that's my perception coming from truck, they are in a very, very stringent way to forward the prices to the market when it comes to cost CVS. The truck team, they seem to be really trained on this because you know it's a very unpleasant thing, and you have to have good reasons to go to your customers twice a year and change the contract. And especially even if we have a price inflation and price -- aggressive pricing strategy based on your inflation environment, but it is not pleasant to do so. And I think there, you need really a very, very strong approach to get it through because not all of that had a price escalation process included.

So I think here, in truck, I see it is really brought forward. And you call it the conversion of cost to price. I really -- my perception that we reach sometimes more than 90%, which is good, which is really good.

In rail, it's a different animal. It's a different business logic. We spoke about it already. Here, I see that pricing is -- it's for them. They're not that used. It's something, which is not a typical animal, which you are confronted with. So I can imagine, but that's just a perception, there was a certain form of hesitation at the beginning when it came to these terms, which we are facing. And now this is getting more and more established and that is now more and more understood. Especially in the new projects, and they call it projects, the new orders, they establish it with a certain form of buffer because they know now that they can't come around the corner next year. So the sensitivity of the topic had to place in RVS more than in CVS. So this is my perception.

So from a pricing strategy, it's also very important you have the short-term effect that you get just your new pricing level through. The problem is we are B2B. On the one side, it's good because you know your customer quite well. On the other side, the customer recognize and remembers very well how you behaved. And here, you have to be very sensitive. You cannot just go through and say that it is, that are the arguments. And if you do supply, we don't supply you. You can't do this, even in our position where we are in an oligopolistic position, yes, we can very, very much managed [indiscernible].

But it comes back to you. So it's a boomerang. So to deal with it needs a lot of expertise, competence and also a lot of breadth in terms of [indiscernible] because otherwise

[Audio Gap]

You need to have strong arguments. And the second wave is underestimated by a lot of people. They say, oh, [ maturity ] goes down, but not the salaries. The salaries are not going down now. They are coming now into full potential. Now it comes in 2023. So this understanding has to be settled. So

[Audio Gap]

and I think this -- the group is doing quite well. CVS first and

[Audio Gap]

now getting used to

[Audio Gap]

This is now known. Two years ago, it was not known, especially not with RVS, not the rail. Now they understand it. Now they know what to do.

[Gael de-Bray, analyst]

Can I squeeze in a very small question on Kiepe Electric? Any update on the planned divestment?

[Frank Weber, executive]

Yes. I'll take that if you allow me. Yes, we're in good progress here. I mean it always depends on who is, so to say, then the ultimate

[Audio Gap]

We are in the last rounds, I would say, in front of crossing the finish line.

[Audio Gap]

Fill some formal regulations, which are not extremely usual. I can tell you more once it's been through in the end. But we basically already

[Audio Gap]

do what we want to sell in detail to what price, et cetera. So it should be signed rather sooner than later if nothing bad happens. But -- so it's a bit of complicated process. You will understand later on once we have done it, why it is the case, but it's looking good.

[Operator]

And the next question comes from Credit Suisse, Calvin Chen.

[Calvin Chen, analyst]

And of course, a very warm welcome and best wishes to Marc for taking into new CEO position and really look forward to working with you in the future. I have 2 questions, please. The first one is probably for Frank. So could you -- may I ask what is the main driver of your guidance of the EUR 350 million to EUR 550 million cash flow in 2023 and in particular, for H1 2023?

And also in terms of the cash flow, if you look a little bit more into '24 or even after, do we expect it to go back to the previous levels in '18 or '19 or at least in line with the new kind of margin level anticipated by the management team, please?

[Frank Weber, executive]

Thank you, Calvin. [indiscernible] are baked in, in this expectation of EUR 350 million to EUR 550 million for the pure empirical evidence that we have been seeing always also towards the end of 2022 that were just that not all levers are in our hands. If the customer doesn't pay in December, then they don't pay in the end, and you have to face reality, and your free cash flow figure is then all of a sudden lower. So that also led us to the EUR 350 million to EUR 550 million guidance range because this might in those more rigid times happen more often also in the future. That's what we, of course, also baked in a bit for 2023. That's the first thing I would say.

Secondly, of course, the supply chain situation, so to say, led to a certain level of inventories and accounts receivables and accounts payables in the end. So the whole working capital is influenced by that in the end that we are now having. I would say in absolute terms, we should not go down significantly because we have to also finance revenue growth into the next year, as you have seen. And we are seeing further inflation, also price increases on our side towards the customer. So you will, in absolute terms, first, [indiscernible] will go up in terms of absolute working capital and then comes the efficiency measures with, hopefully, a release on the supply chain side that we will get better in our processes going into the future. So that should help us bring it down a bit.

So first up, down effects, I would assume we should be able to manage it on a rather stable level going into the next year, not to -- not up, but definitely not down given all the revenue increases that we plan to realize because FX is in our inventories. Price increases are in our inventories, all that and in our accounts receivables. So I think that is somehow how we see it.

Will we get back to the previous FCF margins? Yes, that is the clear task in terms of cash conversion rate. In terms of cash conversion rate, once we have, so to say, gone through the rather challenging times of the supply chain situation, high -- extremely high inflation, we should be able to normalize our scope of days, especially and then come to cash conversion rates of 80% to 90%. That's what we truly believe in. That is clear.

In terms of absolute levels, you -- we won't be able because we have 2 years of extremely high inflation, and that counts in absolute terms. But when it comes to scope of days improvements and when it comes to the improvement of cash conversion rate, there's a clear, yes, this we will improve again, but the major requisite for that will be supply chain situation getting better.

[Calvin Chen, analyst]

That's very clear. And my second question is for Marc. So obviously, really appreciate that you share a little bit of thoughts on the margin for the midterm. Can I just follow up on that question on your midterm margin target -- midterm targets for growth? So if we simply just pull out your organic growth numbers for the past few years, probably post COVID versus the industry or rail OEMs, there seems to be some extent -- an underperformance there. And what is your thoughts on that? And do we expect we come back to an outperformance if we compare ourselves to the industry for the next few years?

[Marc Llistosella Y Bischoff, executive]

So when we speak about midterm, everything goes beyond 24 months, starts from the midterm only to have [indiscernible] definition. Everything what is in the range of 24 to 48 months is a midterm. And here, from my point of view, we absolutely think that a margin target of around 12% for trucks is something, which is achievable. So 12% to 13% is achievable for trucking industry, especially when we do all things right. I would like always to separate between do the things, which you do right, so that means also restructuring, efficiencies, standardization, optimization. And here, we have some space for improvement. So I -- so whenever I say positive, there is also indications then you could do some things better. And especially in the combination of the portfolio of the truck group, there's at least 1 or 2 areas where I see

[Audio Gap]

area for improvement. So far, these 2 are diluting the overall result. It's a fact. It's a dilution, which is -- so I would call it even stop the bleeding. So the other business units are overcompensating

[Audio Gap]

with their productivity and also their profitability, what is done by

[Audio Gap]

or it has to get lost. So in rail, we see -- we don't see this. We have here not this kind of structural changes. We have, for example, one area which has to be more professionalized that is receivable management. So the management of receivables seem to be something, which can be still improved.

[Audio Gap]

the free cash flow. And second, we see here a concentration on one market. And in 2015, the profit of RVS was given by 51% from one single market. So it was China. So this kind of cluster and this kind of concentration on one cluster, we have to avoid. And because we have reached last year 2022 and historic highs in orders, right, with nearly EUR 5 billion. So if this is the case, and China was not really contributing that over proportionally, there is a chance that also China can be normalized. China's importance can be normalized. That's number two.

Number three, China is over proportional and profitable. This is a fact. Even the business now is over proportional and profitable. So the question is, how can you compensate it? Because otherwise, you can't guarantee a profitable growth because you have said the EUR 5 billion are -- most of that, which was now taken all into the order books by 2022, so inflated. So that means where we have the right pricing to the right cost. But how you compensate China, and that is something where we have to really work on that because I call that in German [indiscernible]. This is not the [indiscernible]. This is not the basics. It's not the brownfield. That's the greenfield. That's -- we have to reinvent ourselves.

The margins of the business are still in a very, very profitable territory, but it is not, as you will say, in '19, '20, '21. Especially '18, '19, we have seen something in the range of between '16 and '20, right? That was the marginal expectation for RVS. And now we see you much, much be lower. So yes, in the midterm, it will be a little lower, but do we see that it can reach this? Can it exceed [ 14% to 60% ], what we see as an EBIT margin? Yes, it can, but it can only when we do the 2 things. First, we have to clean the whole house. And if you go outside, if you go for unorganic, we have to make sure that everything that comes in the basket, it's giving us above [ 60 ]. Otherwise, it makes no sense.

So having said that, after 2 months in the company, what you see, I have a look, a very brutal look on the portfolio. I have a brutal of look on what was bought. I have a brutal look when this what we bought

[Audio Gap]

do the next 3, 4 months. And this kind of disinvestment or rearrangement of investment is already started with Frank and the team. They started it last year, and it's good that they started because that's the right attitude. Sometimes you have to face it. We bought it for the aspiration, which was high, and it never came. Latest after [ 5 ] years, you have to face the truth. It's not coming. And that's exactly where we will accelerate in the next 12 to 24 months.

[Calvin Chen, analyst]

But if you look at the organic growth numbers, they're 5.5% to 6.5%, as you laid out before. If you look at the next 24 to 48 months, is this a number that you think is achievable?

[Frank Weber, executive]

Do you want to hear the genuine voice of the CEO or do you accept me? I would say, yes, of course, we definitely do think. And we have to be honest to ourselves, if we will be

[Audio Gap]

this year '23

[Audio Gap]

want to wipe out after several years inflation completely with pricing and not by the help of other cost measures. This should be possible because then nearly half

[Audio Gap]

and then the remaining 3% to 4%, which is not price increases year-over-year, should be organically driven via market development, our content per vehicle in truck and in rail, also, so to say, more sophisticated products over time, yes, it should be achievable based on this knowledge.

[Operator]

[Operator Instructions] And we have another question here, and the question comes from Kepler, William Mackie.

[William Mackie, analyst]

Welcome, Marc. Congratulations. Well, both directed to Marc, really. The first relates to your insights and experience around trucks and autonomous driving. When you review Knorr-Bremse's strengths and capabilities across the CVS division in the field of autonomous driving either directly through ownership or through partnership, what do you consider to be the particular strengths or weaknesses that the customers particularly see in the company? And do you see any white spots for technology that should be filled to

[Audio Gap]

digitization and autonomous driving?

[Marc Llistosella Y Bischoff, executive]

Thank you. Very interesting question. And that's the right question because autonomous trucks -- and now, of course, you know my background with [indiscernible], this will be the future whether we like it or not. And it will lead to some effects, which eventually some of the current OEMs will not like to hear. The thing is the efficiency currently within the trucking industry is in the range of 40% of the assets. The utilization of trucks is 40%. In some markets, more. In some markets, even less.

If you come to an autonomous truck, you will have truck, which can run at any time. So you will have less need for trucks because you will go up in efficiency from 40% to 70%, 80%. So that has an impact on the overall market.

On the other side, which is a good story, these trucks will run in a shorter time period, more kilometers and

[Audio Gap]

So the market size will not completely damaged and hammered by the autonomous.

Number two, the portion, the part, the value, which is then in the truck will shift away from the power pack, which is currently in the range of the power pack itself with the after-treatment of USD 25,000 to USD 30,000 when you come to Class 8, even more, when you have the respective transmission on it, then you can easily come to USD 35,000. This will nearly go down to something below 5. What will go up is the braking, steering, sensoring. And in the sensoring, we see something where Knorr-Bremse is currently not that greatly positioned.

Is this a weakness? I would say yes and no. If you go for the OEMs, they have -- the power pack will be out sooner or later. I don't say it will come the next 5 years. I don't say it will be digital, yes or no. You will have a parallel system. You will have ICEs. You will have them at least for 20 more years, especially in countries like India, Indonesia. And you will have them less and less like Norway or Germany or Netherlands, but they will coexist.

The interesting thing is that if you have this kind of electric autonomous trucks -- by the way, whether they will be fully electric or something else, that's a different question. You have, which is called -- we call it a skateboard. The skateboard itself will have no cap. The skateboard itself will be completely differently looking. And the bill of material of this truck, when you call it like that, or the skateboard will have completely different value drivers and cost drivers than it is today. But one thing is for sure, Daimler, Volvo, Scania, [indiscernible], they will fight for the existence because when you imagine you have this kind of platform, then this platform will be very differently to be used, except with a use pay. The

platform is the platform, then you must be more in sensoring, in prediction, in objectification, in managing and controlling that you must be in the future. This is why some of our peers are going completely into it. But I ask you the simple question, would you like to be completely dependent from someone who is not in your house? So that means you have no longer the power pack. You have no longer the cabin. So what you have, you have just the platform of 2 axles if you have the axles.

So long story short, I expect that the OEMs are going exactly in this kind of [indiscernible] function where they have the perception, where they have the prediction, where they have also the management. But when it comes to the execution, because you need it, mechanical execution of the system, otherwise, it does not work. [indiscernible], that's where we have to go, especially in the -- to last.

And here, we have with the EPS. We have the electronic ESP, the steering, electric power steering, that is something where we are already in a very good position. Now the problem is -- because you asked how is this coming to you? In midterm, it will be insignificant. This is my clear saying, midterm, defined as '24 months. It will be insignificant. It will be a cost driver, not a driver. And it will cost us more even in the next 4 to 5 years to come.

The question is, will the customer -- the OEMs ask for this? Knorr-Bremse has this kind of attitude that they only start with an innovation when they have contracts in site. So if there is no contract in sight, Knorr-Bremse is very reluctant to invest. On the one side, this is good because you really invent only things, which are used to be used. And you have already secured order book for the innovation you do.

On the other side, it could be that smaller companies are coming across, and they just go ahead of us. So we have to walk the line. We have to be very careful what we do. And this is where I see a white spot because it's not only the customer -- the existing customer who's asking you for the future. Sometimes it is a completely new setup, which is asking you for solution. So here, we have to find a way to go.

[William Mackie, analyst]

A very deep subject to be explored going forward. My second question is a follow-up for your comments on RVS margin. I think during your most recent comment just then, you highlighted the importance of the contribution to profits from one market. We're talking China. Could you share your thoughts on the sustainable profitability of RVS within the core European and North American markets if we were to think about it on a mid-term sustainable going-forward basis across the mix of the business?

[Frank Weber, executive]

Okay. I try to take that.

[Marc Llistosella Y Bischoff, executive]

Let's do the following. You give the first part, and I try to do the rest. Okay?

[Frank Weber, executive]

Okay. Okay. Fine. Fine. Asia Pacific, I do think that we have -- we should have in Europe as well as in North America significant potentials out of operating leverage going into the future. We have optimized, so to say, with that example of the restructuring that one of your colleagues was asking before, done optimizations and will be continuously doing optimizations on the footprint side in North America. So Europe and North America for me should be on the OE level side and our competitive advantage with our products, the excellence of our products should be able to grow profitability wise towards the future midterm.

This is what we, of course, would expect also midterm is then according to Marc. I take now a CEO's definition, of course, of midterm. Who am I to come up with a different definition? But I would say, in that period of time, we should be also able to drive through our price increases that we said. And we always said also for rail that we will, over a certain period of time, totally compensate the cost increases -- inflationary cost increases via pricing and don't need cost -- additional cost measures ultimately anymore. So I see that in those 2 markets, positive different to Asia what we just discussed before.

And please, my message is only valid if you take from the past, a normalized Russia. So coming from today's standpoint, looking into the future, this is how I see it from Europe and North America in rail.

[Marc Llistosella Y Bischoff, executive]

So if you allow me.

[Frank Weber, executive]

Yes, of course. Please.

[Marc Llistosella Y Bischoff, executive]

To be very bold already at the beginning because I was told Fortune favors the Board. Hopefully, this is true. In our U.S. and Europe, we have 4 business units. And if I'm right, they have 6 centers of competence and all the good thing with this

[Audio Gap]

And here, we can also -- like in truck, we can identify that something which was acquired in the past with high aspirations after 5 to 7 years eventually does not come to the profit line in guidance, which we had in mind. So the other question is, either we cover this up. Either we try to overcompensate it or we asked us the question, is this really substantial to the business, number one. If it is not substantial to the business, do we have spillovers, carryovers, like you can sell it together, you don't sell it at all? And third, if it's not the case, why do we have it? And what can we do out of it? Do we have the critical mass to do it right?

I think this is a part of the portfolio analysis, which we have to do. And of course, there are some things, which we would like to keep, which we would like to have. But if the logic speaks against it, you have to ask always yourself, how would we look without it? How would it look like? And if then the question is too promising, the call has to be made. And that's exactly what we do, not only overall in the portfolio of markets, but overall in the portfolio of products.

[Andreas Spitzauer, executive]

Okay. Thank you very much, and thank you very much for your participation. We're looking forward to see you next time again. And if they have further questions in between, please call us. And have a great afternoon. Thanks and bye.

[Frank Weber, executive]

Thank you. Bye.

[Marc Llistosella Y Bischoff, executive]

Thank you. See you soon. Bye.