KION GROUP AG (KGX) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus Call operator. Welcome, and thank you for joining KION Group's Full Year 2019 Update Call. Today's presenters will be Gordon Riske, CEO of KION Group; and Anke Groth, CFO of KION Group. [Operator Instructions] The presentation will be followed by a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Mr. Gordon Riske, CEO of KION Group. Please go ahead, sir.

Yes, thank you, and welcome to our update call for the full year 2019. As a basis for this call, we'd like to use our full year 2019 presentation, it's available on kiongroup.com, under Investor Relations in the Publications section. We will be presenting in 4 parts today during the call, and we will then open up the discussion for your questions. I will begin with the financial and strategic highlights for the full year 2019, followed by a market update. Anke Groth will then provide you a financial update for the full year and the fourth quarter, and we'll close the call with our key investment projects in the current year and the new outlook for the fiscal year 2020. So let's get started on Page 3 with our financial highlights for the full year 2019. We saw a very strong finish to the year-end. And on this basis, as already announced on January 17, we reached, or partially exceeded, our outlook. Our order intake grew by 5.3% to EUR 9.1 billion driven by both of our operating units. Revenue grew strongly by 10.1% to EUR 8.8 billion. We achieved an adjusted EUR 851 million in the full year 2019, representing an adjusted EBIT margin of 9.7%. Free cash flow for the group exceeded the already high prior year level and stood at EUR 568 million in 2019. And finally, we are proposing to the AGM a dividend per share of EUR 1.30. This was 8.3% above last year's dividend of EUR 1.20 and represents a payout ratio of 34%. And so in a nutshell, we saw a very strong performance despite the challenging macroeconomic conditions in 2019. So let's move on to Page 4 for the strategic highlights for the past year. We continued implementing our KION 2027 strategy with great success along its fields of actions: energy, digital, automation, innovation and performance. Starting with energy. In the summer of 2019, we announced our joint venture with BMZ for the developments and manufacture of lithium-ion batteries for counterbalance trucks in EMEA. This cooperation strengthens our position in the field of energy-efficient drive technology. Besides that, STILL set new standards with the launch of the new RX 60 electric forklift truck. With its high performance and agility for indoor and outdoor use, it is an e-truck with IC truck characteristics, and allows us to further drive the industry shift towards electric trucks. Moving on to digital. Linde introduced the new generation 12xx, a new truck generation with the launch of the 1202 IC truck as the first derivative. The key highlights of the new truck and the new truck generation is its full connectivity, making it possible to carry out over-the-air software updates to activate further digital services, much like a Tesla in the car. Dematic launched with its iQ Virtual, an emulation and simulation platform for the visualization and validation of automated intralogistics systems. Another important aspect of our strategy is automation. After only 6 months' development, Dematic launched this new micro fulfillment solution. It will help retailers, like our first installation at MEYER, address increased consumer demand for rapid online order fulfillment in a small footprint. Additionally, we are very proud that our STILL brand won the International Forklift of the Year Award in the AGV & Intralogistics Robot category with the automated LTX 50 electric tow tractor. Looking into the field of innovation. Our innovation lab for new digital solutions and business models at KION Digital Campus continue to push agile developments throughout the group. And finally, moving on to performance. During last year, we started a group-wide optimization and efficiency program called Performance Excellence. The program drives cost reduction across various parts of the business and has already contributed to our 2019 financial results. Besides that, we continued to work on our improved flexibility while expanding our production footprint in South China and in India. Moreover, we started construction of our new ITS plant in Poland. So moving on to the market update. On Page 6, it focuses on the industrial truck market and shows the global market development by region in the fourth quarter. In Western Europe, we saw a decline of minus 4.1% in the fourth quarter, mainly driven by Germany and ended up with an overall decline for the full year 2019 of minus 6.7%. Eastern Europe increased slightly by 0.5% in Q4, which was mainly supported by Russia. On an annual basis, the region showed a decline of minus 5.6%. China saw a significant double-digit increase in Q4 with 26.8% growth, which was, again, mainly driven by high demand for smaller warehouse equipment. For the full year, China -- for the full year 2019, China saw a strong growth of plus 8.6%. In North America, in the Q4 2019, we had minus 0.4%, nearly reached prior year level. Overall, however, North America declined by minus 7.6% in the year 2019. South and Central America saw an ongoing positive development in the fourth quarter with 11% growth, with Brazil, bringing a growth engine in the region, ending up at a stable level for the full year 2019 compared to the previous year. So as a result of these regional developments, the global market grew by 5.1% in Q4, mainly driven by China as well as South/Central America, and finished the year at a moderate annual decline of minus 2.1%. Now looking at KION's development on Page 7 by region. Western Europe, KION declined by minus 2.7% in Q4, which was one of the best quarters that we had in history, finishing with a very strong December and still developed significantly better than the declining market. Eastern Europe, KION declined by minus 20% in Q4 compared to a very high base in Q4 2018. In China, KION saw an impressive growth of 25.4% in the fourth quarter 2019. However, KION was slightly lagging behind the market, which was mainly driven by an even stronger demand for smaller warehouse equipment. North America, KION declined by minus 21.7% in Q4. Remember, due to the rather low market share, small changes in order intake can cause significant changes in terms of growth rate. Nonetheless, KION has still outperformed the market in 2019, with a slight decline of minus 1.3%, also including the first major cross-selling order. South and Central America grew across the region, continued for KION, and we significantly outperformed the market. So overall, KION order intakes in units slightly declined by minus 2.1% versus the record level of Q4 2018. For the full year, KION outperformed the market, especially in Western Europe, based on our strong competitive position, with only a slight unit order intake decline of minus 1.4%, and we could, therefore, strengthen our position with an overall market share of 14.2%. So moving on. Page 8, Supply Chain Solutions. As we're all aware, there is no monthly industry statistic for Supply Chain Solutions. However, you can approach the market via the growth drivers and related growth indicators. Especially for Supply Chain Solutions, e-commerce, automation and digitalization are the key drivers for this market, and 2 of them are among our strategic fields of actions derived out of our KION 2027 strategy. Let us look on 2 related growth indicators. Capital expenditure on enlarging or modernizing warehouses and on the related technologies is assumed to have increased by around 11% in 2019. Besides that, the outlook for global e-commerce market anticipates an average growth of 11% for 2019. Both growth indicators support that the market for Supply Chain Solutions sustained its growth trend in 2019, and we expect an unchanged high single-digit growth over the next few years. With this, I'd like to turn it over to Anke, who will present the financial update.

Thanks, Gordon, and also hello from my side. Turning to Page 10. You will see the key financials for the full year 2019. Order intake grew by 5.3% to EUR 9.1 billion, which was mainly supported by the very strong SCS development and the solid IT&S order intake. Based on our strong order book, revenue grew strongly by 10.1% to EUR 8.8 billion in the full year 2019. Adjusted EBIT showed a solid increase by 7.7% to EUR 851 million. Thereby, the adjusted EBIT margin decreased slightly to 9.7%, in particular driven by a mix effect between our operating segments as well as slightly higher R&D investments. Net income increased strongly by 10.7% to EUR 445 million driven by operating performance and lower PPA items in comparison to last year. Overall, full year 2019 saw a strong development, especially in light of the overall macroeconomic conditions. Therefore, our order book at the end of December 2019 was 10% above prior year level and stood at EUR 3.6 billion, which gives us an excellent starting point for 2020. Turning to Page 11. You will see the key financials for Q4 2019. In the fourth quarter of 2019, we saw a strong year-end finish and reached a growth in order intake of 12.7% to EUR 2.6 billion. This was mainly driven by the continued very strong development in SCS. ITS performed well in light of the difficult market environment. Revenue in Q4 increased moderately by 2.6% to EUR 2.3 billion, whereas adjusted EBIT declined by 10.5% to EUR 226 million, resulting in an adjusted EBIT margin of 9.9%. I will comment on the impact shortly within the segment section. Net income decreased by 32.9% to EUR 106 million, among others, due to a positive one-off tax effect in Q4 2018. Let me continue with the key financials for the segment Industrial Trucks & Services on Page 12. Order intake rose by 1.9% to EUR 6.3 billion in full year 2019 and to EUR 1.8 billion in Q4 2019, which represents a growth rate of 1.7%. This was mainly driven by our solid growth in our resilient service business. Revenue grew strongly by 8.2% in the full year 2019 to EUR 6.4 billion and by 1.5% to EUR 1.7 billion in the fourth quarter 2019 based on our strong order book at the beginning of the year. As new business grew by 11.2%, service revenues increased by 5.2% in 2019. Therefore, the share of new business in IT&S has increased slightly to 52.2%, whereas services contributed 47.8% to segment revenues. Adjusted EBIT grew significantly by 6.1% to EUR 695 million in the fiscal year 2019, resulting in an adjusted EBIT margin of 10.8% versus 11.1% in the prior year. During Q4 2019, the adjusted EBIT declined by 7% to EUR 199 million, representing a margin of 11.6%, down from 12.7% a year ago, which was an extremely strong quarter. The main drivers for the margin development in Q4 2019 were: a reversal of the positive phasing effect from SG&A and R&D, which we have been commenting on during the first 9 months of 2019; additionally, our short-term rental revenues declined due to a lower utilization within our fleet, and, therefore, impacting the margin slightly negative. Despite a market slowdown throughout the year, our IT&S segment showed a strong top line. We start into the year 2020 with an order book of EUR 1.4 billion, slightly lower than the year before. Moving on to Page 13. You can see the development of the IT&S service business over a longer term. The growth trend of our IT&S revenues continued. While the new business is fluctuating with the economic development, service sales offer a continued resilient revenue stream with an average growth rate of 5.6% at very attractive margins. Page 14 summarizes the key financials for the segment Supply Chain Solutions. The segment saw a significant increase in order intake of 14.3% to EUR 2.8 billion for the full year 2019, and plus 48% in the fourth quarter 2019 to EUR 823 million. In Q4, we saw a higher activity of pure-play e-commerce again as well as from the food and beverage vertical. Building on that, the order book for the segment reached EUR 2.2 billion at the end of December 2019, representing an increase of 24.2% versus the prior year level, which provides Dematic, our SCS segment, with an excellent basis for 2020. Revenue increased by 15.7% to EUR 2.4 billion in full year 2019 and by 6.4% to EUR 567 million in Q4 2019. As business solutions grew by 17.6%, service revenues increased by 10.7%. Therefore, we have a minor mix effect. Adjusted EBIT increased to EUR 228 million, very strong by 26.6% in full year 2019, and resulted in an improved margin of 9.6% compared to last year's 8.8%. During the fourth quarter 2019, the adjusted EBIT in SCS reached EUR 52 million and was thus able to show a margin of 9.2%. The segment margin benefited from an improved operational performance in project execution. In contrast, a negative mix effect due to a higher growth in business solutions as well as a reversal of the SG&A and R&D phasing effect, overcompensated this positive impact. In summary, SCS saw a strong order momentum, clearly confirming Dematic's leading position and, as already mentioned, starting into 2020 with an order book of EUR 2.2 billion. Slide 15 shows the 8-quarter rolling average order intake for SCS. The average annual growth rate across the shown 2-year period further increased to 11.3%. The segment continues to see strong growth rates in line with market trends. Page 16 shows the reconciliation from the adjusted EBITDA to the net income for the group. Let me highlight selected items. As mentioned before, adjusted EBIT grew strongly by 7.7% during full year 2019. Nonrecurring items, NRIs, have increased by EUR 22 million and mainly relate to reorganization measures in Turkey as well as the preparation for the implementation of levers within our Performance Excellence program. As a result, the reported EBIT grew by 11.5%. Higher earnings led to higher taxes in the reporting period. The effective tax rate increased to 28.4% in full year 2019, slightly up, mainly due to a positive onetime tax effect in Q4 2018. Overall, net income showed a strong increase of 10.7% in fiscal year 2019. This represents earnings per share of EUR 3.86 for the year 2019, significantly higher than 2018. Details on the free cash flow are shown on Page 17. Free cash flow during the full year 2019 was EUR 568 million and exceeded the high prior year level. Our operating performance contributed significantly to this increase of free cash flow. The higher change in net working capital of EUR 147 million was driven by lower contract liabilities from the SCS business. The increase in rental CapEx was lower compared to the prior year primarily as a result of our active fleet steering. Additionally, free cash flow was driven by a slightly higher operating CapEx due to our production capacity expansion in Poland, China and India as well as higher R&D investments. And in 2020, we paid EUR 10 million for the acquisition of the minority stake in EP Equipment. Overall, we saw a strong free cash flow development in 2019. Page 18 shows the net debt of our business. As at year-end 2019, net financial debt of EUR 1.6 billion decreased strongly versus prior year level, resulting from a continued deleveraging from our free cash flow. Therefore, our net financial leverage of 1.0 or 1x of adjusted EBITDA decreased compared to year-end 2018. Leverage on our industrial net operating debt at the end of December 2019 improved further to 2x compared with 2018, and we expect -- and finally, our net pension liabilities increased due to lower interest rates. Therefore, leverage on industrial net debt decreased to 3x. And with this, I hand back to Gordon with our key investment projects in this year 2020, and our outlook for the full year.

Yes, thank you. I'm on Page 20 with an overview on our main investments in the current year. The full year 2020 will be characterized by strategic investments in medium- and long-term growth. A key role in our growth strategy is the construction of a new state-of-the-art plant in Jinan in East China, which will manufacture counterbalance trucks. Similarly, we are expanding our product portfolio in one of the still fastest-growing and most important markets globally. With this, we are taking advantage of our growth opportunities in the value segment and benefiting even more from the increasing electrification of industrial trucks in China. For this purpose, we and our anchor shareholder, Weichai Power, will form a joint venture with KION holding 95%. The investment volume is expected to be around EUR 100 million, comprising the new manufacturing plant for counterbalance trucks of the brands Linde and Baoli, an R&D center, a training center as well as an administration area. The construction is scheduled for late 2020, with the full manufacturing start in the year 2022. So a big step for us in China. We have also signed an agreement yesterday to acquire one of Dematic's long-standing partners, Digital Applications International called DAI. DAI offers logistics automation software, employs 240 people, most of whom are software engineers. With DAI, Dematic is significantly expanding its digital offering, which supports the movement, storage and distribution of goods across the entire supply chain. Additionally, the new software offering can serve as an add-on for existing or entry point for new Dematic customers, while DAI's customers can become new Dematic customers. The overall investment volume will be around EUR 120 million. Due to the favorable transaction structure, only EUR 97 million will be cash effective, while further payments will be made over a period of 3.5 years. Based on the preliminary management accounts of DAI for the 2019 financial year, we expect an EBIT margin of more than 25%, resulting in a transaction multiple of less than 11x 2019 EBIT. This compares favorably to KION's trading multiple. After we have a closer look -- after we have had a closer look on the 2 main strategic investments, let me present to you the outlook for the full year 2020, which you also find in our annual report 2019, and I'm on Page 21 here. And afterwards, I'd like to share with you our thoughts circling around the coronavirus topic. So for the market environment, the overall market for industrial trucks and warehouse systems is likely to see further growth in 2020 if economic conditions stabilize slightly as expected. The ongoing expansion of the Supply Chain Solutions market and a stabilization of the global market for industrial trucks are primed to be engines of growth. Overall, the global material handling market is once again expected to grow at a much faster rate than global GDP. At KION Group, we believe this is primarily because of the fundamental growth drivers that still remain in place, particularly the fragmentation of value chains and consumers' increasing preference for e-commerce. Growth, at a regional level, particularly in the markets for industrial trucks, will again depend heavily on the economic conditions in the main sales markets. Following the market correction in 2019, we at KION Group are expecting new business with industrial trucks in unit figures to hold steady in 2020, which will be below the long-term market growth of around 4%. In 2020, demand for Supply Chain Solutions in the form of warehouse automation is likely again to be underpinned by the strong inclination to invest, seen in the main customer industries in connection with omnichannel and e-commerce strategies. In the medium term, market growth is expected to be in the high single digits. For KION Group, we can see the detailed ranges on this slide. We believe that we will continue along our growth path and aim to further improve our market position worldwide in 2020. The higher level of strategic capital expenditure will adversely affect adjusted EBIT and, thus, profitability in 2020. Please keep in mind that the outlook for the fiscal year 2020 does not take into account possible effects from global pandemics or comparable events, as a valid estimate of the resulting effects is not possible at this time. Order intake for the KION Group is expected to be between EUR 9.050 million and EUR 9.750 million (sic) [ EUR 9.050 billion and EUR 9.750 billion ]. The target figure for consolidated revenue is in the range of EUR 8.650 million to EUR 9.250 million -- EUR 8.650 billion to EUR 9.250 billion, excuse me. The target range for adjusted EBIT is EUR 770 million to EUR 850 million. Free cash flow is expected to be in the range of EUR 270 million to EUR 370 million. And the target figure for ROCE is in the range of 8.5% to 9.5%. All in all, in 2020, we will invest, for example, the DIA acquisition and the new Jinan plant, into future growth to reinforce our position as an industry and technology leader. While this will negatively impact our margin in the short term, our strategic initiatives pave the way for future profitable growth, and that means we have no change to our mid-term targets which we announced last year. Those were EUR 10 billion revenue in 2022 along with the 10% to 12% EBIT margin in 2022. Now as already said, on Page 22, the corona impact. Due to the coronavirus outbreak, we are facing several risks such as the infections in our workforce that could lead to closures of production sites as well as sales and service locations. Additionally, global supply chains may be challenging. Moreover, Chinese GDP is expected to be impacted in 2020, and consequently, we expect high single-digit decline for the ITS market in China in the full year, whereas the market for Supply Chain Solutions is marked by long-term strategic decisions and, therefore, less cyclical. As of today, we do expect that the situation will start to normalize during the second quarter of this year. So what does it mean for KION? Until today, until this moment, we are not aware of any employee, among our 34,500 employees, being affected by the coronavirus. Therefore, all of our plants globally are running. As of today, our Chinese plants do run slightly below our originally planned capacity, in a large part due to foreseen closures within our supply chains in China. For the first quarter, we assume that top and bottom line will be slightly impacted in China negatively, but we anticipate a catch-up until year-end. It does seem feasible, of course, depending on the further development of the epidemic. We've also intensively analyzed our supplier situation for Europe, and as of today, we see only limited risk for our European factories, as we have already have started with the implementation of supply chain mitigation efforts. Additionally, we have installed a KION-wide task force to be able to address the overall global risk situation permanently and followed up daily. As the overall impact as of today is not assessable, we do not consider, at this moment, any effect of the coronavirus in our 2020 guidance. So moving on to Page 23 in our financial calendar. The next big event will be our Capital Markets Day in 2 days, so on Thursday this week, where we will take a deep dive on how KION continues to lead the material handling industry and how we will keep the world moving into a new decade. If you are interested to attend our Capital Markets Day, please contact our Investor Relations team. We welcome everyone joining us here in Frankfurt. Due to the current situation, we will also offer a live webcast. For some technical reasons, it may not be able to answer questions from the room, we will certainly do our best. On April 28, 2020, we will also be presenting our first quarter results for Q1 2020, followed up by our AGM, the Annual General Meeting, which will take place on the 12th of May in Frankfurt. And until then, we look forward to seeing you at conferences and roadshows and hopefully as part of the Capital Markets Day on Thursday. With this, we'd like to close the formal part of this update call and turn it back to the operator so that we can take your questions.

[Operator Instructions] The first question is from the line of Sebastian Growe from Commerzbank.

First one is around M&A and the portfolio and specifically, on DAI. Can you provide more color regarding the business plan that is behind this very asset and if management will stay on board? And can you also help us understand how this acquisition fills the so-far-existing gap and to what extent it gives you an edge over competition? And related to it, should we expect any more such deals, i.e., does this 2027 strategy require any further bolt-on deals similar to DAI? Or would you say this is it for the time being? That's the first question.

Yes. Thanks for the question. First of all, Dematic is a long-time partner with DAI, or the other end DAI a partner. So we've been working with them for almost 20 years, and we have 150 installed sites, so very familiar thing. Logistics automation covers WMS, so the warehouse management systems and warehouse control systems. And the fact is, a lot of times, we do have to buy this in from companies like Manhattan and sometimes we use DAI, et cetera. So it does help us offer the complete range of projects. As these projects get more complex and the projects get bigger, customers don't really want to have any finger-pointing when it comes to what's working, the hardware, the software. And so that is a big driver. It simply gives us much more coverage and a much broader software offering than we had, and it fits perfectly into the Dematic iQ since we have been using them for a long time. The management, part of the unique thing on this deal and the payout structure, we do have a big part of it that does go to employees as a long-term retention program, that's why the later part is paid in 3.5 years. So we do expect the entire management team, which again is supported by a retention program to stay in place. Everybody knows each other. We've been working a long time together. I outlined a little bit of our -- we have the China project going. We have the DAI integration. We have our own running business to take care of. We have the BMZ joint venture coming up. Basically, we're not running out of things to do, to be quite honest with you. So bigger acquisitions, we don't have on the pipeline right now. However, as always, and it's been pretty consistent at KION, if there are opportunities and ways that we can technically upgrade our skills or regionally upgrade our coverage, we will always take a serious look at it.

Okay. That is very helpful. You mentioned China already. So the second question that I do have is around the free cash flow going forward and the more structural CapEx needs that are related to fostering and boosting the sales growth going forward. So how should we simply read this capacity buildout in China and Poland and India? So if the growth rate was to settle at the envisaged 4% CAGR over time in IT&S, how much headroom do you have? How many years would it carry you? And put differently, would you expect that CapEx will return to about 3% of sales by, say, '22, so once the CapEx step up is done?

Yes, I'll hand it over in a minute for exactly the year and perhaps the month when we'll get back to normalized, just kidding. But the fact is, as you know, in our industry, I've had many serious, serious customer discussions in 2017, '18. We can't put our customers and ourselves in that position ever again to always be running at the limit of capacity and suppliers and all those things. And yes, we are taking a larger step. But in China, for instance, we have less than 10% market share. This will boost our ability to dramatically increase our position in China. We have a long time already for the last 10 years had a strategy of our footprint to be where the customers are, and Eastern Europe is a big market. We have very good cost advantages. Our Western -- so Hamburg, Aschaffenburg, Châtellerault have all been running on capacity limits. So we have no real place to grow. And yes, 2020 may be sideways, but we do expect the market to continue to grow globally. So I think with these investments, we should be able to handle the market growth at least for the next 3 to 5 years. And after that, then we have to see where the market comes to pass. Now on the normalization of cash flow, please?

Yes. Let's talk about CapEx here. We think we will peak in 2020 with the CapEx for the capacity enhancements we are doing. So the years thereafter, you will see, again, a slightly lower rate. If we think in percentage of revenue, we are geared towards more a 5% in the year 2020. So that's really -- we think we reach the peak there. Afterwards, it will be lower. And if we think about 2022, that was your question, so 2022, 2023, it will be more in the range of 3% to 4% again.

Next question is from the line of Sven Weier from UBS.

Yes. The first one is on your EBIT outlook for 2020. I was just wondering if you could kind of attach a price tag to the individual measures you are taking, what it costs you incrementally on the EBIT side for the R&D, for the start-up costs for the factory so that we have a kind of EBIT bridge for 2020. And maybe also tell us how those expenditure breaks down for the 2 segments. That's the first one.

Sven, yes, thanks for your question. We can break it down without giving you the specifics for all and every number, but a high portion is related to the R&D spend. So we said we are increasing the R&D spend, and it will be roughly 3 basis points -- 3 percentage points plus additional depreciation, and that is based on the new product launches we are just doing. Gordon has mentioned the fabulous 12xx, which we have brought into the market, which is a first derivative. So those product launches are coming with slightly higher depreciation. And also, we see a lower capitalization. So that is one main effect. Then additionally, we have the start-up costs for Poland and for China, which are not as pronounced as the effect coming from R&D spend and the product launches, but they are also having a part of the overall decrease in margin.

But is it fair to say both items combined is roughly EUR 50 million in total, give or take?

So both items together are a significant part of the range we guided implicitly for. If you look at our guidance range, if you calculate the EBIT margin. So those items mentioned are a significant part of that. We also have some other bits and pieces, which we will also comment on during the Capital Markets Day. And so we will -- we also see some spend to generate further efficiencies, which also comes small start-up expenses, and we will go into those details on Thursday.

And then it's probably fair to say that the real view, like 90% of that is probably in trucks, right? So it's really just a fraction for SCS of those expenses?

That's absolutely right, yes.

And you confirmed the 2020 outlook. So should we also expect you to give us a more proper EBIT bridge than how you will get there to the 10% to 12% or -- on Thursday or...

I think you will understand it very well after listening on Thursday to Gordon's and my part of the presentation.

Okay. And lastly, just on your revenue guidance, just to square that up, especially on SCS. The low end of the revenue guidance is only EUR 2.5 billion. The low end of your order intake guidance is EUR 2.8 billion. Last year, you had EUR 2.8 billion. So is it really the lead times of the orders that you have won in the second half of last year that stretched into '21 that is causing this? Or why do you have such a low end of the revenue range for SCS?

Certainly, the lead times, big projects.

Okay. So they've stretched -- the things you got in Q4, they stretch also into '21, yes?

Some of those, yes.

Yes, definitely. We have seen our order intake is also geared towards larger orders throughout the year. I think we spoke about that also during Q3. So we have a higher percentage of larger orders, which, of course, also then do spread over a longer period of time.

Okay. So you're not really taking any provisions here for potential delays in the execution? So it's just the itinerary of those orders that you have?

Yes, absolutely.

Next question is from the line of Akash Gupta from JPMorgan.

2 I have 2 questions, please. My first one is on China. Can you help us understand how big is China for you in 2019 in orders and sales? And maybe if you can give us some idea of segment breakdown between SCS and IT&S. And within China, a follow-up from your earlier remark that IT&S or IT&S demand could be down high single digit. Is that comment for the full year or for Q1?

Yes. The China revenue, not units, units are higher. The China revenue is about 7.5% for the market. About 80%, 90% of that is ITS. So that is the bigger part of it. The high single digits, we do expect in the first quarter. Well, we know it's going to be that way in the first quarter. I think for the full year, we'll have to see how quickly that can be recovered. We do know, in China, things can go up pretty fast. I'm amazed that our own factory now working and so forth after this period of being closed. So that is for the first quarter, it will definitely be a double-digit negative impact in units of order intake for the market.

And my second question is on SCS. I think one of the key surprise today, for me, at least, was your guidance on SCS order intake and given 2 very strong years of double-digit organic order growth, you are still targeting a very healthy level of growth in 2020. So question is that how much visibility do you have from existing pipeline? And maybe if you can talk about whether you expect more orders to come in first half versus second half. And also a potential risk from customers might be delaying their plan if this coronavirus-related uncertainty increase, particularly in Western markets.

Yes. I mean we haven't -- order pipeline, coronavirus, that's a little bit difficult at this point to calculate. Don't forget, we have a big part of the business in North America, so more than a half, and that's still going strong. In Europe, not too much effect at this point. The fact is that the level of projects that we have in the project pipeline are very strong at this point, so we feel confidence with our year 2020. Certainly, our biggest factor is making sure we have enough people to manage all this stuff because we -- as you said correctly, we have grown double digits since we bought the company in 2016, but from -- strictly from the market, from the market behavior, customer behavior at this point, project pipeline, we're very well filled up.

And yes, maybe to add on Gordon's remarks. Additionally, we haven't seen any slowdown in activity during January and February. So it was a very -- 2 good months for SC&S (sic) [ SCS ]. And we also haven't seen, of course, up until now, customers dropping out of the pipeline. So it still seems that the market is very healthy and not affected, but let's see how that goes forward, of course.

Next question is from the line of Martin Wilkie from Citi Research.

This is Martin from Citi. The first question is to clarify the commentary around the coronavirus. You mentioned earlier in the call that no impact for pandemic could be included, which is obviously very understandable. But just in your slides, you have said that there's no impact included, but you have already assumed that China will be down. So I just wanted to double check that China unit and market unit has been down for the year is the base case that's embedded in your guidance. And it's just anything that's sort of worse than that, that won't be included. That's the first question.

Yes, we haven't included any effect from coronavirus into our guidance. That is absolutely correct. And we said that we expect China to be affected in the fourth quarter. But also if during Q2, the situation normalizes, we expect to catch up with this.

So effectively, a catch-up over the course of the year is what's reflected in the guidance?

That's correct.

Okay. No, that's good. And the second question, you talked about getting a pull-through order, I think, from IT&S because of Supply Chain Solutions. I think in the past, you mentioned these are relatively rare because it's only certain customers that could do this. If you could just talk about how big was that. I mean when you do get some of these orders that come from customers of Supply Chain Solutions, how important is it, either as a potential of quarterly order intake or so forth? How big can that be for the IT&S division?

I mean the one that I mentioned, I think we've mentioned in prior report was Menards with around EUR 35 million or so, so very substantial order and hundreds of forklift trucks and fully automated trucks and everything that goes with it. So there are some important cases, and we do have a number of offerings we're working on at the moment in North America for combined offerings with trucks and automation.

Next question is from the line of Felicitas Bismarck from Deutsche Bank.

Yes, I have a follow-up question. So you mentioned on SCS, but could you also mention if you have seen any impact so far in investment decisions in ITS outside of China, so mainly in Europe, of course?

Yes, not due to coronavirus and so forth. As I say, our sales and service teams are out there. But with the products that you can deliver in 6 weeks, so the visibility is quite a bit shorter, but as I say, so far, so good. January was an okay month. I don't have February numbers yet. And we don't report on a monthly basis. But so far, it's okay.

Just you don't have the feeling that people are German angst and scared to invest at this moment in forklifts in any kind?

Every 24 hours, the picture, if you watch the German news and so forth, it's a little bit -- yes, let me get off of this. Yes, it's probably a bit overreact, but we do have to be careful, especially with our employees and so forth. So as I said, this situation is developing rapidly in Europe. If I look towards China, though, seeing our region in Xiamen in the last 2 weeks, taking the danger level from Level 1 then to Level 2, and just 2 days ago now, to Level 3, which is absolute low risk. No new cases in Xiamen, where we have one of our main factories, that's pretty encouraging.

Yes. And the second question, are there any like specific parts or components that you are watching very closely and are concerned that they might run into shortages once the inventory of your suppliers or your sub suppliers is worked through? Is there anything you're watching specifically?

We have a daily corona update call with all factories. We have a task force for purchasing [14 40,] so that's not so long ago. We have 80 part numbers that are on the list and being monitored and they're now covered until May. We have 10 part numbers where we don't have full confirmation, but we have all mitigation efforts. We have only 1 single supplier right now in the so-called banned zone in Italy. And there, we also have a mitigation on it. So I would say we're pretty well covered throughout. Just as an aside, we had a topic last week of windshield wipers missing, 250. We got those back in from another supplier. So we do have teams working around the clock scanning hundreds of suppliers. We have, as I said, that was 80 critical parts that have been now worked down to 10 critical parts. So I do believe, at least as things move on, we're able to reallocate part sourcing to other suppliers because we generally have dual-sourcing strategy or we can make some of the parts ourselves. So I think we're pretty well set up there.

Okay. Just 1 clarification. What does reorganization measures and preparation for implementing levers within efficiency program mean actually? What kind of thing is it?

Yes, that's specific for we are implementing as one of our performance [ moves ] a shared service center, a shared service center for finance and accounting services, which will be established in Poland. And therefore, we have reorganization, restructuring expenses. And in addition, we have mentioned Turkey, where we have some leasing restructuring expenses, which are also part of our NRIs. But specifically for Performance Excellence, it's the establishment of a shared service center in Poland.

Next question is from the line of Katie Self from Morgan Stanley.

Just 2 for me. Firstly, I wanted to ask around the short-term rental fleet. I know you had mentioned, Anke, that in Q3, and I believe, again, in Q4, you had a slight mix impact from a decrease in revenue from the short-term rental fleet. Just wonder whether you could give us an update on how that's been faring early into Q1? And also what measures you've been taking around the utilization of that fleet or the investment levels in that fleet? And then just the second question I had was around pricing, whether you could just confirm to us that KION has gone ahead with its standard sort of implementation of a new pricing level through December? How that was received by the market? Whether there's any changes related to the current kind of macroeconomic conditions?

Yes, thanks for your questions. With respect to short-term rental, indeed, we spoke about that in Q3 and the slight impact on margin and same is true for Q4. And what we did, we adjusted our fleet. So that's the reason why we have lower short-term rental CapEx if you look at our cash flow statement. So therefore, we expect utilization rates to normalize during 2020, which will then have a slight positive effect again. And due to coronavirus, of course, the situation is a little bit more unclear with respect to short-term rental because we are renting out trucks to trade fairs and big events. So if more of those events are getting canceled, of course, it could have an impact during 2020, so we have to further observe that. But again, we have taken action, we have reduced the short-term rental CapEx into our own fleet. So normally, utilization should go up again during 2020. Your second question was with respect to pricing. Yes, we have put the normal price increase into place. You know that we normally do have a range of 1.5% to 2%, which is our normal price increase, and I can confirm that also for the year 2020.

Next question is from the line of Daniel Gleim from MainFirst.

First one would be on the global end market outlook. I understand you guide for flat industrial truck market in 2020. You shed some light on the Chinese end market assumption informing that. Could you also talk about your European end market assumption to make it a little bit more clear what you think will happen to your most relevant end market in industrial trucks?

Yes. We said part of our guidance is that we would be at the lower -- below the average of 4%, so we do expect it to be somewhat slower year than prior years. It's clear. And one of the biggest effects certainly is everything that has to do with automotive and automotive supply. This transformation of moving from cars driven by engines to cars driven by batteries and many companies exiting out of engine and diesel engine manufacturers, especially in a problem in Germany and slightly less in France. And that is a customer segment that we're not fully dependent on, but it is a big market that has a lot of small companies that are attached to that in one way or the other. So that is the one that is -- will certainly affect the market the most. All the other ones, being e-commerce, food and beverage, fashion, chemical and so forth are also affected by the automotive industry, but to a less degree than the effect of automotive. That would be the single biggest one that affects us.

And if you think about the overall impact on the European market for forklift trucks for 2020 over '19, would you assume a slight decline or more flattish year-over-year? What is your basis assumption that informs the global outlook being more flat year-over-year?

Yes. European market, we have assumed more flattish. This is absolutely the case for 2020.

Very clear. Maybe 1 question on the margin dilution from investments in 2020, do you expect a steady saving throughout 2020? Or will it be more back-end loaded in the second half? Is that something you could provide a little bit more color on?

With respect to say -- yes, I would rather say it's a flat phasing honestly. There can be some deviations, but generally, it's more flattish phasing.

Very clear. And lastly, and apologies for belaboring the point, I understand it's really tough to make any assumptions about the coronavirus impact. But do I summarize your statements correctly that, at the moment, you're monitoring this situation, making precautionary actions with regard to the supply chain, but you yourself, you haven't engaged in any measures to prepare for potential corona impact. So the reduction of the rental fleet would have happened all else we -- anyway, so all the statements you made are not related to corona?

No. We have taken great measures to prepare our supply chain because in China and other areas, Italy and so forth, there were potential disruptions. We have mitigated most of those. As I said, we only have a low number of suppliers, which are affected or which we have not fully mitigated. The other thing is, of course, our own employees, we have released travel guides and restrictions and how to do things, service engineer trainings, Q&As for our people, communication all over the world. So all of those normal measures. We will be providing enough face masks and disinfectant materials, especially to our Chinese employees. That has been going on for weeks now.

Okay. So I'll ask a question maybe more specifically. You haven't started any capacity adjustments in your European plants. That is not something that is in the making?

No, we haven't.

As a matter of fact, we're working on Saturdays to still catch up on some things.

Yes. And you also asked with respect to the short-term rental fleet. Yes, that was in the pipeline anyhow. That is not due to the coronavirus. So we have reduced, in 2019, our CapEx into the short-term rental fleet in order to increase the utilization rate. So that was done already. And we expect corona more to affect us during Q1. And as we said at the beginning, so we do expect for normalization during Q2. And so supply chain was really the greatest act in order to secure our supply chain. And China will -- or is affected during Q1. But as we also said, we expect that we can catch up during the full year 2018 -- 2020 again. So that's, in summary, the coronavirus for us at the moment.

In the interest of time, we have to stop the Q&A session, and I would like to hand back to Mr. Gordon Riske. Please go ahead.

Yes, thank you all for participating in the call. We look forward to seeing, hopefully, many of you in the Capital Markets Day and then our next report for the April date of releasing Q1 numbers, and thank you for attending.