KION GROUP AG (KGX) Earnings Call Transcript & Summary

[Audio Gap] For additional questions. Thank you in advance for your cooperation. And with -- Stuart, please start the Q&A session.

[Operator Instructions] The first question is from the line of Akash Gupta from JPMorgan.

My first question is on the balance sheet that if I do my calculation based on your free cash flow guidance and new EBIT margin, it looks like the leverage is going to be very high, something you didn't had since 2016 when you closed Dematic acquisition. Can you talk about need for capital increase to protect credit rating? And are you also considering delaying some of the CapEx and suspending dividend next year? That's question number one.

Sure, Akash. I appreciate you bringing that question up right at the very beginning. We are very comfortable with our capital position, and we don't see a need for a capital raise. First of all, we got access to multiple debt capital sources and have significant underdrawn facilities. A couple of examples. We recently enlarged our commercial paper program up to EUR 750 million. We also, in the second quarter, added 3 bilateral loans each of EUR 100 million and maturing between '20 and '24. I think the most important thing to understand is that our business model is very intact. And we're generating a positive EBIT on an underlying basis, and that's a tailwind for the cash position. The primary reason for our negative cash flow development is increase in working capital. And that's attributed on the ITS business to the unfinished trucks in the semifinished conditions we've been describing. And we have deliberately chosen to build up our inventory on steel components and electronic components, which are very difficult to get in order to give us a good resilience. And on the Supply Chain Solutions side, we're not able to reach project milestones as planned based on material deliveries coming, and that affects our ability to invoice customers. Being able to work through these over time gives us a working capital expectation that remains higher than in previous levels, but we are comfortable that we can reduce that over time as we drive down the work in process, and we invoice the milestones. You asked about cap, so we do not see a need for work -- for a capital increase, and we're not in a position to be concerned about breaching covenants. We've got 2 investment-grade ratings, and we're in a good way on that. You asked about CapEx. The CapEx is something that we are not changing our strategic capital plan. We will continue to drive our strategy as we have it. The timing of some CapEx, of course, will be demand and capacity related. We have a dividend policy in place, and we expect to stick with our dividend policy and come in within the range we have in our dividend policy.

And my follow-up question is on your cost base. If you look at the orders in the second half as implied by the midpoint of guidance, you are indicating high-teens order decline in the second half. And on this weak demand backdrop, when you look at your cost base, and I see wages last year were roughly 25% to 30% of your cost base, and given the inflationary environment, they will go next year. Can you talk about cost-saving plans that you think might be needed to restore profitability? Or can you sail this storm without any big cost-cutting plan?

Akash, we are always conscious of our costs. I think you're talking about sailing the storm, and let's talk about the tailwind we've got. Both of our businesses have a very significant order book at this point in time. And our SCS business has a good pipeline going forward. There may be some timing issues on customers making choices on when they start. And we know that our project portfolio has large projects in it, and it's lumpy. So the timing of those starting and stopping. But we've had below EUR 1 billion and above EUR 1 billion over periods of time. We've got a good order pipeline, and we've got a good order backlog. And that will give us some good tailwind going into times of perhaps reduced demand in the market. We have an ability to flex our costs as well should we need to. We're very cost conscious and the opportunity to flex our labor with short time working, for example, or in our SCS business, we have contracted labor. So we can flex our abilities. This is a self-help opportunity, Akash. We can drive our profitability and drive our business performance, and it's about improving the process of -- improving the execution and the profitability on our project execution. And we're in the process of doing that. So we can adjust our costs as necessary, and we have a good backlog going into the next quarters.

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

The first question is on the backlog of legacy projects. And I was wondering, so those with the cost issues, what percentage of those orders are still going to be shipped during the remainder of the year? And how much does actually spill over into next year and '24? And the basic question also, do you feel this is now ring-fenced? Do you think that -- do you have all the costs visible and locked in? Or could we see further additional charges? That's the first one.

Sure, Sven. Thank you for that question as well. In August, we saw higher costs on a number of projects, and that led us to initiate this further in-depth assessment on our project portfolio. And as I explained, we saw significant cost increases on the material, labor and logistics side, and did not have contractual protection in place there. And the supply chain disruptions were driving material not being available and having, in total, significantly higher project costs. As you know, in our project business, we use project accounting, and that's a percentage of completion basis. In this quarter, the assessment of those existing projects identified higher costs from those disrupted supply chains, material costs and labor scarcity. And we see that intensifying, and we see it remaining longer than previously anticipated. Therefore, in the third quarter, we booked a cost catch-up in the current quarter based on the proportion of completion of these projects. And given that a large amount of the projects had a high percentage of completion, that's the majority of the effect. It's important to understand that, that increased project cost reduced the margin of those projects. And to the extent that those projects aren't yet completed, they will go into the further quarters and continue to depress margins on those projects until they get completed. As those new projects or as the old projects get replaced by new projects, however, and those new projects are protected by price escalation and cost escalation clauses in the contracts and benefit from the improved project management processes, our profitability -- we will drive that profitability increase over time. You understand, please, that our projects operate on 6 to 24, sometimes even 36 months. The projects we evaluated at high percentage of completion have been in or we sold them, and we've been working on them for the last 6 to 24 months. And there's a large amount we're at high percentage of completion, that's the significance of the third quarter reduction, the catch up. Going forward, we expect to operate at those lower margins until they're finished.

Okay. I understood. But is it still a lot that is to be completed next year and it's going to have a meaningful impact on next year's margins as a whole? Because on the one hand, you say these projects are close to completion, and that's why there was such a big amount. On the other hand, you have long lead times. So I just wonder how meaningful this could still be as an impact on the P&L in 2023?

Sven, I do expect that these projects will roll over into the next year and the impact of those will [ roll over ] into next year.

Good. And the second question is just when we think about underlying demand, right, you made a few comments in the press release. I think a lot of that relates to high comps, right? In SCS, we had super high comps in Q3 last year, which was always an ungrateful comp to compare with. In trucks, you have a super high comp in Q2. So we would have expected a normalization against that anyhow without a step change in what's going on underneath in terms of real client demand. But have you also observed, now in the last 2 months, a critical change in the underlying demand? You sounded like the pipeline in SCS was still sound, but have you observed any of that?

Well, you're very right to be pointing out the high comps. So our third quarter SCS orders last year at EUR 1.4 billion was an all-time high and EUR 830 million is we're projecting this year, we think could be -- it's above EUR 1 billion, it's below EUR 1 billion over time. We think that's still in a normal way. The pipeline, as I consider -- as I continue to see it, it remains good. The timing of customers starting those projects could be pushing out. I think that there is a normalization on the ITS side and no critical changes there. And as you know, a lot of our revenue in SCS, over half of it is service revenue. And in the new truck business, a lot of those are on lease and they roll over. And so we see a normalization from -- on the truck side, a very, very strong first half. And we see on the third quarter, the tough comparison. The overall market, we see as not a significant reduction in the overall market. It could be timing on some of the large projects, and that could be this quarter, next quarter, it depends. Those are lumpy and they're getting bigger. But in general, we see a good pipeline.

And so the cancelations were also kind of an exception in SCS, it's not a kind of a new normal that we should see more often?

No, that's a very good point. It is quite unnormal to have a cancelation on the SCS business. These customers are tying those decisions to their long-term capital plans and their long-term strategies. These were 2 very specific cases. It's not a normal, and we don't expect a lot of that. Thank you.

Next question is from the line of Will Turner from Goldman Sachs.

I have a couple of questions. The first one is on the earnings and the free cash flow guidance for beyond 3Q. So obviously, if we take the midpoint of your new full-year guidance, you're assuming that earnings are going to -- or margins are going to improve for both ITS and Supply Chain Solutions in the fourth quarter. Could you just walk us through a little bit about your assumptions there on why that would happen? And then also how you're expecting the working capital to move in the fourth quarter as well?

Sure. Let's pick it up one at a time. The timing and the adjustment in the third quarter is a percentage of completion effect significantly in the Supply Chain Solutions business, and we've gone through that. The expectation on the ITS business is a function of having what the price increases that we've talked about in previous quarterly calls in place sequentially and increasingly over the course of this year, and those will be flowing through our P&L in the quarter to come or in the quarters to come. You asked about net working capital. Obviously, it is at a high, and we're working on driving that and managing that very closely. We have expectations in each of our businesses to manage that down over time. I think that it's an overall as we get into a new normal, the new normal net working capital will be older than a previous normal net working capital. But as I say, the interim period of driving through and driving down our work in process and getting our milestones completed on the project side will improve the net working capital as well.

Okay. Sure. That makes sense. I mean, on the Industrial Trucks business, but will you not still be delivering in the fourth quarter trucks that you booked from before your price increases that you introduced in the second quarter? So ones from maybe 4Q '21 and the first quarter?

Yes, Will. I mean, we have explained that we made an adjustment at the beginning of this year. We made an adjustment in April. We made an adjustment again in July. We've been doing that on a quarterly basis. And so over time, the trucks from -- sold last year that were not benefiting from those price increases will diminish. And the trucks that were sold after those price increases will increase in the proportion of the trucks being sold. In addition, I mean, we've talked about that as well. And we talked in the second quarter, the order book was not taboo, and our team has been working very carefully and closely with long-term valued customers to make adjustments in the existing order book, and that will make some benefit in the rest of this year because of successes in those discussions with good close customers.

Great. And then the second question, a final question for me. Going back to what Akash was mentioning at the beginning. When you do use your new guidance and you look at the leverage, you are on the net operating industrial debt to the industrial EBITDA, which I believe is what you measure your covenants against. It is the highest it has been since 2016. And there was a number of equity raises that came after that. Could you please let -- discuss what your covenants are? I believe you've got some for both an RCF and the bonds. And if you were to breach one of them, what would be kind of the implications?

Sure. Look, our current financing does not depend on the covenants. The RCF functions is a backup line only, and we have investment-grade covenants. And because of the investment grades, our covenants are not being tested. Our current instruments, we've got promissory notes. We've got commercial paper. We've got bilateral bank loans. We've got bond and very significant amounts of undrawn facilities against those multiple debt capital sources. So we're good on that, and we don't discuss the specifics of our covenants.

Next question is from the line of Sebastian Growe from BNP Paribas Exane.

Sorry for any background noise, I'm traveling. The first one is around the group margin target in the midterm. I was just really struggling with how can you be confident at all, quite frankly, with all very midterm margin targets after what has happened year-to-date and particularly at Supply Chain Solutions. And should we rather consider this target as a peak level instead of through-the-cycle ambition? In the background of that very question is that both segments have probably lived in the best of all worlds from, I think, a growth and also pricing and thus, margin perspective for quite a long time. So we've also heard Daifuku, I think, taking a more cautious tone on the U.S. market. So, yes, your thoughts around that what would be very much appreciated. And then I have one more.

Thanks, Sebastian. Yes, look, Sebastian, our business model is very much intact. Our industry benefits from very strong megatrends. We've talked about those. And we've got very good innovation power and very good state-of-the-art offerings. We have confidence in these targets, and we have our confidence in our ability to do that. And our expectation of getting to 10% to 12% on an overall basis with more than 10% in ITS and 12% to 14% in SCS, we confirm. We're working on the timing of those given the uncertainty right now.

But you would agree with eventually the observation that pricing has probably gone extremely well in the past, I think. That was eventually simply not that much of a discussion. Still, I think the market was really on fire. So everybody was just keen on securing those early projects. So it was simply a seller's market, quite frankly. So things have changed. The market is, I think, more consolidating, et cetera. Do you think that has no impact really on the business? And how one should think about future margins?

No, I don't share the view that pricing has been a big deal in the past. Pricing was very, very moderate in the past. In my observation, it was too moderate in the past. And we have put up pricing, and we've done that consistently. And I was watching very closely to see if the market continued to take demand after we put up the pricing, and it still does. And we've got a good order book on that. So my expectation is that we are able to drive and achieve these midterm targets. The timing of that will be coming back to as we have better clarity with less economic concern.

All right. Yes, we see all this playing out. And the other question I had is more personnel related and the succession, obviously, of the CFO. It's now about 7 months since the announcement that Anke was leaving the company, and I think the current situation probably signals ever greater need here. So can you comment on where you stand today and by when we might expect an announcement? And equally important for me has a profile of the ideal candidate eventually changed after what has happened?

We got a search ongoing. It continues to be in progress. And we'll be coming back when we have news on the CFO search. We don't have anything to report at this point in time.

There's no due date, so to speak, until when you will have that cleared, say, by end of the year or so, it's entirely up, is it the way to look at it?

Sebastian, the search is underway. And when we have news, we'll be bringing that news.

The next question is from the line of Nicholas Green from Bernstein.

So I'd like to understand whether the EUR 3.8 billion SCS order book, is it facing specific problem projects or whether there is a wider spread commercial issue? So I've got a series of questions to try and help dimension that problem. Any color you can give would be helpful, please. So firstly, approximately how many large contracts are sitting in that order book? How many are over EUR 100 million? What percentage of the total would be top 10 comprise? Secondly, did yesterday's write-down put certain of these contracts to 0 margin? You said you reduced the margin. But can you confirm, are they now at 0 margin? How many projects there are we talking about? And specifically, you mentioned they are quite far advanced. Are you able to shed light on the percentage of completion? It does matter quite a bit whether that's 50%, 75% or 90%. Thirdly, can you share with us what share of the order book is likely to be less than 30% complete, but which was also one prior to the improvement in your contractual terms in Q2 this year? And then finally, which is what they all amount to is how should we think about the level of the embedded margin sitting in this quite large SCS order book?

You got in a lot of questions there, I'm going to ask you to take those offline with our IR department and do that bilaterally. Look, we've got a -- the order book that we've been describing is an order book that we built over time. We have 6- to 12- to 24- to 36-month projects in there. And we put in place cost escalation, price escalation clauses during the second quarter going forward. So you're asking about the mix in there and you're asking about the profitability. In times of less uncertainty, not an issue. In times of uncertainty, and that's what we are in now, and we just -- we assessed that carefully in August, and we adjusted the project cost in August. And that was a clear and fair assessment of that. And so the margin in that order book will improve based on the contractual escalation clauses that we put in place going forward. And as those projects -- old projects run out, the new projects run in that will make a margin -- a positive margin impact. The biggest impact was in the third quarter on the catch-up.

I think dimensioning the risk of the order book, it will depend on how big the quantity of work is between the ones you've just written down to low margin, and the new price benefits coming in. You say you had won the work over the last, I think you said earlier in the call, 24 months perhaps. Well, if the price contraction improvement only began in Q2 this year, there could be potentially an awful lot of work in there, which wasn't that far advanced and therefore, maybe didn't suffer much of a margin write-down and will, therefore, be a significant profit risk over the next 12 to 18 months. So I know you can't answer that directly, but can you at least tell us basic ideas of how many contracts are in this order book? Is -- could you tell us the top 10 total percent -- rough percentage of the total order book? Just to help dimension the risk that we're seeing here.

No, Nicholas, I'm -- we don't dimension that in that kind of granularity, and we haven't done that, and I'm not going to do that today either. Some of those projects are over EUR 100 million. Some of those projects are under EUR 100 million. There are big ones in there. There are small ones in there. It's a mix. It's a mix on geography. It's a mix on size and very excitingly, [Audio Gap] there's good diversity in there. The timing and the profile is -- the granularity we don't get to.

Next question is from the line of Gael de-Bray from Deutsche Bank.

I apologize in advance to belabor the point on the balance sheet. But I'd like to compare today's situation with 2020, if possible. I mean you will likely finish 2022 with a debt pile that will be likely pretty similar to the one you had at this point in the year 2020. And back then, the group raised equity to regain some financial flexibility or to potentially get prepared for acquisitions. So I'd like to understand from a strategic perspective, what's different today? What's different this time that makes you consider you don't need a capital increase? So that's question number one. And maybe associated to this, could you just give us some indication on what you consider is an appropriate or a targeted financial structure for the company? And sorry, the second question is about the working capital buildup. That -- I mean it would be great if you could give us a sense of how much, roughly speaking, how much of this year's working capital buildup could possibly reverse out next year?

So Gael, let's pick up on some of those, and let's choose not to answer some of those. I think it's -- there's a big difference between 2020 and 2022. I think in 2020, there was very, very significant uncertainty still in the market on the pandemics. And at that time, our ITS order book was not near the levels that it is now. Very significant difference in visibility on orders and activity going forward, and very significant visibility and perception in the market on the pandemic. I repeat, we're very comfortable with our capital position, and we do not see a need for a capital raise. We've got multiple debt sources -- debt capital sources and significant undrawn facilities. So we're comfortable on that. We've got 2 investment grades and our covenants are not under pressure here. We've got a good financial situation and plenty of access to financing. So let's make it clear on those points there.

And what's the targeted financial structure over time?

Yes. I mean we're comfortable on the current status, and we're going to continue on this level.

Okay. Okay. Understood -- sorry, and the question on the working capital buildup and how that could...

Yes. Let's talk about that one. I mean, we built up the working capital in 2022, and we expect that part of that will remain for some quarters because times of -- just-in-time supply chain deliveries are times when we all look back at, and we enjoyed very much, but the supply chain interruptions and the supply chain uncertainty is causing people all across the industry to carry more working capital in terms of inventory right now. We built up specifically steel and electronic components because they're hard to get. And when you can't get them, we do get them to secure production. So I expect that the working capital will remain on a higher level going forward than it did in the past. As we get more material in and are able to finish further trucks, and as I described, we've been able to reduce that 12,200 to less than 8,500 by the end of August. Our team is very focused on that. And as we build through that -- as we drive that inventory down, that will release working capital. Let's also be clear, if you're still waiting on parts, and they're not showing up on job sites, you cannot get to the milestone that releases the cash when you can invoice at that milestone. And there's some frustration on -- frustrated deliveries that don't allow the milestone completion. As we get those milestones, as we finish those projects, that will reduce the working capital. I mean let me remind you, our Supply Chain Solutions business is in a normal environment got negative working capital. So this is an unusual situation, and we're managing through this, and it will, over time, reduce the working capital needs.

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

Rob, could you scale the cost catch-up effect in Q3 in the SCS segment? What was the roughly size? What I'm trying to get here is how the underlying margin is there in the third quarter compared to the 4% you previously alluded to?

Daniel, I think that -- I mean, Sebastian said it earlier on, we're not done with the third quarter yet. And so let's wait until the 27th of October when we come back with our third quarter review, and we'll have that in granular detail as -- when the quarter is finished.

Maybe as a follow-up. If I look at your full year guidance and the rough indication for the third quarter and therefore, the first 9 months, the implied fourth quarter, is the reported number there an underlying number? Or do you expect further positive or negative catch-up effects in the fourth quarter? I mean are you done with this exercise? Or did you bake into your guidance another catch-up exercise in the fourth quarter?

Look, the assessments we made and we make every month are free and clear and fairly based on our best understandings and best expectations. So the third quarter adjustment in the fourth quarter going forward are based on our best understandings and our best assessments. I think over time, we will see, as we described, the price impacts -- the impact of the price increases that we have put in place sequentially in our Industrial Truck & Service business. And we will see, over time, the impact -- the benefit of the price escalation clauses in both of those businesses, including on the contractual or the project contracts in our SCS business as those new projects come into production over time or go into execution over time.

But could sequential further completion of projects mandate another round of cost catch-up effects, in theory is that possible?

There's a percentage of completion accounting, Daniel. And at each assessment, you give it your very best estimate based on all of the understanding and the current prices and your expectations on futures. So you understand the theory just as well as we do. In theory, yes. In practice, we gave it the very best assessment given everything we know and our expectations on the future.

Very clear, apologies for belaboring the point. My second question is probably more straightforward. Is the order intake guidance for the third quarter and the full year net of the order cancelations? Or is this a gross number? And secondly, what was the magnitude of cancelations in the third quarter?

As I said, Daniel, there were 2 projects canceled in the third quarter. That was a very unusual thing. Of course, we report net order intake. And the 2 cancelations were netted out of the third -- will be when we finish the third quarter and report it, will be netted out of the third quarter order intake numbers. So clearly, they're net.

Next question is from the line of Philippe Lorrain from Berenberg.

I would like to bounce back on the last question regarding the order cancelations. So I understand 2 projects netted out of the order intake in Q3. So that suggests that these were booked first in the order intake either in Q1 or Q2, is that correct?

Yes, that is correct.

Okay. And could you tell us roughly the magnitude of these cancelations just to get a sense of how much is missing and how big these issues are?

No, we don't give specific magnitudes on those. But I would say, 2 very specific and -- specific events based on circumstances of the customers and understandable and quite unusual and not practice. As I say, these are connected to long-term capital plans and the strategy of their customers and the benefits that our Supply Chain Solutions installations and solutions put in place for our customers is strategic for them and gives them competitive advantages. So that's why they're making those investments.

Yes. I'm understanding from your -- the way you answer my question, that it's probably only one customer behind 2 orders. Is that correct?

I said customers, and that means more than 1.

Okay. And also I've got a question regarding your contract structure. So do I understand correctly that all the contracts you had in the past before Q2 were under fixed price agreements? Or just all new contracts now featuring the price escalation clauses? Or are you also revising existing contracts to feature price escalation agreements when they were not featuring this previously?

No. Contracts -- when we sign the contracts are the contracts that we go then put in place and execute, and so there's very, very little revisions on those. So on an ongoing basis during projects, there are change orders based on changes in scope. And clearly, there are discussions about changes in costs, and those are dealt with on a change order basis. But the contractual conditions don't change. That's why it was so important in the second quarter to introduce the price escalation clauses and give us that kind of protection. Because if 24 months, there's no change in inflation and no volatility, it's a different story than 24 months into a project with the current volatility and the inflation situation. That's why we did that. And almost all the contracts we've been able to -- we have closed since putting those in place include these clauses. That's part of our governance.

Okay. And before that, none of your contracts had these price escalation clauses or some of them had already?

Very few. The practice in the industry was that those were not part of contracts in previous times.

Okay. Perfect. And I've got like one more topic regarding free cash flow and debt. So I appreciate you guide for quite a significant cash burn, which is understandable for the remainder of the year. How should we think about the gradual trajectory in free cash flow beyond the year-end. So do you think because we are going to see probably a normalization in the net working capital, and perhaps as well, like in the earnings base, we should be already positive beginning of next year? Or should we expect the cash burn to continue probably into next year for 1, 2 quarters before reversing back into positive territory?

We don't make comments on next year until we start talking about next year, Philippe. But let's talk about the cash because, as I was describing, we have an underlying positive EBIT, which gives us a good tailwind on our cash position and the net working capital, the temporary, the elements of work in process that is an unusual amount that we're building down based on component availability. As we get that availability, we'll work that down, and that will free up cash and reduce our net working capital. In the same story on finishing milestones and therefore, being able -- the projects, I guess, you're asking about a contract, the contract often identify milestones during the course of the project period over the 24 months, for example. And as those milestones with a specific definition of scope are achieved, then the invoices go. And if that achievement of scope is reliant on parts that are not showing up or are delayed, the milestone gets delayed. So as we achieve those, we get to make -- we will make those invoicing. And that will improve the cash and reduce the net working capital, too. And as I described earlier, the net working capital is usually negative in our Supply Chain Solutions business based on the down payments and advanced payments.

Yes. So I guess, like -- really like your net working capital right now, it's really more like the project business that impacts the whole visibility that you have because you can say pretty confidently that the inventory levels in IT&S is going to fall again once the peak is passed?

Let's try it again. The missing components that are coming in -- the working -- the trucks that are almost completed are missing in, on average, 2 or 3 parts. As those parts arrive and we're able to finish those trucks, it reduces the work in process. It's all dependent upon receiving parts in order to complete the trucks. So as parts continue to arrive, we continue to reduce the inventory. If there are interruptions in the future that slow that down, that will slow that down. But over time, we do expect that we will get those, and we will be driving that down. And over time, we're confident in finishing the project milestones, getting the material on site, being able to complete the work, being able to get to complete the milestone, and therefore, generating the invoice and reducing the -- increase in the cash and reducing the working capital. So over time, these will work -- we will work through these. I say one more time, earlier, I was explaining that I think in total, in the future, net working capital will be at a higher level than the average in the past because of an expectation of continued volatility and people keeping a certain amount of stock to keep their productions working well. Or in some cases, securing material earlier in projects. So I think the working capital will be higher going forward, but it will certainly be down from the high level as it is now.

Next question is from the line of Denise Molina from Morningstar.

I'm not going to ask anything specific on this particular quarter. So hopefully that's a relief. But really, I just want to ask you about sort of the nature of the contracts for the SCS and the timing of the cash. So the first question is whether or not you get cash upfront? And if there's some cash then on the balance sheet that's sort of ring-fenced for these projects when they're first taken on by you? And then the second question is, is there at any point in the contract when it can't be canceled? And when is that? If you could maybe just talk about that thing.

So Denise, the way those projects and those contracts are usually set up is there are, indeed, in most cases, down payments, working on the engineering hours and things like it. So usually, there are down payments. And then as you achieve a milestone, there's another payment associated with that milestone and then there's final payments. With each milestone, there are payments associated. And as there is upfront payment, that's why it's usually cash -- or net working capital negative. Are they ring-fenced? No, they're not ring-fenced.

And the cancelation, is there any point where they can't cancel or scope down the projects?

Well, usually, those projects are quite well defined upfront and it's a significant escalation and it all works in concert when you put the whole thing together. And so first of all, very few cancelations, as I described. They're quite unusual to get one because they're part of the customer strategy. And second of all, changes in scope are not very frequent either. That would be an exception as well.

Denise, are you finished with your question?

Actually, can I just ask then, is there any cash on the balance sheet related to the projects that are already in play that maybe you can't really use to finance the underlying cash flow negative situation?

No, I get your question. No, there is not anything ring-fenced that we don't have access to.

Next question is from the line of Alex Virgo from BofA.

I just wanted to understand a little bit more around your comments with respect to the slowdown in demand or reduced demand from e-commerce customers, and the reasons for the cancelations of customers that you called out there, the 2 projects you called out. Trying to understand, I suppose, really, how much of a broader implication that is why you're seeing that reduced demand? And what is it that you see in terms of conversations with those customers that gives you confidence that it's a temporary thing? And I guess that's where I'm coming from. So an awful lot of what we talked about so far today is sort of quite specific to your execution and lack of protection on the project side, but I'm more curious about your comments on the broader market demand.

Yes. I mean let's address that in several different ways, Alex. I mean the first one is the third quarter comp is going to be tough because last year's third quarter was an all-time high at EUR 1.4 billion. Let's also recognize e-commerce is not just a vertical all by itself. It's a very important vertical, but e-commerce plays a role in each of the verticals out there now. And that's been an exciting trend over time and therefore, an exciting element of our Supply Chain Solutions business. This perceived slowdown of e-commerce is a perception -- we need to recall that it skyrocketed during COVID. And there was a very, very strong amount of e-commerce growth in COVID, and there's a bit of an adjustment now. But the expectation on go-forward e-commerce is very good, and our pipeline, we've got a good portfolio of pipeline. So our expectation is this is a period of time where maybe a regrouping on the e-commerce as opposed to any long-term trend.

Okay. So this isn't a customer response to any pricing or action on your part and a shift in competitive dynamics. This is simply a pause for breath in an underlying trend, that's your read?

Yes, that's exactly the correct understanding. Very -- actually, exactly the correct understanding. And as I say, the situation was very specific on the 2 cancelations and quite unusual. So nothing about a trend.

In the interest of time, we have to stop the Q&A session. I would like to hand back to Rob Smith for any closing comments. Please go ahead.

Thank you, Stuart. Thank you very much. Thank you, each and all for your time and your interest in KION Group. We appreciate very much your investment in us. We appreciate the opportunity to have these kind of discussions. I will be back to be talking about this at our third quarter earnings call on the 27th of October. Our IR team is available to you all the time to have further bilateral conversations. And I expect that many of us will be seeing each other in the days and weeks to come at different conferences. So thank you for your attention and your time today, and look forward to speaking again soon. Goodbye.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.