KION GROUP AG (KGX) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome, and thank you for joining KION GROUP's Full Year 2022 Update Call. Today's presenters will be Rob Smith, CEO of Kion Group; and Marcus Wassenberg, CFO of KION GROUP. [Operator Instructions] I will now hand you over to Rob Smith, CEO of KION GROUP. Please go ahead, sir.

Thank you, Emma. Good afternoon, ladies and gentlemen. For today's call, please refer to our Q4 and full year 2022 presentation on the IR website. Before we kick off with our call, in the traditional presentation, I'd like to ask our new CFO, Marcus Wassenberg who joined Kion on the 1st of January this year to quickly introduce himself to you. Marcus?

Thank you, Rob, and good afternoon, everyone. I'm excited to cover my first earnings call at KION Group. Most recently, I was CFO of the German HDAX listed company, Heidelberger Druckmaschinen. Our first and foremost focus was the successful implementation of a comprehensive transformation program, improving the company's financial performance and profitability. Before that, I was CFO at Rolls-Royce Power Systems and Senvion. I've not only gained industrial experience of engineering and project businesses, and also engaged with capital markets. KION is a great company with fascinating products and solutions. I'm excited working together with Rob and the KION team on building confidence, driving performance and transparency as I am aware of the recent challenges. We have to engage in an active dialogue with the capital markets, both on the equity and debt side. I do look forward to meeting you in the coming months. I'm now handing it back to Rob to start the presentation.

Thanks, Marcus. It's great to do the presentation together today. Let's move to Page 4, and I talk you through our key financial figures for the fourth quarter. Each of the KPIs came in within the implied fourth quarter guidance range that we gave in the middle of September '22. Group order intake of EUR 2.5 billion was down 27% year-over-year and showed flat development on a sequential basis. Group revenue came in at a strong EUR 2.9 billion, up 5% year-over-year and 7% versus the previous quarter. And our loss in the third quarter, after that, the adjusted EBIT turned positive again in the fourth quarter, and we finished a positive EUR 82 million for the fourth quarter. Free cash flow showed a substantial positive swing in the quarter and reached EUR 256 million, reflecting an initial unwinding of the net working capital and improved earnings. And earnings per share in the quarter was EUR 0.27. I continue on Page 5 and talk you through our full year figures for 2022. Order intake of EUR 11.7 billion, was down 6% year-on-year and remains on a high level. Revenue increased to a record level of EUR 11.1 billion, up 8% versus last year. Adjusted EBIT was EUR 292 million, 65% below the prior year due to significant cost increases and inefficiencies coming from supply chain disruptions. And despite more than a EUR 600 million positive sequential swing in free cash flow in the fourth quarter, we finished the year with a negative free cash flow of EUR 716 million negative. There's still a lot of cash tied up in working capital, and we expect to further unwind some of that this year. We will be proposing at the AGM on the 17th of May a dividend payout of EUR 0.19 per share, which represents a payout ratio of 25%, which is at the bottom end of our payout policy guidance between 25% and 40%. In a difficult financial year with declining earnings and negative free cash flow, we think this is the right decision on the dividend. And working hard to improve our financial results, revenue, profitability and free cash flow is a key focus for us this year. Let's go to Page 6. I'd like to recap the measures we have underway to increase our agility, our resilience and our profitability. We made 4 price increases last year and became much more agile on pricing in our ITS business. We also achieved good results with our backlog repricing, but we generated EUR 75 million in additional revenue and bottom line EBIT. About 2/3 of that contributed to last year's earnings. And this reflects the excellent relationship and the long-term relationship we have with our customers. We also put in place a number of measures to improve our procurement processes and strengthen our supply chain, significantly reducing the number of critical suppliers. We qualified additional suppliers and our engineering team redesign componentry to make use of better available material. In Supply Chain Solutions, we've introduced fundamental improvements on how we mange, execute and monitor our projects to enable us to perform with profitability in a volatile market environment. And by introducing price adjustment clauses in both operating segments, we're now better protected against the kind of inflationary pressure we experienced last year. And in both of our businesses, we're continuing to enhance our service offering. These actions are already contributing to our performance, and we are focused on the continued and successful execution this year. This will improve our resilience and profitability going forward. On Page 8, let's talk about the unit order intake development of the industrial truck market and how KION performed relative to that market. We now have the data for the global industrial truck market for the third quarter, which declined globally by 14% on a unit basis. It was thus broadly in line with KION's development in the third quarter as well. In the fourth quarter, we expect that the market did not reach previous year's levels, mainly by a substantial decline in EMEA. And as far as KION's performance, Q4 order intake came in at 41,000 units, which was 23% lower quarter-on-quarter and down 49% year-on-year due to the continued softening demand in the market. Do bear in mind the comparison in 2022, late '22, we didn't have a prebuying effect like we had in fourth quarter of 2021, which went the prebuying effect ahead of our January 2022 price increases. And looking at the full year 2022, the unit decline was 10% compared to the record level of last year. Marcus will take through our financials. Marcus?

Thank you, Rob. Turning to Page 9, you will see the key financials for ITS segment. Although the other integrated units was down 49% year-over-year, the order intake in euros declined not as much and was down 30% to EUR 1.7 billion. The reasons for this are the positive effects from the 2022 price increases and continued growth in services. The order book with more than EUR 3.8 billion, we made at a high level and covers more than a year of new truck sales. Now almost half of it includes price adjustment process. With revenues just over EUR 2 billion, we reached a quarterly market level. There are 3 main drivers. We saw 29% growth in new truck sales, we were able to reduce the number of semi-finished trucks from around 8,000 units in Q3 to less than 4,000 units at the end of Q4 and the price increases started to take effect. Revenue and adjusted EBIT also benefited from the successful order banker repricing exercise, as Rob explained earlier. Thanks to the higher volumes, adjusted EBIT in the fourth quarter increased by 17% sequentially to EUR 120 million, leading to an adjusted EBIT margin of 5.8%, despite continued higher procurement costs for materials, energy and logistics. Let's turn to Page 10, which summarizes the key financials for Supply Chain Solutions. Q4 order intake at EUR 882 million rebounded by 44% from the previous quarter. The share of orders from pure-play e-commerce customers remains very low at 4% compared to 38% in Q4 financial year '21. This explains the entire year-over-year decline of the order intake, while other verticals remain stable. In addition, the overall uncertain economic environment has led some customers to draw our decisions on certain projects. At the end of last year, the order book finished at EUR 3.3 billion, and continues to provide good visibility for the quarters to come. Despite the growth in service businesses amounting to 22%, revenue in the fourth quarter declined by 17% year-over-year to EUR 836 million. This is also a result of the lower share of pure play e-commerce projects, which is likely to continue impacting revenue this year. Adjusted EBIT in the fourth quarter of minus EUR 13 million, improved substantially compared to prior quarter, but continues to reflect low and low margin legacy projects. As we reflect before, the adjusted EBIT will continue to be depressed until all lower margin orders have been worked through. We expect this effect to last at least throughout 2023. Page 11 summarizes the key financials for the group. Order intake at EUR 2.5 billion in Q4 is down by 27% as demand in both segments is softer following a record year in 2021. Order book remains high at EUR 7.1 billion and continues to provide good workload for the quarters to come. The EUR 3.9 billion revenue remains at a high level, driven by the solid performance at ITS, and see resilient service businesses in both segments. As mentioned before, the lower margin legacy projects impacted the group adjusted EBIT and adjusted EBIT margin in Q4 of 2022. Let's move to the free cash flow statement on Page 12. In the fourth quarter of 2022, free cash flow was positive at EUR 256 million. The expected improvement compared to the third quarter relates to improved earnings and the unwinding of net working capital, such as the reduction of semi-finished trucks and the completion of project milestones in SCS, leading to the agreed milestone payments. Net working capital optimization remains a key focus for 2023. Let's turn to Page 13 and the leverage ratios. In Q4, our net financial debt increased by EUR 186 million to around EUR 1.7 billion, resulting in a slightly improved leverage of 1.4x. At the end of financial year '22, the RCF-relevant leverage on industrial net debt, excluding pensions liabilities, stabilized on Q3 level at 2.3x. This leaves plenty of headroom under the covenant, which is currently not tested as we have 2 investment grade ratings. Including pension liabilities, the leverage on industrial net debt amounted to 2.8x at the end of fourth quarter. Improving our working capital provision and generating positive cash flows to support our 2 investment-grade ratings is another focus area for this year. Let us now move to our outlook for 2023 and beyond. Page 15 is our guidance for 2023. For 2023, the IMF expects global economic growth to slow again to 2.9% versus 3.4% in '22. We've developed economies expanding by just 1.2% in the euro form at 0.7%. This economic environment and the softening of the market in 2022, make it unlikely that we figured for the global material handling market in '23 will match those achieved in '22. Overall, for the KION GROUP, this will be fair with for the future in view of the steps that we have taken to boost resilience. We expect revenue on group level to remain above the record level of EUR 11 billion, and a strong result in profitability, with the adjusted EBIT exceeding EUR 550 million. We anticipate a free cash flow of at least EUR 500 million in the ROCE of at least 5%. Profitability and resilience are supported by the fastest steps we took in both operating segments. Our measures underway will further support our earnings this year, predominantly in the second half. This is why we're expecting a substantially stronger second half compared to the first half in 2023. We believe that the market for industrial trucks in units will decline by a high single-digit percentage in new trucks ordered, mainly driven by EMEA and the Americas, while APAC should grow slightly. Regarding top line development and ITS given that the availability of materials is predicted to improve, we expect further growth, primarily driven by the large order book from 2022. We assume the adjusted EBIT to be substantially stronger in the second half of the year as both the improvement in supply chains and the 2022 price increases take full effect as the year progresses. We expect to see a slightly contracted FCS market this year due to the continued weaker demand from pure-play e-commerce sector and the uncertain economic outlook in an intense geopolitical environment, resulting in potential project postponements. This explains why we expect that the revenue in FCS project business will decrease in 2023. However, continued revenue growth is anticipated in the high-margin service business. In terms of adjusted EBIT, particularly in the first half of the year, would still be significantly impacted by the legacy projects. Instead of providing ranges in our guidance, like in the previous years, we have decided to guide minimum targets for all co-op KPIs, which we are absolutely committed to deliver. During the process of fine-tuning our KION 2027 strategy, we have also reviewed our management model and KPIs to steer the group. The outcome of that review was that the Executive Board sees the revenue, adjusted EBIT, free cash flow and return on capital employed will see as the core KPIs supporting our profitable growth strategy. Therefore, we no longer guide order intake. I now hand back to Rob, who will talk about the long-term expectations of our markets and update you on the KION 2027 strategy.

Thank you, Marcus. I'm moving from the view on '23 to the longer term. On Page 16, you've got a reminder of why we expect growth to return after 2023. Fee to fulfillment delivery is and will remain a key performance factor for our customers, and that gives them a competitive advantage, and automation is a key to achieving that. As a global leader of intralogistics, we'll benefit from the structural growth and our attractive end markets. We believe the service business will continue to strengthen our resilience and post further strong growth. For our Supply Chain Solutions market, we expect that pure play e-commerce customers will come back with new investments in the medium term, given that the importance of online sales remains high and customers will continue to expect short delivery times. In the longer term, through our strategic planning period through 2027, we believe that the market for supply chain solutions will grow by a compound annual growth rate of more than 9% and is the structural trends in drivers such as automation, wage inflation, labor shortages, these remain intact. Looking at the global ITS market in the longer term through our strategic planning period until 2027, we expect it to grow again towards the long-term trend of around 4% compound annual growth. Please turn to Page 17. I'd like to talk you through our updated building blocks of our KION 2027 strategy. The attractive market growth I just described will support our KION 2027 strategy, which we updated and refined over the course of last year. We reviewed it and further fine-tuned our strategy. Our target is to achieve profitable growth fueled by over 6 of our defined fields of action. In multi-branded go-to-market, we're positioning each KION brand successfully in the market. And on top, our KION brands are teaming up to provide customers comprehensive integrated intralogistics solutions. With our regional specific growth plans, KION supports growth in all business segments with regional growth strategies that take local market needs into account. In ITS, for example, growth is in the APAC and America regions where we're expanding production footprints and sales networks. In sustainability, we developed the manufactured products and solutions that are environmentally friendly and safe, focusing on people, planet and profitable growth is our triple bottom line. And through automation and software, we're offering customized and scalable solutions for a wide range of customer requirements from individual industrial trucks to automated warehouse equipment and full automation, including AMRs and fully automated lights-out warehouse, supporting our customers on their way to lights-out warehouse. We're strengthening the resilience of our business model by continuously increasing our performance and agility. One example is our Global KION business transformation initiative. We're working on harmonizing our process in debt and systems across the group and across functions. And the foundation for all of this are our key on values, our key on people and our leadership. Our HR strategy focuses on global recruitment and development, equipping our teams with all the necessary skills. We supported diverse, equal and inclusive culture that promotes the commitment of employees and unleashes their long-term potential in the best way possible. And as our first next step in delivering our KION 2027 strategy, it's our ambition to improve our adjusted EBIT margin, so that is permanently above 10%. That's for the KION Group as well as both of our operating segments. And we expect to achieve this within our strategic planning period. We are committed to continue our focus on further adjusted EBIT margin expansion once we've achieved this milestone as our first next step. So on Page 18, I summarize my key takeaways for you for today. We are fully focused on executing our measures, which have been implemented to improve our operational and commercial agility. We're doing this to sustainably strengthen our business resilience and sustainably strengthen our profitability in the volatile environment. We plan to deliver a strong increase in adjusted EBIT and free cash flow this year, and we expect a significantly stronger second half of 2023. We've updated our KION 2027 strategy with its 6 fields of action. And with these, we will achieve our profitable growth target. The material handling market remains attractive. It's a very attractive market and the long-term fundamental drivers of this market are strong. We support our ambition to become a strong double-digit EBIT margin company, both on the KION Group level and each operating segment. This concludes our presentation. Thanks for your interest. Marcus and I would be delighted to take your questions, please. Go ahead, Emma.

[Operator Instructions] The first question is from the line of Sven Weier with UBS.

The first one is regarding Supply Chain Solutions. And I was wondering if you could give us a sense on the legacy backlog first. What percentage of the backlog is still corresponding to the projects that are in trouble? And maybe you could give also as a feeling how much of that is going to be executed in the first half and how much has been left over for the second half? And maybe also maybe a more qualitative sense how you have progressed in terms of the risk control since September, right? September was all still pretty early and probably hard to get the total oversight. But now half a year later, maybe you could also give us a qualitative feeling on how the risk control and oversight has improved since. That's the first one.

It sound like 2, Sven, that's good to talk to you. Look, we've continued to make good progress on completing our lower-margin projects. And as we're doing so, we are reviewing each opportunity for cost mitigation, change orders and additional customer recoveries. These low-margin projects will continue to implement -- impact our Supply Chain Solution results until those projects are finished. Most of the low and no margin orders are planned to be completed by the end of 2023. In some project inefficiencies are certain to remain as long as the supply chain issues remain. Internal processes that we've been updating. I covered those before, but those are very important to touch on, on a qualitative basis as well. Look, we've enhanced our commercial agility. We've been putting better taking risk out of our contracts with our contracting. We've been working on our procurement processes and our project execution processes and have been adding capabilities in project management and in project controlling and working on our -- these processes in our system to make it robust and deliver good profitability in a volatile environment. Having said that, this is not a fast fixed spend, and we will be making improvements to our robustness and improvements to our profitability over time. And it will certainly be helpful to be burning through these lower and no margin projects in the quarters to come.

And the second question, if I may, is just I understand you're not guiding for order intake and the focus is on normalizing lead times. I mean, is it fair to say that it will probably take you at least the entire year to get back to normal lead times in basically both divisions and that the order intake doesn't really need to catch up before the second half when we think about 2024? Is that a fair statement? Or how would you respond to that?

I think, Sven, it is a fair statement. We're actually looking at an area of 1 year. So I would agree on that.

Next question is from the line of Sebastian Growe with BNPP.

Two questions from me as well. So the first one would be around the IT&S market. You pointed to see decline in high single-digit percentage range for the year. The first question related to it, should we expect a similar rate of decline for your IT&S business? And would it be right to assume that any such rate of decline would then have to be applied to the H2 order run rates and not to the full year? Maybe we can start there.

Well, it's the best thing to speak with you as well. Yes, we had -- the market in ITS was still very strong in the first half of last year and cooled down, as you see in our -- in the market numbers for Q3 and also our expectations for the market for Q4. We expect and have noticed the first part of this year, continued momentum from Q4, but not at the rate that we saw in Q4. Our overall expectation is coming off a record year in 2021. Last year we did finish in line with our expectations. You'll recall we were calling for lower 2022 than 2021, and it came in that way. Our expectation this year is also we have a view that it's going to be lower this year than last year.

Okay. Understood. So if one looks at this massive disconnect between the H1 orders and then the H2 orders. And if I was to assume that H2 is sort of the right yardstick to work from? And at what point would it really start to hurt in the sense that you have built up, obviously also a staff base in IT&S and is close to 30,000 people. And if then we are going from run rate of 270,000 units that you recorded in '22 to a run rate of sub-200,000 units. Yes, what would you say to this?

I would say that the order book covers more than 1 year of new business, service business is expected to grow additionally. Next year, the order book does not fully cover our minimum revenue guidance in '23. But as we laid out in the presentation, demand from verticals such as other pure-play e-commerce is stable and service business is expected to show continued healthy growth. So therefore, we feel comfortable with the guidance. When it comes to the question about the trucks per quarter, we roughly see 40,000 which is basically in the cycle market and thus, maybe fluctuate according to the economic environment for the current year. We expect a unit order intake level beyond the previous year.

What I'd point out to you, Sebastian, is we've got a very strong order book in both of our businesses. And the order book we've got in Industrial Trucks & Services business easily covers a year of production, and the macroeconomic expectations are that things are picking back up in '24 and '25. So we feel good about our guidance. We feel good about our strong order book. It gives us a very good situation going into this year. And our service business is very strong. So we're on a good way.

Okay. Helpful. And the second aspect, if I just may is on free cash flow if I try to decompose your minimum free cash target of EUR 500 million in '23. I would expect that this contains working capital tailwinds of about EUR 200 million to EUR 300 million, probably. So the first one around this one is if you could comment on the key drivers because I would have expected that there are no real further positive impact from the reduction in semi-finished trucks because that looks at least for me to be widely behind. I heard your comments, Marcus, around the milestones and that this would help here. What are the other key levers that we should think of? And the reason I'm asking that question is simply, if I hear your comments around IT&S order funnel, if I hear also your comments on what you said before, Marcus, potentially slightly contracting environment for SCS in '23, then how should we think about potential prepayments that might kind of unwind and then wind simply into what otherwise might be a working capital tailwind?

So basically, I mean there are several ways to look at that, and I'm thinking of walking you through that actually. But I think, first of all, the number of reduction in net working capital is a fair number. That is something that we see as well, and that's one of the main drivers. Don't forget then the EBIT, actually, which is the second driver. I don't think we are predominantly dependent on down payments. This is not really what we see. If you want, allow me to maybe give you some sort of a bridge that might help you actually coming from the other end, which is maybe starting from the reported EBIT, including the PPA, which is around about EUR 450 million. You add the DNA, which is EUR 500 million. You add the release of net working capital, EUR 250 million. You ignore maybe the taxes and others, which is EUR 100 million, if you come to a free cash flow of operating activities of around about EUR 1.1 billion, you subtract the CapEx of EUR 500 million. And then there might be some room or not for other activities in M&A, and then you get to free cash flow of our fund. So that is, I think, the way to look at things here. And that basically should give you an idea and don't forget project milestones as well giving us cash. And as we work through those projects, I think we're happily covered.

Okay. Now, this is helpful. And then would you mind putting a number behind those milestones that you would see coming through in '23?

That's difficult to say. So I wouldn't like putting a number here.

Next question is from the line of George Featherstone with Bank of America.

Just a real quick one, just on the back of that last question in terms of clarification about kind of what you're expecting here in terms of units. I think you said, Rob, originally I expect the IT&S market from a unit perspective to be down high single digit this year. But I think you also just announced to the last question then, you expect unit volume to grow for KION. Just would like to have a bit of clarity on that. And kind of embedded within that really just an understanding about the IT&S guidance. It looks quite conservative. Your service business there should grow actual sort of headline numbers look like from the guidance you're expecting about 5% revenue growth year-over-year. Just like to understand how much OE growth we should see? How much is price or you expect in terms of buying? I appreciate the supply chain is still difficult to understand, but you've got a year's worth of units. So just trying to understand how much of that year's worth units to be delivered this year?

So basically, we don't see unit growth, but actually, we're seeing shipments coming from the order backlogs that we're having, and that is basically the driving for revenue as we produce through the order backlog.

Okay. So sorry, do you mean in terms of your revenues there? I mean I was asking out after orders really in terms of incoming orders from a unit perspective. Just wanted to clarify what you meant? Do you expect to decline in line with the market from a unit perspective or something else?

All right, George, you're asking us to guide on things. We don't guide on. As a matter of fact, our core KPIs, our revenue, our EBIT, our free cash flow and ROCE, on a go-forward basis, we shall be reporting our order intake as we go quarter-by-quarter, but that's where we are.

Okay. Understood. Let's go back to the revenue question then if we can. How much of the units that you're sort of seeing in your backlog, do you expect to deliver this year? And can you talk about that sort of component from your guidance of EBIT or euro revenue growth? How much of that is price versus the volume component?

So as we talked about with the EUR 3.8 billion backlog starting the year, George, we've got a very good position for our ITS business through the coming quarters, and it's easily more than a year of production. And so as we go through that and the supply chain keeps up with us, we do expect continued supply chain volatility this year, hopefully less so in the second half than the first half. But as the supply chain flows, we're able to build through that backlog. And we're looking forward to the revenues coming from that, especially as the supply chain volatility lessens in the second half as we hope.

So there's a price effect of 10%, but it's already included in the backlog.

Okay. So if the sort of underlying volume is down 5% and is that what you're effectively saying there?

Why don't you take it offline with Sebastian and the IR team after the call. I think you want to be doing a walk with your model and so best you'd be more than happy to help you with that.

Okay. Fine. My next question, just on SCS, if we can, on the sequential orders. Can you just tell how I understand, I think you said in Q3 that you had cancellations that amounted to sort of high double-digit million? I'm just trying to understand a little bit more about that in terms of -- if we think about a gross order intake that, that would be then for Q3, have you actually improved orders sequentially if we were to add back those cancellations in Q3?

I mean the thing on cancellations, as you can add them back, but there was a definite good rebound from Q3 to Q4 on the order intake, and we were real proud of our SCS team in bringing that order intake in the fourth quarter. It was a good rebound.

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

My first question is on Slide #16, where you showed the market outlook in the medium term. If I look at the slide here, you are indicating that supply chain solutions and industrial truck global market in terms of revenues would be flat in '23. But when we look at your guidance, you are implying at least a 7% growth in ITS and maybe double-digit decline in SCS revenues. So can you tell us how shall we reconcile it? Are you basically telling us that you might lose market share in SCS and gain market share in ITS? And then maybe if we extend that to 2027, how do you see your market share overall in terms of your growth versus market growth in both of the segments? So that's question number one.

Good to speak with you. I appreciate your questions. Yes, we -- on Page 16, we're pointing out that our expectations is that the 2023 market in both industries basically is not bigger than the 2022 market. It's about flat year-on-year. We'll see how that develops. Over the longer term, our expectation is in that strategic planning period, easy 9% CAGR in warehouse automation, and 4% or better in the Industrial Truck & Service markets. I think it's a mix. The significant growth that we had in '20 and '21, especially with the pure-play e-commerce players put a lot of capacity in the market for those pure play e-commerce players, and they're slowing that down while they're going into it. Our expectation and their expectation is that in the medium term, they're coming back. Some of that pure-play e-commerce business is a very fast turn. So when it comes in, in the year, sometimes it goes out in the same year as opposed to coming in this year and being built over the following -- over the subsequent years. So as we had lower e-commerce pure-play e-commerce last year, there'll be less execution on pure-play e-commerce this year and some of the longer-term projects in other verticals take a bit longer. So our expectation is growing our profitability and growing our business over the strategic planning period. And as we have a very strong position in the market, and we extend -- we intend to improve on that, I think you'll see that position in the market grow over time as well.

And my second one is on this price adjustment clauses, which you said you have now embedded in both of the segments. Can you provide more details on how exactly they work in reality, like which are the underlying parameters that you use as, let's say, indexation or existing the price depending on how the input cost is moving so we can see what sort of impact is covered in this price adjustment clauses and what may not be covered if we have any surprise in input costs down the line?

No, Akash. I mean, I actually -- please understand our commercial agility and our operational agility are very important for our company and how we do these adjustment clauses is basically how we do these adjustment clauses. And I'd rather keep those good ideas for ourselves as opposed to having anybody else be taking. So we do have those adjustment clauses. They went in, in the second quarter from last year. There's an indexation review at the point of delivery. There are other ways of doing that and different ways of doing that. But what's important is we've given ourselves protection against inflationary pressures like we saw last year on a go-forward basis. So last year, if you recall, we didn't have those protections in place until we started doing so in the second quarter going forward. That will benefit our business, and that makes us more resilient in volatile times.

And maybe a final follow-up quickly. You mentioned in the presentation that pure-play e-commerce orders were 4% of orders in Q4 versus 38% last year. Do we have the number for the full year as well, like what was full year order intake from pure-play e-commerce companies in 2022 versus 2021?

Let's take that offline. Sebastian will provide the numbers to you. We don't have it right now.

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

The first question I have is on the margin objective, the 10% margin target by 2027. So it's for the 2 operating segments, right? But I wonder if you actually expect IT&S margins to reach the 10% mark before 2027. Because just looking at the pricing actions you took last year, I mean, it could perhaps happen maybe as early as the end of this year or early 2024. Or is this really only a 2027 objective? So that's question number one.

Gael, I appreciate you picking up on that. Those are important messages. Our expectation and what we're working hard to deliver and what we're committed to delivering is over the course of our strategic planning period, driving the EBIT, the adjusted EBIT profitability of our company, over 10% on a continued basis applies to the group, applies to both operating segments. And that's our first next step. Once we achieve that, we'll be coming with our second next step, which is to improve beyond those levels on a go-forward basis. So we expect to do that during the strategic planning period. And before we get to that first step, we'll come back and talk to you about our next step beyond that.

Okay. Then the second question is about SCS. I'd be interested to know which proportion of SCS backlog has been reset already at a 0 gross margin level. And can you confirm you've now fully reviewed the entire backlog for SCS.

So again, we most definitely are scrutinizing the entire backlog and go on project by project and project by project, every single month. As we explained in September, less than 10% of the backlog was loss-making projects.

Next question is from the line of Alexander Hauenstein with DZ Bank.

Yes. First of all, Mr. Wassenberg, I've got a question to you, please. What has actually surprised you when you're looking first time into the KION Group in detail? And what is the midterm issue apart from the things we discussed so far that you as the CEO wants to tackle and change here? That will be my first question, please.

Actually, it's quite exciting to work for a company with intake fundamental long-term trends and that provides me with a lot of confidence. Secondly, I was really overwhelmed with the action that Rob and the Board team has initiated following a very difficult situation last year. And I hope that I can contribute bringing in my experience that I, for example, had in Heidelberg, where I really helped improving profitability, strengthening resilience and strengthening the key financial parameters such as leverage, for example, which I think is key for KION in the future to give us the headroom to invest in other activities.

Okay. And coming back on to Akash's question with regard to Slide 16 and your guidance, and I hear what you answered here. I'm wondering, looking into ITS, top line, let it be like 7% growth plus so more than EUR 7.8 billion. And does that actually imply that potentially in 2004, you expect this momentum quite too slow? Or is there a slower slowdown, let's say, going into '25 in order to come back to the CAGR that you pointed out of 4%. So that needs to slow, obviously. The question is how quickly is that baked into your guidance? How quickly would it potentially slow down? Or is it fair to say that it's 1 year of slower growth in 2024, and then we move back to the maybe 4% plus again. Because I mean, with SCS, you pointed out that it could be some time until it comes back again to the lower 9%. So yes, also here, how quickly are we seeing a quite big snapback, is it potentially 2004 again or more likely '25?

All right. And it's primarily focused on 2023, which is the guidance period that we're giving, and we're talking about our expectations for '23 today. Mid-terminal macroeconomic expectations for '24 and '25, following a slower year this year, our returning to growth on a worldwide basis in '24 and '25. So we expect that will have a good impact on our market, and we would expect there's a good impact on our business. As I pointed out earlier, we're starting this year with a very good back order book level for both of our businesses, and the ITS order book is one that provides for production of over 12 months of time, KION, it's well into 2024. So that's how we expect our revenues to do it. That's why and how we're expecting our revenues to develop. And in terms of the medium term, the market outlook is for growth in '24 and '25. And we'll talk about our own guidance for '24 and '25 as we get to this time next, in June.

Okay. But still another question on the 2027 targets. You made some comments about the ITS margin, let it be 10%, even earlier than 2027. So this is understood. But it is also a valid, let's say, a well at point to make that also for SCS, you probably could go for 11% or 12% over time. So this is not a readout explicitly, right?

I think you're getting what Gael said is part of what I was saying. Let me try it again Alexander. Our expectation and our objective is to deliver EBIT adjusted -- adjusted EBIT profitability better than 10% for the KION Group and for both of our operating segments within our strategic planning period. And that's our first next step. And when we've achieved that one, we will continue to drive our profitability for the group in both operating segments beyond that.

[Operator Instructions] Next question is from the line of Kristof [indiscernible] with HSBC.

I've got, say, 2.5 questions. One is, again, concerning your midterm guidance in a more general kind of point there. Is it fair to assume that in your midterm guidance for the 2027 guidance, you're working on a, say, normalized level of 200,000 to 220,000 units, which is also the level obviously that you encountered before, say, the boom in 2020 and 2021. And just the second, the 1B question to that is also regarding your e-commerce or pure-play e-commerce business that you said you expect it to come back. When do you think it comes back? And how much of that is factored into your 2027 targets? And then I had 1 question on your financial expenses. The guidance there is pretty significantly up i.e. I think the market had like EUR 50 million in the making, and you're guiding for EUR 90 million to EUR 120 million. Could you just elaborate what the reason for that is, is it purely interest expenses going up? Or is there other things in there?

Let me take the first one, Kristof, and then Marcus will take the second one. The guidance we're providing is for revenue, is for adjusted EBIT, is for ROCE and is for free cash flow for 2023. What I'm describing are our 2027 targets where we expect to deliver an adjusted EBIT margin above 10% on a sustained basis for our group and for both of our operating segments, and we expect to achieve that during a strategic planning period. Once we've done that, we'll come back and talk about how we intend to increase it beyond that. It is a second step. Marcus, do you want to talk through the second part of Kristof's question?

Absolutely, Kristof. I understand where it is coming from, but you shouldn't look at the '22 numbers for financial year, but actually use Q4 as a starting point. And that gives you different plateau to start with. Secondly, obviously, you spot on interest rates are higher. We're coming from a different plateau, the second thing. And I think my colleagues have explained in the last quarters that basically, we saw changes in fair value in interest rates, deliveries, and therefore, we had compensating effects that we cannot guide on. So therefore, it is rather difficult to come up with a number here. And we've been more on the cautious side as I think the whole of our guidance is right now. So take it in that light, and we're happy to discuss offline in more detail. But basically, I would directionally say this is what it is.

Okay. Probably one question, which just popped up is on the supply chain. Just because we heard from some machinery companies, not direct competitors, but others saying that the supply situation is getting tighter again. Have you experienced similar things?

Kristof, you're doing a good job. Actually describing the volatile environment that industry is living in today. It is our view that things have got a bit better over the -- as the year ended last year. On the other hand, our team has been doing a lot of very, very good work to enable a better material flow ourselves, qualifying new suppliers, helping suppliers that were having difficulties, second sourcing. Our engineering teams have been redesigning componentry to use material that's more available. So with a lot of hard work and a little bit of tailwind, maybe things are getting a little bit better, vis-a-vis where they were very, very tight earlier last year. I mean you saw we reduced the amount of trucks that were outstanding waiting for 2 or 3 parts from over 12,000 in the middle of the year to less than 4,000 at the end of the year. We intend to continue to drive that down. Our team is working hard on that, and that's part of our net working capital improvement plan this year. We do expect volatility in the supply chain clearly to be a part of this year, and we're hoping that the second half could be less volatile than the first half. But we shall see, and you'll be hearing different messages from different companies as the volatility swings affecting over time.

Next question is from the line of Rahul Gonzales with Alpha Investment Banking.

Rob and Marcus, 2 questions from side. First one is regarding SCS guidance. I was wondering taking into account the lead times for SCS are quite long. If we should consider this target harder to beat than the one on ITS or if there is any driver that maybe you can share with us that could make this line to beat your initial expectations? And my second question is regarding China and India. Some of my colleagues have asked you about the midterm targets. And I was wondering if this 10% adjusted EBIT margin is also related to the fact that you are maybe growing faster in those 2 regions. Can you give us an update, quick update on the last developments in those markets?

Sure, Rahul. Maybe I just cover both of those quickly. Our guidance is our guidance. These are minimum targets that we're very committed to beat over the course of this year, certainly deliver on these. We're not commenting on whether anything is more difficult or less difficult. These are our minimum targets. We expect to achieve these during the course of this year. There is about a 6- to 24-month lead time in supply chain solutions. And I think that's an important element to keep reflecting on as you're building your models. We're having a good growth and our expectation is for good growth on a worldwide basis over the strategic planning period. And over the midterm, the whole -- the macroeconomics are expected to be coming back in a positive way in each of the regions in '24 and '25. So China and India will certainly play important roles in our growth, but other markets shall as well.

Next question is from the line of Peter Rothenaicher with Baader Bank.

I have a question on pricing. So you mentioned in 2022, you had 4 price increases. What is the situation looking into 2023? Are you planning further price increases and the current price level? Is it sufficient to compensate for the cost increases in particular personnel costs? And is it fair to assume that you will see in Germany also around 5% personnel cost increases? And within that, there are EUR 1,500 inflation compensation payment, have you booked something here in 2022 already?

So yes, last year, during the course of last year, part of our commercial agility was putting ourselves in a position and part of our process to be on short cycle time, majoring our costs very frequently a couple of times a month and comparing the costing and the pricing. And so there's an opportunity to adjust our pricing, to assessing our pricing and adjust our pricing as appropriate latest on a monthly basis. Last year, we did that on a quarterly basis after being pragmatic and we did increase our pricing 4x during the course of last year. So far, the price level increases covered the cost levels. However, part of our process, as I said, is to continue to monitor that a couple of times a month and be able to make adjustments as appropriate. So we stay vigilant as part of our commercial agility here. Well, you did ask -- let me -- my notes tell me you asked about the inflation compensation for 2023, and was it booked. We booked EUR 15 million of inflation compensation in 2022, if that's helpful for you.

And then second question, what do you observe currently in terms of pricing in the markets are competitors in a few of the less favorable market getting more aggressive now?

No, our best understanding of the market is all competitors are acting on a very rational basis. And the kind of cost increases that impacted our company impacted other companies, too, it's industry-wide, and the players are operating rationally.

There are no further questions at this time. I will hand back to Rob Smith for closing comments.

Thank you very much, Emma. Let me come back to our key takeaways from today. We have put measures in place in our company to increase our agility, drive our resilience and our profitability in a volatile market environment. We expect in our 2023 outlook, we expect a substantial improvement in our adjusted EBIT and free cash flow, and we expect a stronger second half than the first half. And we're very pleased on the updates on our Q1 2027 strategy, driving profitable growth with our 6 action fields and we expect to deliver during the strategic planning period, an adjusted EBIT margin for our company on an ongoing basis for both the group and our operating units above 10%. We'll come back to you after we've reached that milestone and talk about increasing it. Right now, the objective is to get our very strong performance in 2023 to go quarter-on-quarter and drive the guidance that we just delivered. We've got very good actions in place. We're working hard to deliver those and we'll be talking to you and updating you on our progress as we go through the course of this year. Thanks very much for your time and attention. We look forward to seeing many of you in the days and weeks to come. Bye-bye.

Ladies and gentlemen, this concludes today's conference call. Thank you very much for joining, and have a pleasant day. Goodbye.