KION GROUP AG (KGX) Earnings Call Transcript & Summary

Okay. I think we are complete. Thanks a lot for joining our Q3 2024 Pre-Close Call from the KION Group. As in Q2, we have opened today's pre-close call to both, the sales side and to the buy side, and to increase the compliance with the regulatory best practice recommendations we have from the ESMA, we will let you know that this pre-close call will be recorded and I will start the recording now. Okay. From this record, we will also post a transcript later on, on our website as soon as possible. Please note that all the commentaries on the third quarter are tentative as the quarter is still ongoing, and we don't yet have the full picture. This is particularly true for the third quarter, where July and August are impacted by the summer break, in September, even today, can be a decisive month or day. Let me start as usual with our IT&S business. I will start with the global industrial truck market, first with a recap and then we come to the latest trends. The global industrial truck market was stable in the first quarter with some growth in the EMEA region and in APAC, but a strong declines in the Americas. Market activity in the first 2 months of the second quarter, we have so far data for July -- for May and April. They have followed these trends of Q1. Like in Q1, growth was mainly driven by the EMEA and the APAC region, and particularly by smaller warehouse equipment. We confirm our view that we have given an update with our H1 reporting, we expect the global industry truck market to remain around last year's level of roughly 2.1 million units, there was a slight growth that we were expecting before. EMEA is now expected to stay around last year's level versus a slight growth before expected. And we confirm the view that growth in APAC should remain the growth engine of the market, and we expect even a more pronounced decline in the Americas. To give you the recap of the order intake in Q2 at the KION Group before I come over to the recent trends. In Q2, '24 new orders were up sequentially in both in units close to 64,000 units and in money terms, reaching EUR 1.966 billion. On a year-on-year comparison, unit order intake was slightly up, while new orders in money terms were slightly down, mainly reflecting the higher share of APAC and smaller warehouse equipment in the order intake mix like in the previous quarters. Coming now to the trends that we have seen during Q3 of '24, it's a seasonally weaker summer month, as well as the weak macro data that together with the mix shifts we see a skew towards APAC and small warehouse equipment. So just a sequential decline in units any money terms, that could be somewhat below the prior year Q3 level in both units and in money terms. Coming to revenue, adjusted EBIT and the margins. First, a recap of Q2 2024, when revenues stood at EUR 2.15 billion and with that around the solid level of Q1 '24, but as expected, you saw that the adjusted EBIT margin in the second quarter was 10.7% has come down slightly from the level seen in Q1, where it was 11.1%, already starting to reflect a higher share of APAC and warehouse equipment compared to the first quarter. Given the recent order intake patterns, we expect that this trend is slated to remain in the remainder for revenue and for adjusted EBIT in the second half of this year. We have confirmed the outlook and narrowed the guidance bandwidth post our Q2 results. And given the recent order intake patterns, we adjusted the upper end of our fiscal '24 revenue outlook for ITS to EUR 8.7 billion from previous year EUR 9 billion and currently see a range between EUR 8.5 billion to EUR 8.7 billion. Based on the solid H1 '24 adjusted EBIT margin of 10.1%. And the recent order intake development, we have tightened our outlook for the adjusted EBIT to EUR 870 million at the lower end and EUR 930 million at the upper end. Coming from a range of EUR 850 million to EUR 950 million before. For Q3, we see the recent trends in our IT&S business. We assume that revenue will reflect the usual seasonality given that 2 of 3 months, meaning July and August in Q3 are being impacted by the summer break. And with that, revenue could be comparable to the levels seen in Q3 2023. As expected, we assume the adjusted EBIT margin to soften somewhat sequentially, reflecting the order intake pattern since the beginning of the year, which is skewed towards APAC and smaller warehouse equipment. Remainder for the '24 indication is given that the order intake patterns of the past quarters, we assume the adjusted EBIT margin is unlikely to improve sequentially in the fourth quarter compared to Q3. Coming now to Supply Chain Solutions. I will start with a recap and recent trends. On the warehouse automation market, we indicated that despite structural demand drivers, I mean labor scarcity, cost and acceleration and speed of fulfillment and the initial Fed rate cuts in September, we still see customers continue to be hesitant to sign orders straightaway, which is also driven by the continued macroeconomic uncertainty, the upcoming U.S. election and the expectations of a further interest rate cuts ahead. Coming to the order intake at the KION Group SCS. Recap of Q2, you saw that the order intake at EUR 677 million in Q2 remains soft and also included roughly EUR 70 million of orders has paid over from the first quarter. Given that the order intake remains lumpy, and due to the typical seasonality to other 3 months in Q3 are impacted by the summer breaks and [ short downs ] during holiday season, and the continued uncertainty, we assume the Q3 order intake is unlikely to recover much from the underlying level of Q2, meaning excluding those spillovers. Coming to revenue and EBIT. We saw in the second quarter of 2024, that revenue was marginally up quarter-on-quarter and year-on-year, but remained on a subdued level overall, reflecting last year's order intake. We continue to make good progress in working through the legacy projects during the second quarter, resulting into a further improved adjusted EBIT that stood at EUR 23 million for a margin of 3.2%. We also confirmed the outlook and even narrowed the guidance bandwidth post Q2. Based on the solid performance in the first half, we have narrowed the outlook ranges for '24 in SCS as well, lifting the lower end of revenue outlook by EUR 100 million to now EUR 2.8 billion. And also we increased the lower end of the adjusted EBIT outlook by EUR 20 million to EUR 80 million. And this also confirms our view of H2 being better than H1. Coming now to the recent trends of the third quarter. We assume that revenue has slightly stabilized around the levels seen in the first quarter of the year. And given the continued progress in completing our legacy projects, and initial contributions from the measures to adjust our cost base should translate into the small sequential improvement in the adjusted EBIT, including the margins. For the remainder of 2024, we can give the indication that outlook, and we expect to finish more or less all of the legacy projects, except for a handful of projects to remain with us in 2025, and one or two into '26. This should support further improvements in the adjusted EBIT line in the next quarters. And keep in mind, in addition, the cost optimization measures we initiated at the end of 2023, should also start to benefit the bottom line in the second half of this year. Coming now to the group level. On order intake and revenue, we can say it's more or less the sum of all the segments. When we think about the adjusted EBIT line, the corporate services and the consolidation line, this is trending slightly less negative than what we have seen in the first 2 quarters of 2024. On the purchase price allocation, PPA. This is, again, following the usual quarterly pattern, which means, it's excluding the spike that you have seen in the last quarter, which was due to the goodwill write-off of KION ITS in Americas, in North America and South America. Please note that we have updated our guidance range with the Q2 results. We now assume PPA items to range minus EUR 110 million to minus EUR 115 million for the entire year, which not yet all brokers have reflected in the latest estimates. On the nonrecurring items line, we would assume a small to mid-single-digit negative amount in the third quarter, which is in line with our full year view of minus EUR 10 million to minus EUR 20 million. On the net financial expenses, we assume those to develop slightly more negative than in the second quarter of 2024. And consistent with the guidance range of minus EUR 170 million to minus EUR 190 million for the year. On the tax line, you should assume the tax expenses are somewhat lower sequentially and are in line with our guidance range of 30% to 35% for the year. All these items together should lead to a net income that is substantially improving on a sequential basis, but also on a year-on-year basis. Coming to the free cash flow with the earnings that we would generate and some initial improvements in the net working capital, you should assume that the free cash flow is more or less stable compared to the second quarter of 2024. Those would be my initial remarks on Q3. And with that, I would open up the line for the Q&A session.

[Operator Instructions] I see the first question coming in from Sven from UBS.

I got two questions, please. The first one is on the order intake comments you made on the truck business. If I understood you correctly, the guidance is somewhat lower than Q3 2023. Question I have is, does it mean that Q4 order intake needs to go up to be flat in Europe? That's the first one.

Thanks, Sven, for the question. I mean, yes, you understood correctly that it's the typical seasonality that we see. So Q3 is always being the weakest in our IT&S business, and we would assume that this shift in the mix, more towards APAC and towards the smaller wares equipment will cause a level that is somewhat below last year's level. We do not give a guidance on order intake. So therefore, I cannot give you a comment on the fourth quarter, but we will likely give an update about the current trading once we have, let's say, Q3 figures, and we get a deeper insight in how the fourth quarter is going to develop.

Because your guidance for Europe is flat, right, for the market, for the year, right?

Yes, that's true for the market. But also when you recall, the market was growing in the first quarter. The market was continuing to grow in the first 2 months of the second quarter -- in those 2 quarters. We will not exactly be at the same pace as the market. The reason for that is that some of the market growth came especially from the region of Eastern Europe. And here, Russia, in particular, where we have stopped doing business some 2 years ago, so we did not follow that same path of the market so far.

A second question I had was on SCS in terms of the impact of rate cuts. I mean now with the start of the Fed, it's probably too early to say whether that means anything in terms of clients feeling more inclined to move ahead? Do we need a few more of those cuts, do you reckon?

Well, I would assume that the Fed and DCB both have started to cut the rates, but I think also the expectation of the market is for further rate cuts ahead of us. And I would not assume that these initial cuts will straightaway open the CapEx case. I think the underlying trends and the need for automation is unbroken in our customers. But also given that in the states, we have the U.S. election coming up in November, we have still uncertainty about the macro picture. I think those are still elements that hold back the customers to sign the orders to keep them being more hesitant. Nonetheless, at the discussion level meaning our pipeline is well filled. And I think also many others in our industry currently see, it takes a bit longer to convert, let's say, the pipeline into a firm order. Then I have Martin Wilkie having raised his hand, Martin?

Yes. Just one question. You mentioned that the adjusted margin is unlikely to improve in Q4. You touched on it slightly here. But just to clarify, the seasonality of the margin has been kind of volatile over the past few years. Is that common about unlikely to improve in Q4? Is that an underlying comment as opposed to just sort of a seasonal comment. Just to understand kind of what you're talking about in terms of backlog conversion of margins into Q4.

Well, I think you have our guidance range that gives you a certain implied, let's say, second half of the year, I indicated that we indicated earlier this year already that the mix shift we see in the order intake during the first half, meaning more towards APAC, more towards smaller warehouse equipment, will take its toll in the second half and that the margin is unlikely to stay at the very high levels that we have seen during the first half. And with that, we would assume that this should hold true for both Q4 and for the third quarter.

And if I can have a follow-up. Obviously, you gave us the backlog data and so we can sort of track over time. And obviously, the backlog in the truck business is still elevated relative to history. When we look at the revenue that you deliver, is that sort of a genuine demand level? Or are the trucks that are being delivered now that were sort of held up because of either bottlenecks or components or other reasons. So just to understand how we should think about that backlog normalization, and how that's impacting what you print in the second half of the year?

I think what you have seen is that we have already, following down, quite a time that order backlog, order book has come down. And with that also our lead times last year, we had a peak that was anywhere between 12 to 15 months. In the meantime, we talk about that we have a reach of the order book, at least at the end of the second quarter, which was around about half a year and that we are working on to bring that further down into a range that is anything between 4 to 6 months. We are not yet there, but we are getting closer to that. And with that, you could assume that the demand that we see is currently, let's say, more of a normalized level than what we had in the past 2 years. I see the next raise hand Gael de-Bray from Deutsche.

Just, I'm sorry, but I think I missed what you said about the IT&S margin for Q3. What was the exact wording, please, for Q3?

Well, what we have indicated for the third quarter is that we assume that the margin is likely to fall below the strong level that we have seen in the first half of the year. Remember, we had 11.1% in Q1, we had 10.7% in the second quarter and that we would assume, that given on the revenue recognition that is reflecting also the usual, let's say, seasonality, we had 2 or 3 months impacted being by the summer break. Also, we had our factories closed for some weeks during summer. This should, first of all, impact the revenue. And with that, we assume that the adjusted EBIT margin has also to soften somewhat sequentially, which is then also reflecting the order intake pattern since the beginning of the year. And remember here, we have seen still the trend of orders being skewed towards APAC and smaller warehouse equipment.

But on this point, do you expect a relatively similar sequential deterioration between Q3 and Q2 compared to what we saw in Q2 versus Q1?

Well, I think that needs to be seen. But you know what has happened last year, the Q3 margin was somewhat softer than the first half, and this would be something which is normal in that quarter. I cannot give you now the details, as still the quarter is running, but it should be a sequential decline compared to what we have seen in the second quarter.

Okay. But still in the -- well, still above the 10% level, you had talked about previously Voyage 2, right?

Nothing to say against that.

Okay. And then the second question I have is on the order dynamics. So is there a price increase considered for early 2025? And if that's the case, I mean, will you -- well, when will you start talking to clients about this?

Well, Gael, you know that in the past, we had this more or less kind of fixed off pricing mechanism once a year, is a low single-digit increase. But since '22, we have changed out to this agile approach that we are actively monitoring the cost base on a monthly basis, that allows us in theory to adjust pricing on a monthly basis. But so far, we did only one price increase that was effective in January, which was in the very low single digits. And if we feel there's a necessity to talk to customers to change pricing. We will let them know up front a little bit. But so far, we have not done any further pricing action.

So you don't really have any specific visibility in terms of benefiting from preordering activity in Q4 at this stage?

No.

Okay.

Then I see Lucas Ferhani has raised his hand.

Yes, thanks for the remarks. I had one on SCS. I think for a lot of the calls we had, interest rates was pushed as the reason why maybe we didn't see the order recovery in that part. And now we're starting to see it. It feels like the -- maybe the commentary there, is not necessarily positive or more positive or seeing some type of inflection point. Do you think the game is, interest rate can go lower, and so it's going to take more time? Or maybe is there something acute on client side, where maybe the demand on their business is not there, and so they don't feel the need to automate even if it makes sense long term?

Well, I think as the underlying trends have not changed. And with that, that's also this underlying base need that our customers have to start the automation journey to go ahead, on their automation journey. Nonetheless, we have now seen the Fed moving with a 50 bps rate card following the ECB, which also has slowed another 25 bps, but maybe it's a little bit too early yet to sell or to tell whether this has been the impact that everyone was waiting for. And also remember that in the states, we have an election year. So there's always a little bit of a, let's say, holding back before the election. And with that, I would not put too much hope, let's say, on the next coming weeks or quarter ahead, maybe this will be something more than also into next year.

Okay. Perfect. And just the second one on IT&S industrial trucks. It's been a rather kind of different cycle to maybe we're used to. I'm trying to see -- to push you on how -- if you have kind of -- if the market is flattish or if you have units are roughly flat as you used to do kind of around 40 units for the year, do you think we sequentially improve from here? Kind of what do you see from customers from demand maybe pushing over the long term? Or do you think it's kind of volatile and flattish? I think where do you see that number within the cycle where you reached a peak that was very, very high, but obviously, you were quite a bit lower in pre-COVID?

Yes. I mean the market has seen its spike in 2021 when the market was up almost 40%. And since then, it has corrected 2 years in a go that we have seen declines reaching last year, roughly 2.1 million units, which we would assume to see a stabilization during 2024 with some focus of growth in EMEA and APAC for now and for the strong deterioration in the Americas. We would assume that overall, EMEA should somewhat revert in the second half. And with that, become also a stable market more or less at the end of this year. And when I look into our, let's say, order intake, in unit terms measured, we have seen a pretty stable development in the first half. And assuming some normal seasonality, maybe a little bit also put down on the current weak macro data, I would say that also this kind of stabilization just below last year's level is a good starting point for Q3. Then I have a follow-up question from Sven from UBS.

Yes. Thanks, Sebastian, for taking the follow-up. Just on Chinese competition. I was just wondering because I remember during the pandemic, there was more intense competition. I think you also back then lost a little bit of market share. Was just wondering with the slowness in the Chinese domestic market, do you see the Chinese competitors becoming more aggressive again also over in Europe? Or is there no change at this point?

Well, I think they have started to make inroads into Europe in those days, especially in the southern and eastern parts and some markets like in Russia is today fully in the hand of the Chinese players. On the other hand, we still see them here and there. But exactly, this is the reason while we have started to develop our value platform back then in 2021 which we launched in APAC initially, and we saw the global rollout of those products during '23 and [ the first months ] of this year. So this is how we think that we can keep the Chinese player at a certain distance, we see them in the statistics. But when we talk to our customers and our salespeople, they do not necessarily really see them that much at our customer base.

Understood. Thank you.

Welcome I don't see anyone else, I'm raising the hand me so it's functioning. Well, if not on the case, then I would say thank you very much for dialing in, taking our messages into the third quarter results and talk to all of you at the end of October when we will release our results, as always, at 07:00 a.m. in the morning. Thank you, and goodbye.

Thank you, Sebastian.