KION GROUP AG
Q2 2021 Earnings Call Transcript

Published:

  • Operator:
    Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus Call operator. Welcome and thank you for joining KION Group's Q2 2021 Update Call. Today's presenters will be Gordon Riske, CEO of KION Group; and Anke Groth, CFO of KION Group. Throughout today's recorded presentation, all participants will be in a listen-only mode. Presentation will be followed by a question-and-answer session. I'd now like to turn the conference over to Mr. Gordon Riske, CEO of KION Group. Please go ahead, sir.
  • Gordon Riske:
    Yes, thank you. Welcome to our update call for the second quarter of 2021. As a basis for this call, we will use our Q2 2021 presentation. It's available on KionGroup.com, under Investor Relations in the Publications section. We'll be presenting as usual in 4 parts today. And then, open up the discussion with your questions. I will begin with our financial key figures for the first half year, and then, present selected business highlights from the past quarter. This will be followed by a market update. Anke Groth will then provide you with the financial update and we'll close the call with a presentation of our outlook for the financial year 2021, before we turn it back over to you for the Q&A. So let's start with our key financial figures on Page 3. So overall, during the first half of the year, the KION Group continued its recovery after the pandemic year of 2020. And we did achieve significantly improved KPIs compared to the same period of the previous year. Supported by a very strong rebound within the ITS segment, our order intake for the group grew by 34% to €5.9 billion in the first half of 2021. Revenue reached €5 billion, up 26%, driven by both operating segments including a successful orderbook conversion in SCS. Even more pronounced was the increase in adjusted EBIT, which reached €462 million in the first half of the year, resulting in a great margin of 9.3%. Our free cash flow for the group improved further and came in at €301 million. So in a nutshell, we saw a significantly increased profitability, as well as continued strong demand that provides us with a good basis for the remainder of the year. And that is now reflected in our raised guidance. Moving on to Page 4, let me describe a few selected highlights in the past quarter. We continued to stringently implement our 2027 strategy, further strengthened our position through new products and an expanded footprint. Linde introduced the new line of the Linde X20-X35 electric forklift models with load capacities from 2 to 3.5 tonnes. These are the first electric Linde trucks, that are comparable with the performance and robustness of Linde's IC hydrostats, while offering additional environmental benefits. They represent a real alternative for our demanding customers with high intensity applications. Another feature is the full truck connectivity, so that these trucks overall offer all advantages of a digitalized industrial truck. Dematic together with our ITS brands, Linde and STILL and the Digital Campus have jointly developed the Dematic conveyer ConfiKIT, an app that makes configuring a conveyor line at the customer site much easier.
  • Anke Groth:
    Yeah, thanks a lot, Gordon, and also a warm welcome from my side. We start with ITS, so please turn to Page 9. During the second quarter, we saw a significant demand for industrial trucks leading to a record order intake of €2.2 billion in the quarter, partially also driven by pre-buy effects due to our list price increase in July. At the end of June, the order book for the IT&S segment stood at almost €2.3 billion, which is up by 64% versus December 2020. Revenue increased by around 26% to €1.6 billion supported by our new business, despite ongoing supply chain issues. On top, our service business also grew significantly. Looking at the operating performance, we generated an adjusted EBIT of €148 million resulting in an adjusted EBIT margin of 9.2%. Let me address here one point, we often done comparison with 2019 margins. So some of you rightfully points to the fact that despite comparable sales levels to Q2 2019, our margins are not yet back to historical double-digit ranges. The main reason for that is an increased fixed cost structure. We mentioned several times higher depreciation and our strategic expenses, for example, the Polish factory ramp up. And then, of course, we see raw material price increases. During the first half year of 2021, the ITS segment recorded an order intake of €4 billion revenues of more than €3 billion and an adjusted EBIT margin of 8.9%. So overall, we can say the ITS segment showed a very strong second quarter and a good first half year. However, we expect the second half of 2021 to be impacted by certain headwinds, we already mentioned increasing material costs and some component shortages. So, therefore, the margin expectation for the second half of 2021 is slightly lower than seen for the first half of this year.
  • Gordon Riske:
    Thank you. I'm on Page 17. As you've seen, we have just recently increased our outlook for the financial year 2021. This updated outlook is based on the achieved results in all key performance indicators during the first half year, which were significantly better than our original forecast. And in addition, we expect that the current positive projections for global economic growth over the year as a whole as well as the upturn in revenue to continue during the remainder of the year. So for the KION Group, you can see the detailed ranges of our updated outlook on the slide. The order intake for the group is expected to be between €10.65 billion and €11.45 billion. The target figure for consolidated revenues is in the range of €9.7 billion to €10.3 billion, and the target range for adjusted EBIT between €810 million and €890 million. Our free cash flow outlook is unchanged and is expected to be in the range between €450 million and €550 million for the reasons just explained. And the target figure for return on capital employed is in the range of 9% to 10%. This includes an adjusted outlook for the segment Industrial Trucks and Services with respect to order intake, revenue, and adjusted EBIT. For the segment Supply Chain Solutions, we increased our outlook for revenue and adjusted EBIT as well. Our free cash flow guidance remains unchanged based on, as we planned, additional buildup of inventories, respective the working capital due to the ongoing tight supply chains. Now, however, there are still considerable uncertainties in the assessments of our business performance for the remainder of the year due to the unpredictability and the further course of the COVID-19 pandemic, the risks there associated with further development of end markets and raw material prices, also with a regard of availability of the intermediate products. Our 2021 outlook adjustments are based on the assumption that there will be no further far-reaching lockdown measures or plant closures in the course of the year and that the availability of intermediate products will not tighten further. An economic downturn in key sales markets or worsening of procurement risks could cause the KION Group's performance and financial results to deviate in such a case significantly from the outlook. Looking onto Page 19, you see our further financial calendar. Next event is the publication of our Q3 results, which will take place on October 26, 2021, shortly before our Virtual Analyst & Investor Event scheduled for the 3rd of November, 2021. Until then, we look forward to meeting you at conferences and roadshows. And with this, we'd like to close the formal part of this update call and hand over back to the operator, so that we can take your questions.
  • Operator:
    Ladies and gentlemen, at this time, we will begin the question-and-answer session. The first question is from the line of Sven Weier from UBS. Please go ahead.
  • Sven Weier:
    Yeah, thank you. Good afternoon, Anke. Good afternoon, Gordon. The first question is on the truck order intake guidance that you've given. And as you said, it's implying quite a bit of a slower second half, which of course I understand you had some prebuy, you had some pent-up in the first half. But I was also curious, to what extent are you also limiting the order intake, because you're conscious of capacity constraints, conscious of supply chain constraints? So is it also kind of voluntary from your side?
  • Gordon Riske:
    Yeah, I mean, we're a larger company than we were several years ago, but we're not that strong to tell customers no. And I would never tell a customer no. So, no, we are not limiting in any way. You can see that even the strong order book and strong order intakes, despite some of the, let's say, delivery promises that are stretched out, and customers still sticking with us. So it shows there is quite a bit of patience in the market. But I think you made the right statement. We have pent-up demand from last year. People were ordering prebuys. We did have just a huge second quarter. I've never seen anything like it before. And I just don't expect that the range to continue in the second half of the year, and it already shows in China. I mean, 36% between us is not that bad. But I do see some normalization in the second half of the year.
  • Sven Weier:
    Okay. Yeah, that makes sense. Second question, please, is on Supply Chain Solutions. I was just curious how the pipeline has evolved between the last quarter and now. Is it still as upbeat or are you seeing any signs of saturation? Did you maybe have some order slippages more than usual into the third quarter? That would be the second one. Thank you.
  • Gordon Riske:
    No, saturation, I'm amazed that some of our customers when they talk about 5 years, 10 years, 15 years. So, no, actually, the order project pipeline I would call it is as full as the last time we talked in the last quarter. I just think the skillset that we've been able to acquire and the expansion into the grocery business and fashion business and so forth, and we've increased our presence in Europe and made a lot of progress around the world. It's a fast growing company and a really, really solid market. And the pandemic has kind of just inflated all of that and put a turbocharger on customers' behavior that a lot of people will no longer return to stationary buying and stick with the online business. And it's our job to make that as seamless as possible. And that is really adding up to a lot of orders.
  • Sven Weier:
    Yeah, and maybe in that context, Gordon, I saw in the quarterly report that you seem to be buying a company in India. Can you maybe elaborate a little bit on that? I think it's in SCS, right? So maybe you can elaborate a little bit on that one as well.
  • Gordon Riske:
    Yeah, I mean, you've followed us a number of years and the message has always been, where do we have a technological white-spot or where do we have a regional one? And fact is that many of our big customers and it's publicly noted, so it's, I'm not telling any secrets, have made huge bets on the Indian continent and have committed, Amazon being one of over €1 billion investment into these markets. And so, if our biggest customers are going there and investing in a big deal, we have to follow that and be there to make sure that we're the ones that then provides the backbone. So that all of this can happen. And that's just simply, we found a very good partner. And we're already in the forklift side, one of the leaders in the market, I'd say right up there at the top. And so, we're following, as we have all along, where our customers are to provide them with very local, very strong presence.
  • Sven Weier:
    Understood. Thank you, Gordon.
  • Operator:
    Next question is from the line of Sebastian Growe from Commerzbank. Please go ahead.
  • Sebastian Growe:
    Good afternoon, everybody. Thanks for taking my questions. Hi, Anke. Hi, Gordon. The first one is a follow-up to Sven's question, on your whole situation in ITS and then the volume trajectory. The question is after having seen this pent-up demand and certain pre-buying or pull-forward, as you phrased it, can you comment on the potential impact from the pre-buying? So if you could put a number behind, it would be helpful, and also talk around the margin quality on the orders that you have taken so far. And related to it, I would be interested in the midterm outlook, because you're scaling back on the capacity part of the overall improvement program. I would be just interested in hearing your thoughts around your assessment on the underlying market growth in ITS. So if this has notched up a bit eventually from the structural standpoint. Things are going extremely well in China, but also obviously in other geographies. And if I just look at the market being 40% or so above the 2019 levels, I would be just interested in hearing your thoughts around the kind of structural growth in ITS. And then I would have one more around SCS.
  • Gordon Riske:
    Yeah, again, we're not pulling anything back in terms of volumes. I know what you mean about our restructuring program, because we do have to focus on delivering our promises to customers. But structurally, and I think we've alluded to it a few times on these calls, I would say we have our core ITS business, especially the brands of Linde and STILL, which are certainly high-profile, high-usage, sometimes we call them premium customers. That is a pretty steady business and has had some sufferings. Also, I talked about it last year when 2020 those went down, and that has disproportionately come back in the market. That's the one area. But what we are seeing structurally is a lot of products that handheld small pallet trucks, also legally ergonomics, people are not allowed to use those anymore. So that's really driving the conversion to electrify that. So that is a structural thing. We call them entry-level warehouse trucks. That is really moving. We have a partner in China, and we have some low-cost products ourselves. That's one area that will continue to be very robust. Then we have the whole emissions drive. Today, we are 87%. We just introduced within the big product family that we launched last year with the first truck was an IC truck. Now, the electric trucks are coming behind with the same functionality as a diesel truck. And so, structurally, we've become much more of an electric company. And then, you put the whole value part of it in with our China effort, with good enough trucks for medium usage type of equipment. And what we see in SCS simply has an effect on ITS over time. More people buy things online. Yes, they need complex distribution centers to do that. But at the end, closer to the delivery point to the customer, you simply need more forklifts. There are more packages. There are more parcels. There are more small bits being moved around on pallets, and that's structurally driving the market. And so, it is a positive area to be in for exactly the type of products and services that we offer. But again, 2021 second quarter will go down, at least in my mind, as absolutely outstanding. I just don't believe that that's the norm. But we do have structurally I think a great position that we're in to address the further growth trends that I just mentioned.
  • Anke Groth:
    Yes and, Sebastian, hi. With respect to your question to quantify the pre-buy effect, quite frankly, that's really difficult to say what is now normal customer behavior, what is based on the list price increase we announced. So it would really be a superficial estimate and could only be wrong. So no number on that part. Then you asked for the margin quality. And what we can see and observe is that we do have a very positive development of the price assertion. Last year was a little bit more difficult with the pandemic. But this year, we do see a good price assertion in our order intake. So that's a positive development we can report here.
  • Sebastian Growe:
    Okay. Sounds encouraging. And the other question I had was around SCS. I keep it really, really short. But there more interested in the spectrum add, potential and outlook. So I'm bit surprised quite frankly to see that you can earn such good margins, while at the same time running the business at negative working capital. I understand that SG&A was a bit below proportionate in the first half. And then, that is clearly also then I think reflected in your H2 margin guidance. But from a more higher-level perspective, is there a certain cap really for the business, or if operating leverage was to continue, yeah, how should we think about sort of the structural margin outlook in SCS in particular? Thank you.
  • Anke Groth:
    You have seen in the second quarter that we achieved a very good margin of 12.6%. So we think the business has a good potential for margin improvement and the good potential for further volume and scale effects. On the other hand, they need to invest also into SG&A. And you see it in absolute terms, but we definitely have the ability to grow that disproportionately to the revenue growth.
  • Sebastian Growe:
    So the 12% is sort of definitely the aspiration level, and if things play out nicely as seen in the first half, it could be little better. Is that sort of the right way of looking at it? Or is there anything in terms of the mix shift, or I think that's also one of the aspects we haven't touched upon yet that eventually will be also reflected in the H2 margin guidance that I think, by nature, it is better margin in the Americas, eventually, lower working capital, and the other way around in Europe? So how should we think about that sort of structural regional mix shift, to put it that way?
  • Anke Groth:
    Yeah, you are right. So the regional shift could have a slight impact, because we often spoke about the lower margins in the European market. And the European demand has really accelerated. So that could be a slight negative impact. But if I look at the margins for the second half of the year, that is really driven by the slightly lower volume, we are guiding on the midpoint as well as the material cost headwinds. So SCS is not as affected as ITS. It's lower components, lower material. But still it is affected. And you will see that in the margin development in the second half of the year.
  • Sebastian Growe:
    Okay. Good. Thanks, both.
  • Operator:
    Next question is from the line of Philippe Lorrain from Berenberg. Please go ahead.
  • Philippe Lorrain:
    Yes, good afternoon. A couple of questions. I start with ITS. Would you mind sharing with us whether the share of service within the ITS order intake was extremely high perhaps in Q2 2021 versus normal levels? The reason I'm asking is because I'm scratching a bit my head because if I'm doing some kind of back-of-the-envelope calculation around your ITS order intake, I come to the result that the price mix effect on the year-on-year growth of the order intake in value must have been actually huge. I've got something like plus-30% year-on-year or so, assuming some kind of rounding errors. So on the one hand, you've got the mix shifting more in favor of counterbalance trucks. So that must have helped anyway. But you said actually that the price increases that you are pushing through are going to be only effective from July on the order intake. So I'm wondering what could be the reason for explaining such a strong price mix parameter. To give you an indication to my calculations, I'm just assuming that the service order intake equals the service sales, which is perhaps the wrong way to do in the current trading environment. So that's the first topic.
  • Anke Groth:
    Hi, quite frankly, we would propose to discuss your calculations offline. It makes a lot to then go really detailed through your assumptions, through your calculations. And to help you with that, it could take a little bit too long not doing that in that call, if that is okay for you.
  • Philippe Lorrain:
    Yeah. That's pretty fine. I guess, it's quite complex anyway. So then, I'm going to jump to the second one. In the R&D section of the report, you mentioned the leader warehouse manager as a tool helping customers to start using digital warehouse management. It seems like an interesting add-on for SME customers from my opinion. And, I guess, it's all about getting the switch in the door for getting them perhaps to switch, and purchase more comprehensive solutions also from SCS, when the time comes and their operations change. So can you tell us a little bit more about that? For instance like the perceived value for the customer, the competitive position, especially since you mentioned that the competition is picking up further in trucks, especially with the Chinese players. And, perhaps, as well, where the revenues and profits for such business are going to be recognized? I understand that it's brought to the market by the Linde brand, which means that forklift customers should be receptive to the idea. So yeah, if you have like anything on that, that would be great.
  • Gordon Riske:
    As a general trend, our whole software add-ons, whether it's in the truck business, or in the SCS business, for our side, efficiency and for the customer, ease of doing business. And, in the ITS business, much of our fleet out there that we sell these days is on some kind of lease contract, 3 years, 4 years, 5 years. And we have to be extremely competitive with the monthly rates. So the more information and the more data we have to make these things easier, the more correct, we can be on our pricing. What we are not doing yet, perhaps at some day, because we're not that big in this subscription models and those types of things. What we're not doing yet is listing the software revenues out separately. That's the thing we've bounced around internally, and we're still talking about how to do that maybe that comes out someday, but that is not a revenue stream that that we publish separately.
  • Anke Groth:
    But, Philippe, that means you'll find out in the IT&S segment and it will be part of - it is part of the service revenues.
  • Philippe Lorrain:
    Okay. Understood. And perhaps just as a follow-up also on the topic of R&D. Could you add a little more color as well to the 4 projects that you mentioned in the report as part of the R&D partnerships. I think one that I found like really interesting was, for instance, like the robot grips.
  • Gordon Riske:
    Yeah, the gripping part is kind of the last frontier of how to be able to fully get to a lights-out warehouse, it's one thing to move 400 packages through a sortation system per minute. But it's another thing to put an individual iPhone or whatever into a box. And so we are trying to find more ways to automate that. And it's still too expensive. But that is where research is going, all companies to fully be able to automate this part of the - as I call it, one of the last frontiers to be able to have a lights-out warehouse.
  • Philippe Lorrain:
    Yeah. So that's basically, if I understand that correctly, that's basically shifting from AGVs towards, at some point, even like AMRs, like, mobile robots to...
  • Gordon Riske:
    We have one of the larger mobile automation suppliers with a lot of AGVs. And the AMRs, we have the equity participation in Quicktron, which we announced last year, I believe, yeah. And, we don't just announce that we actually do things with these acquisitions that we do, and are starting to put those into real life applications and practice so that that you will see much more of, in years to come is the automated forklifts driving around and autonomous driving vehicles in the warehouses that will have a bigger, bigger presence in the years to come.
  • Philippe Lorrain:
    Okay, I'm excited to see that. Thank you very much. I'm back in the queue.
  • Operator:
    Next question is from the line of Akash Gupta from JPMorgan. Please go ahead.
  • Akash Gupta:
    Yes. Hi, good afternoon, everybody, and thanks for your time. My first question is on IT&S. I think, you have raised prices since July 1. And the question is that are these price increases to offset the raw material headwinds that we have seen in the first half of the year? Or would you need additional price increases later in the year or maybe next year to fully offset that? And the second question, I have is on SCS demand. You said demand is quite strong, and you obviously commented that COVID-19 has kind of turbocharged demand. Can you tell us where this new demand is coming from in particular context of micro-fulfillment center? I think, it's last year, at your CMD, you presented your micro-fulfillment center plan. So just wondering if these MFC offering is accelerating your overall supply chain solution growth, or is it still coming from standard solution? Thank you.
  • Anke Groth:
    I think your question was if we intend to go for second price increase this year, if I understood it right, the material cost headwinds?
  • Akash Gupta:
    The question was that the price increases that you have done, is it enough to offset raw material headwinds given raw material has been quite volatile and keep on increasing in the first half of the year, or do you need more at some stage to fully offset the headwinds?
  • Anke Groth:
    No, it's - it won't fully offset the headwinds we see this year. We have increased prices for the second time of July 1, but some of you see the price increase in the order intake, but until we produce a truck and ship it to the customer, it will take a time a while. So we have lead times. So, no, this year, you won't see that we can balance the material price increases out with our list price increase.
  • Gordon Riske:
    So now the SCS demand part, yes, we do have a couple more micro-fulfillment centers that we have sold, and are putting into on stream especially in North America with some longstanding customers, but the demand is quite broad based, if I would pick one area out that has started to make a difference. We started several years ago with our end caps for the grocery automation business. We have the second generation. We have the new multi-shuttle generation coming out now, and it's available in the market. So we have focused a bit of attention and had some good wins in bigger customers for the grocery automation. But, overall, we are seeing simply this trend to automate large scale warehouses, very broad basely regionally, as well as from the customer segments that we address. We don't have any particular one other than grocery that has had an uptick in the past half a year or so.
  • Akash Gupta:
    Thank you.
  • Operator:
    Next question is from the line of Katie Self from Morgan Stanley. Please go ahead.
  • Katie Self:
    Hi, good afternoon. Thank you for taking my question. So I'll give my first one on ITS, and then the second one on SCS. But so the first one really is around the component shortages or the supply chain issues that you've mentioned in the release? I think, you've previously talked about a particular engine supplier where you're struggling to get the control panels. I just wanted you to comment on, is it still really 1 or 2 suppliers that are having issues? How broad-based or how widespread has that tightness come now? And then my second question just on SCS. I was hoping, we could talk a bit about your account sensitivity. I know in the past, we've kind of talked about the impact, for example, an Amazon order could have in terms of like the lumpiness of order intake, is really you give us an indication of how the nature of that business has developed as you have scaled up so significantly in the last couple of years, for example, what proportion of your top 10 customers account for in terms of the number of orders? Or any kind of qualitative sense of how much the business is driven by large key accounts versus a tail of smaller customers would be great? Thank you.
  • Gordon Riske:
    Okay. On the ITS business, I don't want to disappoint anybody that there's good news and bad news, some of the things have started to get better. So this engine topic is still there. But we're managing it through and the electronics part, we have had some pickups. On the other hand, due to very strong demand of certain things. The suppliers that are having trouble is a bit broader than it was half a year ago. And, we have a number of people at - on site supporting our suppliers with third parties, the team has done a lot of work to find second sources even some of our customers have helped us in certain things. So it's not just the 1 or 2 from batteries, that we have enough batteries for our warehouse to do the factories that have made some adjustments based on closing scenarios that were decided last year 2020. And now we figure out, gee, we need twice as many tires as we had planned. And so now, because of labor shortages and rubber shortages, maybe we don't have enough tires on time, so it is a bit more broad. But all things, we do have under control, because we're not alone. So in this case, customers are being quite patient, because all options of all of our competitors are affected in one way or the other. So it is a little bit broader. But I would say, our scope and our understanding of it, our workarounds are also keeping up with the problem, and that's why, we're quite confident if things don't get much worse, as I said in my opening statement that our uptick in the guidance, we should be able to deliver that through 2021. So, on the mix?
  • Anke Groth:
    Yeah. That's - Katie, a very interesting and far-reaching question, the whole customer, I would say diversification is indeed something which is important for the business we have seen throughout the pandemic, the high share of e-commerce customers fueled by the pandemic. But also in Q1, we have spoken about a substantial increase in order intake from grocery customers. And Gordon also just has spoken about it. So we have seen now in the first half of the year, I would say, a stronger diversification of the customer base than last year with grocery, general merchandise coming back very strongly. Also, April is ordering very strongly. And from a region perspective, we already have stated that Europe has accelerated. So we are strong in North America, we keep to be strong in North America, but also the European market has shown a very strong increase in orders. So, I think, the whole customer base regional diversification is on a very good track with respect to the business. The order size also is very different quarter-by-quarter. So we have seen a lower amount of large orders in the first quarter. In the second quarter, again, it is a share well-above 50% in our order intake. But still it needs to be seen if the trend of last year continues, where it was really a tendency towards the very large orders. So, Q1 was a little bit more balanced towards small orders and Q2 is now back more gearing towards the larger orders. But all-in-all, I would say, the whole development of SCS, the whole order intake, the customer verticals, the diversification, the geographical footprint, that all is very healthy and very well balance. You asked about the dependency on customers. We have disclosed or started to disclose last year, the revenue with one major customer in the SCS segment. And we have also related that customer to the e-commerce segment, as you might remember. And it was in the first half year report, you can also find it. So the share of revenue of that single customer is around €890 million for the first half of the year, which is nearly the number of the full year 2020, so you can also see that we spoke about e-commerce and the order intake in 2020. We are now delivering on the orders. So the revenue share in the first half year is quite high.
  • Katie Self:
    That's great. Thank you very much.
  • Operator:
    Next question is from the line of George Featherstone from Bank of America. Please go ahead.
  • George Featherstone:
    Hi, good afternoon. Thanks for taking my question, just one for me. Clearly, the growth in SCS over the past couple of years has been very strong. And I wondered if you could help us understand what you think penetration rates are for warehouse automation, both on a global basis and also then by the regions.
  • Gordon Riske:
    Yeah. You mean how many of the global warehouses are automated? Do I understand it, right?
  • George Featherstone:
    Yeah. More cases, the total addressable market, as you said today, where are we at in that cycle, I mean, that have gone?
  • Gordon Riske:
    Yeah. That's a pretty difficult one to predict, because there are also new warehouses coming up every month, but it's still less than 50%. So there is still a lot of potential and we have some customers in the grocery business that are just starting it, even if they have 50, 60 warehouses around the world, there's still a lot of manual labor being taken. And fully automated is probably less than 25%. So if you go into a modern warehouse today, the smallest amounts in the world are fully automated, you will more likely see a mix, some things are high speed parts are fully automated and you still have a lot of manual. So there's - the upside of that is there still a huge potential even in brownfield sites for SCS in the coming years?
  • George Featherstone:
    Okay, great. Thanks for the color.
  • Operator:
    Next question is from the line of Martin Wilkie from Citi. Please go ahead.
  • Martin Wilkie:
    Yeah, thanks. Good afternoon. It's Martin from Citi. Just a question on the technology in ITS, and you have a target for lithium-ion penetration by 2027. To understand, where you are in that journey, and related to that we all seen particularly in the U.S., it seems to be a bit of more preference for fuel cells rather than lithium-ion. And I'd be interested to hear if you agree with that. But if it is the case, is the more investment that you need for you to make your trucks more fuel cell compliant? Or is it sort of an agnostic power source you can plug-in either lithium-ion or fuel cell, and we change kind of how you develop trucks and so forth to hit that 2027 targets? Thank you.
  • Gordon Riske:
    Yeah, very good question. And the fact is that the best solution is not always the right solution for our customers. We see the Asian market going for these types of products, full speed ahead on lithium-ion simply, because it costs and efficiency. Lithium is still the most efficient power source, with a fuel cell to get hydrogen, you need to put 100% energy in and you get 70% out, so it's still not the most efficient. However, if you can do it with green energy, then it's at least zero emissions. So, as KION, we have addressed, and we have our own R&D research departments for all of the technologies, lithium-ion, fuel cell, and let's say, lead-acid batteries and combustion engines. Having said that, 87% of all the trucks that we deliver in the world today are already electrically driven, so I think that's a clear sign of where the direction is. And to us it doesn't really matter that much. Is it a lithium power base? Or is it a fuel cell power base? We have delivered both and you're right, the U.S. market has a different subsidy and different view on fuel cells. And because in the U.S., you have atomic energy plants, which you can use them to create hydrogen fuel, which in Europe, especially Germany is a no-no. So there's a whole different cost basis there and so that drives that a bit. But we are delivering fuel cell trucks. We have Weichai Power, which has a cooperation and equity participation in Ballard Power, where we are developing fuel cells with for the industry for forklift application. So we are in all of the propulsion fields very well ahead of the game to be able to deliver what is for the particular market, the most reasonable and sensible solution.
  • Martin Wilkie:
    Thanks. And related to that, your service business, given that you're already heavily electrified, and obviously you make servicing from hydraulics, and all these things that wouldn't change depending on the fuel source. Is it reasonable to assume that the technology is also agnostic for your aftermarket and service business as well?
  • Gordon Riske:
    Well, a diesel engine where you have a lot of consumables has more consumable parts. And a fuel cell also has many, many more moving parts than in battery-driven truck like lithium-ion. So over time, if you did nothing, it would have an effect to compensate that for a bit, the electric truck, in general, our vertical integration is much higher. So we make our own electric motors, we make half of our electric power amplifier. So that puts the energy into the electric motor. We have, as you know, announced a joint venture which is now in production with BMZ, a manufacturer of lithium-ion, we make the electronics control systems so our value add, which means then exclusive spare parts going forward is quite a bit higher on an electric truck than it is on a combustion engine truck we buy the engines.
  • Martin Wilkie:
    Great. That's very helpful. Thank you.
  • Operator:
    Next question is from the line of Alexander Hauenstein from DZ Bank. Please go ahead.
  • Alexander Hauenstein:
    Yes, hello. Alex Hauenstein from DZ Bank. Thanks for taking my question. I have 2 questions. First of all, given what you know today, could you please provide an update about the expected quantified impact of raw material cost increase and supply bottlenecks for ITS and SCS separately, please?
  • Anke Groth:
    Yeah, we can do, as we did it before, we have not quantified it, really, we have qualified it somehow. But, yes, we can do that. So for the full year basis on a group perspective, up until now, always have said that we expect mid-double-digit EBIT impact raw material cost headwinds. From today's perspective, we would say mid- to high-double-digit EBIT impact on KION Group in total. And that would mean SCS somehow low mid-double-digit and ITS a mid-double-digit impact.
  • Alexander Hauenstein:
    Okay. So understand, this is unchanged, right?
  • Anke Groth:
    No, I think, we are gearing a little bit more towards the higher end. And before we have set for the group, it's mid-double-digit, and today, I would say, it's mid- to high-double-digit. So it's slightly higher, but not substantially higher.
  • Alexander Hauenstein:
    Okay. Thanks for the clarification. And another thing, coming back to the cooperation with Weichai, what are the contributions there for your success in China? Maybe you can give us some color here about the success so far. What has been successful? What could be more improved going forward? How is their role in the planned expansion of the sales network in that context in China? And maybe also, looking for your additional production capacities, I understand they have a 5% stake in that facility. But maybe apart from that, maybe you can give some color here about the cooperation status and what you're planning going forward. Thanks.
  • Gordon Riske:
    Yeah, I mean, first of all, there is no operative running business. We run our business. They have a much bigger business in the engine and on-highway truck. Having said that, they are one of our biggest customers. They have lots of warehouses. And Sinotruk is one of the largest truck manufacturers. They're the number one transmission manufacturer. So it's a good customer for forklifts and for SCS. So that's a very good thing. Second thing is the heavy truck business in China as well as the world moving toward zero emissions, that's a good partner to have for fuel-cell technology, as we just discussed in the other question. So there, we have some R&D teams that work very closely together. Third one is, being such a large player in this market, in a very diverse market, it's very helpful sometimes to open doors. For instance, in our project in Jinan, where we are now halfway through or 3 quarters of the way through in building our new facility, being a 5% shareholder, we were able then to get all the necessary normal approvals for building permits, et cetera, hiring people and all these discussions that you have with the local governments, just as you would in any other country, that has been able to expedite that process significantly. So there are a lot of different levels. And we do work together. So it's been for our success in the China market extremely helpful. And we see that moving forward as the world becomes more electric, not only for the forklift business, but also for the on-highway truck business.
  • Alexander Hauenstein:
    Okay. And anything that could even improve further? Or that may…
  • Gordon Riske:
    No, I think we've addressed all the issues, and then we're in constant contact with each other. So that's, let's say, an ongoing partnership relationship and business relationship that has led to good results. And I expect that will be the case in the future also.
  • Alexander Hauenstein:
    Sounds good. Thank you.
  • Operator:
    Next question is from the line of Arsalan Obaidullah from Deutsche Bank. Please go ahead.
  • Arsalan Obaidullah:
    Hi, good afternoon, and thanks for taking my questions. Just first of all, in terms of the pre-buy effect and just the broader market response, just to understand, so is the sort of price-rise you sort of indicated in July, is that something that has been seen across the board? Or is that sort of unique to KION in terms of - at least in what you can see? I guess, what I'm trying to understand is, when I'm looking at the kind of the performance versus the market, whether there that kind of it sort of comes out in the wash or whether that effectively has inflated the performance and whether that's also, that pre-buy, if it's sort of equal across regions or whether you're seeing more in some regions than others? That's my first question.
  • Anke Groth:
    Hi, Arsalan. Thanks for your question. Yeah, pre-buy effect, I would say that could be particular for KION, as we have increased our prices 1st of July and announced that beginning of June. And, therefore, our customers have reacted potentially to that. And again, we cannot really quantify that effect, as we have already said before. But we assume that it has an effect on the figures we have seen, especially again the June figures after the announcement of the price increase. And if our competitors are seeing this as well or the whole market, it depends when they are putting their prices up and communicating it. So I cannot communicate on that one. And I would say, it's especially for the EMEA region, not so much for the other regions.
  • Arsalan Obaidullah:
    Okay. Thank you. And my next question is just on the sort of the new electric product in terms of the, just the early kind of demand and sort of suggestion you're getting, how is it being received by the market? Sort of the X20-35 ones you mentioned, how is that sort of going in terms of early orders and suggestions of how that's going to play out? And also, again, is that something you sort of definitely see as a unique sort of offering that other companies aren't offering? You have a sort of competitive advantage with that?
  • Gordon Riske:
    Well, first part of the question, I'd like to deliver everything that's been ordered. That would be nice. That's not the case. So we have a good order backlog. Second thing, everybody's working on a solution like that to be able to fully replace IC trucks. I don't think it's going to happen in all applications, because you do need a charging system. But at the moment, we do have a, I think, somewhat unique product there that has the full power, the full reach, the full speed lifting capacity like a typical engine-driven truck. So I do think we have some competitive advantages, let me call it that, in this segment right now.
  • Arsalan Obaidullah:
    Perfect. And then just finally, if I may, I noticed, obviously, there wasn't sort of a slide reiterating your kind of medium-term targets. I sort of take that as an assumption that sort of those haven't changed, or they're not under review. You sort of talked about, let's say, for example, in ITS, this sort of growth, sort of a CAGR of about sort of 4%, I think if I'm correct, between sort of 2019 and 2023. Is that something that you sort of are still sort of looking at or do you think that's actually potentially now that given the strong sort of year you've seen, do you sort of see sort of upside to that or is that still something under review?
  • Gordon Riske:
    Yes, 2022-2023, I don't want to get ahead of the game here. We're still in 2021. Every time I look at the numbers, 2017 and 2018, we're all surprised at these double-digit growth rates. This is the first time we're seeing in big markets triple-digit growth rates. That's not a normal thing. So we do expect, as I said before, that things will normalize somewhat. And this traditional slightly better than GDP 4% growth rate, I think that's a very realistic number, especially if you perhaps carve out some of these special effects like these mechanical devices being turned into electrical devices, and because they have electrical motor on it now become part of the statistic. I think we have to work that out a little bit for you clearer to the analysts so that that's much more transparent than it is today.
  • Arsalan Obaidullah:
    Brilliant. Thank you very much.
  • Gordon Riske:
    Yes, thank you.
  • Operator:
    In the interest of time, we have to stop the Q&A session. I would like to hand back to Mr. Gordon Riske for any closing comments. Please go ahead.
  • Gordon Riske:
    Yes, thank you, all, for participating in this call after this quite astounding Q2 2021 and raising our guidance. And we look forward to talking to you again, when it comes to Q3, and in a couple of months, and the roadshows and investor conferences that we have ahead of us.
  • Operator:
    Ladies and gentlemen, the conference is now concluded. And you may disconnect your telephone. Thank you for joining. And have a pleasant day. Goodbye.

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