KION :

KION GROUP AG Investor & Analyst Call Conference Call Transcript 14.09.2022

14:00 CET

Speakers:

Rob Smith (CEO and CFO Ad Interim)

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KION GROUP AG Investor & Analyst Call Transcription

Sebastian Ubert	Yes, thank you, Stewart. Good afternoon and good morning, and
	thank you, everyone, for joining this call. We would like to use this
	as an opportunity to explain in a little bit more detail about the
	news which we published yesterday late and to answer your
	questions.
	So, without further ado, I will hand over to Rob Smith, CEO and
	Interim CFO of KION Group. Rob, the floor is yours.
Rob Smith	Thank you, Sebastian, and good afternoon and good morning to
	all. We will, for the first time since KION went public in 2013, post
	an adjusted EBIT loss between minus €100 million and minus
	€140 million in the third quarter 2022 on the KION Group level.
	Our current Q3 expectations for our Industrial Trucks & Services
	segment should not be any surprise to you. Sales and adjusted
	EBIT should be close to the levels seen in the second quarter this
	year, and order intake should start to normalize following strong
	growth in previous quarters, as we set out in our Q2 call.
	Shortages of parts and components are expected to continue.
	During the third quarter, a critical supplier of electronics had to
	temporarily suspend production due to a cyberattack. We're
	working very closely with our supplier to mitigate the
	consequences and currently expect them to have a limited impact
	on adjusted EBIT in the remainder of this year.
	We do expect a temporary adverse effect on our net working
	capital, however. This is a very typical example how our business
	can be suddenly affected by disruptions in the supply chain, over
	which we have limited control.

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KION GROUP AG Investor & Analyst Call Transcription

Measures initiated in ITS, like agile pricing, strengthening our supplier network, and establishing alternative supply channels, have already started to show effect. The business has been successful in reducing the number of at-risk suppliers as well as reducing the inventory in semifinished trucks from 12,200 semifinished trucks at the end of the second quarter to below 8,500 at the end of August.

We obviously don't have the numbers for September yet, and they may be adversely impacted by the cyberattack at one of our suppliers even though we're not seeing that impact yet.

The situation in our Supply Chain Solutions segment looks very different. Order intake in the third quarter will be affected by reduced demand from e-commerce customers, by project postponements, and very selective order cancellations.

On the adjusted EBIT level, SCS is anticipated to show a loss between minus €160 million and minus €190 million in the third quarter this year.

How did it come to this development? We, like you, have seen, the adjusted EBIT margin of SCS decline sequentially since the fourth quarter of 2021. In fact, you will recall that we highlighted this in our second quarter earnings call in July. The published margin of 7% had benefited from positive one-time effects in the low- to mid-double-digit millions amount. This meant that the underlying adjusted EBIT margin had dropped from 7% in the first quarter to 4% in the second quarter of 2022.

In August, higher costs on a number of projects led us to initiate a further in-depth assessment on the project portfolio, and our

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KION GROUP AG Investor & Analyst Call Transcription

team has been working relentlessly to understand the eroding margins in this business.

The analysis identified the following root causes for the negative profitability development. The costs of materials, labor, and logistics have been increasing, in some cases dramatically and very rapidly. Given the nature of the SCS business, which includes projects that have been calculated and priced and were sold as far back as 6 to 24 months ago -- and those projects are being executed now -- we've had to recognize that there are significant gaps between the costs in the project calculations and today's reality.

So far, SCS has only been able to pass a minor portion of the cost increases on to our customers, as we did not have contractual cost escalation protection in place.

Also, supply chain disruptions continue to impact existing projects, leading to labor inefficiencies and delaying their completion. This means we have a lot of engineering and implementation teams deployed on sites but unable to finish the work because of delayed parts and components, leading to significantly higher total project costs.

At the same time, new projects have started, but with engineering teams and implementation teams still finishing previous projects, they've not been available for all the new ones. In addition, we're experiencing labor shortages, particularly in North America, which makes hiring additional employees on short notice a challenge.

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KION GROUP AG Investor & Analyst Call Transcription

In a nutshell, we were confronted with a volatile and inflationary supply chain environment in a period of very strong growth, and this has revealed substantial challenges within our internal processes.

So now we take action. Let me explain how we're intensifying our initiatives and adding further substantial steps. In the second quarter of this year, we introduced price adjustment clauses in our project contracts, allowing us to more effectively pass through cost increases to our customers. We're also working with our suppliers to lock in costs early in the project lifecycle. These measures will allow us to respond flexibly to procurement cost increases during the usual 6- to 24-month project timelines.

Additionally, we're updating our existing project management processes to better plan and implement our projects to make those processes more agile and more robust in a volatile macroeconomic environment.

We continue to build on the great innovation power of SCS and its state-of-the art supply chain solutions and technologies to benefit our diverse customer base.

The long-term nature of the project business implies, however, that it will take time for the measures to take full effect.

We've also published a new guidance for the full year 2022 yesterday. I'll take you through it, and this is all on the KION Group level.

Our order intake we expect to come in between €11.6 billion and €12.5 billion. We expect to finish this year between €10.45 billion