Kion Group Ag Unsp/Adr

A wonderful good afternoon, ladies and gentlemen. Welcome to the Keon Group's Q2 2024 update call. Today's presenter will be Rob Smith, CEO of Keon Group, and Christian Harm, CFO of Keon Group. My name is Francie, the course call operator. I would like to remind you that all participants will be in a listen-only mode and the conference is being recorded. The presentation will be followed by a question and answer session. You can register for question at any time by pressing star and one. Please limit yourself to two questions only. For operator assistant, please press star and zero. At this time, it is my pleasure to hand over to Rob Smith, CEO of PeelCo. Please go ahead.

Thank you, Francie. Good afternoon, ladies and gentlemen, and welcome to our update call on our second quarter results. please refer to our presentation on the IR website for the call. I shall start off with a quick summary on the second quarter results, and I'll give you a business update, and then Christian's going to take you through our detailed financials and our outlook for 2024, which we've not only confirmed today, but we've also narrowed the guidance ranges following a good performance in the first half and our updated views on the market. Then I'll come back and take you through the the takeaways and we'll move into the questions and answers. So let's start together on page 3. Group order intake was 2.6 billion euros and reflects a seasonal improvement in the ITS segment and the ongoing lumpiness in the SCS segment. Tian had another solid quarter with revenues at 2.9 billion euros and our adjusted EBIT at 220 million euros and the adjusted EBIT margin at 7.7%, both increased year on year, driven by improvements in both of our operating segments. Both segments continue to benefit from our measures to improve operational and commercial agility. Material availability continued to be strong, and we monitor diligently and track the situation of our suppliers and their supply chains, allowing us to put mitigation actions in place in good time. Free cash flow came in at 137 million euros positive, driven by the improved adjusted EBIT and an almost stable networking capital. And earnings per share were 52 euro cents from 54 euro cents in the second quarter of last year. Let me give you some insights into our latest business developments on slide four. I'm proud to report that for the 12th time, our brand Stihl has won one of the coveted awards, the IFO Award. Many of you know this is the International Intralogistics and Forklift Truck of the Year Award. And Stihl once again impressed the international jury with its EXV Aigo automated pallet truck, winning first place in the mobile robot category. Stihl's EXV Aigo is... Still's first automated vehicle to be produced in series production at industrial scale and based on a thoroughly modular concept. The central idea is fast availability and maximum scalability for our customer solutions. Thanks to the industrialized production and modular system parameters, our EXV-IGO is quick to be put into operation using our commissioning software, IGOeasy. Service and maintenance are also fast and flexible thanks to our new digital service concept allowing our service technicians to access the machine's digital twin for each of our individual vehicles for diagnosis and troubleshooting even before getting on site. Another innovation this quarter is Dometic's launch of the noise reduction portfolio with comprehensive solutions that cure our customers' noise problems in their operations. Our portfolio reduces noise at source by up to 15 decibels, creating a quieter work environment that supports employee productivity, employee safety, and overall well-being. Furthermore, only Domatic uses 3D noise mapping audits across our customers' facilities to pinpoint noise and measure sound levels before and after the retrofit so our customers can feel, hear, and see the differences. Another highlight in the quarter was on the sustainability front, where Keyon Group was named one of Europe's climate leaders in 2024 by the Financial Times in cooperation with Statistica. We're proud to be recognized for our sustainability efforts and our commitment to reducing our emissions intensity. Christian is now going to take you through the detailed Q2 financials and our outlook for 2024. Christian?

Thank you, Rob. So let's go to slide 6 for the key financials of the ITS segment. Order intake of nearly 64,000 units was both up sequentially and compared to prior year level. In money terms, new orders declined slightly due to a higher share of APEC and Class 3.1 warehouse equipment in the new business mix, despite a 3% growth in the service business. Overall, the order book remained at a robust level and supports approximately six months of new business revenue. Margin resilience of the order book remains solid despite a mixed skew toward APEC and warehouse equipment in the recent quarters. Revenue at nearly 2.2 billion euros remained on high levels driven by a 3% growth in services. Adjusted EBIT remained at the healthy level of €231 million and continued to benefit from the high production levels and the 2022 price increases. As expected, the adjusted EBIT margin at 10.7% remained in the double digit, but declined slightly sequentially, reflecting a higher share of EPIC and warehouse equipment compared to the first quarter. I continue now on page 7, which summarizes the key financials of SCS. Overall, order intake continues to remain lumpy and is impacted by customers' hesitancy to sign new contracts due to macro uncertainty and postponed expectations and interest rate cuts. Accordingly, business solutions orders were down 27% compared to the prior year quarter. Service orders were down 16% due to the record level booked in the prior year quarter. You may recall that in the first quarter we talked about approximately 100 million euros of expected orders slipping into later quarters. About two-thirds of the spilled over projects from the first quarter were signed in the second quarter. This quarter we once again saw good activity from the PurePlay e-commerce vertical with a share of 61%. As mentioned in the last two update calls, the order book as of the 1st of January 2024 was adjusted due to a change in the presentation of the customer services business that we have aligned to the methodology applied in ITS. The slide which explains and quantifies this change is again included in the appendix of this presentation. Overall, revenue remained close to prior year and prior quarter levels. The service business continued to grow at 11% year over year while the project business declined by 3% as expected, reflecting the lower order intake and the higher share of orders with longer lead times throughout last year. We continue to make further progress in working through the legacy projects. The adjusted EBIT at 24 million euros and the adjusted EBIT margin at 3.2% reflects this and the higher share of service business in the revenue and is in line with our view of a better second half of the year. Let's now quickly run through the key financials for the group on page 8. Order intake reflects the seasonal recovery in ITS and the continued lumpiness in STS. The order book includes the change in the presentation of the service business in STS and continues to provide good workload for the next quarters. Revenue benefited from the solid ITS new trucks business and the resilient service business in both segments, which more than compensated for the slightly softer SCS business solutions revenue. Key and Group improved the adjusted EBIT and the adjusted EBIT margin year over year, driven by both operating segments. Page 9 now shows the reconciliation from the adjusted EBITDA to Group Net Income. Depreciation and amortization followed the usual quarterly pattern. Non-recurring items of minus 14 million euros mainly include the conclusion of a multi-year legal dispute related to an acquisition that DEMATIC undertook in 2015, which was before QM Group acquired DEMATIC. Nevertheless, our full year expectation for NRI remains unchanged at minus 10 to minus 20 million euros as we had positive NRIs from the release of some provisions in the first quarter of this year. PBA items in the quarter included a €22 million goodwill impairment for Kion ITS Americas, which we had pre-announced on July 10th. This was driven by the stronger than expected decline in the Americas market in the first quarter. With the impairment, we have ridden off the entire goodwill related to Kion ITS Americas, which stemmed from the foundation of Kion Group back in 2006 or 2007, when the industrial truck business of Linde AG was sold to private equity. The increase in the adjusted EBIT was more than offset by the two described effects in NRI and PBA, resulting in pre-tax earnings of 118 million euros in the quarter. The tax rate in the quarter was negatively affected by the non-tax deductible goodwill impairment. Excluding this, the tax rate would have amounted to approximately 34%, We have therefore increased our full year 2024 effective tax rate indication to 30 to 35%, from previously 29 to 34%. As always, you'll find a slide on the housekeeping items in the appendix of this presentation. Net income attributable to shareholders amounted to 68 million euros in the quarter, corresponding to earnings per share of 52 euro cents. Let's now continue with the free cash flow statement on page 10. Free cash flow in the quarter reached positive €137 million due to the strong improvement in adjusted EBIT and an almost unchanged net working capital. The triple-digit free cash flow was achieved despite high tax payments of €120 million relating to the improved financial performance in the fiscal year 2023 and high tax prepayments for fiscal 2024. The positive free cash flow did not lead to a decrease in net debt, mainly due to the dividend payment of 92 million euros in June and the complete unwinding of unbalanced sheet factoring. Page 11 shows the development of net financial debt and our leverage ratios. As mentioned on the previous slide, the positive free cash flow did not lead to a decrease in net debt, mainly due to the payment of the dividend and the completed unwinding of unbalanced sheet factoring. In fact, net debt at the end of June 2024 increased by 51 million euros compared to the end of March 2024. Accordingly, the leverage ratio in industrial net operating debt increased slightly, quarter and quarter, by 0.1 to 1.5 times, despite a further improvement in the last 12 months EBITDA. Due to the lower net pension liabilities, the leverage ratio in industrial net debt remains sequentially stable at 1.8 times. We remain committed to improve leverage metrics further to defend our two investment grid ratings as we believe they are supportive to our business model. Slide 13 lays out our updated 2024 view on our respective markets. For the industrial truck market, we now expect orders in units to remain on the prior year level. While we continue to expect growth in the APEC region, the Americas region is showing a stronger decline than previously expected. EMEA is now expected to remain flat compared to our earlier view of slight growth. In the supply chain solutions market, we now expect revenues in 2024 to decline slightly due to ongoing microeconomic uncertainties. We originally expected the market to grow slightly this year. Slide 14 lays out our guidance. The good performance in the first half of 2024 and our updated view on our markets lead us to narrow our guidance ranges for the full year. For ITS, we have taken down the upper end of the revenue guidance range by 300 million euros based on our updated view on the industrial truck market and the recent order intake development. For adjusted EBIT, we have narrowed the guidance range by 20 million euros in each direction, taking into account both the solid performance of the first half 2024 as well as the reduced upper end of the revenue guidance. You can see that we are guiding towards a lower second half of the year profitability in ITS, as already indicated in the quarter one update call. Given our recent order intake pattern, it would not be advisable to extrapolate the first half of the year adjusted EBIT margin for the remainder of the year. In addition, certain cost increases, especially with regards to labor, will start being effective only in the course of the year. We expect to remain above the 10% adjusted EBIT margin mark across the second half of this year. For STS, we have increased the lower end of the revenue guidance range by 100 million euros due to the revenue development in the first half of this year. Our updated view on the supply chain solutions market has not impacted our revenue expectation for this year. Based on the achieved result of the first half, we have also increased the bottom end of the adjusted EBIT guidance range by 20 million euros. For QIUM Group, this results in a narrowed guidance range for revenue in 11.3 and 11.7 billion euros and for adjusted EBIT between 830 and 920 million euros. The corresponding narrowed ROSI guidance range is now between 7.7% and 8.7%. The guidance range for free cash flow remains unchanged. Now I hand back to Rob for our key takeaways.

Thank you, Christian. Let's turn to page 15 together. For our key takeaways, Keyon delivered a solid second quarter in 2024 with continued year-on-year improvements in adjusted EBIT and adjusted EBIT margins in both our operating segments. As observed by many in our sector, the anticipated market recovery is taking longer than we originally expected. As a result, we've updated you with our view on the respective markets today. We now expect the ITS market this year to remain on the prior year level in unit terms. In our expectations for the SCS market, we expect it to decline slightly in revenue compared to last year. We've confirmed our outlook today, and we narrowed the guidance ranges based on our solid performance in the first half and our updated market view. This conducts the presentation. Let's move to the Q&A together. Francie, would you open the line, please?

Yes, of course. Thank you very much. Ladies and gentlemen, we will begin now with the question and answer session. If you would like to ask a question, please press star and 1. If you wish to remove yourself from the question queue, please press star and 2. In the interest of time, please limit yourself to two questions only. One moment for the first question, please. Our first question today is from Akash Gupta from JPMorgan. Please go ahead with your question.

Yes, hi, good afternoon everybody. Thanks for your time. I got two and I go one at a time. The first one I have is on industrial trucks. When I look at your first half run rate of order intake and also your market outlook for the rest of the year, we get to around $8 billion-ish order intake for the year. while revenue guidance at the midpoint is going to be $8.6 billion. When I look at the IR presentation that was updated today, you expect 4% to 6% average growth rates in ITS new unit beyond 2024. The question I have is that I know you won't guide on 2025 today, but conceptually looking at current order run rate and revenue guidance, Is it fair to assume that revenues at some point in the next 12 months should see some decline before returning back to growth? Or is there a scenario where you can avoid year-on-year decline in revenues? So that's the first one.

So, Akash's question, thanks for your question, right? The point that you're looking at in terms of the market and the order intake, as you rightly point out, we don't guide for order intake right now and we don't talk about 2025 in this particular call, in the second quarter call of 2024. I think in the equation that you're setting up or so, there's an element missing actually that I think is very important to look at as well because there's also a service segment which is in the order intake, which is in our revenue, right? So I would not necessarily come to the conclusion that you are lining out when you look at the overall picture.

Thank you. And my second question is on SCS business, where given the lack of new order recovery in H1 and your reduced market outlook for the full year, which may limit revenue growth next year in the segment, Can you please talk about the levers you have to improve your profitability further in the segment versus 2024?

Hi, Kash. Good to hear from you and appreciate your question. Look, as we pointed out earlier, we updated our SCS market outlook today, and it's the pushed out expectations on interest rate cuts and the ongoing macro uncertainties that are the main drivers behind the ongoing hesitancy of customers to sign new orders. Having said that, Akash, irrespective of the current market situation, our supply chain solutions business has shown sequential improvements in the adjusted EBIT over the past quarters and is set to continue to do so. You see that in our narrowed guidance range. We lifted the lower end of the revenue and we lifted the lower end of the adjusted EBIT. And what you're seeing is the effect of the implemented measures we've taken to improve our project management and our execution. And this enables supply chain solutions to continue its margin improvement further, even with the volume growth being delayed. Clearly, when the volume growth comes, that will have an additional uplift on the margins. But, Akash, our dramatic business, we've done our self-help homework. And it's making excellent progress fixing the machine. And the underlying trends that are underpinning the automation, global trend driving automation are very strong and very much intact. And so the macro, the market will be coming back. Macro-wise, at one point in time, it will be coming back. And when it does, our dramatic business is ready and will be We're in at stronger margins when the market's coming back. So we're really pleased with the performance and the progression in that business, and probably the next year and a half of volumes, one way or another, we're able to deliver increasing profitability with that great improvement in the execution of the business.

Thank you.

The next question comes from Sven Weyer from UBS. Please go ahead.

Yeah, good afternoon. Thanks for taking my questions. The first one is regarding the market outlook you've given. And I remember previously we were kind of thinking that the second half, especially on the wealth automation side, should see bigger, stronger auto pipeline conversion. I mean, what you tell us today, does it mean that we should basically see a steady second half in both divisions? that there will be no uptick whatsoever when we think about it sequentially against the second quarter. How should we understand that? That's the first one.

Yes, Sven, don't be drawing too many conclusions here, but the SCS order intake is, remains, and will go into the future is lumpy order intake. The pipeline is good. The conversations with our customers about active projects that they're getting ready to start is well-progressed with a lot of different projects. And they're pushing the starting button to start projects. There's some hesitancy still there. That's going to go away as the macro uncertainties clear over time, but they're still there. And so guiding on order intake we're not doing. I wouldn't... I wouldn't take particularly the conclusions you've got because it's lumpy.

The follow-up I have is just also coming back to the point about the truck business. And I guess another factor that we haven't discussed is the backlog in terms of your revenue generation in 2025. I mean, would you say that by the end of the year, the lead times are kind of as low as they get, so you can't reduce the lead times any further? as one potential to have a positive impact on revenues. Is that concluded by the end of the year or do you think the lead times can go even lower? And I was also wondering, I mean it's an industry phenomenon, it's not just you, what do you think about price discipline? Do you think once we reach the point where backlog lead times are back to normal that we see more pricing aggression from your peers?

Hey Sven, good questions. Good questions. Look, the backlog, as we've been talking about it over many quarters now, was quite high coming out of COVID. Kind of the long-term healthy backlog run rate or order coverage is probably four months plus or minus, and we're still probably over six months plus or minus, depending on which model line you're looking at and which machine. But as we move back towards probably four months plus or minus. There's still some order backlog work to go prior to getting back to that four months plus or minus level. Our observations, our pricing decisions are rational. Our observations that the market is working with rational pricing decisions too and we expect to remain rational and that's our expectations on the market too.

That's clear. Thank you, Rob.

The next question comes from Martin Wilkie from Citi. Please go ahead.

Thank you. Yes, it's Martin from Citi. The first question I had was on the North America business in ITS. Obviously, you've lowered the market expectation there. But also, the goodwill impairment you've done, that, as you mentioned in the opening remarks, was goodwill from a long time ago, potentially 15 years ago. And also, That cycle has been through lots of ups and downs over that period. So what drove the goodwill write-down now as opposed to during other cyclical weakness? Has anything in particular happened to the business this quarter that we should know about? Thank you.

Yeah, so I take the question of the goodwill impairment on the idea is America's business here. So as you said, right, we went into this year with actually an expectation that the North American market in particular, out of the Americas region, the North American market on the IDS side will actually face a reduction, a volume reduction into the year. You know that we get the market information, the market statistics with a three-month delay, right? So we got the market information then for the first quarter, and actually the reduction was way more significant than our initial planning was at that time. So we had to and as a consequence of that we were updating our own plannings going forward and we had to say that the recovery out of the draft that we were seeing from the market will eventually take longer than the reduction that we have seen at the beginning of the year. um so as a consequence of this in in as a matter of principle right uh with uh the goodwill impairment test that was triggered right came to the result that we would actually have to write it off uh as we go it stems from way back here you're right i mean it's from the original calf out of the uh group uh there but a reflection of the view in terms of you know how long it will actually take for our ids business to actually recover out of the very significant reduction that we have seen at the beginning of this year.

Okay, thank you. And if I could just have a second question. Obviously, as we go into the second half of the year, there's lots of focus on elections and the potential for tariffs. And I know that next time around, tariffs may not be quite the same as they were in 2018. But when you think about your SES business, which is already very overweight, Is your footprint very different than it was back then? How do you think about tariff risks in terms of the components that you may still buy in from China? Thank you.

Okay, Martin. Thank you for that. Look, I don't... 4C for our SCS business. Your question is a North America question is my understanding. I don't see a substantial impact in our SCS business coming from potential tariff changes in North America. A good deal of our technology in North America is coming from North America and it's part of our overall strategy to be able to engineer and source and manufacture in region for region and to source between regions is appropriate as well. We've got a good supply chain in the Americas and our expectation is as geographic or geopolitical changes may come, we're well positioned to serve each of those different scenarios in a fashion that is a sustainable fashion. So I would not have the concern that you were just describing for those reasons. Great.

That's very encouraging.

Thank you.

The next question comes from Gail Debray from Deutsche Bank. Please go ahead.

Thank you very much. Good afternoon, everybody. I have two questions, please. The first one is... About the French market, I mean, France is a big market for you, obviously. So have you started to see any early signs that the political issues there have started to impact the business locally? So that's question number one, and I'll get back later for question number two.

so um then just to answer the first question uh no we have not seen uh sort of any ramifications on our business uh in coming from the circumstances you're describing okay cool um and then so the the second question is uh about scs uh with the prospect recovery uh being pushed to the right

Let's assume the business doesn't grow next year. So, theoretically, what could be the margin profile of SCS if we only take into account the full rammed down of the legacy backlog and the benefits from your recent cost-cutting actions? I mean, will the margin be training around 5%-ish or possibly already higher?

Oh, Gail, as Christian pointed out, you're at the second quarter results call in 2024, talking about 2025 already. I don't jump in your boat saying let's assume it's going to be flat next year. We're not talking about next year until we get a bit closer. But what I said before, let me just underscore. SCS has put some very significant self-help improvements in place, improving our project management processes. in improving the project execution. We've been working through the legacy projects and closing those off one at a time and have made very good progress on that. So the SCS business has demonstrated successive improvements in profitability over the last several quarters and will continue to do so. And as the market comes back, that will bring more volume For probably the next six quarters, the profitability improvements in SCOS is not market recovery dependent. The profitability improvements are self-help measures coming from improving the project management and I expect you'll continue to see profitability increases in the quarters to come.

Maybe can I try in a different way? With the aftermarket business, with the service business within SES growing pretty strongly at the moment, I think 10, 11 person-ish. So the margin should be quite good, right? For the service part within SES. Is it still around 10% or above just on service?

Yeah, we don't comment on explicit service margins, but your general understanding that service business is often at indeed good margins is clearly an appropriate understanding, and your understanding that that's a growing part of our business. That's true in SCS, that's true in ITS, that's true in Keyon. Service is a growing and important and good profitability part of our business, and It's, in many cases, recurring in sustainable revenues because it's over longer-term contracts.

Okay. Thank you very much.

The next question comes from Sebastian Groh for BNP. Please go ahead.

Hi. Good afternoon. Thanks for taking my questions. The first one would be on IT&S. And it's to further discuss the self-help levers you might have if and when orders would remain at the 2 billion runway per quarter. So more specifically, I would be interested in the discussion around potential tailwinds from the sale of entry-level trucks. So I think you stated in the past that these are around 150, 200 million, close to at least 23. You were striving for 400 million over time. So could you just confirm that this is still alive and kicking? And the second question around this one is how we should think around the outlook for services, because you alluded to this as a growth engine and an early answer to Akash's question. I would especially be interested in your commentary around aftersales. And the third element that would be worth, I think, discussing is around the potential expansion of existing leasing contracts as new trucks are obviously relatively pricey compared to the past. So I would suggest there's a good sort of interest from clients to renew those contracts. And then I would have another three bridge questions around SES, but if we could start there.

Maybe I start in reverse. I tried from your questions, right? So indeed, you know, uh in on the ids uh business you know offering our trucks you know in the in the connection with the leasing contract is an integral part of our business model right uh the share of trucks that we are offering uh with leasing contracts is actually uh increasing and we continue to do so and that gives us ability to our business model as you rightly assume as you know it brings also drugs uh drugs back so that's part of the whole motion of a growing service business is continuing the further increase of the penetration of the new business with leasing contracts on that side. That already partially answers the outlook for the services because that is an essential part of the services. Now, leasing is also a driver for actually driving um the services next to the pure fact that the installed base is growing right and you know the increased shipments that we had been bringing to the market uh after we you know last year then finally overcome overcame right the uh the the supply issues right and now the con continuing to bring the production volumes actually into shipments, that drives the installed base and the installed base actually comes with after sales in addition to that leasing is driving the contracted services and gives an additional stability to the business model. The first point, frankly, I did not really get, so if you don't mind or so, if we could actually handle that through IR offline or so, I would appreciate that very much.

No problem. Then on SCS, I think also there the framework would be interested when we talk about the price quality on new orders. So apparently you had a broad range in terms of the cross-profit margin ranging from between the teens levels to up to 24% at the peak of the cycle. Would you be comfortable with a 20% plus cross-profit margin at this point? And especially when considering the right sizing that you have been undertaking, i.e. cutting the workforce? The second thing that comes to my mind is the legacy contract. If you could update us on that, how far you have been through with the legacy contract. And then the third point, solutions obviously have come down quite dramatically from 3 billion-ish in terms of revenues to now below 2 billion. So when will this kind of fire back in the sense that the service growth should slow meaningfully? So yeah, if you could comment on those aspects, please.

Yeah, let's start with the pricing, Sebastian. By the way, it's good to hear from you. And the question on pricing, look, the pricing that we're taking new contracts at in our supply chain solutions business, as you know, those projects can go over three, four, five years. And I confirm that the projects that we're taking into our order books now are coming in at margins that are supportive of returning our supply chain solutions business, consistently growing the profitability in it, and taking it past 10% profitability in 2027. The as-sold pricing is good pricing and supportive of that projection and that progression. In terms of business solutions and the size of the business solutions business, it's a function of the order intake. We've been talking about lumpiness. We've been talking about people hesitating to take on new projects. At one point, that's going to turn around though. The macros are going to turn around. The underpinning trends in that market are very, very strong. As I was describing before, when they do, our team is ready because they've done the self-help homework and the machine is ready to be executing projects with good margins as the volumes are coming back. I think the element to the service business is one for both our segments and I appreciate the question on it. The service business is very good business in both our segments and brings good profitability in it and very good customer attention because Customers in both segments are focused very much on total cost of ownership and very much on uptime and availability of their facilities. As we're driving more and more of our service offering to include telemetry capabilities and benefiting from the digital twin of our individual machines as well as the emulation simulation digital twins of our warehouse automation installations. You can do a whole lot of that off-site, and it improves first-time fix rates. It makes the service technicians more productive and more efficient in their handling the service calls, and it's good for those customers. So it's quite good business and quite sticky business. And that's the nice thing about having both in the the portfolio the services are growing well and the market will be coming back on the business solutions businesses less uncertainty prevails in the market and would you mind commenting on the legacy contracts and how much is left here sure thank you sebastian didn't mean to skip it but uh I was working on the other questions for you. Look, we're making very good progress continuing to work off the legacy contracts and projects. We expect that most of those are completed by the back end of this year. There will be a handful that go into next year and one big one that goes even into the year after that. But the amount of those is a proportion of our business. has consistently been decreasing and will have less and less influence going forward, which is quite a bit an important part of the margin recovery in addition to the execution capabilities and consistency in the business.

Okay. Thank you very much.

The next question is from Lucas Fehani from Jefferies. Please go ahead.

Hello. Thanks for taking my question. So I'll have two as well. We can do them. one at a time. For the first time, just on the free cash flow guidance, unchanged, you had a decent start to the year. I'm wondering whether you're expecting any headwinds into H2 on free cash flow. If you take a similar performance to what you delivered in H2 last year, that should drive you towards the upper end or even above the guidance range. Are there any specific things we should watch out on the on the free cash flow into H2 and also on working capital, especially the inventory. You said there was more to go in terms of reducing that. Is that still something that's going to happen?

Lucas, thanks for asking the question on the cash flow. I mean, there's no particular headwinds that you are alluding to that we would consider in the second half of the year. It continues to be our priority to actually work on the cash flow but on the working capital in particular as a constituent of the cash flow for an improvement in the second half of the year but that is reflected in our in our guidance that we maintained for the free cash flow for the year. But there's no particular event, no particular headwind that we would look at for the second half of this year.

Perfect, thank you. And the second one is just on the margin in ITS. So there's an impact from mix. You talk about more kind of higher share of APAC. I'm just wondering about a short-term phenomenon because you have a lower growth in kind of EMEA and North America and so kind of APAC is shining or is there a strategy to kind of really increase your share and grow more in that region? And my point is, you know, are you able to deliver kind of similar margin in APAC kind of longer term? Obviously, it's a different market. It's generally more competitive, a bit more kind of price focused and there's local players. And I'm talking here specifically about China. And just on the guidance for H2, I think you highlighted previously that you'll be below H1 and still above 10%. You've delivered many years of 11% margin in ITS historically. Is that still something that you can get to, that you can deliver consistently, or are you happy with 10% plus margin near-term and even medium-term? Thank you.

Yeah, thanks for asking the question. So, yes, I can confirm that we, over the last four quarters, have now consistently achieved more than 10% in the IDS segment, right? And we remain committed for this one as well. And also for the second half of the year, we're looking at that. And that remains our strategic aspiration for the segment, like it is for the other segment. Just the difference is with IDS, I think we have already shown that over the last four quarters, right? And we continue to look at that. That already includes, obviously, you know, the relative weight of the different regions. We do not comment on margins in the different regions, right? But the weight, the mix of the regional mix or so is well reflected in the actuals, but is also well reflected in the way how we're looking forward in terms of the updated guidance. Perfect. Thank you.

Ladies and gentlemen, in the interest of time, please limit yourself to two questions. And the next question comes from Alexander Hauenstein from DZ Bank. Please go ahead.

Yes, hi, Alexander Hauenstein. Thanks for taking my question. Looking to ITS, you said that you're targeting for the second half of the year more than 10% margin. Any comment from your side? how this could look like in the development path from Q3 to Q4? I mean, are we seeing the draft probably in Q4, I guess? Or is there, due to the matter of components, including in this somewhat slightly going down trend in margins, i.e., for example, the personal components, cost side, do you expect this potentially to slipping also into Q1, maybe Q2, so that the draft in ITS margin, as far as you can see, might not be in Q4? That would be the first question.

So, as I said, you know, we are looking at the double-digit margin in the ITS segment in the second half of the year, and there is factors, you know, that will come into play in each of the quarters, so I would not necessarily look at the draft in the fourth quarter in that context.

Okay, so that means, or kind of a follow-up, it might also be a very high single-digit margin number in Q4, actually, but still being within your guidance of more than 10%. So that is not excluded, right?

Yes. So, uh, again, you know, we are guiding for a double digit margin in the ideas segment in the second half of the year. Right. And I think we are confident that we will see that. Right. Uh, and I think that's how you should look at that. Okay. Okay. Thanks.

Um, yeah. And, uh, coming back to SES, um, Yeah, I know it's a bit tricky to look into the next year, but what I see from what you say and when I look into consensus and roughly seeing a consensus for SES on the revenue side for next year implying a 10% growth, I'm wondering whether this is something that is providing you some headache. At least for me, it does provide some headache. And I'm wondering whether the supply chain solutions... earning side will kind of double at least this is what consensus is believing for next year so apart from everything what you have said so far can you distract these headaches that I have here in one or the other way on top of that I suggest you go get some aspirin for the headache we're describing

an SCS business that's done a real good job doing its homework, is doing a good job delivering improving margins. They are improving consecutively. I expect, and the SCS business expects to continue on that good glide path. In terms of revenue next year, too early to call. In terms of order entry, we don't guide. But we did talk about the market, and basically it's just taken longer for the recovery than I think anybody anticipated. But it's going to come, and when that recovery comes, it's going to bring volume with it. The self-help measures are driving volume increase on muted revenues, and the self-help measures get that machine real nice and healthy. So as then market-driven volumes are coming back with the macro recovery, the business is very well positioned to be executing those that continue to be increasing margins.

Yeah, absolutely understood the things, as you said, rightly, that we all are looking for the macro kind, let's say, interest rate-induced kickstart and to get this rolling again in terms of all the intake. And I'm wondering whether this will most likely be a gradual movement starting, coming in quarter by quarter, or whether you see from what you hear from your customers that as soon as we have a material and feelable step down in the interest rate that a lot of the projects would come at one point of time or would that be a gradual improvement very slowly. Any idea about the the number of projects that are potentially lining up in the back, and we don't see them yet, but you are currently potentially in the discussion, at least on an operational side of that, not maybe financially, but operational-wise.

Sure, I appreciate that thinking, and I think a good way to maybe capture the message there, Alexander, is there is a good solid pipeline of active project discussions and solutioning going on with our supply chain solutions team and their customers as we're speaking. It's the starting point of when the customers kick off the new project, that's when the pipeline starts to turn into order entry. And it remains lumpy and we will see how it develops. I mean, making too detailed projections and predictions isn't an appropriate thing to do when the underlying trend is a bit lumpy as they come in. I think the underlying trend though, it shall get better over a period of time. And we've all heard the messages and we're all anticipating that it's going to, it's just taken longer to get there than we expected earlier this year. All right.

Good. So looking forward to see this and yeah, I wish you all the best for your internal measures for the legacy project. But I think, and I understand that you're making good progress there. So at least this is the basis for me.

Thanks very much.

The next question is from Tore Fangmann from Bank of America. Please go ahead.

Yeah. Hello. Good afternoon. Thank you for taking my question. I got two as well. The first one is a clarification on the first question from Akash today. So I have to go a few minutes back. Sorry for this. I got a bit confused here. It sounded to me like there was like a mix up in the A few of the services are not included in the orders, but they're then included in the revenues, and this is why it's not fair to look at orders to forecast revenues. But could you just please clarify what your answer was to the question? I didn't quite get it. Thank you.

No, so not sure I get your question all right, but I give it a try, right? There's a difference in order intake in units, right? And then the reference was made to order intake in money terms. The order intake in money terms also includes the service business, right? So actually, that's a broader measure as a KPI. It's a broader measure than the order intake in units. I hope that clarifies the question.

Yeah, thank you. That clarifies it better. My second question would be just In general, if we currently look at the pricing and cost environment, do you receive any major pushback from clients against your price increases from earlier this year? And then in addition to this, how are currently your raw material, energy, personal costs, like your overall impost costs developing?

Thank you. On the price increase that we have done at the beginning of the year, that was implemented as planned. The personal costs, obviously, there is still a follow-up in terms of increases from personal costs out of the inflationary periods that we have seen over the last periods of time. material costs actually are flattish. You know, some of the commodities going down, some of the commodities actually reason they have gone up again. Overall, I would rather see a flattish development and the energy prices are actually at this point in time not a particular concern for us.

Okay, perfect. Thank you.

The next question comes from Christoph Dolleschall from HSBC. Please go ahead.

Hi, good afternoon everyone. Also two questions from my side, probably in ANV and ITS. The first one is that if we look at ITS mix, the ICE trucks actually look quite good in the second quarter and also Europe was flat in terms of volumes and still you talk about negative mix effects. So did the APEC effect overcompensate both Europe and ICE or am I getting something wrong there?

Yeah, there's another element that probably is missing in the equation here, which is actually that the warehouse equipment was up, right? So it's not just a question of regional mix that we are alluding to, right? It's a regional mix piece and that there is also a mix between the product groups, right? Warehouse and then the E and IC or counterbalance. So it's the combination of those two mix effects.

Okay, then the next one is on the volumes in EMEA in ITS in the first half. You were at about 79,000 units in total, and now you expect a flat market in EMEA. So does it imply also for your own, so not for the overall market, but your expectations would then also change? point to a similar magnitude of volumes in the second half with the same seasonality that we've seen in the past? Is that your hypothesis for now?

Now, so again, I have to repeat myself. I don't guide on order intake or so, but I'm sure you are aware of the usual order intake pattern that is applicable or that we have seen, you know, historically as well on the ITS side, which particularly alludes to a strong first quarter when it comes to order intake, right? So I think that's the reference point that you probably want to take into consideration.

Yes, I mean, that is what I meant. And also, obviously, if you think the whole market is flat, then I would just assume that then you have a similar assumption for your own units. So I take that as a mild yes for now. Then on SCS, I think what I'm a bit puzzled with is, let's say, the baseline order intake that is coming in. I think so far, at least myself and probably a few others, were thinking about, say, a baseline order intake number in the region of 700, 750 million. But now if we look at, say, the second quarter, this rather points towards 600 million. So I was just wondering what a baseline number is. Should we be thinking at a baseline if the market does not recover, let's put it that way, Should we be looking at a baseline of rather 3 billion or rather 2.5 billion euros if we don't see any market recovery?

I think that's trying to do the same thing on STS like just on the IDS side, right? I think... Again, the one thing is that sort of, you know, order intake in particular quarter and then from quarter to quarter, right, that will remain lumpy. You have seen the pattern last year, right, where we had very strong quarters comparably but there was also weak quarter in the beginning and then in between, right? and that's the nature of the whole business in the whole segment, and that will continue to be so. I think this notion of the baseline water intake in that context of a lumpy water intake actually is not necessarily the right way to look at it.

Okay. Thanks.

Ladies and gentlemen, I kindly ask you to limit yourself to one question. And the next question is from Philippe Lorraine from Bernstein. Please go ahead.

Yes, good afternoon, everybody. I've got like one question with regard to, you know, generally the SES market may be more than the ATS, but like everything, like if you kind of want to comment on that. So since the recovery seems to take longer than expected, but the pipeline looks healthy, how do you think about maybe seeing more growth coming from when the recovery starts because of pent-up effects and therefore, again, more volatility in order intake for both segments over the coming two to three years. Maybe a correlated question as well is when you comment on the pipeline being healthy, is it relatively unchanged versus what you've seen in previous quarters or is it trending slightly up or slightly down? Thank you.

Hello, Philippe. So, actually, the pipeline has been growing over time. The order intake happens when the customers start the orders. And so you could even perceive there is a bit of a backlog building in terms of customers getting closer to needing to start an order, but they haven't done it yet. And it does remain lumpy, like Christian said. I think, though, that at any given one point snapshot in time trying to call the trend and is there a catch-up effect, et cetera, et cetera. The better way to look at it, I think, is our expectations and our demonstrations in our IR PAC that we expect the SCS market to be growing at 9% or better on a CAGR basis over our strategic planning period. And I think that helps take into any year, one year, one quarter, be an upper or And over time, that's the kind of growth that we expect and you should expect.

Okay, perfect. And if you don't mind, I guess, really a quick one. You made a comment as well on ITS, on SES previously with regard to potential impacts from tariff increases in the North American region. Would you mind commenting as well quickly on what you would expect there for ITS?

I think the same applies there. I mean, the former Trump administration has put tariffs in place. The Biden administration actually continued those tariffs and kept them in place. At this point in time, we would not look at the, however the election turns out to have any particular effect on the situation.

In addition, I mean, we put a very good investment into North America a couple of years back and that factory is ready to roll too. And the North American market will continue chew through the stock that's in the network over a period of time. And as that market's coming back, we're very well positioned for it. Francie might not give you another question next time, though, Philippe. Let's see if she does or not. And I see that Timothy's still got one. We'll give him that one, too, Francie.

Timothy, please go ahead.

Thank you very much. Go ahead, Timothy.

Timothy, your line is open. Maybe you're on mute.

Hi, sorry, can you hear me? Hello?

Yes, we can. Go ahead.

Hi, great. I'm sorry about that. So, really quick question on SES. So, I think some of the industry players are actually commenting about, like, you know, the screenshot developments of the order developments or pipeline developments is getting a little bit better in the second quarter, like rising business appetite for the second quarter. I'm not sure whether you are seeing similar pattern or, you know, as long as you are pushing back a little bit of the expectation of recovery in the markets. But how about the sequential development you are observing from the market for the second quarter? That would be helpful. Thank you.

So maybe, Tim, I take the question, right, that comes back to sort of what Rob was alluding before. I think what we are seeing, and probably it goes along the lines that you're referring to, right, we see a pipeline that actually has become better over the recent time, right? And so the point is just, you know, that pipeline actually turns into the order with the signature of the customer, right? But the pipeline actually is has grown, right? So I think that goes along the lines of what you were referring to. All right, that's helpful. Thank you.

And that was our last question of the day, and I will hand back to Rob for any calls and comments.

Thank you very much, Francie. And thanks for all of you joining our call today and your very good questions. We wish you a real good summer break. We'll be at the different conferences in September. We look forward to having those discussions over the coming months, and we expect to see you on our call at the end of the third quarter. Have a good summer, and thanks for your time today.

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