KION GROUP AG (KIGRY) CEO Rob Smith on Q1 2022 Results – Earnings Call Transcript – Seeking Alpha
KION GROUP AG (OTCPK:KIGRY) Q1 2022 Earnings Conference Call April 28, 2022 9:00 AM ET
Company Participants
Rob Smith – CEO
Conference Call Participants
Akash Gupta – JPMorgan
George Featherstone – Bank of America
Sven Weier – UBS
Will Turner – Goldman Sachs
Gael De-Bray – Deutsche Bank
Sebastian Growe – BNP Paribas
Katie Self – NZ
Philippe Lorrain – Berenberg
Martin Wilkie – Citi
Jorge Gonzalez Sadornil – Hauck & Aufhaeuser
Operator
Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining KION’s Group Q1 2022 Update Call. Today’s presenter will be Rob Smith, CEO of KION Group. Throughout today’s recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions]
I would now like to turn the conference over to Rob Smith, CEO of KION Group. Please go ahead, sir.
Rob Smith
Thank you, Nairobi. Good afternoon, ladies and gentlemen. And welcome to today’s update call. For today’s call, please refer to our Q1 presentation that’s on our IR website.
In the next hour or so we’ll be taking you through our Q1 Key financial and strategic highlights and our market update and segment financials in more detail. And I’ll end my presentation with some key takeaways for you. And then we’ll go into Q&A.
Let’s start together, please on Page 3 with our key financial figures. In view of the ongoing and substantial uncertainties in the procurement markets, significantly exacerbated by the war in the Ukraine as well as by corona lockdowns recently, we withdrew our guidance earlier this month. During Q1, we saw intensified material cost inflation and further supply chain disruptions particularly impacting our adjusted EBIT and free cash flow during the quarter.
Before we go further, I would really like to think and recognize our employees, our customers, our business partners all around the world for supporting our business in these extraordinary times. Despite increasing economic uncertainty from the war in the Ukraine, demand from our products and solutions remain at noted level.
Order intake was up 10% year-on-year to EUR2.9 billion and contracted sequentially from a record high in the fourth quarter of ’21. Given the ongoing challenges from supply chain disruptions, our revenue in the first quarter remained at similar levels to the fourth quarter, at EUR2.7 billion.
Adjusted EBITDA – EBIT finished at EUR170 million versus EUR15 million last year, and a margin of 6.2%. Significantly higher working capital needs impacted our free cash flow in the first quarter ending at negative EUR433 million, and earnings per share were EUR0.61. At our virtual AGM on May 11, we proposed a dividend of EUR1.50 per share, a 35% payout ratio on last year’s net income.
Let’s look at some strategic highlights in the quarter on Page 4 together. I’d like to mention three examples that illustrate well how we’re progressing as a global leader in intralogistics and supply chain solutions combining our strengths across the Group to offer the best integrated solutions for our customers. This quarter both Linde and STILL presented their new autonomous mobile robots. These vehicles allow for a high degree of integration in the mini warehouse automation processes, and the attractive economics and flexibility AMRs present a strong benefit to our customers.
In March we exhibited on a joint booth our integrated solutions at MODEX in Atlanta, combining a whole range of Dematic and Linde solutions featuring operator assistance systems, lifecycle services and scalable forklift automation. These highlighted our joint offering from SCS and ITS, and how we give customers a full range of intralogistics solutions.
We also continue to invest in our lithium-ion technology. To meet the increasing demand for lithium-ion powered electrified warehouse trucks, we expanded our production facilities in Karlstein. With our new production line for 24 volt batteries, typically used in warehouse equipment, KION Battery Systems set the next milestone on our innovation and sustainability path.
Let’s move together to Page 6, and I’ll talk you through the industrial truck market and order intake. In the past, we’ve usually provided an update on the global industrial truck market in unit terms using WITS data.
This time following recent assessment of European competition law, the WITS data regarding order intake in units is being delayed by three months since the beginning of this year. So this time we’re not able to describe the market development with WITS data as usual, and we’ll do that according to our own assessment.
We expect that EMEA and the Americas have seen a strong start in the year and that APAC has seen a slight increase. In KION, order intake grew 29% in EMEA, 76% in Americas, 20% in APAC and globally, orders were up 29% reaching 87,000 units, and 87% of those units were electrified. EMEA continued to see a strong momentum in Q1.
In North America with our improved dealer network, we were able to achieve significant growth across all product segments, and we are investing in extending our local production capacity. And our growing in China strategy is bearing fruit supporting growth in e and warehouse trucks, and the factory ramp up in Jinan is running according to plan.
Page 7. We’ll see the key financials for the IT&S segment. Demand remained strong in the first quarter. Although the order intake was up sequentially in units, order intake in euros, was down 15%, EUR2.1 billion. And the reasons for these are three.
First of all, the short-term rental fleet units additional this quarter, as usual, reported in order intake units, but not in euros. Secondly, we’ve seen strong sequential demand for light warehouse equipment. And third, a slight sequential decline in services mainly driven by lower used truck volumes.
At the end of the quarter, the order backlog increased 11% sequentially to EUR3.2 billion. This covers more than three quarters of new equipment sales. This implies that it will take longer for list price increases in our new trucks to drop through. Keep in mind, however, that more than 50% of IT&S revenue comes from service where we are more agile on pricing.
We managed the further intensifying supply chain challenges and we’re able to keep revenue almost flat compared to the fourth quarter, coming in at EUR1.7 billion. Q1 procurement costs intensified versus the fourth quarter, and additional semi-finished trucks that ended up in inventory created further efficiencies – inefficiencies in the production process and triggered increased cost for logistics, storage and handling of these unfinished machines. Adjusted EBITDA margin – EBIT margin finished up at 6.6%, up 20 basis points from the fourth quarter, and adjusted EBIT was EUR114 million.
On Page 8, let’s look at the underlying market trends for the Supply Chain Solutions segment. Medium and strong term fundamentals – medium and long-term fundamentals for the supply chain automation market continued to be strong.
Overall, the structural market drivers are intact and include the continuing growth of e-commerce as a growth channel in all verticals. The consumers demand for faster delivery and ever-increasing labor costs and decreasing labor availability. COVID clearly accelerated the marketplace, and the last 18 months witnessed sizable automation investments.
Only 10% of the global warehouses are fully automated, and headroom to grow in the market is enormous. This gives us strong confidence that the market continues to grow in double digits. Looking at our pipeline, it remains robust and it’s steadily increased over the last quarters. Nonetheless, increasing economic uncertainties, supply chain disruptions and higher raw material prices could trigger players to be cautious in spending for additional capacity in the short term.
On Page 9 I’ll summarize the key financials for the Supply Chain Solutions segment. You know, we often get the question is the EUR1 billion mark the new normal for order intake. And clearly we’ve had quarters over EUR1 billion. But order intake in this business is lumpy by nature, especially as projects are increasingly getting bigger in size.
Q1 order intake in 2022 is 21% below the strong levels than Q4, and remained stable versus last year’s levels. What I would point out is last year’s levels as we announced included a EUR150 million order from a European grocery company. At the end of March, order backlog was slightly down, finishing at EUR3.7 billion.
Revenues improved slightly quarter-on-quarter and finished over EUR1 billion, and like in the fourth quarter, we continued to focus on protecting our customer schedules. And this caused us not only to increasingly by from higher priced spot markets for material to secure material and components, but also keeping our labor forces or technicians on site and ready to install equipment at the moment it arrives. EBIT margin remained stable versus the fourth quarter at 7.3% despite these intensified headwinds.
Let’s go to Page 10 for the key financials for the overall Group. The adjusted EBIT margins of our operating businesses were stable in the first quarter versus the fourth quarter. However, our adjusted EBIT for the Group improved sequentially to EUR170 million and 6.2%, benefiting from a lower provisioning for variable remuneration during the quarter, predominantly reported in the Corporate Services line. This current low level of profitability for KION is not satisfying and we’re taking actions to address this.
Page 11 shows the reconciliation from adjusted EBITDA to the net income for the Group. Reported EBIT included negative non-recurring items of EUR31 million, mainly coming from write-offs in connection to the assets associated with the Russian business.
Net financial expenses decreased to EUR3 million negative including an improved net interest result coming from our Lease business. And as we did not recognize deferred tax assets on the write-off on our Russian business, taxes increased sequentially, reaching EUR35 million in the first quarter. We ended the quarter with a net income of EUR80 million and earnings per share EUR0.61.
Page 12 shows our free cash flow statement. Q1 ’22 free cash flow was negative EUR433 million. Beside the low EBIT, the main driver for the negative free cash flow was a strong buildup of net working capital, primarily driven by higher inventory levels caused by further increased semi-finished trucks and the stocking of material and components to ensure further – future production in future project execution in these volatile times. In addition, contract assets and liabilities developed negatively due to milestone postponements from supply chain disruptions.
Net debt on Page 13. Net financial debt increased by EUR470 million slightly surpassing the EUR1billion mark, mainly caused by the weak cash flow generation. Our strong financial profile gave us the ability to cover our capital needs through commercial paper program at very favorable conditions.
The leverage ratio based on net financial debt increased 0.6 times versus 0.3 times at the end of 2021. And higher discount rates had a positive effect on our pension liabilities that have come down to EUR1 billion at the end of the first quarter. Thus, the leverage on our industrial debt increased to 2.3 versus 2.2 at the end of last year.
So I’d like to conclude on Page 15 with some key takeaways, please. The medium-term and the long-term fundamentals for our markets remain strong. In the short-term, the increasing economic uncertainties could trigger some players to be more cautious on their spend for additional capacity and could push out some project decisions.
With increasing raw material, increasing energy and increasing logistics costs. It was time to become more agile on our pricing. Doing a price increase just once a year or twice a year, these days are behind us KION. That’s why we announced our second price increase for new trucks at the beginning of April and have taken further pricing actions in our service businesses.
Uncertainty remains high, which makes it impossible to provide a new outlook today. We will come back to the market with a new outlook for the year once we have better visibility.
I’d be very happy to take questions now. Back to you, Nairobi.
Question-and-Answer Session
Operator
[Operator Instructions] The first question is from the line of Akash Gupta from JPMorgan. Please go ahead, sir.
Akash Gupta
Good afternoon, everybody. It’s Akash from J.P. Morgan. And my first question is on 2023 target. And I see now you have suspended 2022 guidance, but I was wondering if you can comment on ’23 guidance on margins, 10% to 12% that how realistic that is, but also on top line because now you are indicating that there could be some slowdown in SCS growth next year. So do you think that the target for Supply Chain Solutions revenues for next year is still valid in that backdrop.
And my follow-up question is on China. Maybe if you can elaborate on exposure to China from sourcing point of view. And have you started to see any headwinds already in getting supplies from China that might be required to run your factories as well. Thank you.
Rob Smith
Sure, Akash. Thank you for those questions. Let’s address them head-on. With the economic and political uncertainties and the significant headwinds increase as the war in the Ukraine broke out and the Corona shutdowns and lockdowns in China, we retracted our guidance earlier this month based on the uncertainties in the market. And we do intend to come back and reinstate our guidance later this year when we have better visibility and will update our medium term targets for 2023 at the time we re-in state our guidance, Akash.
In terms of China and in terms of securing material flow, clearly, the lockdowns and the port congestions in China are going to have an impact on the supply chain, but that comes back to some of the uncertainty that we’re talking about, and the volatility. So the supply chains are generally disrupted. We’ve not yet seen fully the impact, and we expect we’ll see that in the months to come. So we’re watching this very carefully and as part of our objective of returning the guidance as the uncertainty disperses over the course of the year.
Operator
Mr. Gupta, have you finished, your question?
Akash Gupta
Yes. Thank you.
Operator
Our next question is from the line of George Featherstone from Bank of America. Please go ahead.
George Featherstone
Hello, everyone and thank you very much for taking my questions. I’ll go one at a time. Just wondered, with the first one, whether you could help us understand the headwinds profitability that you think you might have as you progress through the rest of this year now compared to where you were at the start of the year because clearly supply chain issues where a problem already. So just wanted to know if there is a delta that you could share with us as you see things today.
Rob Smith
Well, George, I mean in the face – in terms of retracted guidance, I mean that’s the entire discussion. And our team’s working hard all over the company to improve profitability and work against those headwinds, but they are very significant and there is a lot of them and it’s quite uncertain.
And so giving you a better answer prior to returning to guidance I think is the right answer here. We’re watching this uncertainty, we’re working through it, and we will return with guidance in the back-end of the year as the uncertainty clarifies and we are able to give a real – give some solid views on the rest of the year.
George Featherstone
Okay, understood. And clearly in this quarter as well, free cash flow was very weak. Given the uncertainties you talked about, you’re likely to probably have more and more cash tied up in working capital for longer throughout the year. Do you expect that you will be able to deliver positive free cash flow in 2022?
Rob Smith
Okay, well that’s a guidance story as well, George. I mean we’re working hard on it. We’re very clear about it. There are very good reasons for the build-up and we’re also working on building it down over time as well.
Operator
Our next question is from the line of Sven Weier from UBS. Please go ahead.
Sven Weier
Yes. Hi, Rob. It’s Sven from UBS. The first question is on what you said on pricing and we appreciate, clearly the high agility that you put in place now. I was just also wondering what’s potentially you see on addressing the pricing of the backlog, I mean obviously on the equipment side, you now have almost like a year of lead times. And I’m just wondering if you see any scope for discussions with clients about the pricing of the backlog. That’s the first one. Thank you.
Rob Smith
Sure, Sven, and good question. Pricing agility – commercial agility really, commercial agility is understanding the dynamics of the headwinds and understanding the dynamics of the material and energy and logistics in real time and working on pricing on a very agile basis too, associated with those headwinds. And as I’ve described we have put now our second price increase in place in early April now for new trucks. We’ve been working on our service elements and have made good progress on pricing and services. And order backlog is not taboo, and there have been moves in order in the order backlog as well.
Sven Weier
Okay. And can you shed some more color on the latter point, I mean how do you go about the backlog then? I mean is it affecting just the further out orders in the backlog, or only some specific clients in the backlog or – I’d be really curious to get some more color there.
Rob Smith
Sure. Let’s be addressing those things as we go through time. At this point, I’d like to stick with what I’ve said. It’s not taboo, we’re addressing these items. And we put in place our second new truck price increase in the course of this year. It was higher than the first one. And we’re working on the service elements and order backlogs is not taboo.
Sven Weier
That’s good to hear. And then the second point, Rob if I may, is just on the guidance order intake. I mean, I guess the most important reason for withdrawing the guidance was probably the uncertainty on earnings, whereas on the demand side, things seem to be coming in still quite nicely, and you talked about the pipeline in SCS and how it has improved. So did I understand you correctly, that’s may be yes in the near term, maybe next quarter on the order intake in SCS might be still hovering around the level of Q1, but the original order intake guidance you gave for SCS is still reflecting the pipelines so to speak?
Rob Smith
Yes, Sven I mean in the middle of no guidance you ask me to guide for the second quarter. We don’t have guidance in place. We got a lot of energy and effort in place. And there’s good momentum. But we’re not reinstating guidance at this point in time. There’s still just too much uncertainty out there.
Sven Weier
Okay. But in the short time it’s fair to assume that SCS, as you said, I mean, there might be some short-term push out there. So I guess it’s probably unlikely that we see a massive pickup in Q2.
Rob Smith
What I’d tell you, Sven, I mean the point is a lot of automation orders are getting bigger and bigger over time. So when you get it, it’s a big lump and when you get it after a quarter-end, it’s a big lump in the next quarter.
So by definition, these things are lumpy. We talked about this year versus last year, last year there was EUR150 million good guy in the order intake, all from one order. And so the pipeline on a mid-term basis remains strong. The fundamentals are there. We’re confident in our business.
Operator
The next question is from the line of Will Turner from Goldman Sachs. Please go ahead.
William Tuner
Hi. Good afternoon, everyone. A handful of questions from me. The first one is on the supply chain bottlenecks and the inventory buildup that you’re having, Could you just elaborate on a bit more on what is it specifically that’s causing the issues? I can imagine is now much broader than just electrical components, but is there any specific products which is really holding up production? And what are you doing to kind of mitigate those issues.
Rob Smith
Sure. I mean there are several elements in the – if you’re asking about different products or different components primarily we’re talking about electronics and we’re talking about steel components. But the other element of the whole story is just the interruptions or the disruptions if you will, in the supply chain. And how containers that are foreseen to arrive at a specific point of time at very short notice get postponed or good delayed by a day or two or several weeks. And it’s a quite a moving picture on these disruptions.
So components, electronics and steel and the overall precision of promised delivery dates turning into postponements on delivery dates at short notice is what drives a lot of inefficiencies, especially on keeping technicians on site, keeping staff on site, to be able to put the material into the project as soon as it arrives, or scheduling factories in production plans in effect and all of a sudden container doesn’t arrive, maybe the container wasn’t available or maybe it got delayed in the port and then you have to re-plan your production. So there are inefficiencies involved with that.
William Tuner
Okay, great. And I guess one of the facilities that may have been distributed as well. You have a factory in Shanghai, if I’m correct. Is that factory operational at the moment or have you seen some disruption there? What’s the latest there?
Rob Smith
Yes. As you know, good points, Will. We’ve got three factories operational and we laid the ground still – and by the way they said the third factory, the Jinan truck factory, the production ramp-up is going very well there. That’s our third factory operational in China and the fourth that we’re building now, those are moving well.
So we don’t have factories being shut down, but the entire situation – once again, factories need a steady flow of parts and with shut downs, that’s making things more difficult than supply chain interruptions. So we’re operational and it’s a moving picture and it’s quite a tenuous situation with the lockdowns.
William Tuner
Okay, that’s great, thanks. And then just a final question, and I’m sorry to labor on this a little bit, but the comments you made around Supply Chain Solutions and potentially being some weakness in the short-term. And just to clarify, basically you’re seeing decisions being postponed for the larger project orders. Those orders are still there, they’re just being postponed. And there’s been no change in your existing backlog. Have you had any of your current backlog of orders customer saying actually, you know what, deliver this in a couple of months’ time?
Rob Smith
Yes, good question. I mean, there are no cancellations in the backlog. These are important decisions that people are making to strategically give themselves a better competitive advantage and change their business. And many times, through significant automation projects. And so those are deliberate, those are thoughtful, those are committed, those are over a significant period of time, and good sized projects. And so it’s very rare and we haven’t had any cancellations.
What is the case is a milestone may be delayed or project could be postponed for a period of time as customers are also sorting through their own assessments of the uncertainties in the market. But as we talked about, the medium and long-term, very strong. The fundamentals are absolutely there. The need for automation, the drive for supply chain automation is very much there. So we have good expectations of that market and good expectations of our business.
Operator
Our next question is from the line of Gael De-Bray from Deutsche Bank. Please go ahead.
Gael De-Bray
Thanks very much for the time. I have a couple of questions, please. The first one is really on the pricing dynamics. So I think you raised prices already by about 5% in January. There was a second price increase in April, which might actually have been even higher. So do you see actually competitors following on your price increases? So that’s the first question.
Then, secondly, are you now fully covering cost inflation for the trucks that will be delivered in nine months on the back of these price increases you’ve already implemented, or do you still need to do more to fully cover cost inflation? And if that’s the case, how much more do you think you can do before we start to see some demand destruction? Thanks very much.
Rob Smith
Good question, Gael, and I would say it’s a balance, and it’s a dynamic balance. You’re asking us if we’ve got explicit visibility to explicit customer pricing actions – competitive pricing actions? No. But I’m very clear that you are also on track with the question that you – or the assessment you made, our price increase effective at the beginning of this year was a bit over 5%. The one we put in place at the beginning of April was certainly more than that. And we’ll work in this in a very agile approach.
Recognize and all that with EUR3.2 billion of backlog trucks that were taken orders for now will be produced in the next 6 to 14 months, and so it will take a period of time with the price increases we’re putting in place right now will come to – into production and get invoiced in terms of the bottom line. The whole point of agile pricing is to keep our eyes on it very carefully and to follow those cost movements. And we do expect to cover our material cost today and wait for our material tomorrow and we’re working that with this agile – commercial agile pricing approach.
Gael De-Bray
Okay, thank you very much. And I have a second question on SCS. Would it be possible to give me a rough idea of the share of the SCS backlog, which currently benefits from escalation clauses? And looking at the more recent order development, have you been able to secure orders with more productive conditions or is there actually some reluctance from clients about this, about the implementation of logistics as a cost-plus element or more broadly speaking escalation clauses?
Rob Smith
Sure, Gael. You can imagine that material escalations and inflation escalations are increasingly on the radar screen in the entire industry there. And customers and market participants understand that we’re in a very dynamic environment. And so the agile – commercially agile pricing I’m describing, affects all of our business. And it’s our SCS business is focused on this, our IT&S business is focused on this. I think we’ve not given a projection or a insight into how much is and how much isn’t it.
And I’d rather not at this point in time. But I tell you, it’s absolutely on people’s radar screens and those are conversations that people are having. Bottom line is our automation installations in the SCS market have given our customers strategic advantages – strategic competitive advantages and it’s a value for value kind of business. So we’re very focused on that and the agility on commercials and pricing certainly applies to a contractual, setting up gradual conditions in place and operating those over time.
Operator
Our next question comes from Sebastian Growe from BNP Paribas. Please go ahead.
Sebastian Growe
Good afternoon, everybody. Hi, Rob. The first one is also follow up on the Supply Chain Solutions business. I would be interested in after having seen the gross margin contracting obviously quite significantly, and I understand the root cause around cost inflation, inefficiencies. But could you also shed some light around what is happening in terms of mix or has this changed for the bad or is really only in certain way coming down to cost inflation, inefficiencies and that should sort of normalize over time. That’s the first question.
The second question is around working capital, and after this massive increase and risk buffer, so on the inventory side, do you feel that you are now pretty well equipped, so to speak on the working capital side, or do you see really need for even higher working capital levels on an absolute basis, that is sort of sufficient to handle the situation.
And the last one with about one month down the road after the second price round for IT&S, can you just give us a comment and how well it has been taken by customers so far? If you could simply comment also on the sequential development on the monthly order development, that would be very much appreciated and helpful for everybody, I guess.
Rob Smith
Hello, Sebastian. Good to hear from you. So let’s talk SCS, let’s talk mix, let’s took– you know, one point in time with very, very significant new build growth last year, we grew that business 45% to 50% dependent on currency last year, year-on-year versus a market growth of about 21%. And so as you put in place new build, over time the service element picks back. So with a very strong service – new build installation last year, a bit of service mix, but it’s not a big deal there in terms of an overall mix story.
Working capital, it may increase and that’s part of the uncertainties that we’re working through. Our team is working against that and the markets work – our team is working on reducing working capital and the market’s given us some headaches. But we’re working through that. I’m not going to say it’s going to get bigger. I’m not going to see is going to get less. We’re working on making it less. It could get larger.
I would say that we’ve got very strong solid financials, we’ve got a good investment grade credit ratings. We’ve been able to cover that with our commercial paper program at favorable terms. And we got our eyes on the profitability, and we got our eyes on bringing the guidance back when the market uncertainty reduces so we can come back with some solid guide for the rest of the year.
You asked about pricing and what’s the approach, what’s the pricing, what’s the market demand reflection after having indeed put pricing up twice this year. The demand remains strong. And it is the second price increase we put up this year, and indeed things – the demand in the order intake remains on a good basis.
Sebastian Growe
If I may just ask a very quick follow up along the SCS because my question was rather on the project mix, not so much really on solutions versus service but inside the solutions, if you have seen sort of any mix shift, in the sense that you’re selling more third-party solutions like one of the Norwegian company for instance that is listed where you get probably a smaller margin than selling your own conveyor sorters and whatever. So that is more the nucleus of the question.
Rob Smith
Okay, I get you. No, our Supply Chain Solutions business is the world’s leading integrator of our own and third-party technology with a full software stack. And being able to put all that into a solution, that’s given our customers competitive strategic advantages. And there is no specific mix change between owned and third-party technology.
We do integrate, by the way, with a very strong partner, the ones that you’re talking about, and integrate their module successfully into overall solutions. Very good example of that is our micro fulfillment centers for urban grocery locations. So no change in those kind of mix. Things are in a good way.
I’d say between 30% and 40% is third-party, between 30% and 40% is our own. And that’s those projects go into place. And as the leading integrator, we integrate all that in an overall solution for our customers.
Operator
Next question is from the line of Katie Self from NZ. Please go ahead.
Katie Self
Hi, good afternoon. Thank you for taking my questions. I’ve got two. One on IT&S and then one on SCS, if I could. So just on IT&S. I wonder if you could help me understand a bit better the dynamics between new truck sales, used truck and on short-term rental? And particularly, could you just explain a bit, the rationale behind increasing additions to your short-term rental fleet as we’re getting to a point where industrial growth is perhaps starting to moderate.
We’ve seen in the past that typically new sales would follow that and utilization can come down with that. Do you see a risk that you end up with overcapacity in your fleet as these orders eventually feed through into the P&L. So that’s question one.
My second question, just around the SCS margin, I totally understand and respect the point that you can’t give explicit guidance, but just if qualitatively you could help us understand where the downside protection is in that SCS margin? As analysts looking at the stock, we haven’t really seen SCS in a sort of significant down period or anything like that. So it’s difficult for us to gauge just how far down those margins could come? Any help you could give us that – aside from pricing, what measures do you have to protect that bottom line? Thank you.
Rob Smith
Okay, Katie, let’s walk through those one at a time. You are asking about IT&S and you’re asking about the dynamics of new trucks, leased trucks, used trucks, rental trucks. It’s a very significant capability we have and overall sustainable element of being able to have our trucks to have a first life, have second life, have a third life. Our trucks go out new as either sold or leased. The ones that go out on a lease program include a full service with it. They will come back, we will give – we will have an opportunity to refurbish, and either sell it again as used or put it into the rental fleet.
In terms of new trucks, sometimes we [technical difficulty] rental fleets or for rentals up to 12 months, sometimes a week, sometimes a month, sometimes several months, but up to 12, and then the leasing is three, four, five years, depending, once as I said, with a full service contract.
And on the cyclicality point of view, when those trucks come back after three lives, then we’re able to do very significant amount of recycling on those trucks and those materials. The lease, I mean, maybe one dynamic I’d share with you.
One of the reasons that there were fewer used trucks available in the discussion about units versus oil rose in the order intake for the quarter, you know with material availability and longer lead times on new trucks, many of our customers, we’ve been helping them by extending the lease contracts. And then when the lease contracts get extended, there less lease vehicles coming back, that we would then sell as used trucks. So that’s one dynamic to mention for you.
And as a short-term rental fleet gets older, then you put new trucks into it, and there’s always a constant flow of either new or may be coming back off of first lease into the short-term rental fleet. Is that helpful for you? Is that what you’re looking for there?
Katie Self
That is. That’s helpful color. Thank you. I guess if I could just ask just a little bit more specifically, what I’m thinking about is, as we looked into the second half of 2019, a number of KION’s competitors started cutting additions to their rental fleet before KION. And what that meant it seemed that their orders underperformed for a while because of this dynamic. You talked about with the additions to the rental fleet being included in units, it meant their margins were more protected into the down cycle because they didn’t have as large a fixed cost base. I guess I’m wondering whether you see any risk of a repeat of that scenario in which case KION’s margins could fall further than peers.
Rob Smith
No, we’ve been looking at that carefully and we don’t see a risk on that, Katie.
Operator
Our next question is from the line of Philippe Lorrain from Berenberg. Please go ahead.
Philippe Lorrain
Yes, thanks for taking my questions. So the first one is really like on the rental fleet orders and the comments you made, with regard to that effect on the Q1 order intake. So if you exclude rental fleet orders, could you tell us roughly what the order intake growth was in unit terms?
And the second question is more on SCS. Are you already seeing orders for the re-shoring of certain manufacturing capacity into higher cost regions?
Rob Smith
Okay. Hey, coming back to the amount of units that went into the rental fleet, I guess if you would do that, it’s probably 6 points and so 29 as 23 would be the answer for you on that one. Ask me again your second question, Philippe.
Philippe Lorrain
Yes, I was wondering whether you start seeing already orders in the wells automation for capacities into higher cost regions that’s following basically the start of the trade wars on the Trump Presidency, the fact as well that we’ve learned from the pandemic that perhaps the globalization is not going to be too far. So this kind of float. And I was just wondering whether you’ve seen already customers placing orders with regard to that.
Rob Smith
No, you know what’s the big driver on orders and automation is what I was talking about before. There is a very strong demand in the market using online ordering. And the e-commerce used to be, I guess we all we’re tracking it as a vertical play itself but in the meantime, all the other verticals have an important element of e-commerce as well. People are ordering online, people want things same day, next day latest, and labor is very hard to get to warehouses. Manual labor is getting very scarce. So there is a lot of focus on getting automation to help companies be able to achieve their needs and their abilities to deliver in the e-commerce environment.
I’d also point out, people are investing local for local in North America, but people are investing for a lot of different reasons. And as people adjust their supply chains, I don’t see too many stopping one supply chain for the expense of another, or starting one at the expense of the first. People are basically adding flexibility to their supply chains.
They are recognizing that when you only have one source, no matter where it is, there is a certain amount of vulnerability. And if it’s a longer ways away and there is supply chain interruptions, that’s even more risk involved. And so people are adding to their existing supply chains to have flexibility in it. And in many cases that would involve and does involve automation.
Operator
The next question is from the line of Martin Wilkie from Citi. Please go ahead.
Martin Wilkie
Good afternoon. It Martin from Citi. So a couple of questions. So the first one is on customer behavior and the cost base. So obviously the trucks themselves are more expensive, but we’ve seen some parts of the world, diesel prices are up 40% or so. Are you seeing changes in customer behavior in terms of trading down or switching from combustion to electric, or has there been a sort of switch because of rising running costs of trucks?
And the second question was then on – just coming back to leasing. Could you remind of the dynamics if presumably second-hand trucks are more valuable because the new trucks are more expenses and prudently scarcer to come by, are customers are able to keep the trucks at the end of the lease period with paying us pre-agreed price rather then you getting it back? Are customers beginning to do more of that in order to profit from inflation in the second-hand market? Thank you.
Rob Smith
Well, let’s talk about that too, Martin. I mean you’re asking about customers’ behavior and rising running costs. What I mentioned to you is about, maximum 15% or so – we’ve got quiet an echo somewhere
Martin Wilkie
That was my line. I’m sorry.
Rob Smith
Can you hear me now, Martin? The echo has gone. That’s good. Look, going back to the raising running costs fuel is an important running cost. Our customers see our industrial trucks as very important capital good investments, and are buying them on a total cost of ownership basis. Maybe 15% of the overall total cost of ownership is the new price in the first place or the investment in the first place.
Next one after that of course, is – if it’s an internal [technical difficulty] as well as the energy, and a very significant portion, 60%, 60% to 65%, maybe even 70% is the operator themselves. So there is a focus on moving to automation in our trucks. And we have a good automated capability and automation capabilities and our AGVs and AMRs as I was talking about before on our strategic highlights, and clearly, yes, as diesel costs go up, operating costs for internal combustion go up. On the other hand, there is a longer term, in many cases, a contract in places, or it’s an ownership. The Truck is already there.
You ask if there is a mix change. We don’t see a specific mix change between internal combustion and e. But what I would point out to you, if you see, we’ve got 87%, almost 90% of our order intake is electric. Why is that? I guess you know warehouse trucks are growing and warehouse trucks are almost exclusively electric. And then the internal combustion and the e-trucks are both counterbalanced. In total, we counterbalance to have internal combustion and electric battery operations.
And in total, about 87% of our order entry is electric, electrified. And as you see on page, must be, 6, So you can see how that’s developed over time. It’s reasonably stable, but it’s higher than it was several years back and I would anticipate as we would go forward, it would continue to grow.
Within the electrification, there’s a lot of advantage associated with the lithium-ion batteries. And that’s why we’re excited about extending and expanding our lithium-ion capacity in the KION battery systems.
You asked about the value of the leased truck. I mean, you see it also in the car market. You saw what’s happening on used cars when new cars have longer delivery times. Lease or used trucks, it’s a dynamic market too. And clearly there is a time advantage.
There is no change in customer behavior when the lease timing ends. In some cases, we have extended the lease if somebody is expecting a new truck coming and it’s not available yet. So those are individual discussions and we work on helping our customers find good solutions that work for them. Those trucks as I said, do have a second, do you have a third life and we don’t see inflation playing a role there.
Operator
Our final question comes from the line of Jorge Gonzalez Sadornil from Hauck & Aufhaeuser. Please go ahead.
Jorge Gonzalez Sadornil
Thank you very much. Hello, Rob. My first question is also regarding Supply Chain Solutions unit, but more from a qualitative point of view. So we are seeing industrial truck order intake being very strong. And I was wondering, what is the difference now that is making industrial truck order this are strong taking into account that should be reflected that the demand for the warehouse equipment is a strong, but is not reflected in Supply Chain Solutions orders? I understand that the increasing size, obviously, could explain part of this in one quarter, but what are the conversations you’re having with clients? Are not clients worried about the increase in lead times? What are you seeing in terms of the potential volume that is accumulating from these effect, this increase in lead times to basically deliver projects?
Rob Smith
So that increasing lead time worry is clearly something that everybody is working on and working against. As I say, our lead-times at this point depending on truck and depending on configurations and things will be somewhere between 6 and 14 months. And that’s part of the consideration our customers making on new versus taking a leased or taking a used truck, or extending the lease on a machine they’ve already got with us, for example.
I want to help you with the first part of your question too, and I think I’m answering the second part. Come back with the first part, Jorge.
Jorge Gonzalez Sadornil
Yes, so I mean, is not the increasing lead times also helping you to sell more automation projects in the short-term. I know clients take into account that there is still a strong demand for industrial trucks, I understand that the demand for overhauls equipment is still strong. How this is not in reflected in the order intake for automation?
Rob Smith
Okay. I got you. So look at it this way, please, Jorge. I mean, the industrial truck is not a substitute for automation, and the – basically what they do is a complementary, and those are two elements of an overall intra-logistics and Supply Chain Solutions that our customers are getting from us.
You put those elements together, you put additional elements and you put an entire software stack on it and you help someone have a multi-channel fulfillment center, you help them have a micro fulfillment center, you have warehouses that will have a lot of automation, perhaps on the grocery side and have some trucks on the beverage side. There are a lot of different elements and they’re complementary.
The exciting thing about KION’s offering is we have the full suite of intralogistics in Supply Chain Solutions. And one is in the substitute for the other. They complement each other and they give the customer all the elements of the solution they’re looking for. That might be a way to look at it.
I guess the other element that you’re asking about, maybe is – you were asking about a trade-off, I’m describing there isn’t a trade-off. I’m describing they’re complementary and augment each other. You’re asking about the order entry and trucks being strong and order entry and supply chain, I come back to the statement real big orders and lots to orders over time, the trend in the automation is orders, and some are getting bigger over time.
And the lumpiness of that industry and orders coming in, do they hit a quarter they come couple weeks later that’s why we’re talking about lumpiness when we talk about supply chain – Supply Chain Solutions. But we see both markets have very good medium and long-terms, than we would describe in the short-term dynamics in some of the other questions today.
Jorge Gonzalez Sadornil
I see. And my last question is regarding the consensus. So after you dropped the guidance because of this, obviously, this uncertainty that we have now, the consensus have reduce a lot estimates, and now is around EUR200 million below in adjusted EBIT. I don’t know if you have any comments regarding this because taking into account the analysts, we have some difficulties to really estimate the impact of the increase of the steel and other raw materials. It would be interesting to know if you’re comfortable with this new estimate from consensus?
Rob Smith
Jorge, I would come back to the conversation we were having earlier about, in a time of retracted guidance, we retracted it exactly because of the uncertainties in the market and the challenges and the headwinds in the supply chain and logistics disruptions. And that was exacerbated when the war in Ukraine broke out. And it was further exacerbated as the corona lockdowns come into place. And so with that uncertainty, we shall come back with guidance for the rest of the year later on in the year as that uncertainty alleviates over time. And we have a good strong view of where we’re going to land.
Rob Smith
If Katie is still on the line, I’m recognizing, Katie, I think I picked up on your IT&S question, but I missed the opportunity to answer your SCS question for you. If you’re still there, I’d be more than happy to help you.
Operator
[Operator Instructions]
Rob Smith
Well, everybody that is on the line, maybe mention to Katie, I did want to come back and I did want to short change your other question. And I think as being a good corporate citizen together on these calls. So happy to help you next time, Katie, happy to pick up a call with our IR department if you want to come back for another follow-up question.
Operator
We have a follow-up question from the line of Will Turner from Goldman Sachs. Please go ahead. Mr. Turner, please unmute your microphone.
William Tuner
Hi, there. Sorry about this. I thought Katie actually asked quite a good question. So just as a member of the audience. I’m actually quite interested to hear what your response was. I think it was along the lines of, where today Supply Chain Solutions margin go to in a downturn or in a more challenging environment, or along those lines.
Rob Smith
Hey, Will you’re double dipping. But I get the feeling you’re helping Katie, and I do now recognize the question again. Katie, Will, ladies and gentlemen, I mean that’s a guidance question. And we’re planning to reinstate guidance when we’ve got a good view. I can tell you that people all across our company and Supply Chain Solutions and Industrial Trucks and Services are working very hard to do very good business this year. And with all the uncertainty out there, we’re working to improve our business day for day and quarter for quarter and we’re working very hard at that. But coming with guidance with the amount of uncertainty we got in the market wouldn’t be an appropriate thing to do.
So we’re going to keep right on it and be working hard at it, and we will be coming back when the market helps us with a bit of less uncertainty out there and as these significant economic and political side challenges the whole world is going through become more clear over the course of the year. So I think it’s the best way to answer both Katie and Will’s question.
William Tuner
I guess just kind of a follow-up on that, in terms of the – how you price the projects in Supply Chain Solutions, are they then – is there pass-through mechanisms for this challenging environment or do you have a certain number of projects which all kind of lumpy fixed prices, and therefore it’s a bit more difficult just thinking for the next coming quarters?
Rob Smith
Sure, I mean you can imagine with a portfolio of over 1,000 projects underway at any given point in time in the year or 1,000 or more over the course of the year, some do some don’t increasingly, obviously, in this environment more and more and more will. For many years we weren’t in an environment like this, and some projects are still in the pipeline like that.
And we’re working on being agile, as I say, in all of our businesses and our Supply Chain Solutions is working just as hard at this as our IT&S team. And I expect that’s a good visibility for you. Thousand projects over the course of the year, each one of them and we’re working on having more and more riders of course, as part of our agility programs.
Operator
We have now Katie online. Please go ahead.
Katie Self
Hi, thanks. Thanks for coming back now. I appreciate it and to Will for asking the question. That was the question. He’s absolutely right. I guess if I could follow up slightly, just one of the questions on a qualitative basis, because I appreciate that you can’t give guidance at this time. But one of the things I wanted to understand, because all of us are relatively new to looking at this business right, at Dematic, since it’s only been part of the KION for a few years. Is – just qualitatively where can you get downside protection, aside from implementing price increases which will take, understandably, some time to come through? Are there other levers you have that could give you some kind of downside protection on that margin in SCS?
Rob Smith
Sure, Katie. I mean the Supply Chain Solutions business has – that’s a great environment to be having – as we are giving our customers strategic advantages as we’re putting these installations in place. There is a real understanding on both sides, that it’s a value for value project together. And in the course of the project there are many opportunities for discussions about scope, and having change order discussions, and having negotiations as people go through those projects.
And they get to understand each other better and sometimes you realize that, hey, if we do an addition here and make a modification there, it will make things even better during the course of the project. And then there is a discussion and agreement, a change order that goes into place. And so there are opportunities indeed to steer these things and during the life of the project and over the course of the project.
Katie Self
That’s really helpful. Thank you.
Rob Smith
Okay. You’re short-changed, and I certainly wasn’t trying to miss your second question
Katie Self
No, I appreciate it. Thank you very much.
Rob Smith
Okay. Hey Nairobi, I think we might be at the point where it’s time to make some closing remarks. Are you okay with that?
Operator
We have a last question, if you don’t mind.
Rob Smith
Let’s take it.
Operator
Our last question is on the line of Philippe Lorrain from Berenberg. Please go ahead.
Philippe Lorrain
Yes, thanks. Thanks, Rob, for taking that last question. Just like briefly to understand since you’ve quantified the effect from the rental fleet ordering on the Q1 stats that we’ve seen. On that track, actually, there was a negative mix effect that was weighing a little bit on the order intake in monetary terms in IT&S or I
Was making calculations that are wrong?
Rob Smith
No, no, that’s a good understanding, I’d be happy to share it again. Look, the bottom line is when you – as you put trucks into the rental fleet, they are new truck – incremental trucks and therefore we count them in the units. However, since it is going into our own rental fleet, we don’t count them in the external reported revenue. And so that’s the one element of the distinction you’re asking for.
Secondly, if you think about all the different kinds of industrial trucks out there, in the warehouse truck space, there are some quite a light range of warehouse trucks and therefore – and less expensive. And so as warehouse trucks in light trucks get increasing shares then there is a certainly a mix element there.
And then as we talked about, we did over time extend or the small ones I’m talking about or the – I guess the – maybe if you want to know more about this. If you’re walking through a grocery store for example you see someone stuck in the aisles with a manual pallet jack, or walk behind pallet jack, those never used to be part of the of the industrial truck market statistics, the WITS statistics that I was talking about earlier.
But as those get electrified and those get a motor on them or a battery on them, all of a sudden they are counted in the overall statistics and so they’re visible. And as the automated ones are more interesting or the electrified ones are more interesting than the manual ones, and so there is a good growing market there. We play in that market and that’s an element of the mix that we’re talking about.
And then as we also mentioned, as customers ask to extend their lease contracts for a period of time, as we did that then there were less trucks coming back that were used trucks – that we would sell as used trucks. And the used truck sales are accounted in our services revenue. And so slight decline in services, basically because we were selling less used trucks, because they were being used longer during the leases. And that would be the explanation behind those three reasons for the order intake in euros versus the order intake in units.
Philippe Lorrain
So I understand correctly that you had like winning the warehouse truck segment actually, these mix effect, because it wasn’t really like Vivo, let’s say if you consider IC versus e warehouse trucks, as of the information that you provide on this basis.
Rob Smith
Yes, that’s the shift I’m talking about, is within the warehouse segment.
Philippe Lorrain
Right. Okay. So, and is my understanding correct as well that we could consider that the sales that you do across the whole service offering in IT&S much is more or less to order intake in the specific period also for that kind of activity because it’s shortlist?
Rob Smith
Yes, that’s a pretty good understanding. Service – sales can be in and out in the same day, in and out in the same week, certainly in and out in the same quarter. Sometimes you some scheduled one quarter for an on-site delivery or an on-site work a little later, but there is clearly a much more in and out in the service business. In and out in the same period.
Operator
So we have no more question, I hand back to you, Rob, for any closing comments.
Rob Smith
Well, thank you, Nairobi, and the thanks to each of you for joining our call today and your strong interest in our company and in our industry. We’re excited about the industry we’re in and we’re really proud of our company and how it’s doing. And we’re very excited about our prospects for the future.
I’d point out to you as a highlight, we publish our 2021 Sustainability Report tomorrow. Please take a look at that, and you will see the exciting progress in journey that we are on with our sustainability in KION. So take a look. I look forward to talking with you about that if you have a chance to take a look at that and read through it, and discuss it together.
Hope to see you in person when we’re out and about over the next period of time, and looking – and picking up these conversations when we get together. So thank you, and thanks for your time, and thanks for the very good questions.
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.
