Kion Group AG

XETRA:KGX

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Haley, your Chorus Call operator. Welcome and thank you for joining KION's Group Q2 2020 Update Call. Today's presenters will be Gordon Riske, CEO of KION Group; and Anke Groth, CFO of KION Group. [Operator Instructions] I would now like to turn the conference over to Mr. Gordon Riske, CEO of KION Group. Please go ahead, sir.

[Gordon Riske, CEO & Member of Executive Board]

Yes. Thank you, and welcome to our update call for the second quarter of 2020. As a basis for this call, we'd like to use our Q2 2020 presentation. That's available on kiongroup.com under Investor Relations in the Publications section. We'll begin and present in 4 parts during today's call, and then we'll open it up for your questions. I will begin with our financial key figures for the first half of 2020. And also give you an update on the current status of our COVID-19 mitigation measures before showing you some of the product highlights in Q2 2020. And this will be followed up by a market update. Anke Groth will then provide you with a financial update for Q2 and the first 6 months of 2020 and the overview of the current liquidity situation. We'll close the call then with our outlook for the full year 2020. So let's get started on Page 3 with our financial key figures for the first half of 2020. A full quarter being globally impacted by COVID-19 is now behind us, and it has clearly changed our daily business. However, KION has defended its market position and succeeded in compensating at least partly for the very difficult market conditions in Industrial Trucks & Services, through strong growth in our Supply Chain Solutions business. Order intake for the group increased by 4.8% and in the first half year and reached EUR 4.4 billion, predominantly driven by our SCS business, generating a record order intake of more than EUR 1 billion in Q2 alone. Our revenue stood at EUR 3.9 billion, minus 10% below the first half of 2019, and we achieved an adjusted EBIT of $205 million in the first 6 months of 2020, representing a positive adjusted EBIT margin of 5.2%. Free cash flow for the group amounted to a positive $2 million in the second quarter of 2020, resulting in a minus $220 million for the first half year. So overall, KION strategic positioning has paid off and the strict cost and cash management measures showed for successes. Let's move on to Page 4 to give you an overview of our current status regarding COVID-19 mitigation measures. With respect to our employees, we maintained our comprehensive health protection measures and have adopted the workplaces according to all of the distancing rules. Also, the opportunity to work remotely from home is still being used. Additionally, we are continuously using personnel measures such as short-term work or reduction of overtime accounts to mitigate the negative impact from the lower demand caused by the COVID-19 pandemic. During the past quarter, roughly half of our employees were affected at least to a certain degree by 1 of these instruments, and we plan to further make use of these instruments in the coming months if markets do not improve significantly. With respect to our operations, we are still closely monitoring the supply situation and material availability. Overall, the number of critical suppliers has decreased since the beginning of the crisis to a low double-digit number of suppliers, which are predominantly monitored and controlled by a central task force and is progressing well. However, the supply situation has not returned fully to precrisis levels, but the easing of restrictions has led many suppliers to being already able to produce once again. With regard to IT&S, the very tight situation at the beginning of the crisis has improved, but we are still facing challenges caused by the corona pandemic. Therefore, we adopted the production capacity in our IT&S production plants to the current level of demand. So that means that our factories are planning for certain closing days in order to make short-term work possible during these times and to produce efficiently in the active periods. With regard to our Chinese plants, they are able to benefit from the noticeable recovery in the market and have and are now producing at pre-crisis levels for some time. With regard to our service capability, we saw the gradual improvement in the after sales areas in the last quarter, which once again confirms the resilience of this business. However, the service business has not yet returned to precrisis levels. In the short-term rental business, we have also been negatively impacted by the corona pandemic. However, a gradual improvement is noticeable. With respect to the used truck business, it showed an unfavorable development in the past quarter. When we looked at the Supply Chain Solutions business, this segment was less affected by the crisis. The number of active project sites that were closed or impaired because of COVID-19 has steadily decreased in recent months and is currently at a very low double-digit percentage rate. However, our employees can expedite projects remotely, at least to a certain extent, and our SCS production plants are all up and running. In order to maintain the financial strength of the business, we further pay close attention to our expenses, which we can influence in the short time. Investments into the strategic projects are now being accelerated once again. As a precautionary measure, in May, we also agreed on an additional credit facility of over EUR 1 billion, with the participation of the KfW Bank of the Federal Republic of Germany, which further strengthens our financial situation. So let's move on to Page 5 and the product highlights for this Q2 2020. Important aspects of our KION 2027 strategy are the areas of automation and innovation. And we're proud to have launched a new generation of the Dematic multishuttle. The system typically consists of multiple levels of racking, shuttles, buffer conveyors and software and is a highly effective system for buffer and totes, cartons, trays or individual bundles used by different verticals, such as e-commerce, food and beverage or logistics. This new generation provides our customers with precise load sequencing and high rates up to 10x higher throughput rates than conventional storage systems and requires less space with much more operational flexibility. Moreover, with the optimized automated pallet storage, Dematic has upgraded its modular system of proven components that can be configured to meet specific customer requirements for pallet storage, such as for food and pharmaceutical industries. It includes a racking system, automated storage and retrieval machines with load handling devices and the complete software around it. Since individual components are standardized, the system can be installed and put into operation in a very short time. The compact design and flexibility to start palletized goods at single, double or even multiple depths makes optimum use of available space, saving up to 20% of the space compared to a manual pallet store system. Last but not least, we're very proud that the electric counterbalance truck, RX 60 made by STILL, which was introduced at our Capital Markets Day earlier this year won the International Intralogistics and Forklift Truck of the Year Award 2020 in the category, counterbalanced trucks up to 3.5 tons. According to the jury of the IFOY award, the RX 60 sets a benchmark for electric trucks in this segment. Test was performed with a combination of acceleration driving and lifting and truck achieved a productivity of 363 pallets in 8 hours. The jury concluded that the measured productivity has never been so high in a comparable IFOY test. So let me move on to the current market situation on Page 7. We concentrate first on the industrial trucks in the global market and the development in the regions in the second quarter. All regions of the industrial truck market outside of China, have severely been impacted by COVID-19, which led to declining markets in Q2 2020. Western Europe saw a decline of minus 29% in Q2, driven mainly by negative developments in the U.K., France and Italy. Eastern Europe decreased by minus 22% in Q2 which, similar to the development in Q1 was primarily driven by a decline in Poland. North America declined by minus 16.8% in the second quarter was highly impacted by the decrease in IC trucks, coming from a low base in the first half of 2019. South and Central America turned even more negative in Q2 with minus 33.8%, driven by negative effects caused by COVID-19 as well as the unchanged tense political and economic situation in the region. The Chinese market, on the other hand, returned to its growth path and increased considerably by 40.6%, driven by IC and warehouse trucks, both mainly in the economy segments, and so as a result of these regional developments, and especially with China with such a huge part of the market, which was 31% in the full year 2019, the global market declined by only minus 4.5% in the second quarter of 2020. On Page 8, it shows KION's breakdown by region. In Q2, KION order intake in units declined by minus 29.8% in Western Europe, slightly lagging behind the market, mainly driven by higher volumes from Chinese competitors within Western Europe. In Eastern Europe, KION declined by minus 18.9% in Q2 and outperformed the market, in particular, driven by Russia and the e-commerce segment. As for EMEA in total, however, the market declined by minus 28.2% in Q2, whereas KION order intake in units decreased less, so only minus 27%. So in a nutshell, KION's market share increased in the past quarter in EMEA. Looking to China, KION's order intake increased by plus 13.7% in the second quarter and was lagging behind the very strong market development, driven mainly by IC trucks and smaller warehouse equipment in the economy segment. Nevertheless, KION was able to grow in all product segments compared to the previous year. So overall, this clearly underlines that our China strategy is the right way to participate in this expected growth market. North America declined by minus 38.9% in Q2 2020 compared to a high base in the prior year. Don't forget, we did have the large Menards deal in this time period last year. South and Central America, KION's unit order intake decreased by minus 36% in Q2 compared to prior year, mainly driven by generally low base and FX-related pressure on imported trucks, especially in Argentina. In total, our unit order intake decreased by minus 22.7% in the second quarter, resulting in a decline of minus 18.5% within the first 6 months compared to the previous year. Overall, all regions, despite China were significantly impacted by this exceptional environment during the second quarter, which also impacted negatively KION's unit order intake growth. For Supply Chain Solutions market, we saw accelerated growth benefiting significantly from the currently booming market driven in particular by high demand from our e-commerce customers. With this update, I'd like to turn it over to Anke, who will take a look at the financial update.

[Anke Groth]

Thanks, Gordon, and also a warm welcome from my side. I do start with the segment financials before turning to the KION Group. So on Page 10, you will see the key financials for the segment Industrial Trucks & Services for Q2 and the first half year of 2020. First of all, the current pandemic and the corresponding slowdown of the economy is visible in our IT&S financials. Looking at the second quarter 2020 first, our order intake fell to EUR 1.3 billion, representing a decline of 19.8%, which was, in particular, driven by the weak development within our new business. At the end of June, the order book for the IT&S segment stood at EUR 1.3 billion, a decline of around 9% versus year-end 2019. Revenue fell strongly by 22.9% to EUR 1.3 billion in Q2 and was mainly impacted by our new business which declined by 33.7% in the past quarter. Besides the closure of our key production plants in April, the market downturn took its toll. However, our service business could at least partly demonstrate its resilient nature and declined only by 10.1% in Q2 despite various restrictions globally. So we were able to generate a positive adjusted EBIT of EUR 16 million in Q2, resulting in an adjusted EBIT margin of 1.2%. The main driver for the development and profitability was the lower volume, and consequently, the lower fixed cost coverage, by far, the most prominent effect. On top of this, we had additional expenses amounting to roughly EUR 17 million in total, resulting from, firstly, a higher depreciation due to the recent product launches and investments into new machinery. Secondly, our so-called strategic projects, such as our new plants in Poland and China, increased R&D costs due to a lower capitalization rate, IT costs as well as the cost from the joint venture with BMZ. On the positive side, our temporary cost-saving measures proved to be effective. So that we were able to save around EUR 60 million within IT&S in the fourth quarter. This means for the first half of 2020, the following: a decrease in order intake to EUR 2.7 billion, down by 13.9% year-over-year. Revenue in H1, down by 14.1% to EUR 2.7 billion, whereas the adjusted EBIT declined to EUR 112 million, resulting in an adjusted EBIT margin of 4.2%. So overall, the IT&S segment felt the pressure from the coronavirus pandemic, but could at least partly compensate the negative effects through the initiated mitigation measures. Page 11 summarizes the key financials for the segment Supply Chain Solutions. Let me comment on the second quarter first. The order intake more than doubled, achieving a record order intake of EUR 1.1 billion. As a result, the growth rate of the rolling average order intake stands at 14.3%. The very good development in the second quarter was, in particular, driven by a strong demand in North America and Europe, especially for pure-play e-commerce customers as well as from the food and beverage logistics vertical. With this, the order book for the segment reached EUR 2.7 billion at the end of June, representing an increase of 21.7% versus year-end 2019. Revenues saw only a minor decline of 1.2% to EUR 635 million in the last quarter despite several COVID-19 related lockdowns and restrictions at our project site. However, our engineers were able to catch up project delays during the quarter so that business solutions revenues only declined by 2.8% year-over-year. Our customer services revenues grew by 4% in Q2 after an already strong development in the first quarter of 2020. With respect to profitability, our adjusted EBIT in Q2 declined by 16% to EUR 53 million, representing a margin of 8.4%, which was burdened in particular by the inefficiencies caused by the difficult circumstances for delivering projects and services under pandemic related restrictions. This means for the first half of 2020, the order intake increased by 57.3% in the first 6 months of the year to EUR 1.7 billion, whereas the revenue increased only slightly by 0.4% to EUR 1.2 billion. Adjusted EBIT amounted to EUR 112 million in H1 '20 resulting in a stable margin of 9.2% compared to the previous year. Overall, SCS showed a very strong order intake development in the past quarter as well as a very solid project execution despite the challenging environment. Page 12 summarizes the key financials for the group. KION saw a significant increase in order intake of 11.6% in the second quarter which strongly benefited from the Supply Chain Solutions business. With this, the order book grew to EUR 4 billion at the end of June '20, representing an increase of 9.4% versus year-end 2019. Revenues declined by 16.7% to EUR 1.9 billion in Q2, which was completely driven by the IT&S segment. And due to the already mentioned underperformance of IT&S, the adjusted EBIT for the group fell by 73% to EUR 61 million in the second quarter and reached a positive margin of 3.2%. Looking at results for the first half year, KION saw a solid increase in order intake of 4.8% to EUR 4.4 billion. Revenues declined by 10% to EUR 3.9 billion in the first half of '20, and the adjusted EBIT fell by 49.8% to EUR 205 million in the first 6 months, which resulted in a lower margin of 5.2%. In summary, IT&S clearly impacted by the market downturn, whereas SCS showed a less cyclical development withstanding COVID-19 and could at least partly compensate the decline in IT&S. Page 13 shows the reconciliation from the adjusted EBITDA to the net income for the group. As mentioned before, adjusted EBIT stood at EUR 61 million in Q2. Nonrecurring items increased to EUR 21 million, mainly caused by the impairment of the minority stake in Linde Hydraulics as well as a realignment of our IT&S sales organization in the U.K. Thus, the reported EBIT decreased from EUR 201 million to EUR 17 million during the second quarter. And overall, net income decreased to minus EUR 17 million in Q2 2020. Looking at the first half of 2020, adjusted EBIT came in at EUR 205 million. And reported EBIT at EUR 138 million. The effective tax rate increased to [ 44.2% ], which resulted on the one hand side from the earnings development and losses that cannot be utilized for tax purposes. And on the other hand, by nontax deductible expenses, which did not decrease to the same extent as the EBIT. Overall net income declined to EUR 51 million in H1, which represents an EPS of EUR 0.46. Details on free cash flow are shown on Page 14. KION was able to generate a small positive free cash flow of EUR 2 million during the past quarter, which resulted in a negative free cash flow of EUR 220 million during the first half of 2020. This development was in particular driven by our operating performance. Besides that, the change in net working capital of minus EUR 205 million, benefited from the very good development and timing of the order intake from SCS customers and the related payments compared to the previous year. Additionally, a lower level of business activity within IT&S is supportive. Moreover, higher tax payments due to higher earnings in 2019 impacted the free cash flow negatively. The net outflow from our rental business increased compared to prior year due to some refinancing activities performed throughout 2019, which led to a positive cash impact in 2019. The increase in rental CapEx does not mean that we increased our rental fleet, the contrary is the case, the assets are going down. Finally, the cash flow from investing activities increased due to several effects such as, of course, our production capacity expansion and the acquisition of DAI as well as further investments into our joint venture with BMZ. However, we were able to limit the cash outflow from investing activities in the past quarter, while we initiated COVID-19 mitigation measures and the postponement of selected investment projects. Due to the improved liquidity situation, as already mentioned by Gordon, investments into strategic projects are now being accelerated again. Page 15 shows the net debt of our business. As at the end of June '20, net financial debt increased to EUR 1.9 billion at its year-end level mainly to fund the working capital needs as well as the DAI acquisition. Considering our operating performance in the reporting period, our leverage on net financial debt increased to 1.3x compared to year-end 2019. The leverage on net financial debt benefited from our cost and liquidity management in the past month. The liabilities from short-term rental financing has decreased to EUR 551 million, which reflects the development within our short-term rental fleet. As a result, the leverage on industrial net operating debt at the end of June 2020, stood at 2.6x, up from 2x at year-end 2019. Finally, our net pension liabilities increased slightly due to, again, lower interest rates. Therefore, the leverage on industrial net debt increased to 3.8x. Page 16 shows KION's current liquidity situation at the end of June 2020. During the last quarter, we have strengthened our liquidity profile with an additional liquidity line of EUR 1 billion provided by our core banks and KfW, Germany's Development Bank, as a precautionary measure. The additional credit facility runs until March 2021 and can be extended by up to 12 months. Moreover, we also reached an agreement with our banking partners that the consequences of a covenant breach, meaning calling in the loans, are suspended until the end of Q1 2021. As a result of the additional credit facility, KION's free liquidity increased to roughly EUR 2.2 billion at the end of June 2020. Until the end of the reporting period, EUR 221 million were utilized out of the first revolving credit facility. Moreover, we achieved step label of our commercial paper program, improved the acceptance in the market so that EUR 287 million were placed at the end of June. And by the way, as of today, I think we even placed EUR 482 million. So overall, KION has a solid liquidity profile to get safe through this crisis. And with this, I'll hand back to Gordon for the outlook for full year 2020.

[Gordon Riske, CEO & Member of Executive Board]

Okay. Thank you. Let's move to Page 18 for the outlook. You all know that we have, unfortunately, retracted the outlook for the full year 2020 in light of the high uncertainty about how the pandemic will unfold, its likely duration, its impact on the global markets and the economy, especially in the various regions around the world where KION has a footprint and the sectorial conditions. So currently, the assessment of the group's business performance over the remainder of this year is still very uncertain. Consequently, we are only providing a qualitative comparative assessment of the outlook for our main KPIs at this point in time. For the KION Group, we are expecting a noticeable decrease in order intake and a significant fall in revenue, adjusted EBIT, free cash flow and return on capital employed compared with 2019. In the ITS segment, the current reluctance to invest and the declining market demand for services will have a significant negative impact. And therefore, we expect that order intake, revenue and adjusted EBIT for 2020 will be down significantly year-on-year. Given the currently very encouraging level of orders in Supply Chain Solutions segment, the order intake in 2020 is likely to be substantially higher than in 2019. Because there are considerable uncertainties about the possible return to lock down measures, delays to project execution cannot be ruled out completely. Revenue and adjusted EBITDA, therefore, expected to be around a level more in line with that which we have seen in 2019. So looking to Page 19, this is our financial calendar. The next event is the publication of our results for the third quarter on October 29, 2020, and until then, we look forward to meet you at least virtually at conferences and roadshows after the summer break. With this, we'd like to close the formal part of this update call and hand over to the operator so that we can take your questions.

[Operator]

[Operator Instructions] And the first question comes from the line of Philippe Lorrain of Berenberg.

[Philippe Lorrain, Analyst]

So the first one is on ITS. It seems like the price/mix component in the ITS order intake was negative in Q2. When I compare that to the volume trends, the FX and also the service trend versus the order intake in value. So was that likely driven by pricing or rather by mix? And perhaps when looking at the order intake in units, does that figure in Europe, especially, benefit from trading trucks going up massively in the region? That's the first question.

[Gordon Riske, CEO & Member of Executive Board]

I didn't quite understand the second question, traded trucks?

[Philippe Lorrain, Analyst]

Yes. Basically, the traded trucks from EP Equipment that you just pay.

[Gordon Riske, CEO & Member of Executive Board]

Yes. Okay. Well, price/mix negative in the -- I mean the second quarter, first of all, was a difficult quarter. And KION has a very broad range of customers, and we do sell to a bigger portion of general industry customers, also customers affected by the downturns in the automotive and automotive related, so heavier trucks. So the negative mix is slightly more negative than is typically in the quarter, whereas when we do sell a lot of heavy trucks, then the negative is positive. Units, yes, the warehouse business, the warehouse related e-commerce business is still trending very well, as you see by the SCS numbers. And so the units we do sell quite a few over the years of what we call branded trucks with EP or others that have performed outstanding in the market.

[Anke Groth]

Yes. But Philippe, with respect to the mix, warehouse is less negative. So that, of course, contributes to a mix effect. And your question with respect to pricing, yes, pricing is more difficult in such a market, as you can imagine. So having a positive price assertion is much more difficult than what we achieved last year.

[Philippe Lorrain, Analyst]

Okay. So I understand. It's a combination of both because like we'll get the mix between the warehouse segment and the heavier trucks and also like pricing is more difficult. And the second question was on SCS. Bearing in mind that the order intake was up massively in Q2, especially versus Q1, I'm just wondering why the contract liabilities were not higher than the level that we've observed in the balance sheet in Q2. In Q2, you did not provide the level of contract liabilities that you had in the balance sheet in Q1, perhaps you can just like walk us through the difference between the 2 quarters.

[Anke Groth]

Yes, Philippe, it always depends on the timing. So when we do get the order intake. And it was very much geared in the second quarter towards the end of the second quarter. That means that customer prepayments will come then in Q3, respectively. So it's really a timing issue. And also depending on the terms and conditions we grant to the customers with respect to their payment for the first terms for the first milestone and prepayment.

[Philippe Lorrain, Analyst]

Interesting. That means just like as a final one on that topic that you can book an order intake in the order intake and you haven't yet received the prepayment, technically speaking.

[Anke Groth]

Yes, sure. We -- you have an order intake in the books once you sign a contract. And of course, the customer is then paying after that signing date, the prepayment and also the amount and the timing of the prepayment. That's not a standard for all the customers, but it also depends on the project and on the customer itself.

[Operator]

The next question is from Sven Weier of UBS.

[Sven Weier, Executive Director and Analyst]

The first one is also on SCS. And sorry, if you mentioned it in the prepared remarks, but I only joined later because of another call. Did you mention that on the big tickets in SCS, could you give us more details whether a lot of orders above 100 individually from 1 e-commerce client? Or how good of spreads did you have on those big tickets? And how much did that activity empty the pipeline for the second half? That's the first one.

[Anke Groth]

Maybe from my side, if we look at the split of orders, that has changed in Q2. So it's, again, geared more to large orders. So the respective splits into large orders, medium and small is as following. So 61% in Q2 have been large orders, whereas small orders account for 34% of the order intake and only 5% are medium orders. So we have had a couple of those big orders coming in.

[Sven Weier, Executive Director and Analyst]

And -- but it was not like you got a lot of orders from 1 client, right? So you had a good mix of individual different clients in there? Or...

[Anke Groth]

Yes. As you can -- as we have said, so e-commerce is currently booming due to COVID-19. And within the e-commerce space, you don't have so many really large global players. And we are also connected to a lot of those players and have good and long-standing relationships. And your question also referred to if the pipeline is now emptied. I think that was also 1 part of your first question. The pipeline is not emptied. It's still very well sold. And if you look at our overall guidance, we have said for SCS that we expect increase, which we classified as a substantial increase in order intake.

[Sven Weier, Executive Director and Analyst]

Yes. And how does your micro fulfillment perform now? Because I guess the solution came right in time, introduced in the market. I mean, I do understand that it's relatively small ticket item per order. But I mean, isn't that also now taking off as we speak?

[Gordon Riske, CEO & Member of Executive Board]

Yes. We have a lot of micro fulfillment. We have a number of pilots now running, and that will take off, but it is a -- if you compare as Anke said, in the e-commerce space, big distribution centers being built up quickly to handle the demand is more of the focus, at least in the second quarter.

[Sven Weier, Executive Director and Analyst]

And I remember in the last call, I think we had the question that whether you could run the business for EUR 800 million of sales per quarter. And I just -- and I remember the capital market statements on the SCS, that the biggest bottleneck you have is really finding the people to handle all the projects that are available out there. Now it seems that you have gotten a lot of these projects out there and have increased your backlog quite sizably. How have you dealt with be the people shortage, so to speak?

[Gordon Riske, CEO & Member of Executive Board]

Yes. The people is certainly an issue, I think, from the investment in capacities and so forth, that's all realistic and a good thing. We built Stríbro a couple of years ago and are expanding it. And also from a factory standpoint, it's okay. But also on the people side, we've made great progress in acquiring people this year and particularly, project engineers. And one of the topics is, of course, when you build large systems is electrical engineers form controls. And we do have the opportunity to partner with some smaller companies because, as you know, these types of systems are also going into automotive factories, which are down investing quite a bit. So there is some capacity in the market available that we have been able to secure to make sure that we are able to deliver this large, let's say, upswing in SCS.

[Sven Weier, Executive Director and Analyst]

Okay. So basically, this EUR 1 billion order level that can in the medium term, also become a sustainable level that you can handle per quarter, so to speak, on that basis. I guess, otherwise, you wouldn't have accepted the orders in the first place.

[Gordon Riske, CEO & Member of Executive Board]

You just answered the question very well.

[Sven Weier, Executive Director and Analyst]

Okay. And then secondly and ties into Philippe's question on the advanced payments. I mean, given that we've just said that some of these will only come in Q3 on your cash accounts. I mean, you did a good job on the free cash flow in Q2. So should we be hopeful that the third quarter or, let's say, the second half won't be negative either.

[Anke Groth]

It depends a little bit on how the economy and the world and the pandemic is progressing. If everything runs smoothly, I think that's a good assumption.

[Operator]

The next question is from Alexander Virgo of Bank of America.

[Alexander Stuart Virgo, Director]

Building a little bit on from Sven's last question there. Just thinking about the extra facility that you've utilized, the covenant waiver that you have, would it not be fair to say that the Q2 situation or the end of Q2 and the Q2 situation is the worst it will be this year? And therefore, what you have done is obviously a clearly taking assessment as a very worst-case scenario in order to feel the need to put these things in place. I just wondered if you could talk us a little bit through the logic? And talk a little bit about how you see that balance sheet situation, I guess, progressing through the rest of this year and into March because at first glance, obviously, putting something in this space might make business sense, but it does -- or it can sometimes spook people a little bit. So maybe you could talk a little bit about the logic of that would be really helpful.

[Gordon Riske, CEO & Member of Executive Board]

Yes. Maybe just first a general statement and then the specifics, I mean, the whole idea of having a guidance and the way we've done it, the uncertainties in the market. And yes, maybe a conservative approach in securing financing towards the second half of the year. But I'd like to remind everybody, the news, the daily happenings and all the major banks around the world, et cetera, and economists are quite cyclical, if you want to call it that, up and down. And we have a responsibility for our customers, our employees, and we have an outstanding pipeline for SCS, and we have a great market position for ITS to serve our customers. But the situation is quite volatile, and we just want to make sure we can sail through that without any issues.

[Alexander Stuart Virgo, Director]

Okay. And then maybe as the secondary question with respect to the second half. I wondered if you could just give us any color or commentary as to how Q3 has started, maybe talk through some of the regional differences? Just to give us an idea of how things stand at the moment?

[Gordon Riske, CEO & Member of Executive Board]

Well, Q3 still has 2 more months and 1 day to go. July has been, let's say, at a steady level, stabilized, I would say, at this level of 2-digit negative on the ITS side, the market. So we haven't seen anything get dramatically worse. I think that's a good sign for -- at least in Western Europe, we're in a little bit of in a summer time, so it's not untypical that July is a little bit slower, August. So I think that's a positive sign. China is really chugging along. That does surprise me in the 40% in Q2. And even in the first weeks now, July has been very solid. So that just encourages us to keep along our investment plans that we have a big investment plan in China, especially in the ITS segment. So we haven't seen it get worse. Perhaps Q2 was the bottom of the curve. But current trading is kind of at a stabilized level at the moment.

[Anke Groth]

And I would say, in addition, if you think about the full half year 2020, which will come -- if you compare that with the first half of 2020, we still had in Q1, especially on the ITS side, a very good quarter. So that you have to take also into consideration when you think about H2.

[Operator]

And next question is from Felicitas Bismarck of Deutsche Bank.

[Felicitas von-Bismarck]

First one, acoustic question. Can you repeat the last sentence that you said? So I didn't catch that.

[Anke Groth]

If you think about the development of the second half of 2020, you have to take into consideration, especially for IT&S that we had a very good first quarter or still a very solid first quarter.

[Felicitas von-Bismarck]

Okay. I have another question. So on your Supply Chain Solutions, you're guiding for flat revenues, flat earnings. H1 was actually stable year-on-year. You have that kind of huge order book in the lockdowns. I mean, yes, there is a risk, but the situations have been improving. So why would your second half performance not improve compared to last year?

[Anke Groth]

So if you are referring to the order book, Felicitas, that will turn into revenue next year, not this year. So the majority of...

[Felicitas von-Bismarck]

Not even in Q4?

[Anke Groth]

Maybe a couple of million here and there, but the majority will turn into revenues next year.

[Felicitas von-Bismarck]

Okay. Okay. And can you maybe give us like some kind of indication what significant means in your KION words because that could be basically anything?

[Anke Groth]

Yes. We have used words instead of giving guidance range for a reason. But I can give you some more of the words we have used. I can put those into an order. And so significant is more than substantial, and that is more than noticeable. So that's a little bit the order and the ranking of the words we have chosen, Felicitas.

[Operator]

The next question is from Katie Self of Morgan Stanley.

[Katherine L. Self, Equity Analyst]

Just a couple of clarifications on some comments on the call. There was one where, Gordon, I think you mentioned seeing some increased competition from lower-priced Chinese entrants within the Western European market itself, which perhaps resulted in some of the underperformance versus the market. I wonder if you could just comment on whether that's -- is that a new trend you're seeing? Were they going more aggressively after price? Just any more color on that would be great.

[Gordon Riske, CEO & Member of Executive Board]

Yes. We -- I mean, first of all, we are -- if you look at all the data and our own estimations, a market leader in Europe with a broad sales and service network. And huge technology investments. However, in some low-cost segments, the Chinese competitors are performing better than they have in years, and the products have become better. The biggest part of the European market, though, is still a value and premium segment. But we have -- as I said, we have seen an uptick in that. We've seen it the last couple of years. It comes for a couple of quarters, and we've had 2018 or so and it goes away for a half a year, but it's a very viable competitive challenge there with these low-cost products, and that's why we have put so much focus in our Chinese operations, and we will use and have used our Baoli brand to mitigate some of that with our, let's say, with our own products to face them head-to-head in certain markets.

[Katherine L. Self, Equity Analyst]

Great. And then just a different question on SCS. Anke, you mentioned that there is a lot of uncertainty in the second half and that there is the potential for perhaps a second lockdowns or more disruption that could mean delays in delivery during project execution, SCS. I just wonder whether your comments there refer solely to the uncertainty in the second half? Are there some projects that you'd expected to deliver on in the first half that are still delayed? Just whether you could just update us there? And then a big -- more so a general big picture question, if we think beyond COVID, beyond 2020, how do you see those trends in SCS progressing? Do you think you've had a sudden wave now where the e-commerce players have found their capacity maxed out because of the online demand. So a big wave of investment, but then that will kind of be the end of it for a while? Or do you see a longer-term continued pickup here?

[Gordon Riske, CEO & Member of Executive Board]

Let's start with the second question and then come back to the first one. The beyond 2020 or beyond COVID or whatever you want to call it. In my view, some people call it a new normal. I don't think there's any normal to go back to. It's just the way of the development of the markets. When we purchased the company in 2016, we saw a unique opportunity there. And that has proved lucky maybe, but has proved to be exactly the right thing to do because the behavior changes in our customers, and we projected it at that time when we made the first announcement of double-digit growth. On average, over the coming next 10 years, I think, was the original statements that we made, and that has more than proven itself. And if you look at the behavior of customers, the online e-commerce part of it, not only in certain verticals like clothing and groceries, but in almost all segments now taking hold and some of the bigger players globally making distribution centers that are able to deliver not just the next day, but within an hour, that really, really drives our business. And so with a unique position that we have with Dematic to be able to put a system into place from 10 million to 200 million in size, anywhere on the globe within 1 organization. That's quite a unique position. So I'm very upbeat about the opportunities. That's not just the wave of COVID, but it's certainly a trend that I think we can drive very heavily in the coming years.

[Anke Groth]

So with respect to your first question, so we also had an impact on SCS in the second quarter predominantly from COVID-19. So there have been a number of project sites which are closed or impaired. That has improved during the last month and improved during the quarter. So currently, we only have a very small double-digit percentage number of project sites, which are still closed or impaired. So it's really, it has significantly improved during the second quarter. But nevertheless, and we also spoke about it when we explained the profitability of SCS where we have said that the EBIT margin of 8.4% was burdened by the inefficiencies. And that is that when a project site is close or impaired, of course, we do a lot of engineering work remotely, but that is not as efficient as working at the project site. And then once site is open up again, so after the lockdown, we need to work overtime to recover the time we have lost during the lockdown, which is, of course, causing higher expenses on the personnel side, but as well on some kind of logistical expenses. So we have seen some kind of effects of COVID-19 as already in the second half. The team was able to catch up, but it's also slightly visible in the figures. And as still some sites, as I explained, are closed or impaired, that will also still go on in the second half of the year.

[Operator]

The next question is from Martin Wilkie of Citi.

[Martin Wilkie, Managing Director]

It's Martin from Citi. Just a first question on the delivery of orders in Supply Chain Solutions. You have pointed to significant growth with, obviously, a very strong quarter. In the past, you've talked about implementation times of anything from 6 months to 18 to 24 months depending on construction lead times and so forth. I mean, given the mix of the orders, are the projects generally sort of in the middle of that range, or the early part of that range, just to get some sort of sense of the phasing of the backlog would be helpful. And then the second question, also in Supply Chain Solutions. You mentioned in your release this morning, certain customer segments, you have food and beverage logistics, e-commerce, very strong. In some of the other categories, are any past orders at risk if some of your customers perhaps in clothing or other consumer areas that are not doing quite so well. Are there any concerns about any of the existing backlog in Supply Chain Solutions?

[Gordon Riske, CEO & Member of Executive Board]

Let me start with the second one again. No, we don't see any projects at risk that we have going on. The team very early in the year, I think, in February or something we had a meeting, and we said, what if this spreads all over the world? Let's look at our project and project pipeline, other things that we have in the bidding cycle that will be affected negatively or positively. So we went through that quite intensive process and skewed it towards customers that would have more demand as this pandemic increases, and we had some luck there and certainly made some right decisions. So we don't have any customers right now that are -- or orders that are going on that will be negatively or that we've stopped the order or canceled the order, any of that type of thing, we don't have it.

[Anke Groth]

So with respect to your question of the delivery times, our estimate would be around 12 to 18 months. So it's geared towards this time horizon, but it's a rough estimate because you kind of -- as you can imagine, there are a couple of orders. And sometimes, you are fast, and sometimes you have problems with the project type or whatsoever. So it's really -- it's a rough estimate of 12 to 18 months.

[Operator]

We have a follow-up question from Philippe Lorrain of Berenberg.

[Philippe Lorrain, Analyst]

Thanks for taking my follow-up. A couple of ones. Just like from today's perspective, I mean, on SCS, and I'm coming back to Sven's question. When would you think that you could deal with a quarterly business volume of about EUR 1 billion? I mean, it's just like -- it's a bit early, but just like to get a sense of how you see that situation will be?

[Gordon Riske, CEO & Member of Executive Board]

Well, last year, we had USD 1 billion quarter. This year, we have EUR 1 billion quarter. The numbers are growing. So we're actively in that process to be able to handle that. I can't say it's Q1 of this year or Q2 of another year, but we are actively in the process driving this business forward. And I feel very comfortable at this point with the actions that we've taken, with the investments we've made in our factory capability, in our engineering capability, in HR. It's a very concerted effort by the whole team, and I think we're well, well underway there to handle that.

[Anke Groth]

And Philippe, as Gordon has rightfully said, we already had in USD 250 million. And I think during the last quarters, we constantly have spoken about the solid and improved project execution of the teams. And so again, we are capable of handling this volume.

[Gordon Riske, CEO & Member of Executive Board]

And maybe just to give you a colorful example, to close the call here. On Stríbro, we have a big complex for ITS and SCS. And we are building capacity to be able to deliver this year to our SCS customers. And we needed immediately quite a few employees to do some mechanical work. And kind of we move from 1 site making forklifts and not losing people and move them over to another site. So it's quite unique what's happening in our company right now. And with these 2 segments, helping each other to get through this.

[Philippe Lorrain, Analyst]

Do I understand it correctly as well that when you say like dealing with EUR 1 billion, let's say, kind of order volume also doesn't mean that not far away, then you can deal with that on the revenue side.

[Gordon Riske, CEO & Member of Executive Board]

Yes. Yes, certainly.

[Philippe Lorrain, Analyst]

Okay. Interesting. And the last one is, do I understand that correctly -- I mean, is it fair to assume that if the situation does not deteriorate in ITS, then the production should probably not be disrupted in Q3, Q4 because you already had these problems on the supply chain, especially in Q2and hence, the overall fixed cost absorption in the whole its segment would look like much better in H2 than in Q2?

[Gordon Riske, CEO & Member of Executive Board]

Yes. I think Anke said it, and I'll say it again. It depends on the entire economic situation. And we flexibilized it. In Germany and other countries, we have short-term work opportunities and other temporary people and so forth. So we are working with unions, everybody has been made as flexible as possible to make sure to get our costs down. But that's a much shorter cycle business. We have delivery times between 6 and 16 weeks visibility. So we have to be able to react quickly, and it really depends on the overall outlook going into the second half of the year. But assuming that Q2 is the bottom -- the bottom of the curve, then your assumptions could be correct.

[Philippe Lorrain, Analyst]

Okay. And the final one, really, just like on the guidance, especially like with the wording around significant, substantial and noticeable. So I've noticed the ranking, but when you speak about the significant decrease or the substantial increase in ITS or respectively, as order intake that is expected for the full year, do you mean actually like in absolute terms? Or do you mean like also interest in percentage when you ranked up because the 2 divisions are -- a significant difference in size?

[Anke Groth]

So it's growth.

[Operator]

The next question is from Richard Schramm of HSBC.

[Richard Schramm, Analyst]

Yes, just a quick one on the topic of short-term work you mentioned. Could you give us the amount you got as reimbursement in Q2? And should we expect this to go forward into Q3 and Q4 as you mentioned that short-term work will prevail for the time being here.

[Anke Groth]

So it's -- there is a difference between the cost effect and the cash effect. So from a cash perspective, there are a couple of millions coming in from the [indiscernible]. But if we look at the expense side, if we look at the cost side, as I said, in IT&S, we have a positive EUR 60 million achieved. And I would say, in the EUR 60 million, roughly 2/3 are from personal measures, including short-term work, but also the reduction of time accounts. And yes, overall, with respect to timing, of course, if nothing new comes up. But our estimation would be that the highest impact would have been now in Q2. Of course, we still have days in the factories where we are going to close and so on. But the majority of the short-term work hopefully was applied in Q2, if nothing new dramatically happens.

[Richard Schramm, Analyst]

So you have already scheduled. So when this will be stopped? Or is this still not decided yet?

[Anke Groth]

It depends on the further circumstances of the market development. We have agreements with our workers council. You know that in Germany, that is needed until the end of the year. And then a new negotiation and assessment takes place, but that is -- it really depends on the further market development.

[Operator]

We have a follow-up question from Alexander Virgo of Bank of America.

[Alexander Stuart Virgo, Director]

Just a quick follow-up on the service development in ITS. Obviously down 10-odd percent in Q2, probably a little bit more hit by access and travel restrictions, I guess, in line with a lot of the rest of the sector that we're seeing. I'm just wondering if you could talk a little bit about how you expect that to trend through the rest of the year, whether or not we can see something of a catch-up? Or do we just assume that it's lost business, if you like.

[Anke Groth]

We do expect a gradually improving of the situation with respect to services. It's always, quite frankly, a difficult question. If there is a catch-up in after phase because if you can't do a service, you can't do a service, and it depends a little bit on the condition of the truck when maintenance or spare part is needed so but overall, the service situation will improve during the next quarters. Again, the disclaimer, if nothing new happens in the market, new second wave and lockdowns.

[Operator]

We have a follow-up question from Sven Weier of UBS.

[Sven Weier, Executive Director and Analyst]

Yes. Two quick ones, please. The first one was also on the service business. I was just wondering, with down time in Q2, if you have to wait for June, or will that be back to kind of flat or still [indiscernible]

[Anke Groth]

No, June was the best month in the second quarter.

[Sven Weier, Executive Director and Analyst]

And the other one is just on your credit rating. I know you came in at 2.65x net debt to EBITDA, and we know that your comfort level in the long term is 2x. I guess in the next 2 quarters, the ratio might still get a little bit worse because the rolling 12-month EBITDA declined. I mean how much time do you give to yourself organically to get back to the comfort level. Are we talking about the next 2 years or would the rating agencies look at it because I know that the investment grade rating is very to you.

[Anke Groth]

No, the rating agencies, the discussions with Fitch we had in April, so our investment grade rating with Fitch was renewed quite recently. With S&P, we also have regular calls. And with respect to deleveraging, I could agree that 2x is our target. We haven't changed that because we deem that a reasonable ratio for our business, and we need to see where our leverage stands at year end. That depends a little bit on the project development in the second and third quarter. And you know that normally we have a very strong cash flow and are able to deleverage quite nicely year by year. But that needs to be seen in the light of the further developments.

[Sven Weier, Executive Director and Analyst]

So basically, the capital increase option that you now have, it remains to be largely the option and there's not the best case for the plan B.

[Anke Groth]

As you mentioned, the AGM has granted the approval to increase our equity. And now it's up to 10%. The time frame is 5 years. So the approval is valid until 2025. And maybe you also have seen that the overall purpose if restricted to refinancing, I would say it's a very prudent and standard procedure to have such authorized capital as a German [indiscernible]. And as I always say, the utilization of such authorization can never be excluded depending on balance sheet structures and debt level. And we have spoken about our [indiscernible] targets.

[Operator]

So the next question is from Stefan Augustin of Warburg Research.

[Stefan Augustin, Analyst]

Yes. Just 2 remaining. I understand that you outlined the risk on the project execution in SCS. Could you also comment on the orders, if you're well satisfied with the pricing level without the execution on it. Is that maybe better than you have seen it before? And the second question would be on your proposed or thought of management of the rental fleet as the rental business was quite okay.

[Anke Groth]

Yes. With respect to rental, let's pick up on your second question first. Rental has to be differentiated into long-term rental and short-term rental. So the overall rental business was down slightly by -- I think it was roughly 4.8%. But in that short-term rental is more affected, there was -- we have seen a double digit decrease. So rental is the bucket for long-term and short-term rental.

[Gordon Riske, CEO & Member of Executive Board]

And SCS pricing, I mean, you've seen our operating results over the past quarters have continued to improve at SCS. And with the market demands, as we have right now, I would say pricing is okay. But we still are trying to improve our pricing situation in certain markets. There are some very good markets, but we are executing within line with our expectations.

[Operator]

And there are no more questions at this time. I hand back to Mr. Gordon Riske for closing comments.

[Gordon Riske, CEO & Member of Executive Board]

Yes. Thank you all for participating in our update call for the Q2 2020, a very interesting quarter. Let's all hope for the best, stay safe, and we look forward to giving the update then or seeing you on a roadshow in the coming months.

[Operator]

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephones. Thank you for joining, and have a pleasant day. Goodbye.