Good afternoon, ladies and gentlemen. For today's call, please refer to our Q2 presentation on our IR website. Today I'll be taking you through our Q2 key financials and strategic highlights, and then a market update and financials in more detail. I'll be ending my presentation with some key takeaways and then looking- forward to your questions for the Q&A session at the end. I'll start on page three with our key financial figures. Despite increasing economic uncertainties from rising interest rates and recession fears in the capital markets, as well as the continuation of the war in the Ukraine, demand for our products and solutions remained healthy in most regions. Order intake was up 15% year-over-year to EUR 3.8 billion, growing 29% sequentially.
The Kion team overcame many challenges with regards to supply chain disruptions and was able to increase revenue in the second quarter versus the first quarter, reaching a record level of EUR 2.8 billion. During the second quarter, we faced intensified material cost inflation as the higher raw material, energy, and logistics costs resulting from the Ukraine war began to flow through our P&L. Paired with the intensified supply chain disruptions, this negatively affected our adjusted EBIT and free cash flow during the quarter. Our adjusted EBIT reached EUR 141 million versus EUR 247 million last year and EUR 170 million in the first quarter, and was a margin of 5% of adjusted EBIT. As I'll explain, we've initiated many measures to address the decline in profitability and to sustainably strengthen the resilience of our business in the second quarter.
As in the first quarter, our free cash flow was impacted by substantially higher working capital requirements. However, we were able to reduce the cash outflow to -EUR 159 million as we dramatically reduced the net increase of semi-finished trucks going into inventory during the second quarter. During the second quarter, we returned close to EUR 200 million to our shareholders in the form of dividends following our AGM in May. Earnings per share was 0.60 EUR in the second quarter. The substantial and intensified uncertainties in our procurement markets, including disrupted supply chains, remains a very volatile challenge. The consequences of the war in the Ukraine and the looming energy crisis cannot be reliably determined at this present time.
For the remainder of 2022, the ongoing disruption to supply chains and further rises in the already high cost of materials, energy, and logistics will continue to have a negative impact on adjusted EBIT and related key performance indicators, as well as on free cash flow. As a result, these figures for 2022 are expected to fall short of the levels achieved in the prior year. Once we have better visibility, we intend to update the markets with a new outlook for the year. On Slide 4 , I'll explain to you now what we've been doing during the second quarter to substantially strengthen the resilience of our business. We've become more agile on pricing and commercials. So far this year, we have adjusted new truck prices on a quarterly basis.
In January with a mid-single digit increase, in April again with a high single digit increase, and just this month, the third time, with further mid-single digit increase. The agility on pricing and commercials also holds true for our services business. During the quarter, we've also started to look into our backlog. As indicated in our Q1 call, the new truck backlog is not a taboo. Even though there were no contractual escalation clauses in place with our customers, our sales teams have begun discussions with thousands of customers to participate in the higher procurement costs on orders that we received before April of 2022. This is being done in a cooperative and respectful manner to safeguard our long-standing and trustful customer relationships. To strengthen our resilience of our business going forward, we're also implementing price adjustment clauses in both our business segments.
Taken all together, that's what we refer to as commercial agility. We're also working on our operational agility. During the quarter, we successfully managed to limit the net increase of semi-finished trucks going into inventory to less than 200 units versus around 4,000 incremental units in the first quarter. That leaves the total number of semi-finished trucks in inventory stable at about 12,000 units. To improve the availability of components, we're also enlarging our supply network. We're not only qualifying additional suppliers, but we've also done redesigning of our electronic components to switch to different chip technologies, which are better available in the market. That is the commercial and the operational agility actions that we're putting in place to make our business very sustainable and robust on a go-forward basis. Moving now to the strategic highlights.
I want to mention two today, which illustrate quite well how we're continuing our implementation of the KION 2027 strategy. Dematic entered into a partnership with Google Cloud, combining Dematic's supply chain expertise with Google Cloud's cutting-edge technologies in cloud, artificial intelligence, and machine learning. Secondly, Kion Group successfully industrialized the production of AMRs. Our plan to do that was first shared during the CMD at the end of last year, and today we have a success story to share. Dematic has won an order to deliver around 300 autonomous mobile robots, AMRs, to Radial Europe's logistics center in Groningen, Netherlands. For Dematic, this is the largest AMR-based order in the EMEA region to date. Let's move now to the market and financial update. On page six, I talk you through the financial update for Kion as a whole.
Turning to page seven, I'll talk about the unit order intake development of the industrial truck market and how KION has performed relative to that market. We now have the data on the industrial truck market performance in the first quarter of 2022, and it confirmed our assessment that KION gained market share across all regions. Coming now to the second quarter, our assessment is that the market in EMEA was down strongly. While we expect the Americas to have seen moderate growth in the second quarter. Due to the corona pandemic in the Asian region, we expect the APAC market has been under substantial pressure in Q2. The market dynamics are expected to normalize in the second half of this year after exceptional demands in the recent quarters.
The long-term compound annual growth rate of about 4% on the ITS market remains valid, and we expect to remain stronger than global GDP growth. Kion's Q2 orders came in at 86,300 units and was close to the record levels of the previous year. Growth during the quarter was mainly supported by electric counterbalance trucks, while IC and warehouse equipment was not at last year's levels. In EMEA, our order unit intake came close to last year's record level, mainly supported by electric counterbalance trucks. With our improved dealer network in the Americas, we were able to achieve a 9% growth in order intake driven by counterbalance trucks, more than offsetting lower demand for warehouse trucks. In APAC, the region, the second quarter was down 9% impacted by the corona pandemic.
In total, our share of electrified products at 88% increased slightly, both sequentially as well as compared to the prior year levels. Turning to page eight, you'll see the key financials for the ITS segment. Although the order intake in units was somewhat down sequentially, the order intake in euros was up 32% to EUR 2.7 billion, supported by an improved product mix, the robust demand for electric counterbalance trucks, successfully implemented prior list price increases, and a growth in our services business. With the 32% increase in order backlog now to over EUR 4.2 billion, the order backlog covers more than a year of new equipment sales, which stood at EUR 3.3 billion on a 12-month rolling basis.
While it will take longer for list price increases on new trucks to flow through, the margin quality of the backlog benefited from recent list price increases. Adding the price adjustment clauses to our general terms and conditions as well as our backlog repricing work should have a positive impact on the margin quality of our order backlog going forward. Please note, more than 50% of ITS revenue comes from services, where we have shorter lead times, allowing us to be even more agile on pricing. Despite the further intensified supply chain disruptions, we achieved significant increase in revenue in Q1. Our Q2 procurement costs for materials, energy, and logistics intensified further versus the first quarter. We still face inefficiencies in the production process from the retrofit of unfinished trucks that were produced in previous quarters.
Our Q2 EBIT was EUR 84 million, and the adjusted EBIT margin was 4.8%, down 180 basis points from Q1. Let's take a look at the underlying market trends for Supply Chain Solutions now. As we've discussed in previous calls, only about 10% of the global warehouses are fully automated. Since the medium and long-term fundamentals for the Supply Chain Solutions market remain intact, the headroom to grow in this market is substantial. We expect that the market will, on average, continue to grow double digits over the years to come, despite news from some e-commerce players saying they have some overcapacities. Looking at our project pipeline, it remains robust. Realistically, it can't be ruled out that near-term economic uncertainty could lead to some deferred investment decisions in the short term.
Turning now to page 10 and summarizing the key financials for our Supply Chain Solutions. Q2 order intake is 21% above the Q1 level, again surpassed the EUR 1 billion mark and is a remarkable success. We were able to compensate a reduction of demand from pure-play e-commerce customers with orders in the general merchandise, the food and beverage, and also the apparel verticals. At the end of June, the order backlog was slightly up, finishing at EUR 3.8 billion. Revenues improved slightly over Q1 and approached EUR 1.1 billion. As in the past two quarters, we continued to focus on safeguarding our customer schedules, resulting not only in increased pricing, in higher-priced spot markets in order to secure components, but also keeping our labor forces intact and ready to install equipment at the moment of arrival of the components on site.
This continued to burden our adjusted EBIT and our adjusted EBIT margin in the second quarter. Q2 adjusted EBIT was EUR 76 million, supported by positive one-time effects. The adjusted EBIT margin decreased from the first quarter by 30 basis points sequentially to 7%. Page eleven summarizes the key financials for the group. During the second quarter, we saw a healthy demand in most regions. Order intake at EUR 3.8 billion and order backlog now almost at EUR 8 billion, benefited from high demand as well as price increases and positive FX effects. With EUR 2.8 billion, revenue was at a record level despite ongoing supply chain disruptions. Group adjusted EBIT and group adjusted EBIT margin decreased sequentially, was EUR 141 million and 5% respectively, and was caused by weaker profitability in both of our businesses.
Page 12 shows the reconciliation from adjusted EBITDA to group net margin and group net income. Supported by lower NRI and taxes versus Q1, net income was EUR 80 million and earnings per share of EUR 0.60, finishing the quarter in line with the first quarter. Let's move now to the key free cash flow statement on page 13. In the second quarter of 2022, free cash flow was negative at -EUR 159 million, which is a strong sequential improvement. Aside from the lower EBIT, the main driver for our negative free cash flow was the further, albeit significantly reduced, buildup of net working capital. In the second quarter, we distributed some EUR 200 million of dividends to our shareholders, also impacting the net debt development.
Turning to page 14, you see that our net financial debt increased by EUR 392 million to EUR 1.4 billion at the end of the second quarter. With our strong financial profile, we were able to cover our capital needs through our commercial paper program and bilateral loans at very favorable conditions. The leverage ratio based on net financial debt increased to 0.9x versus zero point six x at the end of the first quarter. Higher discount rates had a positive impact on our pension liabilities, which further reduced to EUR 767 million at the end of the second quarter. Thus, the leverage on industrial net debt increased to 2.6x. With this, let me quickly summarize the key takeaways from this quarter from my point of view.
In the current inflationary environment for material, energy, and logistics costs, it's no longer sufficient to increase prices once or twice a year. We're implementing multiple commercial and operational agility measures in both segments with a clear intention to sustainably strengthen the resilience of our business. Despite potential short-term softening in demand, our order backlog provides significant revenue visibility for the quarters to come. The medium-term and long-term fundamentals of our markets are intact, and with that, so is the demand for Kion products and solutions. We intend to come back to the market with a new outlook for the year once we have better visibility. When we do so, we plan to also address our medium-term targets. Our revenue and margin targets communicated at last year's CMD for the group as well as for our business segments, are valid.
The timing of their achievements is under review due to the ongoing macroeconomic uncertainties. With that, I'm ready to take your questions. Let's open the line. Please help us out, Natalie. Let's get started with the Q&A.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question with video may click the Q&A and Raise Your Hand button on the left side of their screen. Please note that questioners won't be shown on the webcast. Anyone who has a question may click the Q&A and Raise Your Hand button at this time. In the interest of time, please limit yourself to two questions. One moment for the first question, please. Our first question is from the line of Sven Weier from UBS. Please go ahead.
Yes. Hi, Rob. Good to see you. I hope you can hear me.
It's all good, Sven. Good to hear from you as well. Thank you.
Thanks. My first question for you is on the warehouse automation business. You obviously had EUR 1 billion of orders in a quarter that was already what we could call probably a tough environment. Now you said that it could be potential short-term softening of demand. I mean, is it at this stage something that you don't see yet and July has progressed as it was, or is there some evidence already of that softening?
Yeah, it's a good question, Sven. It's what I said, is our project pipeline is very robust, and it's better than it was end of last year. It's stronger than it was this time last year as well. We can't rule out that with the current uncertainties, some customers may be making some delays, but we don't see that particularly at this point in time right now. You know, I if I just
Okay.
Let me finish. Let me just take that a little bit further. Let's understand those fundamentals together. Interest rates are rising. Some customers may calculate a couple of times on when do they want to initiate a project. On the other hand, wage rates are rising too, and it's very difficult to get labor in the first place these days for customers all over the world. The labor they're getting, they're having a hard time retaining and is more expensive. The real strong drivers for automation are very much intact, and we expect that. The pipeline, as I described, is a good, robust pipeline.
Yeah, thank you for that, Rob. If I may follow up because you were mentioning those one-time items in SCS. On the other hand, I guess you also still have a lot of, call it, one-time headwinds, right, in terms of extra costs and so forth. It was not like you sold a property or something and you generated a one-time profit. It's other issues. I just wonder on the dynamics of these items. I mean, is it fair to say that the cost headwinds should be starting to lessen then in the coming six-12 months, and that there's less need maybe for one-time positive items then?
Sure, Sven. I mean, let's talk about the one-time positive items in the first place. I mean, there were several. There was an FX impact there. There was some variable bonus reductions. You see the profitability in the results this year below last year's levels. On the profitability sides, there was some reversals of some incentive payments, as well as some customer payments in the second quarter that wouldn't repeat in the third and were therefore a one-off, but operationally associated. Those are some one-offs. What I would tell you is in our ITS business and in our SCS business, we did not have contractual price escalation measures in place.
As we put those in place on a going forward basis, they will over time be making an improvement in the margins on both trucks and also on projects. It'll be a part of the contract from the very beginning, as opposed to needing one-time negotiations or change your order negotiations and projects. You know, the same kind of situation applies when the material costs are going up and there are interruptions in the supply chain. The kind of costs that you incur, having a project team on site or in a factory ready for a production plan and the material doesn't show up, there's some inefficiencies involved in that. As the supply chain over time gets better, I expect those inefficiencies to reduce.
As the contractual escalation clauses take impact over time, I expect that to be some benefit too.
Can I just follow up on the pricing you mentioned on the truck side? Because you said, you raised prices one more time now in July.
Why was that necessary? Because when we look at the steel prices, right, which I think is the majority really of your input cost, they have been coming quite down since the peak in April. Does it mean the high single digit increase you had at the beginning of April was still not enough despite the escalation on the raw material prices since?
No, Sven, you need to take a look at a whole bunch of indexes, and steel is just one of them. One you might also wanna consider is a Producer Price Index that Eurostat runs on the 27 countries. You see that that's continued to go up during the period of time. Our team is getting very good at measuring the costs on a very frequent basis and making decisions on do we need to make a price increase or not. The material visibility on how things are gonna develop is still quite uncertain, too. I would say that, yes, steel's gone down a bit since the spike right after the war started in March. Obviously, the end of February, but in March, the steel price was spiked.
It's come down a bit. Is it gonna stay down? It's not yet clear. That's just one of our material costs. Energy has gone up very significantly, so has logistics, and the interruptions are causing some issues, too. We will continue to measure, and we will continue to adjust pricing as appropriate. We've done it three times this year, beginning of the first quarter, beginning of the second quarter, beginning of the third quarter. Mid-single digits, high single digits, mid-single digits again, and we'll continue to adjust as appropriate going forward.
It seems so far the pricing elasticity of your clients was very low, right? I mean, they kept on ordering despite all the price hikes. Is that still the case?
Well, Sven, our products and solutions make a fundamental contribution to our customers' ability to compete successfully and are right in the middle of the heart of their operations. On the truck side, the acquisition cost of a new truck is only 13% of the overall total cost of ownership. It's a B2B environment. Our customers and business partners need that capability from Kion, and they appreciate very much the products and services and solutions they're getting from us.
Okay, understood. Thank you, Rob. I go back in line.
Okay. Talk soon.
There are no further video questions at this time, and we will switch over to Ladies and gentlemen, anyone who wishes to ask a question may press star followed by one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. Our first telephone question is from the line of Sebastian Growe from BNP Paribas Exane. Please go ahead.
Hi, Rob. Hi, everybody, and thanks for taking my questions. Hope you can hear me well. It is both on Supply Chain Solutions. The first one would be around the pipeline and the overall vertical mix. You pointed to strong demand from general merchandise, food and beverage and apparel. This has marginalized the overall contribution from e-commerce to only about 20%. If you look at the pipeline, what's the split between e-commerce compared to your other verticals? I guess what I would like to better understand is, to what extent can the strengths outside e-commerce bridge the temporary weakness in this very e-commerce vertical? Ultimately then when can SCS be expected to return to growth? If we can start there.
Sure. Let's talk about that mix. You have seen, and you see it in our charts, that e-commerce had a significantly larger role over 50% in the top line a year ago, and it is down to the 20% or so at this point in time. I think that the adjustment. First of all, e-commerce boomed very significantly during the COVID early couple of years. The capacity there is a adjustment over time, but the full expectation of those customers, as well as ourselves and market analysts, is that e-commerce that pure play e-commerce vertical continues to grow after a bit of a readjustment right now. What I'd also point out to you, Sebastian, is e-commerce.
Yes, there's a pure play vertical, but e-commerce has a very important part of just about every other industrial vertical out there right now as well. You saw it in food and beverage, you saw it in general merchandise, you saw it in apparel. We expect that, you know, the underlying drivers of needing to be very fast to market, being able to turn orders very quickly, not getting labor, the labor they are getting is more expensive, really continues to drive automation across all those verticals. We see the adjustment or the rebalancing, if you will, in e-commerce as a temporary piece, temporary phenomenon, and we expect it to get back on a grow path and growth path in the quarters or the couple of years to come.
If I may follow up on this one, could you also comment on any meaningful margin or working capital, say, free cash flow related, differences in the e-commerce vertical compared to the other verticals that you're penetrating? That would be great.
No. No, I wouldn't. I mean, containers don't care. When they don't show up, they don't show up for an apparel installation, or they don't show up for a general merchandise installation, or they don't show up for an e-commerce installation. I wouldn't look at it from that perspective. No. Meaning, what am I getting at? I mean, the whole point is, it's the achievement of different installation milestones that triggers the payments and triggers the asset liability mix. Over time, when material is delayed and milestones move backwards, that has the effect on the net working capital. It is independent of vertical, Sebastian Growe.
Okay, that makes sense. If I may quickly ask about the one-time effects once more at SCS. Can you share the exact magnitude of those very one-time effects? What I really would like to understand better is what the underlying margin was in the quarter. I assume it would be only about 5%, which is obviously pretty low. To put that differently, how do you view the trajectory from here, i.e., are the disruptions on the supply chain easing already? Is net pricing expected to get better and better? Until when are you eventually seeing still some low margin contracts impacting the business negatively? That would be helpful. Thank you.
Let's pick off some of that at a time, Sebastian. The statement we're ready to make is that the one-time effects that supported the second quarter is low to mid single, low to mid double digits in terms of impact in the second quarter. One-timers, I talked about that's FX. That was some variable remuneration that got dialed back based on the performance so far this year, and customer payments.
In terms of really those aspects that are kind of lingering around for longer, the production inefficiencies and then also the net impact from pricing. You mentioned obviously that the order backlog quality has improved quite a bit, but I also want to understand that there are still some obviously lower margin contracts sitting in the backlog that still need to be executed. Can you put a rough timeline around until when sort of this is changing to the better?
Let's talk about over a period of time, things do kick in, Sebastian Growe, and if your starting point is not having escalation clauses for either the new truck sales nor the new project sales, and you now go put escalation clauses in place on a contractual basis for those projects and for those machines, that will over time have an effect. Clearly, with the order backlogs, and you can do the calculations yourself, as we go through the order backlog, fewer and fewer of the mix will have not the escalation clauses in place and more and more will over a period of time. Each project is calculated on a standalone basis, and so that's where I'd be happy to talk to at this point in time.
I guess the other element I would though, you know, we talk about repricing, having respectful negotiations and discussions with all the different truck customers that were placing orders prior to April this year on our ITS business. We're also having those kind of discussions with our SCS customers and working to reprice on material things that were just out of expectations. People did not have those expectations. If you've had many years of low, maybe 1%-2% inflation over time and all of a sudden things move very quickly as they are right now, we're having conversations with our SCS customers about change orders on existing projects and those negotiations are happening right now too.
All right. I'll go back in line. Thank you.
Okay, good to talk to you, Sebastian.
Our next question is from the line of Akash Gupta from JPMorgan. Please go ahead.
Yes. Hi, good afternoon, Rob, and thanks for your time. My question is on ITS and specifically on operating leverage. I think you previously said that you had to slow down production because of the missing components. Maybe if you can talk about where do we stand on these supply chain issues and components availability and how do you see operating leverage keeping everything as equal to progress in third quarter versus what we have seen in second quarter?
That is the first question.
I think the leverage is probably on a reasonably consistent basis. The interruptions that we've got in the supply chain are very unpredictable, Akash. We've got some interruptions. We've got increased material costs and energy costs and logistics costs. It takes about three-five months for the different material costs to flow through our P&L. What we're working on very hard on doing is building up the amount of machines that we're able to produce this year. What we did in the second quarter was reduce the throughput in the factory and therefore got a good balance of material in and machines out. As we said, we were able to dramatically reduce the amount of unfinished machines that went into inventory in the second quarter. That was a very good step.
When we talk this time next quarter, what I hope to be able to talk about is we've been able to reduce the amount of work in process trucks, improving our net working capital, improving our cash flow. There are quite a few inefficiencies in the factories based on interruptions at this point in time still. By the way, if you're still working to retrofit some 12,000 trucks, that brings a certain amount of inefficiency in the factory as well. As we get that built down, productivity and efficiencies will increase, and we'll see that in the periods to come.
Maybe any comment that you would like to make on the gas situation in Germany? I mean, you have a big manufacturing footprint in ITS there, including two big units for foundries. How do you see the current situation? How soon can you move from, let's say, alternative fuels away from gas?
Sure. I think that's a very valid question, especially in the environment that we're in right now and potentially a very looming gas situation here, Akash. We've done our homework, and we saw this coming, and we've done a very good assessment in our own operations. We use gas for heating in some of our operations, and we use gas for the drying process in our painting operations. We've been able to adjust. We've found alternatives and put some plans in place and some CapEx in place to enable us to do all the heating needs without the gas and use the gas only for the drying process. As a matter of fact, we can deal with a very substantial reduction in gas levels. We're looking at a 50%-60% reduction. We can still keep our operations going.
That's unique to us, however. We're in contact with our suppliers, working with them through their scenario planning and their adjustments. To be very straightforward, it's very difficult to predict how a gas crisis, a gas shortage, a significant reduction of gas will affect the entire supply chain. Just like COVID led to supply chain interruptions, our expectation is that across the entire supply chain, a gas shortage would have an impact on the supply chain disruptions. We'll work our way through that one step at a time. As I say, we've done our homework. We can deal with a reduction. We're working with our suppliers, making sure that they can be robust, and we'll see how we go.
Thank you. My final one is on Supply Chain Solutions cost base. I think in the last few weeks, we have seen a number of companies in e-commerce space have come out with headcount reduction plan. Maybe if you can comment on how do you see the cost base in SCS and whether there is a need for you to adjust cost base in the second half of the year?
Well, you know, we are working all the time to make sure we have a very appropriate cost base and ability to execute in all of our businesses, ITS and SCS as well. As you saw, we've got very significant top-line demand. We've got a very significant order book, EUR 8 billion order book. You saw the order book between ITS and SCS. What we're working to do is work through that order book, deliver our projects to our customer satisfaction, and get the very best profitability that we can. We got a lot of hurdles that we're working to overcome in the process of doing that. Our companies, our businesses adjust our cost base and adjust the organization and the costs on an ongoing basis and do so appropriately.
Thank you.
Sure. Thank you, Akash. Who is next, please?
The next question is from the line of George Featherstone from Bank of America. Please go ahead.
Hi, Rob. Thanks for taking the questions. I'll go one at a time. I just wondered on your repricing of your backlog comment, whether you could give us a sense of the proportion of your backlog, where you've been successful in doing repricing so far.
No, I can't, George. First of all, good question. What I can tell you is that we're focusing on the orders prior to April of this year, the ones that came in in 2021 and the first quarter of this year. As I talked about, we made new truck price adjustments at the beginning of Q1 just at the beginning of April, and so the ones before April are the ones that are in scope for those conversations. Those are thousands of conversations and discussions, and you can imagine it's a series of discussions with a customer in a respectful, trustful, long-term-oriented fashion as those are progressing. It's too early to give you any kind of completion rates. That's part of the visibility we're working to achieve prior to coming back with guidance. It's an important element of it.
What's very important is that we do this very respectfully and appropriately with individual conversations with individual customers. It takes a period of time, and there's a lot of respect and trust involved in the entire discussion.
Okay. Thank you. Maybe just a couple of follow-ups on some of the questions that have gone already.
Please.
From what you can see on your backlog today and in the round with everything that you've done so far on price increases and proactive actions, et cetera, do you feel like you've now reached a trough in profitability levels for the group?
Also too early to tell, George. Yeah, we referenced an unprecedented amount of uncertainty out in the markets. With COVID still going on, with the war still going on, with maybe new COVID shutdowns coming, with a potential gas crisis on the horizon, it is too hard. It's not possible to truly project where we're gonna finish it the rest of this year. It's too early to make that assessment. You can imagine we're working hard to do our very best, and we'll continue to come back and report to you how it's going.
Okay, thank you. The last one from me would be.
Around labor inflation, kind of going into the end of the year. There are certain German unions looking at 7%-8% wage increases starting in October. Is that a good proxy for where you expect your wage increases?
To end up across the group towards the end of the year?
George, we don't comment on the ongoing negotiations underway. We're very aware of them. Those are part of our costing and planning activities in our FP&A and in our businesses. We're aware of those. We're checking those. Those are one element of the many inflationary levers that are out in the environment right now. The current contract runs until the end of September anyway. If there is gonna be impact this year, it'd be limited this year. We have more impact next year. We're watching those very carefully, and they're part of our planning process. You can also imagine we work on cost productivity all across different on all the elements of our business.
That's part of our planning and that's part of our actions here.
Okay, thank you very much.
Sure. Good to speak with you, George.
The next question is from the line of Will Turner from Goldman Sachs. Please go ahead.
Hi there. Thanks, Rob, for the presentation so far and answering our questions. I think the other analysts on the call at least touched on many of the questions that I had. One of them is, though, this initiative to reprice the backlog, is this something that your competitors are also doing? Then also, when you look at your price increases that you've done year to date, are they more aggressive than what your competitors are? I know you operate more in the premium segment relative to some of them. Is this similar in kind of size as competitors also?
You know, Will, I'd refer you to a very appropriate article that's in the Handelsblatt about day before yesterday that talked about repricing measures in this unprecedented environment. Lots of companies are doing that across lots of different industries. We don't comment on our competition. We take the appropriate pricing actions as we see right for our business and right for our customers and right for the long-term health of both of us. As I said, the amount of the proportion of total cost of ownership of one of our machines is about 13% on the acquisition price of the truck. It's an element of the overall total cost of ownership consideration that our customers make.
We're all making decisions that we think is in the best interest of our companies and in the best interest of our long-term relationships. As I think that, you know, as you can see across multiple industries and industrials, pricing and commercial repricing action is underway.
Okay, great. Could you just give us an update on where you are in your search for a CFO? I know you're obviously holding both roles as the CFO and the CEO. Has there been any progress there?
We are conducting a search, Will. As we have news to share, we'll share that due time and due process. The search is underway. Got a great finance team here. We're working hard together, and it's going well. We'll progress our search. You know, there's a commitment on our side to diversity in our executive board. We maintain that commitment. We expect to have diversity in our executive board post conclusion of the search as well.
Okay, great. Thanks.
Sure.
Our next question is from the line of Gael de Bray from Deutsche Bank. Please go ahead.
Oh, thanks very much. Hi, Rob. Good afternoon, everyone. Two questions on ITS. So maybe I'll take them one at a time. First, within the 6% organic revenue growth that was posted in Q2, how much of that 6% was volume and how much was pricing? And what is now the order of magnitude of the difference between the price rises in your orders this quarter and the pricing in your revenue? That's question number one.
Well, that's a lot of mental math you want me to do right now on the hoof, Gael. What would I tell you? I'd tell you, yes, there's pricing, and yes, there's inflation involved, there's volume involved. What I'd tell you, go back and look, if you would, for a moment, at the difference in orders on the previous page, and then the difference in euros on the next page. It's probably about half and half volume and pricing. I think it's a good start. If you'd like to follow up with our IR team, we can probably answer that to you in an even further detail. What I'd point out right now is about half new trucks and about half service.
The commercial agility and the pricing agility we put in place on both of those elements, new trucks also, as well as our service business. I think there's a positive shift in mix within the trucks themselves as well. You know that warehouse trucks individually are smaller machines in many cases. Certainly, the counterbalance trucks in that mix are more expensive machines. Then there's also a mix between the internal combustion, and you saw the larger take on the electric machines. A positive mix is also in the revenue uplift. You put all those together and you get to the 32% uplift that we talked about.
Okay. Okay, thanks. Thank you very much. The second question is more on the volume side of the equation for ITS. You flagged earlier that ITS demand has been exceptionally high in recent quarters and will likely normalize going forward. Now, if I look at, you know, last year's performance, I mean, your new business order intake units grew by more than 50%, right? I guess my question is, what's your view on what should be a normalized level? I mean, would you expect market demand to fall by, you know, 20%, 30%, or 50% before it normalizes again?
Well, let me just go back to the starting point was last year. We're comparing to last year, and last year was an all-time market high, worldwide. Very, very significant market last year. Our expectations since the beginning of this year have been that overall the market would be below, in units, last year's levels. After a strong first half, when we talk about a normalization, we expect that our expectation of having a market this year still below last year's levels remain our expectations. We expect there will be some slowing in the second half.
When I talk about a normalization, I'm talking very clearly. We still expect about 4% compound annual growth rate per annum in the medium and long term on this industry, and we expect it to outperform the global GDP growth rates. That's what I would talk about a normalization. Second half being softer than the first half, because the first half continued good and strong. If we're gonna be below next year's levels, or last year's levels, second half, mathematically, as well as what we expect to see, will be a bit softer than going forward.
The 4% annual growth rate would still apply for the years to come and would not necessarily, you know, come down or be negative for a certain period of time to offset, you know, the mega growth you had in 2021.
What I'd tell you, Gael, look at it this way. Even if it is a slowdown or a softening for a period of time, we've got a EUR 4.2 billion backlog in our ITS business, and that's over a year's revenue. If there's gonna be a dip for a period of time, we can clearly withstand that and have an expectation that the 4% per annum is a carry on and an expectation of how the market develops over time. You know, the other point-
Yeah.
The other point you have to look at is the kind of mix within the market. There's a very significant amount of individual hand pallet trucks that used to not be in the statistics that are in the statistics now. It's maybe a little less than 20% of the overall is the what we call the 3.1 trucks that used to be mechanical hand pallets. Now they're electrified with batteries, and now they're in the statistics. An individual one of those might be ±$1,000. A large counterbalance could be north of $50,000. Each unit isn't the same kind of value when it comes to the overall revenues.
Okay. Yeah. Thanks very much for this.
Sure. Pleasure.
Jorge.
The next question is from the line of Jorge González Sadornil from Hauck & Aufhäuser Investment Banking. Please go ahead.
Hello. Thank you very much for answering our questions. Good afternoon, everyone. My first question is around the software revenue for the Supply Chain Solutions unit. Could you give us some feedback on how
This revenues evolving, as we know that you are investing a lot in new engineers and in this line of service. Also related to that, if you can also give us some feedback on how the service business for Supply Chain Solutions is going to evolve for the rest of the year. We still expect it at the same levels, 22% levels or above. My last question is regarding ITS. It will also be interesting to know your view on the leasing and rental business for trucks, how that business is evolving, and how do you think this business is going to evolve in case we go to a slowdown of the economy? Thank you.
Oh, Natalie, he struck in, he snuck in three questions, Jorge did. Let's go backwards. Let's start with your last one, Jorge. You talked about long-term rental. I'd put in the picture also leasing. I think that's an important dynamic in the industrial truck space. If anything, the long-term rental has slowed down a bit because of the availability of trucks. We have many trucks that are out on long-term leases, and if there's an interruption in the supply chain and inability to deliver the truck that's gonna come just after, when those leases roll over, there's a new truck delivered for a new lease in many cases. If there's a delay on deliveries, we've been extending the leases on some of those trucks to keep our customers with the equipment they need from us.
Having done that, many times when a truck will come back off a lease, then it goes into the long-term rental fleet. Long-term rental revenues is slowed a bit because of the availability of the machines. It's a very important part of our business. It's also a very important part of our customers' business. I think that's the current trend and the long-term trend of rentals playing an important part in flexibility and peak management by our customers is a continuing trend. Looking at the leasing business, we've got about half of the new trucks going out are on leasing contracts. Those leasing contracts are also, when a new truck goes out on a leasing contract, it comes with a service contract.
That's quite good business for us, and it's very good business for our customers, and it allows our customers to shift CapEx into OpEx. It's, in many cases, a win-win for everybody. There's a growing interest and strength in the leasing business coming from good market demand. You ask about service business and SCS. You know, historically, 20%-25% of our revenues in Supply Chain Solutions are service. With a very significant installation of new equipment in 2020 and 2021, that mix in revenue went back to about 20%. It's catching up now because when the project goes into operation, then there's ongoing service on those projects.
At this point in time, it's about 22%, and I anticipate it being there or maybe increasing slightly, between, over a period of time as things normalize back towards maybe the 25% level. I wouldn't expect any massive changes there, though. Though it's gone from 20 22 and historically between 20 25. So it might continue to grow in the second half. Coming to the software story, you know, on the 8,000 or so different installations we've got on a worldwide basis, software is an integral part of those projects. In many cases, it's on an on-site server, and it's part of the project. I talked earlier about the exciting step we've taken with Google Cloud this last quarter.
Dematic entered into an exciting partnership with Google Cloud and taking the best of our technologies and the best of the Google Cloud cloud-based AI and machine learning and putting those together. Our long-term objective, you know, where we're going with our strategy, is to build individual modules of software and put that stack in the cloud for our customers, and many customers are over time moving from on-site server-based to cloud-based technology. We're doing that with Google. We're doing that with other cloud providers. That ability to do so enables us to add functionality to the customer's automation offering and to monetize that more over time. So I would tell you that's the interesting way of looking at the software revenues.
Thank you, Rob, and I'm sorry for trying to make three questions. I understood it were two. Maybe a follow-up on the leases. Reading the press release, I think the way you commented this is it was like you were extending leases to help your clients because of the long lead times. This means you are changing the way you are doing leases? So now instead of renewing the contracts every four years, are you just extending them one or two years, or how it works? Or it's the same way than before?
If someone had a several-year contract and that contract came due in the middle of the second quarter and there was a delay on delivering the new machine for them, we would extend that contract with the customer, in many cases, for about the amount of time we think and we both think it'll take till the new truck arrives. There's no major fundamental change in how we do leasing. It's been how we can really work with our customers to help them through the same kind of interruptions and supply chain challenges they've got, we've got. We've got together and by doing that, linked up as a partnership as opposed to saying, "Hey, the lease is over. Give us the truck back." We don't do that.
We've been extending to help them have the machine availability they need to keep their operations running. What I would say.
I under-
Is that there is-
Yeah, sorry.
An increasing demand in the market for leasing, and that's very good business for us.
Okay, understood. It's related to the lead times and not related to the lower visibility that maybe is making clients to prefer to stand for lower time than the standard four or five years.
Exactly.
Thank you very much. Gracias.
Our next question is from the line of Richard Schramm from HSBC. Please go ahead.
Yes, good afternoon. I have a quick one on the ITS business and these 12,000 semi-finished trucks you mentioned. End of June, you say it's stable versus the previous quarter, I assume. Should we take this as a kind of at least stabilization of the supply chain? Or, have there been other measures behind to keep the numbers stable and you just were not prepared to inflate your inventory further in this respect? Thanks.
The way I would look at that, Richard, is I see it as truly a very well done job by our supply chain and operations team. Let's talk about how did that 12,000 come together? Normally, at the end of the year, in a normal year, you don't have unfinished trucks in work in process. Factories and industries all over the world oftentimes run their lines, run all the machines through the line and finish the line and clear it before going for the holidays. On a normal basis, you don't have unfinished trucks at the end of the year. Last year, we finished the year because of the supply chain interruptions and the material availability challenges.
We finished the year with about 8,000 trucks in working process, waiting, you know, each one of them on average, looking for about three or four more parts in order to complete the machine and be able to invoice it. That 8,000 at the end of last year grew to 12,000 at the end of the first quarter as 4,000 incremental work in process machines also waiting three or four parts entered into the work in process inventory. The 8,000 and then the 4,000, our supply chain and operations team was able to reduce that to just less than 200 incremental additional units. I see that as a very good balancing of real time supply and demand and real time operations. Is that a turning point in the entire material availability? Too early to tell.
What I can tell you is it's getting more and more difficult over time, but our team is coping with those challenges, and we expect to continue to work very hard and work to cope with the ones that are still forthcoming.
Yeah. Thank you. It sounds a bit like this would be a kind of involuntary measure and you would be happy to avoid it, this number of semi-finished trucks. But at the end of the day, isn't it your decision to build these trucks? I mean, you could also make a kind of interruption here and say, we do not pile up further this number and wait until we get the parts to be able to deliver to customers. In fact.
I mean, Richard, look at it this way, there's several different choices to make when you're making the plan, and one of the ones is, do you use the production slot and start a machine? Your expectation is you would use the production slot to start the machine if you feel like you can finish it in a reasonable period of time and deliver that. That's based on the EDI transmissions between ourselves and our suppliers. It's a demand supply balancing, and that's with the visibility that one has into the supply market. Over time, all of those things adjust. What I would say is it made very good sense to make the production starts that we did in the fourth quarter, in the first quarter, and we reduced our production starts in the second quarter to get that overall balance right.
I would expect as we go through the third and fourth quarters, we're gonna continue to work on that balance. Over time, we surely don't want the machines sitting in WIP waiting three or four parts. As we're able to complete them, reduce the amount of overall machines in work in process, that releases net working capital, that releases cash for us. That makes, as I said, when the machine is semi-finished, and then you have to bring it back in the process to put the last three or four parts on it. That's some inefficiencies due to the retrofit process. When that retrofit process finishes, we get those 12,000 built through, delivered and invoiced. That'll improve the efficiencies in the factories. Those are appropriate decisions being made.
It was they were the right ones in the fourth quarter and in the first, and also a good set of decisions in the second quarter.
Okay, thanks a lot.
The next question is from the line of Nicholas Green from Bernstein. Please go ahead.
Good afternoon, Rob. Nicholas Green here from Bernstein. Thank you for taking my question. It's a question about your thoughts on capital allocation policy, please. Specifically, whether it's appropriate still to pay the dividend. It's clearly good that you guys are paying a dividend, but against that, you know, you've talked about strategically it'd be good to have maybe more investment in software. There could be more M&A needed in the SCS division to help with competitiveness there. Also, R&D is quite low for the group, and of course, M&A is very low. So maybe just talk through how you weigh up investing more in R&D, investing more in M&A, whilst at the same time paying the dividend, and whether that's something that you've been sort of thinking about in your first six months in the company. Thank you.
Sure, Nicholas. I mean, we do easy plus or minus 3% of R&D, and we do that on an increasing revenue base. We're very confident that we're spending the right R&D money and the right R&D amounts. Over time, we've been making a shift towards SCS. We've been making a shift towards software. There's still quite a bit of appropriate R&D going on in ITS and SCS. I don't see us constrained on our R&D whatsoever. We're making the right innovation investments here. In terms of M&A, we clearly keep our eyes on this. It's gotta be willing parties, and it's gotta be the right fit for us.
We keep a good watching eye on that, and as we see opportunities that make good sense for us, we're ready to be pursuing those. Dividends, you know what? Our dividend, we've been paying dividends for many years, and we don't have a. Well, I don't see us in a constrained environment. I see us in an environment where we need to manage things carefully and are. In our dividend policy, we had a dividend policy of 25%-40% of net income being paid out in dividends, and we actually increased that policy last year. We continue to plan to do our dividend payments, and I expect that we manage our working capital and our cash and our capital allocations in a fashion that allows us to do all of those different important elements of running our business successfully.
Okay. Thank you. Just to follow up, yeah, your leverage isn't too high, depending on which measure it's done on. Obviously, it has been going up in the last year or so with the inventory changes. I think what you're saying is you're comfortable that with the level of leverage that you have, there's still dry powder available for M&A if you wish to do it?
Yeah, totally. Absolutely.
Okay. Thank you.
Okay. I think Natalie.
So-
Is about to tell us we're out of time, ladies and gentlemen.
Yes. This concludes our Q&A session, and I would hand back to Rob Smith for our closing comments.
Okay, Natalie. Thanks very much. Ladies and gentlemen, thank you very much for joining our call today. We're very excited about sharing our second quarter results. We're looking forward to sharing our third quarter results. Please continue to watch with us. We appreciate the good discussions. I'm looking forward to having good conversations with many of you when we're out and about in investor and analyst meetings in the next couple weeks and taking these conversations forward in those sessions. Look forward to coming back three months from now and talking about the third quarter. Thanks for your time. Thank you for the good questions. We appreciate that, and we'll see you soon. Bye-bye.