Ladies and gentlemen, thank you for standing by. I'm Stuart, the Chorus Call operator. Welcome, and thank you for joining KION Group's Q2 2021 Update Call. Today's presenters will be Gordon Riske, CEO of KION Group, and Anke Groth, CFO of KION Group. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may press star, followed by one on your touch-tone telephone. Please press the star key followed by zero for operator assistance. I'd now like to turn the conference over to Mr. Gordon Riske, CEO of KION Group. Please go ahead, sir.
Yes, thank you. Welcome to our Update Call for the Second Quarter of 2021. As a basis for this call, we will use our Q2 2021 presentation. It's available on kiongroup.com under Investor Relations in the Publications section. We'll be presenting as usual in four parts today, and then open up the discussion with your questions. I will begin with our financial key figures for the first half-year, and then present selected business highlights from the past quarter. This will be followed by a market update. Anke Groth will then provide you with a financial update, and we'll close the call with a presentation of our outlook for the financial year 2021, before we turn it back over to you for the Q&A. Let's start with our key financial figures on page three.
Overall, during the first half of the year, the KION Group continued its recovery after the pandemic year of 2020, and we did achieve significantly improved KPIs compared to the same period of the previous year. Supported by a very strong rebound within the ITS segment, our order intake for the group grew by 34% to EUR 5.9 billion in the first half of 2021. Our revenue reached EUR 5 billion, up 26%, driven by both operating segments, including a successful order book conversion in SCS. Even more pronounced was the increase in adjusted EBIT, which reached EUR 462 million in the first half of the year, resulting in a great margin of 9.3%. Our free cash flow for the group improved further and came in at EUR 301 million.
In a nutshell, we saw a significantly increased profitability, as well as continued strong demand that provides us with a good basis for the remainder of the year, and that is now reflected in our raised guidance. Moving on to page four, let me describe a few selected highlights in the past quarter. We continued to strategically implement our 2027 strategy and further strengthened our position through new products and an expanded footprint. Linde introduced a new line of the Linde X20 to X35 electric forklift models with load capacities from two to 3.5 tons. These are the first electric Linde trucks that are comparable with the performance and robustness of Linde's IC hydrostats, while offering additional environmental benefits. They represent a real alternative for our demanding customers with high-intensity applications.
Another feature is the full truck connectivity, so that these trucks offer all advantages of a digitalized industrial truck. Dematic, together with our ITS brands, Linde and STILL, and the Digital Campus, have jointly developed the Dematic Conveyor ConfiKIT, an app that makes configuring a conveyor line at the customer site much easier. The app enables our brands to implement custom requirements even faster and in an even more personalized way in the future. As such, it supports our customers at the start of their automation journey. Last, but certainly not least, we have commenced production of our forklift trucks at our new Polish plant in Kołbaskowo.
The new plant has the size of roughly 44,000 sq m. It produces counterbalance trucks that were relocated from Western Europe to Poland, and in the coming years will produce products localized in Xiamen, China, to speed up delivery times.
We expect to invest a total of around EUR 80 million and expect to create up to 400 new jobs by the end of the year 2023. Let's move on now to the market update. On page six, the focus on industrial trucks shows the global market development by region in the second quarter of 2021. After an already very strong development in the first quarter of 2020, the momentum further increased in the second quarter and resulted in a unit order intake of almost 74% compared to the pandemic-induced weak Q2 2020. This growth was predominantly driven by core markets within EMEA and Americas based on the strong carryover effects for counterbalance trucks, combined with pull forward orders of customers in anticipation of longer production lead times based on the tight supply situation around the globe.
While Western Europe was up by 117%, the unit order intake in Eastern Europe increased even stronger at 134%. In North America, the market gained further momentum, almost doubling year-over-year, thereby expanding further from the very solid level seen in the first quarter of 2021. This was primarily driven by IC trucks. Looking at South and Central America, the market more than tripled, not only due to the low comparison base of last year, but also due to strong demands of IC trucks. In China, where the market was already experiencing significant post-pandemic growth during Q2 2020, unit order intake showed a slowing momentum, however, still growing at a plus of 36%. Overall, the global market for industrial trucks reached a new record order intake level of 625,050 trucks. 625,000 trucks is an amazing number for the first half of the year.
Page seven shows a breakdown of KION's unit growth by regions. KION' s unit order intake showed an outstanding performance and reached also a new record level of 87,900 trucks globally. In EMEA, we saw a strong growth driven by carryover effects, pull-forward effects, but also some pre-buying ahead of the announced price increase, which started in effect for July. In our most important end market, Western Europe, unit order intakes more than doubled, while Eastern Europe recorded a growth rate of 80%. We were lagging behind the market based on some of the ongoing strong competition of Chinese players. A very strong quarter. Looking at China, we were even able to outperform the market with a plus of 82.6%, mainly driven by new product additions and further progress in expanding our sales and service network.
Likewise, in North America, KION's unit order intake increased by more than 300% compared to the prior year, based on further successful implementation of our KION 2027 strategy, including cross-selling new products and an improved footprint. In South and Central America, our order intake almost tripled, driven by core countries Brazil, Chile, and Argentina, and a good performance in the IC segment. In total, KION saw a very successful second quarter, with global unit orders having more than doubled. With this, I'd like to hand it over to Anke, who will present you with the financial update.
Yeah. Thanks a lot, Gordon, and also a warm welcome from my side. We start with ITS. Please turn to page nine. During the second quarter, we saw a significant demand for industrial trucks, leading to a record order intake of EUR 2.2 billion in the quarter, partially also driven by pre-buy effects due to our list price increase in July. At the end of June, the order book for the ITS segment stood at almost EUR 2.3 billion, which is up by 64% versus December 2020.
Revenue increased by around 26% to EUR 1.6 billion, supported by our new business despite ongoing supply chain issues. On top, our service business also grew significantly. Looking at the operating performance, we generated an adjusted EBIT of EUR 148 million, resulting in an adjusted EBIT margin of 9.2%. Let me address here one point, the often done comparison with 2019 margins.
Some of you rightfully point to the fact that despite comparable sales levels to Q2 2019, our margins are not yet back to historical double-digit ranges. The main reason for that is an increased fixed cost structure. We mentioned several times higher depreciation and our strategic expenses. For example, the Polish factory ramp-up. Of course, we see raw material price increases. During the first half of 2021, the ITS segment recorded an order intake of EUR 4 billion, revenues of more than EUR 3 billion, and an adjusted EBIT margin of 8.9%. Overall, we can say the ITS segment showed a very strong second quarter and a good first half. However, we expect the second half of 2021 to be impacted by certain headwinds. We already mentioned increasing material costs and some component shortages.
Therefore, the margin expectation for the second half of 2021 is slightly lower than seen for the first half of this year. Turning to page 10, I want to give you an update on our capacity and structural program. Based on the recently very strong improvement in customer demand, we have adapted our expectations for the financial impact of our program. Going forward, we aim to focus only on the structural optimizations rather than on the capacity needs. Thus, for the program in total, we are now expecting EUR 5 million-EUR 15 million lower savings, which come with EUR 20 million-EUR 30 million lower NRIs and cash out, which makes the program more efficient. All in all, we still expect for 2021 around EUR 35 million-EUR 45 million of savings. Around EUR 20 million is already achieved. Moving on to page 11.
Here we have the summary of the key financials for the segment Supply Chain Solutions. SCS developed or showed a strong performance in the second quarter and achieved FX-adjusted growth in order intake, slightly positive. However, including FX effect of EUR 44 million, order intake was slightly below the record order intake level of Q2 2020, which again, 2020 was a record quarter, and that in the midst of the pandemic. Regionally, demand remained strong in North America while it accelerated in Europe.
The order backlog at the end of June increased slightly versus year-end 2020, reaching almost EUR 3.2 billion, of which around half is for conversion into revenue in the second half. Revenue grew significantly, reaching a strong level of nearly a billion in the second quarter, driven by Business Solutions increasing by 69% and customer services with a growth rate of around 20%.
The high profitability of 12.6% adjusted EBIT margin was supported by volume effects and a disproportionate increase in G&A costs. For the first half year of 2021, SCS recorded an order intake and revenues of EUR 1.9 billion and an adjusted EBIT margin of 12.2%. Overall, again, another notable quarter, especially looking at the successful order book conversion. For the second half, we expect if you look at the midpoints of the guidance, slightly lower revenues due to the seasonality of the project business and a lower margin based on the lower volume, material cost, and some investment into SG&A. Moving to page 12, you see the key financials for the group.
During the second quarter, KION saw an order intake of EUR 3.3 billion, up by 40% versus prior year, benefiting from the strong demand you have seen for our products and solutions.
With this, the total order book grew to EUR 5.4 billion by the end of June 2021, representing an increase of 22% versus year end 2020, mainly driven by ITS. In particular, based on the strong performance of SCS and to a somehow lesser extent, ITS, revenue increased by 36.5% to EUR 2.6 billion in the second quarter. Due to the already mentioned improved performance in ITS and the ongoing strong development in SCS, the adjusted EBIT for the group increased to EUR 247 million, which equals a margin of 9.5%. For the first half year of 2021, KION saw an order intake of around EUR 5.9 billion, revenues of close to EUR 5 billion, and an adjusted EBIT margin of 9.3%. In summary, we had a successful second quarter and the half year results provide a good basis for achieving our uplifted guidance.
Page 13 shows the reconciliation from adjusted EBITDA to the net income for the group. Reported EBIT included non-recurring items of EUR 5 million in the past quarter. Net financial expenses decreased to EUR 9 million or minus EUR 9 million, supported by a positive interest result from our lease business, lower expenses for pensions, and generally lower financial debts. Taxes increased nominally, reaching minus EUR 58 million in Q2, equal to a tax rate of 27.3%. Overall, you can see that we ended the second quarter with a net income of EUR 154 million and earnings per share of EUR 1.17, while the first half of 2021 saw a net income of EUR 291 million and earnings per share of EUR 2.21. Moving on to the free cash flow statement on page 14.
We adapted the free cash flow disclosure in this presentation, and we think it gives you a better visibility on how we use our cash. In the first half year, our free cash flow amounted to EUR 301 million, of which EUR 39 million were attributable to the second quarter. Besides the strong operating performance and the favorable development in trade payables, a further buildup of inventories caused by the continued tight supply situation impacted our free cash flow development negatively. In addition, we saw an increase in contract assets due to a high level of project execution in the SCS segment. The generated cash was predominantly used for the early repayment of promissory notes.
As illustrated at the bottom of the page, this year's free cash flow development does not follow the typical seasonal pattern, starting rather weak the beginning of the year with Q4 normally being the strongest as you have seen it many times in the past. If you look at the guidance for the full year, you could question somehow why the remainder of the year looks quite soft. Let me comment on that one. First of all, we had a very strong first half, and a rather untypical pattern as we explained to you also during Q1. We expect inventory build-up due to the supply chain issues.
We intend to fund our pension CTA with around EUR 50 million in Q3 or Q4. If you look at our CapEx, we also expect the payout for our CapEx program to be higher in the second half.
Overall, we left our CapEx guidance unchanged. Moving to page 15, that shows the net debt as well as the corresponding leverage ratios of our business. You have seen the use of the funds already at the end of June 2021. The net financial debt decreased by EUR 162 million to now EUR 718 million due to the positive free cash flow development. As a result, leverage on net financial debt stood at 0.4x at the end of June 2021, which is down from 0.6 seen at year-end. Our net pension liabilities decreased to EUR 1.2 billion, mainly due to higher discount rates, and therefore, the leverage on industrial net debt decreased substantially to 2.2x , down from 3.1x at December 2020. With this, over to you, Gordon, for the outlook for the full year 2021.
Thank you. I am on page 17. As you have seen, we have just recently increased our outlook for the financial year 2021. This updated outlook is based on the achieved results in all key performance indicators during the first half year, which were significantly better than our original forecast. In addition, we expect that the current positive projections for global economic growth over the year as a whole, as well as the upturn in revenue to continue during the remainder of the year.
For the KION Group, you can see the detailed ranges of our updated outlook on the slide. The order intake for the group is expected to be between EUR 10.65 billion and EUR 11.45 billion. The target figure for consolidated revenues is in the range of EUR 9.7 billion-EUR 10.3 billion, and the target range for adjusted EBIT between EUR 810 million and EUR 890 million.
Our free cash flow outlook is unchanged and is expected to be in the range between EUR 450 million and EUR 550 million for the reasons just explained. The target figure for return on capital employed is in the range of 9%-10%. This includes an adjusted outlook for the segment Industrial Trucks & Services with respect to order intake revenue and adjusted EBIT. For the segment Supply Chain Solutions, we increased our outlook for revenue and adjusted EBIT as well. Our free cash flow guidance remains unchanged based on as we plan additional buildup of inventories, respective the working capital due to the ongoing tight supply chains.
Now, however, there are still considerable uncertainties in the assessment of our business performance for the remainder of the year due to the unpredictability, the further course of the COVID-19 pandemic, the risks there associated with further development of end markets and raw material prices, also with regard of availability of the intermediate products. Our 2021 outlook adjustments are based on the assumption that there will be no further far-reaching lockdown measures or plant closures in the course of the year, and that the availability of intermediate products will not tighten further. An economic downturn in key sales markets or worsening of procurement risks could cause the KION Group's performance and financial results to deviate, in such a case, significantly from the outlook. Looking onto page 19, you see our further financial calendar.
Next event is the publication of our Q3 results, which will take place on October 26th, 2021, shortly before our virtual analyst and investor event scheduled for the November 3rd, 2021. Until then, we look forward to meeting you at conferences and roadshows. With this, we'd like to close the formal part of this update call and hand over back to the operator so that we can take your questions.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. Today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. In the interest of time, please limit yourself to two questions, and please ask your questions all at once. One moment for the first question, please. The first question is from the line of Sven Weier from UBS. Please go ahead.
Yeah. Thank you. Good afternoon, Anke. Good afternoon, Gordon. The first question is on the truck order intake guidance that you've given. As you said, it's implying there's quite a bit of a slower second half, which of course, I understand you had some pre-buy, you had some pent up in the first half. I was also curious, to what extent are you also limiting the order intake because you're conscious of capacity constraints, conscious of supply chain constraints? Is it also kind of voluntary from your side?
Yeah. We're a larger company than we were several years ago, but we're not that strong to tell customers no, and I would never tell a customer no. No, we are not limiting in any way. You can see that even the strong order book and strong order intakes, despite some of the, let's say, delivery promises that are stretched out and customers still sticking with us. It shows there's quite a bit of patience in the market. I think you made the right statement. We have pent-up demand from last year. People were ordering pre-buys. We did have just a huge second quarter. I've never seen anything like it before. I just don't expect that range to continue in the second half of the year. It already shows in China, 36% between us is not that bad.
I do see some normalization in the second half of the year.
Okay. Yeah, that makes sense. second question, please, is on Supply Chain Solutions. I was just curious how the pipeline has evolved between the last quarter and now. Is it still as upbeat or are you seeing any signs of saturation? Did you maybe have some order slippages more than usual into the third quarter? That would be the second one. Thank you.
No. Saturation, I'm amazed at some of our customers when they talk about five years, 10 years, 15 years. No, actually, the order project pipeline, I would call it, is as full as the last time we talked in the last quarter. I just think, the skill set that we've been able to acquire, and the expansion into the grocery business and fashion business and so forth, and we've increased our presence in Europe and made a lot of progress around the world. It's a fast-growing company, and a really solid market. The pandemic has kind of just inflated all of that and put a turbocharger on customers' behavior that a lot of people will no longer return to stationary buying and stick with the online business, and it's our job to make that as seamless as possible.
That is really adding up to a lot of orders.
Yeah. Maybe in that context, Gordon, I saw in the quarterly report that you seem to be buying a company in India. Can you maybe elaborate a little bit on that? I think it's an SCS, right?
Yeah.
Maybe you can elaborate a little bit on that one as well.
Yeah. You've followed us a number of years, and the message has always been, where do we have a technological white spot or where do we have a regional one? Fact is that many of our big customers, and it's publicly noted, so I'm not telling any secrets, have made huge bets on the Indian continent and have committed, Amazon being one of over a billion investment, into these markets. If our biggest customers are going there and investing in a big deal, we have to follow that and be there to make sure that we're the ones that then provide the backbone so that all of this can happen. That's just simply, we found a very good partner and we're already, in the forklift side, one of the leaders in the market, I'd say right up there at the top.
We're following as we have all along, where our customers are to provide them with very local, very strong presence.
Understood. Thank you, Gordon.
Next question is from the line of Sebastian Growe from Commerzbank. Please go ahead.
Good afternoon, everybody. Thanks for taking my questions. Hi, Anke. Hi, Gordon. The first one is a follow-up to Sven's question on the overall situation in ITS and then the volume trajectory. The question is, more after having seen this pent-up demand and certain pre-buying or pull forward, as you phrased it, can you comment on the potential impact from the pre-buying? If you could put a number behind it would be helpful. Also talk around the margin quality on the orders that you have taken so far. Related to it, I would be interested in the midterm outlook because you are scaling back on the capacity part of the overall improvement program. I would be just interested in hearing your thoughts around your assessment on the underlying market growth in ITS.
If this has notched up a bit eventually from a structural standpoint, things are going extremely well in China, but also obviously in other geographies. If I just look at the market being 40% or so above the 2019 levels, I would be just interested in hearing your thoughts around the kind of structural growth in ITS. Then I would ask one more around SCS.
Yeah. Again, we're not pulling anything back. In terms of volumes, I know what you mean about our restructuring program because we do have to focus on delivering our promises to customers. Structurally, and I think we've alluded to it a few times on these calls, I would say we have our core ITS business, especially the brands of Linde and STILL, which are certainly high profile, high usage. Sometimes we call them premium customers. That is a pretty steady business and has had some sufferings. I talked about it last year when 2020, those went down, and that has disproportionately come back in the market. That's the one area.
What we are seeing structurally is a lot of products that, handheld, small pallet trucks, also legally, ergonomics. People are not allowed to use those anymore, so that's really driving the conversion to electrify that.
That is a structural thing. We call them entry-level warehouse trucks. That is really moving. We have a partner in China, and we have some low-cost products ourselves. That's one area that will continue to be very robust. We have the whole emissions drive. Today, we're 87%. We just introduced within the big product family that we launched last year, with the first truck was an IC truck. The electric trucks are coming behind with the same functionality as a diesel truck. Structurally, we would become much more of an electric company. You put the whole value part of it in with our China effort, with good enough trucks for medium usage type of equipment. What we see in SCS simply has an effect on ITS over time.
The more people buy things online, yes, they need complex distribution centers to do that, but at the end, closer to the delivery point to the customer, you simply need more forklifts. There is more packages, there is more parcels, there are more small bits being moved around on pallets, and that is structurally driving the market. It is a positive area to be in for exactly the type of products and services that we offer. Again, 2021, second quarter will go down, at least in my mind, as absolutely outstanding. I just do not believe that is the norm. We do have structurally, I think, a great position that we are in to address the further growth trends that I just mentioned.
Sebastian, hi. With respect to your question to quantify the pre-buy effect, quite frankly, that's really difficult to say what is now normal customer behavior, what is based on the list price increase we announced. It would really be a superficial estimate and could only be wrong. No number on that part. You ask for the margin quality and what we can see and observe is that we do have a very positive development of the price assertion. You know that last year was a little bit more difficult with the pandemic. This year, we do see a good price assertion in our order intake. That's a positive development we can report here.
Okay. Sounds encouraging. The other question I had was around SCS. I keep it really short, but we have more interest in the structural margin potential and outlook. I'm still surprised, quite frankly, to see that you can earn such good margin while at the same time running the business at negative working capital. I understand that SG&A was a bit below proportionate in the first half, and that is clearly also then I think reflected in your H2 margin guidance. From a more higher level perspective, is there a certain cap, really, for the business or if operating leverage was to continue, how should we think about sort of the structural margin outlook in SCS in particular? Thank you.
You have seen in the second quarter that we achieved a very good margin of 12.6%. We think the business has a good potential for margin improvement and a good potential for further volume and scale effects. On the other hand, they need to invest also into SG&A, and you see it in absolute terms. We definitely have the ability to grow that disproportionally to the revenue growth.
The 12% is sort of definitely the aspiration level, and if things play out nicely as seen in the first half, it could be well better. That's sort of the right way of looking at it. Is there anything in terms of the mix shift? I think that's also one of the aspects we haven't touched upon yet, that eventually this is also reflected in the H2 margin guidance, that I think by nature it is better margin in the Americas, eventually lower working capital and the other way around in Europe. How should we think about that sort of structural regional mix shift, to put it that way?
Yeah, you are right. The regional shift could have a slight impact because we often spoke about the lower margins in the European market and the European demand has really accelerated. That could be a slight negative impact. If I look at the margins for the second half of the year, that is really driven by the slightly lower volume we are guiding on the midpoint as well as the material cost headwinds. SCS is not as affected as ITS. First, it's component, lower material. Still it is affected and you will see that in the margin development in the second half of the year.
Okay, good. Thanks both.
Next question is from the line of Philippe Houchois from Jefferies. Please go ahead.
Good afternoon. A couple of questions. I start with ITS. Would you mind sharing with us whether the share of service within the ITS order intake was extremely high perhaps in Q2 2021 versus normal levels? The reason I'm asking is because I'm stretching a bit my head because if I'm doing some kind of back of the envelope calculation around your ITS order intake, I come to the result that the price mix effect on the year-on-year growth of the order intake in value must have been actually huge. I've got something like +30% year-on-year or so, assuming some kind of rounding errors. On the one hand, you've got the mix shifting more in favor of counterbalance trucks. That must have helped anyway.
You said actually that the price increases that you are pushing through are going to be only effective from July on the order intake. I'm wondering what could be the reasons explaining such a strong price-mix parameter. To give you an indication, to do my calculations, I'm just assuming that the service intake equals the service sales, which is perhaps the wrong way to do in the current trading environment. That's the first topic.
Hi. Quite frankly, we would propose to discuss your calculations offline. It makes a lot to then go really detailed through your assumptions, through your calculations, and to help you with that. It could take a little bit too long now doing that in that call. If that is okay for you.
Yeah, that's fully fine. I guess it's quite complex anyway. I'm going to jump to the second one. In the R&D section of the report, you mentioned the Linde Warehouse Manager as a tool helping customers to start using digital warehouse management. It seems like an interesting add-on for SME customers from my opinion, and I guess it's all about getting the foot in the door for getting them perhaps to switch and purchase more comprehensive solutions also from SCS when the time comes and their operations change. Can you tell us a little bit more about that? For instance, like the perceived value for the customer, the competitive position, especially since you mentioned that the competition is picking up further in trucks, especially with the Chinese players. Perhaps as well, where the revenues and profits for such business are going to be recognized.
I understand that it is brought to the market via the Linde brand, which means that forklift customers should be receptive to the idea. Yeah. If you have anything on that would be great.
Look, as a general trend, our whole software add-ons, whether it's in the truck business or in the SCS business, for our side, efficiency, and for the customer, ease of doing business. In the ITS business, much of our fleet out there that we sell these days is on some kind of lease contract, three years, four years, five years. The more information and the more data we have to make these things easier, the more correct we can be on our pricing. What we are not doing yet, perhaps at some day, because we're not that big in the subscription models and those types of things. What we're not doing yet is listing the software revenues out separately. That's a thing we've bounced around internally, and we're still talking about how to do that.
Maybe that comes at some day, but that is not a revenue stream that we publish separately.
Philippe, that means you'll find it in the ITS segment, and it is part of the service revenues.
Okay, understood. Perhaps just as a follow-up also too on the topic of R&D, could you add a little more color as well to the four projects that you mentioned in the report as part of the R&D partnerships? I think one that I found really interesting was, for instance, the robot grips.
Yeah. The gripping part is kind of the last frontier of how to be able to fully get to a lights-out warehouse. It's one thing to move 400 packages through a sortation system per minute, but it's another thing to put an individual iPhone or whatever into a box. We are trying to find more ways to automate that, and it's still too expensive, but that is where research is going. All companies to fully be able to automate this part of the as I call it, one of the last frontiers to be able to have a lights-out warehouse.
Yeah. That's basically, if I understand that correctly, that's basically shifting from AGVs to what, at some point, even like AMRs, like mobile robots?
We are one of the larger mobile automation suppliers with a lot of AGVs and the AMRs. We have the equity participation in Quicktron, which we announced last year, I believe. Yeah. We don't just announce it. We actually do things with these acquisitions that we do. Are starting to put those into real-life applications and practice so that you will see much more of in years to come is the automated forklift driving around, and autonomous driving vehicles in the warehouses. That will have a bigger presence in the years to come.
Okay, I'm excited to see that. Thank you very much. I'm back in the queue.
Next question is from the line of Akash Gupta from JP Morgan. Please go ahead.
Yes. Hi, good afternoon, everybody, and thanks for your time. My first question is on ITS. I think you have raised prices since July 1st. The question is, are these price increases enough to offset the raw material headwinds that we have seen in the first half of the year, or would you need additional price increases later in the year or maybe next year to fully offset that? The second question I have is on SCS demand. You said demand is quite strong and you commented that COVID-19 has kind of turbocharged demand.
Can you tell us where this new demand is coming from, in particular context of micro-fulfillment center? I think last year at your CMD, you presented your micro-fulfillment center plan. Just wondering if this MFC offering is accelerating your overall Supply Chain Solutions growth, or is it still coming from standard solutions? Thank you.
Akash, I think your question was if we intend to go for a second price increase this year, if I understood it right, the material cost headwinds-
The question was that the price increases that you have done, is it enough to offset raw material headwinds, given raw material has been quite volatile and keep on increasing in the first half of the year? Or do you need more at some stage to fully offset the headwinds?
No, it won't fully offset the headwinds we see this year. We have increased prices for the second time of July 1st. Somehow you see the price increase in the order intake. Until we produce a truck and ship it to the customer, it will take a while. We have lead times. No, this year, you won't see that we can balance the material price increases out with our list price increase.
On the SCS demand part, yes, we do have a couple more micro-fulfillment centers that we have sold and are putting on stream, especially in North America, with some longstanding customers. The demand is quite broad-based. If I would pick one area out that has started to make a difference, we started several years ago with our end caps for the grocery automation business. We have the second generation. We have the new Multishuttle generation coming out now that's available in the market. We have focused a bit of attention and had some good wins and bigger customers for the grocery automation. Overall, we are seeing simply this trend to automate large-scale warehouses, very broad-based regionally, as well as from the customer segments that we address.
We don't have any particular one other than grocery that has had an uptick in the past half a year or so.
Thank you.
Next question is from the line of Katie Self from Morgan Stanley. Please go ahead.
Hi, good afternoon. Thank you for taking my question. I'll give my first one on ITS and then second one on SCS. The first one really is around the component shortages or the supply chain issues that you've mentioned in the release. I think you've previously talked about a particular engine supplier where you're struggling to get the control panels. I just wonder if you could comment on, is it still really one or two suppliers that are having issues? How broad based or how widespread has that tightness come now? My second question, just on SCS. I was hoping we could talk a bit about your account sensitivity. I know in the past, we've talked about the impact that, for example, an Amazon order could have in terms of the lumpiness of order intake.
I was wondering if you could give us an indication of how the nature of that business has developed as you have scaled up so significantly in the last couple of years. For example, what proportion of your top 10 customers account for in terms of the number of orders or any kind of qualitative sense of how much the business is driven by large key accounts versus a tail of smaller customers would be great. Thank you.
On the ITS business, I don't want to disappoint anybody. There's good news and bad news. Some of the things have started to get better. This engine topic is still there, but we're managing it through, and the electronics part, we have had some pickups. On the other hand, due to very strong demand of certain things, the suppliers that are having trouble is a bit broader than it was half a year ago. We have a number of people on-site supporting our suppliers with third parties. The team has done a lot of work to find second sources. Even some of our customers have helped us in certain things. It's not just the one or two from batteries.
Do we have enough batteries for our warehouse to do the factories that have made some adjustments based on closing scenarios that were decided last year, 2020, and now we figure out, we need twice as many tires as we had planned. Now because of labor shortages and rubber shortages, maybe we don't have enough tires on time. It is a bit more broad, but all things we do have under control because we're not alone. In this case, customers are being quite patient because all options of all of our competitors are affected in one way or the other. It is a little bit broader, but I would say our scope and our understanding of it, our workarounds are also keeping up with the problem, and that's why we're quite confident.
If things don't get much worse, as I said in my opening statement, that our uptick in the guidance, we should be able to deliver that through 2021. On the mix?
Yes, Katie, very interesting and far-reaching question. The whole customer, I would say, diversification, is indeed something which is important for the business. We have seen throughout the pandemic, the high share of e-commerce customers, fueled by the pandemic. Also in Q1, we have spoken about substantial increase in order intake from grocery customers and Gordon Riske also just has spoken about it. We have seen now in the first half of the year, I would say a stronger diversification of the customer base, than last year, with grocery, general merchandise, coming back very strongly. Also apparel is ordering very strongly. From a region perspective, we already have stated that Europe has accelerated. We are strong in North America. We keep to be strong in North America, but also the European market has shown a very strong increase in orders.
I think the whole customer base, regional diversification, is on a very good track with respect to the business. The order size is also very different quarter by quarter. We have seen a lower amount of large orders in the first quarter. In the second quarter, again, it is a share well above 50% in our order intake. Still it needs to be seen if the trend of last year continues where it was really a tendency towards the very large orders. Q1 was a little bit more balanced towards small orders and Q2 is now back more gearing towards the larger orders. All in all, I would say the whole development of SCS, the whole order intake, the customer verticals, the diversification, the geographical footprint, that all is very healthy and very well balanced. You asked about the dependency on customers.
We have disclosed or started to disclose last year, the revenue with one major customer in the SCS segment, and we have also related that customer to the e-commerce segment as you might remember. It was in the first half-year report, you can also find it. The share of revenue of that single customer is around EUR 890 million for the first half of the year, which is nearly the number of the full year 2020. You can also see that, we spoke about e-commerce and the order intake in 2020. We are now delivering on the orders. The revenue share, in the first half-year, is quite high.
That's great. Thank you very much.
Next question is from the line of George Featherstone from Bank of America. Please go ahead.
Hi, good afternoon, and thanks for taking my question. Just one from me. Clearly the growth in SCS over the past couple of years has been very strong, and I wondered if you could help us understand what you think the penetration rates are for warehouse automation, both on a global basis and also then by the regions.
Yeah. You mean, how many of the global warehouses are automated? Do I understand it right?
Yeah. More a case of the total addressable market as you see it today. Where are we at in that cycle of, have gone?
Yeah. That's a pretty difficult one to predict, because there are also new warehouses, coming up, every minute, but it's still less than 50%. There is still a lot of potential. We have some customers in the grocery business that are just starting it, even if they have 50, 60 warehouses around the world. There is still a lot of manual labor being taken and fully automated is probably less than 25%. If you go into a modern warehouse today, the smallest amounts in the world are fully automated. You will more likely see a mix. High speed parts are fully automated, and you still have a lot of manual. The upside of that is there's still a huge potential even in brownfield sites, for SCS in the coming years.
Okay, great. Thanks for the color.
Next question is from the line of Martin Wilkie from Citi. Please go ahead.
Thanks. Good afternoon. It's Martin from Citi. Just a question on the technology in ITS. You have a target for lithium-ion penetration by 2027. Just to understand where you are in that journey. Related to that, we are seeing, particularly in the U.S., it seems to be a bit of a more of a preference for fuel cells rather than lithium-ion. I'd be interested to hear if you agree with that. If it is the case, is there more investment that needs to be made for you to make your trucks more fuel-cell compliant, or is it sort of an agnostic power source you can plug in either lithium-ion or fuel cell? Then re-change kind of how you develop trucks and so forth to hit that 2027 target? Thank you.
Yeah, very good question. The fact is that the best solution is not always the right solution for our customers. We see the Asian market going for these types of products full speed ahead on lithium-ion, simply because of cost and efficiency. Lithium is still the most efficient power source. With a fuel cell, to get hydrogen, you need to put 100% energy in, and you get 70% out, so it's still not the most efficient. However, if you can do it with green energy, then it's at least zero emissions. As KION, we have addressed, and we have our own R&D research departments for all of the technologies, lithium-ion, fuel cell, and let's say, lead-acid batteries and combustion engines. Having said that, 87% of all the trucks that we deliver in the world today are already electrically driven.
I think that's a clear sign of where the direction is. To us, it doesn't really matter that much. Is it a lithium power base, or is it a fuel cell power base? We have delivered both. You're right, the U.S. market has a different subsidy and different view on fuel cells, because in the U.S. you have atomic energy plants, which you can use then to create hydrogen fuel, which in Europe, especially Germany, is a no-no. There's a whole different cost basis there. That drives that a bit. We are delivering fuel cell trucks. We have Weichai Power, which has a cooperation and an equity participation in Ballard Power, where we are developing fuel cells for the industry, for forklift applications.
We are, in all of the propulsion fields, very well ahead of the game to be able to deliver what is, for the particular market, the most reasonable and sensible solution.
Thanks. Related to that, your service business, given that you are already heavily electrified and obviously you make servicing from hydraulics and all these things that wouldn't change depending on the fuel source, is it reasonable to assume that the technology is also agnostic for your aftermarket and service business as well?
Well, a diesel engine where you have a lot of consumables has more consumable parts. A fuel cell also has many, many more moving parts than a battery-driven truck, like a lithium-ion. Over time, if you did nothing, it would have an effect. To compensate that for a bit, the electric truck in general, our vertical integration is much higher. We make our own electric motors. We make half of our electric power amplifiers, so that puts the energy into the electric motor. We have, as you know, announced a joint venture, which is now in production with BMZ, a manufacturer of lithium-ion. We make the electronics control system. Our value add, which means then exclusive spare parts going forward, is quite a bit higher on an electric truck than it is on a combustion engine truck. We buy the engines.
Great. That's very helpful. Thank you.
Next question is from the line of Alexander Hauenstein from DZ BANK. Please go ahead.
Yes, hello, Alexander, DZ BANK. Thanks for taking my question. I have two questions. First of all, given what you know today, could you please provide an update about the expected quantified impact of raw material cost increase and supply bottlenecks for ITS and SCS separately, please?
Yeah. We can do, as we did it before, we have not quantified it really. We have qualified it somehow. Yes, we can do that. For the full year basis on a group perspective, we up until now always have said that we expect mid-double-digit EBIT impact from material cost headwinds. From today's perspective, we would say mid-to-high double-digit EBIT impact on KION Group in total, that would mean SCS somehow a low mid-double-digit and ITS a mid-double-digit impact.
Okay, I understand this is unchanged, right?
No, I think we are gearing a little bit more towards the higher end. Before we have said for the group, it's mid-double-digit, and today I would say it's mid-to-high double-digit.
Okay
Slightly higher, but not substantially higher.
Okay, thanks for clarification. Another thing, coming back to the cooperation with Weichai. What are the contributions there for your success in China? Maybe you can give us some color here about the success so far and what has been successful, what could be more improved going forward, how is their role in the planned expansion of the sales network in that context in China, and maybe also looking for your additional production capacities. I understand they have a 5% stake in that facility, but maybe apart from that, maybe you can give some color here about the cooperation status and then what you're planning going forward. Thanks.
Yeah. First of all, there is no operative running business. We run a business. They have a much bigger business in the engine and on-highway truck. Having said that, they are one of our biggest customers. They have lots of warehouses, and Sinotruk is one of the largest truck manufacturers. They're the number one transmission manufacturer, so it's a good customer for forklifts and for SCS. That's a very good thing. Second thing is the heavy truck business in China, as well as the world moving towards zero emissions. That's a good partner they have for fuel cell technology, as we just discussed in the other question. There we have some R&D teams that work very closely together. Third one is being such a large player in this market, in a very diverse market, it's very helpful sometimes to open doors.
For instance, in our project in Jinan, where we are now halfway through or three-quarters of the way through in building our new facility. Being a 5% shareholder, we were able then to get all the necessary normal approvals for building permits, et cetera, hiring people, and all these discussions that you have with the local governments, just as you would in any other country, that has been able to expedite that process significantly. There are a lot of different levels on where we do work together. It's been, for our success in the China market, extremely helpful. We see that moving forward as the world becomes more electric, not only for the forklift business but also for the on-highway truck business.
Okay. Anything that could even improve further?
No, I think we've addressed all the issues, and then we're in constant contact with each other. That's, let's say, an ongoing partnership relationship and business relationship that has led to good results. I expect that will be the case in the future also.
Sounds good. Thank you.
Next question is from the line of Arsalan Obaidullah from Deutsche Bank. Please go ahead.
Hi, good afternoon, and thanks for taking my questions. Just first of all, in terms of the pre-buy effect, and just the broader market response, just to understand. Is the sort of price rise that you've indicated in July, is that something that is being seen across the board, or is that sort of unique to KION in terms of at least from what you can see? I guess what I'm trying to understand is when I'm looking at the kind of the performance versus the market, whether that kind of comes out in the wash or whether that effectively has inflated the performance. Whether that's also that pre-buy, if it's sort of equal across regions or whether you're seeing more in some regions than others. That's my first question.
Hi, Arsalan. Thanks for your question. The pre-buy effect, I would say that could be particular for KION, as we have increased our prices of July 1st, announced that beginning of June, therefore our customers have reacted potentially to that. Again, we cannot really quantify that effect, as we have already said before. We assume that it has an effect on the figures we have seen, especially, again, the June figures after the announcement of the price increase. If our competitors are seeing this as well or the whole market, it depends when they are putting their prices up and communicating it. I cannot communicate on that one, I would say it is especially for the EMEA region, not so much for the other regions.
Okay, thank you. My next question is just on the new electric product, in terms of just the early kind of demand and sort of suggestion again, how is it being received by the market? Sort of the X25 engine you mentioned, how is that going in terms of early orders and suggestions of how that's going to play out? Also, again, is that something you definitely see as a unique offering that other companies aren't offering, you have a sort of competitive advantage with that?
The first part of the question, I'd like to deliver everything that's been ordered. That would be nice. That's not the case. We have a good order backlog. Second thing, everybody's working on a solution like that to be able to fully replace IC trucks. I don't think it's going to happen in all applications because you do need a charging system. At the moment, we do have a, I think, somewhat unique product there that has the full power, the full reach, the full speed, lifting capacity like a typical engine-driven truck. I do think we have some competitive advantages, let me call it that, in this segment right now.
Perfect. Just finally, if I may. I noticed, obviously, there wasn't sort of a slide reiterating your medium-term targets. I'll just take that as an assumption that those haven't changed or they're not under review. You've sort of talked about, let say, for example, an ITS sort of a growth of about sort of 4%, I think, if I'm correct, between 2019 and 2023. Is that something that you sort of are still looking at, or do you think that actually potentially now is given the strong sort of year you've seen, do you sort of see upside to that, or is that still something under review?
Yeah. In 2022, 2023, I don't want to get ahead of the game here. We're still in 2021. Every time I look at the numbers, 2017, 2018, we're all surprised at these double-digit growth rates. This is the first time we're seeing in big markets triple-digit growth rates.
Yes.
That's not a normal thing. We do expect, as I said before, that things will normalize somewhat, and this traditional slightly better than GDP 4% growth rate, I think that's a very realistic number, especially if you perhaps carve out some of these special effects like these mechanical devices being turned into electrical devices, and because they have electrical motor on it now become part of the statistic. I think we have to work that out a little bit for you clearer to the analyst so that that's much more transparent than it is today.
Brilliant. Thank you very much.
Well, thank you.
In the interest of time, we have to stop the Q&A session. I would like to hand back to Mr. Gordon Riske for any closing comments. Please go ahead.
Yes. Thank you all for participating in this call after this quite astounding Q2 2021, and raising our guidance, and we look forward to talking to you again when it comes to Q3 in a couple of months, and the road shows and investor conferences that we have ahead of us.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.