Ladies and gentlemen, thank you for standing by. I'm Stuart, your Chorus Call operator. Welcome and thank you for joining KION Group's Q3 2019 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 would now like to turn the conference over to Mr. Gordon Riske, CEO of KION Group. Please go ahead, sir.
Thank you and welcome to our update call for the third quarter 2019. As a basis for this call, we'd like to use our Q3 2019 presentation. It's available, as always, at kiongroup.com under investor relations in the presentations section. We'll be presenting in four parts during today's call, and then we'll open up the discussion with your questions. I will begin with the financial and strategic highlights, followed up by a market update. Anke Groth will then provide you with the financial update for the third quarter and the first nine months of this year, and we'll close the call with the confirmation of our outlook for the fiscal year 2019. Let me start today with our financial highlights for the first nine months 2019 on page three. Order intake stood at EUR 6.5 billion, so up again 2.6% year-on-year, driven by both of our operating segments.
Revenue reached EUR 6.5 billion, up based on a very strong order book in both segments. We achieved an Adjusted EBIT of EUR 625 million in the first nine months. This represents an adjusted margin of 9.6%, up 0.3 percentage points compared to the first nine months in 2018. Free cash flow for the group was EUR 53 million positive in the first nine months of 2019. In a nutshell, very strong development despite some challenging macroeconomic conditions. I'd like to move to page four to highlight some of the strategic topics that we addressed in Q3 2019. As we continue the implementation of our strategy KION 2027, along the fields of action that we've talked to you several times about, those are energy, automation, digital innovation, and performance, we again achieved a few milestones in the past quarter. Dematic announced the commercial availability of its new micro fulfillment solution.
This is a solution that is designed to help retailers address increased customer demand for rapid online order fulfillment in a very small footprint. The solution empowers customers with high throughput requirements to maximize space and achieve profitability with their e-commerce ordering, ultimately advancing their omnichannel distribution strategy to give customers what they want with one-hour fulfillment. The system uses proven technology like the Dematic multi-shuttle and goods-to-person picking, as well as our Dematic iQ software. The first customer installation is now in progress with Meyer, a leading U.S. retailer credited with pioneering the modern supercenter concept. KION North America received its largest order in company history from Wisconsin-based Menards, a U.S. home improvement business.
The deal calls for KION North America to manufacture and supply Menards with 600 Linde trucks, all running on lithium-ion batteries, as well as several FMX reach trucks from STILL that will be fully automated by Dematic. Fully automated means driverless trucks. Linde broadened their offering with a P250 fuel cell tow tractor. The P250 is an emission-free operation, which has short refueling times at the hydrogen fuel pump, just a few minutes to ensure maximum availability, especially in multi-shift operations. The last example on this page is the introduction of the new, very successful RX60 series STILL forklift electric truck in the 2.5-3.5 ton truck weight class. The RX60 sets new standards using energy-efficient technologies. The truck has extremely high performance and agility for indoor and outdoor use, and there's by supporting our customers the implementation of green logistics and sustainability strategies.
Let's move on to the market update on page six, looking at the industrial trucks market, showing the global development by region in the third quarter. In Western Europe, we saw a decline of 7.7% in Q3, showing an improvement compared to Q2 2019. Eastern Europe declined by 11.9%, coming off a very high base in the previous year, Q3 2018. China saw a positive development in Q3 with +4.2% growth after a decline in Q2 2019 of -4.5%. Growth in this case was mainly driven by high demand for smaller warehouse trucks. North America stopped its downward trend in the previous quarters and slightly grew by 0.8% in Q3. South and Central America saw a positive development in Q3 with 4.1% growth after declines in the first half of 2019.
As a result of these regional developments, the global market declined by -2.5% in Q3 2019. Now looking at a little different picture on page seven, a breakdown of KION's performance in those regions. In Western Europe, we grew at 2.0% in Q3, which was a record Q3, and developed significantly better than the declining market. Eastern Europe, KION declined by -19.1% in Q3 compared to a high base in Q3 2018. In China, we also grew at 1.6% in the third quarter, lagging behind the market, which was mainly driven, as I said, by smaller warehouse equipment. North America, we did decline by -3.5% in Q3, however, still significantly outperforming the market in the first nine months with a growth rate of 6% versus a market decline of -10.2%. South and Central America, KION grew across the region and significantly outperformed the market.
Overall, KION order intake in units slightly declined by about 1%, or roughly 500 units versus a very strong Q3 2018. We continue to clearly outperform the overall market based on our strong competitive position. With this, I'd like to hand it over to Anke, who will present you with the financial update.
Thanks, Gordon, and also a warm welcome from my side. Turning to page nine, you will see the key financials for the first nine months of 2019. Order intake increased by 2.6% to EUR 6.5 billion, in particular driven by the very strong STS development in Q3 2019 and a solid IT and S order intake momentum. At the end of the first nine months 2019, the order book was 4.2% above September 2018 level and stood at EUR 3.4 billion. Based on our strong order book, revenue grew strongly by 13.1% to EUR 6.5 billion. Adjusted EBIT increased by 16.2% to EUR 625 million. The adjusted EBIT margin improved from 9.3% to 9.6%, driven by various effects, which I'll comment more in detail in our segment section. Let me make some general comments here. As you are all aware, we had a couple of inefficiencies last year, which are solved entirely.
Additionally, we still do have a positive effect on margin from the underproportional growth in SG&A and R&D. If we look at net income, net income increased significantly by 39% to EUR 339 million, driven by operating performance, lower PPA items, and a lower tax rate compared to the prior year. We can say that we saw a very strong development in the first nine months. Turning to page ten, you will see the key financials for Q3 2019. In the third quarter of 2019, we saw the good performance continuing while reaching a strong growth in order intake of 13.5% to EUR 2.3 billion. This was mainly driven by the very strong development in STS. However, IT and S showed an excellent performance as well, considering the difficult market environment. Our revenue in Q3 grew strongly by 13.9% to EUR 2.2 billion.
Adjusted EBIT increased by 12.6% to EUR 217 million, whereby the Adjusted EBIT margin declined slightly from 10.2% to 10.1%. Net income increased significantly by 25.5% to EUR 121 million. Let me continue with the key financials for the segment Industrial Trucks and Services on page 11. Order intake grew to EUR 4.6 billion in the nine-month period, representing a growth rate of 2%, and to EUR 1.5 billion in Q3, which represents a growth rate of 2.7%. This was mainly driven by our resilient service business, but also important, the new business saw a positive momentum in the third quarter against a declining market. At the end of September 2019, the order book for the ITS segment stood at EUR 1.4 billion. Revenue grew strongly by 10.9% to EUR 4.7 billion and by 9.5% to EUR 1.6 billion in Q3.
This development is based on our strong order book, and despite the fact that we saw a slight decrease in our short-term rental revenues in Q3. Adjusted EBIT grew significantly by 12.4% to EUR 496 million in the first nine months of 2019, equal to an increase in margin to 10.6% versus 10.4% a year ago. During Q3 2019, the Adjusted EBIT increased by 7.8% to EUR 170 million, representing a margin of 10.9%, only slightly down from 11.1% a year ago. The main drivers for the margin development in Q3 2019 were no efficiencies or material cost headwinds. A still positive phasing effect from SG&A and R&D, but to a lesser extent than in H1 2019, and a negative mix effect due to a significant growth in new business sales with lower margins than our service business.
Overall, we saw a strong performance, not least supported by the positive growth in new business. For the remainder of the year, please keep in mind that we had an exceptionally good Q4 2018 and therefore a high comparison base. As a result, Q4 will probably not be as strong as the first nine months of the current year. Last quarter, we showed on slide 12 the development of our service business over a longer term. We have updated the chart, and you can see an ongoing growth trend of our IT and S revenues with an unchanged average growth rate of 5.7% for our service business. Page 13 summarizes the key financials for the segment supply chain solutions.
The segment saw an increase in order intake of 4.2% to almost EUR 2 billion for the first nine months and + 40.1% in Q3 2019 to EUR 839 million, reaching one of the best quarterly order intakes in STS history. This very positive development was in particular driven by new customers from Europe, and with respect to customer mix, aside from e-commerce-related orders, we also saw an increase of orders by general merchandise customers. Due to this very positive development, the order book for the segment reached EUR 2 billion at the end of September 2019, representing an increase of 13% versus September 2018. Revenue increased by 19% to EUR 1.8 billion in the first nine months of 2019, and even by 27.1% to EUR 601 million in Q3 2019.
The Adjusted EBIT increased to EUR 176 million, a strong increase by 35.2% during the nine-month period, resulting in an improved margin of 9.7% compared to last year's 8.6%. With a 47% increase in Q3, STS reached an Adjusted EBIT of EUR 64 million and was thus able to show a double-digit margin of 10.7%. The increase in profitability was supported by an improved operational performance and project execution, as well as a still positive phasing effect due to a continued disciplined SG&A and R&D spending. Overall, STS saw a very strong performance, also reflecting the positive market environment. Slide 14 shows the eight-quarter rolling average order intake for STS, and the average annual growth rate across the shown two-year period is up to 10.5% from 9.8% in the previous quarter. The segment continues to see strong growth rates in line with market trends.
Page 15 shows the reconciliation from the Adjusted EBITDA to the net income for the group. Let me highlight selected items. As already mentioned before, Adjusted EBIT grew strongly by 16.2% during the first nine months. PPA is significantly lower than 2018. Taxes are higher based on higher earnings. However, we saw a lower tax rate of 29.1% in the first nine months, and this is based on a lower tax rate in some of our regions and adjustment of tax provisions for prior years, as well as tax subsidies for R&D activities in the U.S. Overall, net income showed a significant increase of 39% in the first nine months of 2019. This represents an EPS of EUR 2.88 for the period ending September. Details on the free cash flow are shown on page 16.
Free cash flow during the first nine months was EUR 53 million and therefore below prior year level. The main driver for the decrease of the free cash flow was a higher change in net working capital of - EUR 471 million, which was impacted by lower contract liabilities from the STS business. Rental CapEx continues to be lower than in 2018. Additionally, free cash flow was driven by increased investments due to our production footprint expansion in Poland and India, as well as the payment for the acquisition of the minority stake in EP Equipment in China. The overall free cash flow decreased, but please keep in mind that the fourth quarter is usually the main cash flow-generating quarter for KION. Page 17 shows the net debt of our business. As at September 2019, net financial debt of EUR 2.1 billion increased versus year-end 2018 level.
Even though our net financial debt increased due to higher net working capital, the leverage ratio on debt stayed with 1.2 on the same level as year-end. The same applies for the leverage on INOT. Only the leverage on industrial net debt was slightly higher with 3.3 due to an increase of our net pension liabilities. With this, I hand back to Gordon with the outlook for full year 2019.
Yes, thank you. Anke on page 19. In general, we do expect the overall combined market for industrial trucks and warehouse systems that it will likely expand again in 2019, and we are absolutely very well positioned to further participate from that growth opportunity. Based on the market development year to date, we do not expect ITS that this market will grow at the average long-term growth rate at 4%, but more likely to be a declining market. How strongly the market will be impacted, of course, depends on a few further developments of the macroeconomic conditions. Despite this environment and weaker unit order intake for industrial trucks in the first nine months of 2019, we do again confirm our guidance for the full year 2019. We can support this.
Our current view is supported by a very strong order book, the visibility for the month of October, and our very resilient service business. Additionally, based on our competitive position, we do expect to further gain market share. For our order intake 2019 for the full year for ITS, we should probably assume that we come out towards the lower end of the guidance range, as we've stated before. That is more likely the case. However, that on the SES side, the systems business side, is more likely to come out at the upper end of the order intake guidance range for 2019. In summary, it really was a great 2019 Q3, and thereby we are confident in our outlook for the full year 2019. Let me turn to page 20, where you see our financial calendar.
The next event will be the publication of our full year 2019 annual report on the 3rd of March 2020, and we look forward to seeing you all at conferences and roadshows. With this, I'd like to close the formal part of this update and turn it back to the operators so that we can take your questions.
Ladies and gentlemen, at this time, we will begin the questio- 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. If you're using speaker equipment today, please lift the handset before making your selection. 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. Please ask only one question at a time and allow for the question to be answered before you move on to your next question. One moment for the first question, please. First question comes from the line of Sven Weir from UBS. Please go ahead.
Questions. The first one is on the truck market. Obviously, quite stunning to see again resilience here, and I think the market has been also quite flattish in the exit of the quarter in September. If you compare that against the current macro and bad PMIs and so forth, quite a stunning performance. I mean, do you have any kind of new feedback to share with us, how that could be, what your clients are saying, why they're keeping that spending so resilient against an ever-weakening macro backdrop? That would be the first question.
Yeah. Again, it was an outstanding performance. I think a couple of key factors are always important to consider. I mean, we have a competitive product. We have, at least in Europe, the biggest sales and service network. I think one of the key points and a lot of things that we hear about macroeconomic conditions have to do with the automotive industry and related suppliers to the automotive industry. If you look at all the companies restructuring, that is the biggest factor. We have a very broad range of customers outside of the automotive industry. Certainly, the macroeconomic conditions have softened, no question about it.
I do believe because of our extremely large base of customers in very different industries, e-commerce, general merchandising, food and beverages, and that combined with the sales and service and the brand recognition of our leading brands does give us a competitive edge at times like these.
When I look to your comment about your visibility in October, it seems that this has not really changed into the October months. Did I understand that correctly?
So far, so good.
Okay. The other question was just on SES. Obviously, you've now taken a big chunk out of your pipeline in Q3. I was just wondering, how do you look at the order pipeline from here? Is it still as crowded as it was, or how should we look at the SES pipeline from here?
Still very robust. I mean, we had a great order intake in Q3. Yes, it's a big chunk, but I did make the comment towards the end of the confirmation statement for 2019 that the way it looks right now today, with all the order activity and project activity, that we will most likely come out at the upper end of our order intake guidance for the full year 2019.
I guess some of your pipeline will probably also already be for 2020 already at this stage now, I guess.
True. Yeah.
Okay. Thank you, Gordon.
Next question. It is from the line of Sebastian Schudlt from Commerzbank. Please go ahead.
Yes. Good afternoon, everybody. Thanks for taking my questions. The first one is also on ITS. And here around mix and then pricing and the preparatory marks, you said that there was some mix related headwinds because the original piece has been growing stronger. Yet it seems when looking at the last 12 months rolling that the margin has kept sort of at around 11% for ITS as a whole. I would be interested in your thoughts around the new product introductions that you mentioned before. Is there anything to mention with regard to competitive edge with regard to potential pricing power, or how can we simply explain this massive ASP increase? Is this simply a function of a higher counterbalance truck share? Obviously, I'm very interested in your thoughts around mix going forward and your ability simply to eventually do better again than competition.
If I look at our numbers in each of the segments, counterbalance trucks with engines, so IC trucks, electric trucks, warehouse trucks in each of the segments, especially in Western Europe, we've had a very strong outperformance in Q3. We do believe that we will be able to maintain that. Pricing certainly is always a topic, but we've maintained, and as you see it on the top line results with the EBIT percentage, have done a good job there. Regarding new product launches, we have our multi-events in Berlin in a couple of weeks, I think, a week after next, right, to introduce one of the most important new trucks for Linde in many, many years. A complete new generation of IC trucks that run on the same line as electric trucks.
A multi-platform that we've talked about a long time, and this is the first time I think we've really kind of put all the ideas into one platform. You can produce it all on the same line. I think that again will give us a competitive advantage. They're all connected, so IoT is pretty much a standard feature with these products, and that will be an important launch. I don't think this year we'll see too big of an effect since it's already November, but in the years to come as we progress with the full model lineup, that will give us an advantage. Never to forget, of course, in times when customers are uncertain, the biggest single factor that kind of wins a deal is the sales and service network. It's always an investment in capital goods.
It's always an investment in keeping your logistics running, and the sales and service is the key driver, in my view, that makes these competitive products the choice when the customer finally makes a decision.
Sebastian, to address from my side, because you asked for IT&S and the margin, if we look at IT&S, we have a clear business segment mix effect. We have a large swing to new business with lower margin. If you look at the mix between service and new business, normally the split was 50-50, and now it is going towards a couple of 52% in new business and therefore a lower share of the service business, which has a higher margin than the new business. We have mixed effects in IT&S.
Yep. That makes sense. Moving on to supply chain and operating leverage is what I'm looking at. The 16% contribution margin that I calculated is really stunning. I think you had already a pretty decent quarter two, obviously, and now you're once more off with a very strong contribution margin. The question is simply where you're heading to. We are approaching, obviously, the upper end, even though we're going beyond the upper end of the guided range in terms of margin for SES in 2019. It seems the momentum in terms of volume is still good, obviously. You referred to the pipeline before, Gordon. Where can you go? You've been indicating, I think, 12% in the past, but also shorter term, we have really seen a very encouraging, I think, development on the margin side of things.
That will be the first part of that question and related to it, because mix has been, I think, the topic of the day, it seems. Can you also comment on the most recent order mix? Is there anything stunning, striking that we should be aware of? Eventually, and sorry for that very latest part of the question, if you also could allude a bit to the project phasing around the order backdrop, that would be much appreciated. Thank you.
Yes. Sebastian, coming to your first question, the margin STS. Yes, we have a very good margin development based on the operational performance of the business, the improved project execution, and the disciplined spending around SG&A and R&D. We said from the beginning that this is a phasing effect, which we are expecting to revert during the second half of the year. STS is still very cost disciplined, but nevertheless, again, it's a phasing effect. The margin you are seeing in Q3 is quite an exceptionally good margin. Overall, you also know our aspiration to grow to an EBIT margin of 10%-12%, and we said that both segments are contributing to that level.
Maybe last part of your question, the phasing. In Q3 2019, we did see a slightly larger part of the business in large orders, 56% were large orders. Normally, in the years before, we were more like 40%, so a slight increase in that. The backlog phasing is 12-18 months, which in general will not change too much looking forward into the end of this year and into 2020.
Okay. The 56%, that was related to quarter three or the nine-month period?
That was your quarter three. That was the last quarter, yes.
Okay. Sounds good. Thank you.
Next question comes from the line of Martin Wilkie from Citi Research. Please go ahead.
Thank you. Yes. It's Martin from Citi. The first question was just on the sort of location and type of customers for orders and supply chain. You mentioned Europe and Asia, and then you called out one general merchandise customer, I think it was, in Europe. Just to get a sense, I mean, obviously, historically, Dematic was very U.S.-focused when you bought it. In general, can we read from this that you're having good success in breaking into the European and Asian markets, and will that be incrementally a bigger source of new orders for you? Also, just related to that, you do have a slide that you've used occasionally that shows that 47% of customers are pure play e-commerce. Again, you mentioned about general merchandise. You talked about a new picking system for retail.
When you think again of incremental customers, is it more coming from those kinds of areas rather than the pure play e-commerce? Just to understand sort of where you see the opportunities. Thank you.
Good. We do not break down the verticals on a quarterly basis, but you are right about the thing general merchandise, those types of projects, micro fulfillment centers in the food and beverage industry. We have made a concerted effort to improve our business in that area, and that is showing progress. The first question, I think, is a very important one. Since we closed the deal November 1st, 2016, we have always said that we have an underrepresentation of our order book and customers in Europe. At this point, we have made some very solid progress in the European market in this year 2019, already starting last year with a lot of work in the organization and the sales setup. We have introduced our factory, which is fully running in Stříbro in Czech Republic.
That was also a key factor to be able to serve customers in Europe from the European market. I think all these things together have given us the background and the ability now to service customers much better in Europe than we were two or three years ago.
With respect to North America and Europe, yes, we are catching up in Europe. We have started not only in the last quarter, I think beginning of the year. We have also changed the management team in Europe, as we told you, and that pays off. We are having really a good catch-up and good successes in Europe so that the mix between the project in North America and Europe is changing slightly. Europe is really catching up.
Thank you. Just one question. You mentioned about the mix of large orders to small orders that I'm not sure you'll be willing to answer, but should we think of that having a different effect on prepayments, project mix in terms of margins? I mean, does that, other than lumpiness, of course, does that mix of large orders versus smaller orders in supply chain solutions, does that have any other impacts on P&L and cash that we should think about?
You know that the prepayment always depends also on the specific contract with the customer and the margin on the specific project. The size of a project does not necessarily mean that we earn a higher or lower margin. It really depends on the specifics of the project we are talking about.
Okay. Thank you very much.
Next question comes from the line of Philippe Lorrain from Berenberg. Please go ahead.
Yes. Thank you for taking my question. I've got a couple mostly on the truck business. I wanted to follow up on the fact that you mentioned that the macro headwinds are actually not really easing. To follow up on that, I wanted to understand how you prepare for such potential headwinds to materialize also on your volumes, although you have outperformed by far the European markets this year. Also to couple with that, basically, when you look at your customer groups within Europe, do you observe that some customers or customer groups are ordering above normal levels and might then normalize their ordering behavior at some point, which would lead to the whole volumes in the segment ITS to decline?
Okay. On the first one, I mean, preparing, of course, we constantly try to review where we stand and our competitiveness and what happens in case one, two, three in terms of market downturns. Over the years, we have increased our flexibility quite a bit. The number of short-term contracts, temporary workers, the footprint of our company has completely changed in the last 10 years. We are much more into those markets, which gives us a much greater flexibility. We have a fairly large setup now in Eastern Europe, in North America and China for factories. We have really moved our production footprints, not only flexible, but in terms of location, much more competitive than in years past. I think we have the flexibility to move up and down with the market, even our European factory, short-term work, all those things.
We have these instruments to be able to handle at least a reasonable downturn. That is what we see going forward. We do not see the falling off of the cliff. That is not predicted in any cases that we have seen and people that we talk to, our customers that we talk to. For the lumpiness ahead, let's call it that in the market, we are prepared very well to deal with that. Regarding customer groups above normal levels, I would put it the other way. The only customer group that is below normal levels is anything related to automotive. You see that in certain other companies that have very high exposure to automotive and automotive-related, that it is much more of an issue because you have actually a double issue there.
One, you have the macroeconomic conditions, and secondly, you have this tremendous technological change going from combustion to electric and all the topics that have to do with that. I think that's probably the bigger force that we have to look at for those types of companies. Our customers are already through that. 80% of our products are electric at this point. Perhaps one market I mentioned at a Bloomberg meeting a couple of weeks ago, the U.K. is a little bit higher than normal in ordering things. We have big market shares in the U.K. Depending on how Brexit goes or does not go, that will certainly normalize sometime in 2020.
Okay. Thank you very much. If I could get your personal view as well on the following. Your peer, Jungheinrich, owns about 20% of the European markets. These guys have increased their prices on the 1st of September last year. They have created, in the months before July, August, a huge pre-buy. Do you think that because of their own size in the market, about these 20%, that might have led to some distortion in terms of volumes, both in Q3 2018 and Q3 2019? That is what we see right now as, let's say, your outperformance versus the European market might be well also driven by the fact that Jungheinrich, owning 20% of the market, has brought down these market numbers?
Hard to say. I can't look inside what they're doing. I can just compare. If we look at the ITS business, double-digit margins, I don't know if too many competitors are able to reach that. I read that also that the prices have been increased. I saw that on the paper. If I look at market behavior, it's difficult to see that come through. As I said, I can't comment exactly what they're doing, but I don't think that's the effect. It simply is that KION, with 34%-35% market share in Europe, with a premium approach, with a much broader customer base, I think that's the main difference.
Okay. Thank you for the follow-up.
Next question comes from the line of Katie Self from Morgan Stanley. Please go ahead.
Hi. I just have one border on the ITS market. I was hoping you could give us a bit of a breakdown on what you saw through the third quarter and then what you've seen in October, so far in the fourth quarter. The point I'm trying to understand is the trend you saw through the third quarter. For example, the rebound in China, the slight improvement in the Western European market, did that come gradually through the quarter, or did you see a step change in October or September? Thanks.
In the first half, I think there was a lot of negative sentiment around the month of June, a particular month. In the third quarter, you saw reported the market numbers have recovered slightly. September was, I think, the best of all the Q3 months. September was a very solid month compared to the others. October, it's a little early. I know it's already the 24th, but typically in our market, 50% of the orders come in the last 10 days of a month. So far, what we see, it's encouraging. Compared to Q2, yes, Q3 was better, and September, much better.
Thanks. Just by region, do you notice any differences in that in China, Europe, North America, if we just look at those kind of three major regions?
My comments were mainly Europe. Sorry about that. Yes. North America, the market last two quarters has come back a bit. There was a lot of pre-buying is maybe too extreme, but a lot of uncertainty last year, which customers then started to buy because, as you know, many customers and so forth do have a high input of material coming out of China. If you're not sure of what are the tariffs, how long the tariffs, many things have changed in tariffs. People have got exceptions. We also have on a few products exceptions, although they only last for 12 months. It is quite confusing of how to make major decisions on CapEx. I think that was the uncertainty. In the Chinese market, it was a nice growth in Q3 with 4.2%.
China does seem to be coming back, although it has a lot to do with e-commerce. We have the SEMA China, which is the biggest material handling fair in China, which I'll be going to in a few hours. The activity that we see right now at this fair, which is a lot more customers than we're used to seeing versus last year. I think China does have potential to surprise us a little bit on the positive side. Let's see. It was a good quarter with 4.2% growth.
Okay. Thank you.
Next question is from the line of Nika Zimmerman from Deutsche Bank. Please go ahead.
Thank you for taking my question. The first one is mainly if we think about or if we just assume that the IT and S market, the forklift market, is declining further in 2020, how long do you believe should KION be able to outperform this forklift market based on its market position and even based on the fact that it might be taking even more market share from competitors?
Yeah. I mean, of course, we're always going to try our best, but it was a very solid third quarter. Let me put it this way. We have new competitive products coming up into the market this year and next year, as we always do, but this year is quite exceptional, as will 2020 in terms of new product launches. I think that will help us. Also, our competitors are not sleeping. We have great competitors all over the place. Everyone has to prove themselves every day. We have a great team out there fighting. To now make a prediction that this goes at the same rate as 2020, I think it's a little bit early.
Okay. Thank you. I understand. Second question is maybe a bit more general. When you first acquired Dematic, I believe one of the factors was cross-selling forklifts into Dematic projects. Now you had quite some good orders in Dematic. Did you also see a further increase in cross-selling activities, or are you trying to improve this somehow?
Yes. I mentioned one, and I think it's particularly the biggest order we received ever for KION North America, the ITS, is a direct result of cross-selling. We wouldn't have been able to do that in our previous state. I think that's a great sign, especially in a market like North America, where everyone knows that KION has, on the forklift side, a pretty small market share. Other areas of the world, Western Europe, Eastern Europe, and in China, the teams are working closer and closer together. The exchange of leads is becoming much more natural than it was in 2016. I do see that as a continued opportunity for us. As you know, things like micro fulfillment and other very high-tech automated solutions are quite the high growth area. All of these things always have a few forklifts attached to them.
If you're at the leading edge of the new e-commerce development, not only at PurePlay, but the e-commerce investments that almost everyone in general merchandise and food and beverage is making, you kind of get on the bandwagon with some of the forklifts. We would not have seen those projects a couple of years ago. I think that's an opportunity, and we are seeing direct effects of that.
All right. Thank you. Congratulations again on that big order.
Next question is from the line of Akash Gupta from JP Morgan. Please go ahead.
Yeah. Hi, Gordon. It's Akash from JP Morgan. I have one general question about service intensity of electric forklifts. Maybe if you can talk about service opportunity for new electric forklifts versus legacy ICE ones. Maybe in a few years down the line, when most of the installed base under service will be electric, how do you expect this change in mix to benefit or impact your service business in the future?
If you've seen, 80% of our forklifts today are already electric. We have this very nice chart that we showed you that even in the last quarter, we had a service business part go up at 5.7% growth rate. I think that kind of answers the question a little bit. We've been on this change to electric for many years now and have been able to consistently increase our service revenues. The revenues are a little bit different where the diesel engine, you have things like filters and oil changes and all those things. It is a more hardware-related type of things. With the electrics, and especially the new generation of trucks, completely IoT capable. You sell extra services, fleet data management, vehicle tracking systems, you name it. You're just able to offer the customer more.
I do believe that this trend that our service business is increasing, even though we're heading towards more electric trucks, maybe it's not 80% someday, it's more like 85%, 87%. I do believe that continued trend will be with us.
Can you say how does this electric versus ICE ratio in your installed base under service? I mean, it's 80%-20% or 85%-15% is in new orders that were there for last year. If you look at installed base under service, do you have a number rough estimate in terms of how much it splits up?
We have one and a half million trucks out there. I mean, there are some beauties out there. They're probably 30 years old still running and with air-cooled engines. I would say from a population standpoint, we still have a lot of trucks out there that have engines in them. That is always to be remembered, 1.5 million. That is still a big part, has to do with engine-driven trucks.
Thank you. We have a follow-up question from the line of Philippe Lorrain from Berenberg. Please go ahead.
Yeah. Thanks for taking my follow-up. Just a quick one on the rental business. I see that there was a slight decline in rental revenues, but at the same time, there was a significant increase in rental CapEx. Could you explain what's happening there? Is that just timing somewhere, and that's something we should bear in mind?
Yeah. Philippe, no, we are managing our utilization rate. That is the reason why we are decreasing the rental CapEx. We are not spending as much as we did in the years before to actively manage our utilization rate. Utilization came down slightly, so no additions to the fleet or less rental CapEx spending and an effect on our revenues.
Okay. So it's worth having more look at the nine months accumulated and not just at the Q3 separately?
Yeah. It's always worthwhile to look at both, I would say. If you look at the overall figure year to date, we are still growing, and rental business has a growth trend, a positive growth trend also over the last three or four years.
Okay. Great. Perhaps just one other quick follow-up. Out of the 2% growth that you had in Western European orders, would you share with us how much of that is coming from the U.K.?
U.K. is, what, 6% or so of our total?
We pick up the next question. We look it up, Philippe.
Thanks.
Next question is from the line of Daniel Gleim from MainFirst . Please go ahead.
Thank you very much for taking my question. Can you hear me well?
Yes.
All right. You spoke about R&D and SG&A phasing in the second quarter call. I understand that has now further been delayed. Is that the right assumption that we will see higher expenses than in the fourth quarter and probably entering into 2021? That is my first question.
Yes. We said it's a phasing effect, which was more pronounced in the first half of the year and which is now starting to revert.
Will we see higher expenses both in 2020 and 2021? Is this more like a push-out, or is this all going to be accelerated in the first half of 2020?
No, that is not what I said. We come up with our guidance for 2020 early next year. It's specific for this year's spending.
All right. I would also be interested in the impact of the U.K. I think, Gordon, you mentioned that the growth was double digits. Could you be a little bit more specific how high that exactly was?
It was below 50%, but it follows also the answer on the other question. It was about year to date, 6.7%, and Q3, it was around 15%. Very solid Q3.
Has that continued also in the fourth quarter? Have you seen that in October happening as well, or was there already a reversion?
It's too early to say. Most things happen in the last 10 days, so we'll see. I also said on a previous question, I do believe that will normalize as things become clear. Do we have a Brexit and what type of Brexit it is, if at all?
Very clear. Thank you very much.
We have another follow-up question from the line of Sven Weir from UBS. Please go ahead. Mr. Weir, are you there?
Can you hear me now?
Yes. Yes.
Sorry for that.
Please go ahead. No problem. Please go ahead.
Yeah. There was also a follow-up question on the rental. Sorry for that. There was obviously quite a swing between the + 4 % in Q2, the - 1.5% in Q3. If I understood your answer correctly, it was really you actively managing the rental base. It has nothing to do with clients actually having less demand for the rental. Is that a fair summary?
No, Sven, I think that's a misunderstanding. What we are managing, of course, are the trucks in our fleet. So how much additions we are putting into the rental fleet. And the rental CapEx is lower this year as it was last year. You see that in the cash flow. Yes, revenues are decreasing, so the customers are renting lesser than they did last year, renting less than they did last year. So our revenues are decreasing.
Okay. Understood.
Overall, year to date, so in the nine-month period, the rental revenues increased, but in Q3, we saw a slight decrease.
Because that's been the kind of only step change between the quarters, right? I mean, the rental was still very solid in Q2. Now it's going down. Do you see that trend also continuing in October then, or was Q3 a bit exceptional?
I follow Gordon in saying we are quite early in Q4. We still have to see how Q4 runs. Normal Christmas time, it goes up again. I would not exclude that Q4 could also be a weak quarter. Sven, we still have to see that.
Is that maybe also a reason for the margin mix issue that you had? Because I suppose the rental margins are some of the highest margin activities in the mix in service. Maybe another reason to keep in mind while the margin went down slightly year on year. Because of the mix within the mix, so to speak.
Exactly. It's a mix within the mix. I completely agree.
Okay. Thank you, Anke.
Next question is from the line of Alexander Hollenstein from DZ Bank. Please go ahead.
Hello, Alexander Scheben. I have also a question following up on the automotive comment you made. You mentioned that automotive demand is one of the few, if not the only one that is seeing some, let's say, slow demand overall, obviously. My question is, how do you think about it? Do you think this is going to be a longer thing, or are you just waiting for a short-term revival here, potentially? The thing I want to know at the end is, do you plan to adapt here in terms of your automotive offering, your portfolio, or your kind of business behavior here? Or are you simply saying, "Well, this is a sick reality for the moment, and we wouldn't change our stance towards automotive overall"? Thank you.
We always try to have the mix of segments that we serve, but no segment has more than 10-15% exposure if I look at the forklift business. That's been a good policy to have a very solid mix in this business. The automotive is something that, of course, will come back. What we're going through is, as I said, you have to look at it in two ways. We have the macroeconomic condition, customer uncertainty, so you don't buy a car. The other thing that makes the customers right now that are thinking about buying cars is, what kind of car do they buy? Is it an electric car? Certainly not a diesel. I think that's the bigger factor that is forcing tremendous change, restructuring of some of the key automotive suppliers as they get into the electrification of the fleets.
Of course, the requirements for emissions coming up in the next 10 years are quite significant. That will change how some of the automotive suppliers behave. They all need material handling solutions. They all need automated forklifts or forklift type of systems, and that's where we are positioning our products. What we're adapting, of course, is a much higher use of mobile automation, so forklifts without drivers and those types of things, AGV systems rather than traditional assembly lines. That's where we're really at the forefront of our R&D, and we will be able to serve those customers also in the years to come as we have in the past.
Okay. I understood. You are not thinking in a way that you say, "Well, in case that at the end, one or the other way how we use mobility will change structurally the demand side for your ITS offering." I understand. Maybe it is also simply too early. Maybe a follow-up on the comment you made also on ITS when you mentioned at the beginning that Q4 was exceptionally high, and the base from last year has been very, very or the bar is very high. On the other hand, you are saying that the phasing of SG&A and the lower R&D is just at the start. I do not get that completely together in my mind, actually.
I'm simply wondering, should we expect this strong development due to these two, three factors to continue over the turn of the year, or is that something which is probably a very specific 2019 thing, and afterwards, you're probably kind of normalizing here? I know you have been commenting on it already at one or the other point, but I don't get it completely together, actually. Maybe you can help me.
I think the RR team also would be more than happy to give you a call afterwards to clarify that more in detail. From my side, the overall comment is we confirmed our guidance. So also for ITS, we confirmed our guidance. We said for the full year, we come up at the lower end of the guidance range for order intake. If I look at Q4 2018, that was a very strong quarter in ITS from an order intake perspective, but also from a revenue perspective. We have worked tremendously, as you might know, to resolve our supplier issues. So factories were running at full steam. We had two and three shifts models to really get the trucks to our customers. Q4 2018 in ITS was a very good quarter under the circumstances we had last year. That was the comment referring to.
With respect to phasing, that's a margin driver. SG&A and R&D spend was underproportional in the first half of the year, which, again, we expect to revert in IT&S until year end. That is all what we wanted to make clear. Again, happy to pick up your questions afterwards and go much more into detail if needed.
Okay. Thank you.
In the interest of time, we have to stop the Q&A session, and I would like to hand back to Mr. Gordon Riske. Please go ahead.
Yes. Thank you all for your questions and the participation. As always, very helpful. We look forward to seeing you on the upcoming roadshows and then to report on the development of the fourth quarter 2019.
Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.