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Edited Transcript of KGX.DE earnings conference call or presentation 24-Oct-19 12:00pm GMT

Q3 2019 Kion Group AG Earnings Call

Oct 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Kion Group AG earnings conference call or presentation Thursday, October 24, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anke Groth

KION GROUP AG - CFO, Labor Relations Director & Member of Executive Board

* Gordon Riske

KION GROUP AG - CEO & Member of Executive Board

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Conference Call Participants

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* Akash Gupta

JP Morgan Chase & Co, Research Division - Research Analyst

* Alexander Hauenstein

DZ Bank AG, Research Division - Analyst

* Daniel Gleim

MainFirst Bank AG, Research Division - Director

* Katherine L. Self

Morgan Stanley, Research Division - Equity Analyst

* Martin Wilkie

Citigroup Inc, Research Division - Director

* Nika Zimmermann

Deutsche Bank AG, Research Division - Research Associate

* Philippe Lorrain

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Sebastian Growe

Commerzbank AG, Research Division - Team Head of Industrials

* Sven Weier

UBS Investment Bank, Research Division - Executive Director and Analyst

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Presentation

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Operator [1]

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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.

(Operator Instructions)

I would now like to turn the conference over to Mr. Gordon Riske, CEO of Kion Group. Please go ahead, sir.

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Gordon Riske, KION GROUP AG - CEO & Member of Executive Board [2]

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Yes, 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 will be presenting in four parts during today's call, and then we'll open up the discussion for 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 a financial update for the third quarter and the first 9 months of this year, and we'll close the call with a confirmation of our outlook for the fiscal year 2019.

So let me start today with our financial highlights. For the first 9 months 2019, on Page 3, order intakes 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 13.1% based on a very strong order book in both segments, and we achieved an adjusted EBIT of EUR 625 million in the first 9 months. This represents an adjusted margin of 9.6%, up 0.3 percentage points compared to the first 9 months in 2018. And free cash flow for the group was EUR 53 million positive in the first 9 months of 2019. So, in a nutshell, very strong development, despite some challenging macroeconomic conditions.

I'd like to move to Page 4 to highlight some of the strategic topics that we addressed in Q3 2019. As we continued the implementation of our strategy key on 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 fulfilment solution. This is a solution that is designed to help retailers address increased customer demand for rapid online order fulfilment in a very small footprint. The solution empowers customers with high throughput requirements to maximize space and achieve profitability with their ecommerce ordering, ultimately advancing their omnichannel distribution strategy to give customers what they want, with one-hour fulfilment. The system uses proven technology, like the Dematic Multishuttle and goods-to-person picking, as well as our Dematic IQ software. The first customer installation is now in progress with [Meijer], 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 Menard, 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 the 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 RX 60 series STILL forklift electric truck in the 2.5 to 3.5-ton truck weight class. The RX 60 sets new standards using energy efficient technologies. The truck has extremely high performance and agility for indoor and outdoor use, and thereby supporting our customers' implementation of green logistics and sustainability strategies.

Let's move on to the market update on Page 6, 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, and China saw a positive development in Q3, with plus 4.2% growth after a decline in Q2 2019 of minus 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, and South and Central America saw positive development in Q3, with 4.1% growth, after declines in the first half of 2019. And as a result of these regional developments, the global market declined by minus 2.5% in Q3 2019.

Now looking at a little different picture on Page 7, 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 minus 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. In North America, we did decline by minus 3.5% in Q3, however still significantly outperforming the market in the first 9 months with a growth rate of 6% versus a market decline of minus 10.2%. South and Central America, Kion grew across the region and significantly outperformed the market. So, overall, Kion order intake in units slightly declined by about 1%, or roughly 500 units versus a very strong Q3 2018, and so we continue to clearly outperform the overall market, based on our strong competitive position.

And with this, I'd like to hand it over to Anke, who will present you with the financial update.

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Anke Groth, KION GROUP AG - CFO, Labor Relations Director & Member of Executive Board [3]

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Thanks, Gordon, and also a warm welcome from my side.

Turning to Page 9, you will see the key financials for the first 9 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 [ITSS] order intake momentum. At the end of the first 9 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 under-proportional 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 9 months.

Turning to Page 10, you will see the key financials for Q3 2019. In the third quarter of 2019, we saw the good performance continuing, while reaching the strong growth in order intake of 13.5% to EUR 2.3 billion. This was mainly driven by the very strong development in SCS. However, IT&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 9-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 IT&S 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 9 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 of 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 in 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, (inaudible) 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&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 9 months, and plus 40.1% in Q3 2019 to EUR 839 million, reaching one of the best quarterly order intakes in SCS 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 our orders by general merchandise customers. Due to this very positive development, the order book for this 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 9 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 9 months' period, resulting in an improved margin of 9.7%, compared to last year's 8.6%.

With 47% increase in Q3, SCS reached an adjusted EBIT of EUR 64 million and were 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 the still positive phasing effects due to a continued disciplined SG&A and R&D spending. Overall, SCS saw a very strong performance, also reflecting the positive market environment.

Slide 14 shows the eight-quarter rolling average order intake for SCS, and the average annual growth rate across the shown two-year period is up to 10.5% from 9.8% in the previous quarter, so the segment continues to see strong growth rates, in line with market trend.

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 9 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 9 months, and this is based on a lower tax rate in some of our regions, an 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 9 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 9 months was EUR 53 million, and therefore, below prior-year levels. The main driver for the decrease of the free cash flow was a higher change in net working capital of minus EUR 471 million, which was impacted by lower contract liabilities from the SCS 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. So, 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 of 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 1.2x, on the same level as year-end. The same applies for the leverage on INOD. Only the leverage on industrial net debt was slightly higher, with 3.3x, due to an increase of our net [pending] liabilities.

And with this, I hand back to Gordon for the outlook for full-year 2019.

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Gordon Riske, KION GROUP AG - CEO & Member of Executive Board [4]

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Yes, thank you. Okay, I'm on Page 19. You know, in general, we do expect the overall combined market for industrial trucks and warehouse systems that it will likely expand again in 2019, and you know, we are absolutely very well positioned to further participate from that growth opportunity. And so, 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 the further developments of the macroeconomic conditions.

Despite this environment and weaker unit order intake for industrial trucks in the first 9 months of 2019, we do again confirm our guidance for the full year 2019, and we can support this. Our current view is supported by a very strong order book, the visibility for the month of October, and a very resilient service business. Additionally, based on our competitive position, we do expect to further gain market share. And for our order intake 2019, for the full year for ITS, you should probably assume that we come out towards the lower end of the guidance range, as we've stated before -- that is the more likely case; however that on the SCS side, or 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 then we look forward to seeing you all at conferences and roadshows. And with this, I'd like to turn -- or close the formal part of this update and turn it back to the operator so that we can take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Sven Weier from UBS.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [2]

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-- 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. So, obviously, 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 are keeping that spending so resilient against an ever-weakening macro backdrop? That would be the first question.

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Gordon Riske, KION GROUP AG - CEO & Member of Executive Board [3]

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Yes, again, it was an outstanding performance. I think a couple of key factors are always important to consider. We have a competitive product, so 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 industries. If you look at all the companies restructuring, that is the biggest factor. And we have a very broad range of customers outside of the automotive industry. Certainly, the macroeconomic conditions have softened; no question about it. But I do believe, because of our extremely large base of customers in very different industries -- ecommerce, 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.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [4]

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And when I look to your comment about your visibility in October, it seems that this hasn't really changed into the October month. Did I understand that correctly?

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Gordon Riske, KION GROUP AG - CEO & Member of Executive Board [5]

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No. So far, so good.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [6]

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The other question was just on SCS. 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 SCS pipeline from here?

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Gordon Riske, KION GROUP AG - CEO & Member of Executive Board [7]

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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.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [8]

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But I guess, you know, some of your pipeline will probably also already be for 2020 already at this stage now, I guess, yes?

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Gordon Riske, KION GROUP AG - CEO & Member of Executive Board [9]

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True, yes.

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Operator [10]

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Next question is from the line of Sebastian Growe from Commerzbank.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [11]

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Thanks for taking my questions. The first one's also on ITS, and here around mix and pricing. In the prepared remarks, you said that there were some mix-related headwinds because the original equipment 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, so I would be interested in your thoughts around the new product introductions that you mentioned before. Is there anything to mention with regard to a competitive edge with regard to potential pricing power, or how can we simply explain this massive ASP increase? Is this simply a function of higher (inaudible) structure? So, obviously, I'm very interested in your thoughts around mix going forward and your ability simply to eventually do better again than the competition.

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Gordon Riske, KION GROUP AG - CEO & Member of Executive Board [12]

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Well, if I look at, you know, 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 you know, 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-event in Berlin in a couple of weeks I think, the week after next, right, to introduce one of the most important new trucks for Linde in many, many years, so a complete new generation of IC trucks that run on the same line as electric trucks, so 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, so I think that, again, will give us a competitive advantage. They're all connected, so IoT is pretty much of a standard feature with these products, and so that will be an important launch. I don't think this year we'll see too big of 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.

And never to forget, of course, in times when customers are uncertain, the biggest single factor that kind of wins the 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 sales and service is the key driver, in my view, that makes these competitive products the choice when the customer finally makes a decision.

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Anke Groth, KION GROUP AG - CFO, Labor Relations Director & Member of Executive Board [13]

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From my side, because you asked for IT&S and the margin, so if we look at IT&S, we have a clear business segment mix effect. So, we have a large [thing to] new business with lower margins, so if you look at the mix between service and new business, normally the split was 50/50, and now it's 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, so we have mix effects in ITS.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [14]

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Yes, makes sense. Moving on to supply chain, and operating leverage is what I'm looking at, so the 16% contribution margin that I calculate is really stunning. I think it's already a pretty decent quarter 2, obviously, and now you're once more off with a very strong contribution margin. So, the question is simply where you're heading to. So, we are approaching, obviously, the upper end, even, or going beyond the upper end of the guided range in terms of margin SCS in 2019. It seems the momentum in terms of volume is still good. Obviously, you referred to the pipeline before, Gordon, so 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, so that will be the first part of that question. And related to it, and because mix has been I think the topic of the day, it seems, can you also comment on the most recent order. I mean, is there anything stunning, striking that we should be aware of? And, eventually -- and sorry for the third latest part of the question -- if you could allude a bit to the project phasing around the order backlog, it would be much appreciated. Thank you.

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Anke Groth, KION GROUP AG - CFO, Labor Relations Director & Member of Executive Board [15]

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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 was a phasing effect, which we expect it to revert during the second half of the year, so STS is still very cost disciplined, but nevertheless, again, it's a phasing effect. So the margin you're seeing in Q3 is quite an exceptionally good margin, but overall, you also know our aspiration to grow to an EBIT margin of 10% to 12%, and we said that both segments are contributing to that level.

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Gordon Riske, KION GROUP AG - CEO & Member of Executive Board [16]

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Maybe the 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 at 40%, so a slight increase in that. And the backlog phasing is 12 to 18 months, which in general won't change too much looking forward into the end of this year and into 2020.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [17]

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Okay, and then the 56%, that was related to quarter 3, or was it a 9-month period (inaudible).

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Gordon Riske, KION GROUP AG - CEO & Member of Executive Board [18]

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That was the (inaudible). That was the last quarter (inaudible).

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Operator [19]

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Next question comes from Martin Wilke from Citi Research.

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Martin Wilkie, Citigroup Inc, Research Division - Director [20]

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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, we know historically, Dematic was very U.S. focused when you bought it. In general, can we reach from this, are you having good success in breaking into the European and Asian markets, and will that be incrementally a bigger source of new orders for you? And also, just related to that, you do have a slide that you've used occasionally that shows that 47% of customers are pure play ecommerce. 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 ecommerce, just to understand where you see sort of the opportunities? Thank you.

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Gordon Riske, KION GROUP AG - CEO & Member of Executive Board [21]

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We don't break down the verticals on a quarterly basis, but you're right about the general merchandise, those types of projects, micro fulfilment centers and the food and beverage industry. We have made a concerted effort to improve our business in that area, and that is showing progress. And the first question, I think, is a very important one. You know, since we closed the deal on November 1, 2016, we always said that we have a underrepresentation of our order book in customers in Europe, and 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. You know, we've introduced our factory, which is fully running, in Stribo in Czech Republic. That was also a key factor to be able to serve customers in Europe, from the European market. And 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.

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Anke Groth, KION GROUP AG - CFO, Labor Relations Director & Member of Executive Board [22]

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And with respect to North America and Europe, yes, we are catching up in Europe, so 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. So 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. So, Europe is really catching up.

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Martin Wilkie, Citigroup Inc, Research Division - Director [23]

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Thank you, and just one question. You mentioned about the mix of large orders to small orders. I'm not sure you'll be willing to answer, but I mean, 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 impact on P&L and cash that we should think about?

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Anke Groth, KION GROUP AG - CFO, Labor Relations Director & Member of Executive Board [24]

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You know that the prepayment always depends also on the specific contracts with the customer and the margin on the specific project. So, 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.

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Operator [25]

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The next question comes from the line of Philippe Lorrain from Berenberg.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [26]

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Thank you for taking my question. I've got like a couple, mostly on the truck business. I wanted to follow up on the fact that you mentioned that the macro headwinds actually not easing, and 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 each year. And 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 they normalize their ordering behavior at some point, which would lead to the whole volumes in the segment ITS to decline?

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Gordon Riske, KION GROUP AG - CEO & Member of Executive Board [27]

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Okay, 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, so the number of short-term contracts, temporary workers, the location, 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 four factories, so we have really moved our production footprints, not only flexible, but in terms of location, much more competitive than in years past. So, you know, I think we have the flexibility to move up and down with the markets, even our European factory, short-time work, all those things we have as instruments to be able to handle at least a reasonable downturn. And that's what we see going forward. We don't see the falling off of the cliff; that is not predicted in any cases that we've seen and people that we've talked to or customers that we've talked to, but for the lumpiness ahead -- let's call it that -- in the market, and 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's below normal levels is anything related to automotive, and you'll see that in certain other companies that have very high exposure to automotive and automotive-related that it's 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, and our customers are already through that. Eighty percent of our products are electric at this point.

Perhaps one market I mentioned at a Bloomberg meeting a couple of weeks ago, you know, the U.K. is a little bit higher than normal in ordering things, and you know, 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.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [28]

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And if I could get your personal view as well on the following: your (inaudible) owns about 20% of the European markets, and these guys have increased their prices on the 1st of September last year, so 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 this 20%, that might have led to some distortion in terms of volumes, both in Q3 2018 and Q4 2019, and that what we see right now as, let's say, your outperformance versus the European market, might be well also driven by the fact that (inaudible) owning 20% of the market has brought down these market numbers?

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Gordon Riske, KION GROUP AG - CEO & Member of Executive Board [29]

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Hard to say. I can't look inside, you know, what they're doing. I can just, you know, 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 say, 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.

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Operator [30]

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Next question comes from the line of Katie Self from Morgan Stanley.

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Katherine L. Self, Morgan Stanley, Research Division - Equity Analyst [31]

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Hi, I just have one 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, so far in the fourth quarter. The point I'm trying to understand is, is the trend you saw through the third quarter. So, 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.

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Gordon Riske, KION GROUP AG - CEO & Member of Executive Board [32]

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Well, you know, in the first half I think there was a lot of negative sentiment around the month of June, a particular month. And then, you know, the third quarter, you saw, I reported the market numbers have recovered slightly. And September was I think the best of all the Q3 months, so September was a very solid month compared to the others. And 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 the month. So, so far, what we see, it's encouraging, but compared to Q2, yes, Q3 was better, and September much better.

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Katherine L. Self, Morgan Stanley, Research Division - Equity Analyst [33]

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And then, just by region, do you notice any differences in that in China, Europe, North America, if you just look at those kind of three major regions?

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Gordon Riske, KION GROUP AG - CEO & Member of Executive Board [34]

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Well, my comments were mainly Europe. Sorry about that. Yes, in North America, the market the last two quarters has come back a bit. You know, 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, and so if you're not sure of what are the tariffs, how long the tariffs, you know, 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, so it's quite confusing of how to make major decisions on CapEx, and I think that was the uncertainty.

In the Chinese market was a nice growth in Q3, with 4.2%. China does seem to be coming back, although it has a lot to do with ecommerce. We have the CeMAT China, which is the biggest material handling fair in China, which I'll be going to in a few hours. But the activity that we see right now at this fair, which is a lot more customers than we are used to seeing versus last year, so I think China does have a potential to surprise us a little bit on the positive side; let's see. But it was a good quarter, with 4.2% growth.

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Operator [35]

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Next question is from the line of Nika Zimmerman from Deutsche Bank.

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Nika Zimmermann, Deutsche Bank AG, Research Division - Research Associate [36]

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Thank you for taking my questions. The first one is mainly, if we think about, or if we just assume that the IT&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?

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Gordon Riske, KION GROUP AG - CEO & Member of Executive Board [37]

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I mean, of course we're always going to try our best, but I mean -- 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, so I think that will help us. But also, our competitors are not sleeping; we have great competitors all over the place, so everyone has to prove themselves every day. So, you know, we have a great team out there fighting, but to now make a prediction that this goes at the same rate in 2020 I think is a little bit early.

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Nika Zimmermann, Deutsche Bank AG, Research Division - Research Associate [38]

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Okay, thank you; I understand. Second questions is maybe a bit more general. So when you first acquired Dematic, I believe one of the factories 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?

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Gordon Riske, KION GROUP AG - CEO & Member of Executive Board [39]

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Yes, I mentioned one, and I think it's particular 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, and 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, so I do see that as a continued opportunity for us. As you know, things like micro fulfilment and other very high-tech, automated solutions, are quite the high-growth area. But all of these things always have a few forklifts attached to them. And so, if you're at the leading edge of the new ecommerce development, not only of pure play, but the ecommerce investments that almost everyone in general merchandise and food and beverage is market, you kind of get on the bandwagon with some of the forklifts. We would not have seen those projects a couple years ago, so I think that's, you know, an opportunity, and we are seeing direct effects of that.

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Nika Zimmermann, Deutsche Bank AG, Research Division - Research Associate [40]

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All right, thank you, and congratulations again on that big order.

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Operator [41]

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The next question is from the line of Akash Gupta from JPMorgan.

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Akash Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [42]

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I have one general question about service intensity of electric forklifts. So maybe, if you can, talk about service opportunity for new electric forklifts versus legacy ICE ones. And maybe, in a few years down the line, when most of the install base and their service will be electric, how do you expect this change in mix to benefit or impact your service business in future?

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Gordon Riske, KION GROUP AG - CEO & Member of Executive Board [43]

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Well, if you've seen the -- 80% of our forklifts today are already electric. And then, we have this very nice chart that we've shown you that, even in the last quarter, we had a service business part go up at 5.7% growth rate, so 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. With a diesel engine, you have things like filter and oil changes and all those things, so it's more hardware related type of things. But the electrics, and especially the new generation of trucks, completely IoT capable, so you sell extra services -- fleet data management, vehicle tracking systems, you name it. You're just able to offer the customer more, and so I do believe that this trend that our service business increasing, even [though] we're heading towards more electric trucks -- maybe it's not 80%. Some days, it's more like 85%, 87% -- I do believe that continued trend will be with us.

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Akash Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [44]

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But can you say, how does this electric versus ICE ratio in your install base and the service? I mean, it's 80/20 already; 5/15 is a new order schedule day for last year. But if you look at install base and the service, do you have a number estimate in terms of how much it splits up?

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Gordon Riske, KION GROUP AG - CEO & Member of Executive Board [45]

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We have 1.5 million trucks out there. I mean, there are some beauties out there that are probably 30 years old, still running, and, you know, with air-cooled engines. So, I would say from a population standpoint, we still have a lot of trucks out there that have engines in them, so that is always to be remembered, 1.5 million, that still a big part has to do with engine-driven trucks.

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Operator [46]

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

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [47]

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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 an increase in rental CapEx. So, could you explain what's happening there? Is that just timing somewhere and that's something we should bear in mind?

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Anke Groth, KION GROUP AG - CFO, Labor Relations Director & Member of Executive Board [48]

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Yes, Philippe, no, we are not doing our utilization rate. That's the reason why we are decreasing the rental CapEx. We are not spending as much as we did in the -- just before to actively manage our utilization rate. And utilization came down slightly, so no additions to the fleet, [or less] rental CapEx spending and an effect on our revenues.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [49]

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Okay, so it's worth having more a look at the 9 months accumulated, and not just at the Q3 separately.

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Anke Groth, KION GROUP AG - CFO, Labor Relations Director & Member of Executive Board [50]

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Yes, it's always wise to look at both, I would say. But 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.

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Philippe Lorrain, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [51]

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Okay, great, and 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 U.K.?

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Gordon Riske, KION GROUP AG - CEO & Member of Executive Board [52]

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U.K. is, what, 6% or so of our total?

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Anke Groth, KION GROUP AG - CFO, Labor Relations Director & Member of Executive Board [53]

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We'll pick up the next question. We'll look it up, Philippe.

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Operator [54]

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Next question is from the line of Daniel Gleim from MainFirst.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [55]

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You spoke about R&D and SG&A phasing in the second quarter call. I understand that has now further been delayed. Is it the right assumption that we will see higher expenses than in the fourth quarter, and probably entering into 2021? That is my first question.

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Anke Groth, KION GROUP AG - CFO, Labor Relations Director & Member of Executive Board [56]

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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.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [57]

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So we will 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?

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Anke Groth, KION GROUP AG - CFO, Labor Relations Director & Member of Executive Board [58]

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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.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [59]

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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?

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Gordon Riske, KION GROUP AG - CEO & Member of Executive Board [60]

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Well, it was below 50%, but it follows also the answer on the other question was about, year to date, 6.7%. In Q3, it was around 15%, so very solid Q3.

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Daniel Gleim, MainFirst Bank AG, Research Division - Director [61]

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And has that continued also in the fourth quarter? Have you seen that in October happening as well, or was there already a [reversion]?

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Gordon Riske, KION GROUP AG - CEO & Member of Executive Board [62]

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So, as I said, 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.

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Operator [63]

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We have another follow-up question from the line of Sven Weier from UBS.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [64]

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This is also follow-up question on the rental. Sorry for that, but there was obviously quite a swing between the plus 4% in Q2 and the minus 1.5% in Q3. And 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?

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Anke Groth, KION GROUP AG - CFO, Labor Relations Director & Member of Executive Board [65]

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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. But, 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 (inaudible) only. So overall, year to date, so in the 9-month period, the rental revenues increased, but in Q3 we saw a slight decrease.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [66]

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Because that's been the kind of only step change between the quarters, right? I mean, the rental was still very solid in Q2, and now it's going down. Do we see that trend also continuing in October, then, or was Q3 a bit exceptional?

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Anke Groth, KION GROUP AG - CFO, Labor Relations Director & Member of Executive Board [67]

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That's -- I follow Gordon in saying we are quite early in Q4, so we still have to see how Q4 runs. And normally, Christmastime it goes up again, but I would not exclude that Q4 could also be a weak quarter. But, Sven, we still have to see that.

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Sven Weier, UBS Investment Bank, Research Division - Executive Director and Analyst [68]

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And 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? So maybe another reason to keep in mind why the margin went down slightly year on year, because of the mix within the mix, so to speak?

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Anke Groth, KION GROUP AG - CFO, Labor Relations Director & Member of Executive Board [69]

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Exactly, it's a mix within the mix. I completely agree.

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Operator [70]

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The next question is from the line of Alexander Hauenstein from DZ Bank.

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Alexander Hauenstein, DZ Bank AG, Research Division - Analyst [71]

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(inaudible). 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. So 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, potentially? And 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 cyclicality for the moment, and we wouldn't change our stance toward automotive overall?

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Gordon Riske, KION GROUP AG - CEO & Member of Executive Board [72]

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We always try to have the mix of segments that we serve that no segment has more than 10% to 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, but 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. But 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. And 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. And of course, the requirements for emission coming up in the next 10 years are quite significant, and so that will change how some of the automotive suppliers behave.

But 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, and that's where we're really at the forefront of R&D, and we will be able to serve those customers also in the years to come, as we have in the past.

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Alexander Hauenstein, DZ Bank AG, Research Division - Analyst [73]

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Okay, understood, so 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. And maybe it's 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 -- or the bar is very high. On the other hand, you're saying that this phasing the SG&A and the lower R&D is just at the start, so I don't get that completely together in my mind, actually. So, 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 the other point, but I don't get it completely together, actually. Maybe you can help me.

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Anke Groth, KION GROUP AG - CFO, Labor Relations Director & Member of Executive Board [74]

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I think the IR 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 [to my know] to resolve our supply issues, so factories were running at full steam. We had two and three shifts modeled to really get the customers -- the trucks to our customers. So, Q4 2018 in ITS was a very good quarter under the circumstances we had last year, so that was the comment referring to.

And with respect to phasing, that's a margin driver. SG&A and R&D spend was under-proportional in the first half of the year, which again, we expect to revert (inaudible) until year end. So that is all what we wanted to make clear. But, again, happy to pick up your questions afterwards and go much more into detail, if needed.

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Operator [75]

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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.

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Gordon Riske, KION GROUP AG - CEO & Member of Executive Board [76]

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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.

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Operator [77]

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