KION GROUP AG (OTCPK:KIGRY) Q4 2021 Earnings Conference Call March 3, 2022 9:00 AM ET
Company Participants
Rob Smith – CEO
Anke Groth – CFO
Conference Call Participants
George Featherstone – Bank of America
Sven Weier – UBS
Sebastian Growe – BNP Paribas Exane
Daniel Gleim – Stifel
Jorge Gonzalez Sadornil – Hauck & Aufhauser Investment Banking
Philippe Lorrain – Berenberg
Operator
Ladies and gentlemen, thank you for standing by. I’m Stuart, your Chorus Call operator. Welcome, and thank you for joining KION GROUP’s Full Year 2021 Update Call. Today’s presenters will be Rob Smith, CEO of KION GROUP; and Anke Groth, CFO of KION GROUP. [Operator Instructions]
I would now like to turn the conference over to Rob Smith, CEO of KION GROUP. Please go ahead, sir.
Rob Smith
Thank you, Stuart. Good afternoon, ladies and gentlemen. Anke and I welcome you to our full year 2021 results update call.
Let me start by saying just how concerned we are about the situation in Eastern Europe and the Ukraine and Russia conflict. We’re deeply concerned about this, and our thoughts are not only with the people in the Ukraine that are enduring so much suffering, but also with our employees and their families in Russia. And KION wants to help, and that’s why we’re donating €1 million to the German Red Cross for people that – refugees and people that need help in the region.
And also, we’re providing forklifts for the German Red Cross, who is establishing a logistics centers to provide humanitarian aid in the region, and we hope very much for better time soon. Some of you, we’ve had a chance to meet. For those of you that don’t know me, maybe I’d take a minute to introduce myself. I started as the CEO of KION at the beginning of this year.
To get a rolling start, I’ve done what I call my meet, greet, list and learn. I’m still in that phase. I’ve met easily 300 employees around the company. Many, many of those in person. I’ve spent time with external views and a lot of time with our customers, and I’m really impressed with what I see. I’m excited about what I see. KION’s in a very good position today, and has enormous potential for the future.
So although I met many of you, I’m really happy to present our strong results today and looking forward to meeting you in person in the coming days when we have a chance to see one another in person. For today’s call, please refer to the 2021 presentation that you can find on our Investor Relations website. I’ll be talking you through the ’21 financials, the key financials and some strategic highlights, and then a bit on the market development.
And Anke is going to take you through the financials in detail, and we’ll close the call with an outlook for ’20 and some key takeaways for you. But let’s start with the top line figures on Page 3. We published very strong earnings this morning, and many of our KPIs are well above pre-pandemic targets.
This lays a very solid foundation towards our 2023 medium-term goals. I really want to thank and recognize employees and customers all around the world for delivering extraordinary results in extraordinary times last year, and delivering on every one of our guidance metrics. Extremely well done. I admired that, and our team is very proud of that and, really, hats off there.
So let’s talk about that. Order intake was up 32% year-on-year, finished at a record level of $12.5 billion. And for the first time, our sales at $10.3 billion broke the $10 billion mark and finished up 23% year-on-year. Our adjusted EBIT was $842 million, up 54% year-on-year, and finished with a margin of 8.2%, up 160 basis points from the previous year.
Free cash flow was almost 4 times the previous year at $544 million, and we should be proposing at our Annual General Meeting on the 11th of May a dividend per share of €1.50, which is a 35% payout ratio. So we saw strong growth across all metrics, and a very strong continued order intake. Page four are some strategic highlights. We’re about halfway through our KION 2027 strategy that defines the way we intend to become, by far, the global leader in intralogistics and supply chain solutions for our customers worldwide. Our strategy is a very good one, and it has some flexibility and/or an ability to refine it and extend to it.
A good example of that is sustainability. We’ve added sustainability to our strategy last year and are very focused on that as a clear field of action, and it’s very important to me. We’re very committed to this. It’s not only in our strategy, it’s also in our remuneration and our focus on. And 20% of the remuneration on a variable basis is dedicated to occupational health and safety, to environmental management systems, to ESG performance and employer attractiveness. We talk about an intersecting triple bottom line or the 3Ps.
The people, planet and profitable growth, and excelling in each of these is very important to us. Last year, we continued to invest strongly in innovation. We spent €207 million – we invested, let’s say that. We invested €273 million or about 2.7%, and are consistently between about 2.5% and 3% of our revenue going into R&D. And as our sales grow, our investments in R&D is growing. A very good example of that last year is the load runner, a very exciting new technology we’re developing with the Fraunhofer Institute.
And it’s about swarm robotics, and we’ve got some very exciting videos of that to be sharing. Swarm robotics, artificial intelligence, brand-new technology, very strong investments in research and development. We also worked hard to extend the capabilities of full line customer projects and joint offerings between ITS and Supply Chain Solutions, and saw some really good projects where Linde or STILL and Dematic are jointly working on holistic intralogistics solutions projects. Some examples with Trelleborg, with Byersdorf, or Siemens or the BMZ Group are flagship examples of great collaboration and joint offerings between the two.
Maybe another good example of our joint offerings and collaboration between our businesses is an app that we put together that allows both ITS sales teams and supply chain solution sales teams to offer products and make a simple, small-scale automation solution with very standardized elements and do that with an app so we can do it in real time for our customers. In addition, we executed on strategic investments.
We started production at our ITS factory in in Poland last year in July, and then we kicked off production in the new segment of drugs in December at our dedicated ITS plant in Jinan, China, built in record time, less than 15 months and went into production.
We also laid the cornerstone for our supply chain solutions factory in Jinan, China. Talking about the ITS plant in Jinan. By producing in China, we get a benefit from local production costs. We compete head-to-head with Chinese players there on a cost perspective. It gives us vertical integration of critical component suppliers, gives us a better cost position and better control the quality with the vertical integration. So we’ll be addressing the market in China first with our Jina factory, and we expect to extend exports to Europe and other places in the course of the year.
So moving quickly to Page 6, and talking about the Industrial Truck segment here. Let’s start with the fact that the fourth quarter in Western Europe finished up 32% and we finished up 52% for the whole year. In North America, we finished the fourth quarter at 17% increase and finished the year, 59% was the market in growth. In South America, 18% in the quarter and plus 71% growth in the year. In China, 0.8% in the fourth quarter and a strong 28% growth for the year. And worldwide, we finished at a record level of 2.3-plus million units per year, up 42% year-on-year. A huge significant growth for the year.
Page seven shows how KION’s unit growth by product and region finished. And we’re very proud to say we clearly gained market share on a global level, not only in the fourth quarter but also for the full year. With our unit intake almost 300,000 trucks, it was a historical record for us. The fourth quarter had 81,000 trucks, up 33% year-on-year, almost twice the market despite a real high comparison base in Q4 2020. Worldwide, we finished up 51% for the year and 43% for the – 33% for the quarter and 51% for the year.
So in summary, KION saw a very strong fourth quarter and full year and gained market share globally in our ITS business. Let’s talk about Supply Chain Solutions on Page 8. Our full year 2021 benefited from ongoing very solid market fundamentals for Supply Chain Solutions. Demand was supported by the general need for faster fulfillment and delivery as a lot of customers returning more and more towards online purchasing. Also, urbanization and demographic change supported demand.
The interact analysis, according to them, the market for warehouse automation and revenues expected to have grown about 21% in 2021. EMEA and the Americas contributed very strongly to the growth of the warehouse automation market.
And in terms of verticals, the general merchandise market, the food industry vertical stood out with sharp increases in sales volume. So market growth in the past year was driven by execution of very high order backlogs at the end of 2020, and KION was able to increase its supply chain solutions revenue by 45% versus a market of 21%, a very, very strong performance.
So with this, let me hand it to Anke, and she’ll take you through our financials, please. Anke?
Anke Groth
Thank you very much, Rob, and hello to all of you from my side.
Turning to Page 10, you will see the key financials for the IT&S segment. As just pointed out by Rob, the ongoing strong demand for industrial trucks was beneficial for us, of course, supporting a 43% growth in order intake. At year-end, the order book more than doubled to almost €2.9 billion, which covers approximately 3/4 of new equipment sales. Provided, of course, parts are available. We managed the ongoing challenges of tight supply chains fairly well during the fourth quarter, resulting into revenue growing 10% to €1.8 billion. The service business continued on its strong path also during the fourth quarter, while new business, as just mentioned, was negatively impacted by supply chain issues.
The Q4 adjusted EBIT improved by 11% to €113 million. However, despite increasing revenue, the margin remained stable at last year’s level mainly due to the higher material costs, supply chain interruptions and component shortages that were more pronounced in the fourth quarter. In the fourth quarter alone, we saw more than 5,000 trucks that could not be shipped to our customers, ending up to a large extent as unfinished trucks and inventories. These trucks stand for around €130 million of unrealized revenues and a significant contribution margin uplift in the mid-double-digit million euro range, if we had been able to ship them.
This effect is even larger in the full year, where we are talking about more than 12,000 trucks that were not shipped, representing roughly €300 million of unrealized revenues. The missing components triggered shift changes, overtimes and extra shifts, resulting in the situation that we were impacting our productivity, and the unfinished trucks led to higher logistics, storage and handling costs.
On top of these headwinds from supply interruptions, we also had higher material costs, as I mentioned, and an increased need for spot buys in order to keep up production for the benefit of our customers. All of this weighed on our profitability, particularly in Q4, almost offsetting the positive average contribution from the development of our new business, a higher share of service and our achieved cost savings from our structural program. In the full year 2021, the IT&S segment recorded an order intake of €8.2 billion, revenue of more than €6.5 billion and an adjusted EBIT margin of 8.2%.
Turning to Page 11, I’ll give you an update on our capacity and structural program. As already flagged with our Q2 results, we have shifted the focus of the program towards structural optimization rather than on capacity needs based on the very high order intake. We achieved €41 million cumulated savings last year, targeting additional €20 million to €30 million in this year. All in all, we are very well on track and confirm the targeted €80 million to €100 million cumulated cost savings by 2023. And on top of that, at significantly lower costs than initially anticipated.
Page 12 summarizes the key financials for the segment Supply Chain Solutions. SCS order intake was again above the €1 billion mark with a very solid order pipeline ahead of us. even higher than a year ago. Regionally, demand increased substantially in Europe and North America but was slightly down in APAC, mainly as last year was supported by two larger projects which could not be compensated by the higher number of smaller projects this year.
Looking at our verticals. We saw strong demand particularly driven by general merchandise, grocery as well as food and beverage. The order backlog at the end of December was up by 24%, reaching roughly €3.8 billion. 70% of this is anticipated to be converted into revenue this year. In other words, more than 55% of our mid-point revenue outlook for full year 2022. Despite the difficult supply chain environment, revenue grew significantly in Q4 2021, surpassing a level of €1 billion for the first time, while business solutions grew by 36%, customer services grew with a rate of around 28%. Looking at adjusted EBIT, we saw a margin of only 7.3% in Q4.
We focused on the benefit of our customer, thus, our priority was to protect our customers’ schedules. We therefore incurred higher costs in the spot markets to secure material while simultaneously keeping our labor forces ready to install equipment at the moment of arrival. At times, this required demobilizing and remobilizing of our staff as well as the use of short term and higher cost labor out of sequence installation, rework and overtime premiums have added up to higher costs.
All this, as I said, resulted into increased costs of roughly more than €60 million, more than half of the full year impact, which was more than offset – which has more than offset the positive effects of our top line growth. And in addition, we faced higher personnel expenses as we positioned ourselves for future growth.
For the full year period, SCS saw a record top line with order intake of around €4.3 billion, up 19%, and revenues of €3.8 billion, even up 45%, as well as record levels for adjusted EBIT of €410 million and a margin of 10.8%, and all of this despite the challenging environment. Page 13 summarizes the key financials for the group.
So overall, we saw strong growth rates for both order intake and revenue in Q4. The order book grew around 50% to €6.7 billion by the end of December ’21, driven by both segments and providing a good basis for this year’s revenue generation. In Q4, the adjusted EBIT for the group dropped to €151 million, a margin of 5.5%. I’ve already commented on the effects that affected our operating segments, and rest assured that we will address these very actively this year. In addition, higher personnel expenses due to higher variable remuneration compared to the low level of the prior year.
We also saw an impact from our ongoing digitalization initiatives, mainly driven by the implementation of SAP S/4 Hana. For full year 2021, KION’s order intake of around €12.5 billion, revenues of €10.3 billion. Both by the way, record levels for KION and an adjusted EBIT margin of 8.2%. Page 14 shows the reconciliation from adjusted EBITDA to the net income for the group. Reported EBIT included positive non-recurring items of €42 million in the past quarter.
These were mainly driven by a pension plan amendment to allow employees to choose their form of payout at the time of retirement, and we also recorded releases of provisions in relation to the capacity and structure program. Net financial expenses decreased substantially to minus €10 million, driven by lower refinancing costs due to reduced financial liabilities and an improved net interest result from our lease business.
Taxes increased nominally, reaching minus €24 million in Q4 based on higher tax deductibles and additional tax credits. Impacted by the lower rate in Q4, the tax rate for the full year was standing at 25%. Overall, we ended the fourth quarter with a net income of €137 million and earnings per share of €1.08, while we saw a net income of €568 million and earnings per share of €4.34 for the full year. Let’s move to the free cash flow statement on Page 15. Full year ’21 free cash flow amounted to €544 million. Main driver, of course, for the free cash flow was our strong operating performance.
On the negative side, we saw an increase in net working capital, driven by higher inventory levels mainly caused by the semi-finished drugs I mentioned, partly compensated by a favorable development of trade payables. Operating capex was lower than originally planned since we saw some investments spilling over into this year. In Q4, we recorded a free cash flow of €409 million, following our usual seasonal pattern this Q4 which is, as you know, the strongest cash-generating quarter for us. Overall, we ended the year with a strong cash generation.
Page 16 shows the net debt as well as the corresponding leverage ratios of our business. At the end of December 2021, net financial debt decreased by €312 million to €568 million at year-end 2021, mainly driven by the significant free cash flow generation. The leverage ratio based on net financial debt improved to 0.3 versus 0.6 at the end of ’20. Our net pension liabilities decreased to around €1.2 billion end of December mainly due to higher discount rates, and leverage on industrial net debt decreased substantially to 2.0, significantly down from 3.1 at December ’20. You know, we have two investment-grade ratings right now, and with that, no covenant testing for our new ESG-linked revolving credit facility.
Yes. And with this, back to you, Rob, for the outlook for full year 2022.
Rob Smith
Thanks, Anke.
Let’s move to Page 18 [indiscernible]. Thanks, Anke. Let’s go to our current – look to our outlook on Page 18 for 2022. After a strong performance in ’21, KION expects to show further profitable growth in 2022. We expect an increase in sales, we expect an increase in adjusted EBIT, and we expect an increase in profitability. Although I do must highlight here that there are still some significant uncertainties in the global supply chain around the material availability and also around material pricing and inflation.
So let’s go to that outlook, and let’s walk you through it. Order intake, we expect to come in between €11.6 billion and €12.8 billion. We expect to finish revenue this year between €11 billion and €12 billion of revenue. We expect to be better than €1 billion of adjusted EBIT between €1.010 billion and €1.15 billion of EBIT. Our free cash flow, we expect to come in between €520 million and €640 million.
And our ROCE for the year, we expect to finish between 11% and 12%. On Page 19, you can see my key takeaways. KION is very well-positioned in a dynamic and growing market, and reached record levels last year in order intake and revenue, and I am very excited about leading KION into it’s promising and profitable future here.
We expect very solid financial performance this year despite raw material inflation and supply chain interruptions. Those particularly affected the fourth quarter, and we expect to address these going forward through agile pricing actions and efficiency and productivity improvements across the company. And with our full year 2022 outlook, you see we’re very well on the path to achieving our medium-term targets in 2023 to which I am fully committed.
So I and Rob be delighted to answer questions now, and let’s open the line, operator, please.
Question-and-Answer Session
Operator
[Operator Instructions] One moment for the first question, please. First question is from the line of George Featherstone with Bank of America. Please go ahead.
George Featherstone
Thanks for taking my questions. I’ll go one at a time. First one would be for you, Rob. Just wanted to know what you learned in the first few months of being with the business? Is there anything you particularly like, anything you’d like to change? And do you think there’s a need to change the sort of medium-term strategic aims of the business?
Rob Smith
Thanks for diving in right there, George. I’m – as I said, been working real hard to get to know the business and get to know our customers’ views and get to know an external outside in view, as well as the inside out view. I’ve met over 300 colleagues across the company. I’m very motivated with what I see.
I must say also, I’ve been following KION for many, many years. The industrial truck and service business has played an instrumental role in all of my industrial companies over the last 30. I’ve been following the company itself since the IPO in 2013.
So basically, what I’m seeing really confirms the excitement and the motivation to come here and really underpins we’re in a good position now, and we’ve got very exciting growth potential going forward. You asked where my – I also talked about the KION 2027 strategy. I think it’s a very strong strategy, and it does give us some opportunities for refinement and extension.
A great example of that is adding sustainability right in the middle of our strategy last year. That’s going to be an important part of our focus going forward. I expect to do some work on the multi-brand strategy. It’s a very important element to focus on performance and agility. I talked about agile pricing. I think that the entire commercial and operations need to be very agile in the environment that we’re in, and I expect that’s an important part of our work going forward. KION’s got some exciting core values that underpin our performance and underpin our company.
And with their focus on sustainability and the intersect and three bottom lines of people, profitability – our people, planet and profitable growth, there’s a very strong focus in KION on people and leadership. So I see these as refinements and extensions to a great strategy that’s already underway. We’ve been implementing it for about the last five years, and I expect it puts us very well on track to be that, by far, a global leader in Logistics and Supply Chain Solutions. What’s your second question, George?
George Featherstone
Thank you very much. Yes. And my second question would be on SCS. I just wanted to talk a little bit about or ask you, rather, about the contracts that you have in SCS in terms of the structure and the pricing within them. Are they typically fixed pricing? Or do you have any inflation linkage in there? And also, in terms of the new contracts that you’re signing today, have you got any form of mitigation for what is ultimately quite volatile raw material and supply chain environment?
Anke Groth
I’ll take that up, George. Hi, it’s Anke. I would say we have both types of contracts, so we have fixed contracts, but we have also contracts with pass-on clauses. It depends on the project, it depends on the customer, it depends on the competition and, finally, the negotiations we are conducting.
But we have definitely learned from the year 2021, as we have said. So one of the task is, of course, to increase the share of contracts with pass-through clauses. But again, currently, we do have a variety of contracts, and that is because we have a competitive environment.
George Featherstone
Okay. Then one final question for me, if I may, I’ll squeeze it in. I’d like to say you had quite a significant increase in the number of employees. I think it was around 9% year-on-year in 2021. Just wondered where you’ve been deploying those extra employees, where particularly in the business? And is there a need for you to invest in more capacity given the strong end to the year for 2022?
Anke Groth
Yes, it’s – we have a strong increase in the SCS, of course, as you can imagine. You have seen the increase in order intake. You have seen the increase in revenues we have achieved, so that’s only possible with adding to the workforce. And that will also go on in the year 2022, so it’s a strongly growing business. And on the ITS side, we do have new production facilities.
So we have added a couple of employees in Jinan, in our new facility as well as in Poland. So also on the ITS, we see growth of our employee base based on the new production facilities. And additionally, we have a strongly growing service business, so that is not to underestimate. Also, that depends on service technicians, but still the majority was growth in our SCS business.
George Featherstone
Okay. Thank you very much.
Rob Smith
George, we don’t want to miss putting a plug in for adding quite a few software capabilities and engineers along the way as well, real important part of our growth here.
Operator
Next question is from the line of Sven Weier from UBS. Please go ahead.
Sven Weier
Yes. Thanks for taking my question. Good afternoon, Rob, Good afternoon, Anke. The first question is on the EBIT guidance for 2022. When I take the mid-point of the guidance, I obviously get to a run rate of €270 million. You had €150 million in Q4. So how should we think about the phasing of that? Should we already see a significant improvement in the first quarter given that some of the additional costs you had in Q4 might have been also a bit one-off, the pricing improves of the backlog? And yes, I think that’s – I think the guidance was probably a relief, but I think the issue some people still have is how do you – does it add up on a quarterly basis to get to this run rate? That’s the first one.
Anke Groth
Yes, Sven.
Sven Weier
Hi.
Anke Groth
Hello from my side. Yes, that’s, of course, a very often asked question, as you can imagine, based on what we have seen in Q4 and learned in Q4. Let me first comment on the overall levers, which will support our margin development. So the volume growth, of course, is the most important lever, and that is based on our order book and the additional capacities we have put into place. Secondly, we have higher prices in our order book from the second price increase last year, and the price increase beginning of 2022 will come into force in the second half of the year. Thirdly, we have our structural program savings, as we have pointed out. And fourth – the fourth effect is a very, very strong service business, which we also have seen this year. Now, let’s come to the headwinds.
Yes, we have seen the Q4 effect, but I would say it was very much pronounced with the respective headwinds in Q4. So based – and the order of magnitude cannot continue, so Q4 was with an extraordinary high effect on the ITS side as well as on the SCS side, where we’ll also see in Q1 still some spillovers from 2021 projects with a higher cost base going into 2022. So taking all of that together, I would say Q1 and the first half potentially of the year will still see somewhat a lower margin than the second half of the year, so it is expected to be stronger. So that’s – in a nutshell, what we expect and see for 2022.
Sven Weier
Understood, Anke. Thank you. And I mean, based on the numbers you’ve seen so far in Q1, I guess, there is already also a sequential improvement in Q1, right? So it’s not a totally second half-loaded guidance.
Anke Groth
We will talk about Q1 once we are in Q1 and that’s also – end of April, as you know. But what we can say is that our order pipeline is very well sold on the SCS side. We have mentioned that the truck market is still in very healthy conditions, but there are also still some uncertainties out there. So let’s talk about Q1 once it’s over and finished, and we can give you the number.
Sven Weier
Well explained. Thank you, Anke. And the second point was just following up on some, let’s call it the self-help improvement measures you probably especially have on the truck side. And Rob, you already talked about agile pricing. I guess, maybe also – I mean, I know everybody had supply chain issues last year, but the question is where they may be even more pronounced in the truck business than at other companies, your own cost base. So I was just wondering what – is there also a mentality change needed within the truck organization? Because normally, you always have this one-time price increase in the year, and now this needs to become agile. So how easy do you find to implement that actually?
Rob Smith
Listen. I take my hat off to the performance of our industrial truck and service business worldwide. I think it overcame some very, very significant challenges during the course of last year, and I expect that we continue to overcome challenges during the course of this year. I certainly wouldn’t be talking about any attitude changes.
I’d be talking about continuously working to make our performance better and better and better, and an important element of that will be the agile commercial activities that we’ve talked about. But we’ve got a very strong basis and a strong team, and I think we’ve got a good run in this year.
Sven Weier
And you also mentioned multi-brand. I mean, I think we can now see at your former employer, – AGCO sales in the U.S. are picking up. So what’s the recipe for Linde in the U.S.?
Rob Smith
Sven, the recipe is not to assume that all the elements that made the multi-brand strategy at multi brand strategy at AGCO one-to-one apply here. KION has great brands with a wonderful heritage. I think we could position each of our brands very successfully in the market on a sustainable basis, where each of our brands are able to do sustainable win-win business with their target customers and taking market share from competitors outside of KION.
And I think we could do so by – and by listening to our customers is how we’re starting this. And the whole story is to understand the customers, their ambitions, their needs now, how they see the future and help them realize that future in a fashion that gives them multiple.
As a matter of fact, all the elements of intralogistics and supply chain solutions they need from KION’s brands, and having those brands positioned so we’re covering the entire market as opposed to parts of it. That will be what we’ll be working on. And I expect that over a period of time, we’ll be able to talk about that more, and we’ll be able to show those – show the effect of it.
Operator
Next question is from the line of Sebastian Growe from BNP Paribas Exane.
Sebastian Growe
Hi good afternoon. Anke, Rob. Thanks for taking my questions. The first one is on the supply chain issues and also then related to the guidance. I would like to start on the supply chain with the question simply, what you’re currently observing in that very supply chain? Are things getting better, or say, at least more stable and reliable? It’s a similar comment we just heard from GIA, so I would be interested in your current observations here.
And then related to it, when I think of your guidance and also then the related growth of 7% to 17% for the group on the top line, how much of a risk buffer is embedded here? And the same, obviously, would also apply to the margin. If I made the – briefly on ITS and the Americas, it has been a very strong growth from what is a relatively low base still, I think, for your business. Can you just walk us through the outlook from here, and what the planned measures to regain share in the region are? Thank you.
Rob Smith
Why don’t you and I tag team on that Anke? Let me talk about some of the supply chain difficulties now. Maybe you can address the other portions, and we’ll see how we finish that shaping up. But the – Sebastian, I mean it’s no secret. Everyone is struggling with a very tight supply chain right now, and there are different interruptions and there’s quite a bit of volatility there that was with us last year. I do expect that it continues with us this year, at least the first part of it. The first half, I expect it to be more pronounced than the second, and we’ll be observing this very carefully.
Having said that, KION added €2 billion of sales, which is a very significant amount year-on-year of incremental sales, which means a very significant amount of incremental supply chain performance and parts being received and purchased, and supply chain challenges being overcome in 2021. And our team has been very, very focused on that, and I expect that we’re able to continue to meet these challenges as they come up. And hopefully, they’ll abate a bit in the second half. Anke, would you like to talk to some of the things…?
Anke Groth
Sebastian. Yes, we still are seeing supply chain issues, as Rob has pointed out. Things are not getting better, things are not getting worse. But I would say, it’s on a on a stable – we are facing a stable situation if I compare it with Q4. But if someone supplier can deliver again, then potentially you have another supplier who is getting a little bit into trouble. So it will be a tight management necessary during – especially during the first months of the year here.
Your question was, have we baked in something into our guidance? Yes, of course, we did so. We baked some effects into our guidance. Also with respect to potentially trucks, which cannot be delivered, but more substantially also with respect to material cost headwinds. We have seen a significant number this year affecting us, and we have also taken a considerable amount of headwinds into consideration for the year 2022.
Sebastian Growe
Would you mind putting a number behind that?
Anke Groth
I don’t give you a concrete number, as you know, but I – what I will do is give you the number we have seen in the last year or so. In 2021, we have faced material cost headwinds of roughly €120 million, so that was even a little bit more than our high double-digit to low triple-digit which we estimated, and you’ll see the effect on Q4.
We spoke about spot prices we had to do in order to secure the delivery to our customers, and all that has somehow landed in our material cost headwinds. And for the year 2022, we do not expect that number to go down based on the current market environment. I think that is the guidance we can give you on that one.
Sebastian Growe
Okay. Fair enough.
Anke Groth
It will probably increase, than going down.
Sebastian Growe
That makes sense. And in terms of the volume that you have put on to fragile it this way when it comes to the volumes in the IT&S business. How should we think about that?
Anke Groth
Again Sebastian, I have spoken about 12,000 trucks which we couldn’t deliver this year based on the missing material and the missing parts, which are sitting in inventory and which we are going to wait for it as soon as we do have it. And all in all, the order of magnitude will hold true also for 2022 plus and minuses, so don’t name me down here on an exact number for the guidance. It’s a full year guidance, as you know. We are putting ranges around – in order to not give one exact number and then might be proven to be wrong. So that’s also with respect to trucks and material cost segments.
Sebastian Growe
Yes. Yes, true. And on the Americas?
Anke Groth
Rob, do you want to speak about our positioning and our development in North America? Sebastian, can you repeat your question? It was how we develop further or intend to grow our position for the North America on the truck side. Wasn’t that your question?
Sebastian Growe
Yes. Sure. I think it has been obviously going on for ages, if you that had in the past double-digit market shares in the region with that obviously also pretty high volumes. And now you’re pretty low market shares of – let say [indiscernible] and we have seen, obviously, in quarter four, a very, very strong development. It’s always difficult to actually quarter, but if you could just help us with understanding what has driven that phenomenal increase and how we should think about the further trajectory from here? That would be helpful.
Rob Smith
Yes, that’s an exciting story, Sebastian. We put a team in place there that has worked very hard over the last 1.5 years to capitalize on some good decisions that we did make in the past year, too. I’m quite conscious that the story all the way back to 1977. And where we are now, the 2021 performance was quite exciting.
We took our revenues up very, very significantly. If you want to talk about units in the market, we went from probably about 4,000 units per year on average to an order entry last year of 10,000. There was a lot of work done. It’s an interesting time in the North American market right now.
The market is growing very strongly. It was a record year in North America last year. And some of the competition is facing some interesting challenges, and we see it as an opportunity for our business there. And I think the 2021 order intake of 10,000 demonstrates the impact of working on the key accounts.
And part of the key accounts is benefiting from the very strong teamwork between our Industrial Truck and Services business and our Supply Chain Solutions business in North America. Some of the key accounts we were able to enter for the truck business came from the Supply Chain Solutions business.
In addition, there’s some real – very good work on getting some substantially stronger dealers into our network. We’ve been working on a network transformation, going from smaller and less performing dealers to larger and financially strong and very focused dealers for KION there, and have seen some very substantial increases with the dealers that just came in last year, making a big difference in the order entry.
So we see it as a very good starting point, but watch that space, because our expectation is to go get a very strong share there. We expect to be able to demonstrate that in the times to come. So thanks for picking up on that.
We’re focused on that. The team is working hard on it. We got the right team in place. We’ve got exciting dealer network improvements. We’ve got products going in that are right to the market, especially focusing on the warehouse segment and the warehousing segment. I think that will be a good boost for us.
And look, watch this space and we keep talking about it. And we’re excited about the cross-selling capabilities that Industrial Truck and Services and Supply Chain Solutions are demonstrating and have in their plans, especially around the key accounts that we talked about.
Operator
Next question is from the line of Daniel Gleim from Stifel. Please go ahead.
Daniel Gleim
Yes. Good afternoon, Anke, Rob. Thank you for taking my questions. Actually, I have two of them. First one is for Rob. I’m wondering whether we will see a Capital Markets Day at the end of this fiscal, and whether you will present 2027 guidance or mid-term targets at that point? That is question number one.
Rob Smith
Well, I expect you do have a Capital Markets Day at the right point in time, Daniel, and we’ll be telling you exciting things about what we’ve already done and what we have in mind. There will be no reversal on the 2027 strategy, so I think we’re very well positioned with our 2027 strategy, and I talked about an ability to refine it and extend it.
And so I don’t see an immediately pressing need for a Capital Markets Day in the short term, but at the right moment in time, we’ll be coming and sharing some further exciting future plans.
Daniel Gleim
Very clear. Thank you very much. The second one is for Anke. I value your opinion how to calculate true underlying margin for the SCS business in 2021, given what we heard so far. I think you mentioned €60 million in additional costs for the full year.
Is that the correct number? And secondly, I wonder whether simply adding back those €60 million to the EBIT line gets the job done? Or would you also point to lost sales that we would need to add back to?
Anke Groth
No, there are no lost sales you have to add back to. Underlying margin, yes, I would say you have seen the margin development in the first three quarters of the year, and we were hit in the fourth quarter by additional costs, as we have pointed out, in order to serve the customers.
In order to maintain milestones, we really had to face higher labor and installation costs, which we haven’t seen in the three quarters before. I would say that you also can look at our mid-term targets where we have given the guidance for sales of 12% to 14% profitability, so that gives you a good hint towards the profitability SCS is able to achieve.
Daniel Gleim
Yes. This is where I was heading with that question. And maybe pushing my luck a little bit, when we think about the €60 million in 2021, could we roughly scale what the €60 million will look like in 2022? Is it half of that or 1/3? How should we think about that number in 2022 from a zero comparison basis, so not incremental but €60 million in 2021 compared to X in 2022?
Anke Groth
Yes, you can try our luck and maybe I’ll give you a little bit more. It gives you a more complete answer with the €60 million. I think you misunderstood it. So the €60 million we said, it’s more than half of the full year impact, so you can easily double that up for the full year impact.
But I would expect that to go down in the year 2022. As we said, it was really – we were hit hard in Q4 on the SCS side with respect to cost increases, particular, really, for some sites of particular customers where we wanted to keep the schedule, where we also have not negotiated a postponement of certain milestone so that has really hit us hard in the fourth quarter. And I see some spillover effect, as I said, from 2021 projects going into 2022, where we will also see a higher cost burden. But I would not expect to see that in the full year, so to say.
Operator
Next question is from the line of Jorge Gonzalez Sadornil from Hauck & Aufhauser Investment Banking. Please go ahead.
Jorge Gonzalez Sadornil
Hello. Thank you, Rob and Anke, for taking my questions. My first question will be around your expectations for the order intake evolution of Supply Chain Solutions in 2022. I was interested to know if you see a softer evolution for the e-commerce vertical, taking into account that the post-COVID economy scenario that we currently have is maybe a little bit worse for e-commerce after the rapid growth. And if you see other verticals growing faster this year, it would be interesting to have some feedback about that.
And my second question will be around the mix for industrial truck orders in 2021. You show us that the volume growth grew 51%, but if I remember well, the orders in euros grew by 40-something percent. So, I was wondering how the mix has changed? If this is going to revert at some point, and if that is going to mean also better margins maybe in the future? If – when the mix change not to potentially bigger probably or – well, maybe you can tell me a little bit more on this, please?
Anke Groth
Okay. Let’s have a trial mill on your first question before we deep dive into the next one. E-commerce is still a very, very strong vertical of ours and a strong growing vertical. So e-commerce and what we call general merchandise, you can also somehow put that together, is one of the fastest – fast, strong, growing verticals, then followed by grocery and food and beverage. So there – if you take not only pure-play e-commerce but also look at general merchandise, who have to go into online channel fulfillment, you’ll see a very strong growth of that one.
If we go into the mix question, I would say, so warehouse is slightly down. The overall trend, nevertheless, remains that the warehouse is increasing and that has a negative effect on the value. Not on the numbers and units of trucks, but on the value, as the warehouse trucks are smaller trucks and have a lower average sales price. Yes. And maybe if we have not hit your question correctly, then please repeat it.
Jorge Gonzalez Sadornil
No, that’s perfect, yes. I was wondering if it is because you are selling more small for list. And well, from – from now on, this is – maybe there is not going to be this – the correlation between amount of volumes and the price.
Anke Groth
Yes, there is some – with the increase in share of warehouse trucks, a little bit of decoupling absolutely. So you know that we quite often talked about the statistics and that also the small hand pallet trucks getting a motor are now part of the statistics and adding to the units. But from the overall pricing position, these are rather very low-value trucks and all of that has – yes, goes into the numbers.
Operator
[Operator Instructions] Next question is from the line of Philippe Lorrain from Berenberg. Please go ahead.
Philippe Lorrain
Good afternoon. Thanks for taking my question. That’s going to be more on the working capital. I was wondering a little bit, how we should think about the net working capital in 2022. Inventories went up a lot in 2021 driven by all positions, and that was especially the case in work in progress.
Payables went up and helped a bit, but looking at the project business, the contract balance was relatively stable because new orders and pre-payments financed to contract asset expansion. So is there anything particular to expect on the contract balance for 2022, due to the advancement of project execution? And also on the remaining working capital position, so perhaps, probably more like inventory? That’s the question.
Anke Groth
Hi. Phillipe. Yes, inventories. I think, I said also in the last call that inventory will go down. Unfortunately, I was proven wrong. We see parts not arriving and, therefore, ending up with a high number of unfinished trucks in inventory. But yes, I would expect that to go down during the course of this year and therefore, giving – giving a relief there.
Contract liabilities, I would expect to go rather up, so inventory down contract liabilities up. And let me make one remark. If we look at SCS, at year-end, the net working capital was again negative. So you know that we have spoken about a quite unusual pattern during the year 2021, but at year-end, it was negative again. So SCS is contributing negatively to our working capital. And that is also expected, of course, for the year 2022.
Philippe Lorrain
Yes, that’s a fair point. So you said like contract liability is going up, but what about the contract assets? Would that go up as well like in line with that so that we still keep like a contract balance that is perhaps relatively stable? Or would there be like a real shift observed in the contract balance?
Anke Groth
I would rather expect a positive contract balance.
Philippe Lorrain
So more growth in the assets then, how do you understand the positive?
Anke Groth
No, no. Rather on the stable level.
Philippe Lorrain
Okay. Okay. Perfect. And in – just in terms of the guidance, so that’s basically what you’ve baked into your free cash flow guidance, I guess, no?
Anke Groth
Yes. So everything we know, we baked into the guidance.
Philippe Lorrain
Okay. And these bigger fluctuations that you’ve seen especially on the contract balance in the project business, is that leading you to change your view perhaps on the target, let’s say, kind of net financial leverage for the business? Do you believe perhaps, that having a net financial leverage that doesn’t go up too quickly is perhaps the right thing to do because of the potential working capital fluctuation?
Anke Groth
I’m not 100% sure, I got your question. Nevertheless, let me try and answer. So if we look at our net financial position, you have seen that it came down very nicely based on our cash flow generation. We do not have too many maturities coming up this year. There is one-off roughly €90 million promissory notes which we intend to pay back.
Apart from that, yes, in Q1, we will see needs. And we already do have commercial paper out and so on in order to finance working capital. And you know that in the first quarter, we normally are negative from a cash perspective. So we have to finance working capital in the first quarter. But that is following the usual pattern, we do see in a normal year.
Philippe Lorrain
Yes. Sure. Okay. And perhaps, I’m going to try again like on the topic of cost and so on, but just to understand a bit. So last year, you increased prices in the trucks twice, once in July and one towards what’s year end, that’s going to be effective like in later this year.
If cost inflation continues to be a topic and there is no normalization, let’s say, how should we or how have you thought about the guidance on the profit line? And should we expect as well further price increases perhaps on scheduled over the course of the year, and hence, the delay again in building up the margin?
Anke Groth
Rob, will talk about the agility in pricing. And yes, we have two price increases last year. The second one is now visible in the order backlog. And then, we have being more pronounced one at the beginning of this year, which will come into force, then with the orders more towards the second half of the year, more towards autumn, but we also will be much more agile throughout the course of this year, and I hand over to Rob to comment on that one.
Rob Smith
Yes. I think that you’re talking about one element of pricing. I think you’re primarily discussing in previous times one or twice a year uplifts on the list price of new trucks. And the list price of new trucks is one element of many elements of agile pricing. An agile pricing means you can work on multiple elements and you can do that at quite a much interesting – more interesting frequency than once or twice a year.
Agility means one can be working on that at any point in time as appropriate to get the balance right to be handling the productivity and material costs and the inflations and the energy costs with productivity in the operations and the supply chain, but also frequent adjustments and agile adjustments on the pricing. So that’s what I mean by agile pricing, and we’ll be seeing that as we go forward.
Philippe Lorrain
Okay. So you mean like as well as prices in the aftermarket, I guess, because that’s the one that you can probably adjust at discretion now?
Rob Smith
That’s one element I’m addressing. I’m addressing basically everything besides what you were talking about with primarily just new prices – new list prices on new trucks. And there’s many more elements commercially that can be addressed in the agile pricing fashion.
Philippe Lorrain
Sure. Okay. And perhaps, like, last topic because you mentioned the energy costs. Would you mind giving us like a little bit of a hint by how much you’re exposed to rise energy costs, perhaps electricity versus gas? We have some data on your megawatt-hour consumption from the sustainability report, but putting a euro median amount behind that could be helpful.
Anke Groth
Yes, we would expect that we are rising by a low double-digit million euro impact this year. So it’s not the highest cost for us, to be honest, Phillippe. But nevertheless, it’s a headwind additionally, which we take into consideration.
Philippe Lorrain
Perfect. Thanks very much. I’m back in the queue.
Operator
In the interest of time, we have to stop the Q&A right now, and I would like to hand back to Rob Smith for closing comments. Please go ahead.
Rob Smith
Thank you, Stuart, and thank you very much for joining our call today. We’re really excited about the 2021 performance and results that we described earlier today, record elements in that. And we’re very focused on delivering our 2022 prognosis as we’ve shared in route to delivering the 2023 midterm objectives that I and our KION team stand fully behind. I’m looking forward to seeing many of you when we’re out and about in the next couple of weeks in person, and look forward to picking up these conversations then.
Thanks for coming, and thanks for your time and your very good questions. Bye-bye.
Operator
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephones. Thank you for joining, and have a pleasant day. Good-bye.
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