Dear shareholders,

Dr John Feldmann
Chairman

2017 was another successful year for KION GROUP AG. It was dominated by the integration of automation and supply chain optimisation specialist Dematic, which had been acquired the previous year. The Supervisory Board of KION GROUP AG provided extensive advice and support on this process. The acquisition is bringing about sustained and significant changes to the business model of KION GROUP AG and its market positioning, transforming the Company into a provider of end-to-end solutions for automated intralogistics. Of particular importance in this context are innovations for tackling the future challenges of Industry 4.0 and for integrating industrial trucks into existing intralogistics solutions in order to increase the efficiency of customers’ processes, particularly with regard to warehouse system logistics, warehouse technology and order picking. Today, the KION Group is one of only a few companies able to supply all intralogistics products, from hand-operated warehouse trucks to fully automated warehouses, from a single source. The first integrated customer projects incorporating products both from the traditional material handling business and from the Supply Chain Solutions segment were initiated over the course of 2017.

Alongside the integration of the business, the refinancing of the Dematic acquisition was successfully completed in May of last year when a second capital increase was carried out. The Company was able to secure highly attractive refinancing terms by utilising the currently favourable environment for borrowing and by capitalising on the strong interest in KION GROUP AG among equity investors.

Another focus of the Supervisory Board’s work was its involvement in refining the strategy for the KION Group following the acquisition of Dematic. The Company produced scenarios for the changes that will occur in relation to its markets, technologies, customers and competitors over the next ten years. These provided the foundations for developing the “KION 2027” strategy. Particular attention is given to the requirements in the various customer segments arising from the automation of intralogistics and related services, which are based on unlocking the full potential of the data that is collected. The aspects summarised under the heading ‘Industry 4.0’ – automation of processes in order to provide greater benefits for customers as well as brand-new digital services and solutions to problems – will be extremely important to the markets that will be relevant to the Company in the future. On this basis, the Executive Board and Supervisory Board met on several occasions to discuss and reach agreement on guidelines and principles for updating the Group’s strategy, the Group’s business aspirations and future positioning and the resulting action plans and objectives. Having deliberated on the “KION 2027” strategy extensively, the Supervisory Board gave its approval at its meeting on 27 November 2017.

In this context, the Supervisory Board examined developments in the industrial truck business on the basis of strategic parameters such as customer satisfaction, market trends and new technologies. It also held in-depth discussions on innovation and operational excellence in this area of the Company’s business. The Supervisory Board talked at length with the Executive Board about the strategic direction of this business and about operational matters, including further capital expenditure. The Supervisory Board is supporting the Executive Board in broadening the basis for the Company’s future through capital expenditure in these areas.

Last but not least, the Company needs to use the market’s current strong growth to further optimise internal processes and strengthen its resilience in periods of economic weakness.

Monitoring and advisory role in dialogue with the Executive Board

Last year, the Supervisory Board continued to fulfil the tasks and responsibilities imposed on it by the law, the Company’s articles of incorporation and the German Corporate Governance Code with dedication and diligence.

In addition to the focus areas outlined above, the Supervisory Board, as in previous years, discussed numerous other issues and transactions requiring consent, made necessary decisions, advised the Executive Board on all significant matters relating to managing the Company and monitored the Executive Board’s running of the Company’s business. The Supervisory Board was fully involved in major decisions affecting the Company from an early stage. The Executive Board always notified the Supervisory Board of every significant aspect of the decisions to be made promptly and in detail, providing both written and oral reports. Between meetings of the Supervisory Board and between those of its committees, the chairman of the Supervisory Board, who is also chairman of the Executive Committee, remained in close contact at all times with the Executive Board, particularly the Chief Executive Officer and the Chief Financial Officer. There was also regular contact between the chairman of the Audit Committee and both the Chief Financial Officer and those responsible for internal audit and compliance in the Company. This ensured that the Supervisory Board was continually and promptly updated on the Company’s performance and any significant transactions, even between meetings. The Supervisory Board satisfied itself at all times that the Company was being managed lawfully and diligently by the Executive Board. Giving the specified period of notice, the Executive Board presented to the Supervisory Board transactions that, according to the law, the Company’s articles of incorporation or the rules of procedure for the Executive Board of KION GROUP AG, require the Supervisory Board’s consent so that it could adopt resolutions. The Supervisory Board examined closely the resolutions proposed by the Executive Board and deliberated on them before adopting them.

Corporate governance matters

Besides the regular corporate governance matters, the issues dealt with by the Supervisory Board during the reporting year included the evolution of the corporate culture and new statutory requirements, as well as recommendations and suggestions in the German Corporate Governance Code.

In the first half of 2017, the Company conducted another survey of managers on the leadership culture. Building on the data collected in 2015, the Organizational Health Index (OHI) was ascertained. This time, the managers at Dematic were also included in the study. A comparison of the results from the previous survey shows where the Company currently stands in terms of its leadership culture, what progress has been made and which individual topics require more work. Overall, the data showed an encouraging trend with regard to how the surveyed employees identify with the Company’s goals and their positive perception of the leadership culture. In the latest updates to the remuneration system for the Executive Board, the Supervisory Board defined further improvements to the OHI as one of the parameters for setting the long-term variable remuneration.

The Executive Board and Supervisory Board believe that clearly and unambiguously formulated principles and values that are communicated and put into practice in the Company at all management levels are vital for the Company’s sustained success. The Supervisory Board is taking a keen interest in the related measures and processes.

Another focus of corporate governance work was the report on non-financial key performance indicators, which was produced voluntarily for the first time in the year under review. In this sustainability report, the Company provided information on the processes that have been put in place in the area of sustainability management as well as those currently being implemented. This is the first time that the Company has combined all of this information in one document. In the opinion of the Supervisory Board, business management focused on sustainability provides a ‘licence to operate’, i.e. society’s acceptance of a company and its business model. The Supervisory Board received information on the preparations for this report during several meetings, at which it also discussed the matter with the Executive Board and the relevant managers within the Company. In 2018, the Company will again produce such a report for 2017, which will have to be audited by the Supervisory Board. Consulting an external auditor, the Supervisory Board therefore went through, and discussed, the necessary processes last year on the basis of the voluntary report.

The Supervisory Board also scrutinised the new requirements in the German Corporate Governance Code regarding skills profiles for supervisory boards. Led by the chairman of the Supervisory Board and supported by external advisors and a manager from the legal department, the Supervisory Board created a profile containing 17 skills areas in the second half of the year and also decided on the content and format of the related reporting. The Executive Committee provided advice and support during the preparations and submitted a recommendation. The draft and the final proposal for the skills model were deliberated upon extensively by the Supervisory Board during several meetings. The Supervisory Board was fully aware that, with 17 skills areas, the KION skills profile is very comprehensive and at the upper end of the scale compared with profiles produced by other companies. Nevertheless, the Supervisory Board firmly believes that the combination of knowledge and experience in the various skills areas that are important to the Company should be, as they have been in the past, an important criterion when selecting new Supervisory Board members in future. The Supervisory Board’s skills profile has been incorporated into the Company’s diversity concept.

In compliance with the statutory requirements, the updated remuneration system for the Executive Board, which has applied since 1 January 2017, was presented to the Annual General Meeting for approval in May 2017, where it was confirmed by a large majority. Similarly, the revised remuneration system for the Supervisory Board was approved with an overwhelming majority at the Annual General Meeting.

The topics on which the Executive Board and individual managers in the Company regularly gave reports during the meetings of the Supervisory Board and its committees were the internal control system, risk management, internal audit and compliance in the Group. The focus was on the processes in place as well as on the content of the individual reports. As a result of these reports, the Supervisory Board was able to gain an impression of the existing processes and to examine and comment on proposed developments in these areas. It concluded that the systems and mechanisms at KION GROUP AG are adequate, suitable and effective.

The Supervisory Board and Audit Committee received information on a number of occasions from those responsible within the Company and from the independent auditors about changes to the auditors’ opinion on the audit of the financial statements.

At its meeting on 13 December 2017, the Supervisory Board held its final discussion on the KION Group’s compliance with the new recommendations of the German Corporate Governance Code, which was updated in 2017. The Supervisory Board issued an unchanged comply-or-explain statement pursuant to section 161 of the German Stock Corporation Act (AktG). It has been made permanently available to the public on the KION GROUP AG website. KION GROUP AG complies with all but one of the recommendations in the German Corporate Governance Code (version dated 7 February 2017) and intends to continue to do so in future. As in the previous year, the only recommendation of the Code with which KION GROUP AG does not comply is the recommendation in section 3.8 (3) of the Code for an excess in the D&O insurance policies for members of the Supervisory Board. KION GROUP AG’s articles of incorporation do not provide for this type of excess. The Company believes that such an excess is not typical at international level and would therefore make it considerably more difficult to find independent candidates, in particular candidates from outside Germany.

In accordance with section 3.10 of the German Corporate Governance Code, the Executive Board and the Supervisory Board provide a detailed report on corporate governance at KION GROUP AG in the corporate governance report. This is combined with the declaration on corporate governance pursuant to sections 289f and 315d of the German Commercial Code (HGB) and can be found in this annual report and on the KION GROUP AG website at.

Work of the committees

In the run-up to the capital increase carried out in May, the Supervisory Board of KION GROUP AG established an ad-hoc committee to ensure the Company was able to act and the Supervisory Board was able to adopt the necessary resolutions at short notice. To the extent permitted by law, the Supervisory Board’s decision-making powers were delegated to the committee. The committee was made up of four employee representatives and four shareholder representatives. The Executive Board of KION GROUP AG kept the committee updated on the progress of the capital increase. The committee was dissolved on 31 December 2017. Since the last report, there have not been any other material changes to the established committees.

KION GROUP AG’s Supervisory Board had four standing committees last year: the Mediation Committee pursuant to section 27 (3) of the German Codetermination Act (MitbestG), the Executive Committee, the Audit Committee and the Nomination Committee. These committees, but primarily the Executive Committee, prepare the matters to be discussed at the meetings of the full Supervisory Board. In individual cases, the Supervisory Board’s decision-making powers were delegated to committees within the scope permitted by law. The chairman of the Supervisory Board is also chairman of all committees except the Audit Committee. The chairmen of the committees each report regularly to the full Supervisory Board on their committee’s deliberations. In addition, the minutes of the committee meetings are distributed to the other members of the Supervisory Board for information purposes once the committee members have approved them. This ensures that the Supervisory Board as a whole is always fully informed about the committees’ deliberations.

In 2017, the Supervisory Board and its committees dealt with the matters at hand and made the necessary decisions at a total of 20 meetings. These consisted of nine meetings of the full Supervisory Board, five of the Audit Committee, four of the Executive Committee and two of the ad-hoc committee. The Nomination Committee and Mediation Committee did not meet in the reporting period. There were also several informal conference calls for the purpose of providing the members of the Supervisory Board or the relevant committees with advance information. In 2017, all members of the Supervisory Board attended all Supervisory Board meetings and the meetings of the respective committees of which they were members apart from in the following cases:

There were six Supervisory Board meetings at each of which one member sent apologies and two committee meetings at each of which one member sent apologies. Supervisory Board member Tan Xuguang participated in fewer than half of all Supervisory Board meetings.

Engagement of the auditors; audit of the separate and consolidated financial statements

The Company’s independent auditors, Deloitte & Touche GmbH Wirtschaftsprüfungsgesellschaft (Deloitte), Munich, Frankfurt am Main branch office, audited the separate financial statements, the consolidated financial statements and the combined management report for KION GROUP AG and the Group for the year ended 31 December 2017 following their engagement by the Annual General Meeting on 11 May 2017. The corresponding proposal to the Annual General Meeting had been prepared in meetings held between the chairman of the Audit Committee and the auditors. They concerned the suitability and independence of the auditors and the fees. The proposal was discussed at the Audit Committee’s meeting on 22 February 2017 and committee members were given the opportunity to speak to the auditors in person.

The key audit issues were discussed and set out accordingly at the Audit Committee’s meeting on 25 July 2017. The auditors were appointed by the chairman of the Supervisory Board on 27 November 2017.

The auditors submitted their report and the documents relating to the 2017 financial statements to the members of the Audit Committee on 12 February 2018 and to the members of the Supervisory Board on 21 February 2018.

The report was discussed in depth at the Audit Committee meeting on 21 February 2018 and at the full Supervisory Board meeting on 28 February 2018, both of which were attended by the auditors. At both of those meetings, the auditors reported in detail on the main findings of the audit and provided comprehensive answers to all questions asked by members of the Audit Committee and Supervisory Board.

The auditors issued an unqualified opinion for the separate financial statements for the year ended 31 December 2017, the consolidated financial statements and the group management report, which was combined with the Company’s management report, for the year ended 31 December 2017 on 21 February 2018. Having itself scrutinised the Company’s separate financial statements, consolidated financial statements and combined management report for the year ended 31 December 2017, the Audit Committee then made a recommendation to the full Supervisory Board, which the chairman of the Audit Committee explained in more detail in his report to the meeting of the full Supervisory Board. On this basis and taking the auditors’ opinion into consideration, the Supervisory Board held a further discussion of its own and then approved the results of the Audit Committee’s review at its meeting on 28 February 2018.

Based on the final outcome of its own review, the Supervisory Board did not raise any objections. The Supervisory Board approved the Company’s separate financial statements and consolidated financial statements for the year ended 31 December 2017 prepared by the Executive Board, thereby adopting the annual financial statements.

At its meeting on 28 February 2018, the Supervisory Board also discussed and approved the proposal made by the Executive Board that the distributable profit of KION GROUP AG be appropriated for the payment of a dividend of €0.99 per no-par-value share. In doing so, the Supervisory Board took account of the Company’s financial situation and performance, its medium-term financial and capital-expenditure planning and the interests of the shareholders. The Supervisory Board believes the proposed dividend is appropriate.

Non-financial declaration

After consulting the Supervisory Board, the Company commissioned an auditor to carry out an external review of the content of the non-financial Group declaration pursuant to section 315b HGB. The Supervisory Board will take account of the auditor’s assessment in its own review of the non-financial Group declaration and in the resolution that it adopts. The sustainability report and the non-financial declaration will be published on the Company’s website by 30 April 2018.

Relationships with affiliated entities (dependency)

The Supervisory Board also examined the report concerning relationships with affiliated entities (dependency report), which the Executive Board signed off on 21 February 2018. The auditors reviewed this report, prepared an auditors’ report on it and issued the following opinion based on their audit, which they completed without identifying any deficiencies on 21 February 2018:

Based on our audit and assessment in accordance with professional standards, we confirm that

1. the facts in the report are stated accurately,
2. the consideration given by the entity for the transactions specified in the report was not unreasonably high,
3. there are no circumstances in respect of the measures specified in the report that would justify an opinion materially different from the opinion of the Executive Board.

The dependency report and the auditors’ report about it were submitted to all the members of the Supervisory Board in good time and were discussed in detail in the presence of the auditors at the Supervisory Board meeting on 28 February 2018. The auditors reported on the main findings of their audit. The Supervisory Board agreed with the findings of the audit. Based on the final outcome of its own review, the Supervisory Board did not raise any objections to the Executive Board’s declaration at the end of the report concerning relationships with affiliated entities.

Personnel changes on the Executive Board and Supervisory Board

There were no changes on the Executive Board of KION GROUP AG last year. However, at the request of the Chief Financial Officer, Dr Toepfer, the Supervisory Board reached a mutual agreement on 27 November 2017 on the termination of his appointment as a member of the Executive Board with effect from the end of 31 March 2018.

There were several changes on the Supervisory Board in 2017:

The employee representatives Mr Brandt and Mr Hartig did not stand for re-election when the employees voted for their representatives on the Supervisory Board in spring 2017. At this election of employee representatives, all of the other employee representatives were re-elected to the Supervisory Board. Dr Frank Schepp was elected to the Supervisory Board to replace Mr Brandt as an executive representative and Mr Stefan Casper to replace Mr Hartig as an employee representative, in both cases with effect from 11 May 2017. The Supervisory Board would like to thank Mr Brandt and Mr Hartig for the great dedication with which they always carried out their work in the interests of the Company.

The details of this report were discussed thoroughly at the Supervisory Board meeting on 28 February 2018 when it was adopted.

My colleagues on the Supervisory Board and I would like to thank the members of the Executive Board and the employees of KION GROUP AG and its Group companies in Germany and abroad for their commitment and outstanding achievements in 2017.

Dr John Feldmann
Chairman

Basic earnings per share is calculated by dividing the net income (loss) accruing to the KION GROUP AG shareholders by the weighted average number of shares outstanding during the reporting period (2017: 114,328,999 no-par-value shares; 2016: 103,241,256 no-par-value shares). The net income accruing to the shareholders of KION GROUP AG was €424.8 million (2016: €245.5 million); information about determining the net income (loss) accruing to the KION GROUP AG shareholders can be found in the consolidated income statement. Basic earnings per share for the reporting period came to €3.72 (2016: €2.38). The 160,829 no-par-value treasury shares repurchased by KION GROUP AG were not included in this figure as at 31 December 2017 (31 December 2016: 164,486).

Diluted earnings per share is calculated by adding the potential dilutive no-par-value shares that employees can obtain for free under the employee share option programme (KEEP) to the weighted average number of shares outstanding during the reporting period. The calculation of diluted earnings per share was based on a weighted average of 114,356,934 no-par-value shares issued (2016: 103,278,542 no-par-value shares). Diluted earnings per share for the reporting period came to €3.71 (2016: €2.38).

To KION GROUP AG, Wiesbaden/Germany

Report on the audit of the consolidated financial statements and the combined management report

Audit opinions

We have audited the consolidated financial statements of KION GROUP AG, Wiesbaden/Germany, and its subsidiaries (Group) – which comprise the consolidated balance sheet as at 31 December 2017, the group income statement, the consolidated statement of comprehensive income, the consolidated statement of cash flows and the consolidated statement of changes in equity for the business year from 1 January to 31 December 2017 as well as the notes to the consolidated financial statements including a summary of significant accounting methods. In addition, we have audited the combined management report on the entity and the Group of KION GROUP AG, Wiesbaden/Germany, for the business year from 1 January to 31 December 2017. In conformity with German legal regulations we have not audited the parts of the combined management report specified in the Chapter “Other information” of our independent auditors’ report with regard to their content.

In our opinion, based on our knowledge obtained during the audit

• the accompanying consolidated financial statements in all material respects comply with the International Financial Reporting Standards (IFRS), as adopted by the EU, and the additional requirements of German commercial law pursuant to Sec. 315e (1) German Commercial Code (HGB) and give a true and fair view of the net assets and financial position in accordance with German principles of proper accounting as at 31 December 2017 as well as its results of operations for the business year from 1 January to 31 December 2017, and
• the accompanying combined management report as a whole provides a suitable view of the Group’s position. In all material respects, this combined management report is consistent with the consolidated financial statements, complies with the German statutory requirements and suitably presents the opportunities and risks of future development. Our audit opinion on the combined management report does not extend to the content of the parts of the combined management report detailed in the Chapter “Other information”.

Pursuant to Sec. 322 (3) Sentence 1 of the German Commercial Code (HGB), we state that our audit has not led to any reservations with respect to the propriety of the consolidated financial statements and the combined management report.

Basis for audit opinions

We conducted our audit of the consolidated financial statements and combined management report in accordance with Sec. 317 of the German Commercial Code (HGB) and the EU Audit Regulation (No. 537/2014, hereinafter “EU Audit Regulation”), and German generally accepted standards for the audit of consolidated financial statements promulgated by the Institute of Public Auditors in Germany [Institut der Wirtschaftsprüfer] (IDW). Our responsibilities under these requirements and principles are further described in the Chapter “Auditors’ responsibility for the audit of the consolidated financial statements and the combined management report” of our independent auditors’ report. We are independent of the group entities in accordance with European and German commercial law and rules of professional conduct and we have fulfilled our other ethical responsibilities applicable in Germany in accordance with these requirements. In addition, pursuant to Article 10 (2) Lit. f) of the EU Audit Regulation, we declare that we have not provided any prohibited non-audit services pursuant to Article 5 (1) of the EU Audit Regulation. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions on the consolidated financial statements and the combined management report.

Key audit matters in the audit of the consolidated financial statements

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements for the business year from 1 January to 31 December 2017. These matters were addressed in the context of our audit of the consolidated financial statements as a whole and in forming our audit opinion thereon but we do not provide a separate opinion on these matters.

In the following we present the key audit matters in our view:

1) Recoverability of the goodwill and brand names with indefinite useful life

2) Recognition of leases as regards sales

3) Realisation of revenue regarding construction contracts in the Supply Chain Solutions business segment

Our presentation of these key audit matters has been structured as follows:

a) Description (including reference to corresponding information within the consolidated financial statements)

b) Auditors’ response

1) Recoverability of the goodwill and brand names with indefinite useful life

a. As at 31 December 2017, the goodwill and brand names with indefinite useful life in the consolidated financial statements amount to mEUR 3,382.5 (30.1% of total assets) and mEUR 943.7 (8.4% of total assets), respectively. The goodwill and brand names with indefinite useful life are tested by Management for impairment each year. This impairment test is conducted regardless of whether there are external or internal indicators for an impairment. The impairment test is conducted at the level of the operating entities as cash-generating units by determining the corresponding realisable amount and comparing that realisable amount with the corresponding carrying value. The realisable amount is determined using the discounted cash flow method on the basis of KION GROUP AG’s budget consisting of the operative three-years plan (budget 2018 and medium-term budget 2019 to 2020) as well as of a projection concerning two further years, which is adjusted using assumptions about long-term growth rates. The result of this measurement highly depends on the Legal representative’s estimation of the forecast cash flows of the corresponding operating entities as well as the discount rate used (weighted average cost of capital – WAAC) and, therefore, is subject to great uncertainty. Therefore and due to the underlying complexity of the valuation models applied, this matter was of particular significance in the scope of our audit.

The entity’s information on the goodwill and brand names with indefinite useful life is provided in Note [7] and [17] of the consolidated financial statements.

b. During our audit, we, among other things, obtained an understanding of the method applied during the impairment test, the budget process of KION as well as the determination of the cashgenerating units and assessed the determination of the WACC. In this context, we considered the Group’s adherence to the budget process over the past years.

Regarding the impairment test, we audited the appropriateness of the expected future cash flows mainly by comparing the information with the operative budget (2018) approved by the Supervisory Board and with the medium-term budget (2019 to 2020) approved by the Legal representatives and by examining the key valuation assumptions and parameters for plausibility based on expectations about macroeconomic and industry-specific trends. As a significant portion of the value in use has been determined based on projected cash flows for the period following the five-year budget (period of perpetuity), we also audited in particular the sustained growth rate applied for the period of perpetuity based on industry-specific market expectations. With respect to the evaluation of the discount rate, we consulted internal valuation specialists, who convinced themselves of the appropriateness of the discount rate used based on market comparisons. Due to the great significance of the goodwill and the brand names with indefinite useful life in the consolidated financial statements, we finally conducted sensitivity analyses with regard to both the growth expectations of the future cash flows from the operating entities and the applied discount rate.

2) Recognition of leases as regards sales

a. To a great extent, KION uses leases as a sales instrument in the business segment Industrial Trucks & Services. The corresponding agreements comprise contracts, under which the KION entities qualify as contract parties, and those, under which the lease object was sold to external financial partners. The following three contract types are primarily used:

• Single Step Lease: The lease object is directly leased to the consumer.
• Sale and Leaseback Sublease: The lease object is sold to a financial partner and subsequently leased back. At the same time, the lease object is also rented out under a sublease contract to the consumer.
• Indirect consumer financing: The (lease) object is sold to a financial partner, who rents it out to a consumer.

As at 31 December 2017, the carrying value of the lease receivables and of the lease assets amounts to mEUR 875.8 (finance leases) (7.8% of total assets) and mEUR 1,173.7 (operating leases and indirect consumer financing, which does not meet the requirements under IAS 18) (10.5% of total assets), respectively. Single-step leases and sale-and-leaseback sublease contract types are classified as finance leases or operating leases within the meaning of IAS 17. Revenue realisation with respect to the indirect consumer financing is governed by IAS 18 and, consequently, depends on whether the material benefits and risks are transferred to the financial partner. If the requirements for realisation of revenue according to IAS 18 are not met, the purchase price paid by the financing party is recognised as deferred charge and proportionately recognised as revenue over the term of the lease agreement between financing party and consumer.

Group-wide, consistent lease applications shall ensure that the recognition, categorisation and classification of the various contract types according to the IFRS are complete and correct. The determination of the criteria and parameters in these applications are subject to the Legal representative’s judgement. The classification and entry routines of the lease applications are updated, programmed and managed centrally in Germany while the contract input is performed locally in the operating or the Group’s own financial services entities. In the financial year 2017, in this context, a new lease application was introduced in the operating group entities, with this new application replacing the previous applications in selected component areas.

Due to the high transaction volume in connection with the various contract types, any errors in this area may considerably affect the consolidated financial statements. For this reason, the assessment of the accounting for leases was of particular significance in the scope of our audit.

The entity’s information on the accounting for leases is provided in the Notes [7], [18], [19], [22], [31] and [34].

b. As part of our audit, we first updated our understanding of the process including our understanding of the existing contract types as well as the entity’s internal controls regarding leases.

In the light of our understanding of the organisational composition and the overall process, the audit on the one hand focused on the lease applications used and on the other hand on the completeness and accuracy of the data input in the individual component areas.

With respect to the lease applications used, we examined, where required, the appropriateness, implementation and effectiveness of the IT controls in line with our audit strategy. As part of this examination, we consulted internal IT specialists.

In a next step, we obtained an understanding of whether the automated entry and classification routines used in the lease applications comply with the relevant IFRS. To this end, we first examined the KION Accounting Manual, which represents the basis for routine programming, for conformity with the IFRS. In addition, we assessed whether the entry and classification routines have been appropriate. To this end, regarding the lease applications, which have already been used in the prior year, we examined, on the one hand, the revision protocols of the financial year for compliance with the KION Accounting Manual. On the other hand, we made examinations on a sample basis both in the form of random samples and judgemental selections by making sure that all contract types used were subject to the examination. Based on the data inputs, we assessed for each selected contract whether the results of the lease applications comply with the relevant IFRS.

We examined the data inputs made in the financial year in the individual component areas for accuracy directly in the operating entities on a sample basis in the form of mathematical and statistical methods and extrapolated any identified deviations to the corresponding basic population. In this context, apart from the accuracy, we audited the appropriate cut-off and completeness of the data inputs on the basis of the original contracts. Where required, we received confirmations of third parties to assess the completeness of the entered contracts.

Due to the introduction of a new lease application in selected group entities in the financial year, we additionally examined the required migration of the historical contract data for completeness and accuracy and the entry and classification routines for appropriateness. This examination was performed in the form of a reconciliation of the assessed results of the lease applications and comparison between the transferred and the migrated contract data.

3) Realisation of revenue regarding construction contracts in the Supply Chain Solutions business segment

a. In the business segment Supply Chain Solutions, KION’s revenue increased from mEUR 364.7 to mEUR 2,001.8 in the financial year 2017 primarily due to the acquisition of the Dematic group in November 2016. Accordingly, the business segment’s contribution to the Group’s total revenue increased from 6.5% to 26.2% due to the full-year effect.

Construction contracts, the determination of which is based on the percentage of completion of the individual projects, make up a significant portion of the revenue in the business segment Supply Chain Solutions as they amount to mEUR 1,725.6 and account for 86.2% of the business segment’s total revenue. The percentage of completion is determined based on the proportion of the contract costs that have already been incurred to the total estimated contract costs as at the balance sheet date.

The revenue highly depends on estimations subject to the legal representative’s judgement particularly concerning the total contract costs and the resulting percentage of completion. Also taking into account the high amount of revenue related to construction contracts in the consolidated financial statements, this matter is of particular significance in the scope of our audit.

The information in the notes to the consolidated financial statements concerning revenue realisation from construction contracts in the business segment Supply Chain Solutions is provided in Notes [7] and [8].

b. As part of our audit, we deepened our knowledge of the processes concerning the project business including our understanding of the corresponding internal controls of the Group. We examined the appropriateness of the internal controls’ design and implementation regarding the estimation of the percentage of completion and continued review of contract costs.

Based on that, we assessed the estimations made for individual projects, which were selected based on risk considerations. To this end, we examined the current cost reports and project calculations taking into account the customer contracts with respect to the percentage of completion of the selected projects. To this end, we additionally consulted the employees responsible for the relevant projects on matters such as the current project phase, any risks including penalties and changes to original assumptions and requested declarations on unexpected project developments, which were compared with supplementary evidence. In addition, we have convinced ourselves, where required, of the project progress on site and have taken into account the adherence to the budget planning based on retrospective analyses of selected projects.

Other information

The legal representatives are responsible for the other information. The other information comprises the following documents received prior to the date of this independent auditors’ report:

• the Group’s statement on business management specified in the combined management report,
• The assurance pursuant to Sec. 297 (2) Sentence 4 German Commercial Code (HGB) to the consolidated financial statements and assurance pursuant to Sec. 315 (1) Sentence 5 German Commercial Code (HGB) to the Group management report, and
• The remaining parts of the annual report, with the exception of the audited consolidated financial statements and combined management report as well as our independent auditors’ report.

In addition, the other information comprises the separate non-financial Group report, which is expected to be published to KION GROUP AG’s website by 30 April 2018.

Our audit opinions on the consolidated financial statements and the combined management report do not extend to cover the other information, and accordingly we do not issue an audit opinion or any other form of assurance conclusion thereon.

In connection with our audit, our responsibility is to read the other information and, in doing so, to consider whether the other information

• is materially inconsistent with the consolidated financial statements, the combined management report or our knowledge obtained in the audit, or
• otherwise appears to be substantially misstated.

Responsibilities of the legal representatives and the Supervisory Board for the consolidated financial statements and the combined management report

The legal representatives are responsible for the preparation of the consolidated financial statements, which comply with the requirements of the IFRS, as adopted in the EU, and the additional requirements of German commercial law pursuant to Sec. 315e (1) German Commercial Code (HGB) in all material respects, so that the consolidated financial statements in accordance with German principles of proper accounting give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with these requirements. In addition, the legal representatives are responsible for the internal controls they have identified as necessary in order to enable the preparation of consolidated financial statements that are free from material misstatements, whether intentional or unintentional.

In preparing the consolidated financial statements, the Legal representatives are responsible for assessing the Group’s ability to continue as a going concern. Furthermore, they have the responsibility to disclose matters related to going concern, as applicable. In addition, they are responsible for using the going concern basis of accounting, unless this conflicts with the Group’s intention to liquidate the Group or wind down operations or there is no realistic alternative.

In addition, the Legal representatives are responsible for the preparation of the combined management report, which as a whole provides a suitable view of the Company’s position, is consistent with the consolidated financial statements in all material respects, complies with German legal regulations and suitably presents the opportunities and risks of future development. Furthermore, the Legal representatives are responsible for such arrangements and measures (systems) which it has deemed necessary in order to enable the preparation of a combined management report in accordance with the German commercial law to be applied and to furnish sufficient and appropriate evidence for the statements in the management report.

The Supervisory Board is responsible for overseeing the Group’s financial reporting process for the preparation of the consolidated financial statements and the combined management report.

Auditors’ responsibility for the audit of the consolidated financial statements and the combined management report

Our objectives are to obtain reasonable assurance about whether the combined financial statements as a whole are free from material misstatements, whether intentional or unintentional, and whether the combined management report as a whole provides an appropriate view of the Group’s position and, in all material respects, is consistent with the findings of the audit, is in accordance with German legal regulations, and appropriately presents the opportunities and risks of future development, as well as to issue an independent auditors’ report that includes our opinions on the consolidated financial statements and the combined management report.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Sec. 317 of the German Commercial Code (HGB) and the EU Audit Regulation and German generally accepted standards for the audit of financial statements promulgated by the Institute of Public Auditors in Germany (IDW), will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements and the combined management report.

As part of an audit, we exercise professional judgement and maintain professional scepticism. We also

• identify and assess the risks of material misstatements in the consolidated financial statements and in the combined management report, whether intentional or unintentional, design and perform audit procedures responsive to those risks and obtain audit evidence that is sufficient and appropriate to provide a basis for our audit opinion. The risk of not detecting a material misstatement resulting from fraud is higher than one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
• obtain an understanding of internal control relevant to the audit of the consolidated financial statements and the arrangements and measures relevant to the audit of the combined management report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of these systems.
• evaluate the appropriateness of the accounting policies used by the Legal representatives and the reasonableness of accounting estimates and related disclosures made by the Legal representatives.
• conclude on the appropriateness of the legal representative’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that there is a material uncertainty, we are required to draw attention in our independent auditors’ report to the related disclosures in the consolidated financial statements and combined management report, or, if such disclosures are inadequate, to modify our corresponding opinion. Our conclusions are based on the audit evidence obtained up to the date of our independent auditors’ report. However, future events or conditions may cause the Group to cease to continue as a going concern.
• evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures and whether the consolidated financial statements represent the underlying transactions and events in a manner that the consolidated financial statements give a true and fair view of the net assets and financial position as well as the results of operations of the Group in accordance with the IFRS, as applicable in the EU, and the additional requirements of German commercial law pursuant to Sec. 315e (1) German Commercial Code (HGB).
• obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express opinions on the consolidated financial statements and the combined management report. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinions.
• evaluate the consistency of the combined management report with the consolidated financial statements, its legal consistency and the view provided of the Group’s position.
• perform audit procedures on the forward-looking information presented by the Legal representatives in the combined management report. On the basis of sufficient appropriate audit evidence, we particularly evaluate the significant assumptions underlying the forward-looking information by the Legal representatives and evaluate the correct derivation of forward-looking information from these assumptions. We do not issue an independent opinion on the forward-looking information or on the underlying assumptions. There is a significant unavoidable risk that future events will differ materially from the forward-looking information.

We communicate with those charged with governance, among other matters, the planned scope and timing of the audit and significant audit findings, including any deficiencies in internal control, which we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current reporting period and are therefore the key audit matters. We describe these matters in our independent auditors’ report on the consolidated financial statements unless law or regulation precludes public disclosure about the matter.

Other legal and regulatory requirements

Other information pursuant to Article 10 EU Audit Regulation

We were appointed by the annual general meeting on 11 May 2017 to audit the consolidated financial statements. We were engaged by the Supervisory Board on 16 May 2017 and 20/27 November 2017. We have been engaged continuously as the auditor of the consolidated financial statements of KION GROUP AG, Wiesbaden/Germany, which was named KION 1 Holding GmbH until 12 June 2013, since the business year 2007. Since the financial year 2013, the entity has been a public interest entity within the meaning of Sec. 319a (1) Sentence 1 German Commercial Code (HGB).

We confirm that the audit opinions contained in this independent auditors’ report are consistent with the additional report to the audit committee pursuant to Article 11 EU Audit Regulation (“Prüfungsbericht”).

Responsible Auditor

The auditor responsible for the audit is Kirsten Gräbner-Vogel.

Frankfurt am Main/Germany, 21 February 2018

Deloitte GmbH
Wirtschaftsprüfungsgesellschaft