[41] Financial risk reporting

Capital management

One of the prime objectives of capital management is to ensure liquidity at all times. Measures aimed at achieving these objectives include the optimization of the capital structure and ongoing Group cash flow planning and management. Close cooperation between the individual companies and the Corporate Finance division ensures that the local legal and regulatory requirements faced by foreign Group companies are taken into account in capital management (see also the descriptions of financial covenants).

Net financial debt – defined as the difference between financial liabilities and cash and cash equivalents – is a key performance measure used in liquidity planning at Group level and amounted to €1,210.6 million as at December 31, 2023 (December 31, 2022: €1,670.5 million).

Default risk

In certain operating and finance activities, the KION Group is subject to credit risk, i.e. the risk that partners will fail to meet their contractual obligations. This risk is defined as the risk that a counterparty will default, and hence is limited to a maximum of the carrying amount. Default risk is limited by diversifying business partners based on certain credit ratings. The Group only enters into transactions with business partners and banks holding a good credit rating and subject to fixed limits. The potential default risk attaching to financial assets is also mitigated by secured forms of lending such as reservation of title, credit insurance and guarantees, and potential netting agreements.

Counterparty risks involving our customers are managed by the individual Group companies. To reflect the default risk, valuation allowances are recognized for defaults that have occurred and for expected defaults (see note [25]).

Financial transactions are only entered into with selected business partners that have an investment-grade credit rating. The KION Group’s default risk remains insignificant.

The KION Group enters into derivatives in accordance with German master agreements and the global netting agreements (master agreement) of the International Swaps and Derivatives Association (ISDA). The amounts that, in accordance with such agreements, are owed by each counterparty on a single day in respect of all outstanding transactions in the same currency are aggregated to achieve a single net amount that one party has to pay to the other. In certain cases (e.g. if a credit event such as default occurs), all outstanding transactions under the agreement are terminated, the value upon termination is calculated, and only a single net amount to settle all transactions has to be paid.

The ISDA agreements do not satisfy the criteria for offsetting in the statement of financial position. This is because the KION Group currently does not have a legal right to offset the recognized amounts. The right to offset is only enforceable when future events occur, such as a credit event.

The following table shows the carrying amounts of the recognized derivatives covered by the master agreements.

Liquidity risk

The KION Group maintains a liquidity reserve in the form of a revolving credit facility and cash in order to ensure financial flexibility and solvency. Taking into account the credit facility that was still freely available, the unrestricted cash and cash equivalents available to the KION Group as at the reporting date amounted to €1,674.4 million (December 31, 2022: €1,577.3 million). The age structure of financial liabilities is reviewed and optimized continually.

The credit ratings awarded to the KION Group by the two rating agencies remained essentially unchanged in the year under review. Fitch Ratings continued to award the Group a long-term issuer default rating of BBB with a stable outlook. The short-term issuer default rating remained at F2. Standard & Poor’s kept the issuer rating at BBB– but raised the outlook from CreditWatch negative to negative in April 2023.

As at the reporting date, the KION Group had sold trade receivables with a total volume of €111.9 million (December 31, 2022: €102.9 million) in factoring transactions. Of these factoring transactions, trade receivables of €69.5 million continued to be recognized in full in the consolidated statement of financial position as at December 31, 2023 (December 31, 2022: €66.9 million) because the KION Group retained the material risks and opportunities. A liability in the same amount was recognized under other current financial liabilities. For trade receivables of €36.3 million (December 31, 2022: €30.8 million), the material risks and opportunities were neither fully transferred nor fully retained. In this case, the amount of the maximum downside risk arising on the trade receivables that were sold was recognized (as a continuing involvement). As at December 31, 2023, this figure was €4.0 million (December 31, 2022: €4.0 million). A liability in the amount of the continuing involvement was recognized under other current financial liabilities; the fair value of the liability corresponded to the carrying amount. To improve comparability, the figures as at the end of 2022 for trade receivables were adjusted by €70.9 million, from €1,596.4 million to €1,667.3 million, and other current financial liabilities were adjusted by the same amount, from €215.4 million to €286.4 million, in accordance with IAS 8.42. This is because new information about the transfer of material risks and opportunities has come to light. As at January 1, 2022, there was the adjustment of €60.8 million in each of the aforementioned items.

The following tables show all of the contractually agreed undiscounted payments under recognized financial liabilities as at December 31, 2023 and 2022, including derivative financial instruments with negative fair values. The future interest payments for variable-rate promissory notes and liabilities to banks may change if market interest rates change. In addition, future cash flows may vary due to changes to the underlying interest rates or exchange rates. With regard to the other line items, the cash flows included in the maturity analysis are not expected to arise significantly earlier or in a materially different amount.

Currency risk

The KION Group hedges currency risk both locally at the level of the individual companies and centrally via KION GROUP AG using prescribed hedging ratios.

The main hedging instruments employed are foreign-currency forwards, provided that there are no country-specific restrictions on their use.

In the Industrial Trucks & Services segment, hedges are entered into at individual company level for highly probable future transactions on the basis of rolling 15-month forecasts, as well as for firm commitments not reported in the statement of financial position. Currency risk arising from customer-specific project business contracts in the Supply Chain Solutions segment is hedged on a project-specific basis at individual company level. As a result, these hedges are classified as cash flow hedges for accounting purposes in accordance with IFRS 9 (see note [42]). In addition, foreign-currency forwards are employed to hedge the currency risks arising in the course of internal financing.

Significant currency risk arising from financial instruments is measured using a currency sensitivity method. Currency risks from financial instruments as defined by IFRS 7 are only included in calculating currency sensitivity if the financial instruments are denominated in a currency other than the functional currency of the Group company concerned. This means that currency risks resulting from the translation of the separate financial statements of subsidiaries into the Group presentation currency, i.e. currency translation risks, are not included.

Currency risk relevant to currency sensitivity in the KION Group arises mainly in connection with derivative financial instruments, trade receivables, and trade payables. It is assumed that the portfolio of financial instruments as at the reporting date is representative of the portfolio over the whole of the year. The sensitivity analysis for the relevant currencies (after tax) is shown in the following table. Sensitivity was based on a net currency exposure of €353.8 million as at December 31, 2023 (December 31, 2022: €220.9 million).

Interest-rate risk

Interest-rate risk within the KION Group is managed centrally. The basis for decision-making includes sensitivity analyses of interest-rate risk exposures in key currencies.

The Group’s financing takes the form of variable-rate and fixed-rate financial liabilities. The risk of a change in the fair value of a fixed-rate financial liability is hedged using an interest-rate swap. In addition, the fair value of certain lease receivables is hedged at portfolio level using amortizing payer interest-rate swaps. Overall, this results in a variable interest rate for the lease portfolio that is in line with the benchmark rate for the currency area in question; the variable interest rate thus equates to the variable rate used for the financing of the lease portfolio from an economic perspective. These hedges are accounted for as portfolio fair value hedges in accordance with IAS 39 (see note [42]).

The shift in the relevant yield curves was simulated to assess interest-rate risk. The effects after tax shown below resulted from the marking-to-market of interest-rate swaps and from variable-rate financial debt. Sensitivity was based on a net interest-rate exposure of €829.4 million as at December 31, 2023 (December 31, 2022: €1,296.8 million).

Risks arising from lease business

The lease activities that are used to promote sales in the Industrial Trucks & Services segment mean that the KION Group may be exposed to residual value risks from the marketing of trucks. The trucks are returned by the lessee at the end of a long-term lease and subsequently sold or re-rented. Residual values in the markets for used trucks are constantly monitored and forecast on the basis of prices in these markets. The KION Group regularly assesses its aggregate risk exposure arising from the lease business.

Risks identified in relation to the existing contract portfolio are taken into account by prospectively adjusting the depreciation expense, impairment losses, or provisions. If there is a sustained decline in residual values, they will be adjusted in the costing of new leases. Groupwide standards to ensure that residual values are calculated appropriately, combined with an IT system for residual-value risk management, aim to reduce risk and provide the basis on which to create the transparency required.

The KION Group mitigates its liquidity risk and interest-rate risk in the lease business through a funding strategy that seeks to ensure that most of its transactions and loans have matching maturities. Nevertheless, the lease business is still subject to interest-rate-volatility risk related to residual, non-matching maturities. The level of this risk depends in part on the relevant market interest rates. The KION Group also seeks to mitigate risk by continuously updating its liquidity planning. Long-term leases are primarily arranged on a fixed-interest basis. If they are financed using variable-rate instruments, interest-rate derivatives are entered into in order to hedge the interest-rate risk, where it makes commercial sense to do so.

As a rule, the KION Group finances its lease business in the same currency as the lease with the end customer in order to exclude currency risks.

The counterparty risk inherent in the lease business continues to be insignificant. The Group also mitigates any losses from defaults by its receipt of the proceeds from the sale of repossessed industrial trucks. Furthermore, receivables management and credit risk management are refined on an ongoing basis.