Risk report
Risk strategy
The business activities of the KION Group necessarily involve risk. Dealing responsibly with risk and managing it in a comprehensive manner is an important element of corporate management. The overarching aim is to fully harness business opportunities while accepting controlled risks. The purpose of the KION Group’s groupwide risk management system is to identify and assess risks that could prevent the KION Group from achieving its corporate goals and to implement suitable measures to manage them. It always seeks to avoid risks to the Company’s ability to continue as a going concern.
Risk management is embedded in all of the KION Group’s companies and functions and is overseen by a central function at Group level. The objective is to evaluate and manage risks to the business model and strategic goals and to the day-to-day running of the business. Risk management is integrated into the business processes and into the KION Group’s planning and reporting process.
Principles of risk management and of the internal control system
Risk management system
Under its KION 2027 strategy, the KION Group is consciously taking on a limited amount of risk in order to achieve its business objectives. In doing so, it follows a well-balanced risk strategy that is conditional upon it always being able to secure external funding. Management decisions therefore take the risk perspective into consideration. Risk management is intended to ensure a clear view of the value at risk, the probability of occurrence, and the steps being taken to manage risk at the different levels of the organization.
Having a groupwide risk-bearing capacity plan requires the Group to define a level of risk appetite across the various risk types that will help it to achieve the objectives of the KION 2027 strategy. Risk-bearing capacity is defined as the maximum risk that can be sustained, while strictly avoiding any risks to the Group’s survival as a going concern. It provides the framework for the risk appetite of the KION Group in respect of the different risk types. Risks need to be aggregated in order to determine whether the combined effects of individual risks have the potential to jeopardize the business as a going concern. Aggregation of risks is facilitated by a Monte Carlo simulation in which different scenarios are modeled. The results of the Monte Carlo simulation plus an additional risk cushion are used to evaluate risk-bearing capacity. The Monte Carlo simulation does not take into account risks where the financial impact has not been measured. These are instead used as a qualitative factor in the assessment of risk-bearing capacity. The KION Group’s risk appetite is defined as the level of willingness to take on risk in respect of the individual risk types in order to achieve its strategic objectives and medium-term planning. The KION Group does not believe that its ability to continue as a going concern will be jeopardized either by risks where the financial impact has been measured or by other risks.
The procedures governing the KION Group’s risk management activities are laid down in a groupwide risk management policy. For certain types of risk, such as financial risk, risks arising from the lease business, and compliance risk, the relevant departments also have guidelines that are specifically geared to these matters and describe how to deal with risks specific to the business units. Risk management is organized in such a way that it directly reflects the structure of the Group itself. For each company and each Operating Unit, risk officers and their subordinate risk managers have been appointed who are responsible for identifying, assessing, and independently managing risk and reporting to the central risk management function.
In addition, selected risks at Group level are captured and managed by a central risk manager who is responsible for ensuring that proper procedure is followed in the execution of the risk management processes. His or her remit includes the validation and aggregation of the reported risks and the definition and implementation of standards to ensure that risks are uniformly captured and evaluated. He or she is also responsible for reporting to KION GROUP AG’s Executive Board and to the Audit Committee of its Supervisory Board.
Like the organizational structure, the risk management process is also generally organized on a decentralized basis. Firstly, a groupwide risk catalog is used to capture the risks attaching to each individual company, segment, and department where the financial impact of the risk has been measured. Each risk must be captured individually. However, not all risks have their financial impact measured. Risks for which financial impact is not measured do not form part of the quantitative assessment but are taken into account qualitatively. Risks for which financial impact is measured are quantified on the basis of their likelihood of occurring and the extent of the losses that would be incurred were they to do so.
KION GROUP AG’s Executive Board and the KION Group’s central risk management function are notified immediately if a new risk is identified outside the regular reporting cycle for which the gross value of expected losses exceeds the defined limit. Each risk is documented in a reporting system designed specifically for the requirements of risk management. Risks affecting more than one Group company, such as market risks and competition risks, are captured and evaluated in aggregate at the level of operating segments.
Risk management is the responsibility of the individual companies and is therefore organized on a decentralized basis. A quarterly reporting process is used to keep the central risk management function up to date with the impact of the steps taken to manage risk, in particular changes to the expected losses and the probability of occurrence.
All subsidiaries that are included in the basis of consolidation are covered by a standardized risk reporting system, in which the risks reported by the individual companies are summarized in risk reports and discussed at quarterly risk management meetings. In addition, each of the main risks for current planning is analyzed and discussed at all levels as part of the regular business review meetings. At Group level, the KION Group’s central risk management function compiles the aggregate risk portfolio on the basis of the individual risks reported by the Operating Units. Risks for which the financial impact is not measured are analyzed on a qualitative basis. The central risk management function produces a quarterly risk report that is presented to KION GROUP AG’s Executive Board and to the Audit Committee of its Supervisory Board. To support this, the relevant departments of KION GROUP AG are consulted each quarter in order to identify and assess risk – particularly Company-wide risk – affecting areas such as corporate finance, procurement, legal affairs, compliance, tax, human resources, and the lease business.
The Internal Audit department audits the risk management system at regular intervals. In addition, the KION Group’s external auditor examines the early-warning system for risk as part of its annual audit of the consolidated financial statements.
Internal control system*
The KION Group’s internal control system, which is geared toward the specific needs of the Company, covers the entirety of the systematically defined controls and monitoring activities that are designed to ensure the efficiency of the Company’s business operations, the reliability of its financial reporting, and compliance with key legal provisions and internal policies.
The elements of KION Group’s internal control system are structured in line with the internationally recognized framework for internal control systems developed by the Committee of Sponsoring Organizations of the Treadway Commission (‘COSO framework’). The internal control system therefore features, as its main components, the control environment, risk assessment, control activities, information and communication, and ongoing monitoring.
All fully consolidated subsidiaries of the KION Group are covered by the internal control system. The scope of the control activities to be carried out is dependent on the specific risks and the materiality of the respective subsidiary for the consolidated financial statements of KION GROUP AG.
The system and the methods applied are refined on an ongoing basis and are regularly assessed to ensure they are functioning as intended. However, because of the limitations inherent in any control system it is not possible to provide complete assurance.
The Internal Audit department regularly evaluates the internal control system, thus helping to bring about continuous improvements. It focuses primarily on the following aspects:
- appropriateness and effectiveness of the internal control systems for avoiding financial losses
- compliance with legal requirements, directives from the Executive Board, other policies, and internal instructions
- correct performance of tasks and compliance with business principles
Please refer to the information provided in the corporate governance statement for an assessment of the appropriateness and effectiveness of the risk management system and internal control system.
* The content of this chapter/section is disclosed voluntarily and is therefore unaudited.
Material features of the internal control and risk management system pertaining to the (Group) accounting process
The main objectives of the accounting-related internal control system are to avoid the risk of material misstatements in financial reporting, to identify material mismeasurement, and to ensure compliance with the applicable regulations and internal instructions. This includes verifying that the consolidated and separate financial statements and the combined management report comply with the relevant accounting standards. For its (Group) accounting process, the KION Group has defined structures and processes within its internal control and risk management system and implemented them in the organization.
The Corporate Accounting group function coordinates the preparation of the consolidated and separate financial statements of KION GROUP AG. It specifies the requirements for the reporting content, which are mandatory for all subsidiaries, and manages and monitors the stipulated deadlines and processes. The reporting packages submitted by the subsidiaries for the consolidated financial statements of KION GROUP AG are combined at Group level using consolidation software. The KION Group eliminates intercompany transactions during this consolidation process. A team is responsible for monitoring the system-based controls, which it supplements with manual checks. The relevant departments or specialists from outside the Company are brought in to handle particularly complex issues and questions.
Changes to the law, accounting standards, and other pronouncements are continually analyzed with regard to their relevance and effect on the consolidated financial statements and group management report; the relevant changes are then incorporated into the Group’s internal policies and accounting processes.
All consolidated entities must follow the KION Group IFRS Accounting Manual when preparing their IFRS reporting packages. This contains the recognition, measurement, and disclosure rules to be applied in the KION Group’s accounting in accordance with IFRS and primarily explains the financial reporting principles specific to the KION Group’s business.
The accounting-based internal control and risk management system is underpinned by written policies and procedures, compliance with the double-checking principle, and approval procedures. Another important aspect, the separation of functions, has been integrated into processes and systems. The employees involved in the (Group) accounting process receive regular training in this field.
Those in charge of the control functions and senior managers regularly conduct self-assessments to evaluate the appropriateness and operational effectiveness of the internal control system. The results are captured and documented in a central IT system. External reviews are also conducted for individual parts of the internal control system. The Internal Audit department regularly reviews the internal control system and accounting processes, including Group accounting. Any identified shortcomings to the controls are documented in the proper way and steps are taken to promptly resolve the issues. The Executive Board of KION GROUP AG and the Audit Committee of its Supervisory Board are informed of the results of the self-assessments for the internal control system once a year.
Risk
Aggregate risk
The outlook for 2024 is based on the assumptions made about the economy and the geopolitical situation. The further stabilization that is anticipated in the sales and procurement markets of the operating segments is subject to risks, however. For example, the predicted recovery in the main EMEA sales region will not materialize if geopolitical events cause the supply chain situation to deteriorate and materials to increase in price again. An escalation of the conflict in the Middle East could lead to a scarcity of supply in the oil market that might, in combination with the ongoing war in Ukraine, trigger a commodity crisis that would stunt global trade while also driving up inflation. This would entrench the restrictive monetary policy, and the associated constraints on growth, while increasing financing risk and financing costs. Customers in both operating segments would then become more reluctant to invest again. Equally, an escalation of the real estate crisis in China could lead to state interventions that would dent the outlook for growth not just in the APAC region but also in the export-driven European economy.
On the other hand, measures to enhance operational and commercial agility were introduced to make the KION Group’s segments more resilient to risks such as sales and procurement risk.
Currently, the KION Group still regards the overall risk to its ability to continue as a going concern as low. The risk limit specified in the risk-bearing capacity plan in 2024 is not expected to be exceeded. As things stand at present, there are no indications of any individual or aggregated risks that could jeopardize the Company’s continuation as a going concern.
The risk matrix below, showing the gross risk levels and probabilities of occurrence of risks that are quantified and are considered relevant to the Group, changed as follows compared with the end of 2022. The probability of occurrence for procurement risk was downgraded from medium to low, with the risk level remaining the same. The probability of occurrence for financial risk was raised from low to medium. The gross risk level of the risks arising from the customer project business was raised from medium to high. The risk level of IT risks was raised from low to medium. The risk matrix does not include risks that are not quantified, in particular goodwill impairment risk, ESG risks, regulatory risks, and some financial risks.
The KION Group recognizes the importance of extreme risks and is aware that they could present a significant threat to the Company. Extreme risks are risks that lie outside the range of normal risk, that cannot be influenced or can be influenced only to a minor extent, and that would have severe consequences for the KION Group. Examples of extreme risks include natural disasters, terrorist attacks, pandemics, and political instability. These risks could lead to substantial losses that might severely restrict the Company’s business activities or jeopardize its continuation as a going concern. The KION Group knows that although the occurrence of extreme risks is rare, the severity of the potential losses mean that they still pose a serious threat. Indeed, events such as the coronavirus pandemic, the war in Ukraine, and the conflict in the Middle East, not to mention the persistently high number of cyberattacks, illustrate that extreme risks very much can occur and how important it is for the KION Group to prepare for them. The KION Group has taken suitable precautionary measures in order to improve its resilience in the face of extreme risks. It is difficult to quantify the financial impact of extreme risks and so they do not form part of the risk aggregation.
While the risk report examines possible negative influences and variances from the scenario on which the outlook is based, potential positive influences are described in the opportunity report. At the time that this combined management report was prepared, all known risks were reflected in the outlook for 2024 with their gross risk level and expected probability of occurrence.
Risk matrix
The market risks and competition risks described, the risks along the value chain, the human resources risks, and the legal risks relate to the Industrial Trucks & Services and Supply Chain Solutions operating segments. Risks arising from the lease business mainly affect the Industrial Trucks & Services segment, while project risks primarily relate to the Supply Chain Solutions segment. However, financial risks resulting from the Company’s general funding situation are relevant to the Group as a whole, as are IT risks, tax risks, and environmental risks.
In 2023, the existing risk catalog was revised in respect of sustainability-related risks and adapted in line with current ESG risks. This revised risk catalog will be integrated into the risk management system in future. The KION Group is currently in the process of capturing and analyzing these risks.
The risks applicable to KION GROUP AG generally correspond to the risks applicable to the KION Group due to dividend payments and profit-and-loss transfer agreements with key subsidiaries. There are also risks arising from potential impairment of investments in or loans to affiliated companies and from losses made by subsidiaries that directly affect KION GROUP AG because of a profit-and-loss transfer agreement.
Market risks and competition risks
Market risks
Market risk can arise when the economy as a whole or the relevant sector does not perform as well as had been anticipated in the outlook.
In the Industrial Trucks & Services segment, the outlook for 2024 with regard to new business assumes a moderate increase in order numbers, albeit with significant regional differences. Whereas the Americas is projected to see a sharp decline, the forecast is for a recovery in the EMEA market and growth in the APAC region. However, the KION Group does see a risk that order numbers could decline, contrary to expectations. And if economic conditions were to deteriorate further, investment demand could weaken and have a correspondingly negative impact on the financial performance of the Industrial Trucks & Services segment.
In Europe, there are significant sources of risk that could have an adverse impact on the market environment and, as a result, on the KION Group’s business. These include supply chain issues (procurement risks related to supply chain problems are not yet fully resolved and could increase again as a result of geopolitical shocks), unexpected increases in material prices, and financial market risks, making it more difficult to finance capital expenditure. This has the potential to impact negatively on the KION Group’s business.
In the Supply Chain Solutions segment, the KION Group is expecting investment in warehouse automation to pick up slightly. Cyclical fluctuations in macroeconomic activity affect both the market for industrial trucks and the market for supply chain solutions, although the latter generally has greater immunity to economic cycles because the capital expenditure decisions have a longer-term perspective. Customers’ investment activity depends to a large degree on the macroeconomic situation and conditions in their particular sector. This means there is a risk of KION Group’s revenue expectations for 2024 having been set too high.
As the KION Group can only adjust its fixed costs to fluctuations in demand to a limited extent and with a delay, reductions in revenue impact on earnings. Despite the importance of the North American business (mainly in the Supply Chain Solutions segment) and the prospective growth of KION’s business in China, the bulk of the KION Group’s revenue continues to be generated in the EMEA region. As a result, the market conditions that prevail in Europe significantly influence the KION Group’s financial performance. As detailed in the outlook, the KION Group is expecting order numbers in the Industrial Trucks & Services segment to increase in the EMEA region.
Risks in connection with trade disputes and geopolitical conflicts and tensions may also hinder some aspects of the global economy’s recovery. As well as the war in Ukraine, the focus here is on a potential escalation of the conflict that broke out in the Middle East in October 2023. An escalation of the conflict in the Middle East could, for example, lead to a scarcity of supply in the oil market that might, in combination with the ongoing war in Ukraine, trigger a commodity crisis that would stunt global trade while also driving up inflation. In the medium term, new barriers to trade could significantly hamper sales channels and lead to renewed disruption to global supply chains that would have a knock-on effect on production.
All these factors could have a negative impact on customers’ willingness to invest and thus on demand for the KION Group’s products and result in a decline in revenue. However, it is not currently foreseeable whether such market risks will occur and then have a material effect on the business situation and financial performance.
Further developments in the geopolitical situation (e.g. Middle East conflict, war in Ukraine), including any knock-on effects that change the level of risk, are monitored closely. Measures have been taken in both operating segments to help contain the earnings risk arising from reductions in revenue as a result of economic conditions. Diversification of the customer base in terms of industry and region and the expansion of service activities also play a role in mitigating risk.
Moreover, the KION Group closely monitors the market and the competition so that it can identify market risks at an early stage and adjust its production capacities in good time. Besides global economic growth and other data, the KION Group also analyzes exchange rates, price stability, the consumer and investment climate, foreign trade activity, and political stability in its key sales markets, constantly monitoring the possible impact on its financial performance and financial position. The KION Group mitigates such strategic risks by, for example, carrying out in-depth market research, conducting thorough evaluation procedures to assess political and economic conditions, and structuring contracts appropriately.
Given the high level of risk and low probability of occurrence, market risk is still regarded as medium overall.
Competition risks
Competition risk describes the risk that growing competitive pressure will prevent the KION Group from achieving its predicted margins and market share and thus cause its revenue and adjusted EBIT to fall short of expectations. The Industrial Trucks & Services segment risks losing market share to competitors and coming under increased price pressure, which could lead to it generating less revenue than expected. The KION Group currently expects the Supply Chain Solutions segment to gain market share. However, there is a risk that this target will not be achieved, and this would have a negative impact on revenue and adjusted EBIT.
The markets in which the KION Group operates are characterized by strong competition, often price-driven. Price competition is compounded by some manufacturers having cost advantages, in some cases due to the currency situation and in some cases because local labor costs are lower. This mainly affects the Industrial Trucks & Services segment, where competition is fierce, particularly in the economy and volume price segments. The KION Group mitigates this risk though a wide range of product variants made possible by modular concepts, along with good availability of services, mainly in the volume and premium segments.
Building on their local competitive strength, rivals from emerging markets are also seeking opportunities for expansion in regions outside their local markets, particularly in the Industrial Trucks & Services segment. Competition has continued to increase, especially from manufacturers in China, which can be seen from the changes in the competitive situation last year. The fact that customers in developed markets have sophisticated service needs and high expectations in terms of quality still presents a barrier to growth for some of these manufacturers, but the bar is getting lower. Competitive pressures are likely to continue to intensify in the future, however.
It is conceivable that competitors will join forces and their resulting stronger position will be detrimental to the KION Group’s sales opportunities. Moreover, predictions of higher volumes and margins may lead to overcapacity, which would put increased pressure on prices. Although the excellent customer benefits provided by its products and services have enabled the KION Group to charge appropriate prices until now, it is taking – and will continue to take – a variety of steps to contain competition risk. These include entering into joint ventures, strategic alliances, and partnerships, which are increasingly helping to make the KION Group more competitive in terms of resources, market access, and technology.
One of the risks of partnerships and acquisitions is that the expected benefits will materialize only partly or not at all. For example, the organizational integration of acquired companies may actually harm the Group’s financial performance. It is also possible that a partner will collaborate with competitors if exclusivity agreements are not in place. The steps that the KION Group is taking to mitigate its competition risk, which could have a negative impact on revenue and earnings, also include improving its cost position and securing competitive, stable sources of supply.
For 2024, in terms of gross risk value, competition risks continue to be regarded as having a low level of risk and a medium probability of occurrence.
Risks along the value chain
Research and development (R&D) risks
The KION Group’s market success and business performance depend to a large extent on its ability to tailor its portfolio to the specific needs of the various industries in which its customers operate. Key to this is the integration of the hardware (industrial trucks and automation solutions), software (from control center to warehouse management systems), and services (from repair to financing) into a single offering. The Group therefore needs to continually develop products that meet customer expectations and comply with changing regulatory and technological requirements. To this end, the KION Group must anticipate customers’ needs and changing market conditions and has to quickly bring new products to market. If the Company fails to do this, there could be lasting damage to its technological and competitive position, leading to a decline in revenue over the medium to long term.
Many of the KION Group’s innovations are comprehensively protected by intellectual property rights, in particular patents. Nevertheless, there is always the possibility that products or product components will be imitated or copied. There is also a risk that patent applications will be unsuccessful. The KION Group mitigates research and development risks by focusing firmly on customer benefit in its development of products and solutions. Customer needs are to be incorporated into the development process on an ongoing basis by ensuring close collaboration between sales and development units and taking account of all region-specific requirements. The KION Group mitigates potential research and development risks by systematically managing projects and processes. As at the reporting date, no R&D risks had been identified that would have required measurement and therefore inclusion in the risk matrix.
Procurement risks
Procurement activities constitute a potential risk for the KION Group in terms of the general availability of parts and components and the rising cost of raw materials, inputs and intermediate products, logistics services, and energy.
Although the cost of materials, energy, and logistics fell slightly in 2023, they remain key factors in the KION Group’s cost structure. In addition, geopolitical developments can cause procurement prices, for example the price of energy commodities, to increase suddenly. Moreover, conditions in the commodity markets typically affect component prices after a delay of no more than three to six months.
Issues with disrupted supply chains and the resulting reduction in the availability of parts and materials eased in 2023 despite the ongoing war in Ukraine, but are still not fully resolved. Geopolitical shocks could at any time significantly restrict suppliers’ capacity and therefore their ability to supply further raw materials and components to the KION Group. The KION Group obtains some of its key components from a limited number of core suppliers. Key components in the Industrial Trucks & Services segment include internal combustion engines, tires, and high-performance forged and electronic parts. Supply bottlenecks in respect of the KION Group’s end customers as a result of this situation could lead to temporary decreases in revenue and liquidity as well as to inefficiencies in production.
The supply chain risks for 2024 are regarded as manageable based on the prevailing market conditions. The KION Group has initiated countermeasures in order to mitigate problems with suppliers and in respect of sales to customers. For example, the supplier base has been further diversified in order to mitigate disruption in the supply chains and suppliers are being closely monitored in the context of the global procurement function. Further steps to increase diversification will be taken in 2024. In addition, dedicated project teams are continually monitoring supply chains, the availability of materials, and suppliers’ ability to fulfill orders. For critical materials, the KION Group has also increased its buffer of inventories.
Moreover, prudent contractual arrangements can be put in place to allow the continuing rise in material and energy costs to be passed on to customers through appropriate price increases and thus to reflect changing market circumstances.
In terms of probability of occurrence, procurement risk has reduced overall relative to the 2022 annual report. The probability of occurrence has thus been reduced from ‘medium’ to ‘low’, while the risk level remains unchanged at ‘medium’.
Production risks
Production risks are largely caused by quality problems, possible disruptions to operational procedures, or production downtime at individual sites. They can also materialize as secondary risks resulting from the aforementioned procurement risks.
The KION Group’s closely integrated production network presents a heightened risk to its ability to deliver goods on time to end customers. There is also a risk that structural measures and reorganization projects will not be implemented owing to ramp-up difficulties, disruption of production, or strikes. Delays in delivery or a rise in the number of quality defects could harm the KION Group’s standing with its customers and, as a result, could harm its financial situation.
Contractual provisions and comprehensive project management are important elements of reorganization projects because they help to minimize this risk. The KION Group also carries out preventive maintenance, implements fire protection measures, and trains its staff. Insurance is taken out to limit the financial impact if potential loss events do occur. Quality assurance is a high priority throughout the value chain and reduces possible quality-related risks arising from the products and services provided. The KION Group mitigates its quality-related risks by applying rigorous quality standards to its development activities, conducting stringent controls throughout the process chain, and maintaining close contact with customers and suppliers. In light of the measures that have been taken, the gross risk value is regarded as medium with a low probability of occurrence and is therefore unchanged from the prior year.
Risks arising from customer project business
In the customer project business of the Supply Chain Solutions segment, risks can arise from deviations from the schedule originally agreed with the customer, potentially leading to an increase in project costs, to revenue and profit being recognized in subsequent years or, in isolated cases, to the imposition of contractual penalties. Another possible risk is that the technology deviates from the promised specifications, which may result in additional completion costs and contractual penalties. This is influenced by the customized development of sometimes innovative technologies at customer sites, which can increase the risk of technology failures and contractual penalties having to be paid as a result. A high degree of complexity in the technical specification of customer solutions can lead to unexpected cost increases over the term of individual projects that were not anticipated in the project costing and cannot be (or cannot be fully) passed on to the customer. If these risks were to occur it would have a negative impact on the expected adjusted EBIT and adjusted EBIT margin.
The measures that were initiated in the prior year to improve internal processes in project delivery and project management and the inclusion of price adjustment clauses in customer contracts were continued in 2023 with a view to helping to mitigate risk in 2024. Project-specific risk management is carried out as well. This involves detailed evaluation of the risks when defining the technical solution. The aim is to provide for financial risk on the basis of individual project specifications when preparing tenders. A multi-stage approval process based on an extensive list of criteria is intended to ensure that technological, financial, country-specific, currency-specific, and contractual risks are mitigated to the greatest extent possible.
The potential risks that may arise in the project realization phase are monitored in every individual project using detailed continuous reviews based on the individual items of work that make up the project. This enables corrective measures to be taken at an early stage and thus keeps risks under control. In the customer project business, the aforementioned risks of disruptions to the supply of components would mainly manifest themselves in the form of isolated project delays and increased expenditure on project realization. Given this risk potential, the KION Group regards the probability of occurrence for this risk to be medium and has raised the gross risk value to high for 2024. In contrast with the evaluations of other types of risk, the risk-mitigating effects of the measures that have been taken are already factored in.
Sales risks
The main sales risks – besides a drop in demand caused by market conditions – result from dependence on individual customers and sectors. Even though the global material handling market is expected to stabilize, the KION Group believes that there is still a risk that customers in the Industrial Trucks & Services segment will cancel orders. This assessment is partly a reflection of the substantial regional differences, particularly in respect of industrial trucks. Once again, there were no significant cancellations or problems resulting from other changes to orders in 2023.
Because of its customer project business, the Supply Chain Solutions segment generally has a greater dependence on individual sectors and individual customers than the Industrial Trucks & Services segment, which is not dependent on individual customers. The KION Group’s presence in a wide range of customer industries and segments helps to minimize the overall risk.
The concentration risk for the KION Group as a whole is therefore still considered to be low. The business is highly diversified from a regional perspective. In addition, the KION Group supplies companies of all sizes and from a large number of industries.
As at the reporting date, no sales risks had been identified that would have required measurement and therefore inclusion in the risk matrix.
IT risk
A high degree of interconnectedness internally between sites and externally with customers and other companies means that the KION Group relies on its IT systems working flawlessly. The KION Group refines its IT system environment on an ongoing basis in order to counter migration risk when updating software as well as any IT-related risks that may arise from the failure of IT systems and IT infrastructure. Internal IT resources are pooled in the cross-segment KION Group IT function, which has well-established processes for project management. Independent external reviews are conducted to provide additional quality assurance.
Various technical and organizational measures have been implemented with the aim of protecting the KION Group’s data against unauthorized access, misuse, and loss. These measures include, in particular, measures to protect and defend against cyberattacks on IT systems of the KION Group. For example, the KION Group has implemented a state-of-the-art cybersecurity tool stack to provide optimum protection against existing or future cyber threats. The Group’s own Cyber Defense Center is available around the clock in the EMEA, APAC, and Americas regions to respond as quickly as possible to current threats and attacks. Other key countermeasures include continuous vulnerability scans of the entire IT infrastructure and regular penetration testing of critical systems.
The number of attacks on companies’ global IT infrastructure that can be attributed to organized crime or industrial espionage has increased significantly. Failure of critical systems, disruption of production and the ability to deliver to customers, and the loss or release into the public domain of data are among the potential consequences of these attacks. Losses are possible because a successful cyberattack can result not only in financial losses and liability risk but also reputational damage. The KION Group’s cyber defense strategy is aimed at providing continuous protection for all processes and systems, particularly those that are business-critical. For example, procedures are in place to validate and log access to the Group’s infrastructure.
For 2024, IT risks are deemed to have a higher gross risk level than in the prior year and the risk position is therefore regarded as medium. However, the probability of occurrence remains unchanged at low.
Financial risks
Financial risk encompasses liquidity risk, currency risk, interest-rate risk, and counterparty risk. In the context of corporate finance, counterparty risk relates to credit risks attaching to financial institutions. Financial risk also includes the risk of impairment to the Group’s goodwill and brand names and to investments in affiliated companies and loans made to these companies by KION GROUP AG. Loss-making subsidiaries also present a risk because the profit-and-loss transfer agreements that are in place mean these losses will be passed on to KION GROUP AG. Groupwide policies stipulate how to deal with the aforementioned risks.
Risk arising out of the bond, lending, and promissory note conditions that have been agreed relate, for example, to the restrictions in respect of compliance with financial covenants and upper limits and in respect of the obligation to submit special regular reports. There is a particular risk of exceeding the agreed maximum level of leverage as at a specific reference date, which would give lenders a right of termination. Exercise of a right of termination may also give rise to a cross-default situation that could trigger a right of termination in respect of the other contracts. If these funding instruments were to be terminated, the KION Group would need to agree new financing, probably on less favorable terms.
Some of the Group’s financing takes the form of variable-rate or fixed-rate financial liabilities. Interest-rate swaps are used in some cases to reduce the interest-rate risk arising from the variable-rate financial liabilities. This mitigates the risk of rising finance costs in a risk scenario with higher than expected inflation and more restrictive than anticipated monetary policy.
The interest rate on the revolving credit facilities arranged in October 2021 and April 2022, each of which has a volume of around €1.4 billion, has – since 2023 – been based in part on the achievement of defined ESG performance indicators. This is also the case for the coupon on the promissory note with a nominal amount of €375.0 million that was issued in October 2023. There is a risk that the targets agreed in the credit facilities and the promissory note will not be achieved. This would result in a small increase in the interest rate payable to the lending banks or promissory note investors. Financial risk is regarded as low because of the agreed maximum number of interest rate rises in the event of ESG performance targets being missed and due to the KION Group’s good ESG performance in 2023. The KION Group believes that it will have no issues accessing external financing or insurance services, including and beyond the aforementioned financial instruments.
The Company generally refers to credit ratings to manage counterparty risk when depositing funds with a financial institution.
The KION Group uses derivatives only to hedge underlying operational and financial transactions; they are not used for speculative purposes. Because of the high proportion of its business conducted in currencies other than the euro, it is exposed to currency risk and opportunities. These result mainly from fluctuations in exchange rates in connection with future cash flows, both revenue and costs, that are denominated in foreign currencies. In the Industrial Trucks & Services segment, at least 75 percent of the currency risk related to the planned operating cash flows based on liquidity planning is normally hedged by currency forwards in accordance with the risk management policy. The Supply Chain Solutions segment hedges against currency risk on a project-by-project basis.
As a further natural hedge against currency risk, the KION Group endeavors, where possible, to make payments in the currencies in which cash inflows are generated.
Each Group company’s liquidity planning is broken down by currency and incorporated into the KION Group’s financial planning and reporting process. The liquidity planning is checked on an ongoing basis and used to determine the funding requirements of each company. The funding terms and conditions faced by the lenders themselves (manifested, for example, in the payment of liquidity premiums on interbank lending) may result in a future shortage of lines of credit and / or increased financing costs for companies. However, the Group currently does not expect any changes in its lines of credit or any excessive increases in margins.
The individual Group companies directly manage counterparty risks involving customers. They use a credit management system for identifying customer-related counterparty risks at an early stage and initiating the necessary countermeasures.
Goodwill and brand names with an indefinite useful life represented 25.9 percent of total assets as at December 31, 2023 (December 31, 2022: 27.5 percent). Pursuant to IFRS, these assets are not amortized and their measurement depends, above all, on expectations about the future financial performance of the KION Group. If these future expectations are not fulfilled, there is a risk that impairment losses will have to be recognized on these assets. Any such impairment losses can have an adverse and substantial non-cash impact on earnings and affect the balance sheet ratios.
Regular monitoring of goodwill is important for identifying potential risks at an early stage and taking suitable steps to ensure the financial stability of the Company. This monitoring is carried out as part of the routine year-end processes and not as part of the risk management process, which is why both monitoring of goodwill and impairments of investments in and loans to affiliated companies do not form part of the risk matrix.
Overall, the assessment of the gross risk level of financial risk as low is unchanged from the 2022 annual report, whereas the probability of occurrence has been increased to medium.
Risks arising from lease business
The lease activities that are used to drive 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 therefore constantly monitored and forecast on the basis of prices in these markets. The KION Group regularly assesses its aggregate risk position 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.
Long-term leases with end customers 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. 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.
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.
For 2024, the risk arising from the lease business is again regarded as low both in terms of probability of occurrence and gross risk value.
Human resources risks and legal risks
The KION Group relies on having highly qualified skilled workers and managers in key roles. If they left, it could have a long-term adverse impact on the Group’s prospects. That is why the KION Group actively engages in HR work aimed at identifying and developing young professionals with high potential who already work for the Company and retaining them over the long term, thereby enabling succession planning for key roles across the Group. The KION Group also positions itself in the external labor market as an employer of choice. Firstly, this should enable it to make strategic additions to its portfolio of existing staff and, in this way, avert the risk of possibly losing expertise. Secondly, access to highly skilled workers helps to lay the foundations for future profitable growth.
Any efficiency enhancement measures, capacity adjustments, or restructuring necessary to secure the Company’s long-term competitiveness may result in a risk of strikes and reactions of other kinds by the workforce. The KION Group is committed to doing all it can to limit the negative impact on the workforce of such measures and, if job losses are necessary, taking steps to ensure they are achieved with the minimum possible social impact. At sites where codetermination arrangements provide for the workforce to be involved in decision-making, the KION Group engages in constructive talks on these matters with the employee representatives.
Defined benefit obligations are subject to an annual actuarial valuation and the future payment obligations are discounted. A reduction in the discount rate increases the present value of the defined benefit obligations and therefore decreases equity. A further risk arises from the fact that if the return on the plan assets of the KION pension plan in Germany falls below the minimum guaranteed interest rate that exists in some cases, the KION Group is required to make up the difference. This may result in higher expenses for defined benefit obligations. The KION Group aims to limit this risk by adopting a suitable investment strategy.
The legal risks arising from the KION Group’s business are typical of those faced by any company operating in this sector. The Group companies are a party in a number of pending lawsuits in various countries. The individual companies cannot assume with any degree of certainty that they will win any of the lawsuits or that the existing risk provision in the form of insurance or provisions will be sufficient in each individual case. These lawsuits relate, among other things, to liability risks, especially as a result of legal action brought by third parties because, for example, the Company’s products were allegedly faulty or the Company allegedly failed to comply with contractual obligations. Overall, the KION Group is not expecting any of these existing legal proceedings to have a material impact on its financial position or financial performance.
Further legal risk may arise as a result of the environmental restoration of decommissioned sites, for example because of work required due to contamination. Any damage to the environment may lead to legal disputes and give rise to reputational risk. There are also risks arising from the need to implement regulatory requirements intended to facilitate a circular economy and mitigate climate change and from the implementation of regulatory requirements restricting the use of certain pollutants. These risks are captured and assessed only on a qualitative basis. They continue to be regarded as low due to the KION Group’s business model and to the standards that have already been achieved in the areas of energy-related emissions, occupational health and safety, and supply chain monitoring.
Further legal risks exist in connection with potential breaches of data privacy laws, including in relation to the processing of personal data and the documentation of such processing. For example, serious breaches of the European General Data Protection Regulation (GDPR) can lead to fines of up to 4 percent of the previous year’s revenue. Given the compliance standards maintained by the KION Group, the probability of data protection laws being breached and the risk level continues to be regarded as low. Events in 2023 gave no grounds to assume otherwise.
The Company has taken measures to prevent it from incurring financial losses as a result of these risks. Although legal disputes with third parties have been insignificant both currently and in the past, the Company has a centralized reporting system to record and assist pending lawsuits. The Company applies high quality and safety standards to the use of its products and in product development and manufacturing, and it has also taken out the usual types of insurance to cover any third-party claims. In addition, interdisciplinary teams work on the avoidance of risks arising from inadequate contractual arrangements. A further objective of this cooperation across functions is to ensure compliance with mandatory laws, regulations, and contractual arrangements at all times.
Owing to the KION Group’s export focus, legal risks arise due to the numerous international and local export controls that apply. The Company mitigates these risks with a variety of measures. Consequently, export controls are an important part of the compliance activities carried out by the Group companies.
Reputational risks are secondary risks that can arise from legal risks as well as other types of risk. Involvement in legal proceedings and investigations into non-compliance with laws could harm the reputation of the KION Group and of the individuals responsible. This could result in the loss of customers and have a negative impact on the positioning of the brand companies in the competitive arena. As they are qualitative in nature, reputational risks are not quantified and therefore do not form part of the risk matrix.
The KION Group’s human resources risk and legal risk both continue to be regarded as low.
Tax risks
The KION Group also takes tax risks into account. Uncertainty regarding the interpretation and application of tax laws may lead to unexpected tax charges. In addition, changes in tax legislation or disputes with the tax authorities may lead to financial risks. Potential consequences include back payments and penalties.
To minimize these risks, the KION Group continuously monitors the tax rules and adjusts its tax strategy accordingly. Tax advisors or other external experts are consulted for particularly complex or specialist matters.
The tax risks have been newly added to the risk matrix and are regarded as low both in terms of their level of risk and probability of occurrence.
Environmental risks
The KION Group’s business activities inevitably give rise to circumstances that may have a negative impact on the environment. This includes the use of polluting substances and the generation of harmful emissions. The KION Group is aware of these risks and has made it an objective to mitigate them and to find sustainable solutions. Nevertheless, unforeseeable events such as natural disasters or breaches of environmental law may result in environmental risks that could have an impact on the Company and its stakeholders.
The KION Group currently sees a ban on per- and polyfluoroalkyl substances (PFAS) in the EU as the biggest individual risk position. Although such a ban could have a wide-ranging impact on the KION Group’s business activities, it is too uncertain at present to be assessed for the risk matrix. The KION Group is currently in the process of capturing and analyzing environmental risks.