Kuehne + Nagel International AG

Ladies and gentlemen, welcome to the Q1 2020 results conference call. I am Alice, the protocol operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. For operator assistance, please press star and 0. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Dr. Desbless Tretzker, CEO of Kühne-Nagel. Please go ahead.

Thanks, Alice. Good morning. Good day. Good afternoon and good evening to all of you. And welcome to the analyst conference on the first quarter 2020 results of Kühne-Nagel International. Our CFO, Markus Blanka Graf, and I welcome you from sunny Switzerland. We published our results and the respective slide deck earlier this morning. And as always, let's get started on slide three. Two months ago, we welcomed you from snowy Schindeläcki. And despite the weather, a lot of things have happened since then. The coronavirus pandemic is an immense global challenge and also for Köhne & Nagel. Our organization chose and shows a high degree of resilience in the face of this crisis. And therefore, we were able to close the first quarter 2020 with group earnings of Swiss francs 139 million and a solid free cash flow of 156 million Swiss francs. The EBIT and C logistics came to 79 million Swiss francs in the face of a reduced volume, especially to and from China in February. The EBIT in air logistics came at 71 million Swiss francs with a significantly reduced capacity and market volume. Our net turnover increase in road logistics has been at 0.6% in constant currencies with an EBIT of 17 million Swiss francs and contract logistics also closed the first quarter 2020 was an EBIT of 17 million and continued progressing with its restructuring activities. Let's follow me moving on slide four and you will see a new slide. We have to talk a bit about COVID-19. The Kühne & Nagel Group got to know COVID-19 already earlier this year when it started in China. And we started to respond fast and consequently throughout the organization. The markets at the moment show a worldwide trade reduction. In some markets down 20, 40, 60 percent, especially in February and March. Business in China has started to recover since March again. And today I would say we are back to 90, 95 percent normal. Europe and the Americas started to become heavily impacted by the COVID-19 pandemic since the beginning of March, and the duration and the severity of the pandemic is totally uncertain. Also, its economic impact is uncertain. We have seen a decrease of demand of perishables, and we have also seen an increased demand for pharma, healthcare, and e-commerce goods. We have responded fast, as mentioned before. Our operations went never out of operations. Globally, we are fully operational in 1400 locations in more than 108 countries. And only where government regulations or customers do not allow to continue operations, we had to reduce or stop them. Less than 10% of our operations had to stop for a certain period. 45,000 employees connected remotely within four or five days globally to our operating systems, and all of them stayed in close contact with the respective customers. We were able to adapt transport capacity and cost structure as fast as possible, and we have experienced significantly reduced volumes in all business units. while pharma and e-commerce volumes and some of the essential good volumes increased significantly throughout the last four, six weeks. And we will go into more detail for sure on the balance sheet, but the balance sheet shows a solid liquidity. During the last six, eight weeks, we also won a lot of new business throughout all business units that will help us to prove customer excellence in our operations moving forward. Let's continue on slide five. I mentioned that the group performance has been significantly impacted by COVID-19 and partly FX, foreign exchange, but that is always a topic in the Swiss franc, so I will not comment further on that. That is part of our sunny life in Switzerland. But at the same time, we have experienced that the crisis boosted the rollout and acceptance as well as the transaction volumes of our digital customer platforms. We have seen a lot and huge transactions on those platforms. If you look into the key figures, you will see on slide five, net turnover decreased by 6.2%, gross profit decreased by 5.1%, the EBIT decreased by 24%, and we estimate, and you will see some details on the next slide, an overall EBIT impact due to COVID-19 of 46 million Swiss francs. And the earnings per share went down by 23% respectively. Slide six, we tried to calculate the impact of the COVID-19 situation. So what was the situation? Shutdowns, curfews, especially impacted the luxury goods industry, the aviation, the automotive industry, the consumer industry with regards to apparel and other goods. We saw very low volumes, especially from China and to China. We have seen the reduction in perishables, especially flowers and luxury perishables like lobster or shells and other perishables that go into restaurant consumption. And we have, on the contrary, seen higher volumes, especially in e-commerce, pharma, healthcare, and what we call food and essential goods consumption. which we will explain later on. So you see that there's a huge impact due to COVID-19 in sea logistics with an EBIT impact of 29 million Swiss francs. Air logistics, 5 million Swiss francs EBIT impact from COVID-19. Road logistics, three, and contract logistics, respectively, 9 million Swiss francs EBIT impact. As markets begin to normalize throughout the second semester, so quarter three and four this year, we anticipate to exit the current coronavirus pandemic in a much stronger position than we have entered. And we will see that the whole KN group will become stronger through that period. But the effects and the new market dynamics, we will not be able to assess and discuss with you before the end of the year. Let's go into some details of the business units. Slide seven, short overview on sea logistics and air logistics. And you have noted that we call them now sea logistics, air logistics, and road logistics. I'm sure you have noticed of that. I said already the coronavirus pandemic we experienced already since early this year. The Wuhan lockdown and then a curfew started January 23. So we had already emergency calls very early this year. And the lockdown led to significantly lower volumes from and to China. and also a disadvantageous cargo mix in sea logistics due to the fact that SME volumes reacted much faster, the small and medium-sized enterprise volumes reacted much faster than those of the big volume shippers. Air logistics, here our business continuity, the capability of continuing a seamless operation throughout the globe across all business units was very advantageous, especially for our air logistics colleagues. We were able to serve our customers and to win business that came up all of a sudden due to the new situation. freighter services and hub structure is part or has been part of our normal network operations. And therefore, with more and more capacity now being realized via freighters, that helps a lot to operate a seamless logistics operation even throughout the last couple of weeks. And I mentioned that less perishables in the network flower business and luxury segment of the perishable business led also to a more beneficial cargo mix because perishables, as you know, are lower yielded in general. Slide eight, a short comment, some short comments on the volume declines. So we saw a 6.2% volume decline in sea logistics. And as mentioned, it's all about China. The greater China volume was down 20 to 40 percent in February, revamping as of mid-March, while Europe and North America experienced a mid-single-digit volume decline as of March. And we saw weaker China-Asia exports and also a weaker transatlantic volume with minus 10% approximately in the first quarter. There were some pockets of growth, but they were related to Latin American exports mainly and partly intra-Asia after the lockdown in China has come to an end. Air logistics. I think we have to look into the different months to understand that business a bit better. So January, I would say, was more or less a normal and rather stable months. While in February, the tonnage in China declined significantly, 20%, 25% volume decline, countered by stable trends in other regions, like what I mentioned before, South America. In March, the pandemic related lockdowns led to reduced import demand in Europe, but an increasing export demand also for pharmaceutical and healthcare products out of China. So we have a volume reduction of 9% or 37,000 tons respectively in air logistics. And one third of that is related to perishables. And I mentioned the goods that traded down during the first quarter 2020 in parachutes. Let's go to slide nine to see the sea logistics details on a unit basis. So we saw a very swift drop in demand in China and that really hit us, especially in February. 70% of the reduced volume of 71,000 EU were or are China related. I mentioned also the negative cargo mix development as the volume decline primarily has been experienced with the higher yielding small and medium sized customers than with higher yielding larger customers. So we saw that most of them had to react very fast in February and March. Also, it's a strategy to stay operational, so to lean against large-scale reduction on the breadth and depth of our sea logistic service offering and to capture as much market momentum during the rebound as possible once we see that business comes back again. And further, we focused on an excellent customer service and winning new business, and I can tell you across all sectors, modes of transports or all business units, we experienced a huge pipeline conversion into business throughout the last four or six weeks. Slide 10, air logistics. As said before, the cargo mix has been advantageous for the air logistics business unit in the first quarter this year, the ability to maintain operational and to maintain operational integrity was a very high quality during this crisis have helped and supported to fill the pipeline and to show a modest market share gain in quarter one. Additionally, the cargo mix, and I mentioned it already, I think, two times, showed a much stronger growth in pharma and healthcare, essential goods, including spare parts, by the way, and also with quick, the pharma part of the quick business that we acquired a year ago. And all this in total led to a higher GDP, higher or a stable GDP. stable margin and EBIT per 100 kilo than what one would have expected. The advantages of our scale and service excellence and the technology platforms that we have deployed like NC Logistics are now most pronounced and fully accepted by our customers and shippers and I think we have a We have one relative to market in both business units, market share, which might not be important from a percentage point of view, but from a customer name and volume point of view, for sure we will see benefits of that in the second semester this year. Slide 11, road logistics. They started strong. Road logistics really started strong this year. And the first two months were, you know, they didn't even know what COVID-19 would would lead us to. But the volume significantly dropped then in March. And the reduced volumes are both visible in Europe and in the US. And that is a pure COVID-19 effect. If you follow me on the next slide, slide 12, you will see that the... fast and huge deterioration of volumes, especially hit Italy, not surprisingly, Spain, France, and the UK. And that all happened in the second, third, and following weeks in March, mainly. The US saw a much severe reduction of intermodal business, also in the beginning of March or since the beginning of March, while we have some positive effects. You see this here under the column of acquisition, some positive effects from the integration of both the Ypsil in Austria and Eastern Europe and the Rotra acquisition in the Netherlands and Belgium, which showed a positive impact. In addition, you don't see this in KPIs here, and maybe KPIs in these days are really not so important, but maintaining business up and running and making sure our customers are served in a high quality. But especially in road logistics, we experienced, like in the other prisoners' units, that the bookings in our online platforms soared. And eTruck now, a platform that we launched a year ago, shows a very high growth rate in bookings since the beginning of this year. Let's move on to slide 13, which is contract logistics. And contract logistics showed high resilience and showed two phases, more or less. The one phase was where the business decreased, where volumes decreased, where some of the operations, less than 10%, as I mentioned, had to stop for a certain period, which is automotive, industrial, and partly the aerospace sector. And the other phase is a huge volume increase in pharma, health care, e-commerce, essential goods operations, where we partly had to introduce additional shifts in order to cope with the demand. And 90% of our sites remained opened since the beginning of the year and showed a high-quality service also in contract logistics. If you follow me on slide 14, we show here the operational view on contract logistics. So we have extracted all the real estate related topics in order to show how does restructuring show traction or gets traction. The details of the BU you will find in the in the key data sheet at the end of the presentation. So we have a COVID-19 impact in contract logistics of approximately 9 million Swiss francs on EBIT level. And the restructuring showed clear benefits from an operational point of view. Pure operational contract logistics performed better than previous year. We were able to adapt cost structure as much as possible in the short period of time we had to react. And in total, I would say that the contract logistics business showed a remarkable performance throughout the last four or six weeks. Here, like in the terminals of our road logistics operations and networks, here are the workers that had to go into the warehouses, into the terminals, and to continue operations. With all the health and security measures that we have, that we implemented, these were the guys that made supply chains work and move over the last weeks. On slide 15, just another notice we published on March 9, I think it was, that we signed a contract to dispose or to divest a major part of our contract logistics business in the UK. We have signed a binding agreement with our colleagues from XPO Logistics, and the business that we are going to divest encompasses drinks logistics, food services, retail and technology. We believe it will take another, whatever, five, four, six months to close that business, hopefully in two, three. um and um the key figures of the business 2019 key figures were 750 million in turnover swiss francs obviously and earnings of 2 million swiss francs and a net asset net assets of approximately 100 million swiss francs and we will see we will see uh when when closing can be expected the quarter one is the for sure also impacted or has the COVID-19 situation in quarter one 2020 for sure has also an impact on this business. And I would like to stress that the pharma healthcare business that we operate successfully in the UK will be retained and continued with in the Kühne & Nagel contract logistics business unit. And having said so, after a short overview on the four business units, I'm happy to hand over to Markus, who will give you the details of the first quarter 2020 performance.

Markus? Thank you, Detlef, and welcome, ladies and gentlemen, also from my side. Start page number 16, income statement, and I think we have been quite resilient on a business model from the first three months in 2020. Given the amount of change in the regions and in the countries. When we take what Detlef just alluded to, China went down, then went back up again, then probably slowing down again a little bit on the production side. Then Europe came into the game. So there was a lot of changing environment, obviously. What the management did, we were responding to the various challenges around the last 90 days or so. And I think with... maintaining fully operational capacities and capabilities with moving into home office. That has been one of the achievements. Clearly, we were also having a GP reduction. I mean, this is something you would expect from the situation that we are all in. So the first quarter for me had kind of two bad news, one good news. The bad news, number one, was when you look into the P&L that ends in March 31st, 2020. We had 100 million GP less than a year ago. The good news is we have offset the 100 million with around 50 million cost savings. And last but not least, the second bad news is that also the currency was not helping us, at least not on the GP side. On the cost side, for sure, same effect, just in the opposite way. However, at an EBT level, that also costed around 9 million. So, summary of an income statement that was certainly challenged in the first quarter and will continue to be challenged also in the second quarter. Cross-profit reduction offset in a very short time frame with around 50% cost reductions. Leading to page number 17, balance sheet. Two items I want to talk about. The first one, connecting to what Detlef just said on the UK XBO deal. You have here on the face of the balance sheet, we have disclosed the asset held for sale and the liabilities associated with those. So net assets around 100 million. The second more important line, obviously, cash and cash equivalents. We are looking at the end of the period of around 900 million cash. And we are, as you would expect, very closely monitoring the development of that position. Going straight into page number 18, cash and free cash flow. I think unexpectedly you have operational cash flow pretty much at the same level as we had last year. Yes, of course, we made less profits also here. There's a bit less operational cash flow in there. Overall, I think we have to acknowledge one thing. You see that in the note to the free cash flow, we have around $72 million from a prepayment of withholding tax that is going to come back in the second quarter. So as such, our cash and cash equivalent, as it is noted here, of $888 million at that point in time would probably look $72 million higher than this. But it's not time to rest. It's not time to say, okay, everything is in best order. We have to obviously be very careful and look forward into our risk position with customers as well as with suppliers. There is a lot of development in the area of financial stability. And we are monitoring this very, very carefully not to run into unexpected risk or risks that we cannot manage anymore. So this is one of our main focus areas, certainly even more elevated than normally in the second quarter and most likely also for the rest of the year to come. Working capital, page number 19. Again, I would like to point out that from a DSO, DPO perspective, we have performed actually quite well in the first quarter 2020, but I don't want us to rest on the good numbers. I think there is pressure on these numbers. There's pressures on the DSO and DPOs. We must not underestimate that. And as I said a minute ago, that pressure might come together with risk profile that is changing rapidly. Page number 20, return on capital employed. Here, as you would expect, size is not the main driver of this KPI. You can also have a very good return on capital employed when you are small. So that is not driving the number. We are still on a 60 plus percentage on return on capital employed. Note here that we have, as usual, excluded acquisitions and for this effect also taking out the asset held for sale that we have disclosed in the March 2020 numbers. Last but not least, page number 20, financial targets. And as you can imagine, we have been thinking about that slide long and hard. difficult to actually give any targets going forward in the current situation. We are maintaining our target 2020 in terms of conversion rate. Again, here size is not the predominant measure, but we will have to see how that develops when the uncertainty is getting a bit reduced and we see a bit clearer where we go to. Similar comment around the return capital employed. Also here, the 70%, as you can see, it's manageable. We can make that. We have to see what the next couple of quarters are going to bring. What you would expect and what you have already seen now in the first three months, on the last line, CapEx on property, plant, and equipment, PPE, you see a very significant reduction here on the cash outflow. So this is what I said previously in managing volatile situations and, let's say, hitting the brakes on all of the investments that we would normally do in terms of growing the business. I think when we extrapolate this, we are currently on a 200 million line on the capex. I'm pretty comfortable that if the situation continues like that, we might actually even be slightly below this. Market update?

Yeah, market update. So you've seen our action figures for the first quarter, and we are at the moment not in a position to give a solid outlook for this year. There are a lot of rumors and expectations on the market dynamics for the first quarter. Even those figures vary significantly, and we refrained from giving any guidance for the year. As soon as we have more confidence and a much clearer outlook, especially when lockdowns and curfews will be released and whether consumption starts to return to whatever means new normal, um we will we will allow ourselves to give some indication again expect this not uh maybe in the next quarterly call so semi-annual call maybe after quarter three we will be in a position to give a bit of a of a guidance here um And I think having said so, I would like to stress that our targets for 2020 and our strategy has not changed. Also not our strategy with regards to what we announced earlier this year, an acquisition, transformational acquisition or major acquisition in Asia without any time pressure. Also what we said already in our last call with you, But all the parameters of our strategy remain in place. Some of the activities and measures and programs have been postponed and delayed, and some others have been accelerated because with regards to our experience how to work digital, also with our customers and partners, that encouraged us a lot to advance and accelerate some of the deployment programs that were already in place. Having said so, I hand over back to Alice and open the Q&A.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on the touchtone telephone. You will hear a tone to confirm that you answered the queue. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and 1 at this time. First question comes from the line of Daniel Ruska, Bernstein Research. Please go ahead.

Gentlemen, good afternoon. I hope you and the families are well in this situation. Three, if I may. Number one, how would you expect your unit cost to develop over the next couple of quarters? You touched a little bit on the efforts you're doing, and maybe more specifically, how many of those unit cost and OPEC savings projects are more temporary? and how many of those kind of could benefit you also as you see volumes rebound, so really fundamental run rate restructurings that you can keep in place and also harness and harvest for longer. Secondly, you touched on it a little bit, but maybe could you share some more color on the kind of opportunity to accelerate digitization in any of the business units? How are you thinking about the C-Log rollout? Or does the current disruption also sometimes lead to greater complexity in the business and thus more manual work, pausing a little bit the positive effects from eTouch? And lastly, touching on capital allocation a little bit, and let's see if you're prepared to answer, but Do you see development here where you would want to accelerate inorganic growth for a longer period of time as a response to the crisis? As you go into the next cycle, do you think that you will do more acquisitions than you did in the past cycle and allocate more capital to M&A, also beyond the discussed potential target in Asia?

Hi, Daniel. Thanks for your questions. And first of all, to answer your initial remark, yes, we are all in good health and we feel well and full of energy. And I hope that is true for you and all of the participants listening. Unit cost development. I would say we have both elements, the temporary unit cost element. effect which is like with temporary labor where we put people out of operation because that is always the first and initial measure that we put in place when volumes are fluctuating. But fundamentally, I would say digitalization proved during the last couple of months that we can drive very efficient processes. And therefore, my remark, let's focus more on this. And we had some ideas and visions, so to say. But for me, or for all of us, not only for me, those ideas and visions are becoming much more tangible and much more tangible. permanent than what we have maybe thought four or five months ago. Opportunity to accelerate. I would not only comment on eTouch. I think eTouch has a lot of automation and technological and technical aspect that in the total combination will deem a shipment an eTouch shipment once the conversion rate is 60 to 80 percent and you know the definition. But I think the acceptance and the buy-in and the daily use of MyKN for our customers, so access to our operating systems online, remotely from home virtually to manage complex shipments, showed during the last couple of weeks that that is a very proven and high quality tool and more or less convinced a lot of our existing customers to continue with that business or with that platform on that basis. I would say we have had less and daniel forgive me for not giving you any statistics but less manual work than before i think we had more online and and systems driven activities than manual work yes you might have had to do a phone call or some personal interference but that was more to find the right capacity and and some other very specific topics related to pharma healthcare In total, I think it's a huge opportunity to make sure what we have achieved during the last two months and in the best scenario, we would have never thought about moving 45,000 people within five days into a seamless, remote, home office-based work everywhere around the globe with seamless access to our operating systems. And let's accelerate this. Also from our customer point of view, some of our e-commerce fulfillment customers experienced an growth in their volume during the last two or three months that was covering two or three years organic growth. And we all believe that that will not come or will not move backwards anymore. So it will find its balance or equilibrium on a much higher level than before the crisis. So, and then your last question, Daniel. More M&A or not, I think we will focus on organic growth. There's no reason not to focus on organic growth, especially as maybe some of the competitors struggled during the last couple of months, to say this with all respect, to stay operational. We have a huge opportunity to grow organically. But we always said that a major acquisition, a transformational acquisition in Asia is will help us to get customer access, access to Asian customers. And that is what we are looking for. And maybe also technology competence. So what we are looking at is a very successful, strong and reliable partner or acquisition in Asia. that can be blended with our competences and jointly we would be able to do more business with more customers, not only in Asia. So that's the idea. But our strategy of strong organic growth, relying on our own systems, quality and processes and network design, I think will not change or has not changed from my point of view during the crisis. So I hope that answers your questions, Daniel.

One follow-up on your comment that it's convinced a lot of people to use the digital routes. It sometimes seems that the air freight business unit may have been a little bit more innovative than the sea freight business unit, which has, of course, a much longer history in Kuna. Is this something you also see internally, where sea freight is saying, oh, had we just done sea log earlier?

No, I think absolutely not. Air freight is a much faster and agile and reactive business model as such. So if you are desperate and you need masks in certain markets, shipping them with sea logistics will need a minimum four or five, six weeks. So from that point of view, it's a different business model. I don't think so. Sea logistics has been very successful in Deploying the Sea Explorer, big data predictive analytics, making sure that time-definite shipments can be assessed for different carriers. The CO2 footprint can be assessed. I think there's a lot of innovation there, but it's a different market segment and it serves different customer needs. So both, I think, have their strengths. And I would say also the industry as such, let me say the air line industry has more standards data standards communication standards than the sea freight industry or the shipping industry and with yatta and cars and all those models it's much easier to standardize and go into in a seamless e-touch environment than for example with sea freight carriers which have their own set up at the moment. This industry lacks data standards per se, and it's different in the different business segments. All right. Thank you very much.

The next question comes from the line of Satish Tilakumar from Citigroup. Please go ahead.

Yes, thanks for taking my question. I just have two questions. One is on your risk assessment. So regarding the credit insurance program that you have in place for trade receivables, have you started to see any more claims being made against those insurance programs? And secondly, on the vertical, what is your exposure to energy vertical? And with the oil where it is today, have you started to see more customers defaulting? Or what does your risk profile look like within those verticals? Thank you.

All right. Satish, if I understood correctly, so we are talking about the trade receivables, any claims against the insurance program. And The current situation is that we have received cancellations and reductions from credit coverage. However, we are dealing with that very diligently on a customer-by-customer basis. And we have seen, as I said, cancellations, but not in a massive number. You have to think about that we have... many thousands counterparty risks. We have around 250,000 active customers. And when we receive cancellations in, let's say, 100 terms, then obviously we can manage that through different means. What is important for us is that our insurance stands with us in terms of going through what is perceived by many of us as being a situation that is going to improve until the end of the year. And I think that is very relevant. Of course, there are some buckets that insurers would have a very strange look at, you know, because there is also the notion, you know, take the airlines, for instance, a very important supplier to us, very important customers to us. But of course, I also have a certain understanding for the insurers that they say, well, this is becoming a relatively risky coverage. So for us, it's very clear. They are highly valued customers. They're highly valued suppliers, right? So when we receive some reductions on these limits, if you see what I mean, then we get in contact with the airlines and find usually a way how to deal with each other.

Okay, your second question, Satish, is the energy vertical. It's one of the verticals we do business with. No over-proportional exposure, I would rather say under-proportional. And it includes spare parts, renewable energy as well as oil and gas and all those activities. But it has the consumable spare parts part very much in the focus. And from that point of view, we do not see any major deviation at the moment from our approach towards this sector for the time being.

Okay then, perfect. Thank you very much for taking the question. Thank you.

The next question comes from the line of Andy Chu with Deutsche Bank. Please go ahead.

Good afternoon. Three questions, if I may, please. The first one is just to do with sort of wage costs. Obviously, as we sit here in Q2, I think we've seen a massive sort of step down in volume, certainly versus Q1 as a whole. So as you look at that sort of volume development, could you just give us a flavour in terms of, you know, what are you doing on wages and salaries? You've obviously started taking out temps, but, you know, where were wages and salaries? What could that look like sort of year on year? Secondly, just a sort of mechanical question, what will sort of GP per tonne in air freight cost? in March, just to give us a better exit rate in terms of GP per tonne that was up 3.8% in the quarter. And then finally on contract logistics, obviously there was a huge decline in profitability in Q1. Does that sort of force you to think about that business going forward? Because I guess when you look at contract logistics in periods of an economic downturn, what happens is that some of your customers may get into trouble, there's some bankruptcies. Is there any sort of risk within your portfolio, A, of bankruptcies, and B, whether you might again look to reshape that portfolio and whether we therefore may see another raft of restructuring charges in contract logistics? Thanks very much.

Right. Andy, thanks for your questions. Let me start with the latter one. And so risk of bankruptcy, I think, is equal to all business units. It's not related to a business unit from my point of view or our point of view. It's more the industry, the customer itself. And we have a very profound and professional credit risk management in place where we discuss those risks. The opposite, even in contract logistics, very often you have access, you can put your hands on the goods in your warehouse, and very often you have a certain way to secure your receivables and that sort of thing. The question is, the contract logistics strategy is clear. We have a defined strategy. We went through a hard restructuring phase over the last 12 months, as we said, and we all hope that could be closed by Q2 this year. Let's say it will be closed by Q3 this year, but it will be done. Then the restructuring of contract logistics is done. What is contract logistics today? Contract logistics today is what we call scaled solutions. So solutions we develop specific to certain customers or certain industries and then scale throughout the globe, worldwide. And 80% of our customer base in contract logistics is blue chip. So from that point of view, we don't see at the moment any major exposure. I can only say the resilience of the contract logistics business was extremely high and their flexibility and agility to cope with different customer requirements instead of luxury goods we stored and semi-produced masks and stuff like that was really impressive. And it's part of our portfolio of solutions. There's no other discussion or message that I would like you to think about with regards to contract logistics. GP per ton in March, yes, we know, but we don't disclose those figures. Forgive me, Andy. We have seen a different pattern. And I think I mentioned that when we went through the different months. So we have seen a huge, a normal January in air logistics. We have seen a disastrous February in air logistics. And then with all the pharma, healthcare, and essential goods transports in a wider sense, we saw a rather strong march, and that should give you enough guidance. But now, as we move into April, which leads to your initial question, or we are almost through April, we will also see that air logistics will react faster with lower volumes that we see in the market, and then will react faster when markets start to normalize again because then replenishment material, production supplies and so on are required again. Our wage costs, we will see a different cost structure for sure in quarter two, as we will see a different gross profit structure. We optimize everything we can, but, and I would like to reiterate that message, that's true for the whole Kühne & Nagel organization, we want to keep as many as possible of our Kühne & Nagel colleagues and employees on payroll, because we believe there will be a rebound effect. We have high quality experts. They are looked after in our industry and we want to keep as many as possible and therefore we have not started any sort of a major restructuring or down winding exercise. And at the moment, I cannot see that happening. We will weather the storm and the situation jointly. And then in the second semester, we will jointly, you know, grow volumes again and see business coming back. And that is our policy and has been decided as early as early March or sorry, early February, mid-February. And we saw the situation coming up, coming up out of it. I hope that answers your questions, Andy.

No, that's very helpful. Can I just ask one follow-up, and maybe it's, again, one that can't be answered, but in terms of GP per ton, despite the sort of air volume declines that we're seeing in the market today, do you think that we should be penciling in or thinking of a GP per ton that's pretty materially up year-on-year in Q2? I mean, to me, that would kind of make sense. Is it possible to make any comments on whether that logic is correct or not?

I would not follow that logic for the full year, for sure not. You might see maybe another month or two, but I wouldn't say even in quarter two that that will be the reality. You should know that 90% of the capacity out of Asia, especially China, is back already, capacity. It's greater capacity, so the markets start to balance to a certain extent as well. And also the demand for pharma and healthcare products, yes, has been soaring the last weeks, but it's balancing to a certain extent as well. So I would not feel comfortable to, you know, take the run rate maybe from March and take this as a guideline for the rest of the month. We also hope, I haven't mentioned that, we also hope altogether, because it will be a good signal for Mother's Day, May 10, because then in many European economies, curfews, lockdowns and so on should be fully or partly released and then we will see more flowers in our perishable network again, which is per se, per definition, a very low margin product. But we look forward to it because it's a symbol of a cycle that starts to normalize to a certain extent again. Thank you very much.

Thank you.

You're welcome.

The next question comes from the line of Namina Kayani from Bank of America. Please go ahead.

Hi. Two questions, please. So you mentioned that you've taken advantage of the temporary unemployment schemes. Was there any benefit from that in the first quarter? And what sort of contribution will that have in the second quarter or just April would be helpful to understand? And then secondly, on sea and air volumes, what has been the trend in April? Can you help quantify that versus the numbers in the first quarter? Thank you.

Okay, so I didn't mention anything on unemployment schemes, but we will use everything that helps to keep our experts and colleagues on our payroll wherever possible. uh local programs will will provide for it yeah quarter one uh nothing is in the figures absolutely nothing and uh quarter two we we can't even judge we have uh one target Our people are looked after in the market and we want to balance volume and GP development with our overall cost structure, but we have other cost effects. And I think Markus mentioned that we are not traveling at all. So I have not been traveling this year, which is a bit awkward, but that's a new situation. So there are a lot of other areas where we see that costs can be saved. So in total, I would say our costs will hopefully, to the major extent, compensate a GPA reduction that we will see for sure in quarter two because volumes will decline and especially the special situation in air logistics is not ongoing in April and May and might start again in June when we see that curfews and lockdowns will be reversible. Then your volume question, I have a lot of sympathy for your For your question, and I can't, but to be honest, we can't give you any percentages. What we can say is that the air volume will further decline. So the market will decline and also our volume will decline, especially in quarter two. And we will worldwide, while China at the moment is very robust and strong with volume. So it's at the moment too premature to judge it. But we would expect this market, also the sea logistics market, to decline. And the percentage, we hope that we can give you some guidance in the Q3 call, but not earlier than that.

And so, to be clear, you're expecting... Go ahead. Yes, please. So you're expecting a greater impact on the air volumes because it's the faster-moving goods, right? in 2Q rather than versus the C segment?

I would say that the first and the volume decline is visible in F logistics faster and volume increases will be visible in C logistics then if normalization is taking place. But at the moment, it's a lot of speculation. What we need is a release of all the curfews and lockdowns. That's a government decision. It's not an economic or a business decision. And then people that have enough interest and money to spend to consume again. Whether they wear a mask to go into the shop or gloves or not doesn't matter. If the spirit is the spirit of, yes, we can consume again and we have enough money to spend, then we will see normalization happening again. again soon. And let me add one thing. Looking into China, also Hubei province and Wuhan, we have today, as we speak, two shift operations in line feeding car manufacturing sites, two shifts with 9, 10, 11 hours each, and weekend shifts. So we see after two months of lockdown, even in this province, in China, a normalization again. I think I could expect the same after two, three months in more and more normalized environment in Europe as well.

Thank you.

You're welcome.

The next question comes from the line of Mark McVicker with Barclays. Go ahead.

Good afternoon, Dennis and Marcus. Hope you're both well. Two questions really which sort of follow on a bit from previous questions. If you're not going to have a restructuring program and you're not going to start taking out meaningful lumps of cost between GP and EBIT, and I note that in Q1 that totality of costs fell by just 2.5%, do you think you can keep the business profitable in Q2? And the linked question to that is really, from everything you're saying, it sounds as if you're expecting a fairly sort of V-shaped recovery in activity through the second half. Is that a fair interpretation of what you've been saying? Thank you.

Sure.

First of all, I think we have to be diligent with the wording. And I'm not a native speaker, Mark, you are. But I would say restructuring is our approach for contract logistics. What we do at the moment is clearly we have cost programs in place. We adapt costs according to what we expect will be the volume and GP development. But we will not let our people go. And that's the most important message. And we do everything to keep our people. And I will not reiterate that message now for the rest of the call. But That is important because we believe there will be a recovery. Will it be a V-shaped recovery or a longer U or whatever? I think it will take longer. And the new normal will maybe not be 100%, but 90% or 80% in certain industries. But the new normal in e-commerce fulfillment, the new normal in some other markets might even be 110%. So there is no rule for everything, not one rule for everything. Yeah. So our recovery, we have an Easter scenario that we built. We have a couple of scenarios that we built very early in end of February. One scenario is the Easter scenario, and it's more first and primarily a medical scenario. So will all the government measures and initiatives show traction in the number of cases, new cases, cases recovering and people being affected by COVID-19? And from our point of view, this scenario is highly valid because this April 20, many of the governments in Europe and also the US government stated when they will release curfews and lockdowns, when they will gradually start to go back. So, as I said, it's a medical scenario, not a commercial scenario. We believe that Q2 will be maybe a lost quarter, more or less, lost in the sense of, yes, there will be volume, but no growth, and for sure, nothing compared to quarter one. But also for Q3, we would expect then that on that basis, we will see growth again. I would not say it's a V. I don't know what shape it will look like, but it will also not be a U, as some people have speculated. It will be a gradual improvement and we are ready for that. So we are waiting for this. Don't underestimate temporary labor, though. 20% or 19% of our capacity is based on temporary labor. So we can breeze up to 20, 19%, if you want, on that basis very fast and have done so. But forgive me, restructuring is something different. Restructuring is that you permanently change structure. And that might be the case when we leverage our platforms more, that we use our platforms more to have a solid business running with our customers.

Okay. I just think I'm slightly struggling to understand what you can do between if you're not going to I get a bit about some temporary labour, but if you're not doing anything more structural than that, let's say volumes are down 15% to 20% in Q2 or something, that's going to have a huge impact on the bottom line, isn't it? I mean, there isn't... Look at the two items here. Roughly, what, 75% of the... the cost between GP and EBITDA is people, and then the rest is SG&A. I struggle to see how you've got that much natural flexibility unless you're pushing something into the organization or pushing something out of the organization.

So maybe, Mark, there is no global recipe or no recipe to serve... the global requirements of our networks. When we went into the COVID-19 contingency plans, we also set the framework, but let people decide on a site level, because the situation was totally different, even within a country. It was totally different given the customers we serve, given the markets we serve, given our number of stuff we have in different sites and so on and so forth. And that is also true with regards to our countermeasures. There's a huge bunch of activities that we have in place and that we have started. They are very local and on site level. We feel confident that we will weather the situation in quarter two well, whatever that means. But we are confident that that is the right approach and especially our customer feedback. I've never seen so many complimentary letters, emails, contacts with customers than what I've heard and seen over the last four weeks. We are operational. Many of our peers have struggled, and I'm saying this with all respect, but that should help us to win volume in addition to the base volume that we have as our with our existing customers.

Mark, I think the missing link between our communication right now is that I think when we talk about keeping people, that means we are subjecting them or nominating them for the state unemployment subsidy programs. Right? Right. So that means from a cost perspective, it is much better from our perspective, believing in the improvement of the situation, that over two, three, four, five months, we keep everybody, whatever everybody means in the context, right? And they go on short-term labor or anything like that, where governments help the situation. So from a cost perspective, You can calculate, if you like, whatever redundancy cost you would have. Say for a moment, this would be somewhere between three and six months redundancy cost, right? When you believe that the recovery is going to be within the three to six months timeframe, you would actually be worse off in doing the layoffs and rehiring. When you believe that the situation is going to be much more longer and extended, then obviously you're right. But this option is still on the table because at the end of the day, if the situation improves after three months, then through the government support, we have the same cost effect, which means the cost reductions are there.

Sure. I thought you said earlier that you weren't accessing the furlough schemes at the moment?

Well, I didn't say so. I said I didn't comment anything like unemployment or furlough programs. We didn't give a comment.

No. Okay.

And Mark, once more, it's a local country and site decision. Even in the UK, where you are based, hopefully at home and in good and healthy conditions, you have pharma sites where we seek more people, where we employ more people at the moment, where we have additional shifts. And we have other sites where the restaurant consumption is not happening anymore because pubs and restaurants are closed and therefore we had to stop activities totally. So that's not one program. We try, and Markus made it a mathematical model, for me it's more We have the best people in our industry. I'm fully convinced by that. And we want as many as possible to stand the situation together with us and then to be back in a market that whatever shape it will show, will show growth again. That's our approach.

Okay, that's great. Thank you both very much.

The next question comes from the line of Todai City. Main thread. Go ahead.

Yes, good afternoon. Thanks for taking my questions. Actually, firstly, following on the air freight market, can you elaborate a little bit on how you look at the equilibrium there? I mean, most of the passenger aircraft on the globe are grounded. That means 50% of capacity is essentially gone, and that looks to happen for the next couple of months still. So when sort of the initial cargo rush on some of the healthcare stuff comes off, do you still think the market will be in short supply and rates will remain high until passenger aircraft come back online as capacity? Is that the way to look at it? And then in that environment, where do you sort of make the extra margin or something that mitigates your impact on the bottom line there? And the second one, maybe it's set in the corner line, and the home office isn't always perfect, but there's a higher depreciation on the contract logistics side. Can you elaborate on what's been driving that step up in depreciation there? Thank you.

Okay, Tobias, hi. I would like to answer your equilibrium in the air logistics market. At the moment, I think we are having a much better supply against than we had three, four weeks ago from a capacity point of view. You know that many airlines have started to either take out seats or to use the passenger space also for boxes for cargo flights. It's not a normal environment. And in a radio interview, I said that it's fancy for the journalists, but it's not really sustainable. I think the freighter capacity will... stay strong. We had a lot of freighters that were put in a desert or were not flying too many cycles and the freighters now are the right answer to capacity demand in air logistics. You said a couple of months with regards to passenger flights. I think it's premature to expect intercontinental passenger flights to come back. We don't know, and I will not speculate, but I believe that will not happen too soon. And on that basis, we rely on freighter capacity. And I think what I mentioned before during my short presentation is that we have set up already years ago a hub structure that supports freighter activities, the consolidation and deconsolidation of cargo. And therefore, with our existing infrastructure, state-of-the-art and modern operation that is complementary to be served by freighters or belly, but by freighters even more so. I would say that maybe 2021, second semester, Tobias, so in more than a year from now, we might see the belly capacity being back to normal, what we knew from last year. but that is a scenario not based on any KPIs or it's just what we hear and talk to in the market.

Depreciation, thanks to, as you may imagine, thanks to IFRS 16 depreciation, new leases, a bit more on the depreciation line, but nothing that would not be operation.

So it's basically a switch from asset, no, no, asset that you sold or something, no? Yeah, from SP&A to depreciation.

Okay. Okay. Okay. Thanks a lot. Thank you.

The next question comes from the line of Frank Hoyer, Handelsbanken. Please go ahead.

Thank you very much. A more general question regarding the yields, gross profit per ton and per container that you are seeing, they are looking rather impressive if you look at it over a longer period of time and not least given that they are in hard currency. And I was just wondering in the context of the volume trends that we are seeing and in the context of the competitive pressures that you are seeing. How do you, are these yields sustainable or vulnerable from current levels in your view?

I think we, Frans, first of all, thanks for your question, but we gave clear sight that the yield is part of the mix or the result of the cargo mix, the specific cargo mix that we see. Let's talk about air logistics or air freight for a moment. When we see more perishable, normal perishable volumes in the market again, which are desperately waiting for the capacity to kick in again, then we will see also that the yield per 100 kilo, for example, will go down. Nevertheless, it's a very interesting business for us. As you know, we are market leader in perishables. And we have seen that a certain resilience during this crisis were with perishables. So from that point of view, I would say no problem. Yields per TEU, yes, they will go down, clearly. Yields per TEU will go down. And I would say that the... The market has to rebalance again. We know that some of the carriers will take out certain capacity that will have a different effect, a positive or a price pressure effect on the rates and as well as the yields maybe. But at the same time, the cargo mix is very decisive also in sea logistics for the yield. We hope that was our... presentation funds, we hope that the SME customers will be able, with all the government subsidies and support, to come back to business. That is the basis. Because they buy holistic services, they buy end-to-end supply chain. They have a more complex demand than the pure transactional volumes that we see with some of the blue-chip shippers. And that will help then to stabilize yield. So there is no rule. I would say quarter two, for sure, pressure on the yield. And quarter three, we will see, it depends on the overall market development. In our scenario, quarter three, we will see volume stabilizing versus the previous quarters, not versus previous year, stabilizing, improving, increasing again.

Okay. All right. Thank you very much for that. Thank you. You're welcome, Frank.

The next question comes from the line-up from Bland, J.B. Morgan. Please go ahead.

Hi, good afternoon. Two questions from me, please. First is on working capital. Slide 18 is a 208 million franc outflow. So if you adjust for the 72 million dividend impact, there's still an outflow, probably a bigger outflow than last year. I just wonder whether that you maybe would have liked to do a little bit better than that, given the lower volumes. or whether the working capital benefit from those, you might be a bit more obvious in Q2, for example. I guess, is there any receivables issue, overdue receivables issue going on there, anything to note? And the second one was on the cost base and the kind of maintenance of the capacity there rather than any aggressive cost cutting. Just point to any kind of evidence or what kind of gives you confidence in that. Have you had, whether it's good feedback from customers, whether you've seen others maybe being more aggressive on

costs and and you're winning any tender work or what the sort of pipeline new business is looking like as a result thanks uh sure sam um i think on the working capital the the the question would we have liked to have it better yes i would like to have better no question However, the first quarter also from a historic and seasonal point of view, I think the first quarter usually is a quarter which has rather limited, let's say, possibility to improve free cash flow. I think we were reasonably okay with the situation we are in. What I can confirm is we don't have any overdue situations. We don't have topics on credit risk or so. You have seen the DSO numbers were actually quite good. So none of that point into anything abnormal. The usual is that the first quarter is the weakest quarter, if you like, during the year. Again, I don't see a risk profile that has substantially changed in the first quarter now.

Capacity, cost, people.

Yeah, but capacity, I think we have... No, I think Sam was asking on the people, right?

Well, it was whether you're seeing any kind of positive results tangible positive benefits from maintaining the capacity, maybe a little bit more than peers have, whether that's in tender results so far or more qualitative things like customer feedback.

Yeah, I heard the tender results. Yes, we are fully operational also with our sales organization or key account organization. And I would say we have won not over proportionally, but significant business throughout the last four, five, six weeks across all industries. So for my point of view, it's the right approach. Maintain the expertise and the knowledge and the people in the organization. Ensure that we continue with our operations seamless on behalf of our customers. And we will see less volume with existing customers, but more volume or counterbalance partly by more volume that we win in the market. And that we have seen already in the past weeks. Our pipelines are moving up and the conversion rate, which is more important than the pipeline as such, is improving as well. So, RFQ to business. Sure. Okay, that's great. Thank you.

Thank you. The next question comes from the line of Stuart Todd from FOMO. Please go ahead.

Yes, good afternoon, gentlemen. I just want to pick up on one of Detlef's comments earlier that you built up a huge pipeline of new business in the last four to six weeks. Could you elaborate on that, given that you think in this uncertain climate shippers might be a little hesitant to sign new contracts with you?

Stuart, yes, you want some names and volumes? I have them, but despite jokingly, I think shippers are not reluctant to shift at the moment or to sign contracts because they are preparing for rebounding and reactivating their production and sales activities again themselves. And some of them have experienced things during the last couple of weeks that they do not want to continue with moving forward when volumes start to pick up again. And there are opportunities out there. But we are not crazy as well. We are not hunting everything in the market. We have a clear market development strategy. And we have a clear development strategy also for certain verticals and key customers in those verticals. We are a reliable and long-lasting partner for our customers. And we are looking for shippers that look for a stable and reliable partner as well. And I think we see more customers that know that paying a bit more for a supply chain solution that works is better than paying less and the goods do not end up where they should go to.

Okay, thank you.

The last question for today comes from the line of Sebastian Vogel with UBS. Please go ahead.

Hello, can you hear me?

Yes, very well. Thank you, Sebastian.

Perfect. I've got two questions. The first one, sorry, coming back again to the temp stuff side of things. You reduced your temporary workforce by around like 3,000 FTEs. There are like 17,000 still left. Is there some further room to take this number down, or do you think this current 17,000 is the sort of runway you need to keep your operations still properly working along the plans you have? That would be the one question. And the other one is, I recall that at the full year results, you mentioned that you have currently the real estate portfolio review ongoing for the next two years report, as you mentioned there. Is the coronavirus situation currently delaying that schedule? And if not, Have you seen a change in behavior of potential buyers regarding potential prices to be paid over the last couple of weeks?

Sebastian, thanks for your question. So let me start with the latter one. No change in behavior. The only topic is a physical due diligence in some markets is not possible when you have a lockdown. So there might be a delay. As I said before, the whole restructuring of contract logistics, including the real estate portfolio, will be accomplished quarter three, the latest. So when we speak in October for the Q3 results, we will have accomplished all of that. I see no major change or deviation or whatever. Also, we are not desperate and have to sell something underpriced. So we have... a fair valuation and that has not changed throughout the last two months or three months. Temporary labor. I could give you a detailed explanation. Temporary labor at Köln Erlangen, like with others, is calculated on hours. And please take into account the crisis in Europe. The coronavirus-induced crisis and volume reductions in Europe started early March. So we had a normal gen in February and then things collapsed more or less in March. So the calculation of man hours into FTEs is what is the basis for temporary labor. For sure you will see different figures of FTE, different FTE figures when we end quarter two. Understood. Many thanks. You're welcome.

That was the last question for today.

Thank you. Alice, thank you, gentlemen, or ladies and gentlemen. Thanks for joining in. And I would like to close our call of today with a clear statement of thank you to our colleagues, the Kühne & Nagel colleagues around the globe that made quarter one a, from our point of view, successful quarter. that did everything to keep supply chains alive to ship goods. And even in the worst conditions, market conditions, we were able to complement all or the majority of our customer requirements. which I think was a great, great job done. Thank you very much. And how this translates into figures in quarter two, we will share with all of you on the 21st of July. We are looking forward to have you with us then in that call, the summer call. And in the meantime, I can only say, stay healthy and take care. Thank you very much and bye-bye from Schindler Lake.

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