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?