Kuehne + Nagel International AG

Ladies and gentlemen, welcome to CUNY Nagel's half-year 2020 results conference call. I am Sandra, the chorus call 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. Detlef Tretzker, CEO of Kühne & Nagel. Please go ahead, sir.

Thank you, Sandra. Good morning, good day, good afternoon, and good evening to all of you, and welcome to the analyst conference on the semi-annual half-year 2020 results of Kühne & Nagel International AG. Our CFO, Markus Blanka, And I welcome you from sunny Switzerland. We published our half-year results and the respective slide deck earlier today. And as always, let's get started on slide three. Over the first half of the year, the Kühne & Nagel Group successfully managed to deliver excellent service for customers in the face of unprecedented challenges posed by the COVID-19 pandemic. This started with the very abrupt halt to Chinese exports in February, followed by lockdowns in March and a deliberate pace of day-to-day recovery. Thanks to our dedicated colleagues and a seamless transition of approximately 45,000 staff to home office in a matter of days, our customers faced no degradation of service quality despite extraordinary volatility and demand for essential goods. This culminated in substantial market share gains across all transactional business units. From a financial perspective, the group's performance in quarter two is a testament to our flexible asset-light business model and our efforts to optimally variabilize a meaningful portion of our short-term fixed costs. And looking at those four key figures that are in front of you, you will see that the net turnover decreased by 7.5% heavily impacted by an FX effect of 5.9% versus previous year. Gross profit went down by 9.1% and the EBIT by 18% down to 419 million Swiss francs in the first half of 2020. Earnings per share landed at 2.58 Swiss francs per share. Please follow me on the next slide. slide four with a couple of details on the group and the business units. Group earnings for the period of the first six months were at 309 million Swiss francs. And we generated a strong free cash flow of 383 million Swiss francs. Looking at the four business units, let's start with sea logistics. We have seen an EBIT of 167 million Swiss francs, which were 28% below previous year, as a result of a shift in cargo mix, less SME volumes, and a positive reefer and farmer development. Also, the demand for rail solution, especially at China, started to pick up strongly as of June last quarter. Air logistics, an EBIT of 181 million Swiss francs has been achieved, which is 4% higher than previous year, based on a high demand for crisis goods, but also a demand for special solutions, such as sea and air volumes, which more than tripled in quarter two 2020. Road logistics ended the first semester with an EBIT of 26 million Swiss francs. All networks were maintained. and Europe now is slowly recovering while the Americas are still suffering from the effects of the pandemic. And contract logistics ended the first semester with an EBIT of 45 million Swiss francs, 21% below previous year, seeing a high demand of essential goods and answering the gross profit decline with strict cost management, almost matching the gross profit development. On slide six, we will discuss briefly the volume development in sea logistics and air logistics. Please let me start with sea logistics first. We have a pronounced effort in sea logistics, especially on maintaining our own networks in sea logistics, especially on maintaining our own network capacity, which yielded in significant market share gains across all segments. but especially in pharma and reefer and the e-commerce segment. The cargo mix, I mentioned that before, showed a significantly lower SME volume, and this is higher yielding as we have mentioned in some of our previous calls. The market demand is continuously recovering over the course of quarter two, but it's still below previous year. Let me give you some hints on how market, sorry, how our volume developed months by months in quarter two. We saw April was a 15%, 1.5% volume decrease, but gaining market share ended our volumes in May by only minus 12%. And the June volumes already showed a minus 8% volume decrease. So gradually we see volumes picking up again, but still lower than previous year. In total, we shipped 217,000 TEU less in our networks, which resulted into an 11.7% reduction in quarter two and a 9.1% reduction in volumes for the first semester 2020 for sea logistics. Air logistics saw a significantly lower demand for dry cargo and perishables, and both are lower yielding, as you know. a strong demand for essential goods, which were higher yielding, and mainly produced or operated in a charter, via charter business, because the recovery of belly is not expected to see or show significant effects before quarter four this year. a soaring demand for sea and air solutions, and also a monthly development that was rather stable by minus 23 to minus 20% April to June. In total, the first semester, a reduction in volume of minus 15.5%. How does this translate now into the unit performance of the business units? And please follow me on slide seven first. See logistics. Mentioned this already two times. Now for the third time, cargo mixes lower SME volumes, volume gains in pharma, e-commerce, and revert, and a stable margin development per unit in constant currency. On the next slide, slide eight, you see the details of the development. The gross profit mix is the driver of the unit profitability. with an FX effect, a currency effect of 6%, minus 6%. On the unit basis, you see a constant development or a constant margin per TOI, per TEU in quarter two this year. All cost measures were intact, and including the tailwind from FX or from currency, we saw a reduction in the cost level per unit as well. The EBIT per TU is well below our normal EBIT per TU, but this includes also headwind form currency of 6%. So, in total, we are at the lower end of the range that we usually pursue, the 80 to 100 Swiss francs TU EBIT per TU. But it's recovering, and we also see some seasonal effects kicking in. We are focusing, especially in sea logistics, on excellent customer service. And we have one significant business which already related or resulted in less volume reductions than one might have expected from the market development. And quarter two has been stronger and improving month by month. with regards to both volume, margin, and unit profitability. Slide nine, air logistics. The general cargo volume declined significantly. I will comment on this on the next slide. And the demand for higher yielding crisis goods has soared. The market demand has been much weaker in quarter two, as anticipated. We have to say the regular dry cargo, so the general cargo, the normal cargo that we transport, especially in the belly capacity, has been down by minus 40 to minus 50 percent. And this has been offset by crisis volumes, essential goods, but not only crisis volumes, essential goods, but not only PPE, but also packaged food, as well as e-commerce volumes went into that segment. Perishables were down in April and May, but the recovery started already in June, and we also see hard cargo or general cargo coming back step by step as of June this year. We had a spike in charter business while belly was not existing, which led to unit figures that are skewed by a different way of producing air logistics. And our unit yield, as you can see, is clearly above our normal range of 70 to 85 Swiss francs per 100 kilo, per ton, sorry, no, per 100 kilo for the normal volumes transported in our networks. The unit EBIT is also above normal despite higher currency headwinds. And this marks a 50% increase in quarter two versus previous quarter due to the beneficial volume mix. The cost consciousness also in this business unit, as well as the first airlock efficiencies that we have seen kicking in into that segment. Slide 11, a short overview on road logistics. Europe is slowly recovering. while the volumes in America stay at a low and very low level at the moment. This is true for both intermodal as well as truck brokerage. We have seen, slide 12 now, we have seen a fast and massive deterioration of volumes in Europe at the start of quarter two. And I think we mentioned that when we had our quarter one analyst call with you. And the order of magnitude has been higher than 50% volume reductions. But that was true for two, three weeks only. And we see a steady volume recovery step by step, especially in domestic transports in Europe at the moment. U.S. followed with a sharp volume decline end of April. and especially intermodal more or less collapsed. And we see a steady recovery in June, since June in Europe, and a stabilization on a low level in the U.S. at the moment. International and cross-border, which is the higher yielding business, those transports are still lagging, but also here we see volumes coming back. All our networks have been maintained and we are ready to deal with the cargo kicking in. And in some markets, I will not say the geography, we have even had to reject certain volumes because our networks were filled again in June. That's true for domestic transports. We saw a very strong growth in bookings on our digital roads. platform called eTruckNow. And we have been able to roll this out even in a virtual environment over the last couple of months in many Asian countries. And we see the volume soaring on that platform at the moment. While EBIT was 42% below previous year, we generated a positive EBIT of 26 million Swiss francs. And in our best case scenario, we would not have expected a positive quarter two in road logistics, given the character of our networks. So we are very proud of what has been achieved here, countering volume reductions with cost measures. Slide 13, contract logistics. And I have to say, contract logistics showed high resilience And it showed two faces. The ugly face, if I may say so, was industries that clearly were down trading, automotive and industrial to name two. And we had complete shutdowns by customers and sometimes by governments in those industries for two, three, four, six, up to eight weeks. and some of the volumes have not recovered even to a sizable level again than prior to the crisis. And there was a couple of nice faces that we saw, or up-trading industries, the pharma and healthcare industry, up-trading industries, the pharma and healthcare industry, the industry for essential goods, which is packaged food and consumables, and also e-commerce. And here the volumes were well above seasonal peaks, and we had extra shifts that we had to introduce, especially on the weekends, to cope with the soaring and spiking demand. 90% or up to 85% to 90% of our sites remained open throughout the whole crisis. And currently, we only have 12 sites that are still closed out of more than 600 sites globally. So we see a clear confirmation that 50% of our solution portfolio is related to essential goods. And this demand has never stopped or has never been reduced. Some details on the contract logistics business unit on slide 14. The implementation of the COVID-19 SOPs or operating procedures across all operations were introduced, but they also added a lot of cost and a lot of efficiencies. While we were doing everything to protect our staff, we lost clearly efficiencies. Cleaning, disinfection between shifts, no overlap of shifts anymore, segregation of workflow between shifts led to a lower productivity. and higher costs, obviously. But the excellent cost management that contract logistics introduced immediately with the crisis becoming one, so as of February, clearly showed progress and we were excluding the pressure from the exchange rate. We were able to counter the top line revenue pressure with cost measures almost entirely. And that is for such a huge business unit employing so many people, that's a huge effort and a great result. So the high portion in our solution portfolio of essential goods showed high resilience. And the lease debt largely backed by contracts with customers back to back. So we have more than 50% of our sites are so-called dedicated sites. So we were not exposed to an overproportional lease without any activity in too many sites. Nevertheless, we saw a development end of quarter one and early quarter two. But if you look into the figures, the overall performance, including the FX effects, is only 11.3% lower net turnover and in EBIT almost on the level of previous year, quarter two. And having said so, I am happy to hand over to my colleague, Markus, to lead you through the key financial figures.

Thank you very much, Douglas. Welcome to all participants, also from my side. A very special second quarter indeed. A time that was characterized by unusual business pattern. I think we had quite some Opposite focus on business management focus in the business units. Air freight can be described by just make it happen. Times where customers as much as on the carrier side, I think a lot of creativity was being required to make things happen. On the other side, as Ned Lev mentioned in contract logistics, clear focus on on cost containment and cost management. So a lot of times we have been confronted with the fact that traditional KPIs, key performance indicators, have been not extremely helpful. We needed to look differently at the business because it was a very special situation. But, and I want to lead you on to page number 16, I think the result ultimately was a quite good one. And when you look at the magnitude of impact, what such an unusual business can happen is, when you look at the gross profit development from the first and the second quarter compared to last year, we have actually lost in the second quarter 265 million gross profit compared to last year. That is two and a half times more than in the first quarter. However, on an EBITDA level, we actually have been at the same, even better level than compared to the first quarter. So we only, if you like, still a big number, but this quarter. So we only, if you like, still a big number, but only had a reduction in FHDA of 30 million out of a cross-profit reduction of 265. So there's quite a lot of the cost contained and the cost management in between That I think you can appreciate was quite a piece of hard work to get that done. Going further down in the P&L, of course, on an EBT level, yes, we are around 18% behind last year on a half-year basis, so 90,000,000. of which, and that's not an excuse, just a fact, of around 20 million are coming out of foreign currency exchange. So 70 million from an operational perspective reduction versus last year. So in relative terms, I believe the second quarter, and that's also very apparent, was even better than the first quarter. Page number 17, let's talk about air and sea freight in that context, the eTouch project and the automation initiatives behind that. We have presented the potential of the eTouch initiatives in commercial terms at our full year 2019 presentation. So, what you see here is merely an update where we stand. It's not a new assessment of values. It's just an update on progress. And I think you can appreciate we have set the baseline in many areas in air freight. Our operating system airlock is fully rolled out in 2019, which is prerequisite for many of the eTouch initiatives. Not all of them, but many of those. Despite the fact that Q2 had been a challenging environment to put through a project, but we have continued to drive eTouch initiatives and we made pretty good progress, at least in one of the five core areas, the one that is customer booking and order entry. I think the message here is, yes, do not expect any miracles right now in the current situation with still over a good three months, people working partially from home, partially just what I said, trying to keep up service in an excellent manner. But some of these projects have a slight delay. The message that I want to give you here is eTouch is on track. Page number 18, balance sheet. I'm only going to talk about three, four components, of course, some of them housekeeping. First one, trade receivables, biggest item on the balance sheet, 3.2, 3.3 billion by the end of June 2020, compared to 3.6 billion. Not surprisingly, again, here we see a position where business volume has reduced slightly. And you know, it's a function basically of rates and volume. And of course, a currency impact also on that position that is reducing the overall amount. Secondly, and arguably more important, cash and cash equivalent. I think our balance sheet is strong with a gross cash position here of nearly 1.2 billion, translated into net cash of around 760 million. which compares to roughly 900 million, respectively 480 million by the end of the first quarter 2020. So simple terms, a very good development in cash generation. In light, I think, of the decision, and you have read it in the news today, in light of the decision to propose the distribution of a dividend to the shareholders of four Swiss francs, We have calculated a pro forma net cash position at that point in time, and that would still be positive with 280 million. Just as a housekeeping topic here, you're aware that we have a revolving credit facility available to us, which is entirely undrawn, so nothing has been used so far in the extent or at the frame of 750 million. Coming back to the next item on the balance sheet, asset held for sale. Also here, information purposes. This is the value that we have or that is the scope of the business that we have signed a contract of divestment with XPO. You can see here very transparent asset held for sale. You can see here very transparent asset held for sale, $400 million. Liabilities associated with these assets held for sale, 300. So the net asset value of that business to be carved out is around 100 million. Equity ratio, I'm sure you have already calculated that yourself. From December, 23.6%, an increase to 25.9%. So I think the solidity of the balance sheet is also in these rough times and unusual times a benefit. Nevertheless, balance sheet is one thing, cash is king. So main topic, cash, going swiftly to page number 19. Operational cash flow, you can see that here in the first half 2020 at around 804 million. Similar level than last year with around 872 million. However, when we go down a little bit and look at the total cash and cash equivalent situation, we have an increase on the cash balance of around $666 million. Be reminded at that point in time that included last year a dividend payment to the amount of $720 million. So comparably at similar level, free cash flow generation, really what we are looking at. Very resilient free cash flow generation also in the second quarter. So I'm talking second quarter, not half year. In the second quarter of 227 million, which compares to 223 million. So let's talk about crisis or non-crisis. Free cash flow generation has been at the very same level as last year. Excluding some of the disposals, and this gives you a bit of an idea on how much extraordinary components are in there, excluding the disposals, the underlying free cash flow for the second quarter was still 221. So, the swing that we talked due to disposals is a very neglectable, I think, 6 million out of the free cash flow. For everybody who runs some of the models, I think you can see here from the investing activities, the gross CapEx, the run rates or the CapEx that we spend into the business is currently aiming at around 200 million on an annual basis, which is significantly lower than we had it seen over the last couple of years. Some of the drivers, of course, is the contract logistics disposal of part of the UK business. At the same time, we're also very diligently working on the usage of long-term leases, according to IFRS 16, rather than outright purchases. Looking at the pattern in time, so the trajectory of the free cash flow, I think when you look at the curves on the page 19 on the right side, there is no reason to believe that that should look differently, at least in the third quarter than it was last year. Again, be reminded in the fourth quarter, we had some extraordinary impact in 2019. So we should expect a more even development into the fourth quarter also for 2020. Going to page number 20, and I only touched the accounts receivable quickly on the balance sheet. When I talked about the balance sheet, here you see trade receivables have decreased over year over year by around 400 million. The reasons that I mentioned already. trade payables by around 260 million. So our networking capital is down around 146 million. What's more important, our KPIs on DSOs and DPOs, we were able to keep, especially on the DSO side, days of sales outstanding, a number around 54, 55. So we have a deviation of 0.4 days. many questions coming along our way, obviously. Is there pressure from customers on extended payment terms? Yes, there is. Very clear, yes, there is. I think we will see more pressure coming in the third and fourth quarter. We are holding up quite well. I think service is one of the important arguments to maintain the DSOs. At the same time, I think our focus moves towards the risk profile behind the counterparties. I do expect going forward for the next two to three quarters an increase in the risk two to three quarters, an increase in the risk profile on counterparty risks. So nothing bad happened so far. I want to underline that. It's a no big defaults or anything like that, but I would expect that the pressure is also here getting higher until the end of the year and maybe into the first half year 2021. Regenerate capital employed, page number 21. You see that Little infliction point that we had here from 60% up to 66, 67, and I think that was a good sign. So now we see a little bit the COVID-19 effect that pushes down to 62% again. Very clear, and I just wrote it for clarity just beside it, the sudden decrease of the profitability that we have seen also on the P&L on a very similar asset base. is obviously mathematically leading to a bit of a compression on this one. However, from a target perspective, we maintain our financial targets with around 70% return on capital employed. That should be possible. The good news, and at the same time, I think the expected also from some of you news, is on the next page, page number 22. Dividend proposal, just to put also some clarity around conversations we had over the last years, you know that we never had a formal written dividend policy. As it is, all decision-making power remains with the Board of Directors and the General Assembly. That having said, the actual payout ratio in the recent years was always consistent with also our verbal communication to a distribution of around 75% of the net profit after tax. Clearly, now the BOD's proposal is based on the assessment of the market conditions and also the groups, performance, and likely ongoing performance. And as you can see here, the proposal to the extraordinary general meeting on September 2nd will be to pay out a dividend of four Swiss francs. Financial targets, and last slide from my presentation. I think you see on the left side, uh, the group financial targets, conversion rate, 11 to 16%. I think everybody's clear. One of the main drivers, e-touch, uh, return on capital employed. I just, uh, spoke about it. I think when we come back to, uh, regular profitability based on our asset base, 70% is, uh, is in reach working capital intensity. I want to talk about that first working capital intensity, uh, currently at 3.9%. And, uh, you might have noticed, I have, uh, Intentionally widened a little bit the corridor from top end 4.5% to 5% for a simple reason, because I believe that is anticipating a reflection of pressure on counterparty risk and potential DSOs for the next four quarters. Tax rate. Tax rate, I think, very important to look at this one. It's a housekeeping topic for you also to update on your models. We expect a group effective tax rate of around 24 to 26 percent, up from around 24 to 25 as per our latest communication. This is just reflecting the current shifts in the business and geographic mix. So just that you're not surprised on your models. Right side, the four business units, you see the first line, our actual performance in volumes, but underneath the part that everybody was really waiting for, that is the update on the market expectations for 2020 and the outlook. And as you can imagine, I think we're in line with many of our peers. We are not giving any. You know, I think the performance that the group has shown so far gives us a certain confidence in our ability also to manage through what we believe is going to still be a volatile and highly uncertain believe is going to still be volatile and highly uncertain market also for the rest of the year. And as the market outlook remains extremely uncertain to us as well, we offer, again, no explicit financial guidance for the group, nor volume guidance until the end of the year. Very sorry for that, but at the current stage, we will all have to live with guessworking and a bit of color of what we said on our past performance. With that little... Lack of outlook. I will hand over to Dentleff.