Kuehne + Nagel International AG

Ladies and gentlemen, welcome to the nine-month 2020 results conference call and live webcast. I am Sandra, the chorus call operator. I would like to remind you that all participants are in this remote and the conference is being recorded. The presentations will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Dr. Detlef Dreske, 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 nine months 2020 results of Kühne & Nagel International AG. Our CFO, Markus Blanka, and I welcome you, as always, from sunny Switzerland. We published our nine-month results and the respective slide deck early this morning, and we get started on slide three. Kühne & Nagel manages the crisis successfully, especially in quarter three. And in September in quarter three, we saw a gradual improvement of volume and gross profits, which continued across all business units. Our underlying earnings recovery outpaces improved volume trends, a reflection of cost control, favorable product mix, and improving market conditions. As a result of the strong operational performance, we were able to increase our free cash flow by 31.4% versus previous year. Let's go into more details on the next slide. The group EBIT ended for the first nine months with 790 million Swiss francs, which came almost on the same level as previous year where we closed the first nine months with 794 million Swiss francs. The quarter three performance showed an EBIT of 371 million Swiss francs up by 31%, an underlying operational improvement, EBIT improvement of 8.8%. C-Logistics showed a very strong quarter three. ended the first nine months with an EBIT of 304 million Swiss francs and a conversion rate of 36.2%. especially in c logistics and we will come to this later in our presentation we saw increasing volumes of the small and medium-sized enterprise customers and we saw a very favorable portfolio mixed development and the tight cost control getting traction in quarter three Air logistics continued a strong performance, closed the EBIT for the first nine months with 350 million Swiss francs, and the volumes in automotive and perishable industries came back in quarter three. Also here, we will share some more details with you during the course of the presentation. Road logistics closed the first nine months with an EBIT of 38 million. We saw domestic transport volumes back to pre-crisis level in Europe, while the cross-border volume recovery is still lagging. And we saw still low volumes in North America. Contract logistics, our fourth business unit, closed the first nine months 2020 with an EBIT of 98 million Swiss francs and posted market share gains in pharma and healthcare and in e-commerce fulfillment. A strict cost management led to a very strong operational improvement. Let me lead you through the business unit update on slide six. And the picture, the graph shows it all. Sea freight, sea logistics, volume trends improved month by month. And let me give you some details on the figures. In June, we saw a minus 8% volume development. June marks most likely an inflection in the sea logistics market, while July, August showed a minus 6% volume decline and September only a minus 3% volume decline. gained share in higher yielding Asia to Europe trade and saw a significantly improved Europe and North America import business. The SME volumes, I mentioned that before, gradually came back and showed a very strong volume development in quarter three. Less dynamic were clearly automotive and U.S. agricultural products, for example, while the winners in the volume development were sports and garden equipment, furniture, pharma, reefer, and less container load businesses. Sea logistics volumes in quarter three were down 5.1%, while for the first nine months we posted minus 7.7% volume development. Air logistics, the volume trend materially improved. We saw a quarter two volume decline of minus 22%, while in quarter three, we saw a decline of only, minus 12.8%. Our market share is stable to maybe up on some trade lanes. And we saw a very strong volume trend being evident in European export business. This was driven especially by automotive and perishables. Let's go into the details of the sea logistics business. I mentioned the positive small and medium sized enterprise volume development, a reversal of a trend that we have seen in quarter two 2020, the strong increases of imports into Europe and North America from Asia and a tight cost control. That leads on slide eight to unit figures per TU. With a very favorable above 300 Swiss franc per TU gross profit, a result of the portfolio development and the SME customers being back into our portfolio. A tight cost control with unit costs below 200 Swiss francs. We mark here a 198 Swiss franc per TU unit cost development. And the highest EBIT ever in sea logistics with 113 Swiss francs per TU. In quarter three, we posted 378 million gross profit, which was 3.3% below previous year, while year to date, the gross profit development is minus 10%. And in EBIT in quarter three, that was 12.3% above prior year. We continue in C-Logistics on focusing on excellent customer service and have fully deployed the implementation of the concepts of customer care location and operating care center to get closer and most efficient to our customers. Air logistics. I mentioned automotive imperishable volumes recovering. and the positive one of impact of net 63 million Swiss francs. Therefore, the figures you see on slide 10 of the presentation, the air logistics figures are unit KPIs adjusted for impairment of intangibles in quarter four 2019 of minus 40 million Swiss francs and a quick one of in quarter three, 2020 of net positive net 63 million Swiss francs. The unit, if you look into the unit KPIs, unit meaning 100 kilo, we see a normalization of the average yield, which is a result of the improving cargo mix, while still the long haul packs belly capacity is depressed. The active cost management in all business units, but especially also in air logistics, showed a stable unit costs on the same level as previous year's quarter three. we have an adjusted EBIT result of Swiss francs 287 million, 9.1% above prior year. While in quarter three, we posted 106 million adjusted EBIT, which was 19.1% above prior year. A very strong operational performance. And as you know, we have made a statement in our press announcement, the whole KN group, Kühne-Nagel group, but especially our air logistics colleagues are well positioned to serve ongoing COVID related demand and especially the potential distribution of COVID-19 vaccines. Our next business unit, the road logistics business unit. As mentioned before, the demand for Domestic transports in Europe is almost back on pre-crisis level, while the high yielding cross-border volumes are still lagging. North America, volumes still lag, except for pharma and e-commerce. And I would say that the Americas somehow are still in the eye of the hurricane, the COVID-19 hurricane. From a performance point of view, road logistics is our hardest hit business unit. driven by three effects, which I would like to mention. A material drag from export and events, a shipment recovery almost on the same level as previous year, as mentioned before in Europe, but with lighter average weight, which drive obviously pressure on productivity, and North America still being distressed somehow by the COVID-19 situation. We see nevertheless sequential improvements continuing and expect this to continue in the next couple of months. And we have a very positive market reaction on our digital platform eTruck now, which drove a lot of the volume development, especially in Asia during the last six months. Contract logistics. We posted market share gains in the essential goods sector as well continued with the strict cost management. But I don't know whether you remember what I said to you in our previous call. I've spoken about the two phases of contract logistics. One phase The not so beautiful phase were at that time the automotive sector, aviation and industrial, while the nice phases were pharma, healthcare, essential goods and e-commerce. Today, I can say that we see improving trends in all sectors. So there is no two-phase for contract logistics anymore. Some are more shining than others. In detail, on slide 40, you see The contract logistics business unit excluding all real estate transactions, so the pure operational business performance. You see that, or you don't see it, but let me mention that e-commerce accounts for more than 150 fulfillment centers globally. that quarter three has been operationally the strongest quarter in the last seven years, a clear result of the consequent restructuring of the contract logistics business unit. The ongoing cost management shows more effects, and we have seen the lowest idle space ratio ever with 2.4%. From an operational point of view, in quarter three, we saw improvement of 15 million, 1.5 million to an operational result of 49 million adjusted by real estate, as mentioned before, which was 44% above previous year. and one can say that the restructuring plan of contract logistics will close on plan end of this year with quarter four and will enable contract logistics to shift then into a selected growth year again and before we continue going into the details of the financial figures i would like to mention that all the figures that we have that i have presented that marcus is going to present are driven and generated by the hard work and the full commitment and driving force of our colleagues, all our colleagues worldwide. And I would heartily and heartfelt thank all of them, all of you that are participating in the call for your commitment and your support in a very special year. And now I hand over to Markus to give you details on the financial figures.

Thank you, Detlef. Also from my side, welcome to everybody, ladies and gentlemen. I'm going to the first page, income statement, and what I want to open with is a confirmation that what we said in our half-year call would happen in the third quarter also happened. So what we anticipated, I think, really turned out to be true. We have seen coming back most of the business units in a normal situation in terms of how volume and margins develop. You may remember we said after the second quarter extraordinary high margins in air freight. we would expect through normalization of gross profit margins per 100 kilo that the average comes down a little bit at the same time the mix has normalized again so some of the perishable volumes in business came back so hence all of that has happened and we have seen that in the in the numbers Sea Freight, I think Detlef already highlighted very clearly a very good development on cost. At the same time, we were successful in the market to have a good gross profit margin here to you. One thing I want to mention before I go into the third quarter numbers, we have not experienced our regular seasonality. I think the year 2020 has been bare of any regularities, so as such also the seasonality that we have usually seen has been different or certainly distorted. When you follow me into the column of the third quarter variance between 2019 and 2020, you see that sequentially we have improved our development on the gross profit. You see here when the third quarter still that we are 108 million in the quarter behind last year but notably we should say that in sea freight and air freight uh we are three respectively four percent below last year which is very little we talk about 13 and 14 million so very close already coming up to what we have seen in the year 2019. Second point I want to highlight is you have heard there is a significant positive one-off effect in air freight amounting to net 63 million Swiss franc. Having said that, when we look into the EBIT line of 88 million, we would recognize that even without that effect, our growth would be between 8 and 8.5%. Quite remarkable, I think, when we look through the quarterly sequential development of the numbers. Not to forget, all that development against a backdrop of currency, an average here, as you can see on EBT level, earnings before tax of 5.7%, looks like a small number, still represents 45 million CHF in absolute terms. For simplicity reason, we have provided a simplified bridge, a reconciliation of the EBIT for the nine month period. Again, we have tried to keep it simple and I a knowledge that many of you on the call would like to have far more details than what we have disclosed here. I appreciate that we have addressed that in many of our calls already today in the morning and I'm pretty sure that Chris Combey is going to be happy to answer some of the more detailed questions around it. However, what the message on that slide clearly reveals is that we are very close to our 2019 thanks to cost control, cost control, cost control, motivation and now it is really, really the time to keep that momentum into the fourth quarter and going forward. I think echoing what Detlef has already said, it was the right decision to keep connected to our staff, to our employees, to our experts, and to bring them back into the business the moment we need the most, which is now at the time of recovery. Don't ask me what shape the recovery is going to be. The only thing I know is that it is happening at a point in time and we are able to to gain market share by bringing our people back into the operation. How can we do that? A solid foundation is something that is needed for that. Everybody knows when I talk about solid foundations, I can only talk about balance sheet. Three topics or three highlights, if I may. First one, you see clearly the total value of the balance sheet has reduced around 550 million. Simple calculation. You look quickly into the exchange rate impact that we have experienced in the P&L. Very similar, even a little bit bigger on that point on the balance sheet for the month end rate, September 30th, 2020. But this is where the main driver is coming from. Secondly, we have paid dividend in the third quarter to the amount of four Swiss franc per share, which is a cash outflow of roughly 480 million. After that, equity ratio as it stands 30th of September is still at around 24% equity ratio. Last but not least, very important, everybody looks at it on a daily basis. We do for sure cash and cash equivalents position. We are now at around 1 billion Swiss franc cash on the balance sheet. Talking about cash and free cash flow, of course, you have on slide 19 of the presentation the reporting on the cash and the free cash flow comparison on 2019 and 2020. One remark which is technical nature, operational cash flow and changes in working capital. You see there, there was a huge operational cash flow improvement with that little footnote to it. This is the reclassification, if you like, comparable with the one-off item from the quick acquisition that we have mentioned in the air freight business. That also means our working capital management has been significantly better than last year. I will allude to that on the next slide to come. How does the trajectory look like? The right side of the slide, we are currently at around 811 million as you see at the end of third quarter. uh anticipating some of your question how is the fourth quarter going to look like um last year you may remember we had um some special items out of real estate divestment um i would expect this year that a small item around this topic is also going to reappear we have been on the process of selling a second portfolio of real estate locations. Hence, my projection for the fourth quarter would be that we would probably create a free cash flow in and around 350 million Swiss francs. Working capital, page number 20. Extremely important message, and I reiterate that message as often as possible, we do closely monitor our receivable risk, our debtor risk. Until now, and I repeat myself what I said three months ago, we have had no significant problems, we have had no bad experience, no write-offs in significant numbers. However, we monitor extremely closely how the development is. We are cautious. The operation is in alert on that section. So there is something we expect, but as so many things in these times, we don't know exactly what to expect and where to expect it. We just try to be as much prepared as possible. You see the working capital intensity at 3.3% currently, just below the lower end even of our corridor that we have set ourselves around between 3.5 and 4.5%. It's a reflection of a very hard fight to keep the DSOs at a reasonable level and at the same time to manage the DPOs well. So my thanks go out again here to the operation who is the main driver for that. Return on capital employed. We're on slide 21 of the presentation. You see that kind of wavy curve on the top. You may remember when we talked in 2019 about restructuring of contract logistics. That is exactly what you have seen there. There is a swing up. Then first quarter 20, second quarter 2020, the dip through the COVID-19 development and let's call it carefully the recovery then back into the mid 60s on the return capital employed level. We maintain our target of 70% return on capital employed that we have already announced and already reiterated for a longer period of time. Moving forward to page number 22 and whoever was waiting for it, now it comes. How do we reach our conversion rate of 16%? eTouch is the answer, is still the answer and will remain the answer. So you can expect by our announcement for the full year 2020, a far more detailed progress report on eTouch, including financial implications of this. I can only tell one thing. today which is and by no means i would like to say crisis is good but there is always a momentum that is created by uh disruption and i think the disruption that we are living through and the crisis we're living through i think has opened many doors for digitalization automation and a more remote approach to execution. And I think this is exactly what has also propelled some of our eTouch initiatives. Again, confidence here that we can reach our targets 2022 with a 16% conversion rate. For illustration, if you like, the third quarter, if you take the recurring EBIT as we have reported it, you would find already a conversion rate in the third quarter excluding one-offs of 16.2%. Return on capital employed, I have mentioned that 70% remains our target and the effective tax rate as we have seen it here. We currently still work on the 24 to 26% brackets. I can say through the extraordinary profits that we have seen this year, we might have a slight alteration in this tax rate. I would expect that by the year end, we would move rather to the higher end of that bracket in 2020. So far, the financial targets for the business units and also the markets, our outlook for the fourth quarter, and you may appreciate that we have abstained at least in the second quarter of making any outlooks, so we are now trying at least to have a certain view into the fourth quarter. We would expect currently market growth in sea freight of around minus 6%, air freight of around minus 14%. In both of the areas, I think our target clearly will be to be better than the market. I think we are working on that. We are getting there for the full year 2020. For overland logistics, we will have the market estimated around minus 8% and for contract logistics minus 4%. So you see our estimates are still rather on the cautious side. I think reflecting again uncertainties around not only the kind of next year what's going to happen, but I think already when we talk about December, there is plenty of uncertainty at that point in time how December is going to look like. So take this outlook with certain precautions, but that is our current view how things may develop until the year end. With that little view forward, I would hand back to the operator and open our question and answer sessions for all the participants on the call.