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.

We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment may press star and 1 on the touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question comes from Daniel Rushka from Bernstein. Please go ahead, sir.

Good afternoon. Three, if I may. Number one, last time we spoke, you mentioned that your forward visibility of the business was very limited. Could you just comment on how that outlook over the next couple of weeks is shaping up and if that's changed in the past couple of weeks so you have a longer visibility this time? And then if volumes continue to recover, even if it's slowly, how should we think about the unit cost in air and sea? How much operating leverage can you capture as you grow out of this crisis? And lastly, connected to that, then if free cash flow continues on its trajectory, how would you think about the balance between dividend and, let's say, the war chest for M&A? May there be more room for a bigger dividend next year? Thanks.

Thanks, Daniel. Let me answer the first question and then hand over to Markus for the other two questions. Our visibility for the next couple of months has not changed. Our outlook is limited to, let's say, six to eight weeks maximum. And that has given us the cautiousness of assessment of the markets as well as what Markus has presented before on development. At the moment, as we have ended quarter three, we don't see a material change in the momentum that we have seen in September. But that is that statement and it is good for four to six weeks, not longer. So that would be our our reading of the market because there are a lot of uncertainties still remaining. You know that we have regional lockdowns or discussion of these. We have a lot of limits to travel, leisure travel and business travel. All this will have impacts on the consumption patterns and consumption as such, which will directly impact or indirectly impact transport volumes. We feel in good shape. We are in close contact with all customers and industries. And as I mentioned before, we have seen most of the industries somehow starting a recovery. different levels, different speeds, but they are starting a recovery. And that should give us enough confidence that most likely in 2020, only in 2020, we might have seen the worst of the market situation already. For the other two topics,

Marcus will happily comment. So, Daniel, I think the second question on the volume recovery and cost per unit, I mentioned cost a couple of times during my presentation. I think reflecting exactly what Detlef says, on the volume side, we have a certain visibility, maybe even shorter than what we normally have. So we have to focus on what is our cost base to it and the cost base efficiency gains that we have already demonstrated in sea freight and that for me is the big lever also going forward. that we can bring a cost per toy below 200 Swiss francs. And we may argue now there is also a currency effect in there that helps that. But at the end, the trend goes in that direction. And I think this is where we keep our focus on. So cost per unit, cost per toy below 200 Swiss francs, that's something that we feel is also sustainable going forward. So if we are... call it halfway right, that there is going to be a recovery over time. And maybe we can expect until Chinese New Year that we have some traditional, stronger trade lines coming along. We should see a good operational leverage going forward. Again, the focus is on the cost side. Whatever comes then on the cross-profit side, I think, is something we need to be careful with. Free cash flow question, your number three, I think, fair question. First of all, first priority for us as the management team is creating the free cash flow. Second priority is our M&A strategy. You know that we are committed into the Asian area with a substantial view on step changing our game in Asia. That has not changed. On the back of this M&A strategy that we have, we lost at least 18 to 24 months and communicated as well. I think you should look into payout ratios as we had them originally planned at the beginning of the year, which was reflecting around 60% as something that 60% of net profit after tax. That could be something that might also find the proposal going into the supervisory board and obviously after that into the general meeting. So that is, I think, the connection somewhere around the free cash flow generation and the spending of the free cash flow that is coming out of that.

Perfect. Thanks very much.

Thank you.

Next question comes from Satish Savikumar from Citigroup. Please go ahead.

Good afternoon, everyone. Detlef, Marcus, thanks for taking my questions. I have three questions. So firstly, on air logistics, could you please touch upon the booking window that you are seeing from shippers? How much of the volumes are booked on spot basis versus two to three weeks window? And How much of your freight capacity is actually exposed to charter network versus freight versus the commercial airlines? Secondly, on SME segment, where you pointed a sharp recovery, could you please elaborate where you are actually seeing a sharp recovery by verticals and market? That will be helpful. Finally, on the employee count, In the financial statement, the full-time equivalent of employees actually reduced from 78,000 to 72,000. So the question is, what will be the run rate into Q4? And is this number impacted by any short-term schemes?

Thank you, Satish. I think I start with the last one on the employee count. We have to be very specific on this one. There is obviously the number of employees that are on the payroll and then there is the FTEs associated with this. I think it's very important to understand that the short-term labour programmes that we have been enrolling people into, that counts against the FTE numbers, of course. At the same time, we do see very clearly that we have also cost reductions and people reductions in place. All the cost reductions have not been at the back of the furlough or short labour programmes. Unfortunately, there was also a number of people, of course, such programs are not available, we had to let go. So your trans reading or your reading is correct in that terms. However, having said that, it's an amount of around 4% or 5% of our stuff. That is, I think, reflecting fairly the situation on the employment side.

Then you ask Satish about the logistics window and how we book our capacity. I have to say we see the Asian market being very stable. We are seeing spot getting less particular, especially in quarter four, and there's still COVID-19 headers that apply on a monthly or quarterly basis, but we do not have an over-proportional securitization of charter business unless we would have clear demand, customer demand on specific trade chains. The sharp recovery, I'm not sure I've got the question, to be honest. We never spoke about a sharp recovery. We didn't even refrain from quoting any letter that would be a metaphor for recovery. At the moment, we saw a sequential recovery month by month, and especially the consumer products in Europe, in Latam and in North America, get more and more or drive more and more sea freight volume. And I mentioned leisure or sports equipment, garden equipment and so on, outdoor equipment, whatever. So this is driving a recovery. Is this a sharp recovery? Is it sustainable too early to say?

Okay, just on that point, just to follow up. So you said about SME being a good positive contribution. uh so within the semi segment which market are you seeing and performing better than the other market is it mainly in europe where you're seeing a good performance from sme versus north america no that is i mentioned it before it's europe north america and latin latin america

where we see the small and medium-sized enterprises coming back to production and thus starting to ship with us. This was a totally different situation in quarter two. Please do not forget that our volumes are still clearly behind previous year. We are talking about a development, a sequential development quarter two or quarter three versus quarter two.

Perfect, yeah, thank you.

Good afternoon, a couple of questions from me please.

Just one point that I picked up in terms of seasonality, you're saying that the business clearly isn't behaving given the crisis and sort of typical seasonality pattern and Q3 would normally be the strongest quarter. Just wondered if you could make any sort of comments on Q4. I mean, just directionally, are you therefore saying that the seasonality goes out the window such that Q4 could be a stronger quarter than Q3 in terms of profitability, which I think would make sense given the trends that we're seeing into October. And then on the F side, in terms of your OPEX, which seems to have come down very, very nicely below sort of a couple of hundred, million um swiss frags is that the sort of run rate that we should be using uh going forward thanks very much um let me let me come back to

Seasonality, Andy. In my 30 years or more in this industry, I've never seen a Q4 outperforming Q3, unless there were some special extraordinary items. So I think it's absolutely not possible, especially with the insecurity of COVID-19, that Q4 will be outperforming Q3. What we said, and that is maybe important to mention once more, that the momentum that we have seen in September seems to continue in October. But that's all we see. We can't even judge longer than six weeks, we said. So, therefore, be careful in assuming that quarter four from a pure operational point of view will outperform the previous quarter. We will nevertheless see a peak coming from Asia, Asia export. We will see a consumption peak around Thanksgiving and Christmas. That's the normal seasonal pattern. And we will see a preparation for Chinese New Year, which sometimes has an effect end of the year or early the following year. But nothing extraordinary or specific that we would need to state already today. With regards to OPEX statement, it's a cost statement. It's 200 or below 200 Swiss francs per TU. And that is something that was driven by a lot of cost activities. And I mentioned customer care location and operating care center. So a new way to operate in sea logistics, by the way, we have implemented that in air logistics as well, which drives efficiency gains. And that is something we have always stated that through an improved process and IT infrastructure, we will be able to harvest from efficiency gains. And I think this quarter or last quarter has shown we can get there.

Apologies, probably that's my line or my way of explaining things, but I was just wondering about the air logistics OPEX, sorry, in absolute terms, not per unit, being running below 200 million Swiss francs. Apologies there. Sorry. No worries.

I think the right way of looking at it is still the cost per unit because this quarter in air freight, and that's what we're talking, in air freight, we have the distortion around the extraordinary impact of the quick acquisition. But if you look into the production cost air freight, per 100 kilo. We are at 59 Swiss franc per 100 kilo. From our perspective, that should be sustainable, a sustainable number going forward, unless, of course, the odd chance happens that there is all of a sudden a massive increase in volumes that we have to manage. But under the current circumstances, 59 should be a number that we should look at from a sustainable basis.

Fantastic. And could I just ask one point of clarification, I guess? Again, apologies if it was my line, but I think you're very clear around Q4 free cash flow, Marcus. Did you say 350 or 300 for Q4, or maybe both?

Okay, let's settle for between 300 and 350. No, I would be inclined to say 350 should be a number we should be able to reach. Okay, thanks.

Thank you very much. That's really helpful. Thank you. Thank you.

The next question comes from the line from Mark from Barclays. Please go ahead.

Good afternoon, Detlef. Good afternoon, Marcus. A couple of questions, really. Two questions. First of all, because you mentioned it, Detlef, with the COVID-19 potential vaccine rollout next year, So the two questions are, do you see that being organized at a very international level? I mean, is something like the WHO or the UN going to be involved, or is this going to be a bit more piecemeal than that and more country by country? And the other half of that question is, I guess, do you think you'll be able to handle that business on normal commercial terms? Or are governments and those international bodies going to put pressure on you to do this at cost or cost plus or something like that? There's no clear view at the moment, but I just wondered what you thought you were seeing so far.

Sure. Mark, let me answer this question. So how will this be organized? I think it will be first of all dependent on which OEM or OEMs, manufacturers of pharmaceuticals and vaccines, will make the race. And depending on that, there will be most likely supranational bodies that will influence the distribution of vaccines, plus governments. The European community has already asked the national governments to come up with their national vaccination plans that will get involved. To your second question, Nobody can force us to do business. We are a privately or we are a stock listed company. We are not a government body. And I think the market play will be applicable here as well. There will be providers that will offer solutions and there will be a demand side that will seek solutions and they will, as always, RFQ the business and will not only look for the cost of handling and distribution of products, COVID-19 vaccines, but also the experience, the compliance with the GXP standards as well as the ability to deliver on time, undamaged, without any So there will be a huge market potential and we will look for those segments in the market that we have the best solution for. Also, there will be different demand per region. And we believe that there will not only be on the long or midterm, not only be one provider OEM producing it, but we will have contract manufacturers as well as a second or a third provider that might contract. have a listed and registered vaccine to offer to the market. And that will ease up the constraints that might be there in the first couple of weeks or months, nobody knows, throughout the course of the time.

Yeah, that sounds sensible, doesn't it? The second question I had, and again, I think it's for you, Detlef, is that with the kind of Q1 and then the Q2 results, you said you were seeing a certain amount of flight to quality and that you expected, and the inquiry levels were high, and you expected to see market share gains. Has that followed through? Because obviously I'm looking at the financial targets page and the piece on volumes, and it doesn't look as if you're expecting to significantly outperform the markets other than a little bit in air. Is that just... Mark has been very conservative with his forecasting, or has that market share gain kind of normalized a bit?

We always try to be realistic with our forecast. At the moment, we didn't show a 2020 forecast on our slide 22. Be careful, we show the performance that we have seen so far. Our growth or the basis is our year-to-date performance. Our ambition is still for the two network businesses, air logistics and sea logistics, to gain market share. And we will see at the end of this year whether the mid-sized companies forwarder, logistics companies were able to cope with market demand in a way that we were able to cope. For me, it's the same, Mark. Our ambition stays. And I think we are in good shape and have a good run rate to show that we are gaining market share in a contracting market. By the way, let me add, we have one substantial business, Marc. We would not have said so if we would not have seen our RFQs or our response to RFQs being successful.

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

Thank you. Thanks, Marc.

The next question comes from Sam Bland from JP Morgan. Please go ahead.

Afternoon. I have two questions, please. You've mentioned the strong September exit rates and trends in September, and obviously you gave the monthly volume progression in CFRADE on the call earlier. Is the September strength you saw broader than that Q3 CFRADE volume? Is it strong in September in other areas as well? Just wanted to give some detail there, please. And then on the CFRADE unit margins, It's up quite strongly. Well, it's up year on year, but I guess it's up even more strongly in US dollar terms. I appreciate why it's stronger than it was in Q2 because you get the SMEs come back. I just wonder why it might be up so strongly on a year-on-year basis. Thank you.

Sure. Sam, timber was stronger across all business units. I think I mentioned that in my initial or introductory statement. We saw a sequential improvement. I stated some figures for sea logistics or sea freight, but not only. So across all BUs, we saw an acceleration of volume recovery versus previous or sequentially versus previous months.

On the unit margins, I think, Sam, it's obviously a very important question for all of us. You're absolutely right, the increase third quarter versus second quarter is significant, also taking the US dollar in consideration also versus last year. The GP margin that we always report here has various components, one of which is clearly the mix. And SME better improvement means at the same time as a cross read, if you like, that commodity business has been reduced. or has been on a lower share from our product mix in total. And third quarter was maybe not so unexpected, but third quarter was clearly a lower share on commodities versus a higher share uh in the sme business um of course as the complexity towards it and you know that in sea freight we also have to look into some of the trade line development right some of the trade lanes have a rather tight market A lot of this conversation went through the press as well, Transpacific East Bank. There is tightening in the market, which always gives a bit of margin opportunities. Combination of mix, so better SMA versus lower commodity, plus some of the trade lanes in a tight situation, I think has helped the development. I would not bank necessarily on that development being going forward at the same time. It's pretty much what I said during my presentation. I think we are more confident in where our cost level is than what we can forecast on the GP level. But for the third quarter, that is the explanation.

Okay, thank you very much.

Thank you.

The next question comes from Alexandra Toome from Morgan Stanley. Please go ahead.

Hi, thank you for taking my questions. I just have two quick ones left. Just on the air freight market, Marcus, I think you mentioned we've seen some normalization in the air freight profitability already, but I just wanted to ask what you see as the normalized level, because it seems that 89 Swiss francs per 100 kg is still above the sort of 18, 19 level. And then the second question, just on contract logistics, Seeing some decent margin improvement there, the conversion rate of around 5.96% in the quarter. How much of this improvement would you say is sustainable? How much has been driven by cost restructuring versus, say, some of the equivalent furlough schemes or the higher margin growth in e-commerce? Thanks.

Alexander, thank you for asking the question because I think you're absolutely right on the air freight. I have been a bit or not precise enough. When I talk about normalization, it would be normalized for Cunha Nagel's product and cargo mix. So that meaning, you know, that around 30, 35 percent of our volumes traditionally going back into 2019 had been out of the perishable sector. And our GP at that point in time was always around the 80 Swiss franc mark. What I meant is coming from the second quarter where there was hardly any parish, a lot of special transports on PPE, which was giving an extraordinary GP per unit. at very low volume, you know, obviously that is a trade-off to that. We are now slowly developing back into regular, whatever, so hard cargo, the mix with perishables, with pharma, with e-commerce, so that mix starts balancing a bit closer to what is our normal cargo mix, and hence that GDP comes from above 100 into now into the region of 90, and probably going forward back into the 85 region. So that is what I meant with normalized. Normalized for our product and customers.

Do we hear?

Understood.

To your contract logistics question, Alexandra, what we have shown on slide 14 is from our point of view an operational performance. And the improvement very much comes from portfolio mix, a strong development in e-commerce, as well as with pharma customers, pharma healthcare customers. I think I mentioned that when I presented that slide. And also a cost program that we have started years ago that gets more and more traction. Your question regarding furlough, furlough is not to make profit. Furlough is the benefit of our employees and it's a cost coverage to keep them in employment. That's a totally different scheme. And from our view, the... performance in contract logistics with an improvement versus previous year quarter three of 50 million or 44 something percent is sustainable that was the aim of our restructuring and the targets and the contract logistics business unit and all colleagues involved hit those targets or meet those targets okay great thank you thank you you're welcome

The next question comes from Neil Gillean from Credit Suisse. Please go ahead.

Good afternoon, everybody. If I could ask two of Marcus and then maybe one for Detlef. First of all, on the CapEx side, Marcus, your last couple of years before this year, you had over 300 million Swiss francs a year. I guess this year is probably below 200. And I'd love your thoughts on next year or what kind of a CapEx level is reasonable to think about. Second question with respect to the impressive working capital management. I guess the DPOs lengthened, which is quite impressive given the tight supply on the air and the ocean side. Can you give us some flavor as to whether this is more on air or ocean or whether there's anything else to consider within the DPOs? And then finally, for Detlef, on the M&A side, you brought it up again today. I'm just interested when you look towards Asia, would you prefer to buy a company that's firing in all cylinders and has had a good pandemic? Or is there a bigger opportunity to find a company with good market presence that requires your expertise and a bit of TLC perhaps?

Thanks, Neil. So CapEx, yes, you're right, over the last couple of years we were around and above the 300 million Swiss franc expenditures, some of it being driven also through real estate investment that we have done. I think this year we will be around the 200 million mark, most likely not substantially below, but somewhere in that area. Going forward, we have to consider that we have restructured our contract logistics business quite significantly. And I'm not only talking about the divestments we have executed or are in execution. We also talk about how efficiently we are making use of our own capital allocation. I would feel comfortable with a number between 200 and 250 even going forward. So I'm very clear that we will not reach the 300 million number in the foreseeable future. Working capital, very good observation. The DSO side, obviously, we have been managing, as I said in my presentation, as hard as possible. It's a hard fight. It's a daily fight, clearly. On the DPO side, Yes, business pattern have changed slightly. When we look into the air freight market, of course, everything before was, if you like, regulated, you know, capacity, belly capacity was paid through IATA and costs on a monthly payment. Still that's happening, but not much has flown on that capacity. So there is a bit of a different way of managing currently the DPOs. Is that sustainable? I would like to think as long as we are in the situation as we are right now, that should be sustainable. But for us, the bigger focus or the more prominent focus certainly is having access to a good supplier relationship rather than stretching our relationships because of the DPO. So if something would have to give, if you ask me, then I think we would probably give half a day on the DPOs rather than not being available to service the customer.

Neil, your question regarding M&A. Thanks for putting M&A on the agenda because we didn't mention it really. Our strategy has not changed. We have mentioned our criteria before and I think it's agnostic to the COVID-19 situation or development of some of the targets. We are looking to strengthen our domestic or local footprint, access to Asian customers, access to Asian distribution networks and the like, and maybe also access to e-commerce solutions and infrastructure, IT infrastructure for those that could be scaled to the rest of the world. So, having said that, we are in contact with some of the targets that we have identified, but it's not related to any of the recent developments that we have faced altogether during the last six months or so.

Well understood. Thank you very much.

The next question comes from Franz Hoyer from Handelsbanken. Please go ahead.

Good afternoon. Thank you very much. We've seen a very tight market in parts of the sea market and especially on Asia and North America. And we've seen some complaints from some of your peers regarding getting access to capacity. And I was wondering whether you might have some comments on that issue, please.

My comments would be we have no complaints. We see the market being liquid, so to say. And we have a lot of our customers to get the right space on vessels that were full. And we are seeing that some of the lanes, Asia to Latam, for example, are very constrained. but you get access. From that point of view, I wouldn't mention any constraints.

Thank you. And just one more regarding the consumer electronics vertical this autumn, whether you might offer any comments on your view of that season this year, please.

Consumer electronics is a very specific question. This is a seasonal business and through e-commerce fulfillment or e-commerce orders, as well as through countries or regions going back to a lockdown-like situation, we will see demand continuing on a high level.

Thank you very much.

Thank you.

Yes, thank you very much and hello.

Small balance sheet questions, two small balance sheet questions are left. One is, can you give us some kind of a framework, your underlying framework for the impairment charges of 53 million for QUIC you booked? And the last one is, is it helpful for sale? increased by approximately 100 million and the same amount of 150 million the liabilities held for sale related to the UK activities which you intend to address in Q4. Can you also give us the idea why you increase that kind of numbers? Thank you.

Sure, Christian. I guess these are two questions for me. Just two. I'm kicking him. Clearly, to give a bit of flavour around the impairment charges, clearly the acquisition of QUIC was hugely successful. The two operating units, if you like, were mainly around pharma and healthcare, which is very strong. The other one is around the aerospace industry. And you can imagine that that is an industry that unfortunately has taken a huge hit by COVID-19 and continues to have a huge hit on this. And as it is with IFRS reporting, of course, and impairment testing towards that, that part has led us to make a justified impairment into that area.

Sorry, maybe an add-on on that. What is the share of aerospace related business within QUIC?

I think we are not disclosing this. Okay, thank you. Second question, the asset held for sale and the associated liabilities, very well spotted. I think it's a natural evolution around the fact that a transaction takes a bit of time. And I think the buyer as much as ourselves, we would have liked that transaction to be closed at the point when we talk already. But naturally, when you continue to operate a business, there is some right of use assets, so renovation or renewal, sorry, renewal is the right word, of longer lease liabilities and right of use assets associated with it. So it's a moving number that we're looking at. And you may remember that that is a quite large activity in the UK contract logistics business. And hence, you will see at the point of taking on new assets to operate and or transforming assets that had been owned in the past now into longer term lease. agreements, you will see these assets and liabilities as being a moving target at that point in time. So it's all associated with the way we have to report according to the IFRS reporting standards for asset health of sales, but it's an ongoing business, right?

And you are still very confident to close a deal in Q4?

We are very confident that that's going to happen. I think we are waiting for regulatory authorities to approve this. Clearly, the filing for the regulatory authorities is from the buyer's side, it's not from the seller's side, so we are supporting here the process. We hope that the UK authorities will deliver the answers before the year-end. Absolutely.

Maybe they have to do something else in due course. Of course. Thank you very much and all the best. Thank you.

Thanks, Christian. Take care.

There are no more questions.

And thanks, everybody, for joining our analyst conference today on the nine-month 2020 results of Kühne-Nagel International. We say goodbye to all of you and wish you good health. Stay healthy and full of energy. So do we. And we will talk again for the full year 2020 results on March 3rd next year. Take care. Bye-bye.

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