Kuehne + Nagel International AG

Ladies and gentlemen, welcome to the full year 2020 results conference call and live webcast. I am Moira, the chorus call operator. I would like to remind you that all participants will be listened on remote and the conference has been recorded. The presentation 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 broadcasting. At this time, it's my pleasure to hand over to Detlef Trasker, CEO of Kühne & Nagel. Please go ahead, sir.

Thanks, Moira. Good morning, good day, good afternoon, and good evening to all of you, and welcome to the analyst conference on the full year 2020 results of Kühne & Nagel International AG. Our CFO, Markus, and I welcome you from, as always, sunny Switzerland. We published our full year 2020 results and the respective slide deck earlier this morning. And also, as always, we get started on slide three. Bühne & Nagel successfully navigates through the crisis in 2020. Accelerating of operational and market momentum in quarter three and especially in quarter three 2020, we were able to see underlying earnings recovery, which outpaced the improved volume trends, which is a reflection of improved market conditions on one side, cost control, and a portfolio mix on the other side. As you see on this slide, we closed the year with 20.4 billion Swiss francs net turnover, 7.475 billion Swiss francs gross profit, which is a decrease of 6.3% versus previous year. And as you hear not very often today, but at least at this time of my presentation, we were fighting a currency headwind of around 6%, both in net turnover as well as in gross profit last year. The free cash flow, closed at 1.453 billion Swiss francs, which was an increase versus previous year of 27.7%. And the earnings per share slightly were reduced and ended up at 6.59 Swiss francs per share. As a result of the strong operational performance, the increase of the free cash flow is what we are proud of because that shows the solid operational performance of the organization. Let's continue on the next slide, slide four. Kühne & Nagel had a strong performance. We ended the group EBIT at 1 billion, 70 million Swiss francs, which was up 0.8% versus 2019 EBIT. And the operational EBIT improvement for the full year has been 4.4%. The last quarter has been extremely strong from a pure operational point of view. The EBIT was up 4.9% and closed at 280 million Swiss francs in quarter four 2020. A quick glance at the four business units. Seafreight closed the year 2020 with an EBIT of 423 million Swiss francs and a conversion rate of 29.9%. the increasing share of small and medium-sized customers recovered or increased since quarter three and especially in quarter four the conversion rating quarter quarter four uh just for interest it has been 32.5 percent in c freight air logistics uh The air logistics business closed the year 2020 with 505 million Swiss francs EBIT and an operational EBIT despite one time effects of 442 million Swiss francs. The underlying performance has been a conversion rate of 33.2% purely operational in 2020. And the strong yield performance in quarter four 2020 showed a conversion rate of 41.4%. So a very strong operational performance, especially the recovery in quarter three and exceptionally in quarter four 2020. Road logistics closed the year 2020 with an EBIT of 62 million Swiss francs. Domestic transport volumes back to pre-crisis levels. We mentioned that already in quarter three, while we still experienced end of last year, also early this year, low volumes in North America. In contract logistics, the EBIT closed at 80 million Swiss francs. You know that this business unit has a heavy restructuring exercise. We will come to this later on. And market share gains in pharma and healthcare and e-commerce fulfillment are the highlights of the year 2020 for contract logistics. Let's go into the details of the volume development of sea and air logistics on slide six. The sea, let's start with sea freight or sea logistics. The volume trends improved month by month. We posted a volume reduction in June of minus 8%, which was the inflection point. Quarter three minus 5.1% in quarter two minus 4.2%. The markets were slightly stronger, especially in quarter four, and this is a reflection of a lower demand for commodity shipments, forestry products, for example, and a very high demand for high-yield solutions. With child capacity on the supplied side, we were also very selective, except in volume, and especially in quarter four, did not except too much of the commoditized cargo. SME volume, small, medium-sized enterprise regained ground in quarter three and even more in quarter four, which was also beneficial for not only volume development, but as you will see in the next slide, also the yield development. The winners from a category point of view, industry point of view, the winners were sports, garden equipment, furniture and leisure products that can be used individually for the end consumers. The air logistics development showed material volume improvement also throughout the year. We started the one with minus 9 percent. Quarter two, we posted a reduction of minus 22 percent. Quarter three, minus 12.8 percent and still negative, but a huge improvement in quarter four, minus 7.5 percent. So sequentially improving market share is stable in 2020 in air logistics and in some of the businesses in Europe. We lost shares because the perishable business we saw reduced volumes due to the lockdowns, especially in Europe. Asia exports were extremely strong bowls into North America and Europe, and we benefited from this. And automotive high-tech pharma were the big winners in air logistics commodities that we transported, while perishables, as mentioned, and also general cargo was rather weak. Let's go into the details of C-Logistics, slide eight. And as you know, our slide tech very well, I would assume these are the unit KPIs, so per TU in the case of C-Logistics. We ended quarter four with 321 Swiss francs per TU cross-profit, a reflection of the favorable portfolio development, especially with more SME customers in our portfolio coming back. And the sea freight yields holding what we have already seen in quarter two. So very stable yield. The volume driven cost control also showed traction again. And so with 217 Swiss francs per TEU, the costs were on a very moderate level. And that is also a reflection of the efficiency programs, operating care centers and customer care locations that we implemented throughout the year 2020. And I think we have mentioned that throughout some of our last calls. So we are confident and we always stated that confidence that the EBIT per TU would end up on a sustainable basis at around 100 Swiss francs. And you see that with 104, we are in that corridor. We continued in quarter three and four our selective growth approach, and most likely that will be the path forward for the time being. And we are focusing on delivering an excellent customer service in sea logistics. Air logistics, slide nine briefly, strong yield performance in quarter four 2020. And as we mentioned already in our last call, when we published our quarters three results, a positive one of impact of net Swiss francs, 36 million, sorry, 63 million in quarter three 2020. The air logistics KPIs on slide 10 are operational KPIs. So be careful. The one-off effects have all been excluded for comparison reasons. And you see that we benefited also here from the cargo mix and the strong intake from high-yielding new customers and new volumes, desperate market situations. So the 100-kilogram Gross profit ended at or was at 95 Swiss francs per 100 kilo. The active cost management confirmed a rather stable 55 Swiss francs per 100 kilo. cost base, and we had a very strong operational performance, purely operational in quarter four, ending the quarter four with 100 kilo EBIT of 40 Swiss francs. And I mentioned the conversion rates before. The operational, and that's my last point, and I mentioned that also in the short overview, was at 442 million Swiss francs. which was 28.9 percent above prior year and in quarter four 155 million swiss francs which was 93.8 above prior year the whole kn group and especially air logistics but not only are well positioned to serve increasing covet related and in demand so we are here to drive growth that we see through the demand of all the COVID-related products versus the e-commerce demand in some of the trade pits. Let's continue with road logistics, slide 11. The demand of domestic transports in Europe returned to pre-crisis levels. So we were very happy to see this happening, especially in quarter four. The high yield in cross-border volumes are still lagging, but there was a spike that we experienced in pre-Brexit demand last six weeks of 2020 or so. So there was a stock buildup that we experienced and for sure road logistics benefited from that as well. North America unchanged volumes are lagging behind, and there are only two exceptions, which is pharma, not surprisingly, and also e-commerce fulfillment that shows growth in our networks. The rest is rather depressed, and we see less volume growth. Slide 12. I mentioned that in our quarter three call, and I think also in our quarter two call, road logistics is our hardest hit business unit with a strong recovery in quarter four, really. And you see this in the shape of the graph and the pictures in sync here, which is not by chance, obviously. So we have driven the graph according to the picture. That was our intention. But we see a shipment recovery and we have seen a shipment recovery in the fourth quarter. But the shipment recovery shows also much lighter average weight of the shipments. So this drives productivity or the gross profit per unit down and is a productivity strain that we are dealing with. At the same time, we still lack the expo and events business, and that is dragging on the results, while some of the expo and events team found a new home dealing with the last mile solutioning for vaccines distribution and vaccination, so to say. We have seen a very positive trend last year in the booking development of e-truck now or online platform for road logistics. And I can tell you that we have rolled this new blockbuster out into more than 14 markets worldwide. And it's huge by the customers or the markets in using that platform for their bookings. In total, the EBIT for the full year 2020 in road logistics was at 62 million Swiss francs, which is 20.5% below prior year. And last quarter was exceptional or showed a very positive development that at least was for sure a highlight in road logistics. On slide 13, next slide, you will see the details of contract logistics or the front page of contract logistics. And before we get into the details, let me state one thing. In 2020 especially, but also already in 2019, but in 2020 especially, contract logistics coped successfully with two challenges. One was the pandemic. And we mentioned that there was a nice and an ugly face to the pandemic because we saw extreme volume declines on one side in our contract logistics operations for customer serving industries that were either shut down or had no demand, have not seen any demand and volume spikes in other warehousing locations. where we were dealing with essential goods or pharmaceuticals or e-commerce fulfillment. So both has been a challenge for our contract logistics teams around the world. And in addition, the business and portfolio restructuring was continued with full speed and full focus throughout 2020. Today, I can say contract logistics. Congratulations. Mission accomplished. Restructuring completed. And that's the main message, as we have stated by end of 2020. This should be accomplished and it is accomplished. And now we have a very strong and solid base to selectively grow that business further in the months, quarters, years to come. We experienced market share gains in pharma health care and e-commerce fulfillment. And from the disposal of a business in the UK, a contract logistics business in the UK, experienced a net one-off impact of 42 million Swiss francs in quarter four 2020. On the next slide, a couple of details on the contract logistics development. We saw mid single digit business wins in contract logistics, assets, e-commerce and pharma mainly. We operate more than 150 e-commerce fulfillment centers around the world and we see an increasing portfolio profitability. If you look into our key data sheet at the end of the presentation, you will see that the EBIT margin operationally improved from 2.4% in 2019 to 2.5% in 2020. Given all the restructuring and given all the headwind in some of the operations from the pure operational point of view, I think that's a fantastic performance. The idle space is at the very low end. If you would have years ago, I would have said it's not possible, but we are below, slightly below 2% idle space at the moment. And it's a very healthy figure, which is managed very carefully and diligently by our contract logistics team. So, After the mission completed, a signal has been given to contract logistics or has been given by contract logistics, I should say. They have started now to shift back to selective growth mode again, and that is fully analyzing market opportunities and focusing on those solutions that we can scale throughout the organization and markets that are complementary to the rest of the network businesses as well. So 2020 has been a bit of a roller coaster, but we have driven and managed that roller coaster well. It has been an excellent team performance throughout our organization. And I know it's an analyst call, but let me say a heartfelt thank you to all our colleagues worldwide for what they have achieved and done and contributed to our success last year. Thank you. And now I'm pleased to hand over our key financials and the secrets of the figures to Markus, our CFO.

Thank you, Detlef, and also welcome from my side to all ladies and gentlemen on the call. I'm starting, as usual, page 16 of the presentation income statement. And indeed, it has been a year of extraordinary events. I think looking into the full year numbers, they do not, at least, just as to what has happened on the development of the year. I think what started as maybe a series of unfortunate events, what we thought would be the second quarter 2020, has really given a lot of uncertainty and volatility in the business and, as such, also in the numbers. And I would like to just point out a couple of facts of how the year developed when you look into the P&L statement. On the paper, we have ended the year with 506 million less gross profit than we had a year ago. Knowing that as nearly every year, the translation impact into the Swiss franc is negative, it has been negative to the effect of 425 million out of these 500 is actually attributable to the exchange rate differences. So a year that has been very difficult and challenging and only put up speed and recovery on the third and fourth quarter ended up basically at the same level of gross profit than it has been a year before. Moving down slightly in the P&L to the EBIT line or EBT line, either way, not only that we have extraordinary events in terms of business development, we also have two extraordinary events in the third quarter, positively impacted by the determination of the acquisition from Quake in the US and the fourth quarter and negatively impacted by the impact from the deconsolidation and the sale of the parts of our contract logistics portfolio in the UK. You will find the details on each of these two main special effects in the key data sheet. However, when I normalize and when I look into only normalizing these two events for the quality review, you can say already the third and the fourth quarter have tremendously increased in profitability and had been substantially better than a year ago. Having said that, that drives for sure conversion rate. And all of you on the call, you're very well aware that our target conversion rate for the group is 16%. And I can tell that operationally, so adjusting for only these two main impacts, we would have a conversion rate in the third quarter and fourth quarter each above 16%. I think that is for the very extraordinary year that we have behind us, the sign that it can be done and that we are not deviating from our targets to achieve 16%. which is our group target. Moving on to page 17, shedding a bit of details around the extraordinary effects that we had. Small illustration of what has happened. You can see here the bridge. Coincidentally, I would say there is the negative and the positive impact of the two larger effects had been nearly cancelling each other out. And you see the foreign currency impact on a level of EBIT is 64 million. Normalizing for that, you see very clearly that the improvement year over year in what we call a crisis year is 10.4% or 105 million. Important page number 18, as much as the P&L statement can move up and down, I think one of our focus area is the stability in the balance sheet. Very important. We have a close eye to our cash position for sure and to the risk that we have in the receivables. Either half today or always forward looking. What do we have to expect for the future? I want to highlight three topics here in the balance sheet. Some of you may ask, well, okay, you have sold the UK part of the business. You still keep it on the 31st of December on the balance sheet. Fact is that we have deconsolidated as of 1st of January 2021. Hence, as of the 30th of December, you'll see here still both position asset held for sale and the associated liabilities with it. However, the P&L impact has been recorded as required per IFRS in December 2020. Cash and cash equivalents, 1.7 billion nearly on the end of 2020. You have to see that, of course, also in the context with the acquisition of APACs, you have seen in our annual report that we have disclosed the range of the purchase value between 1.1 and 1.2 billion Swiss franc for the share that we have purchased. Hence, you see, that was, I think, expected also since last year when we declared our target and focus on Asia acquisition, that that will happen in such a magnitude, I would say. At the same time, equity ratio improved from around 23.6% last year to 24.5% this year. So very well in the range where I think we can talk about a solid and healthy equity ratio. Cash is king. Not anything I would usually like to be quoted for, but I think in times of crisis is something that is even more important than in the normal ongoing business, page 19. And I would again point out one thing when we look into the cash flow from operating activities variance between 2019 and 2020, it is remarkable that it's nearly the same number. And I think it doesn't look like it's coming out of a year of crisis, but I think what it does is it reveals the hard work the dedication and the effort of each of the employees of the group to actually make it happen. We often talk about this stringent management and cost management and also receivables, credit management, cash management. But I think we have put that to the test in the year 2020. And I'm very proud that from a free cash flow perspective, we have delivered that huge amount in 2020. Main driver, of course, working capital KPIs, page number 20. We ended the year with working capital, networking capital of 570 million, representing a 2.3% working capital intensity, a ratio that is, I think, very remarkable. I would just Be clear also for the coming quarters, I think 2.3% is a level that we should consider at far below our corridor that we have set ourselves for market growth and a normal networking capital requirement. I believe that in the regular quarters during the year, that number will get closer to the 3.5% where we usually sit with our networkers. capital intensity. Switching from working capital management to return management on page 21, return on capital employed. You may remember even in the days where the return on capital employed number was around 50 or 60%. I never stopped insisting that the calculated return on capital capacity on the balance sheet and the business we have is around 70%. I think we made it now. We are around the 70%. This is now 75, 71, but I think it is at the right level. Hence, I think it is very, we are confident that we can confirm our financial targets for the growth that we have not changed and we can reiterate those on the return on capital employed, 70%. Effective tax rate between 24% and 26%, working capital 3% to 5%, the ones that follow us for a longer period of time, that has been 3.5% to 4.5% previously, but we have extended the corridor a little bit downwards to reflect the good management of working capital we have. And again, the confirmation of our conversion rate of 16%. One of the elements to achieve the 16% conversion rate, of course, is cross-profit margins, some of the extraordinary good business that we have been able to manage over the last two quarters, but also the progress on our most important initiative in automation, what we call eTouch. And I have added in that presentation two pages on eTouch. I think also to illustrate again what is the context of eTouch so that we remind ourselves again what it actually is. And you see here a little pictogram, you know, of how the branches have operated in the past in what we call the efficient way, but it was kind of the master of his own efficiency by sequencing the way of work. Now that has been more managed and organized centrally on what is the workflow. This is on the left side bottom. And part of these components are now being shifted step by step. Also, depending on the implementation of our backbone operational system in sea and air freight has shifted into shared service centers operation or even being entirely automated. That is really the driver of what we do. What do we do with the effect of that? There is always twofold, and I'm very cautious in what I'm saying here, twofold to the extent that we are saying there is lower cost associated with this. Yes, of course, we can produce in a cheaper way. You have seen some of that already in the P&L. I'm going to come to that back in a minute. But also we improve service quality for customers. And I think the last year has shown that service quality for customers and being able to offer individual solutions to customers that have an immense demand for solutions in times of crisis is something that attracts new business, keeps customers and lowers attrition rate. Just as an example, when we today, when we talk about costs in the Z-freight arena, Prior to 2020 situations, we probably had a very, or we certainly had a very well-managed communication with carriers that immediately has gone into a much greater effort to do today when booking for containers. What probably was, and I'm just picking random numbers, what probably has been one phone call 18 months ago is now five phone calls with carriers to make things happen. There is no container available. The container is in the wrong place in the world. We have to create a lot of additional effort, or we have a lot of additional effort to make supply chains actually work. So even looking at our current situation, which is certainly far more intensive servicing, I think our cost base has been stable or even reducing a bit. Which leads me to page number 24. And I emphasize this is one snapshot out of the air freight arena where we are more advanced on the eTouch operation. So, whereas it is certainly more difficult to quantify the service quality, right? And the measurement is indirectly, as I said, is through higher customer satisfaction, lower attrition rate, more customer gains. So, but there is no KPI out there that is reflected in our financial numbers. But the cost side can be monitored very closely. And on this slide, we have tried to spread a bit of transparency. And forgive us, we are trying not to be explicitly transparent also in terms of some of our competitors may be looking into some of our slides as well. So we have grouped some of the activities into clusters that you can see here. And we have FAB. We have looked into the hours, man hours saved. We always talk about the personnel cost, of course. Man hours saved that we have been recording here in these activity clusters then have put a value to it. That value is, although it looks like round number 30, 15, 60, but there are numbers that vary very well and very close to what we calculated. You can see that through these activities in air freight, we have already managed an improvement on conversion rate of around 1.1%. Some of you may remember I said an improvement with full rollout of eTouch is an equivalent of around 3% improvement of conversion rate. I think that clearly reflects where we currently have to, and again, also should reflect a certain confidence to get there. All therefore mentioned, the e-touch conversion rate, cash generation, free cash flow and so on. I think that should give us also, or that has given us the confidence to put forward a proposal for the dividend for the year 2020 to be paid out after approval of the AGM in 2021 for Swiss franc 50. at a gross level. And I think it also reflects the expectations for 2020 with what we said, our acquisition ambitions in Asia and I think a quite satisfying return on the dividend side. With that message, I want to thank you and hand over back to Detlef on the topics of our acquisition.