Kuehne + Nagel International AG

Ladies and gentlemen, welcome to the Half Year 2021 Results Conference Call and Live Webcast. I am Alice, the Chorus Call Operator. I would like to remind you that all participants will be listening only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 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 Tretzger, CEO of Kühne & Nagel. Please go ahead, sir.

Thank you, Alice. Good morning, good day, good afternoon and good evening to all of you. And welcome to the NLS conference on the half-year 2021 results of Kühne & Nagel International AG. Our CFO, Markus Blanka, and I welcome you, as always, from sunny Switzerland. And as always, let us get started on slide three of the slide deck published earlier today. Highlights of the last six months. We have seen that in quarter two, we have been developing very strongly and have experienced another remarkable quarter. results more than doubled, factor 2.5 of the previous year results. And an extension of our strong trend from the start of this year has been clearly seen. This is a confirmation as well as an acceleration of our strategy and its deployment. And I'm sure you will hear more of that when we go into the details of the business units. On this slide three, we have highlighted some of the KPIs, a gross profit increase of 23% versus previous year, out of which APEX contributed 134 million Swiss francs, so an organic growth of 15% without APEX, pre-cash flow increase, which will be detailed by Markus in the finance section, and a strong improvement of the earnings per share to 6.31 Swiss francs per share. Please follow me on the next slide, on slide four. As stated, in fact, earnings were 1.5 times higher than previous year first half. And the group exceeded a billion Swiss francs EBIT clearly. And the group conversion rate in the first six months 2021 ended with 20.9%, an acceleration in conversion rate in quarter two, which showed 26.2% versus 21.3% conversion rate in the previous quarter. Needless to say that this is amongst many other figures and all time high in our performance. Sea logistics, a very strong performance in a very chaotic market and I will go into more details in a couple of slides. Focus on high-value products and the very intensive service, operational service quality that we have to provide. A high demand also on premium services by our customers. Air logistics, a very strong EBIT. of 406 million Swiss francs in the first six months, 2021, with a strong volume and yield performance, both quarters, but accelerating in the second quarter, and as said, consolidating apex for the first time in the second quarter, 2021. Both logistics, EBIT of 54 million Swiss francs with a sustained volume growth in Europe, especially in the second A high demand for digital solutions. I will give you some flavor and details when we go through the road logistics section and a very solid operational performance. We shipped all cargo that came into our network without any flaws. And contract logistics, an EBIT of 72 million Swiss francs, continued organic growth, especially in pharma and e-commerce fulfillment, those areas where we focus on scaling our solutions. Please follow me on slide six for some details of the business units. And we always start with the sea and air logistics volume development. Let me start with sea logistics first. Our volume has been up 3.8% in the second quarter. And for the first half year, 2.9% growth. This, although exports of commodities, forest, agricultural, recycling material almost stopped. We saw a very high demand on the Transpac and North America or U.S. imports in general and a trend towards inventory buildup in the U.S. By the way, the U.S. inventory is the lowest, as per our understanding, of the inventory-to-sales ratio since 2001. We mentioned that in our first quarter review call with all of you, and I have to reiterate, we face a chaotic market. Sewers, port closures, limited capacities throughout the supply chain, reduced port productivity, and all this partly a pandemic effect, congestion, equipment shortages, all this is ongoing. and all this against the backdrop of robust demand. For this year, GDP growth is expected to see 6% plus by the end of 2021 versus a decrease of 3.3% in global GDP last year. So that is a swing of 10% and we clearly see this in the demand of the private households worldwide. U.S. imports are up 15% year to date already, and we see an accelerating trend as we are facing the autumn peak, so to say, in a couple of weeks. Kühne & Nagel focuses on premium services. I mentioned that before with sustained service intensity. And it's a huge workload for all our colleagues, Kühne & Nagel colleagues. And I can only reiterate a big thank you to all of them for the energy and their close interfaces with our customers to support them in managing their supply chain demand. And for sure you will ask, what is our outlook? And you have seen the last slide that I will present later. Currently, we don't see any sign or any trend that the environment shall change. We believe it could persist, could persist perhaps through Lunar New Year. And as you know, February 1st, the tiger year will start again. So maybe until then we will not see a major change in the demand and also the bottlenecks in the supply chains globally at the moment, mainly caused by port congestion and port inefficiencies. Air logistics. The pace of organic growth market share gains extended in quarter two versus quarter one And this reflects our strong based strengths across all industries, all verticals and perishables. So while we discussed perishables a year ago, we clearly see perishables being back with high growth rates and big demand at the moment. We see a strong growth with Asia exports, both on the Transpac and also to Europe. And also no change in the long haul packs capacity, despite the belly capacity, despite some effects of charter flights for the holiday season in some of the regions at the moment. But they don't comply or they don't meet the demands of the typical belly network that we operate pre or that we operated previously. So we focus on charters, block space, and this production is expanding. Looking at the sea and air freight markets globally, I would say it's a classical parallel development to the so-called bullwhip effect. I don't know whether you remember, but this were in the early 60s where supply chain was supply chain demand versus inventory optimization was discussed by the way Kanban and other concepts were born at that time and the container was in the early 60s five or six years old so a very early effect that was discussed and we have a similar pattern at the moment we have a bullwhip pattern which is even accelerated or amplitude further by the effect of the carrier constraints or the port, the infrastructure constraints, handling our belly capacity constraints in order to handle the increasing transportation needs of all our customers and the market in general. Some details on sea logistics, please follow me on slide eight. Clearly a strong yield development reflecting both a favorable portfolio development or product mix if you want a focus on SME and blue chip customers and virtually no commodities in the network right now. The key theme in sea logistics at the moment is sustained service intensity to meet exceeding high customer demand and that versus the constraint and chaotic market that I've described before. The yield expansion more than compensated for sequential unit cost increases, but the increase, the pace of the increase is lower than quarter one 2021 versus quarter 420. The half year earnings ended with an EBIT of 504 million Swiss francs and the conversion rate in the first six months of 2021 in sea logistics has been 46.7%, a remarkable progress in sea logistics. Air logistics, slide 10 of the slide deck. Quarter one and quarter two delivered a small degree of yield and EBIT per unit normalization. I mentioned that already in the first quarter call, and this is continuing, especially if you look into the figures or excluding APEX, which we consolidated, as mentioned before, first time in quarter two this year. We have stable unit costs, including first effects from initiatives, and Markus will give you details on this in his part of the presentation. And we see a very strong contribution of APEX, which becomes clearly visible in total, but also on the unit KPIs and clearly exceeding our expectation of business plan. The conversion rate in air logistics for the first six months, 42.3%. and accelerating also with a small or with an apex effect in quarter two to 43.6%. Some details on apex. Next slide, slide 11. A short update if you want. We gave you some flavor and background when we discussed the acquisition during the last call. Apex is one of the leading air freight forwarders in Asia. and if not the leading air freight forwarder in Asia, at least from our perspective, with a focus on Trans-Pacific trades and supported by a strong U.S. presence and intra-Asia market activities. A very reputed expertise in e-commerce, fulfillment, high tech and e-mobility, We announced that the closing took place on May 11 this year and the net turnover figures we have for information purposes put on this slide that have become part of our business and P&L in the second quarter. At this stage, I would like to warmly Welcome again, Tony Song and his entire APEX team. The spirit of our collaboration, the way they conduct business is really inspiring, a very good fit on all levels. And we experience a great collaboration, especially in joint procurement and also servicing our customers or both of our customers. in these difficult market environments very well with a high quality. Welcome, Tony, and welcome to the entire APEX team once more. I would like to move on then to road logistics, and you will clearly see in the figures on slide 13 that road logistics gained significant momentum in the second quarter 2021. Not only have we seen a strong volume, i.e. shipment growth in core European network and especially in the domestic markets, but also the international business in Europe especially is back. We also saw an accelerating net turnover growth and we have exceeded the 2019 levels for the first time again. and with a continuous demand, high demand and even improving demand for digital solutions like e-truck now or your easy Brexit solution. The easy Brexit solution, to comment on the letter, is planned to scale globally as your easy custom solution once we have received so much great feedback from our customer using the Brexit clearance between the European Union and the UK. So this will address a market of $7 billion US dollar market size globally as a pure digital solution that we will offer. eTrac now, we have mentioned that a couple of times, is centered growth is centered around visibility and software as a service. And it's also a very important door opener to new accounts for not only the road logistics colleagues, but also for the entire Kühne & Nagel organizations. EBIT of the half year 2021 in road logistics closed at 54 million. And that is a strong improvement versus last year and a sustained trend that we have noted for road logistics. The last business unit to comment on, slide 15, is contract logistics. A very strong performance and all operations. running smooth in contract logistics. We have seen an acceleration in organic net turnover growth of 13%, centered in farm e-commerce, which by the way is 80%, eight zero of all newly signed contracts. A strong growth of business in Asia and North America, both regions grow two times as fast as Europe, which is what we planned to achieve. Ida's base remains extremely low with 2.4%. And one interesting note as we look at this in more detail recently, over 10% of the lease obligations backed by customer contracts and nearly 100% of those lease obligations expire beyond 2025. So very well positioned business. And the ROSI improvement is clearly a credit of the restructuring and the organic growth. At the moment, we are running 20 plus percent, and that is one of the key contributors to the improved group ROSI, but Markus will go into more detail. So before I hand over to Markus to give you more details and the background of the financial figures, let me summarize the business overview shortly. We closed quarter two 2021 as another remarkable quarter and for the entire KN group we have experienced results that more than doubled and that is the contribution of not only strong growth and demand that we face and improvements in our operating models, but also the continuation of our strategy deployment that we have started in 2018 and an acceleration, as I mentioned before, that we have pushed, so to say, given the opportunities throughout the last six to nine months. I would like to remind everybody of us that still the majority of our white-collar staff is working mobile or from home. And with the discussions in many countries at the moment, we don't see a major shift or change. The pandemic is ongoing was a message that I stated last quarter, so three months ago, approximately. And most likely this will be true for another six to 12 months. Nobody knows. And maybe the pandemic is then an endemic and maybe we get used to it, but it is still there. I would... clearly and loudly extend a very heartfelt thank you to all our König & Nagel colleagues for an excellent customer service and all our service providers, partners for supporting us in these extreme times. The company is full of energy and a lot of customer focus and it's joy to see how the company is performing well. Thank you to all of you. And now I hand over to Markus to give you the details on the key financial figures.

Thank you, Detlef, and welcome also from my side to all participants on the call and listeners on the web. Let me start on page number 17, income statement. And yes, second quarter 2021 was a very strong result in absolute terms, but also relative, of course, compared to quarter two 2020, but especially to the already very good result in the first quarter 2021. We were able to accelerate incremental results sequentially. And when you look into the columns of the variance between first and second quarter 2021, you can see we have in second quarter added 536 million of cross-profit and 373 million of EBT compared to last year. Indeed, there is an effect of the first consolidation of APEX in it on the gross profit level, as mentioned before, to the amount of 134 million on an EBIT level in the amount of 71 million. Nevertheless, also the growth on the on the legacy business, on the Cuninago proprietary business that was stronger in the second quarter accelerating than in the first. Of course, that acceleration expresses itself in nearly every KPI alongside the profit and loss statement. Let me highlight a few of them. Conversion rate is on a year-to-date basis on 23.9%. In the second quarter alone, 26%. You may remember that is the target number that we have given for 16% conversion rate for 2022 in our strategic outlook. I think we will most likely update that number in the next quarters to come when we will also expand on our future plans on a strategic level. Let me talk about the Apex acquisition and consolidation, certainly as one of the main events in the second quarter. It has not only changed the performance level of the group, When you look into the numbers that I just mentioned, 134 million gross profit and 71 million EBIT, you can calculate the incremental conversion rate of this business in itself is 53%. But not only the financial performance has been improving, but also the balance sheet and the P&L has added a few lines. Most notably on the P&L, you can see here our non-controlling interest line has increased to around 7 million. That is the value for around two months. That is equal to the share that is still owned by the Apex management. Let me move on to the balance sheet. And here we have the major impact, obviously, through the acquisition. Just a few technical remarks. You can see all the details on the interim financial statements. Note number nine that we have published also this morning. But a few I want to mention, obviously, through the acquisition, we have added goodwill to the amount of 1.1 billion. We have on the other side, also added current assets to the value at 390 million. You will not see that current asset impact in full because offsetting is, as we mentioned in the first quarter, the asset held for sale that had been deconsolidated as much as also the associated liabilities through the divestment of XPO. So on that side, On the total number, not a lot of change, but you should know about 390 million of current assets added through the APEX acquisition. On the liability side, that same number on current liabilities would be around 310 million. Cash and cash equivalent had to be expected, of course, a lower balance on the 30th of June 2021 than it would have been on December 31st. We have around one billion less cash on the balance sheet. why and we move on probably to page number 19 cash and free flow so uh very simple to identify the apex purchase price you can see on the line cash flow from investing activities here uh represented with around 970 million again the firm number or the exact number for the apex acquisition itself you can find in the notes on the other hand with the dividend payout that has been executed with 538 million. Just to remind our last year at the same point in time, we did not have any dividend payment yet because we made a decision to defer the decision to a later point in time and then executed the decision as well as the payout in September 2020. So looking at the overall number here, when you go to cash to cash equivalents as of June 30 is net compared with last year, we probably have 500 million less on the cash to cash equivalents. 500 million, that's more or less the dividend payment that we have executed. Looking at the trajectory and the graph on the right side, And you can see over the last three years that we have mentioned here, we are on the very same trajectory, give or take a certain variance, of course, per year. So it all looks good. And I think the free cash flow generation and the cash we can be quite happy with. However, page number 20, we also don't want to hide that. The fact that working capital has increased. Working capital has increased by around 400 million. Two major drivers for that. The one is obviously growth in rates and in volumes. On the other hand, We also have here an impact of Apex that is running a business model slightly different in financial terms of DSOs and DPOs to the Cuninago air freight business that we usually know. To give you a bit of flavor to this APEX details and without stating the specific numbers, but the DSO of that business is moving between 40 and 45 days and the DPO is currently between 10 and 15. Why is that? Because a lot of that business is currently executed on the charter contracts, and these charter contracts obviously have very limited, if at all, credit or payment terms towards the carriers. So at that point in time, we can say there is very good profitability at the cost, if you like, of a certain working capital intention, if the situation on the purchasing of capacity would change and rather tend back into belly capacity, automatically the DPOs, so the days of purchase, would actually increase and lighten up and relieve the working capital. Nevertheless, current situation, as I mentioned, we have an expansion in working capital for good reasons and I think for the right profitability. Talking about the right profitability and return, page number 21, return on capital employed. I said, and I looked it up in the transcript, that in the first quarter 2021, at the same point in time, I said, this is certainly a quarter at the top end of expectations. And that is when we were posting around 93, 94% return on capital employed. Usually, I don't like doing this, but this time I want to repeat myself. I want to say that in this quarter, we are certainly on the top end expectations with above 100% return on capital employed. What does it show? It shows the potential of the group's operational and financial strength and the ability on extraordinary returns under these circumstances. Not resting on that. So talking about improving these returns even further, I want to move on to page number 22. And it may look like a tiny piece in that big picture of the second quarter 2021. But it's an effort that will last and that will grow and that will gain more importance and the importance that it actually deserves. Yes, we look right now at eTouch delivering 1.5% additional conversion rate. And in the bigger scheme of what we currently live through in the market and the business environment, that might look tiny. But it's going to stay here, it's going to accelerate, and it's going to return value on a sustainable basis. Happy to discuss some of the details on that slide, but the message here very clearly, as we mentioned, the moment business will get a bit more into standard routines, this eTouch and all the eTouch initiatives will gain further momentum and deliver returns. So we will continue these updates and keep going to make ourselves better on conversion rates. So that is my little view on the financial drivers. And I would like to hand back to Detlef, who is going to tell us how the perspective on the market is going to look like.

Thanks, Markus. The emergence of the pandemic last year triggered a high degree of uncertainty, which persists to this day. And as always, you ask us for outlooks and what is the perspective, what do you expect? Let us share the current perspectives, both on the market as well as on ourselves, how we respond to this dynamic environment. Noted also in today's press release, we anticipate continued strong demand in the second semester 2021 across all business and all geographical markets. driven by the end consumer and the spending of governments into a lot of infrastructure projects that have already started. This current favorable trend and all the trends we see in different countries and markets is likely to persist through the Lunar New Year, which I mentioned, February 1st next year. Don't take the February 1st next year, but it will last longer than we originally anticipated. And the view on the market post-LUNA would be speculation. It remains uncertain. But one would believe that there will be no radical change to be expected, but maybe a gradual trend towards whatever normalization might look like. But I would like to make also one statement that despite this trend to normalization, Transport rates in general, for many reasons, will stay and remain at a higher level than what we have experienced during the last decade. And that we shouldn't forget because we will not see rates again that we have described in 2014, 15, 16 as being a record low in transport rates that we have seen for many decades at that time. In our response, as mentioned, our strategy has been clearly confirmed and the implementation and deployment continues to accelerate. We push hard to finalize our strategy deployment. In this strategy, we focus on three areas and this focus continues and is strong throughout the whole. It's industry solutions and eTouch. So servicing both customer needs at the same time out of one organization. And we're getting a lot of traction here. Technology and digital platforms, an enabler to stay active and in business without any minute interruption caused by us last year. And that is even accelerating and expanding. And a focus on our colleagues and experts. training them, retaining them, ensuring that their freedom to act and their decision taking is given in order to serve the customer needs that they have to face in the local and regional markets. And with this summary or current perspectives, I would like to hand over to Alice again to open Q&A. Thank you.

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 touchtone 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 2. Participants are requested to use only handsets while asking a question. Anyone who has a question or a comment may press star and 1 at this time. The first question comes from the line of Daniel Ruska with Bernstein Research. Please go ahead.

Good afternoon, gentlemen. Kun has seen exceptional performance, is seeing exceptional performance, both in the business and your share price. Kind of thinking beyond the current disruption, what new strategies or actions in the business or your financial strategy can you launch to support continued performance and to soften headwind when freight markets normalize? Secondly, maybe that's from your conversations with customers, how are your customers kind of holding up and reacting to the strong price increases? And how have your conversations over the past 12 months changed? Is there any change in tonality or the topics that are important to your customer? And lastly, you sold 24, 24.9% to partners group from the apex acquisition. Why? Um, you, the release says it's kind of for continued M and a and improvement, but it seems like you have expertise and you could have done a lot of that yourself. So what's the rationale? for selling the stake if Apex is a great business? Did you need the cash in the end? Just some insights on that decision would be great. Thanks.

Hi, Daniel. Thanks for your questions. Let me start answering them. New strategies. Yes, we have a lot of ideas, but let us finish deploying our strategy fully and completely by end of next year and really start harvesting from it. from the strategy even more than this year. You know that we are still deploying the operating system for sea logistics and what we have seen in air logistics we can only also generate as momentum with regards to eTouch and sea logistics. But the prerequisite is the new TMS and this needs another six, nine months for fully being fully rolled out worldwide. We have ideas and I only allude to one topic, which is the industry expertise that we have developed in many areas and a more industry-focused approach for certain markets. One example could be the pharma healthcare sector. And here I stop, Daniel. We will invite you and share the new strategy with you in due course when we have prepared our thinking. Customer retention and customer reactions and customer behaviors are First of all, we are a service provider that can deliver what we promise, and that is what we focus on at the moment. So you've seen the growth in sea logistics. We do not accept each and every cargo. We make sure whatever we accept, we can ship as much as we can influence it as flawless as possible. Customers are very grateful. We support them also with our digital platform, our outlooks, our supply chain visibility. I mentioned that also with the eTrackNow solution and the sustainability of our solutions. We don't talk about it much, but with all the discussions, also Green Deal Europe, sustainability is back on track. the agenda high with our customers, and we have transparency, we can avoid, reduce, and we can also offer compensation possibilities. But this transparency and the possibility to optimize the supply chain also with sustainability or CO2 footprint is becoming more and more important, and especially with those customers that have a direct and consumer-related business model.

Daniel, to your third question on partners group, I think it's always good to have a strong partner. And I think our ambitions in Asia that we have been quite vocal about already since a year, one and a half or so, I think we have made a good step. I think also in the first quarter we said already we'd like that step and it is very beneficial, but I think we hinted also to the point that it was not the last one. And I think with a strong partner that has very good expertise in Asia, has different access to a level of potential targets. You know the market as much as I do, maybe even better. M&A targets are, you know, identified sometimes because they raise their hand. Some of them are identified because investment bankers find them. But some of them only strong, knowledgeable partners in the region actually know and have access to. And I think this leverage with partners group is the right one and is the one that is going to open doors that we might actually normally even not know that there is a door. And I think before that background, I think that is a very good relationship we started, and we have hopes that that's going to expand further. So that is the why, and that is a strategic why, and looking forward to obviously see that coming to fruition as well. Great. Thank you. Hello, Ellis?

Ellis, I think we have... The next question comes from the line of Satish Sivakumar with Citigroup. Please go ahead.

Yeah, thank you. Thanks again for your time and the presentation. I've got a couple of questions here. Firstly, on the APEX. So how does APEX actually change your vertical exposure within the air logistics? And what do you actually attribute that GP per ton outperformance as a standalone Kuna Nagel Is it mainly because of the vertical or is it driven by the market that they operate in, i.e., mainly trans-Pacific? And the second one is around the OPEX per TEO in sea logistics. Looking at the current disruption levels, how does it actually change your productivity in terms of shipment that is being handled per staff per day? Is it fact to say that 250 to 260 CIS franc per TU kind of a new normalized levels in the near term?

Satish, let me answer your two questions. Thank you for that. First of all, OPEX in sea logistics, it's too early to talk about a new normal. We don't know. We have a lot of manual efforts, and I mentioned that during my presentation, especially in sea logistics, because there's a lot of disruption in the physical supply chain. And our experts, our logistics and forwarding experts have to interfere manually. So e-touch in sea logistics would not be possible at the moment given the current market situation. So that is the current situation and the outlook too early to say what would be the new normal. But we believe that this continues longer and that the manual interference and the workload for our colleagues remains. or the involvement of our colleagues remain so that we do not expect a major change in the next couple of months. With regards to APEX air exposure, I would not talk about an exposure. For me, it's a chance. It's two, twofold. It's the focus on the Transpac, one of the great trade lanes where, by the way, in sea logistics, we grew extremely well. But we had not had a strong position in air logistics before we acquired Apex. That was one of the rational backgrounds for that acquisition. And secondly, the Asian and Chinese customer base. These are customers that originate in the market that we are strong in and have been strong in prior to the APEX acquisition, but we get much closer to an Asian customer base and that has always been our strategy to exploit the market potential with Asian customers better. And both, we see already after only two months of three months of post consolidation, we see clearly that we make a lot of progress here. We have the same thinking, the same way to addressing topics, and that helps. Furthermore, they have a carrier business different to us. Their carrier management is unique, and we can leverage this not only on the Transpac most likely, but beyond, and that we will see in the future. Thank you.

Okay, thank you very much. Just a quick follow-up on the carrier management. How easy it is actually to roll out similar capabilities across your own dedicated network?

We don't have co-loading in our dedicated network, but we see a unique position of APEX in Asia with Asian co-loaders, and that is one of the reasons why APEX continues to stay standalone or separate from the Kuno Nagel organization. We will leverage this further.

Thank you. Very clear.

You're welcome.

The next question comes from the line of Muniba Kayani with Bank of America Global Research. Please go ahead.

Hi, thank you for the call. First question, Detlef, you mentioned that you expect transport rates to remain above pre-crisis levels. Can you talk about why you think that would be the case and kind of how much higher than pre-crisis levels do you think transport rates would be? And then secondly, on the M&A strategy and working with partners' groups, So how should we be thinking about M&A going forward? Like, can you give some maybe size or timing or any other color around that would be great to understand? Thank you.

Muneeba, thanks for your questions. Market rates. I wish I knew exactly what the rates will look like, but the reasons for the rates being higher than the last decade, in the next or in this decade we are in right now for sure have capacity or is a reflection on capacity and the upgrade of or the requirements for investments upgrading the infrastructure in many ports, in many operations of our suppliers. as well as also the, let's call it the sustainability part of transportation. You have heard about the Green Deal Europe and it includes the carriers, the sea freight carriers all of a sudden. and we will prepare and we have had a discussion on IMO 2020 last year but we forgot because of the pandemic so the sulfur or low sulfur bunker in sea vessels that have been introduced all this will cause higher transaction costs permanently or longer lasting in the business models we pursue. If you look back for two or three decades, we had historic low rates in the last decade between 2012 to 2019. And this is most likely it's our assessment getting back to a more normalized level. And if you take the average of the. First decade of the century, most likely that is a good indicator or could be a good indicator for the future normal rates. But it's too early to talk about normalization. This will last for sure until Lunar New Year and maybe even longer. We don't know. And I mentioned the bullwhip effect because the effect of the bullwhip is that the acceleration is increasing and nobody knows what needs to be improved. what input needs to be coming to the system in order to stabilize.

How many there is, Marcus? On the M&A, I think the strategy has not changed. The partnership with Partners Group doesn't change the strategy. It just is a massive leverage for us, a positive momentum that we take. I think the strategy in M&A is still very much focused around Asia and also the support from the supervisory board and the majority shareholder into the Asian development is continuous. And that remains our primary focus on the M&A targets. Will you see some bolt-on acquisition of small size as well in the future? Yes, you will. I mean, you have seen that A couple of days back, we have announced the closing of a small, small in relative terms to the other acquisition we have done, but still important acquisition in Norway. So niche markets, niche players on a complimentary note, it's always on our agenda. But strategy has not changed. Asia is the focus. We want to be relevant, large and important in Asia.

Thank you. Any specific size? Should there be more like billion-dollar yields?

We do select targets by relevance to our business model and strategy size. But in Asia, you could fairly assume that most of the targets are sizable.

Thank you. And Detlev, just a clarification. When you say transport rates, are you talking just about sea or are you talking about air as well? And how do you see e-commerce impacting the air side of things?

I'm talking about sea and air, and e-commerce has a clear impact on the demand, at least, and those rates, but also partly on the road logistics networks because we will see – I'm coming back to Europe, sustainability or demand for CO2 efficient transports kicking in soon. We have solutions for this, but operating this comes at a higher cost.

Thank you.

You're welcome.

The next question comes from the line of Sam Blunt with JP Morgan. Please go ahead.

Morning or afternoon. I've got two questions, please. Again, it's back to this sort of long term comment on freight rates. As you said that you think freight rates will be higher in the long run. Does that necessarily also extend to unit margins? Obviously, they're not exactly the same thing. So you're confident enough to say unit margins can be higher in the long run than the historic level or not at this point? And the second question is, obviously with all of these, well, A, very strong, very high freight rates, and also maybe low reliability, have you seen any pickup in sort of customer demand for, you know, nearshoring, bringing production back closer to consumption, or anything along those lines? Thank you.

Happy to answer your questions. Yes, freight rates, I mentioned, Will, will most likely stay higher than in the last decade, in this decade, after the normalization has taken place, maybe in 2022. The operating cost, though, is addressed by our clear strategic program. And eTouch is one effect. And we always said eTouch is not only creating benefits for eTouch shipments, but also for solutions in those areas where we have a fully automated or majority automated solution or system running a booking process, for example. So there will be benefits that go beyond the classical e-touch. But too early to say at what level we will end. It's also the benefits that we will see, especially in air freight from APEX and our joint procurement will also have a certain effect on how we can produce more efficiently air freight solutions. Nearshoring, it's a classical question. We have answered that a couple of times already and don't take it as a criticism, but it's interesting that it comes back because we have seen a trend to regionalization and nearshoring already happening. 10, 15 years ago. Countries like Vietnam recently, but Romania, Mexico benefited from this trend. Turkey, for example, benefited from this trend extremely over the last 10, 15, 20 years. What we will see, and that is some trend, especially in the consumer electronics, spare parts business and automotive and others niche areas, that we see a trend to second sourcing in a different geography, maybe with the same supplier, but a different geography. If you had a... a service provider or a producer located in Wuhan early last year, in the Hubei province, maybe a second one, and you were line feeding from there with a minimum stock level of two or three weeks, or maximum stock level in fact, and maybe you prepared even for Chinese New Year, you stopped production the latest middle of April. because nothing was floating. And if you had a second provider in Mexico or Romania to take those examples once more, you had a chance to continue production until the pandemic hit the European or the North American markets. The second sourcing in a different geography, that is a trend we see with certain customers that had not prepared for this previously. So it's not an industry. It's more a customer specific trend, but not a general change. I hope that answers your question.

Yeah, that's right. I mean, on the first one, I was more asking, I think you said freight rates will stay higher. I was more asking about sort of unit margins, the GP per unit. Does high freight rate automatically mean high GP per unit? Or could you have one that ends up higher than before, but one that's lower than before?

I always aim for the higher, and I would assume that we will, and that was my answer, with joint procurement with APEX for air logistics, with the new systems in place in sea logistics, we'll be able to have a higher margin. Not as high as today, most likely, but a higher margin than previous years generated sustainably over the next couple of years.

I think if I may add to that point, Sam, I think it's common interest also for some others on the call. I think what we have to realize is when there's very high freight rates today and when we were to agree that they are going to stay higher, certain mix, certain cargo mix will not be there or certain cargo will just not be there. So there is a shift in mix that is driven by freight rates eventually. So that is something that we need to consider. And the second part, I think, that we also need to consider, on a longer-term basis, we might see other geographies becoming more important, be it, I don't know, India, be it North Africa, be it areas like that where we actually might be seeing also geographic changes in the mix. And that might well end up in a higher GP per unit number than what it is right now.

Understood. Thank you very much.

Thank you.

The next question comes from the line of Alexi Dogani with Barclays. Please go ahead.

Hi, good afternoon. Thank you for taking my questions. I actually wanted to follow up on the On the next point, actually, on sea freight volumes, if we're getting no commodity volumes at the moment, I mean, does that have an implication for sea freight volumes globally or other sectors are filling in that gap that will be sustained in a kind of rate normalization environment? Then secondly, in terms of your customer base in sea freight in particular, are you actually gaining new customers? Are you just increasing the activity you do with the existing customers? Can you just give us a little bit of color of what's happening just on the customer base? And then finally, in terms of seeing normalization, and you kindly indicated likely kind of post-lunar new year, what really needs to happen to see... spot rates normalize? What would be kind of the sequence of events? Thank you.

Let me answer or let me start with the letter question. What needs to be normalized? A lot of things at the moment. First of all, it will take another year or so if we see a significant increase of capacity. But the congestion is with the ports. So we need different models for the port and an upgrade and enhancement of the ports. I'm talking sea logistics. For air logistics, normalization would require belly capacity to be offered or be available in the market in a significant volume, which we don't expect to come back before 2023 or 4, maybe. Carbon footprint and sustainability and CO2 emissions is a huge topic. existing customers and new customers and we on both ends we have seen a lot of demand and i mentioned that before especially with those customers that have a direct end consumer business model that pursue a business model producing whatever apparel sports gear or whatever directly is sold via e-commerce for example the end consumer And our solution, our transparency, our visibility on what causes what, what routing, what mode of transport, what packaging and so on causes what CO2 emission. And how can this be optimized is well received. And the first question with regards to commodities, there is. absolutely no reason to believe that higher rates will allow low-mining products as such to move back into air logistics or sea logistics. They will have to seek different markets or the value of the goods have to increase because there's a huge demand in forestry products, for example, driving a construction cycle and all of a sudden this product can bear higher transport costs.

Thank you.

The next question comes from the line of Christian Obst with Baader Bank. Please go ahead.

Yes, hello and thank you for taking the question. First is you are entering into partnerships or you stated that you're entering into partnerships with airlines, American Airlines, British Airways, Air France and so on and so forth. Can you give us some kind of an idea how these partnerships are working especially when it comes to sustainable aviation fuel? So what is the content of these partnerships? This is the first question. The second one is On eTruckNow, you gave some kind of a market value for your digital custom clearance platform. Can you give something else for eTruckNow? And can you confirm that the conversion rate for eTruckNow is 75%, 80% plus? And last but not least, maybe just a comment on APEX. So maybe you also might comment on that. So I understand how you target the Asian market and how you like to develop there. However, why does partner have to have a stake in APEX to open further doors for you in Asia? Thank you.

Christian, thanks for your questions. Partnership on SAF, so sustainable air freight, aviation fuel. The partnership is that we procure a certain volume of SAF and we provide this for certain flights or for certain customers. And this is then used on those flights or applied by the airlines on those flights or or put into the cycle when we have cargo on board for those customers. They have been a regular network being set up for being totally SAF-fueled, so to say, and we have specific customers that require SAF. And we see a trend that this is increasing. The bottleneck, by the way, is the production of SAF and biofuel and what you call it. But there's a huge demand because it's immediately CO2 neutral because it's built on renewable or recycled produce. Okay. Your question with regards to cost?

Sorry? Okay. You guarantee a certain amount of volume for these kind of flights. So this is the main thing you are doing there.

You mean versus the airline?

Yeah. For what?

We buy this solution or we develop this solution jointly with the airline and we buy it then from the airline. And the airline guarantees that they have capacity and the possibility to apply SAF on certain routings or in certain flights. And it's on customer demand or on the airport-airport networks that we have announced already. Then your second question, I think there's a misunderstanding. Our customs solution for the Brexit has been called or is called your easy Brexit solution. And your easy Brexit solution got so much traction and has received so much positive feedback and buy-in from the customers that we neutralize this now from the pure Brexit, Europe, UK trades, and build on that platform, on that basis, your easy customs solution. And this will address customs clearance processes on a platform in many markets worldwide. And a very focused approach. And this you will see or this we will deploy in the third quarter this year. So the quarter we are in.

So on the last, maybe on the last question, I think the questions about why we can decide as a company, you know, why and how we want to drag on expertise, on know-how. And I think it's important that Partners Group, who has also a seat in the APEX board, can bring that expertise, that know-how in the market directly into the boardroom. And that is something that obviously is different when you have a joint commercial sharing of the benefits. I think that is a perfect reason why you would bring somebody who shares the destiny also in commercial terms and can bring, as I said, his expertise, know-how and experts into the boardroom. I think it's a brilliant idea.

Okay, understood. And the other one was on e-truck now. So the e-truck now is now in 18 countries worldwide. So and what is the entire volume you are approaching maybe in the next five years from eTrack now and how is the conversion rate there?

We are not disclosing details on those platforms, Christian, but you're right. eTrack now is the SaaS software as a service solution and the supply chain visibility solution that has started in many markets and that we are increasingly rolling out into other markets. Okay. Thanks, Christian. Thank you.

The next question comes from the line of Sebastian Vogel with UBS. Please go ahead.

Hello and good afternoon. I got three questions. The first one is on sea freight. In many of the news outlets, it's mentioned like pretty much everything is on the water that can still be there, so to say. At the same time, I see that your volumes are increasing but not that materially. Are you getting more selective or how do you see the situation there? The second one would be on APEX. I sense that the way APEX was sort of calculating the air freight volume was a bit different from the way you were calculating your air freight volume. Since the Hager transaction is now being closed, can you remind me what is the sort of the real Cunha-Nagel volume that APEX has sort of been flying around in the past? And last but not least, again on APEX, you mentioned there that you have seen like an EBIT of more than 70 million for one and a half months. And you mentioned on the other side that you expect that the rest of the year should be sort of the same what we have seen in the second quarter, more or less, or at least understood it this way. Would it mean that we could get then there to a level of 350 in terms of EBIT contribution from APEX, or is it just far too early to say something like that?

If I may, I take the last one first. I think your calculation is correct, but it always takes a certain level of uncertainty with estimates. So I wouldn't entirely outrule the number that you're saying, but I think it is on a very ambitious high end. But for sure, compared to what we have announced prior to the closing of the deal based on the 2020 numbers, I think it will be a significant improvement.

Then let me take the other two question and I start with the apex volume question. We have posted ninety four thousand tons for the second quarter for two months. That is only taking into account the export volumes, independent on how many legs we transport. And we will give even a sharper picture than during the when we announced the quarter three figures. There is a difference which we knew when we When we acquired APEX, it's always different per company. We purely count export volumes per shipment and not per leg or export and imports twice. And you find everything in the market. So what you see, you have to check what is the definition of the volume, the underlying definition of the volume. Yes, I said so. Yeah. clear, more selective, more intensive operations and the lack of commodity shipments. We don't have forestry products. We don't have recycling material, pipe and paper. We don't have a lot of commodities in the network anymore. And we have compensated this lack with a 2.9% volume growth and we are extremely selective. Growth is at the moment not our focus. but ensuring that our customers get as much as possible flawless supply chain operated and supported by Kühne & Nagel in sea logistics.

Understood. One quick follow-up with regard to the APEX volumes. And for 2020, does it mean, for example, that APEX had flown around something like 500,000 tons? Or do you have a number for 2020 then in mind?

No, we have not recalculated 2020 in our terms, but I think we could well come up to the 500,000 to 600,000 tons in 2021.

Got it. Many thanks.

Cheers.

Today's last question comes from the line of Mark Zegg with Stifel. Please go ahead.

Hello. Thank you for having me. Just two questions. One on the commodity volume in sea freight. Could you just remind me or give a ballpark figure? What was the commodity volume pre-pandemic in terms of or in relation to the total volume you shipped in sea? And second question on APEX. Apparently, they've grown volumes quite significantly in the first half of the year. Could you elaborate a bit on the split between co-loading volume and non-co-loading volume for APEX? Which one of these segments is growing stronger? Thank you.

Sure. Let me start with the APEX related question. So the co-loading volume is 40 to 45% of the whole volume. Both develop at an equal or similar speed at the moment. There's no significant difference. But, I mean, we can go into details when we share some more details on APEX after the third quarter. For sure, the gross profit is much lower in co-loading, as you know, but has a different conversion rate. So it's a different business model, which we are eager to continue with. One of the reasons why we have pursued APEX and their expertise. The commodity volumes, we don't disclose details here, but if you look back in some of the analyst calls when, by the way, recycling material dropped out of the market, you get a bit of a, we stated on the forestry trend two years ago, I think it was, you get a bit of a flavor how much that is. It's significant. It's a significant volume contribution in the network. Thanks, Mark. Okay. Thank you.

There are no more questions at this time.

Thank you, Alice. And ladies and gentlemen, thanks for joining the Kühne Nagel call on the semi-annual results first half year 2021. As you know, Kühne Nagel has performed strong in the second quarter and also in the first half of this year with earnings more than doubling. But 2021 remains unpredictable and challenging, but we are prepared, we know our way, and we remain committed to our proven strategy of providing reliable, high-quality, technology-supported, and data-driven services to our customers. That's the focus. Customers is in the center of our activities, and thus it's all about our logistics experts, our technology platforms, as well as our agility. And having said so, I wish all of you a nice summer. And we talk again on October 10 when we post our third quarter results. Looking forward to you. Stay healthy and see you soon again. Bye bye.

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