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.