Kuehne + Nagel International AG

Ladies and gentlemen, welcome to the nine months 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 in listen-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 Nage. Please go ahead, sir.

Thanks, Alice. Good morning. Good day. Good afternoon and good evening. Welcome to the analyst conference on the nine months 2021 results of Kühne International. Our CFO, Markus Blanka, and I welcome you from, as always, sunny Switzerland. And also as always, let's get started on the slide three of the slide deck that we have published this morning. Q3, the third quarter 2021 has been a remarkable quarter. Results more than doubled versus previous year. And it is an extension of what we have seen in quarter one and two already this year. And it is a confirmation as well as an acceleration of our strategy and its deployment. On slide three, we have published some of the KPIs. So our net turnover increased to 21.8 billion Swiss francs, which alludes to an increase of 47%. Gross profit increased by 25% to 6.9 billion Swiss francs Free cash flow missed the 1 billion by 1 million, so 99 million Swiss francs, an increase of 23% nominal versus previous year. And the earnings per share were at 10.94 Swiss francs, increase of 128% versus previous year, with an organic EPS growth of 106%. Please follow me on the next slide, which is slide four. Some highlights of the third quarter and the year-to-date development. The third quarter is another excellent quarter, as we have stated before. And the group nine months EBIT concluded at 1.825 billion Swiss francs, up 131%. Let me also draw attention or focus your attention on the conversion rate. We showed a conversion rate year-to-date, nine months, of 26.6%. In quarter one, we started with 21.3%. Quarter two came to a 26.2% conversion rate, and we concluded the third quarter with a conversion rate of 31%. Outstanding performance in sea logistics in a very chaotic market environment, which I will explain or give some details later throughout the presentation. A very strong performance, a high service intensity is continuing, and our colleagues, especially in sea freights, are all over the place to make the shipments of our customers work. Air logistics, a very strong performance with an EBIT of 645 million Swiss francs for the first nine months, a strong volume and yield performance in that period. And we have fully consolidated APEX. And let me also state we have an excellent collaboration with the colleagues from APEX. And this is based on an almost identical entrepreneurial spirit. And there's a seamless interaction with the team of Apex, which we all enjoy. Road logistics, EBIT of 75 million Swiss francs for the first nine months, a very strong volume, especially in the third quarter in Europe. and high demand for digital solutions with a very solid operational performance despite all the headwind that we experienced with driver shortages in the market, equipment shortages and so on. And contract logistics continued its growth, especially in pharma and e-commerce very successfully and concluded the first nine months with an EBIT of 114 million Swiss francs. Please follow me on slide six, where we give some details on the volume development in sea logistics and air logistics. I will start with sea logistics. We have a volume progress of minus 2% in the third quarter and apex adjusted of minus 4%. Our organic development on purpose, I shall say is minus 9%, or we like like 100,000 TU. which is exactly the low yielding cargo, the commodities that we have mentioned and described before. Forest products, ex-Europe, agricultural products, ex-USA, which are not running in our networks at the moment as we lack capacity, as there's a huge lack of capacity. We focus and we see a strong focus on where it matters most on the trans-PEC, Asia exports to North America, especially U.S., we see a mid-range double-digit volume increase, a significant increase. And Europe to North America and partly South America, we see a solid double-digit volume increase on those trades, especially with cargo or with customer demand that requires solutioning and expertise from our sea logistics team. I mentioned that before, we have a chaotic market environment and that is going to continue. And I know you will come up with this $1 billion question, when does it end? There's no end in sight at the moment. It might last until Chinese or lunar new year next year, but we would expect this can continue even longer than six or 12 months. there's no sign of relief and as I mentioned in some of the press interviews recently this is a bullwhip effect we experience and it's getting worse at the moment and we should expect this to become worse or to get worse in the next couple of months. What is the chaotic market situation? We have ports with historically low productivity. And I checked like half an hour ago or 45 minutes ago on the West Coast US, we have in 100 vessels waiting to enter a port. Average waiting time most likely is 14, 15 days. We have rail ramps that are congested, rail terminals that are congested, trucker shortage in the US, in UK, and partly no chassis available to do the short haul transports. We focus, we stay focused on our customers. We stay focused on our customers' demand and the cargo mix. And the key to success remains sustained and expanding service intensity. So it's a service industry as we speak and access to capacity wherever possible and shifts and solutions with both modes of transports integrated in order to bypass congested ports. Air logistics, volume development, totally different, and maybe also a reflection of the congested and tight, chaotic sea freight markets. The pace of organic growth and market share gains is still high, but it's slightly moderated from Q2 to Q3, from 46% growth to 29% growth organically. We have a strong development in all segments, especially pharma, aerospace, general cargo, e-commerce and also perishables. We see this trend also unbroken and do not expect a major change even beyond the next three, four months. And we still have no significant additional capacity in the long haul packs, belly capacity. There are flights, intercontinental flights, but they are homeopathic, so to say, with regards to the demand for the belly capacity. So we produce with charters and block space agreement we have mentioned, before in our previous calls and that is expanding, that development is expanding. Please follow me on slide eight, some details on the sea logistics KPI. We have seen a strong yield development, especially in the third quarter, reflecting both the favorable portfolio mix, which is a very important factor in that yield per unit development. We do not have any commodities, no forestry products, recycling material and so on in our cargo mix at the moment in sea logistics or very low volumes. And we concentrate on small and medium sized enterprises and blue chip customers, which drive this favorable product mix. And we grow in the high yield or high yielding segments with high service incentives on purpose, as I said, in the mid-range double digit on the Transpac, for example. which is Transpac and Transatlantic from a geographic point of view, but which is also less container loads, LCL business, very strong, great performance, great projects, renewable energy is in the focus here. And we have stated some of the wins, customer wins, where we were able to do so in the recent press announcement. And this development is also unbroken and ongoing. The yield expansion more than compensate for the sequential unit cost increase, which is also shown here. And at the moment we see no relaxation of the intense workload, our organization, as we have to produce a seamless supply chain, more or less manually with a lot of personal interference of our sea logistics and come later to this air logistics experts. This pressure or this development is also unbroken and expected to a auto continues throughout the next couple of months. EBIT is for the first nine months was at 990. million Swiss francs, which is 226% above previous year. And Q3 saw a clear acceleration of that trend that we have already posted when we had all Q1 and Q2 calls. Conversion rate year-to-date nine months, 52.3% versus 29% previous year. And I think that's also a clear sign that we produce, continue to produce with a lot of manual interference, but also using our automation and platforms wisely in order to make the shipments flow happen on behalf of our customers. Next details on air logistics, you will find on slide 10, sorry, slide 12. And air logistics KPIs, we have delivered a small degree of yield and EBIT normalization in air freight over the last couple of quarters. In the figures that we show without APEX, you will see that we have a stable organic yield at 94, 95 Swiss francs per 100 kilo. and a stable organic unit cost at around 57 Swiss francs per 100 kilo. Apex and I mentioned that in the beginning is continuing to exceed expectations, both in yield and EBIT development, they are outperforming market and also in the volume growth and the way they do business and the way we do business is really complimentary and it's super cool and pleasant collaboration amongst the two organizations. We have closed another small acquisition, a company called Selmospet. Have a guess what they do. A Norwegian perishable freight forwarder. We closed that September 1st, 2021. Annual turnover last year, 18 million Swiss francs. And last year, 2020, they handled 63,000 tons. So we welcome them. Also a very interesting business. And they are supplementing our existing KN perishable network, which has been built on more than 70 stations around the globe. And as you know, we are one of the leaders, if not the leader, in perishable worldwide. Conversion rate the first nine months at 41.2% versus 30% in 2020. Please follow me to road logistics. Next slide. Strong volume growth in European network, not only domestic, but also cross border. and that volume growth has been accelerating. Typically, the third quarter is due to the summer vacation Europe, a quarter that shows maybe less growth or less development. We haven't seen that effect at all this summer, especially not in the big markets of UK, France or Germany, which is very encouraging. And we see a high demand and still growing demand for digital solutions like eTruck now or your easy customs solution. Road logistics does very well, has gained market significant momentum in the second and third quarter. And if you have a look on slide 12, you will see their KPIs in the quarter over quarter comparison. So strong volume growth and especially the networks that I mentioned before. First signs of driver capacity shortages, but they can be overcome with our platform solutions. We have the market visibility. We have the partnership agreements with the trucking organizations. And we see a high demand for digital technologies. for both for visibility reasons, but also access to capacity reasons. And we deploy eTrac now as a software as a service solution, which is more as a plug and play for our customers and enjoys a lot of new customers or enjoyed a lot of new customers during the last quarter. EBIT for the first nine months 2021 at 75 million Swiss francs, 97% above prior year and that is a trend that has been ongoing since the last two quarters. Great performance, strong organization and a cool spirit in boat logistics. And then please have a look on slide 14, contract logistics, a strong organic growth in net turnover, especially in the areas of pharma and e-commerce. We posted a 6% excluding foreign exchange effects growth in those two sectors. a solid Q3 performance and grows across all geographies. There may be important for you is that trading in Asia and both Asia and North America is twice as much as in Europe. So we grow much faster outside of Europe, which maybe gives also a signal to market maturity and market developments outside of Europe. Cost management programs that have been initiated six, nine months ago have been completely rolled out to all 700 sites. And we start to see benefits from those programs as well. That's the routine optimization of the process flow within warehouses. And contract logistics is a key contributor to improve KN Group Proceed, which will be explained in detail by Markus. But before I hand over, please allow me to give a short summary of our business performance. for the first nine months of the kn group so we posted another remarkable quarter and and that is true for the entire can group all countries all business units all areas and segments contributed to this successful quarter three We see that all the key figures, key KPIs that we use for steering the business have improved. And even volume developments in sea freight happen on purpose because we concentrate on what matters most for our customers, as I stated before. We have still approximately 45% of our white-collar staff in working mobile mode. So the pandemic, I have mentioned this a couple of times, the pandemic is ongoing, has gone away. And before it becomes endemic, we will see another quarters to come, which will be difficult to predict and to anticipate. And at this stage, I do this loud and clear. I would really state a heartfelt thank you. to all our KN colleagues worldwide for their outstanding customer service, their persistence and perseverance. They really drive the needle and without their spirit, this KN spirit that makes this company unique, our customers would have seen more problems, that's for sure. And now we come to the key financial figures and I'm happy to hand over to our CFO, Markus.

Thank you, Detlef, and welcome from my side to all ladies and gentlemen and all participants to this call. Indeed, it was an excellent and, as Detlef mentioned, remarkable quarter. I'm starting on page number 16 on the income statement and want to highlight a few numbers on that page. Results again accelerated with incremental cross-profit over the first nine months of 1.355 billion, of which 678 million in the third quarter. Looking further down into the income statement on the EBIT line, there was for the first nine months, a billion, 43 million more ET earnings before tax of which 422 in the third quarter. So a further acceleration of results improvement. Conversion rate, something we have mentioned frequently today, conversion rate incremental in the third quarter was in excess of 60%. And I want to use the opportunity here to clarify also some news or some pieces of information that had been published today in the morning around the conversion rate of the group that I was quoted in some of the papers being between 20 and 25% conversion rate for the group in 2021. That is not correct. I was quoted, or correctly I should have been quoted, a sustainable conversion rate is for the group between 20 and 25%. For the fourth quarter 2021 and obviously also for the full year 21, this number is going to be in excess of 25%. Just to clarify and to use this opportunity because I think it has created a bit of irritation. Let me finish this page with two more technical notes. The first one, on the foreign exchange column on the very right of the page. I think it has been a long time ago that I can talk about the foreign exchange impact that is neglectable. I think over the last couple of years, we have always seen a negative impact. So I think we have to keep that in mind, exchange rate impact currently on a very, very low level. Secondly, and you see that also in the footnote that we have added to the slide. We have closed the sale of our equity stake of 24.9% in APEX to Partners Group in August 12, and that explains the increase, which you certainly have noticed, on the non-controlling interest line in the third quarter, the so-called NCI, non-controlling interest, to approximately 20 million on a quarterly basis. Given the performance of APEX at the current stage and for your information, I would expect that number to be relatively stable in the fourth quarter. The next page leads us, of course, into the balance sheet and also on the balance sheet we have some impact from the sale of the equity stake and the acquisition of APEX. Before that, page number 17 of the presentation, major deviations or changes in the numbers on obviously Goodwill, other intangible assets. We have added approximately 1.1 billion Goodwill between December 31st and September 30th. at the same time around 160 million on intangible assets. On the right side of the balance sheet, you will see on the current liabilities an increase of around 1.3 billion, of which a good part is what you can see down here, the recognition of redemption liabilities, for the put option out of the transactions with Apex and Partners Group. Second topic, and let's go back to what I call the most important position on the balance sheet, which is the cash position. Cash position of around 1.6 billion, 1592, exactly as you can see it here, leading me straight into page 18 and the reconciliation entity bridge of the cash and free cash flow generation. Most of our improvement in the cash flow comes out of operational cash flow. We have 996 million more operational cash flow, as we have mentioned before, and it's mainly fueled from operations. Where did we put it? And I'll be very transparent here. Changes in working capital have absorbed around 500 million of that additional operational cash flow. Partially it was, I called it burned in the working capital, but both from organic development as far as well as from the apex acquisition. Why? Because on the organic side, as everybody can appreciate, we have high rates, sea freight and air freight rates, we have volume growth and also we have with APEX a different business model in terms of greater reliance on charters that usually do not enjoy the same payment terms as we would have for regular air freight capacity. Going back to the overall bridge, cash flow from investing activities, this is just from a Explanatory note, the 1 billion flow that you see here is the majority, the outflow from the acquisition of Apex. At the same time, you see three lines further down. on the so-called others cashflow from financing activities, you see an inflow of more than 290 million, which is the net amount of what the inflow came, the sale of the equity stake to Partners Group. Again, more on the explanatory side, you will find a full detail explanation on our condensed statements for the first nine months in the notes nine and 10. Right side of each free cash flow trajectory, you see here the triple nine that we have in year-to-date September. And I am very confident that the trajectory for the rest of the year, so fourth quarter, will be very similar to the ones over the last couple of years, as you can see here on the slide. Because we have seen what... I would call the maximal expansion in the working capital. Page number 19, the working capital, as mentioned, organically impacted from higher rates and volume growth and from the business model, Apex. We have And just for reference purposes, the numbers for networking capital in the second quarter was 1 billion 350. So today we have one on the 30th of September, not today, on the 30th of September, we have recorded 1.7 billion. So we have added another 350 million over the third quarter to networking capital for the reasons that I have mentioned before. DSO DPOs remained relatively stable compared to the second quarter. And if you some flavor what APACs in the same categories of KPIs would deliver, DSOs for APACs are between 40 and 50 days, DPO are between 10 and 15. That is what I mentioned before, it's different business dynamics. The numbers back to the graphs and next page, number 20, return on capital employed. And I would like to start with an apology for misleading you on the last quarter conference call that we had because I quarter two was certainly a quarter at the top end of expectations. obviously Q3 was even better than that, but this is how difficult I think it is under the current market conditions to actually make uh prediction that would uh that would hold truth however with uh the performance that we have now in the third quarter and i tried again it's the quarter at the top end of our expectations it really shows again the potential of the group's operational and financial strength but As Nedlev said before, the most interesting question for sure remains, what are the current and future perspectives of the market? And with that question, I do hand back to Nedlev.

Thank you, Markus. Before I answer this question, let me talk about our internal situation at the moment. We have put a claim into the organization as of second quarter last year, which is still staying on course. And staying on course meant we deploy our strategy, we accelerate where we can, and we stay on course with all our activities, especially customer-facing, technology-oriented. And our strategy has been clearly confirmed and the implementation continues to accelerate. What are the areas we are focusing on? We are focusing on industry solutions and within the industry solutions on key customers and their transformational needs. We focus on technology, digital platforms and eTouch to drive both customer facing efficiencies as well as internal efficiencies. And our colleagues and experts because it's a people's industry is the service industry. And these are the three focus areas they are part of our strategy, which we have presented more detail, and we never gave up implementing driving this forward. And I think we start to harvest from this situation, or from this approach. The question, the main question is the market and how does the market develop further? We have mentioned that on different occasions. At the moment, we see a continuation of the private consumption and the demand for goods, which remains very strong. This is also what we have stated on slide 21. And the current market situation and capacity constraints are also expected to persist longer or beyond lunar new year 2022. And I said this before, most likely or as from today's perspective, we do not see a major change during the next six to 12 months. And whatever is changing will not be a radical change, but a gradual, hopefully, normalization. But for the time being, we expect bullwhip effect. I repeat myself, we expect an even worsening of the market situation and capacity. And that is unfortunately what we see at the moment, especially at the West Coast in the U.S., Our strategy approach, we are successfully meeting high end service level requirements of our customers and we focus on those. So we are extremely selective with our growth and where do we grow. And I mentioned Transpac before, LCL business, test container load business and so on. And we continue providing solutions for the different industries, pharma and e-commerce. and focusing on deploying our technology because this was clearly a pandemic effect that the buy-in and the onboarding on our technology solutions, our customer platforms, eTruckNow, Sea Explorer, MyKN has been exceptionally high and this trend is ongoing and unbroken. With this statement, I thank you for the attention so far. I'm sure we have some questions in the pipeline. And for this, I hand over to our facilitator, Alice.

We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment may press star and one on the touchtone telephone. You will hear a tone to confirm that you have answered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question or a comment may press star and 1 at this time. The first question comes from the line of Robert Joynson with ExanBFP Paribas. Please go ahead.

Good afternoon, Detlef and Marcus, and thank you as always for the presentation today. Three questions from me, please. First of all, on ocean freight volumes, they were They were down by 9% in Q3, excluding APEX, as you mentioned. When you talk about low-yielding cargo not running in the network at present, is that primarily because it's just uneconomic to transport low-yielding cargo with rates as high as they are? Or is it more because you can only obtain a finite amount of capacity from the container shipping lines and therefore you understandably allocate that capacity to the high-yielding cargo? So that's the first question. The second question on the gross profit per TU, it's now obviously more than double the level seen prior to the pandemic. Could you maybe just comment on the extent to which the markup element has risen in recent quarters as opposed to the value added element? And then the final question on supply chain disruptions. We all know that the US ports have seen severe disruption for several months now, and you just said that you think that will get worse But could you maybe provide us with an update on what you're seeing at the main European ports? Recent news flow suggests congestion has worsened quite significantly over the past month or two. Is that consistent with what you're seeing? Thank you.

Absolutely. Thanks for your questions. Let me start with the latter question. Ports are congested, I should say, around the But the severest congestion is at the U.S. West Coast right now. While East Coast ports are doing marketing with shipping lines to reroute transports or vessels because they still have capacity. We still lack a 47-hour, seven days a week service in some of those ports, despite political statements. It's not happening. And we have the high season now in the U.S. with Thanksgiving coming up soon and Christmas season and so on. It is not only a U.S. topic, but it's very hot, so to say, in the U.S. At the moment, we have around 740 vessels somewhere waiting in front of ports around the globe, which is like 12-13% of the global vessel capacity. So, this is a topic which is also relevant for European ports. And especially those ports that are not automated or only automated to a very low degree. And that would be my answer to your third question. Low yielding cargo in sea logistics networks. Yes, I fully agree. It's both. It's uneconomic for the shipper. unless you have increased your prices for forestry products or recycling material already, and those prices can bear the high spot rates. This is a cargo typically running on a spot rate basis, and it's a capacity. because not all those goods would be shipped and would be waiting in some of the export ports and therefore we are more selective in accepting those cargo or this cargo. And GP per TU, I'm not aware of any markup. We have, if you see our increase in GP per TU, it's mediocre compared to the spot rate increases by the carriers. And they are a reflection of extra works in order to handle those goods. So I'm not aware of any markup that they've alluded to. Thank you.

Can I maybe just ask one quick follow-up question? Just going back to the first point on the ocean freight volumes, are you starting to see any signs that the container shipping lines are skewing capacity towards their own controlled volumes as opposed to the forwarders? Is that an issue?

This is something that's happening in the market for years. Back at force, I don't see any significant trend or shift in trend. And also here, whoever controls the volume, more important is that you control the terminal or the infrastructure on port side. And that's the bottleneck. And then the inbound and outbound. bound flows both on trucks as well as on railways we have seen a huge disruption also there so the the the total say the market share of the carrier controlled versus forwarder controlled business has not shifted significantly over the last years all very clear thank you thank you

The next question comes from the line of Satish Sivakumar with Citigroup. Please go ahead.

Yeah, good afternoon, Dr. Love and Marcus. Thanks for the presentation. I also have three questions here. Firstly, production cut in China. Are you seeing any impact on export out of China? And especially as we go into the Chinese New Year, what are your shippers are actually talking about how to offset some of the potential impacts output drop there. Secondly, on the trucking shortage in Europe and the U.S., how does it actually impact your ability to buy capacity? Do you have any dedicated charter or a block space agreement similar to the AFRAID in the trucking market? And when do you expect things to normalize here, i.e., if the CFRAID should see first normalization, then you see a trucking, or which one should actually as a lead indicator? And then the third one, obviously given the surge in the freight rates, looks like the named accounts or the big customers got some priority over SMEs. And what are you actually seeing within your client portfolios, SME versus the big named accounts?

Right. Hello, Satish. Let me answer your question. The production shift in China, i think is ongoing for is it five years or so yeah maybe we should reflect the last but one five-year plan of china which ended last year and then the new one it was clearly stated that china will concentrate on high value production mainly for the domestic market and selectively for exports And they want to bring imports and exports GDP related to imports and exports in equilibrium, which would mean that they have to bridge a gap of two point five percent GDP, which is obviously which is which reflects them both less in less exports and more imports. to state this. And we have seen this. It's not a new trend. Our development in other Asian markets like Vietnam, Indonesia, Myanmar, even partly India or Singapore, Malaysia, has reflected that trend over the last years. And I think we are not seeing an ad hoc development here, but a gradual shift. And the domestic Chinese market is so huge that this capacity that is freed up, so to say, will be serving the domestic Chinese market. No major change. Trucking shortage is both. We have a trucking or trucker shortage in many markets based on... an industry that was never primarily in the focus and the container truck shortage will remain. That's all. We have long term agreements with our partners, even throughout the pandemic, by the way. And therefore, we don't experience that to that certain extent. But whatever is spot causes additional problems. And that is maybe then also referring or leading to the answer to your third question, because last decade, to say this frankly, our customers have shifted from long or mid-term contracts to short-term contracts and spot. It was normal two, three years or four years ago that a logistics, head of logistics of a production or trading company put 40,000 TU to be shipped next month on the spot market and would have placed them within 48 hours. This is impossible. So we see more long-term contracts, but this is also true for SME customers. So those that are really suffering are those customers that ship goods that have a very low value per good or article and that have a very low value per container and then have not provided for a volume or capacity with a long term or mid term contract, but try to place those on the spot market, which is, if you ask me, almost impossible. So that would be my answer, but it's not. related to named accounts and those mechanisms. It's more what is your sourcing strategy and what is your capacity demand and have you sourced long-term for the capacity or are you trying to play the spot market, which obviously brought a lot of surprises to some customers. Thank you.

Thank you. Just a quick follow-up, actually. Sorry, I should have made it a bit more clear. Production cut. I was also referring to the power cut in Chinese companies.

uh production facilities so uh do you see any impact of that power cut that is i'm not sure i understand the question i'm not aware of any problems in chinese uh production facilities if that was the question i'm not i think i say stated everything regarding china uh it's based on the second five years plan that has uh focused on Renewable energy, sustainable production and high margin or high value products as such, mainly serving the domestic market. And that's the trend that we have seen over the last years. And that is driving us in supply chains.

OK, thank you. That's very clear.

Thank you.

The next question comes from the line of Alex Irving with Bernstein Research. Please go ahead.

Hi, good afternoon and thank you for taking the questions. Three from me, please. First of all, on capital allocation, your net debt isn't far off turning negative at this point. How would you prefer to use the surplus liquidity? So M&A, increasing payout, anything else that comes to mind? And then kind of secondly, and related to the topic of M&A, you've mentioned before that you'd like to be doing some more deals Any thoughts on the type of target that would be most appealing, either size, verticals, niches? Is there anything you've learned from the Apex deal that would kind of change your approach on M&A deals going forward? And then third and finally, could you please talk a bit about your medium-term plan as markets normalize? Do I have it right that you're hoping to achieve higher yields than pre-pandemic by maybe focusing a bit more on the cargo mix? And if so, why is that the right strategy with eTouch also being rolled out? Does eTouch not increase the operating leverage so it makes sense to pursue for as much volume as possible? If you could help me to understand that, please, as well. Thank you.

All right, Alex, it's Marcus. I'm going to take the first two questions on capital allocation and M&A deals. So capital allocation, for me, the first and foremost focus is always create enough cash. So we need to focus on the cash generation of the business. This is the foremost and utmost importance. later on on capital allocation where you know we don't we do not have a written down fixed dividend policy but you know from a historic pattern and also what we communicate remotely over the quarterly calls that we have a certain payout ratio that we are targeting and that also the supervisory board usually makes the proposal to the to the AGM so cash generation and remain asset light as much and as enthusiastic as possible. And certainly, Detlev and myself and every leader of the business units, we are very much focused on the asset light model that we are maintaining at KN. And that for me is first priority. And of course, M&A plays a role in that. We have always said our M&A strategy is bolt-on acquisitions and acquisitions. I would even use Salmon Spade as a very small acquisition, but very typical for the way how we develop. It's very specialized, very niche at that point in time, but it is extremely valuable know-how that we get with that kind of acquisition. And then we leverage the know-how, the expertise through our larger network. Of course, not every acquisition is that of that rather smaller size acquisition. Some of them are larger size acquisitions, but from a type perspective, very similar. And that is one part of our M&A strategy. The other part is Asia. And I think we have been very vocal around it and we have also been very successful with the APEX acquisition in our footprint development in Asia. And I think we can expect that we are continuing that path in Asia. Is it going to be another APEX? Most likely not. We are not buying two times the same thing. But obviously there is going to be other focus areas that is going to increase and solidify our footprint in Asia even further.

And let me answer then, Detlef speaking, your third question, Alex, cargo mix. Why would we not take all cargo that contributes a positive EBIT per unit if we can operate them in an efficient way? And that is the strategy of eTouch. eTouch is automation across the whole shipment flow, but it will create benefits to complex and high yielding cargo, but also to the commoditized cargo. And if you reflect, We believe that a fully e-touch shipment will create a conversion rate of 60, even 90, or in theory 100% incremental. And we will capture these volumes if there's enough space in the market and if the contribution of these shipments is positive. If you look only to the total figure or the average figure, not the total figure, sorry, the average figure, you will not, you will, you might see a reduction in yield per TU or per ton, per 100 kilo or EBIT per ton, 100 kilo or per TU. But the contribution is positive. It will create cash inflow and EBIT inflow. And that is what we will focus on. But as we have seen in the last months or as we have shown in the last months, it's a plug in and plug out. We can steer it, we can control it. And that's the current, it's a reflection of the current market situation where the goods cannot bear the transport costs at the moment and the capacity is geared more towards the higher yielding or more complex solutions.

Very clear. Thank you very much.

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

Thank you for the call. The first question is around, you mentioned some of the ports will start working 24-7. They haven't yet. Do you think that once the Port of LA starts working 24-7, will it help to ease the congestion and will it be meaningful? Then secondly, on the air freight side, now that the U.S. will be opening from November onwards and transatlantic passenger flying should increase, How do you see that impacting the global air freight market? And then if you could please comment on dividends, given the strong cash flows and how we should think about that for this year. Thank you.

Thanks for your questions, Moniva, and let me answer them. So ports of LA 24-7, yes, is highly needed and we are desperately waiting. And it will gradually influence the bottlenecks. But it's not the only story and it's not the only bottleneck. But it would be highly needed. But that's what I mentioned before. It might create or might be a starting point for a gradual improvement. But it's not only the port. It's the inbound and outbound flows of the containers. It's the railway terminals, even in Chicago and in Detroit, which are closed down for a week or so in order to sort the containers in the terminals. So it's more. It's a very complex approach. But with a 24-7 operations, it would signal that gradually this can improve. At the moment we have some ports that are working 24 hours a day at the west coast and some aren't, so that's maybe maybe the big difference. Belly on the transatlantic. Yes. First of all, I'm flying to the US on early November again. So it's great to see that we see a bit of normalization, but the volume that we expect coming from belly on the transatlantic only will be in high demand, but will not be, you know, serving much of the market needs at the moment. So it's not a big change. It's not a big, It will not have a big impact and our expectation or the expectation of our colleagues in the logistics community, especially that we will not see a belly capacity of sizable of a sizeable offering kicking in before 2024. We need regular flights between the continents again, passenger flights. And if you remember, we had 50 flights alone from the West Coast US per day to Europe. We see that coming back, it will take some time. By the way, the holiday season is over. So it will be more the relatives and business travelers that we will see in those flights that might be possible as of November 8th from Europe to the U.S. and vice versa.

And dividends in the last question, I think I mentioned something before already on the question from Alex. I think I would believe a good reference point would be payout ratio over the last year. As you know, we never give guidance to that, but I think it's a good reference point to that.

Thank you. Thank you.

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

Hi there. I've got two questions, please, on the same topic. First one is, if we look at the C unit margins, I guess they've been particularly strong across the group. Can we just kind of unpack that and talk a little bit about what's driving them to such high levels? In particular, how much of it is mixed kind of away from lower margin margins? type in your commodity volume, whatever else, versus sort of other impacts. And the second part of the question is, has there been any sort of time lag benefit between when you've bought capacity and when you've sold it? So, for example, where you're able to buy capacity three, six months ago at lower rates and you can now sell it at spot market. Is that sort of time lag effect having a big impact on unit margins at all? Thank you.

Let me start with the letter question. That is not our business model. We buy and sell, so to say, in your wording at the same time. We do not provide capacity and then wait for customers to come and make use of that capacity. Clearly not. Whatever we do is in direct junction and interaction with a customer always. The C unit margin is a reflection of the market situation at the moment, nothing else. And it's reflected in higher operating costs, which we mentioned before. And maybe here it takes some time before you see that on a unit basis to really kick in. But we have, this is the main driver and nothing else.

Okay, I'll leave it there. Thank you. All right, thank you.

The next question comes from the line of Michael Firth with Fontobo. Please go ahead.

Yes, good morning. Two questions from my side. Going back to the GP per unit margins but not in sea, in air, I was wondering what explains really the stability of the unit margins or the yield in air freight versus the sort of chaos we're seeing in sea, if you could help us understand that. And the second question is, in practice, how do you manage or how do you circumvent the congestion problem in sea freight for your customers? And how do you really manage to get the goods from A to B in a reasonable time with the current chaos going on in the ports? Thank you.

Michael, let me answer your questions. First of all, what is driving the stability in air logistics? It's our own flight operation. We have our own production, our own flight operation that's driving the stability, if you want. And we have not the high demand that we saw in quarter two, especially last year, where we had all the PPE, you know, the PPE. personal protection equipment that needed to be shipped to Europe or somewhere in the world like overnight. And the heat is out of the market, although the market is still very hot. It's a market which sees a high demand. We can grow our volumes. Sorry, we base our own flight operation as this is based on solutions are based on their own flight operation, which gives a certain stability.

The second question, the first question was the gross profit per ton in air freight and why the stable? I think that was my answer. Just my answer. Okay. The second was to see freight.

How do we manage to get the containers through a lot of manual interference, a lot of organizations interference with port authorities? with railway companies, with trucking companies, a lot of guesswork. Unfortunately, I have to say, when does the container really leave the port or is able to enter a port or a terminal? And that is why we say it's a high demand for the expertise and the skills of our sea freight forwarding experts at the moment. So you can't automate this process flow at all.

But you still have, sorry, as a follow-up, you still have a very high visibility on the global goods flow through your systems. Is that correct?

It has not changed, and we can anticipate even bottlenecks, but then you have to, I'll give you an example. If you see that at the moment we are piling up all the vessels that are waiting to enter the West Coast ports in the U.S. are increasing. It was a record last night of more than 100 vessels waiting to enter the other West Coast port at one night. Imagine, 100 vessels. and we can see this we can anticipate this and then we can give our customers different signals we can ask them to unload their cargo in a port prior to the west coast and then fly cargo so the sea air combination we can urge and come in combination with the carriers reroute vessels even which we did partly during the Suez Canal clutch when the Ever Given was sitting there wrongly anchored in the middle of the Suez Canal and those are the solutions we are trying to initiate and drive for our customers and the rest is real individual customized activities to make the container flow as Stable is the wrong word. As possible, as much as possible.

Thanks, Michael. Thanks a lot. Well done. Can I just address to the audience, we still have a number of people in the queue. Can I please ask you, since we are a bit limited on time today, that you would focus on one question each, please? Thank you.

The next question comes from the line of Mark Zek with Stifel. Please go ahead.

Good afternoon and congratulations on the great results. Then just one question, maybe on APEX. It seems that the volume development quarter over quarter, so the second quarter, was very weak for APEX and costs per unit were pretty high. Could you elaborate a bit why this happened? Could you maybe also extend on what was the co-loading development in APEX?

So okay, so you're you're addressing this sequential development of apex volume, right? q2 to q3? Is that right? Yes. okay good uh yeah so we talking talking about air freight i think the growth rates in both had been had been still quite quite solid but obviously in in in q2 q3 we still have a bit of a misalignment of the first consolidation which of the volume was in which of the quarters so uh there is a bit of a of an effect that certain decrease can then uh give you more details to that. But I can say that the growth, the absolute growth in both courts has been very similar. So it's more of a reporting topic rather than a business topic. Okay, thank you.

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

Yes, thank you for taking my question. I just wanted to ask you what's your view in terms of kind of medium-term volume growth in relation to your comments around cargo mix and the low-yield goods? I mean, do you think there's any reason to believe that this don't ever return because structurally we go to a higher rate environment mid-term? Thanks.

I would not concur with your statement. I think we will see more of the commodity cargo entering the market again because eventually the customers of those goods are willing to pay higher rates. It will drive a certain price increase of those goods, not of the transport cost, but we will see this kicking in again. At the moment, as the market is so congested, only urgent commoditized cargo will find its way into the network. But we are a company that still is pushing to grow volumes in all areas, all its business units, and has clearly stated and that has not changed for market growth rates. But at the moment, in the current logistics environment, we have put this target on hold for generating higher yields and higher EBITs per TU, as mentioned before. Thank you.

Thank you. The next question comes from Sebastian Vogel with UBS. Please go ahead, sir.

Hello and good afternoon. I have just one question on sea logistics with regard to the M&A impact there. If I'm calculating correctly, the cross-profit margin on the incremental business was quite pronounced. Is that a specific factor because of the consolidation or is that something which we could think of could go on there going forward or how should we put that into context?

Gross profit margin per incremental TEU is a reflection of the current market situation which we described throughout the last hour.

Yeah, but I mean, the conversion rate is like 68% on the sort of incremental cross-profit versus incremental EBIT. What is the high number?

The current market situation, sorry, Sebastian. It's a reflection of the current market situation because we owe the onboard cargo where we have a high service demand, where we are able to, you know, fulfill customer expectation. And that is exactly reflected in the conversion rate.

Many thanks.

Sure.

Today's last question comes from the line of Carolina Doris with Morgan Stanley. Please go ahead.

Hi, good afternoon. Then one question for me. I guess given that the supply bottlenecks are getting worse and not better, What concerns you in terms of pressure points on the cost side that could squeeze the margins and drive profits lower? I do understand the third quarter is a special situation, but I'm just worrying on the cost side, what is your main concern for the next two quarters?

On the cost side, our main concern is that our e-touch solutions and automation can be fully deployed because this would mean that our human being or the personal interference is decreasing. So the more markets stabilize and we are anticipating, as I said, a worsening, but we can anticipate it at the moment maybe better than three months ago or two months ago. We can drive productivity through technology. We need our experts to interfere with customers and suppliers and to interact with them. So therefore, at the moment, I would say it's more driving our automation to become even more effective in the current market environment. Thank you.

Thank you.

This was today's last question.

Thank you, Alice, and thanks, ladies and gentlemen, for joining in for the nine-month analyst call of König & Nagel International AG and our performance throughout the last three quarters. And you saw that we have performed very strongly, but 2021 remains unpredictable and challenging, but we find ways and we find solutions for our customers. We remain committed to our proven strategy, staying on course, I mentioned before, and this strategy includes providing reliable, high-quality, technology-supported and data-driven services to our customers. and a selection of where we want to grow as that mid double digit grows on the Trans-Pacific with a clear focus on those trade lanes that really matter for our customers. It is all about our logistics experts that is also reflecting some of the last questions that we had, our technology platforms and our agility to adapt and find solutions to the market situation. We thank you for joining us. Have a nice year end. And I'm sure we will talk again in early March next year to see how the year has closed. The year 2021 has closed. Thank you and bye bye from Schindler Lake.

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