Kuehne + Nagel International AG

Ladies and gentlemen, welcome to the Half Year 2023 Results Conference Call and Live Webcast. I am Sandra, 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 1 on your telephone. In the interest of time, please limit yourself to two questions only. For operator assistance, please press star and 0. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Stefan Paul, CEO of Kühne Nagel. Please go ahead, sir.

Thank you very much, Sandra. Good afternoon and welcome to the presentation of Kühne Nagel's first half 2023 financial results. I'm Group CEO Stefan Paul and I'm joined on the call today by our Group CFO, Markus Blanke-Graf. Let's move into page two, half year results and the highlights. The financial results for the first half of 2023 were marked by accelerated cost management against a backdrop of declining demand for logistics services. As we all know, the declines are relative to an extraordinary comparison period of 2022. EBIT for the first half would have been the strongest in history, excluding the pandemic years 2021 and 2022. Net turnover in Swiss francs was 12.7 billion, cross-profit 4.6 billion and EBIT at 1.1 billion. Over the first half, the focus on cost control intensified and was most visible in Q2. This marks yet another example of our well-established ability to adjust our variable cost base to the market environment. An ability we have demonstrated through many economic cycles and periods of economic volatility. Following our strategy, yield management efforts supported the financial results in both Q1 and Q2. More on positive mix development later in this presentation. Page three, the highlights on C-logistics, volume, GP, EBIT and the variance. Over the first half, C-logistics generated an EBIT of 639 million. Cost measures intensified in Q2 as unit costs declined by 13% year over year and by 14% versus Q1. In Q2, our volume trend improved to flat year-on-year versus the broader market decline of 4-5%. The market share gains were strongest in the Trans-Pacific trade lane. The current data does not indicate a robust peak season this year. But we do believe that we may be near an infection point with a potential to return to a positive year-on-year volume growth versus easier comes in H2. A critical point that I would like to emphasize is that our market share gains were not won on the expense of yield or mixed development. SME, so small and medium-sized enterprise volumes, expanded by 9% year-on-year in the first half. bringing the share of SME volume in the sea logistics portfolio to approximately now 50% of total. Our monthly yields over the course of the second quarter were roughly stable. Under such circumstances, it is fair to expect continued cost discipline in the second half in order to deliver further unit cost improvement. At the same time, we believe the second half will bring further normalization with average yields in the upper 400s. Next page, page number four, air logistics, tons, volume, GP in 100 and EBIT 100 and underneath the variance. Air logistics delivered EBIT of 293 million during the first half of 2023. As was the case for sea logistics, cost management was a central focus as unit costs declined by 9% year over year and by 10% versus the first quarter. In Q2, our volume trend improved slightly. The year-on-year decline of 15% was broadly in line with the market. With easier comparison on the horizon for the second half, We believe year-on-year volume declines may moderate to a high single-digit decline over near-term with a potential for return to growth before year-end. In terms of mix, we experienced low double-digit growth in perishables and more than doubling of volume of small base in the semiconductor, semiconductor segment, a strategic focus of our roadmap 2026. This partially offsets softer demand in general cargo, high-tech and healthcare. Monthly yields over the course of the second quarter showed modest variation. In light of the volume outlook for the second half, we anticipate average yields to set around plus 90 per 100 kilo in Swiss francs. Next page, page number five, road logistics. Road logistics EBIT of 93 million is the highest ever achieved for a first half of the year. Our overall order volume was stable year-on-year over the first half of 2023. This corresponds to 5% cross-profit growth in the first half, excluding any currency effects. The conversion rate in Q2 was the strongest ever in the second quarter. Expect, of course, for the last year's Q2 result. The outcome is a credit to continued high-end utilization of our network, our yield management, and the benefit from an ongoing rollout of our proprietary road log TMS system, which is now rolled out in 43 countries, with six added over the first half of 2023. Page number six, contract logistics. As we saw in road, contract logistics also delivered the strongest ever first half EBIT. The result was 110 million or SwissRank's 101 million, excluding a real estate gain in Q1. Cross-profit grew by 9% in the first half, excluding currency effects. We believe our market share expands during the period thanks to further inroads in healthcare and e-commerce. We continue to observe faster growth in these specific verticals than in many others. It's important to flag that we saw evidence of destocking over the course of the first half this year. Utilization of warehouse space or our own operational capability remained at a high level. Next is page number seven, roadmap 2026. I'm pleased to provide a short update on our roadmap 2026 progress achieved in Q2 in the last quarter. Earlier, I touched upon key achievements, which was the consistent expansion of a share of C-Logistics SME, small and medium-sized enterprise volumes through the first half. We also expanded our SME-focused e-commerce capabilities. We were talking about that during the Capital Markets Day. In selected markets were the first customers onboarded for new integrated offerings, combining multi-user fulfillment centers, cross-order and last mile capabilities. We also advanced our strategic trade and efforts with a major commercial event for Japanese and Korean customers. Beginning of this month, we visited both countries. This would not have been possible without the hiring of experienced native-speaking sales colleagues in recent quarters, which we positioned around the globe. In air logistics, we made progress on two fronts. First, we won a sizable semiconductor contract, which includes SAF power transports. The Semicon contract was not the only ESG-related success, by the way. We also rolled out real-time scope 1 and 2 dashboards in 800 car and facilities and concluded the purchase of 6 million liters of stuff from AIG Cargo. With this, let me hand over to Markus, please.

Thank you, Stefan, and good afternoon, everyone. Thank you for your interest in Kuninaga and taking the time today. As Stefan has outlined, we aim to secure a new sustainable level of profitability against the backdrop of a normalization in supply chain conditions in sea and air logistics. One element is our focus on cost control that intensified during the first six months of 2023. As a company, we have been managing through countless economic cycles and periods of unforeseen volatility. I credit to our highly flexible assets light business model combined with the legendary entrepreneurial spirit. Cost actions taken since the start of the year. culminated in a much more visible reduction of unit costs in the second quarter. This reflects both a reduction of absolute cost with stable to increasing sequential volumes in sea and air freight. Contra Logistics and Rogue Logistics, as we have heard, continue to further increase their profitability levels in quite volatile market dynamics. Let's start for me, page number nine, with the income statement. And as expected, we can see negative developments in nearly every P&L line compared to last year. But what matters is the absolute performance with earnings before tax of 549 million Swiss francs in the second quarter or roughly 1.1 billion Swiss francs in the first six months. Let's remind ourselves that could have been a full year result in any year before the pandemic. Gross profit margin continued to outperform 2022, confirming some early successes in our strategy to focus on higher yielding business. We see a solid conversion rate of 24.4% for the group, also supported by diligent FTE resource management. There were no reported non-recurring impacts in the second quarter. In the prior year, just for reference, we had had a negative earnings before interest and tax impact of 28 million out of the exit from Russia. Headwinds are consistently coming from currency and they have even increased with a negative impact of around 4%, equaling 230 million at the gross profit level and around 3% or the equal of 59 million on earnings before tax. In the second quarter, the group minorities, preempting a question of yours, that result suggests a loss from APEX, which is not correct. That was impacted from a large withholding tax impact from the intra-group dividends that APEX has provided towards Clean International. The total minorities result operationally would have been comparable to the first quarter. Reading through the P&L, I want to give you also some update on the air freight initiatives on eTouch. Page number 10. As a brief reminder, and you have seen that slide repeatedly in the past. As a brief reminder, let me summarize the impact of eTouch, which uses integrated technology to standardize and centralize processes. Repetitive work processes are digitized. automated or shifted into global service centers with the aim to expand customer-facing capacities to provide greater efficiencies and extraordinary service experience. Let's look at the numbers then. Next page, page number 11. We have saved 1.7 million staff hours with a positive effect of approximately 2.6 percentage points on the air freight conversion rate. But not only have we continued the improvements in the well-known categories that you have seen, we have also now made initial progress in the carrier and supplier communication category for the first time. This exemplifies the continuous effort to widen the scope for our eTouch processes. Coming back to The working capital development, page number 12. Working capital currently at 741 million Swiss francs. One of the topics that has been on our agenda for the last couple of quarters was quickly contracting due to the reduction of receivables and contract assets. Receivables predominantly have reduced as a function of lower rates. accessorial charges and lower volumes in the network businesses, sea and air freight. Looking forward, I anticipate stable networking capital for the next quarters to come. have expanded slightly against the beginning of the year, less so against the same time last year. DPO on the other hand have increased quite significantly, mainly due to a reduction on our air freight charter contracts that usually don't offer any payment terms. As a result, the spread between DSO and DPO has increased to 12.7 days. Next page on cash and free cash flow generation, page number 13. Clearly, quarter two free cash flow is low and well below the expectations and the consensus. Two elements that drove this. Elements for good reason and well explained, I think. Relatively large cash bonus payments linked to record profitability in 2022. on the one side good news record profitability on the other side for sure from a cash flow perspective that was linked to larger bonus payments and in addition to that lesser so good news i would call it higher tax payments and dividend withholding tax in the quarter the relative measure of the networking capital as reported on the page, is based on the narrow selection of working capital items in the cash flow statement. So our net working capital intensity improved, as we have seen on the previous page, to 2.8% at the end of quarter two from 3% at the close of Q1. I want to emphasize with that explanation that the operational networking capital, so the management DPOs, DSOs, so receivables, payables, remains extremely robust and has actually improved over the past quarter. It is not the contributor to the weaker than expected free cash flow generation, but what I explained is to be looked at into the bonus payments and the tax payments. With these comments, I'm on page number 14, I would like to end our presentation for today with a couple of key takeaways. For the quarter, a solid Q2 result. Cost controls showed the first results. Volume development is as expected. Our active yield and portfolio management continues, and as Stefan has alluded to, the Roadmap 2026 initiatives are well underway. With this short presentation, I want to thank you, and I would like to open the line now for the Q&A session. Over to Sandra, please.