Kuehne + Nagel International AG

Ladies and gentlemen, welcome to the nine months 2023 results conference call and live webcast. I am Sandra, the course call operator. I would like to remind you that all participants have been listened only mode and the conference has been recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. In the interest of time, please limit yourself to two questions only. For operator assistance, please press star and zero. The conference does not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Stefan Pohl, CEO of Kühne Nagel. Please go ahead, sir.

Thank you very much, Sandra. Good afternoon and welcome to the presentation of Kühne Nagel's 9 Months 2023 Financial Results. I'm Group CEO Stefan Pohl and I'm joined on the call today by our Group CFO, Markus Blanka Graf. Let's go into page number two, nine months results. The solid financial results for the first nine months of 2023 reflect accelerated cost management and continued strong yield management amidst subdued demand for logistic services. They also reflect the extraordinary comparison basis of 2022 results. As was the case in the first half, EBIT for the first nine months of 2023 would have been the strongest in history, excluding the pandemic years 2021 and 2022. Net turnover was 18.2 billion Swiss francs, cross-profit 6.7 billion Swiss francs and EBIT nearly 1.6 billion Swiss francs. Our focus on cost control has intensified over the course of the year. with visible sequential cost reduction in Q2 that we extended in Q3. This exemplifies the flexibility of our business model and long-standing experience of right-sizing our cost base to the market environment. Our strategic focus on yield management also supported our financial results in the first nine months of the year with particularly strong gains in the first half. Let's move on page number three, C-Logistics. As always, from left to right, volume in toys, GP per toy, and EBIT per toy in Swiss francs. C-Logistics generated EBIT of 875 million through September. The effect of cost measures became visible in Q2 and even more so in Q3. as unit costs declined by 17% year over year and by 13% versus Q2. In Q3, C-Logistics also achieved its first quarter of growth since Q2 2021. Our year-on-year increase of 0.3% slightly outperformed the overall market decline of between 1% and 2% year over year. As suspected, there was no peak season in Q3. but volumes did improve modestly once again on a sequential basis. For Q4, we anticipate volumes to be broadly similar to Q3, excluding the effect of discontinuing some lower yield volumes in line with our yield management strategy. These volumes represent about 130,000 TOI per year. Despite this, we expect volume to grow year on year in Q4. Market share gains have not come to the expense of yield or mixed development. Year to date, SME volumes grew by 6% year on year versus minus 10 for commodity volumes. This brought our share of SME volumes to nearly 50% of total versus the mid 40s during the same period last year. In Q3 alone, SME volume growth was plus 1% year over year versus minus 1% for commodity volumes. The yield decline from Q2 to Q3 was most visible early in the quarter, with some recovery and relative stability in the last two months of the quarter. Q4 will bring more sequential yield pressure in light of significant supply and demand imbalance. We will respond by continuous to focus on cost measures. Page number four, air logistics. Again, from left to right, tons, GP per 100 and EBIT per 100 in Swiss francs. Air logistics delivered EBIT of 429 million during the first nine months of 2023. As with sea logistics, the pace of air logistics cost management efforts accelerated in Q3. Unit cost declined 23% year over year and by 14% versus Q2. Volumes declined by 9% year on year in Q3, broadly in line with the overall market. Volumes in Q3 were once again weighted down by double-digit declines in Transpac. Sequentially, volumes improved once again with a 2% uplift versus Q2. This extends the modest sequential volume recovery of H1. Mixed trends in Q3 resembled in H1. Volume in the general cargo segment remained weak, but perishables demonstrated strong, absolute, and relative year-on-year growth in the low double digits. Volumes from the Semicon sector, a strategic growth area, continues to grow at multiples of prior year levels, again, versus a low base. For Q4, we do not expect an air freight peak season. Typically, a peak would entire volume uplift from Q3 to Q4 in the range of high single digit percentage. Our expectation for Q4 this year is for volume similar to that for Q3. The yield decline from Q2 to Q3 mirrors the sea logistics development. The weakest result was in July with modest recovery and stability in August and September. The sequential decline reflects an uptick of capacity, weaker yield development at apex, and some dilution from stronger perishable growth. Next is page number five, road logistics. Road logistics EBIT of 119 million for the first nine months of the year nearly exceeded the all-time high achieved last year. Shipment volumes declined by 9% year on year in Q3, but slightly outperformed the overall market, which appeared to contract by more than 10%. Strong pricing and effective supplier cost management mitigated the volume pressure, so that cross-profit declined by only 5% in Q3, excluding currency headwinds. The Q3 conversion rate of 9% showed a year-on-year sequential decline. but it still marked the second best Q3 performance ever, following last year's result due to a 3% cost reduction versus last year and a 6% versus Q2. Sources of savings included fewer FTEs in high-cost countries as well as lower admin costs. Page number six, contract logistics. Contract Logistics delivered a record high EBIT result of 158 million for the first nine months, or Swiss francs 149 million, excluding a one-time gain booked in Q1. The EBIT of 48 million in Q3 was lower than last year's result, which was the best ever quarterly result for the business on it. Cross-profit grew by 2% year over year in Q3, or 5% excluding currency headwinds. We believe our market share expanded during the period, thanks to our strategy to focus on selected verticals and customers less affected by broader market fluctuations. New business wins are up by more than 20% year on year in the first nine months, while our pipeline has expanded by more than 50%. which makes us confident about our prospects in the coming quarters. Now next, page number seven, an update on our roadmap 2026. We have much to report on the strategic roadmap progress we achieved in the third quarter. Let's start with the market opportunities. We expanded our capacity and offering the strategic healthcare vertical. We also commenced deliveries for the NEOM project announced in late August. An early and significant success in our efforts to grow in the renewable arena. Remember, this industry offers high growth opportunities with a limited competitive landscape. On the technology front, we have appointed a new digital transformational officer reporting directly to our CIO. He brings relevant experience to the group as our cloud migration program is in full swing. As a reminder, this project will yield multiple benefits, including faster, more consistent exchange of data. Equally important, it will provide a platform to more effectively leverage all of our data, including applications of artificial intelligence and to create new services for our customers. In terms of sustainability, we have also expanded our offering to include an emission reduction solution for road logistics customers. Let's move to page number eight. You see the picture of the wind blade. This is a picture of our renewable project showing local transportation activities towards the harbor facility in Shanghai. I traveled to China two weeks ago and would like to share some of my key takeaways. On the agenda for this trip were visits with several customers and a number of verticals, including renewables, e-mobility, semiconductors, high-tech and e-commerce. These visits left me with an overall impression of China's speed, agility and optimism, and technological progress. Following the COVID pandemic, many in the West seem to have the perception that the growth we were used to seeing from China would come to an end. These visits showed me that the potential remains despite the global slowdown in GDP growth. We as a company must understand the evolving service requirements and to be ready to take advantage of this dynamic so that we can grow with them both inside and outside of the country and in particular to support our end customers in North America and the European marketplace.

With this, I would like to hand over to Markus. Thank you, Stefan, and good afternoon, everyone. Thank you for your interest in Cuninago and taking the time today for the nine-month result 2023. As Stefan has outlined, and as a quick summary, we witness an environment of demand for global logistics services that remains subdued. The sea freight peak season did not materialize in Q3, and confidence remains low in material air freight peak demand emerging in the fourth quarter. Destocking effects may now be fading, but inflation challenges persist and geopolitical tensions are rising further. We have been managing through countless economic cycles and periods of unforeseen volatility. a credit to a high flexible asset light business model combined with our entrepreneurial spirit. Hence, our current focus is on cost control that intensified during quarter three of 2023 and culminated in a much more visible reduction of unit costs. This reflects both a reduction of absolute costs with stable to increasing sequential volumes in C and air freight. Contra logistics and road continue to further increase their profitability levels in such volatility market dynamics. That as a small summary and layout of how our P&L is coming along. Let's start with the income statement. And as expected, we can see negative developments on nearly every P&L line compared to last year that was of exceptional nature. What matters? Is the absolute performance with EBIT of 455 million in the third quarter or 1.6 billion in the first nine months? A result that could have been a full year result in any year before the pandemic. The gross profit margin continues to outperform 2022, confirming some early successes in our strategy to focus on higher yielding businesses. we see a solid conversion rate of 23.5%, also supported by diligent FTE resource management. The combined sea and air freight conversion rate was 39.2% in Q3. For reference, the full year 2019 result was 28%, excluding one-offs. Headwinds coming from currency increased with a negative impact of around 4%, which is around 320 million CIS strength at a cross-profit level and around 3% or 80 million on earnings before tax. So quite significant. There were no reported non-recurring impacts in Q3, just for your reference. Moving on to working capital. One of the topics that has been on the agenda for the last couple of quarters, quickly contracting due to the reduction of receivables and contract assets compared to one or two years ago, together currently at around 4.2 billion. Receivables have reduced as a function of lower rates, extra charges, and of course, lower volumes. Looking forward, I anticipate stable networking capital in absolute terms for the next quarters to come. DSO, as you can see, have expanded against the beginning of the year and against the same time last year. DPO, on the other hand, have increased also quite significantly so that the spread between the DSO and the DPO has increased to 12.6 days. Networking capital intensity is based on a quite narrow selection of working capital items in the cash flow statement. The net working capital intensity deteriorated slightly by the close of Q3, with a result of 3.3% versus 2.8% for Q2, and as a reference, 3% in the first quarter. The absolute level of 795 million Swiss francs is slightly up, about 7%, versus 740 million at the end of June. In September, DSO and DPO stood at 57.5 and 70.1 days respectively, both having increased by roughly two days relative to the gym numbers. In absolute terms, This points to a 260 million reduction of receivables, more than being offset by 314 million reduction of payables, driving a net 54 million Swiss franc increase of working capital, as you can see in the schedule above. This leads me to page number 12 and to the cash and free cash flow generation. Q3. Free cash flow of 233 million represented a 73% cash conversion, always in relation of net income before minorities. While that has been better than the trough in free cash flow generation in Q2, which was, as we explained at that point in time, weighed by large cash bonus payments and dividend withholding tax impacts. The Q3 result was below our long-term average of approximately 100% cash conversion rate and should not be considered indicative of what is to come. A reference made also to our first quarter free cash flow generation, which was at around 91%. Two factors contributed to the relatively weak result in the free cash flow generation. We had a later phasing of tax payments, which obviously now in an environment of positive interest rate is beneficial. And secondly, some working capital pressure that I have explained previously on the DSO progression. As a summary, we anticipate further improvement of the free cash flow conversion in the fourth quarter. and I can't see any reason why we shouldn't return to the 100% or around 100% conversion rates when these effects that I mentioned will dissipate. With these comments, I'm already at the end of our presentation with some key takeaways following a solid Q3 2023 result with a continued and intensified cost control, signs of modest volume recovery in the sea freight arena, active yield and portfolio management that continues, and a clear early success with our roadmap 2026 initiatives. With that short presentation, I want to thank all of you already now and would open the line for Q&A. Sandra, please.