Kuehne + Nagel International AG

Ladies and gentlemen, welcome to the full year 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. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcasting. 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 full year 2023 financial results. I'm Group CEO Stefan Pohl, and once again, I'm joined on the call today by our Group CFO, Markus Blanka Graf. Let's look into page number two of the presentation. We delivered a robust financial result in 2023, thanks to ongoing and resolute cost and yield management. We also made more progress toward meeting our long-term strategic ambitions. We achieved this robust result amidst subdued demand with some signs of improved volume trends at the end of the year. The 2023 EBIT result of Swiss francs 1.9 billion represents a solid performance for the group following the extraordinary result of the pandemic years 2021 and 2022. The fact that the percentage decline in cross-profit year on year was half the decline in turnover is a direct consequence of our resolute cost and yield management throughout 2023. Our ability to radically match our cost base to the market environment underscores Once again, the flexibility of our asset-light business model. Cost control measures intensified over the course of the year. This is evident in the substantial reduction of operating costs from the first half to the second half of 2023. Additional measures taken near year-end will drive further improvement already visible in the current quarter. They will result in a headcount reduction of nearly 1,300 with roughly 40% already implemented by the end of 2023. These latest measures come at a cost of 53 million Swiss francs booked in Q4. But we project recurring cost savings equivalent to at least twice that amount. Additional cost measures are already in progress in Q1. Our strategic priority on yield management also supported our 2023 financial results. We drove a positive shift in our portfolio mix. At the same time, we see some stabilization of demand and we are well positioned to maintain or expand our share of a recovering market. Our success in shifting the mix is most evident in sea logistics. Next is Sea Logistics Deep Dive, TOI, GP per TOI and EBIT per TOI in Swiss franc, as always. Sea Logistics produced EBIT of 161 million in Q4, excluding one-off costs, and a full-year EBIT of just over a billion in Swiss francs. The positive shift in mix I just mentioned on the previous slide came primarily from higher yielding SME volumes. They outperformed with a growth of plus 7% year on year in contrast to commodity volumes, which contracted by 9%. Overall volumes were down 1% for the year, but up 1% excluding the effects of our choice to discontinue certain commodity volumes from early Q4. This compares February to estimated market volumes, which were down by 3% for the year. Looking at Q4 alone, volume trends ended the year on a stronger note. Overall organic volume was up by 5% year-on-year versus overall market growth of only 2%. Our SME volume alone were up by 9% in Q4. Unit costs. fell by 14% in the second half relative to the first half, thanks to a 7% increase in volumes and a 9% reduction in recurring operating expenses. This excludes consideration of the 21 million Swiss francs one-off costs booked in the fourth quarter. When evaluating the likely run rate cost base going forward, one should take into account the most recent cost measures. which are already having a visible effect in Q1. Over the course of 2023, yields normalized consistently, but also at a moderating pace. Thus far at the start of Q1, there are signs of sequential stability relative to Q4 average yield alongside modest volume growth. Regarding the Red Sea situation, we saw no financial impact in Q4, but expect to see some in the first half of 2024. The extent to which recent current conditions may support yields remains highly uncertain. Next is air logistics. On the left-hand side, again, as always, tons, GP per 100 and EBIT per 100 kilo in Swiss francs. Air logistics delivered Q4 EBIT of 140 million Swiss francs. and 569 million Swiss francs for the full year, both excluding one-off costs booked in Q4. Overall, Cunanagel volumes declined by 11% in 2023, but only by four year-on-year in Q4, in line with estimated market development. Volume was weakest year-on-year in Q1, then improved progressively over the next three quarters. This resulted in a more typical peak season pattern from Q3 to Q4 with a 6% plus organic sequential volume uplift. This was strongly driven by perishables demand and rising e-commerce exports from Asia. We reduced recurring operating expenses by 13% in the second half relative to the first half, thanks to cost control efforts. Similar to sea logistics, greater volumes in the second half, also plus 7% versus the first half, resulted in sharp 19% decline of unit costs over the same time period. This excludes consideration of the 14 million Swiss franc of one-off costs booked on Q4. Again, please take note of the impact to come in Q1 and future quarters from the most recent cost measures we initiated in Q4. The pace of yield normalization and air logistics also moderated into year end with a modest 4% decline from Q3 to Q4. This trend appears to have continued into the early part of Q1 alongside organic volume growth. The situation in Red Sea triggered a wave of customer interest in exploring various options, including sea-air combinations. To date, this has not resulted in a material uplift of air logistics demand. Next is road logistics, page number five. Road logistics EBIT for Q4 was 19 million Swiss francs or 138 million Swiss francs for the full year, both excluding one of costs booked in the last quarter Q4. Shipment volumes declined by 6% year-on-year and by 9% in Q4. We believe this volume development was broadly in line with the market. Ongoing yield and supplier cost management mitigated the volume pressure throughout the year. In Q4, this limited the pressure on cross profit to a 3% year-on-year decline, excluding currency headwinds. In the early part of Q1 2024, it appears that challenging market trends continue. We are pleased to have closed the acquisition of customer broker Ferro Group by end of January 2024. More in this development later in my presentation. Next, contract logistics, page number six. Contract logistics delivered a record high underlining EBIT result of 55 million in Q4 or 204 million Swiss francs on a full year basis, excluding non-recurring items. These include 13 million Swiss francs of one-off costs booked in Q4 and a 9 million Swiss franc of profit on sale from Q1. Market share expanded, expanded that over the course of the year with continued gains in healthcare and e-commerce. Ongoing process re-engineering and automation supported an underlining improvement in the conversion rating Q4 of nearly 100 basis points. We look forward with confidence given the new business opportunities are up by more than 20% year on year. Next is a deep dive into our roadmap 2026 targets, page number seven. The progress update. We concluded baseline customer and employee experience surveys, which will serve as a reference point from which we can measure progress over the coming years. We are also improving customer experience in sea logistics. As noted earlier, the share of SME customers in our portfolio is expanding. Measures include the addition of 27 new customer care locations, we call it CCLs, in second-tier cities as of end 2023, and the addition of about 170 SME-focused field sales over the last two years. In the area of technology, we are now leveraging AI in a meaningful way in several areas while developing solutions in others. The scope of opportunity is wide with implications for our own efficiency as well as pricing and the quality of our service offerings. On road logistics slide, I touched up on the successful acquisition of Ferro Group. Ferro represents a step change in our customs clearing capabilities in a market which is seeing strong demand growth, fueled in part by nearshoring. Additionally, we have developed several specialized service offerings, including LCL for healthcare customers and an India-US SME commerce solution. Turning to ESG, Q4 saw an expansion of our electrified fleet and road logistics, and we have proudly supported the first ever transatlantic cargo flight entirely powered by SAF. We also more explicitly defined the scope of our social impact framework by identifying six key dimensions. Human rights, labor rights, employee development, health and safety, diversity and inclusion, and community support. With this, I would like to hand over to Markus.

Thank you, Stefan, and good afternoon, everyone. Thank you, as always, for your interest in Cluny & Nagel and taking the time today for the full year 2023 results. As Stefan has outlined, we witness an environment of demand for global logistics services that remains subdued, and we don't expect a material change to this situation. E-freight and air freight did not see a broad-based peak season in 2023. And I want to point out we have been managing through countless economic cycles and periods of unforeseen volatility, accredited to a highly flexible asset-light business model combined with our entrepreneurial spirit. Our current focus, hence, is on cost control that intensified during Q4 of 2023 and will continue into 2024 to ensure a further reduction of unit costs. This reflects both a reduction of absolute cost and stable to increasing sequential volumes in C and F. Country logistics and road continue to defend and work hard to further increase their profitability levels in equally volatile markets. Let's start with the income statement. And as expected, compared to the pandemic years, we can see lower results on nearly every P&L line compared to last year. What matters is the absolute performance with an earnings before tax of 324 million Swiss franc in the fourth quarter, including, as mentioned before, 53 million Swiss franc one-off costs before tax for the full year 2023. The gross profit margin continued to outperform 2022, confirming some early successes in our strategy to focus on higher-yielding businesses we see a solid operational conversion rate for the group of 22% also supported by active manpower resource management. The combined sea and air freight operational conversion rate was 34% in Q4 and just below 40% for the full year 2023. For reference, the full year 2019 conversion rate was 28% excluding walnuts. Padwinds coming from currencies increased with an impact of around 4% or the equivalent of 414 million at the gross profit level and around 3% or roughly 105 million on earnings. On the next slide, working capital. One of the topics that have been on the agenda for many quarters, contracted due to the reduction of receivables and contract assets, together currently at around 4 billion Swiss francs. Receivables have reduced as a function of lower rates and accessorial charges. We anticipate stable networking capital for the next quarters to come. Days of sales outstanding have expanded against the beginning of the year and against the same time last year. Days of purchase outstanding, on the other hand, have had increased also significantly so that the spread between DSO and DPO has increased to 11 days. Networking capital intensity is based on a slightly narrower selection of working capital items in the cash flow statement. And it has closed by the end of 2023, closed with a result of 3% versus 2.7% for 2022. The absolute level is around 768 million Swiss franc and is stable since some quarters versus in comparison roughly 1 billion one year ago. Continuing with cash and free cash flow generation in Q4, we anticipated and reached close to 90% cash conversion rate, which represents a continuous improvement through the last quarters. Compared to the previous years, of course, this is at a lower absolute level. For a bit better illustration, we have added one additional slide. When we move to the next slide, this features an expansion about the cash tax issue, which waited on the free cash flow generation and conversion over the past year. While the headline free cash conversion was 85% in Q4, it was nearly 100% excluding cash tax effects, as you can see in this slide. In recent quarters, cash tax outflows have significantly surpassed P&L tax liabilities by a wide margin. This trend which has now faded, reflects the lag between the peak P&L tax recognized in 2022 and the usual lag in cash payments, which typically comes over the course of the following tax year. As the P&L tax of 2023 declined by about 50% year on year, that is, the higher cash tax outflows in that year related to 2022 resulted in significant pressure on the free cash flow generation. Another less significant factor has been our shift away from diligently pre-paying tax as the interest rate environment swung from negative, as we have experienced years ago, to positive. Going forward, we anticipate a more consistent relationship between P&L and cash flow. Going to something more tangible and easier, as a result of our healthy profitability, well-managed cash conversion and balancing current and future cash needs for adapting the workforce to the markets, the Supervisory Board has decided to propose a dividend distribution of 10 Swiss francs per share to the AGM on May 8, 2024. This represents a higher payout ratio compared to recent years, but is in line with earlier historic values. As a special element, one Swiss franc 75 per share are being paid as a repayment from capital contribution reserves, which may offer tax advantages to recipients under certain conditions. But now enough of 2023, let's move on to the activities that will shape our future, which is eTouch and our customer portfolio management. I'm on slide 14 on eTouch C Logistics. Digitalization and automation are the core drivers to increase efficiency in operation. For all of us to remind ourselves, we developed the eTouch methodology that addresses all aspects of operational processes. And we have selected only a few workflow areas for C Logistics and Air Logistics to demonstrate the relevance of eTouch. Man-hour savings continue to accelerate as we expand the efficiency gains through the operational processes resulting at a positive conversion rate of around 100 base points in C-Logistics. This represents a value of roughly 1 Swiss franc operating cost per GU. Most of you are familiar with this topic so let's have a look at the customer portfolio management and important activity that we haven't shared in the past so let me first explain the content of slide 15 the pie charts represent the share of product and customer type per category in terms of share of volume and share of gross profit for the years 2019 2022 and 2023 sme is green commodity is gray and others is blue Additionally, we have provided the share of APEX in the same dimensions in dark blue. SME contribute a much larger portion of the gross profit compared to their share in volumes and commodity the opposite. What you can also notice is the increase of share from SME and APEX contribution over the last two years compared to 2019 from 58% GP contribution to 61%. Most notable, of course, is the development in absolute terms as gross profit per TU. Whilst, of course, 793 Swiss francs per toy represents the high point in the pandemic years, the look through from 2019 to 2023 better represents the organic efforts to shift the portfolio and the product mix. There's more to come. It's the first stab at it, so we're confident that this is one important element to achieve the financial ambitions in Roadmap 2026. Moving on, and I think I can keep this short as you're already familiar with the information. In air logistics, we can report man-hour savings resulting at a positive conversion rate impact of around 300 bits, representing a value of 275 operating costs per 100 kilo. And same moving on swiftly towards the customer portfolio development in air logistics. We have chosen the categories, perishables, APACs, and all dry cargo, which includes all types of customers. I think you can digest that information on that slide yourself, but we do focus very clearly on yield improvements with all customer categories. With these comments, I would like to end the presentation with our key takeaway slide, challenging fourth quarter 2023 in various dimensions. I think Stefan has pointed out a stable but still uncertain volume development going forward. We do intensify our cost measures, focus on active yield and portfolio management, and we are diligently working and hardworking confirming our focus on the roadmap 2026 initiatives. In closing, volume trends showed some improvement in the Q4 amid challenging market conditions. Nonetheless, market demand and yields remained subdued. In this environment, we remain relentlessly focused on cost management And this is evidenced most recently by measures taken in the fourth quarter to further reduce costs. These actions will yield incremental benefits ramping up from Q1 going forward. With this, I would conclude our presentation section for the four-year result 2023 of the CUNINAR group and hand back to the operator, Sandra, for the Q&A session. Thank you.