Kuehne + Nagel International AG

Ladies and gentlemen, welcome to the Q1 2024 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 1 on your telephone. For operator assistance, please press star and 0. The conference must not be recorded for publication or broadcasting. At this time, it's my pleasure to hand over to Mr. Stefan Paul, CEO of Kühne Nagel. Please go ahead.

Thank you very much, Sandra. Good afternoon and welcome to the presentation of Kühne Nagel's first quarter 2024 financial results. I am CEO Stefan Paul and I'm joined as always on the call today by our CFO, Markus Blanka Graf. Let's go into the first quarter earnings. The Kühne Nagel Group achieved a Q1 EBIT result in line with our expectations. This result was stable relative to the reported Q4 result of Swiss francs 375 million, which excluded a redundancy charge of 53 million. Our ongoing focus on yield management and cost control offset the typical seasonal downtick of cargo volumes from Q4 to Q1. We achieved modest volume growth in our two largest business units, building on the somewhat improved volume trend of late 2023. During our last earnings conference call, you may recall that we undertook redundancy measures in Q4 and said we had additional cost control measures already underway in Q1. This was a direct reference to the recently announced organizational streamlining which will centralize general management and speed up our decision making processes. We anticipate related savings of approximately Swiss francs 100 million per year, comparable to the redundancy program announced with year end results. The associated charge in Q2 should be roughly half this amount and we expect the full run rate savings to emerge over the coming quarters. Lastly, historical free cash conversion in Q1 is usually low and sometimes negative. The result in Q1 2024 reflects the unexpectedly sharp rise in sea freight rates, a pressure which is not likely to extend beyond Q1. Markus will have more on this topic to come a bit later. Let's move into the Sea Freight Business Unit, page number three. As always, left the volume in toys, GP per toy and EBIT per toy always, of course, in SwissRanks. Sea Logistics achieved EBIT of SwissRanks' 197 million in Q1, which was a 36 million improvement on the result of Q4. To last year, this result includes a currency headwind of around 3% or 10 million Swiss francs. Effective yield management, Drover Stark, sequential increase in GP per toy of plus 17% from Q4 to Q1. This improvement more than compensated for seasonally lower sequential volumes of minus 9%. This also accounted for about 80% of the EBIT improvement with a balance from an absolute operating cost reduction of 2%. Headline volume growth in Q1 was 1.5% year-on-year or roughly 5% on an organic basis, excluding the effects of discontinued commodity volumes in Q4. We view our market share as roughly stable with estimated market volume growth of 2% to 4% year over year. The sharp rise in freight rates triggered by the situation in the Red Sea resulted in a relatively small uplift to yields in March. We expect some additional uplift in early to mid Q2, but no further effects after mid-year. Next is page number four, air logistics. tons, GP per 100 kilo and EBIT per 100 kilo in Swiss francs. Air Logistics delivered Q1 EBIT of 94 million Swiss francs or 14 million lower than the operational result for Q4. Our intensified prioritization of yield management resulted in a stable overall outcome in Q1 relative to Q4. This prioritization will persist and we expect further improvement ahead. Headline volume growth was at 3.4% year-on-year, revealing modest acceleration. Organic volume growth of 0.8% tipped into positive territory, aided by mid-single-digit perishable growth. In the hard cargo segment, excluding e-commerce, we believe our market share is stable. Note that we are serving the growing Chinese e-commerce export volumes, but with less exposure relative to the broader market. Revisiting the situation in the Red Sea, you may recall that we had not witnessed a material uplift in sea air at the start of the year. Since then, we have seen some additional demand growth, but of a relatively small base. Next is road logistics on page five. Road logistics EBIT for Q1 was 30 million Swiss francs. Shipment volumes remained under pressure in Q1 at minus 6% year-on-year, but broadly unchanged, excluding day count effects. This is a slight moderation of the Q4 result of minus 9%. Yield and mix effects mitigated volume pressure once again, resulting in a more modest GP decline of 3% year-on-year, excluding currency effects. The Q1 result also reflects the first-time consolidation of Ferro Group results since February. The acquisition of Ferro addressed a key strategic initiative to expand our customs footprint. Ferro is a long-established specialist cross-border North America trade, A market where custom solutions are cornerstone of successful sales efforts. We expect to close the recently announced acquisition of Cityzone Express in Q2. As a reminder, this is a Malaysia-based provider of cross-border road services spanning their home market, Vietnam, and Thailand. Next is contract logistics on page number six. Contract logistics generated another strong EBIT result of 55 million Swiss francs in Q1, matching the record result of Q4 and comparable to the Q1 result of 53 million last year, excluding a real estate gain. Market share expanded once again in key healthcare and e-commerce segments, categories which continue to dominate the sales pipeline. Our ongoing focus on efficiency resulted in a modest year-on-year increase in the recurring conversion rate. Please note that the major adidas distribution facility in Northern Italy, designed and operated by Kühne Nagel to serve Southern Europe for this client, is now operational. Let's move on On to page number seven, roadmap 2026 and update for the quarter. And before turning over to Markus, let's review some key developments with respect to this roadmap 2026 strategy. With respect to the cornerstone KNX, actions are underway to make meaningful improvements guided by the insights from the customer and employee survey conducted in the second half of last year. These actions market important steps to improve our customer service offering and our attractiveness as an employer. Additionally, as I touched upon earlier, the recently announced streamlining of our organizational structure will bring us closer to our customers and improve the speed of our decision-making process. In terms of market potential, I already referenced key recent acquisitions in road addressing geographic coverage ambitions in Asia, as well as expansion of our customs brokerage capabilities. We also made further advances in key verticals such as healthcare and renewables. Our shift from on-prem to cloud-based hosting of our in-house business application is on track while we continue to explore the potential for AI to drive new efficiencies. Lastly, We expand our service offering in road to include tangible emission reductions and avoidance solution and also made progress with respect to our social impact initiatives. With this, I would like to hand over to Markus now to talk more about the financial KPIs.

Thank you, Stefan, and good afternoon, everyone. Thank you for your interest in Cuninagel and taking the time today for our first quarter 2024 results. Just as a quick recap, as Stefan has outlined, we continue to see an environment of demand for global logistics services that remains overall subdued and we don't expect a material change to this situation. In such periods of a potential volatility, we focus on our highly flexible asset-light business model combined with an entrepreneurial spirit. Our current priority, hence, is on cost control. with several significant actions initiated in the fourth quarter 2023 and intensified in 2024 to ensure a further reduction of unit cost. This reflects both a reduction of absolute cost and per unit cost with stable to increasing sequential volumes in CNF rates. Moving on to the income statement. the PML remained below the same quarter in 2023. But we shall recall that the first quarter last year still enjoyed some positive spillover effects from 2022. Looking at the quarters sequentially, we can see a solid operational conversion rate of 18% supported by active FTE resource management. The combined sea and air freight conversion rate was 33% in the first quarter. For reference, the full year 2019, sea and air freight conversion rate was 28% excluding walls. Not to forget, headwinds coming from currencies increased with an impact of around 4% or 102 million Swiss franc equivalent at gross profit level, and around 3% or 19 million on earnings before tax. Moving on to working capital, one of the topics that has been on the agenda for the last couple of quarters, it increased due to the unexpected sharp rise of sea freight rates triggered from the situation in the Red Sea, as Stefan has outlined already in his opening. I anticipate stable networking capital for the next quarters to come. DSO have expanded against the end of last year and also against the same time last year. Days of purchase outstandings, DPO, on the other hand, have increased to a similar extent so that the spread between the DSO and DPO stands now at stable 12 days. Network and capital intensity increased by the close of March with a result of 4.1% versus 3% for 2023. The absolute level of 990 million Swiss francs is there with almost 100 million greater than it was a year ago. I will come back to this fact in a minute. Let's continue with cash and free cash flow. The pressure on the network and capital, which was discussed, arising from the sharp rise in Z-freight rates is clearly evident in the Q1 free cash flow result. This, along with some other factors, amplified seasonal effects, which typically result in a lower free cash flow conversion in the first quarter of the year. For a better illustration, let me move on to the next slide, which is a new slide. starting some more information on the cash conversion. The first quarter is usually not marked by the high-end free cash flow conversion, as it follows the peak demand season for Sea Logistics, our largest business unit. On that slide, you can actually see the average free cash flow conversion rate over the last over the last years between 2010 and 2020, so a 10 years look back on the Q1 cash conversions. A look back at this decade leading up to the pandemic points to an average first quarter free cash flow conversion of just under 20%. Excluding the effect of the recent sharp rise in sea freight rates and some other factors detailed on this slide, the Red Sea impact the non-core capex in the amount of 55 million Swiss francs earlier last collection day that we had in March due to the timing of Easter and initiated in the fourth quarter 2023, but cash effective in the first quarter 2024, some of the redundancy payments. We experienced also As mentioned briefly, a curtailed collections due to the timing of Easter and some material cash outflows linked to the redundancy charge as mentioned in the fourth quarter. With these few comments, I would like to end our standard presentation with some key takeaways. As Stefan mentioned, there is a silver lining on the horizon positive volume development to be continued, intensified cost measures on Kuninago's side, streamlining of the organizational structure as announced in the first week of April, strengthening of the customer proximity, active yield and customer portfolio management, which all results into a confirmation on our focus on the roadmap 2026 initiatives. So in closing, volume trends showed some improvements in the first quarter amid challenging market conditions. Nonetheless, market demand overalls and yields remained subdued. In this environment, we remain relentlessly focused on cost management, And this is evidenced most recently by the additional measures that we have taken in the first quarter to further reduce costs. These actions will yield incremental benefits continuing in the second quarter and of course, beyond that point. With these commentary, I would like to conclude the standard presentation and I would ask Sandra to open up for Q and A.