Kuehne + Nagel International AG

Ladies and gentlemen, welcome to the nine months 2024 results conference call and live webcast. I'm Sandra, the chorus call operator. I would like to remind you that all participants have been listened on in mood 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 must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Stefan Pohl, CEO of Kühnenhagen. Please go ahead, sir.

Thank you very much, Sandra. Good afternoon and welcome to the presentation of Kühnenhagen's nine months 2024 financial results. I'm CEO Stefan Paul and I'm joined by our CFO Markus Blanka Graf. Before I go into the details, please apologize. My voice, I catched a little bit of a cold. I will speak a bit slower in order to ensure that everybody will understand what I'm going to say. Let's move to the nine months results, the overview. In Q3, Kühnenhagel achieved a sequential improvement in Group EBIT and the first year over year quarterly increase in two years. We earned a group EBIT of Swiss francs 455 million with non-recurring items. Sequential earnings expansion in Q3 was driven by volume growth, effective yield management, and contract logistics market share gains. Our ongoing cost control efforts resulted in a further sequential reduction of unit costs in sea logistics, while air logistics units cost were stable. With respect to cost-saving measures taken in Q4 last year and Q2 this year, we continue to see emerging benefits that we expect to realize fully by year-end or early in 2025. As we have noted in recent quarters, these savings are mitigated by inflationary pressures and now also by the effect of volume growth and additional investments in service quality. In terms of free cash conversion, the second half is typically much stronger in our business than the first half and usually strongest in Q4. Our year-to-date performance in 2024 reflects this trend, but working capital expansion softened the effect on absolute conversion. This was primarily due to growing trade volumes and especially the sharp rise in sea freight rates which appeared to have peaked in Q3. Per usual, Markus will expand on this topic in a few minutes. Lastly, the return to profit growth in Q3 was broadly in line with our expectations, but with diminished prospects for this year peak seasons relative to our views at mid-year. This is due in large part to front-loading of cargo demand which persisted through the middle of Q3, a development with implications for both the sea freight and air freight markets. Front loading was a reaction by supply chain disruption sparked by the rerouting away from the Red Sea. Potential fallout from port strike actions in the US and geopolitical uncertainties. These uncertainties persist with the US election now in focus and its potential impact on trade policy. That said, Kühne-Nagel has a long established track record of successfully navigating challenging market conditions. We remain focused on the execution of our strategy with progress in Q3 across multiple fronts, including improvement of SME service levels, additional sea freight portfolio management migration of our core TMS to the cloud and the closing of our board on road logistics acquisition in Asia. Looking back at the nine months we have delivered on the right sizing workforce, streamlining the management structure and refocusing the sales force. This has created a solid platform from which to accelerate growth in the quarters to come. Let's move to C-Logistics, as always, volume in TU, GP, and EBIT per TU in Swiss francs. C-Logistics EBIT grows sequentially and year on year in Q3 to Swiss francs 256 million. This compares to an underlying result of Swiss francs 206 million in Q2 and Swiss francs 236 in Q3 last year. The sequential EBIT increase of 24% reflected a cross-profit increase of 7% with volumes plus two and yields plus five, along with reduction of operating costs. As I mentioned, we took another step towards improving our volume mix in Q3 with a de-selection of additional low yielding business from a single customer who accounted for about 140,000 TU of volume in 2023. Adjusting for this decision and the volume from the two other accounts we stopped serving in Q4 last year, our underlying volume growth was just under 2% year-on-year in Q3 versus estimated market growth of 3% to 5%. This change and especially the delayed recognition of Red Sea FX contributed to sequential yield expansion in Q3. Turning to cost, Recurral OPEX declined by 5% quarter-on-quarter to 292 million Swiss francs and declined by 3% year-over-year. This translated into unit cost reduction of 7% sequentially and 1% year-to-year. We anticipate a small step up costs into Q4 as we continue to invest in our service offering and pursue higher yielding volumes, which also entails higher costs. This includes additional customer care locations in second tier cities. We have now opened 37 since late 2022 with three new locations in Q3 alone. This all resulted in an increase of conversion rate to 47% in Q3 from 40% in Q2, which also marks an improvement of 44% in Q3 last year. Shifting to current trading, it is clear that yields improved over the course of Q3, but they did not top out as high as we expected. Given the earlier than expected conclusion to the peak Let's move to air logistics. The volume in tons on the left hand side GP in 100 kilo and then EBIT per 100 kilo always in Swiss francs. The air logistics EBIT result for Q3 of 120 million is roughly comparable to the underlining Q2 result of 122 million. This compares to 136 million a year ago. Modest sequential cross-profit growth of 1% on the back of volume growth and stable yields was more than offset by a 2% increase of OPEX, which translated into flat unit costs. APEX drove the volume uplift from Q2 to Q3 with all other volumes flat. From a year-over-year perspective, perishables and APEX showed the strongest growth. Spillover from the sea freight market due to Red Sea disruption appeared to be minimal. Air logistics volume grew 7% year-in-year in Q3, or by 5% on an organic basis. We view our growth in line with our reference markets. The net effect on yields was neutral, as higher growth in the lower yielding perishable segment offset stronger yields in other areas of the portfolio. As for costs, Q3 saw a plus 2% Q&Q rise in OPEX to Swiss francs 314 million. On a year-over-year basis, costs were up by 4% relative to the average quarterly OPEX in the second half last year. The sequential rise of overall OPEX reflects the stronger performance from APEX, which is in part seasonal. This all resulted in a conversion rating Q3 that was stable relative to Q2 at 28%, but lower than last year Q3, result of 33%. Here as well, looking at current trading, we see a muted peak season this year in Q4, with most likely modest low single-digit percentage volume growth on both sequential and year-over-year basis. Again, the contrasts with our more bullish expectation at mid-year. This partially reflects the extent of front-loading earlier in the year, the reduced potential emergency demand as sea freight disruption has eased, and the actual demand in some key segments such as the German auto sector, which fell short of expectations. That said, we aim to deliver higher growth in the quarters to come. Let's move to road logistics. Road logistics EBIT for Q3 was CHF 22 million versus a recurring CHF 39 million result in Q2. This compares to 26 million last year. Shipment volume grew 80% year-on-year in Q3, up from 6% year-on-year in Q2. On an organic basis, Q3 volumes were closer to flat. Cross-profit remained roughly flat year-on-year in Q3, reflecting soft conditions in our core markets, notably Germany and France. Overall, the net result was relatively weak. EBIT contribution for Q3 during the slowest seasonal quarter for road logistics. Please note that the CitySolExpress exposition closed in Q3 consistent with our most recent communication. As a reminder, CitySolExpress was Franks & Coulinard's cross-border road service in Malaysia, Vietnam and Thailand. Next is contract logistics, a highlight for this quarter. Contract logistics once again generated solid EBIT growth in Q3. EBIT increased to Swiss francs 57 million versus a recurring result of 52 in Q2 and 48 in the year-ago quarter. Cross-profit growth excluding currency effects accelerated further to plus 10% year-in-year in Q3, up from 8% year-in-year in Q2. This reflects in part the ramp up of the major Adidas distribution facility in Italy, we spoke about that in Mantua, a site which will fully fulfill all of the company's distribution and e-commerce needs for Southern Europe. As previously indicated, the Adidas project is expected to reach the planned full run rate contribution by the first quarter 2025. Market share expanded once again in key healthcare e-commerce segments, categories which continue to drive the science pipeline. The conversion rate of 6% in Q3 was stable in both quarter-to-quarter and year-over-year basis. Before turning it over to Markus, let's review some key developments over the past quarter with respect to our roadmap 2026 strategy. In Q3, we addressed the market potential pillar of our strategy with the further expansion of our contract logistics footprint in e-commerce and healthcare. As mentioned a few minutes ago, we also closed our road logistics acquisition in Asia. If we look at our technology efforts in the digital equity system, we reached an important milestone in Q3 with a successful first wave migration of our in-house transport management system TMS to the cloud. This is a critical prerequisite to boosting our ability to leverage our data and continue to identify and test GenAI use cases. Also our offering to help customers decarbonize their supply chains is gaining further traction in the areas of air and road logistics. With this, I will 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 2024 results. As Stefan has outlined, and before we turn the page, we can record sequential improvement in group EBIT and a year-over-year quarterly increase as well. We have achieved this result in a market environment characterized by the ongoing Red Sea situation, short-term disruption from East Coast strikes in the US and some severe weather conditions in Asia at the end of Q3. Hence, we continue to focus on our highly flexible asset light business model. Our current priority is on cost control with the elimination of the regional structure in the second quarter of 2024. which resulted in a reduction of absolute cost and unit cost. As always, let's start with the income statement. Q3 has been sequentially stronger than Q2 2024 and Q1 2024, even more so when considering restructuring costs of 17 million CHF in the second quarter. For 2025, we expect a further improvement in our performance on group conversion rate. Looking at the three quarters in 2024 sequentially, we can see solid operational conversion rates of 18 and 19, now nearly 21%, excluding restructuring costs, supported by active workforce management. The combined sea and air freight conversion rate was 38% in the third quarter. For reference, the full year 2019 sea and air freight conversion rate was 28%. Headwinds coming from currencies had a negative impact in translation of around 3%, or 121 million at gross profit level, and around 2% or 36 million on EBIT level. Working capital increased due to the significant rise of sea freight rates triggered by the sustained higher rate levels on Far East-Westbound trade lane and a recent surge in air freight charter activities from a Pax operation in Transpac. Looking forward, I anticipate stable network capital for the fourth quarter with some relief into Q1 2025. DSO have expanded only slightly against previous periods. DPO, on the other hand, have decreased significantly, mainly due to the increase in air freight charter activities, which reduced the spread between DSO and DPO to now 4.8 days. Networking capital intensity increased by the close of September with a result of 4.3% versus 3.3% for 2023. The absolute level in Smith's friend is thus more than 400 million greater than it was a year ago. I will come back to that fact in a minute. Continuing with cash and Free cash flow generation. The pressure on networking capital we just discussed is also evident in the third quarter free cash flow result, but with a better free cash generation than in any of the previous quarters in 2024. In absolute terms, we are satisfied that the free cash flow generation improved to about 300 million Swiss francs in the third quarter. Looking more closely at free cash generation, the third quarter result reflected free cash flow conversion of 85% to net income before minorities. This compares to 38% in the second quarter. As a reminder, and relative to other quarters, the third quarter is historically the second strongest after fourth quarter. The historic annual average is in the range of 90 to 100% free cash flow conversion rate. The quarterly performance here to date does feed the historic pattern, but with a more muted overall development due to the pressure of network and capital expansion, as I alluded previously. As sea freight rates appear to have peaked in Q3 and assuming further moderation ahead, We anticipate an eventual reversal of these network and capital outflows over the coming quarters. In summary, our key takeaways. We are positioned for a greater profitable volume growth in a low growth market environment. We assume that Red Sea effects have peaked in the third quarter 2024. We have right-sized our cost base and progress further on our key strategic initiatives, customer mix, service mix and technology. We will provide more details around our plans in conjunction with Roadmap 2026 with the publication of the full year results. Looking back at the nine months, we have delivered on the right-sizing workforce, streamlining the management structure, and refocusing the sales force. This has created a solid platform from which to accelerate growth in the quarters to come. With this, I would like to thank you for your attention and hand back to operators Sandra to open the Q&A session.