Edited Transcript of KNIN.S earnings conference call or presentation 27-Feb-20 1:00pm GMT

Quarter 3, we posted great results, while we saw a slowdown in some of the industries, in addition to automotive, for example, the high-tech industry. It’s typical for Kuehne + Nagel that we focus on profitability, but especially in quarter 3, you saw, while — an EBIT improvement of 16% versus the GP growth of 2%.

Quarter 4 saw a lot of challenges. Markets went down. The peak season didn’t come to a volume increase that we would have expected, and we refocused again on cost and restructuring of our — ongoing restructuring of our contract logistics business. There was, in total, a decelerating growth in quarter 4 2019 noted. Nevertheless, GP improved by 1% and EBIT grew by 10%.

Let’s deep dive a bit into the 2 network businesses, seafreight and airfreight. Slide 5 for a moment, if you may. Seafreight, we have seen that our selective growth strategy, focusing on customers with scalable solutions also in seafreight show traction, and we were able to grow twice as fast as market. Especially the focus on customer service, especially for small- and medium-sized enterprises, showed the expected benefits. Cargo mix, we mentioned that a couple of times last year, continued success with digital platforms and especially our KN ESP and Sea Explorer showed a lot of traction. And therefore, we were also able not only to post and show volume increases, but also a higher conversion rate in seafreight last year.

Airfreight, flying successful in a very turbulent market environment. That is my message about airfreight. We have seen declining markets. We had a higher exposure earlier last year with our strong automotive customers, which were down trading for a couple of quarters. But nevertheless, we were able to stay on course and had continued success, especially with our solutions business, KN InteriorChain, KN PharmaChain, KN BatteryChain, you know about it. We mentioned that a couple of times in our calls. Yes, we have onetime effects, writeoff of intangible assets, and we will come to that later on. But nevertheless, in that turbulent environment, the airfreight business unit was able to show a very [stable] results.

How did the volume develop? If you move on to Slide 6, please. Let’s start with seafreight. We had a very robust volume growth of 171,000 TEU or 3.6% versus previous year versus a market that was, for sure, flat the last quarter, but showed for the whole year maybe 1% to 2% growth. The market decelerated, second semester, especially in quarter 4.

Where did we see the strong volume growth? Europe to Asia, very strong volume growth; and Asia to Europe, showed a very strong volume growth as well. And then North America and South America both to Europe. Here, we posted the highest improvement increases in our tonnage — or TEU, sorry.

Ongoingly, both reefer and less container load, LCL, continued to perform extremely well. A topic that we have mentioned in the last couple of our quarterly calls already.

Airfreight, different market dynamics. The market contracted in 2019 by 4% to 5%, approximately and we’ve seen this since December 2018, virtually, as I mentioned before. So did our volume, we lost 100,000 tons in our network, which would add to 5.7% decrease, but with a slightly improved trend in quarter 4, and you see this clearly here on Slide 6 where the difference to previous quarter 4 2018 is much lower than the previous quarters.

Where did we see the tonnage declining, especially in Asia exports and also European exports to Asia, while the North America and the South America exports to Europe were still robust or expanded, you could say, modestly.

Let’s move on to Slide 7, where we have shown the details on the unit profit development. For the whole year 2019, the unit gross profit in seafreight came to CHF 317 per TEU versus CHF 316 per TEU in previous year, 2018. So that is a flat development. While the unit cost decreased to CHF 223 per TEU versus CHF 227 per TEU previous year so improved by 2%, leading to a unit profit improvement of CHF 5 or 5.6% and CHF 94 per TEU in 2019 versus CHF 89 in 2018.

What is the root cause for that development? I would like to mention the cargo mix. We mentioned that, I think, in the semiannual call already, the strong, small- and medium-size enterprise focus for businesses that is operating in a niche and [indiscernible] a holistic end-to-end service from us. And I mentioned that earlier, digital solutions, the platforms that we see get a lot of traction and more and more customers on-boarding on those customers and doing business with us via those customers.

In addition, not to be seen on that slide, but it’s important to know, and I’m sure you noticed that the conversion rate improved from 28.2% in 2018 to 29.6% in 2019. A very high incremental conversion rate due to our stable unit gross profit versus reduced unit costs.

How did the situation develop per unit in airfreight? Slide 8. The unit gross profit in airfreight nominal increased from CHF 69 per 100 kilo in 2018 to CHF 80 per 100 kilo in 2019, but that is also attributable to the mix we have for the first time included the Quick business, the higher-margin time-critical business into our portfolio in quarter 1 last year.

The unit cost also increased from CHF 49 to CHF 59 per 100 kilo in 2019. So that would mean a cost of CHF 10 per 100 kilo also attributable not only, but to the majority to the cargo mix, the Quick business model, which is quite different from our classical network billings.

The unit EBIT, and that’s you have to take into account excludes the impairment of intangibles, but the unit EBIT improved from CHF 20 per 100 kilo in 2018 to CHF 21 in 2019. So a 5% improvement purely operational and cargo mix or solution mix related per unit versus — in comparison of the 2 years.

Let’s move on, on Slide 9. We have the overland business, and we are proud of the strong performance of the overland business over the last couple of years. They also performed very strong in 2019, not only in the European network, but also in the North American intermodal and truck brokerage business, which large volume customer especially.

In addition, not to be seen in the figures yet, but on a very great way, overland has very successfully launched a digital platform in Asia, and as we just mentioned, that gets a lot of traction.

The overland business unit performance decelerated in the second semester 2019. But nevertheless, we have seen a stable growth of 3%, 4% in pure growth in 2019 in quarter 3 and 4.

So what contributed to the strong success and performance of the overland division? The European groupage and LTL [drove the] clear focus on target customers and solutions, optimization of the processes and automation of the processes. Yes, the launch of the platform not yet seen — seeable in our figures. But in addition, the pharma and e-commerce solutions where overland got a lot of momentum and continue to grow last year.

For the whole fiscal year, overland posted a EBIT of CHF 78 million versus CHF 76 million previous year. Please take into account nonrecurring items and you would come to a conclusion that the operational performance of our overland business improved by 10% year-over-year last year.

We posted 2 acquisitions in the overland business units. One, we mentioned in our Q3 call last year, the Joebstl acquisition in Austria and Eastern Europe. And now we have made an acquisition and closed that acquisition earlier this year called Rotra in Belgium and the Netherlands, a European-wide overland transportation business with a very professional and efficient groupage business and cross-dock facilities, revenue of approximately CHF 110 million and 800 employees. As I said, this became effective January 7, and it’s not yet included in the figures for 2019 obviously.

I suggest we move on to Slide 13. Please go to Slide 13, contract logistics. As stated, since quarter 3 2018, we have started and continue since then the restructure of our contract logistics business.

What does CL, contract logistics, restructuring really mean? This refers to both the customer contract and the real estate portfolios. These are 2 distinct topics. Yes, they come together in 1 business unit, but they pursue different dynamics.

So let’s start with the real estate — review of the real estate portfolio first. We have the real estate disposals generated over the last 6, 8, 9 months. And these disposals generated a cash proceeds of CHF 245 million for the fiscal year 2019. We believe that this will be ongoing for another 2 or 3 quarters, and that review of the real estate portfolio should come to a natural end as well. We have a leaseback quota of the real estate we disposed of roughly 70% of these assets. And the rest is a disposal without any further activity.

The second dimension of our contract logistics restructuring, the contract portfolio and also the improvement of the operational performance, I would like to comment in more detail as well. So let’s do the deep dive on Slide 14 of the slide deck.

The revenue of the contract portfolio and the operational improvement includes a lot of measures. And let me refer to some of those measures because I think it’s important to understand what is going on there. First of all, we looked at each and every single contract logistics contracts, the whole portfolio, then we assess those contracts with regards to stand-alone profitability, scalability of the high-margin solutions throughout the contract logistics locations, contributions to our network business units, especially to sea and airfreight, but also overland and also the capital requirement. CapEx needs to run and set up those solutions.

In addition, we — and we mentioned that last year a couple of times, we invested ongoingly into technology, picking enhancement, a new WMS, so warehouse management software, and we were very selective with our organic growth in 2019 and will continue to be very selective with our organic growth. This — all this together led to a deceleration of our net turnover growth quarter-by-quarter. So we started with 6% in quarter 1 growth and ended quarter 4 2019 with 1% growth on purpose. That was a targeted growth, while we saw and experienced a growth of 8% in 2018, respectively, 7% in 2017 still. So a slowdown of our organic growth in contract logistics.

We also improved the working capital position in contract logistics for the whole year. We reduced the working capital by CHF 227 million versus an increase of working capital of CHF 260 million in 2018. So all of this is part of a review and restructuring exercise of the contract logistics business, operationally and purely operation, that is what you see on Slide 14 here. The operational improvement in contract logistics is on EBIT level, CHF 14 million versus previous year, which is an improvement of more than 13% and I can think the whole contract logistics colleagues can be proud of what they have achieved in the last year.

I would like to give — maybe I’m preempting some of your questions with that statement. But there is no change to the guidance we already gave that the reduction of contract logistics footprint will commence. You would expect or you should expect a indiscernible percent lower contract logistics footprint in the overall portfolio of our activities as well as you should expect that this restructuring exercise continues until quarter 2 ideally this year. The latest quarter 3 into this year, we should be through with all the activities that we have set up.

And now after the deep dive and go through the 4 business units, I would like to hand over to Markus, our CFO, to give you the details on the 2019 financials.

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Markus Blanka-Graff, Kuehne + Nagel International AG – CFO & Member of the Management Board [3]

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Thank you, Detlef, and also from my side, a warm welcome to everybody. You said it, it was a successful year, and I would like to guide you through the slide — Page #15, that is underlining some of these successes. And let me highlight a couple of numbers here. Gross profit margin was going up consistently over the year. We are now on 37.8% by the end of 2019. And also, the conversion rate has reached with 13.3% on a higher level than it was in 2018.

Admittedly, the third quarter was the star quarter. And I think we said it also on the occasion of our 9 months results call that the third quarter was very good. However, looking into the full year, I think we can still be quite proud of it. As some of you may recall, one of our targets that we have been looking for some years ago was a 5% EBIT margins to net turnover. In 2019, we would have actually reached the target that we have given ourselves at that point in time.

So overall, a successful year. And despite some headwinds and some of the headwinds that we need to mention is certainly that currency impact, foreign currency impact, especially around the euro have been significant. 3.6% negative impact. Some of the companies in our sector have a 3.5% growth rate per annum. So we have a negative currency impact of 3.5% from the euro conversion. So that is a sizable magnitude we need to also consider when we look at operational performance of the group.

And for your reference, Page #16, we have provided a high-level bridge on EBIT reconciliation between 2018 and 2019 on the reported numbers as well as on the operational numbers. And you can see, we would have, on an operational level, improved the result on and around 7.5%. That, I think is, from an operational performance, quite remarkable.

But we are not resting. I mean that is not what you would expect from us, and we would not expect that from ourselves. eTouch is one of the major drivers to achieve our goals and targets for the year 2022. And Page 17 and 18 provide a bit more color and flavor, but also a bit of a reminder for ourselves what we want to achieve with eTouch. And first of all, we confirm, and that in the nature of that project, that there will be accelerating eTouch returns back-loaded into the years 2021 and ’22. As we speak today about the year 2019 in the financial accounts of 2019, there is only a minimal impact, positive impact of the eTouch activities. A lot of these benefits that we have seen, and I come to that on the next page, are overlaid or overshadowed by some of other market and growth initiatives that — so that they become less visible than we would wish them to be. So it’s unfortunately not that transparent, that we can say the conversion rate went up for 0.1% because of this and this eTouch initiatives. So it becomes for 2019, not yet very visible on the overall P&L.

I would expect at the current stage, that we will provide further details on eTouch as you can see on the next page, Page #18, also through the year 2020 and obviously through ’21 and ’22. However, the magnitude of what we talk about, I want to give you a flavor already now.

So Page #18, how do our efforts — and I think we have shared a lot of the operational details around what eTouch is, but how do these efforts translate into numbers? And on that slide, we have done simplistically, I have to say, a higher aggregation level than obviously we manage the project. We have picked out of the — of 10 core areas that we are looking at, we have picked 5 in the area of airfreight. And [so far] as you can see, very much operationally process-driven, like document filing or customer booking and order entry and status updates that we want to share with you how important they are. So what share of a total process, they would be accounted for. So like document filing would take around 50% of the entire process and would account in our current volume and workforce around 2 million to 6.5 million man-hours. This is a fantastic number. You can try to calculate that how many people are actually working on document filing [indiscernible] providing documentation. For everybody who is thinking about the effort we are making and then thinking about digitalization, you probably understand how far we are away from a digitalization across companies, across government institutions and across borders.

So I think there is still a lot to do on this topic. However, for 2019, we can say we have productivity gains on around 900,000 man-hours. Easy translation, this is around about 500 people. They would be accounted for around CHF 20 million annualized savings. Adding up together, and I’m pretty sure the majority of you listening have already added up the man-hours estimations for all 5 processes that we have listed out, we would be in the range of 3 million to 9 million man-hours potential saving, which would translate into CHF 60 million to CHF 70 million, up to nearly CHF 200 million savings. That is something what made us since we started with the eTouch initiative comfortable in reaching the 2022 target of 16% conversion rate. So now you see a little bit where our comfort level comes from that we can achieve that within the given time frame.

Going back to something a bit more on the accounting side, Page #19, a quick summary on the balance sheet. I think looking at it, 2 components that are shouting out from that balance sheet is we prepared

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[for] acquisition, and we are also ready for fight against disruption and uncertainty to provide also or to respond to the developments in the year 2020. So preparation and, at the same time, being ready to conquer whatever the year 2020 with all the difficulties we have seen until now is going to bring us. Equity ratio is one of the components. Cash is the other component.

Let me talk about the equity ratio first. We are around about the 30% equity ratio when you normalize for IFRS 16 impact, so that we have comparable numbers between ’18 and ’19. So stability in a very strong [format.]

Cash. Page #20, cash is what counts at the end. I’m very happy that we, over the year 2019, has been able to reinstate our strong free cash flow generation. I think when we look at the numbers, year-end 2019, there was CHF 600 million — more than CHF 660 million more free cash flow generated in ’19 than in the previous year. We stand currently at around CHF 1.2 billion free cash flow out of the operation. Give or take now some of the real estate sale cash inflow, of course. But I was never a big supporter of say from mentioning too many one-offs because in a business like ours, there is every year somewhere, something that we’re selling or buying or there is some restructuring that needs to be taking place. So the art, I have to say that some of our competitors in the industry have made out of the reporting of extraordinaries becomes very difficult, I think, for me to relate to. For me, it’s a cash flow that is CHF 1.2 billion free cash flow, CHF 660 million more than last year. So we end up with a solid cash base for the end of the year.

Where is it coming from? I have mentioned it, a small part is coming with the disposal of the real estate portfolio. The bigger part is coming out of the improvement of working capital. So something that is in our management empowerment, so that we can manage. That is in our world of how we manage receivables and payables.

Page #21. You recall maybe our working capital intensity target, self-set target between 3.5% and 4.5%. We are at 3.3% on a year-end position, which is always a bit favorable, of course. We’re quite happy that we’re able to reduce the net working capital [need] from above CHF 1 billion to CHF 820 million at year-end.

Result out of all these efforts, Page #22. Return on capital employed. You see our target or calculated target, as I always say, based on our structure of the balance sheet and the business is around 70%. We are at 66%, 67% granted that is not 70%, but I think we are moving closer to that. And I think it will remain achievable as well.

One of the most discussed topics, if you like, already in the first couple of hours of this — of today. What is our dividend proposal for the year 2019. Two things I want to preempt on that slide. You have seen our preparation for Asia growth. Some of the information that has been already out in the markets before that call. We have reorganized the Asia organization from 2 separate organizations in Q1 that makes it far more focused and effective to prepare for that. And as we have mentioned, Asia is the area where we want to grow not only organically, that is not excluded, obviously. This is our home turf. This is what we are good in. And — but we also want to make a major step forward on inorganic growth. At the same time, maintaining solidity and a good liquidity position to keep our options open for reacting, restructuring, whatever is necessary in the very unsecured environment that we are currently in to serve both of these target at the same time, I think we have made a very respectable proposal with a payout ratio of 60% that we — that the Supervisory Board will propose to the Annual General Meeting.

Financial targets, another way of [probing] on our Page 24. Strategic targets remain in place for a longer period of time. So we maintain and confirm what we have said already for a couple of years. Strategic target, 16% conversion rate, 70% return on capital employed, solid cash foundation and free cash flow generation. These targets remain in place, nothing is going to move us at the current stage away from these targets. Yes, there are probably uncertainty, disruptions. There are macroeconomic and as of the coronavirus, which I’m pretty sure some of the question will hover around as well. There are disruptions. There are difficulties, but our strategy remains in place, and we are holding tight to these targets. I’m even [not] alluding to all of the numbers that are on the right side that are talking about markets, they are all — when you look in the column market 2020, you have to take the numbers at the current stage with an element of speculation, of course.

Again, for me, it’s less important to get the predictions and the speculations right. I think it’s more important to have an answer on the challenges that are coming through that, whatever they will be, be ready and prepared and without losing our strategic target out of sight. And I think with that, I would like to hand back to Detlef on Page 25 of the presentation.

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Detlef A. Trefzger, Kuehne + Nagel International AG – Chairman of Management Board & CEO [4]

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Thank you, Markus. Uncertainty, disruption, challenges, a tough environment. This is what we experience every year. This is part of our business model to solve or to provide uninterrupted and sustainable supply chains for our customers. We had a couple of key words that we exchanged in our calls previously, Brexit, trade war, Iran crisis, Russian crisis, a lot of topics that came up. This year, we are seeing the Asian trades being down due to CoVID-19, and I’m sure some of the questions will go through this, but we can already say that, yes, there will be a volume reduction to be experienced in quarter 1. We will also see an effect on EBT, especially in China. But in total, we stay confident for the full year that this will be another [whatever,] successful year.

We see increasing and growing demand for perishables and you know that Kuehne + Nagel is the market leader in perishable logistics worldwide. And we see demand growing in almost all areas of the world. In the second semester, we expect with all the know-how that we have today, volume grows again on the transpac as well as the European exports, both to North America, but also to Asia. And that is what we have started and launched a couple of months ago. We see huge potential for our CO2-neutral and CO2-efficient solutions.

What is our response to be unknown, to the uncertainty, the challenges, the tough environment that we experience every year? We are adapting our transport capacity and cost structure, and that is one of the strengths of Kuehne + Nagel, and we have proven that we can manage this in quarter 4 2018, quarter 1 last year and quarter 2. So we feel comfortable here, but at the same time, we are able to provide a seamless and robust service to our customers.

We will complete, I mentioned that before, the contract logistics restructuring at the latest in quarter 3 this year. Hopefully, quarter 2 this year, we will be through with all our activities.

Markus, your flavor of eTouch, we would accelerate our eTouch deployment. It’s a process that takes time, but once it’s up and running, it’s automation. It’s not visible, as we discussed with you before, but the visibility comes through the P&L eventually.

Focus our growth on Asia organically as well as inorganically, and we keep the powder dry for this, especially and we have a first mover offering with our Net Zero Carbon Program and a high and accelerating customer demand on CO2 and — CO2-neutral and CO2-efficient solutions.

As from this year onwards, from the 1st of January onwards, all our less container load shipments or our — wherever you or however you book them or our customers book them are CO2-neutral. So we see this demand, and you can expect that we will come up with some more customer-related solutions on that basis.

With these statements, yes, a tough environment. As we state each and every year, we never said that it will be a [good] year, and we will surf the waves without any effort. But an environment that, at the moment, there’s no signal that Kuehne + Nagel should not be able to close this year successfully. With that statement, I would like to hand over to Mara to start the Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Daniel Roeska from Bernstein Research.

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Daniel Roeska, Sanford C. Bernstein & Co., LLC., Research Division – Research Analyst [2]

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Three, if I may. First, kind of on your plans for the Asian acquisition or inorganic growth potential. You already commented that you kind of restructured the business in Asia. Are there other things you would still want to do or need to do in terms of process, IT, kind of getting ready for integrating something during the year? And kind of how does that relate to what you’re looking for? Kind of are you looking for sea and air forwarders? Are you thinking about contract logistics? Kind of which areas would you like to expand more and where you’re looking for inorganic opportunities, kind of that [sense?] Secondly, we’re in or we’re towards the end of the key tender phase. Could you shed some light on which areas in the tenders you’ve been more successful, kind of where is demand going? Where have you been able to win against competitors? And maybe also on the flip side, what is the business you’re not taking right now? So where are you happy to leave that to competitors in the current phase? And then maybe a little bit more tactical, towards the end of the year, you already commented that you think the year will be actually quite okay in the end, which means we’ll see a rebound on air capacity in your view, which will probably then also skew air prices. That hasn’t always been the most successful of times for you. And so how are you preparing maybe for the capacity crunch you seem to be expecting in the second half on air specifically?

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Detlef A. Trefzger, Kuehne + Nagel International AG – Chairman of Management Board & CEO [3]

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Daniel, and sure, I’m happy to answer your questions. M&A, Asia, we have consolidated 2 Asian organizations in order to provide the management capacity and consolidate management capacity to have enough bandwidth and capacity to deal with an acquisition, to prepare an acquisition and eventually then to integrate it later on. But we are talking about Asia. This will not happen within the next 2 or 3 months. That will take time. And I think the rest of what needs to be prepared, I would say, we can gear up very quickly. Our systems are scalable. In airfreight, we have already implemented and rolled out the latest generation of our operating system called AirLOG, as you know. And in seafreight, this starts now, second semester this year. So we will be able to make use of our tools and operating systems as well as our CRMs, our customer-facing systems as well.

The areas you were asking for, yes, we are looking for expanding our networks. So it’s sea and airfreight with a customer base, and therefore, also, we are optimizing our sales structure with a customer base that is more originating in Asia Pacific. And that guides a bit the idea where we want to pitch in the next, let’s say, 12 to 24 months.

Key tender phase, we are successful because we continue with our approach seamlessly. We have a lot of wins for automotive in both directions, imports/exports, and the automotive industry has seen a better quarter 4 than previously in the previous 4 quarters. Perishables, very strong growth, and we have won a lot of new business this year, small and medium-sized enterprises but also major shippers. And we are seeing more demand for new solutions, sea and air solutions, for example. But we are also happy to leave certain part of the business to competitors because cutthroat pricing is not our approach. We have a high-quality service, and our solutions serve complex customer requirements end-to-end. And if that is not noticed or seen by our customers, we leave it. I would say the last 12 months but especially in quarter 2 and 3 last year, we won a lot of business, which is now in implementation or has become part of our network already, very successful in airfreight.

Your capacity question and air prices, we are prepared. We have a lot of charter business at the moment. So we have a charter capacity program in place. We are in very close contacts with each and every of the airfreight carriers. At the moment, we have a regular service in and out of China without any problems. The capacity crunch will be — it’s expected in China, especially as seafreight with the 6 — or 4 to 6 weeks sailing time, will not be able to support inventory ramp-ups too soon. We would expect that airfreight will benefit eventually from that. When will that happen? April, May, June, we don’t know, and we won’t — don’t want to speculate that there will be a certain effect to be expected.

And if I may say, we have 2 blockbusters where we are very successful, especially in airfreight. And you [will hear] a bit of proudness myself, although I’m not an airfreight guy. But the KN PharmaChain, I mean, airfreight is extremely successful with this. We have hundreds of customers in that solution area and also our KN InteriorChain. So all the services, AOG Desk and all the activities we do for the airline airfreight — airline industry, sorry, and the manufacturers, including Quick services for both our Quick time-critical services for both pharma industry with Quick STAT and for the airline industry or the AOG solutions, aircraft-on-ground solutions with regards to the brand name Sterling, are very well received in the market and show strong growth ongoing.

So that would be my answer, Daniel, to your 3 questions.

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Operator [4]

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The next question is from Robert Joynson from Exane BNP Paribas.

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Robert John Joynson, Exane BNP Paribas, Research Division – Senior Transport Analyst [5]

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Detlef and Markus, 3 questions from me, please. First one, on the dividend, you reduced the payout ratio from 93% down to 60%. I — if you could maybe talk about the dividend policy looking forward. And in particular, is it possible that the payout ratio could be reduced further? I guess one could argue that even 60% is quite high for a company that has ambitious growth plans in Asia. So that’s the first question.

The second question, on the outlook for global container volumes, you mentioned plus 1% to 3% in the presentation for 2020 overall. Could you maybe just talk about your assumptions for Q1 specifically? I guess you have a reasonable visibility now with 2/3 of the quarter done.

And then finally, on M&A, Detlef, you used the phrase “game-changing deal” in an interview this morning. Could you maybe just provide some color on what you would consider a game-changing deal to be like, maybe, for example, in terms of [indiscernible] The size of the target relative to Kuehne + Nagel at present?

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Markus Blanka-Graff, Kuehne + Nagel International AG – CFO & Member of the Management Board [6]

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Rob, good to hear you. I think I’ll take the first question and number 2 and 3 then for Detlef. On the dividend and the dividend policy, I entirely concur with you. I think a 60% payout ratio is already quite respectable. And as said, as I think also in my little presentation on the slides deck, especially for a company like ours that is gearing for growth in one particular region, that is one of the biggest markets in the world. So I think that is, at the current stage, what we can say about it. You know that we have never formalized the dividend policy and publicly communicated it. But I think you can see through the history, I think that we have always made sound and meaningful decisions. And at a 60% payout ratio, I think that is the current status.

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Detlef A. Trefzger, Kuehne + Nagel International AG – Chairman of Management Board & CEO [7]

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Okay. Robert, let me take the other 2 questions. Global container volumes, I think what you — what we have to discuss most likely is the situation in China at the moment and how do we expect the markets to develop over the next, let’s say, 1 or 2 months. And let me start with Kuehne + Nagel first, our organization, because that I can judge best. We have 5,200 employees in China. Our colleagues in China, first of all, none of them is infected by the virus. That’s, for us, also a very important message. We had a disruption, and we’re not able to come back to offices for a couple of weeks. But as of now, today, Thursday, we have like 90% of our offices opened again. It’s 2 offices, 3, 4 offices that are not fully — couldn’t open fully because of government or provincial regulations. We have 90% of our staff being active either locally in the office or remote from home. We have business continuity plans in place since early February and — which we have, by the way, updated 1.5 years ago because our new platforms and software pieces allow us to work seamlessly with our customers on the same platform even from home if you

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data line access, and that is working extremely well. So we see a huge volume reduction early February, not unexpected, because Chinese New Year is the period where China comes to a halt in total. At this period, obviously, it took longer, and I would expect a 20% to 40% volume reduction in total over quarter 1 in China. I’m only talking China, I’m not talking the rest of the world. So we see that our customers are coming back to work, and we monitor the container retrievals from the container yards. So there, we see a growth of 50%, 60% week-over-week. So people are starting to retrieve containers again to their production sites. These need to be filled now with produced goods or goods produced in the different manufacturing sites. And then eventually, our bookings are increasing as well. So that in total, we expect to be back to normal, whatever that means, by 90% end of March this year. So quarter 1, we get a hit volume-wise. EBT will be lower than previous year’s quarter 1. But in total, and you [hear] this, we are still confident for the full year to be able to develop a strong momentum eventually. We have not calculated any revamp effect yet, but we are preparing for stock rebuilding or refilling effect in quarter 2 and 3 eventually in certain industries and for certain customers.

M&A, game-changing, whatever you interpret, for sure, is true. Game-changing for us is we have a huge and strong presence in China for almost 60 years — in Asia for almost 60 years. I — we have employees and colleagues that are with us in Asia, in Hong Kong, in Singapore, in Japan for 25, 40 years. So that is a very strong base. But we would like to do more business with Asian customers and do this business not only in Asia but globally with those customers. The future challengers, those Asian companies that will become a major player globally eventually are what we are looking at, and this is what we mean with game-changers. Yes, we are a [traditional] European-based international transport and logistics group leading in many areas, but we would like to have a bit more of an Asian flavor (inaudible). We don’t give up our roots and our identity, so to say. But for sure, we want to transform further based on such an acquisition. And size is also a topic that is important, and I stop here because I don’t want to create any speculation. As said before, it will take longer. We are talking about Asia, but it will — we are very — we are in very good talks at the moment, and I think we will get more and more momentum with this topic.

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Robert John Joynson, Exane BNP Paribas, Research Division – Senior Transport Analyst [8]

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And then maybe just one quick follow-up question on the final one there. If we look at air and sea specifically, if the volumes which touch Asia at present, what share of that business would be done with customers which are based in Asia as opposed to European or U.S. customers, et cetera, doing business with Asia?

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Detlef A. Trefzger, Kuehne + Nagel International AG – Chairman of Management Board & CEO [9]

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I would say 80-20 rule is always true, but I think we shouldn’t give too much details here. From our point of view, we have defined target customers. We have target markets from a geography point of view and also industry, and that guides our whole M&A strategy as well as our organic growth approach. It’s connected. It’s not — It comes together, yes.

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Operator [10]

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The next question is from David Kerstens from Jefferies.

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David Kerstens, Jefferies LLC, Research Division – Equity Analyst [11]

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Two questions, please. Just a follow-up on the impact from the Coronavirus. I’m surprised that you are actually targeting a volume growth ahead of last year. What’s driving this confidence? And do you see the disruption mainly as a volume impact? And will you be able to mitigate any issues to reduce capacity in Q1? And will there be any costs associated with adding capacity in Q2 and beyond to offset the impact on volume?

Then secondly, you were talking about the expectation to be able to close the year successfully. What exactly does that mean? Does that mean that you can match last year’s EBIT level in line with what some of your peers are currently expecting? Or do you expect you can achieve the organic growth of 7.5% that you realized in 2019? And then finally, maybe if I may also on the transformative M&A that you were talking about. Would you be able to fund that fully on your balance sheet? And is the current dividend reduction that you are proposing sufficient?

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Markus Blanka-Graff, Kuehne + Nagel International AG – CFO & Member of the Management Board [12]

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Okay. David, let me answer your 3 questions. I’ll start with the latter one. So the transformative M&A, we will discuss financing when we are in a situation where we can clearly state what did we acquire, how is the process, is it a full takeover or a joint venture or whatever it is and then we talk about financing. We are, at the moment, providing or keeping the powder dry to be prepared for whatever comes up here.

Secondly, EBT projection for this year, you will not get any guidance from me. Successful for me is it will be a year where we can all say, given the market environment, we will be successful. Quarter 1, for sure, will not be able — we will not be able to show volume and EBT figures on previous year’s quarter 1 level, and I think I mentioned that already. But let’s see. We have a rebound effect and how long whatever disruption or slowdown will take, let’s see. And your market growth slide takes into account, at the moment, a view that incorporates and calculates all the effects that we have seen in the last, let’s say, 2 months of this year — or 2 months of this year. And whether that becomes a reality or not, that is not — it’s not a scientific approach. It’s our assessment of the market. And at the moment, we feel quite well with that guidance.

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Operator [13]

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The next question is from Mark McVicar from Barclays.

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Mark John McVicar, Barclays Bank PLC, Research Division – Head of European Transportation Research [14]

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Just 2 — only 2 questions from me. We’ll cut the number down. First of all, just to square the circle on China. Could you give us a sense of what proportion of your airfreight and seafreight volumes are outbound or inbound to China so we can understand the volumes? And you gave us the sort of Q1 20% to 40% down on seafreight, Detlef. What do you think the same number is going to be for airfreight? That’s the first question.

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Detlef A. Trefzger, Kuehne + Nagel International AG – Chairman of Management Board & CEO [15]

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Mark, I thought you would be posting both questions. Let me answer your China question. Mark, 20% to 40% seafreight, you’re correct, maybe 10% to 20% airfreight. But take into account that the airfreight market already showed a negative growth also in China or in Asia — in China last year. The gross profit of China for the whole group is like 5%, 4%, 5%, 6% in that range. And the majority of our business in China is seafreight followed by airfreight, and then we have contract logistics, line-feeding activities as well. So all this is the Chinese portion. And we are talking China only because at the moment, that is what we have seen, where our business continuity plans are active. And we are — as I mentioned before, now 90% of our staff is back either at home, 60% of them are at home, and then 30% are work — sorry, in the office and 30% work from home. And that is a seamless service that we can provide on that basis. So that would be my answer to your first question.

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Mark John McVicar, Barclays Bank PLC, Research Division – Head of European Transportation Research [16]

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Okay. That’s great. The sort of — it was a linked question really, in terms of what’s going on below GP. Presumably, you’re not going to start laying off people because of the short-term volume drop. You keep your people in place because you’ll need them for the — whatever shape the rebound comes through in Q2. So if we’re modeling it, we should expect a lower GP and, therefore, a significant squeeze on the conversion ratio just at the start of the year. Yes?

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Detlef A. Trefzger, Kuehne + Nagel International AG – Chairman of Management Board & CEO [17]

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I think that’s correct.

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Mark John McVicar, Barclays Bank PLC, Research Division – Head of European Transportation Research [18]

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Okay. That’s fine. And sort of the second — or we could call it the third question. As you complete the…

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Detlef A. Trefzger, Kuehne + Nagel International AG – Chairman of Management Board & CEO [19]

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It is the third question, Mark.

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Mark John McVicar, Barclays Bank PLC, Research Division – Head of European Transportation Research [20]

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Okay. We’ll call it a third question, okay, 2.5, really. As you complete the cleanup of the contract logistics portfolio, could you give us a sense for how much more in — cash inflow from real estate there’s likely to be? Is it another couple hundred million? Is it more than that? Or are you through the bulk of the disposals?

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Markus Blanka-Graff, Kuehne + Nagel International AG – CFO & Member of the Management Board [21]

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Mark, it’s Markus. The question with the numbers, I usually take. Contract logistics, I think there is a second portfolio out there that is currently being marketed, without giving away too many details because we are obviously in negotiations. So I think we look at the number between CHF 150 million and CHF 180 million.

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Mark John McVicar, Barclays Bank PLC, Research Division – Head of European Transportation Research [22]

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They’ll come in somewhere in the first half, probably, yes?

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Markus Blanka-Graff, Kuehne + Nagel International AG – CFO & Member of the Management Board [23]

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That would come in, I would think, second or third quarter, rather than first half.

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Mark John McVicar, Barclays Bank PLC, Research Division – Head of European Transportation Research [24]

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Yes. Okay. But certainly, inside this year, yes?

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Markus Blanka-Graff, Kuehne + Nagel International AG – CFO & Member of the Management Board [25]

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Sure. Yes. That is for sure.

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Operator [26]

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The next question is from Christian Obst from Baader Bank.

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Christian Obst, Baader-Helvea Equity Research – Analyst [27]

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First of all, concerning the impairment in airfreight. Despite the fact that it’s a small one, can you give us some kind of an idea that you’ve always followed some kind of a cautious approach when it comes to goodwill and intangibles. So what went wrong? And what can you learn from that for further M&A going forward? And then coming to your IT from a possible acquisition going forward. So to have it scalable, of course, you have to merge whatever kind of target to your IT. Is the implementation of SeaLOG a precondition for some kind of a acquisition and then really bearing the fruits there?

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Markus Blanka-Graff, Kuehne + Nagel International AG – CFO & Member of the Management Board [28]

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Christian, it’s Markus. Nothing went wrong and nothing went in the wrong direction on the impairment or the intangibles. Let me phrase it the way that our around 170 participants are not offended in any way. I think we have a very cautious policy on protecting the balance sheet. I think we are very conservative, if you like. And we are known for taking opportunities when there is smaller acquisitions, maybe somewhere in the range of CHF 4 million, CHF 5 million, created intangibles, that when there is an opportunity, we would scrutinize the numbers and obviously fully audited by our external auditors, take the opportunity to lighten a little bit the balance sheet. So nothing went wrong with the acquisition per se. That is more our conservative approach and our quick (inaudible) approach to our numbers.

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Detlef A. Trefzger, Kuehne + Nagel International AG – Chairman of Management Board & CEO [29]

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So I will take the second question, Christian, and that’s an interesting one. Is SeaLOG the prerequisite for a major M&A? It’s clearly not. Our legacy system are robust and working extremely well. They are scalable. Ideally, SeaLOG would be up and running, or we would be in a phase where we could start directly to convert into SeaLOG, but that is not a prerequisite. There are other topics we look at, and it’s no bottleneck and no prerequisite. I would say all our systems are scalable, legacy as well as the new systems, and that guides — has no impact on our M&A at the moment. It’s other criteria that we mentioned before that guides our focus in M&A.

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Christian Obst, Baader-Helvea Equity Research – Analyst [30]

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And maybe despite that fact, and another question on SeaLOG and AirLOG. So AirLOG is more or less implemented. So have you now running only — or running on 1 system on the airfreight side? And when you’re running on the sea side — seafreight side, completely on SeaLOG or not on 2 systems in parallel?

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Detlef A. Trefzger, Kuehne + Nagel International AG – Chairman of Management Board & CEO [31]

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Yes. We have shifted last year from our legacy system to AirLOG completely and stopped using AirLOG — sorry, the legacy airfreight system, operating system in quarter 4, I think, quarter 3, quarter 4. And we will do so the same in seafreight. But with SeaLOG — but SeaLOG will need until the middle of 2022 to be fully rolled out in all areas of our organization. We will start this year. But don’t underestimate, we have 700, 800 offices for seafreight, and they all have to convert and need certain training and systems transfer. It’s more about the training than the system or the IT as such. So you would expect production costs to go down in seafreight continuously independent of the system. But all the scalable and major improvements, including the eTouch topics, require at least for the bigger — volume-related bigger stations. SeaLOG, as we have shown now with AirLOG, there is a sizable momentum that we can create.

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Operator [32]

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The next question is from Michael Foeth from Vontobel.

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Michael Foeth, Bank Vontobel AG, Research Division – Head of Industrials Team [33]

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Three questions from my side. We talked a lot about the downside from the current situation in China. But I was wondering if you see any opportunities and additional profitable business due to shifts in supply chain resulting from the whole situation, customers changing their sourcing strategies. That would be the first question. The second question is regarding your target profitability in contract logistics. Once you’re streamlining program is done, can you help us understand where you see your profitability going in contract logistics? And then the final question is regarding your 0 carbon program. I would like to understand what the costs to either Kuehne + Nagel or your customers are in implementing this Net Zero Carbon strategy.

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Detlef A. Trefzger, Kuehne + Nagel International AG – Chairman of Management Board & CEO [34]

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Thanks, Michael. Happy to answer your questions. Yes, China downside, as you mentioned, that there are other [markets] benefiting from it but not only due to the effect of the extended Chinese New Year, due to the coronavirus. I think we have to take into account, there has been a shift of production or a split of production in China ongoing for years. And if you would read the last or the current existing 5-years plan of the Chinese government, which was launched, I think, in November 2017, it’s part of the strategy, that strategy that low-cost or low-volume or lower value-add production moves to a neighboring country or is split and moves partly to a neighboring country. Yes, we see other countries benefiting from this, and we have mentioned that before. It’s Vietnam, Cambodia, Indonesia, Myanmar and so on, Thailand, to a certain extent Malaysia. And this trend is not only propelled by the current situation in China but also by what we have seen in the past 2 years with regards to disputes on trade taxes, so to say, or trade conditions as well as labor cost increases, productivity losses in China in certain parts of the manufacturing or production segments.

We have a target profitability in contract logistics, that’s true, which is significantly higher than what you’ve seen operationally at the moment. I would say an EBIT target between 4% and 5% is what we — to net turnover. So the EBIT to net turnover target is what should be our ambition. And we will see that, that will be more and more achievable operationally, take out all the one-off effects. So that’s the second slide of contract logistics that we have put into the slide deck. That should give you the guidance here.

And Net Zero Carbon program, yes, there is a cost associated to it. But we are able to market these costs because we will have — we win new business, we win new volume on that basis, and all the solutions that we are providing are generating an additional gross profit. We will charge at cost to our customers, including our internal costs for the platforms. And why are we so confident with the whole program is because we have the data and the information. We know exactly on which trade, which vessel, which routing creates what CO2 footprint per container and how to optimize this. And on that basis, our customer, especially those that have end consumer contacts, are extremely interested in getting access to those solutions. And we are providing them with an — the transparency, the visibility and also ideas how to reduce it. And eventually, then you have to compensate it. Industries that are very interested in that is the retail, the end consumer, food and retail industry, automotive and [pharma.] All those industries are extremely keen on those solutions.

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Operator [35]

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The next question is from Muneeba Kayani from Bank of America.

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Muneeba Kayani, BofA Merrill Lynch, Research Division – Director & Head of European Transport [36]

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I wanted to ask about the — with the DSV and Panalpina’s integration ongoing, how has that impacted the market from your perspective? And have you seen any changes from your customers? That’s my first question. And then secondly, just going back to the discussion on Asia. What’s your appetite in the size of the acquisition? And kind of what’s your — how much would you let leverage go to in the scenario of a cash financed acquisition?

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Detlef A. Trefzger, Kuehne + Nagel International AG – Chairman of Management Board & CEO [37]

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Thanks for your questions. We usually do not comment on our competitors. I would say, in general, we have not seen a major shift or change in the market. That would be my conclusion on your first question.

Our appetite in Asia is huge. We are extremely hungry. And we are, as said before, depending on where we can come to a meaningful approach, we have enough firing power to make that happen in — with our balance sheet or in our organization. I think that is our guidance to that. I would like to not create any speculation on this. And therefore, we are a bit cautious to allude to certain sizes.

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Operator [38]

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The next question is from Sam Bland from JPMorgan.

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Samuel James Bland, JP Morgan Chase & Co, Research Division – Research Analyst [39]

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Two questions for me. The first one was on airfreight unit margins. So they’ve been pretty strong through 2019 as volumes have come off. Appreciate volumes won’t be brilliant in 2020, but they’ll be a little bit better. And just some general commentary on how much of that stronger unit margin you think you can retain versus give back? And the second question is just on the reasoning behind the dividend cut. Obviously, starting from a place of the dividend is covered, albeit only just, and you don’t have very much financial leverage. So was the cut really still [equated –] to do with building up some firepower for M&A? You know, the 2 are quite linked. Is that the way we should interpret it?

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Detlef A. Trefzger, Kuehne + Nagel International AG – Chairman of Management Board & CEO [40]

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Sam, yes, let me answer both questions. And I’ll start with the latter one. The answer is yes.

The first question, airfreight higher margins and your forecast for the whole year, I’m very cautious to concur with your statement. We will — it’s too early to say that we will see any major changes in the market. We would expect the margins are similar to the average margin in quarter 4 2019. And we don’t see any particular movements at the moment. Whether then there is a high demand in a rebouncing China — Chinese market possible for a certain period would be speculative. So at the moment, your assumption would be more to what we expect if you take the quarter 4 margins into account for this year as well.

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Operator [41]

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The next question is from Greg Knowler from IHS Markit.

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Greg Knowler;IHS Markit;Senior Journalist, Maritime & Trade, [42]

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I also have 2 questions, both on the Coronavirus. And what we are hearing from shippers and from forwarders is that there is a container equipment shortage building in Northern Europe. And I was just wondering, is this something you are seeing or something that you are preparing for? And my other question is on airfreights. And how much you have seen the — your use of air charters increasing? And how long do you expect this demand for air charters to continue?

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Detlef A. Trefzger, Kuehne + Nagel International AG – Chairman of Management Board & CEO [43]

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So let me start with the latter question, Greg. Air charter is increasing. Yes, the number of charters has increased because there is no belly capacity, as the passenger (inaudible) have been canceled by many airlines. So there’s virtually no belly at the moment, very low belly capacity available. We have regular charters daily, so to say, in and out of China, and it’s working quite well. At the moment, there is, from our point of view, a rather stable service that we see. Container equipment shortage, let me start in China. The container ports are almost congested with containers being stuck there. But I mentioned that, I think, before, we see huge order increases in containers, retrieving them out of the ports and give it a week or 2 or 3 before those containers start sailing again. So this shortage will be most likely a temporary shortage, especially in Europe. But we have — we expect surcharges to cope with that, and there will be certain mechanisms to balance this market again, bring it to an equilibrium again.

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Operator [44]

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That was the last question.

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Detlef A. Trefzger, Kuehne + Nagel International AG – Chairman of Management Board & CEO [45]

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Then thank you very much, ladies and gentlemen. Thanks for joining in and for discussing the 2019 record results 6 times in a row with us and all the details of the different business units. As I mentioned before, it’s part of our business model that we deal with disruption, the unknown turbulences, and that we are the right partner for our customers in order to provide them with robust and resilient supply chain services. How this progresses in quarter 1, we will share with you end of April in the next call. And we are looking forward to this and say goodbye from still snowy Switzerland. Thank you very much. Bye-bye.

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Operator [46]

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Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.