Kuehne + Nagel International AG

Ladies and gentlemen, good morning, good afternoon and welcome to the Kuehne & Nagel Nine Month 2014 Results Analyst Call. Today, Detlef Trefzger, our CEO and myself will lead through the financial and operational highlights of the third quarter 2014 and the nine-month 2014.

We will also address the impact for the Kuehne & Nagel Group, some developments in the logistics market and some of the macroeconomic trends in the recent past, including, some of the currency effects for the group. I want to lead you back to the 25 pages information plank, including the key data sheet provided as usual and to press release that was issued today in the morning at around 7 o'clock.

I will hand over now to Detlef to lead through the overall group performance and business units seafreight, airfreight, overland and contract logistics. I will then take over for the financial analysis and will finalize the presentation with the outlook.

As usual, we will have a question and answer session after the end of our presentation. Now, let me hand over to Detlef.

Thanks, Markus. Ladies and gentlemen, good morning, good day, good afternoon, good evening from my side as well.

Thanks for joining the Kuehne & Nagel analyst call Q3 2014. I will lead you through the business development over the last nine months, with a focus on Q3, and I would like to ask you to go to Page 4 of our slide deck.

On Page 4 of our slide deck, you see the development of our excellent over gross profit and EBIT, 1% growth in the net turnover, 0.3% growth in gross profit and an EBIT growth of 8.2% clearly show the leverage of our business and network business. It also shows our cost consciousness and the focus on productivity increases in all our business units.

I will detail those statements in the slides to come. Let's move to Page 5.

Based on our volume development year-to-date, January to September, you see 211,000 TEU increase in seafreight, which results into 7.9% year-over-year growth. In airfreight, 40 ton increase which leads to an improvement of 4.8% growth year-over-year.

With these figures, we also confirm our outlook for 2014, which I will allude to at the end of our presentation. If we continue on Page 6, you see where the result improvement of 8.2% came from, and I will only go through this slide very briefly, because the details to be discussed and seen then on the respective slides for the business units.

Seafreight's CHF 300 million, EBIT in 2014 year-to-date September versus CHF 305 million previous year, a strong acceleration in Q3. I will comment on that in more detail in a minute.

Airfreight, an improvement of CHF 16 million to CHF 182 million EBIT, Overland, our strong restructuring program in the continuous quarter, was very successful and led us to an EBIT of CHF 18 million versus the loss in previous year same period. Contract Logistics, an improvement of CHF 8 million to CHF 107 million, EBIT year-to-date, September 2014.

In total, our improvement and increase in EBIT is CHF 46 million, resulting into CHF 607 million EBIT for the whole group September 2014. On the right column, you see the constant currency result, which we will not comment on in further details during the next slides.

Moving onto Seafreight, which you will find on Page 7, let me start with a very strong third quarter, a very strong development on the North Atlantic, in both directions to Europe, so import and exports to Europe, but also U.S. imports on the TransPac was a strong growth.

LatAm trade was a weaker development and the Asia, Europe and Intra-Asia volumes very strong, all this led to a 991,000 TEU transported in the third quarter, an improvement – turnover of 0.2%, a gross profit minus 0.5% versus previous year and an EBIT minus 1.6% of the CHF 5 million that I have mentioned before versus previous year, but in EBIT in percent of gross profit, our payments conversion rate of very stable 30.2% year-to-date September. If you look on the schedule on the left-bottom of the slide, you would see an improvement in conversion in the quarter three 2014 to 32.3%.

Let move onto Airfreight, Page 8. Our success story in Airfreight continued also in the third quarter with a turnover year-to-date of 0.3%, stable gross profit and an EBIT improvement of 9.6%.

More important is our volume growth was 997,000 tons transported in Q3. We are at all-time high level also compared to Q4 2013 and a conversion rate, which leads to an all-time high conversion rate for the period [129] 2014 of 27.5%.

In a nutshell, we have volume growth; we achieved volume growth and improvement in conversion rate. This shows the results of solution selling and focus on the perishable sectors with regards to volume growth.

Also, I would like to mention that as announced in late summer, our KN FreightNet, the online booking platform, and execution platform for our airfreight shipments has been successfully launched and we see double-digit growth in the shipments booked by our KN FreightNet. Let's move to Overland on Page 9.

As you know, Q3 is always very difficult due to the seasonality - in summer vacation period in July and August, but if you compare the Q3 figures on the bottom-left of this slide, you see that we had an improvement, a constant improvement Q3 2012, Q3 2013 and now Q3 2014, to and EBIT result of CHF 12 million. In total, this business unit shows the fourth quarter in a row with a positive EBIT and shows also a net turnover in gross profit growth even after our currency effect and a strong turnaround management and that led to an improvement to CHF 18 million EBIT in one to nine, 2014.

Very important, in addition to the restructuring, the overland business community has successfully launched. Its new product and solution called I2M Inbound to Manufacturing, addressing the specific needs of the automotive and other manufacturing industries globally and we see that this new product, which was launched in July, also got a lot of traction in the market already.

I will move onto Contract Logistics on Page 10. In Contract Logistics, we also saw a strong Q3, with in total one to nine-2014, net turnover growth of 3.5%, and the gross profit growth of 0.8% and an EBIT improvement of 8.1%.

As you know, we are reshuffling our project and solution portfolio heavily. All this is happening while we are at the same time improving our top and bottom-line.

Also, here we saw, during the last nine months, especially during Q3 that our two-market strategy got traction and seems to be successfully implemented. I will now hand over to Markus to lead through the financial details.

Thank you, Detlef. I am on Page 12, and here you can see the income statement for the group.

I want to point out that year-to-date September 2014 numbers; you can see the net turnover increase to CHF 13 billion for the first nine months and CHF 4.7 billion gross profit. Here again, you see the dynamic that already Detlef has addressed.

The total variance between 2014 at 2013 is CHF 14 million of which you can see in the third quarter, the accelerated momentum of growth of CHF 19 million has been achieved. With that increment in gross profit, you can see that the EBIT has increased from CHF 561 million in 2013 to CHF 607 million in 2014, a CHF 46 million improvement year-over-year, which now leads us to an EBIT margin in relation to next turnover of 4.7%.

You can also see at that point, that the foreign exchange impact to the bottom-line of the group is around 3.9%, which in the first half year have been slightly higher, so we are currently experiencing a flattening of the currency impact for the good result. That all leads to earnings for the period of CHF 480 million for the first nine-month in 2014, an improvement of 8.6% or CHF 38 million.

I continue on Page number 13, group key data and I want to highlight our financial target on the right side, where we have introduced in the capital market data first time, our financial target of the group EBIT margins and net turnover of 5%. We have received some feedback through that target in terms of that is perceived very easy to achieve.

I just want to highlight that 0.3% improvement, so the currently run at 4.7% and the target is 5%, a 0.3% improvement translates into CHF 60 million improvement into roughly 10% of the EBITDA number, so there is some work to do and we are off to do that work. Furthermore, nothing else has changed in our structure of the business, so cash generating, you can see the cash and cash equivalents on the net amount number is CHF 928,000 million compared to CHF 992,000 last year.

You will see the cash flow reconciliation in a month. I lead further to page number 14, structure of the balance sheet.

We maintained a high equity ratio of 36%. Obviously, you can here again CHF 2.6 billion change to receivables and around CHF 914 million cash.

Please move onto page number 15, cash flow for the first nine months and a good development is the changes in working capital in the year 2014, with CHF 74 million has been around better than in 2013. You will see the impact on that also on the next page.

Just for reference, the cash flow from financing activities includes the dividend payment, therefore in the year 2014; the number CHF 751 million contains the payout from the dividend of CHF 5.85 per share in May 2014. Page number 16, working capital development, we were both quite aware of the fact that the half year results 2014, we have reached our higher end of the bracket of the working capital intensity of 4%, therefore we have put a lot of endeavor into reducing that working intensity into third Quarter and indeed we had achieved a 3.8% working capital intensity at the end of the fourth quarter.

Notably, we have compared to the September 2013 number, the net working capital reduced by roughly CHF 20 million from CHF 816 million to CHF 795 million. I am handing over to Detlef for the outlook and the volume development in 2014.

Thanks, Markus. I am on Page 17.

Let me start with the nine-month actual versus our estimate. Seafreight, the market growth has been estimated for the nine months 2014 of 3% to 4% and we expect this market to slightly accelerate to 4% to 5% in 2014.

Our target is to outperform the market 1.5 times, which we confirmed already during the first five months. Airfreight, 5% growth versus the market of 2% to 3% in the first nine months to be expected to grow 2% to 4% for the whole year and also here our ambition is to outperform the market to gain market share with the effect of 1.5 times market.

Overland, the growth of 3% versus the market of 1% to 2% and we expect a market of 1% to 3% for 2014 and our plan is to grow at market. In Contract Logistics a market of 2% to 3% versus our growth of 5% and we expect to outperform the market two times, two times market and the market forecast for 2014 remains at 2% to 3%.

In total, we confirm the outlook that we have made already in summer, in the Q2 call, or half year call as well as during the Capital Markets Day, no changes to be expected for the remaining three months from a market growth and our volume growth perspective. I will hand over to Markus again.

Thank you, Detlef. That would conclude our presentation part of this call.

I will ask now to start the question-and-answer session.

Yes. Good afternoon, gentlemen.

Good afternoon, David.

Hi, David.

Question on the Seafreight market first, with the Asia-Europe rates falling still, what do you see as kind of the potential for a downward pressure on your [GP] per TEU, because it has been fairly stable through the year, but how much lower can rates go before you really see some significant negative pressure there?

Okay. David, I will answer that question.

First of all, the market is still a growth market for us. We find our initiatives in the market, and as in past not only month, but years, we are managing our GP very carefully, so it's not only the rate that impact the GP, but all the other touch points that lead to a solution for the customers in seafreight, therefore we are still - we have not changed our assumptions on GP per TEU moving forward for the next three months.

All else equal, would you prefer rates - and is your plan to go up significantly from here or stay where they are or go down further?

David, this answer is easy and whoever you ask, you will first of all prefer stable rates and the volatility is what makes the market difficult. The more stable the rates, the better for everybody in the market.

Also, higher rates are also more sustainable than cut growth rates that are at least risky for some of the market participants.

Okay. Then just shifting over to Airfreight real quickly, any comments on the fall peak season that has been talked about?

What are the development so far this quarter? Then how is that shaping up very expectations specifically as it relates to Asia exports?

We came strong out of the third quarter. At the moment, there is no reason to believe that this is changing at the moment.

Excellent. Thank you very much.

Thanks, David. The next question comes from the line of Stephen Furlong from Davy Research.

Please go ahead.

Hi. Good afternoon.

Just maybe you could comment about the exchange rate movements. I mean, I think the way the movement has been on over the last number of years, it has been a, I guess, translation impact and a pricing impact on your numbers.

The way the exchange rates are moving, I mean, as you look into next year or maybe it could become a tailwind larger than the headwind. Maybe you could make some comments about that.

It's certainly something that can help maybe a bit of the leverage on the gross profit. The second thing is, since I asked about at the Capital Markets Day, I just asked you at it.

I see that and you might just, Detlef, make some comments about and new appointment that has been made in Contract Logistics and presume that it is just going to be business as usual in terms of continuation of the strategy there please. Thank you.

Yes. Thanks for your questions.

Let me start with the latter one. Yes.

I am happy that Gianfranco has been nominated now. First of all, it's a pure signal for continuation in our go-to-market strategy and Contract Logistics Gianfranco and I have met a lot of times and I have to say his philosophy of dealing with Contract Logistics business and the portfolio improvement is similar to what I have pursued.

From that point of view, I don't expect any changes rather than an acceleration, a clear focus and even more stronger development in certain markets, where we see market potential, so I am happy, the board of directors have decided for Gianfranco in his new role and I am looking forward to his on-boarding in early 2015. To go back then to the second question, exchange rates, First of all, we don't do include an exchange rate risk or incorporate in our budgets.

We have a net budgeting process where the exchange rate impact is neutralized so to say and that is important. Will be get the headwind on backwind or tailwinds, nobody knows.

It really depends on how the rates are really developing. At the moment, you read a lot of surprising things in the news and we have to make sure we don't end up in self-fulfilling processes also not an exchange rate item, so we have a volume growth target and that is what I alluded to on Page 17 and that is independent of any exchange rate changes.

Very clear. Thank you.

Hi. Good morning or good afternoon, gentlemen.

Two questions please. First on the working capital side of things, a solid improvement as you guys pointed out.

Was there anything in particular that drove this any particular change in customer behavior or just a concerted effort or continued effort from management to make sure that this stays under control?

The working capital improvement clearly is based on our enforced internal policy, so I think we have been very selective on various payment terms decisions and we have been offering also on the other side, on the payable side, we have been offering finance solutions and I think we in various initiatives we saw us getting traction on improving the situation.

Great. Thank you.

Secondly, on in road division, now you guys have finally turned to positive EBIT in the weakest quarter there. Is it time to start thinking about accelerating the revenue growth or do you still have more work you need to do on network before you start to think about gaining market share in that sector or in that space?

Yes. Clearly, we are thinking for the full new endeavors in the Overland business, the restructuring hopefully is over end of this year and we will show a solid result, a solid performance continues performance over then five quarter and then it's about defining our market strategy, where to grow and how to grow complementary to our needs in the other business unit.

As you know from previous calls, we are pursuing an end-to-end supply chain solutioning approach 'in the market and therefore a strong overland business unit with capacity and capabilities that are complementary to our requirements is heavily needed and we are in a good and excellent discussion here with our colleagues.

Great. Thank you very much.

Good afternoon. Thank you.

Two questions for me please. First of all, could you if possible just give us some idea of what the trajectory of the volume growth look like through the quarter?

We have heard signs from elsewhere that things we came [down] in September that is contrary evidence. I am just interested here what you saw in your business base?

Then secondly turning attention to the ocean freight business, the Q3 versus Q2, sequential, looks a little bit slower than normal. Was there any particular reason for not other than relatively [go in] comp.

I know it's just the gross profit per TEU for example when you adjust the currency looked a little bit stronger. Was there change in shift to price or is that just lost in the mix?

Thank you.

Yes. Thanks, Damien.

Let me answer that. Projection of volume growth, in the third quarter, we saw growth throughout all months, but the softening of the growth in September.

Was it significant, I would say no, but it was noticeable, nevertheless, we saw the start of lots in peaks, so we have to be careful not to over judge or too sensitive to those trends. Still, we are selective in our volume growth, so we can select volumes in the market and that has always been our approach and there is for us good sign.

I am not sure I got your last question, but the GP on TEU has developed through all our measures over the last three months positively, especially as the rate tend to have increased especially on the North Atlantic and also the Trans-Pac, there is high ceiling to be noticed there at the moment especially all the imports going into the U.S. show a stabilization or an improvement of the rates.

As you know rates have been very stable on the North Atlantic for many years and we saw rate increases recently on that trade lane, so there is a rate improvement or has been a rate improvement in the market.

Okay. Thank you.

Could I ask one follow-on - and that's just we are beginning to signs. It seems that there are some parts of the market in certain weeks and certain months, where there is almost the capacity tightness.

Historically if you look back, and I know this is going back it feels like almost a decade now, as a large company with buying power, do you tend to find that you need to manage to extract better pricing in GP in those periods or is it loss through the tightness of the rates?

Yes. I hope that our market leadership position will lead to a better rates, but I don't know what rates the others get, therefore I can't prove it.

We are very carefully assessing our buying rates in all markets as you know and we are benchmarking them also versus a seasonality and autumn peak and all those Chinese New Year, or what have you, over the years and have our own systematic way of challenging our partners with growth rates.

Okay. Thank you very much.

Hello, everybody. I just have a follow-up question on Seafreight.

At the time of the year when rates are falling, I am just curious what you're seeing thus far in the fourth quarter after Golden [week] and whether or not you would expect the normal seasonal pattern that is sort of uplift before you ran. Related to that, are you seeing any sort of greater than typical reshuffling of assets amongst the - Thanks.

To answer your latter question, all major reshuffling, there has been a capacity improvement or increase noted on the North Atlantic as I mentioned before, so the imports to the U.S. and exports from the U.S.

are finding a better capacity, but still has a shortage of capacity in the market and yes the seasonal pattern is there and no change in the pattern versus previous year at least not noticeable for us at the moment.

Okay. Does that mean, you would expect some of the [upcoming] to stick or do you think it will take continued efforts between year-end?

Difficult to say, I will say they would rather stick than go away. Given the peak season is now happening until mid-Jan approximately.

All right. Thank you.

Yes. Good afternoon.

Just a question in terms of strengths and weaknesses that you see in particular industry verticals, in particular towards the end of the quarter if you can make some comments in particular for Europe and North America?

Yes. At the moment, I think, all industries are performing well.

The high-tech industry was a bit sluggish and weak. The first six months we saw an acceleration during the past.

Automotive has been strong despite whatever you read in the news as the moment. At the moment, we see the volume in the market and industrial with July exports in Germany at an all-time high is also performing very strong.

At the moment, it goes across all vertical and happily to say, especially high-tech came back about the party.

Okay. Excellent.

Thank you and maybe just one question on the financials. The minority contribution in the P&L in the third quarter seemed higher than usual CHF 6 million that went away.

Can you maybe just, Markus, comment on what that relates to?

The contribution in minority is mainly driven by our Middle East business and Middle East business is very much driven in project oil and gas business, so you can when you compare to last year, we had a relatively stable development of non-controlling interest of around CHF 7 million as a year-to-date number. We are at CHF 10 million.

When you look at the second quarter that was actually the weakness, so there is no specific reason to that other than projects have been completed at a different point in the quarters.

Okay. Thank you very much.

Good afternoon. Two questions if I may.

Firstly, Markus, on the working capital, good improvement, but you sounded a little bit more bullish on the Investor Day that you correctly expected towards lower end of the range and what happened during September that spoiled the party a little bit? The second one, Detlef, now you seem to have in place pretty strong management team there, which should free up some time for you, what are your strategic priorities going forward when you have got time freight up and don't have to bother about the Contract Logistic that much anymore.

First of all I will continue Contract Logistics as I bother about Seafreight and Airfreight and Overland and I will take the time off and we will goes - Seriously, it will help me to spend more time with customers and that is something I used to and which I always try to build in, but I meet of these customers and will see what customer trends we should make use of or should take on something we have to de-risks to drive and accelerate from our point of view. Okay.

Working capital, first question, I think a bit more bullish in western side. I think that will not necessarily remains to be realized already like three weeks after the Investors Day, so yes we have been seeing improvement throughout (Inaudible).

As you can see the working capital intensity is back of the way, that I think there is a lot of efforts going into that area and the lower end of the bracket is reachable, but again not necessarily within a few weeks, so forgive us for that. We will work more quarter.

Okay. Thanks.

Good morning and good afternoon over there. Thank you very much.

Hi, David.

Hi. I just wanted to say that, you know, if you read the newspaper, Europe is either in a downturn or going into one.

Industrial production is terrible and exports are not working right, yet you seem to be if anything a little more optimistic about Overland growth in the fourth quarter in terms of traffic than you were in the nine months, so how do you see that? Is that a company country-by-country analysis or is it related to data that you have and no one else has?

I am trying to figure out why we should be more optimistic.

Okay. Thanks David.

I tried to answer this, but let me start with a little joke. Since when do you believe what's written in newspapers?

I mean, that is really - you have your own models and your own data sheets and I am sure you have your own assessment of what's going on in the different markets. I didn't say we are growing at least with our market share in all business units, we find a lot of growth.

We are selective with our goals, we are looking for those customers that see growth and are developing well and that is what our two-market strategy has been focusing on over the last let's say 12 months, 18 months and that will continue. I mentioned before, in July, we celebrated a 100 billion and more exports surplus of Germany, and four, five weeks later after the Germans went on holidays in August, everybody is surprised that the August figures are not expecting the forecasted growth rate.

We have to be careful not to end up in self-propelled downwards cycle here. We see also talking to customers, we see certain cautiousness, but we see growth in the market and we will participate in that growth.

That's great. Excellent.

Just one follow-up. You mentioned and you were talking about Overland that the growth strategy, particularly for next year will follow the needs of your strategic decisions on solutions and the door-to-door aspect of the business, it clearly implies that it may grow faster if required by [CNA].

In other words, your Airfreight, Seafreight growth is faster and therefore Overland should be as well. Does that make any sense?

No. It's not about growth.

It's about the right quality of growth. If we don't drive volume in no business unit by all means, we are very selective with our growth.

What I have said before was the solution selling, David, is that for example a pharma chain product that we are offering in our group is the full GXP compliant supply chain coming from Airfreight inbound flows, storage with Contract Logistics and a distribution with Overland in the markets where we are activate in and that is what we are looking for. A similar product offering is the I2M, the Inbound to Manufacturing that I mentioned before, which is an integrated product offering not only of Overland, but together with integrated logistics will steal those Inbound to Manufacturing processes, so there is a lot of collaboration between the business units because that is the unique position that Kuehne & Nagel can get to and is in and that we want to leverage on

Great. Thank you very much.

You are welcome, David.

Hello.

Yes. Thanks.

Just two brief questions on the Airfreight business. Speaking about the conversion rate, which is nicely around 27% to 28% throughout the year.

Going into Q4 and then listening to what you say that you are seeing rather a positive development, would you expect the margin to rather go up and in Q4 and/or potentially be at risk to go down? I know it depends on the way you handle the business to planning et cetera, but that's why you might have a feeling how the margins could be developing in Q4 for Airfreight.

Then another question on the number of employees, which has gone up by about 2000 - in Q3 versus - well, in nine months H1, however the personnel expenses per employee has come slightly down, completely mistaken so you seem to be hiring cheaper people if I may call it that way, so what's happening exactly there and can you give us an outlook for the number of employees. How you handle the situation throughout the remainder of the year?

Thanks.

(Inaudible), thanks for your question. I will start with the latter one.

You gave your own answer. We have employed cheaper people, because there is a net turnover and gross profit growth in Contract Logistics.

On average, these people are less costly than the white [color] people in our networks. That is driving P/E growth.

In the networks, our growth was almost at standstill. The first question, margin development in airfreight, I am not a magician here.

I would assume that the growth we will see will go through at a similar or maybe slightly below the current average margin, but clearly above the 25% that we have set.

You are anticipating my follow-up question because the 25% plus guidance, which you have skipped as you have replaced the guidance with the 5%, but speaking about the 25%-plus which you obviously still, I guess, target internally. I guess, we rather speak about 27%-plus at this point in time.

Don't we?

We don't disclose any conversion rate targets any more. You know that we are aiming at 4% over 5% EBIT margin.

In total, every business unit has its own target to get there and that is what we are looking at.

Okay. Thanks.

You are welcome.

Thanks for taking my final question. The 5% profit margin target, is that the target you have for the fourth quarter or for 2015 and beyond?

David, we have a target of 5% EBIT margin set at the Capital Markets Day. We didn't disclose when we are aiming to achieve it.

As Markus, during his presentation stated, 0.1% margin improvement is a CHF 20 million figure, so we are talking about the significant effort to drive the group overall to a 5% EBIT margin. Even if it sounds and looks very easy in your model, it's not.

We have to make that happen in the market with our customers and that is what the group is driving for. It will come in the next couple of years, maybe three years.

We didn't disclose any timeframe for that.

Okay. Thank you.

Thank you very much. I would like to close the call now by informing you about the next main event of the KN Group.

You can also read that on Page 20 of the information deck. It's February 25, 2015 for the full-year results 2014, April 14 for the first quarter '15 and on May 5, we will have our next Annual General Meeting.

Ladies and gentlemen, thank you for your interest and your questions. I will now close the call.

Thank you very much and good bye.

Bye, bye.