Q4 2006 Kuehne & Nagel Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good morning, good afternoon and thanks for standing by. [OPERATOR INSTRUCTIONS]. Now I will turn the meeting over to Mr. van Kesteren. Please go ahead, sir.

GERARD VAN KESTEREN, CFO, KUEHNE & NAGEL: Okay. So, welcome everybody to the traditional Kuehne & Nagel analyst conference call based on the results of the year 2006, which, this morning we published. We had a media conference, a media meeting, with the German-Swiss press this morning.

We have a special guest today. This is an opportunity. I don't say anything more, Mr. Klaus-Michael Kuehne, the majority shareholder of Kuehne & Nagel International with 55.75%. He takes the time to stay not only in the morning, but also in the afternoon, to see what kind of [spoken in German], what kind of activity he sees. It gives you an opportunity to talk to the majority shareholder right if you want. On the other hand, we go through the normal routine.

So, last week Friday, the Board of Directors of Kuehne & Nagel International, the [spoken in German] approved officially the Annual Report. The financial part, including an unqualified opinion of KPMG, our global auditor, the financial part was printed over the weekend in English for your convenience. A very much improved note. And, if you look at the last page 30 -- I think 34, you will see the segment reporting, the Kuehne & Nagel segment reporting by product, by business field as we call it. And it goes starting with external revenue and then going down to EBIT, with all the EBITDA, EBITA, etc.

At the bottom of this section, you see, in line with requirements from IFRS, you see capital employed per segment. I come back in my presentation. So we will have now return on capital employed per business field, assets and liabilities. If you add up all the assets and liabilities you will come to the balance sheet of Kuehne & Nagel, with the exception of cash, tax issues, deferred tax -- deferred tax liabilities, actual tax liabilities and the financing, long term and short term.

That is -- it includes in the capital employed calculation, it includes all the asset allocations per business field. It includes capitalized pull through and remaining part of the capitalized intangibles. That is one of the reasons why contractors we stick with ACR acquisition has a high capital employed assets because of the allocation of that part to this business field.

On top of that, we will see how much we had invested in capital spendings. You see the capital spendings of CHF246m. The third line is specified by business field. On the amortization and impairment of intangibles, CHF103.4, a unique thing that Kuehne & Nagel is doing via IFRS 3, allocating a part of the purchase price via constricted price allocation two intangibles and write it off. So we have charged the P&L account this year CHF100m, CHF104m, and it is specified per business field. I will give you a guidance to what the charge will be by business field in 2007 in our plan based on the current portfolio excluding new acquisitions.

So this is the financial statement in Kuehne & Nagel International. That will not change. Right. You have a copy of the press release for your information, and you will have a copy of our presentation. That is also, as from quarter to two, now on the website. So, if you want a soft copy go on the website and you can print it yourself. Or go to Heidi who is my left hand, my right hand, my everything.

Okay. So, Kuehne & Nagel 2006, 46,000 people, 830 locations, the environment of Kuehne & Nagel, ownership of the global network. You know how strong we are in confirming to the world that ownership of the network drives standardization. And standardization, [inaudible], standardization drives productivity, possibility of productivity improvement. You have seen that in the traditional Sea and Air. Growing in Sea and Air means more volume over the existing network. Non-asset based Sea and Air, brokerage concept for Rail and Roads and 18% of the logistics center is owned by the Group with an net value of CHF850m, as you can see in the fixed assets specification.

Revenue CHF18b, up 30%. EBITDA CHF855m. Don't forget five years, six years ago, we talked about CHF160m EBITDA for the Company as an ambition.

Scope, here you see the total performance of the Group. So, invoiced turnover up 30%. We all know that invoiced turnover includes rate developments, surcharges, ForEx, volume impact, etc., etc. If you look at this 30%, CHF11b in 2004, CHF14b in 2005 and CHF18b in 2006, 30%, 2% ForEx, minimal, goes almost down to the bottom line. The bottom line earnings before tax is 1% - the ForEx impact. Acquisitions, 18% of the 30% and organic growth 10%.

Gross profit, you see as a result of the acquisition of the Kuehne -- the ACR Group of companies, the structure of the P&L account, the nature of P&L account for contractors. It will be different for freight forwarding. Now it is a material part of the total business and, therefore, gross profit is going up considerably, 90% and costs are going up accordingly as well.

Contract Logistics, freight forwarding expenses 20%. For the charters we are buying, we are contracting to the delivery from warehouses of the contractors just to customers to the [opener companies]. And then the rest is fixed costs, relative fixed costs. Main costs rise is Contract Logistics, facility costs, open up roads, and then power costs.

Freight forwarding, we all know that it's completely different. We had 15% gross profit margin and so 85% is variable and remaining is 11% network costs. About 60% out of the 11% is manpower costs. Margin 4%, more or less up or down.

Okay. Depreciation. We see the EBITDA at 52%. Out of the 52%, we had 1% ForEx, we had 27% acquisition and we have 24% organic growth. Sea and Air mainly. Depreciation impact of ACR, with its own fixed assets brought from the acquisition. Amortization intangibles, CHF104m, the charge for 2006. I have it per business field. I have a guidance for the amounts for 2007. We created financial result and demonstrate in this specification there is compensating CHF2m costs and CHF2m income. Tax, CHF148, profit after tax CHF458, or 46%. I'll give you a guidance later on, on the tax rate for the year 2006.

Segment reporting. Segment reporting as is specified on the -- on page 36 of the financial statement, we are going at this level to EBITDA, because of the CHF100m start, the CHF104m start of the intangibles below EBITDA, to make that comparable in respect of the industry and the competition.

And you see the Brokers, and there is the whole business model. We believe, we are convinced, that the over-proportional growth in Sea and Air with the over-proportional margin in Sea and Air, we can only realize if we have the beginning and the end of the chain. And, therefore, we continue to invest in Contract Logistics and road, the last miles, in order to offer integrated services.

The business model Sea and Air, with Seafreight with a volume increase of 19%, gross profit increase of 20%, CHF944 to CHF1,138m, EBITDA of 41%. The costs are more or less stable and IT here is the driver for productivity improvement. Or productivity enhancement.

Airfreight, exactly the same story. Less leverage effect in the costs because the volumes are smaller. The volume increase is smaller. Market is growing 5%. Kuehne & Nagel is growing 10%. Gross profit improvement 12% with a ForEx of 1, 2%. And EBITDA is almost EBIT, 19%. Also, there, we see the enormous leverage effect on that. Klaus Herms will give you later on freight line information, targets for next year, etc.

Rail and Roads, our remaining projects in order to complete the Kuehne & Nagel world in respect of Integrated Services, there, we reach a -- 18% volume, i.e. revenue increase from 2.0 -- CHF2.1 to CHF2.4b, 2% ForEx., 8% acquisitions and 8% organic growth. Margins okay or nothing. 1.5% EBITDA margin. Concept is to bring the level of CHF5b and to create a critical mass in order to offer the other divisions, the other business fields, as well as local customers the offers at the right price the product within 24 or 48 hours all over Europe.

Contract Logistics heavily positively involved -- influenced by the ACR acquisition. We had the figures separately. Now we are fully integrated so we cannot, we will not report separate figures ACR as from 2007 onwards, but, in 2006, we still have it. We created it because most of the companies are integrated from an in built and from an organizational point of view.

Here we see in an improvement of the revenue of 194%, of which 2% ForEx, 15% organic growth Kuehne & Nagel, and that's exactly the difference of growing in Sea and Air and growing in Contract Logistics. 15% organic growth means 15% in principle, 15% new locations, new customers with new locations with new investments in the future with new CapEx, with maybe new starting up costs. And a 15% generated 7% EBIT or the EBITDA improvements. So not in line with as a result of starting up issues, which is a temporary situation. And the acquisition, ACR, accounted for [177%] on the revenue line.

Real Estate, a new business field which we internally did report earlier on several years already to follow the return on capital employed of the Company-owned locations, 18% approx. We have taken the decision to share this information with you, although the asset light issue is still the concept of Kuehne & Nagel. The CapEx are kept for a depreciation amortization for the current year. We have seen this year CHF246m. Next year CHF295m approximately. Not more. And I like that because I like the cash in. I don't like the cash out.

Okay, Insurance Brokers a standard performance. The highlights. The cash and cash equivalents, CHF600m at the end of December 2006, as per the IFRS calculation and definition that was last year CHF1,125m. Don't forget last year we, on January 1 2006, ACR completion took place and CHF700m left the cash box of Kuehne & Nagel in exchange for 100% of the shares of the ACR Group of companies.

As a result of the performance of the Group, earnings per share CHF2.87 in 2005 and 2 -- CHF3.90 in 2006, the recommendation will go to the AGM on May 5 -- on May 4 to increase the dividend per share from CHF1.10 to CHF1.50. Total equity as a percentage of balance sheet, 5.7%, 5.7b balance sheet, almost CHF2b equity is 34%. And the operational cash flow, which is profit before tax, is EBITDA in a way. You can see it in our cash flow calculation analysis. It's CHF857m.

No changes in the shareholding structure of Kuehne & Nagel International. That means Mr. Kuehne, via the Kuehne Holding AG, holds 55.75%. The free float by the end of December '05, 42 and a bit, and Treasury shares non-dividend, non-voting rights, 1.91%.

Organization chart, nothing has changed here. The structure is still 11 regions in the field with five regions in Europe covering 30,000 people of Kuehne & Nagel after the integration of ACR. Europe is heavy -- happy. We had 15,000 Kuehne & Nagel --now 15 to 30,000. So we adjusted, we amended the organizational structure and we have a new member on the Board for HR, as of April 1, 2007, replacing Mr. [Peach] a long serving Director of Kuehne & Nagel.

Mr. Herms will now present the main business issues, as well as the individual business units, business fields. And I'll come back on the financials later on.

KLAUS HERMS, CEO, KUEHNE & NAGEL: Ladies and gentlemen, also I am happy to welcome you here this afternoon and go through the business, the business activities of Kuehne & Nagel. Not only numbers, maybe also a little story around it, all these developments which are created at the end of the day the success of Kuehne & Nagel, again in quite a sequence, over the long success we had in the last couple of years.

The industry is consolidating. I think that it's a known fact. I think we have no -- everybody understands this. It will go on further. I think we participated on this consolidation by acquiring ACR early last year. DHL, with the acquisition of Exel did a major step towards consolidation. We have Schenker acquiring Bax Global, DSV acquired Frans Maas. And so on and so on. I think the PWC/Agility, or Geologistics before was -- it was interesting to see how this integration takes place, and we see further activities. Panalpina is doing an IPO, but that's already in a year earlier. And then the TNT, the CEVA acquisition through Apollo is an interesting activity. Geologistics, the French try to become -- Geodis, excuse me. Geodis is also trying to participate on the global presence of the logistics providers. I think, here, significant consolidation took place.

We had, in Kuehne & Nagel, we had last year an excellent year in Sea and Air. I think we had an excellent performance. The increments were already explained. The integration of ACR went reasonable painless. It was -- it is, of course, when you see to integrate 140 locations of ACR into a network of offices and location of Kuehne & Nagel, it is reasonable [to see] it went very well. I think the business we, effectively, got what we asked for. The business was not -- there was no [made] down of profitability. And we have been able this way to continue to build up through this extra location and excellent logistics network in Europe.

The CapEx, Mr. Kesteren explained already. It's always good if it's less, otherwise you tell us we have -- we are too much …