The first-quarter earnings of global logistics giants Kuehne+Nagel and DSV showed a remarkable drop in profits that reflected the industry’s quick cooldown in the past year — with a big silver lining.
In reality, the down results were quite positive compared against historical trends and not the hyperinflated conditions of the pandemic, when supply chain disruptions and soaring goods demand sent freight rates through the roof. They also beat analysts’ expectations.
Instead of windfall profits, the goal now is sustainable profitability.
Kuehne+Nagel (CXE: KNIN) last week reported revenue slid 37% to 6.7 billion Swiss francs ($7.5 billion), as inflation, high business inventories and geopolitical challenges lowered demand for freight transportation across the sector. Operating income dropped 45% to $684 million. Still, the quarter would have been the Switzerland-based company’s best ever were it not for unicorn results achieved in 2022. All Kuehne+Nagel business units, in fact, were more profitable than in 2019, before the COVID crisis overturned the global economy.
Management attributed the relatively good results to the company’s ability to manage yields in volatile markets, cost controls and increased focus on higher-margin customer segments such as health care. The outsourced logistics provider reduced headcount by about 2,000, including about 1,300 temporary workers, during the quarter.
K+N is the largest ocean and airfreight forwarder in the world by revenue and volume.
First-quarter sea freight sales ($3 billion) and operating income each fell 45%, but yields were 13% better than in the fourth quarter and nearly double the 2019 average as the company concentrated on customers with high-yielding shipments. Volumes were lower than last year during the same period, but followed more normal seasonal patterns, and ticked up in March for the first time since the fall.
The logistics provider estimates it gained market share as the market declined seven to eight points. It also claimed the top spot in the trans-Pacific market, according to Datamine. AB Bernstein’s European transport analyst said the group’s ocean unit beat operating profit estimates by 42%.
Falling rates actually boosted gross profit per container unit because rates paid to ocean carriers fell more than those K+N charged its customers, said CFO Markus Blanka-Graff. Forwarders typically benefit from higher margins on purchased transportation. That didn’t happen in the second half of last year because K+N was still locked into volume commitments, but with the expiration of long-term contracts the company is now able to book freight at low spot-market rates.
K+N’s midterm target is for gross profit of more than $500 per unit versus the $375 annual average between 2014 and 2019.
The mega-forwarder hired 100 ocean sales agents during the first quarter as part of a strategic push to capture more business from small and midsize shippers. CEO Stefan Paul has previously called these new employees “a hunting force.”
K+N’s airfreight division experienced a 41% drop in revenue to $2.1 billion, resulting in a 61% drop in operating profit. Global cargo volumes are about 12% lower than a year ago while capacity is up 13%, which has pushed rates down 40%, according to market reporting agencies. But K+N said its analysis shows tonnage is down 17% year over year. A noticeable drop-off was in trans-Pacific moves of high-tech goods.
Executives said perishable and aerospace shipments were pockets of strength for air cargo.
Air cargo milestones this year include becoming the customer for the final 747-8 produced by Boeing and launching a dedicated freighter service to Birmingham, Alabama, to support Mercedes-Benz and other businesses. K+N has two full-time 747-8 freighters at its disposal under dedicated transportation contracts with Atlas Air.
Paul was cautiously optimistic that second-quarter volumes for ocean freight might increase slightly as some customers in certain industries begin restocking again but said air cargo is not expected to improve.
Ocean and port congestion that drove a substantial amount of freight to the air logistics sector has mostly disappeared. And with excess capacity and rates in ocean transportation at 2019 lows, it will be difficult for air cargo to attract extra business beyond what is urgent or high value.
The company’s contract logistics and truck divisions increased profitability during the quarter despite uncertain economic conditions. There is little available space in warehouses because customers are maintaining high levels of inventory.
Leadership reiterated its confidence that the company will continue to grow despite the economic uncertainty because businesses are shifting to providers that are able to provide capacity, reliability and shipment visibility around the world.
“This industry is developing into an area where digital capabilities and global reach with scalability, when we add the customer experience and the service component to it, is going to drive consolidation of the industry, not necessarily because of [mergers and acquisitions], but there will be expectations from customers where small and medium sized providers may not be in a position to fulfill anymore,” said Blanka-Graff.
At DSV (DXE: DSV), the third-largest global logistics provider, the story was similar. CEO Jens Bjorn Andersen said management was “tremendously” pleased with the results considering the amount of uncertainty entering the year and the more competitive market caused by declining freight volumes.
Revenue retreated 33% to 40.9 billion Danish krone ($6 billion), contributing to a 28.2% downturn in operating profit of $690 million. Revenue for air and sea freight management, which represents nearly two-thirds of the company’s sales, was down 43%. Unit volumes declined, but gross profit remained relatively strong due to pricing discipline and a focus on higher-yielding cargo, the company said, adding that yields are expected to decline in the coming months as supply and demand shake out more.
DSV’s air volumes declined 20% in the first quarter, with export volumes from the Asia-Pacific the weakest. The volume decline was most significant at the beginning of the quarter, with slight upward momentum toward the end that officials said raised hope for future improvement. Air rates, excluding fuel surcharges, are now close to pre-pandemic levels on most trade lanes, it said. Ocean volumes were down 12% year over year.
The Danish company estimates it lost some market share due to its continued focus on pricing discipline and higher-yielding cargo, but asserted it would outgrow competitors over the long term.
“The market has been more volatile than normal in Q1, and we have decided that we will protect the yields,” Bjorn Andersen said on a call with analysts.
Road freight was flat as a decline in volumes was offset by higher rates and surcharges, with management expressing confidence DSV gained market share. The logistics and warehousing group suffered a modest revenue decline of 8%.
As with K+N, DSV saw profit margins increase more than 6.5 points compared to the same period last year as the rates it paid to carriers dropped sharply while pricing for its own products came down moderately. The company enjoyed growth in free cash flow due to a significant reduction in net working capital, which was influenced by lower freight rates.
Management said the number of invoices sent to customers — a proxy for the number of shipments and key performance indicator — was only down 10%, suggesting that customers continued to ship but in smaller quantities. That helps prop up yields because the same amount of customs clearance and transport processing work has to be done regardless of the shipment’s size.
The logistics provider has trimmed its cost base by eliminating more than 2,700 employees in the past year, including about 2,000 office professionals. About 1,700 positions were eliminated in the first quarter, mostly through attrition.
DSV’s full-year outlook is for a volume decline of up to 5% in air and ocean shipping.
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