Kuehne + Nagel under pressure

The departure of CEO Reinhard Lange has heightened the sense of surprise around the changing fortunes of Kuehne + Nagel. Alongside results that suggest Kuehne + Nagel is experiencing difficulty passing-on cost increases to its customers, it is now facing management restructuring on a significant scale.

Reinhard Lange is retiring “because of health reasons effective May 7, 2013”, which presents the company with the need to accelerate its succession process. However, this also comes in the midst of a major restructuring of senior management with Western Europe, Middle East and Asia being centralised in Hamburg, Dubai, Shanghai and Singapore.

The annual results announced today are not bad, however they are not the usual flow of good news the market has come to expect from Kuehne + Nagel. For the whole company, turnover is up 5.9%, whilst gross profit is up 3.3%. EBITDA (Earnings Before Interest, Depreciation and Amortisation) however, has fallen by 12.5%, in part influenced by one-off charges, but also due to underlying weakness in the market.

The sea freight forwarding business saw respectable growth of 6% in volumes handled and turnover up 8.8%, but EBITDA fell by 5.3% to €415m. The underlying market grew much less than the company expected at an estimated 2%. It seems that, despite high volatility and very weak rates, Kuehne + Nagel is being squeezed between the shipping lines desperate to stop the fall in prices and customers determined to drive down prices.

The situation is worse in air freight, where the market shrank by 2-3% overall and despite a 1.1% rise in turnover for Kuehne + Nagel, EBITDA fell 9.1% before an exceptional charge as a result of an EU anti-trust fine.

Contract logistics also suffered, with profits falling by 6.2% despite rises in turnover of 4.5%. Here, the pressure is not only attributed to tougher price competition, but also lower utilisation of assets such as warehousing.

Similarly, in road and rail freight the company is being squeezed by rising fuel costs. The company was also hit by a shift towards lower weight per shipment, although it grew turnover faster than the market at around 7%.

What is clear is that Kuehne + Nagel has been fully affected by the fall-off in world trade over the past 12 months. Although sea freight and road freight have grown faster than the market, this has been accompanied by lower profits. In sea freight, in particular, but also in air freight it illustrates that the company has not been able to use its leverage to drive down prices from shipping and airlines faster than its customers look for lower costs. This is a somewhat unusual situation for a company that has invariably out-performed the market and its competitors in the past. Consequently, the early departure of Reinhard Lange with no immediate replacement is unfortunate timing.