K+N profits in the face of volatility, yet contract logistics hammered

Kuehne and Nagel’s half yearly results demonstrate how the company has modified its approach to the ocean container freight forwarding market. For the business as a whole net turnover and gross profit were up year-on-year by 4.5% and 5.6% respectively whilst earnings before interest and tax increased by 11.1%.

Within the sea container business K+N is clearly focussing on quality in terms of profit margins and is willing to sacrifice market-share to do this. Volumes as measured in TEUs fell by 1.8% but yield per container rose 4.4% if measured in the rapidly appreciating Swiss Franc, giving an EBIT margin of 30%. Stripping-out the effects currency fluctuations, K+N claim an increase in EBIT of 18.1%. It appears that much of K+N’s caution stems from the volatility of rates with the Chief Financial Officer commenting that container shipping prices varied wildly from week to week. This is not new with the company reporting problems with volatility over the past few quarters, however this half’s results demonstrate the issue vividly.

The situation in air freight forwarding was the reverse. Volume by tonnage was up by 5.2% but yield per tonne fell by 3.9%, resulting in a fall in revenue of 2.2%. Yet profits in terms of EBITDA jumped 8.1% when measured in Swiss Francs.

What was slightly shocking in these latest numbers was the sharp fall in revenue and profits at the contract logistics business. Even stripping-out the rise in the Franc, sales fell by 6.6% and EBITDA by 4.1%. The reason for this given by K+N was tougher markets, especially in the UK, and falls in big client volumes passing through K+N warehouses. Land transport was even worse, with revenue falling by 5.9% after stripping-out currency fluctuations and EBITDA by 5.7%.

Kuehne and Nagel’s profitability in both air and forwarding is impressive and appears to stem from a high degree of discipline in being willing to retreat from unprofitable business as well as an apparently successful strategy of focussing on longer-term market relationships within sector ‘verticals’. It also begs the question, who is sacrificing profits to gain the business Kuehne and Nagel is refusing?