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Edited Transcript of CEVAL.S earnings conference call or presentation 31-Jul-19 12:00pm GMT

Q2 2019 CEVA Logistics AG Earnings Call

Aug 14, 2019 (Thomson StreetEvents) -- Edited Transcript of CEVA Logistics AG earnings conference call or presentation Wednesday, July 31, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Nicolas Sartini

CEVA Logistics AG - CEO & Member of Executive Board

* Pierre Bénaich

CEVA Logistics AG - SVP of IR

* Serge Corbel

CEVA Logistics AG - CFO & Member of Executive Board

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Conference Call Participants

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* Adey Delbridge

Onex Credit Partners, LLC - Research Analyst

* Areti Loizuo

Boundary Creek Advisors - Analyst

* Chris Stainton

HPS Investment Partners, LLC - Managing Director

* Danielle Ward

JP Morgan Chase & Co, Research Division - Analyst

* Michael Clerico

HPS Investment Partners, LLC - Vice President

* Peter Jurik

Tresideor Invesment Management LLP - Partner

* Sheharyar Malik

CQS Investment Management Limited - Hedge Fund Investment Analyst

* Thomas James Gibney

BofA Merrill Lynch, Research Division - Research Analyst

* Ventsi Stoichev

Symphony Asset Management - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for holding. Welcome to the CEVA Logistics AG Quarter 2 2019 Results Call. (Operator Instructions)

I would now like to hand over the call to Mr. Pierre Bénaich. Please go ahead, sir.

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Pierre Bénaich, CEVA Logistics AG - SVP of IR [2]

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Thank you, Patricia. Good day, and welcome, everyone. It's Pierre Bénaich, Senior Vice President, Investor Relations, for CEVA. We're pleased to host today's second quarter 2019 results conference call.

Regarding the materials for this call, we published both the press release and presentation slides, on the CEVA investor website earlier today. As always, elements of this presentation are forward-looking and are based on our best view of the world and our business available today. I refer you to our complete safe harbor statement at the end of our Q2 financial results press release and at the end of this presentation for more details.

For today's call, we have our CEO, Nicolas Sartini; and our CFO, Serge Corbel. I will turn now the call over to Nicolas.

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [3]

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Good afternoon, everyone.

So we'll move directly to Page 3 where I will present the highlights of our second quarter of '19 and our first half of 2019. We are now busy with the new management team implementing the turnaround plan of CEVA Logistics. There are several elements in this turnaround plan.

First of all, we have a new governance structure. Mr. Rodolphe Saadé, who is the Chairman and CEO of CMA CGM, holding now 99% of the shares of CEVA Logistics, has been elected Chairman of the Board, and I've been appointed as CEO since June 1.

The second element of the turnaround plan is now we have a new operation center in Marseilles. This is, by the way, where we are holding the call. This is a center where we are going to be 200 by September of this year, and it will facilitate decision-making and follow-up and execution of the decisions.

Third, we have a new brand identity, which you can see on the slide, the new modern and dynamic logo, which is illustrating the new momentum in the company.

And four, we are resetting priorities. We are focusing on top line improvement. We are also making sure that the opportunities are better qualified and that we have better control on the new opportunities, especially in contract logistics. And then we have engaged on the digital acceleration.

It's the first time since the 2nd of May that we have consolidated CMA's CGM Logistics, which is bringing to CEVA additional ocean volume and a global presence in several countries.

The revenue for H1 2019 increased by 2.5% in constant currency. And this has been supported mostly by our freight management activity and CC Log. EBITDA is at $264 million, which is $68 million on a pre-IFRS 16 basis. It has been negatively impacted by currencies; market headwinds in airfreight, we'll come back to that; and also in automotive. But we are seeing, on the other end, positive signals when it comes to contract logistics in Italy, which has been a sore point for CEVA Logistics in the previous quarters, and the first measures of the turnaround plan.

Our EBITDA margin stands at 7.5% on a reported basis and 1.9% on pre-IFRS 16 numbers. Our adjusted EBITDA, which includes Anji-CEVA for H1 '19 is at $104 million. We'll be detailing later on various refinancing initiative which has been undertaken in the last quarter, which Serge Corbel, the CFO, will cover.

Net debt stands at $1.4 million (sic - see slide 3, "$1,434 million"). And our free cash flow improved by USD 89 million versus first half of 2018.

I will now turn to the business update on Page 5, starting with Freight Management, which represents more or less 50% of our activity. So we have, for our first half of this year, a mixed bag with disappointing volumes but, on the other end, improved yields.

If we start by Air, we have seen on H1 a volume decrease of 10.8%. This is coming from various reasons: one, that the market is coming down globally; two, we have average shipments compared to 1 year ago; then we are witnessing a down-trading from some of our customers, especially when it comes to automotive and high tech, which are 2 strong verticals for CEVA Logistics.

On the other end, the net revenue is holding up well. And our yield, we'll see that in a minute, is improving and is the highest in fact for the last 6 quarters. We are also improving our productivity by almost 2% when compared to H1 of 2018.

For Ocean, we have, let's say, a flat situation. The volumes are flat when we compare them to last year. But we have also an improvement in yield, and this is mostly driven by the development of the LCL activity, or groupage, which is one of the priorities which has been set for the Ocean sector.

On the Ground, especially in the U.S., we see a strong increase in the number of shipments, where we witnessed a 7.1% in the period. And we are also improving both the productivities and reducing the impact of the drivers' shortage which we faced last year. So it means that we are well positioned for the second half of '19, which is always the peak season for Ground.

When it comes to EBITDA performance for Freight Management, we finished the first half at $32 million in terms of EBITDA, which is, as we indicated, caused by a decline in Air and also a lower volume of what we call the VAS, which are the value-added services we perform in our warehouses.

Let's move now to the indicator for Freight Management, so as indicated for Air freight, on Page 6, sorry. When it comes to -- we see that the tendency on Air freight is not improving in the recent quarters. Even if the market is contracting, we are slightly below the market. This is, again, linked to our exposure in 2 sectors, automotive and high tech. And obviously, we are taking steps to diversify our footprint in the air markets.

We have better news in terms of Air yields, as indicated, at $789, we are doing a good performance in the yields. So we have a good first half in terms of yield for Air, and we see this tendency going on based on the procurement initiatives we are making on the air markets.

In terms of Ocean volume, the performance was good in the first quarter. It's disappointing in quarter 2. This is especially owing to the loss of one big contract, which has reduced our volumes in that quarter. We are also confident to recover in the next quarters. In terms of yields, we also see a good improvement in the yield for Ocean where we have the best quarter if you look at the last 6 quarters in terms of yield, at $310 per TEU, which is again driven by our effort to boost the LCL volumes.

Moving on to Contract Logistics on Page 7. Here also, we have a slight reduction in revenue. This is due to the loss of some contracts in the U.S., albeit low-margin contracts. It's also because we have elected to exit from a low-margin contract. And then the last impact for the revenue is the relative softness, once again, in the automotive sector.

In terms of positive news, our retention has been excellent at 92% for H1 2019, which is one of the best performance we've had in years. Looking forward, we have some impact -- we'll have some impact, especially in December in Europe with some of the automotive manufacturers closing factories for a few days, which will impact our activity in Europe.

On the other end, we have some positive news. I would say, at last, on the Italy front, as you know, we had, in Italy, 2 severely loss-making contracts in the publishing sectors. What we can indicate is for one of them, we have now -- we are now in much better territories. We are performing well in terms of productivity to the satisfaction of the customer.

Number two, we have been able to increase the rates to the tune of 4.8 million for the period.

Number three, we have extended the contract with this customer to end 2021. And the interesting news is that we are now discussing with this customer long-term cooperation on new grounds. That's for the first contract, in publishing.

The second contract is not yet as much advanced. We are still ongoing in terms of negotiation with respect to rate increase and termination of the contract. So all in all, we have an EBITDA for a Contract Logistics of $53 million with an EBITDA margin of 3%.

On Page 8, we are covering the Anji-CEVA business. Anji-CEVA, as you will remember, is a Contract Logistics JV that we have in China. So in this JV, our revenue increased by 4.7% in constant currency in the first half of '19. And we have -- in this JV, we have 2 divisions. One is automotive, where we do the contract logistics for the SAIC Group, where the revenue was up 5% in constant currency, but where we have witnessed also in the second quarter, a slowdown in the automotive markets. That's on the construction manufacturing side, whereas the aftermarket is still doing well.

On the non-automotive division, which we are trying to boost, our revenue was up 6%.

In terms of EBITDA, Anji-CEVA produced $38 million in the first half. And again, 50% for CEVA, which gives us an EBITDA margin of 5.3%.

I will now hand over to Serge Corbel, the CFO, who will give you the financial results for the period.

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [4]

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Thank you, Nicolas.

Moving on to Page 10, Slide 10 of the presentation. We have here the half year results. So as indicated, we have a constant currency -- we would have had a revenue increase of 2.5%. But actual currency because of translation in euro, Turkish lira, we have seen the revenue going down by 3.4% to $3.514 billion.

EBITDA unadjusted, I mean, is at $68 million, down $14 million compared to last year. But what we can say about this $68 million is that it is comprised of the Q1 at $20 million and of Q2 at $48 million. So we're in the right direction in terms of, let's say, improvements.

Of course, worth noticing is also the net income. It's improved by $52 million. We're at minus $60 million, which is still a quite significant loss, but we improved that by $52 million. And you see that it is currently through reduction of depreciation and amortization and reduction, significant reduction in finance expenses.

Moving on to the second quarter. Here, we see, again, the second quarter, we have less revenue than what we had in the first -- second quarter 2018 to the tune of 1.7%. We're coming out at $1.816 billion. EBITDA unadjusted is at $48 -- $48 million, and that compares to $36 million in the similar quarter last year. So this quarter is yielding better results than last year and better results than Q1. So although the figures, again, we want to boast about the figures, but we think we're in the right direction. Similarly, on the net income, minus $26 million compared to minus $45 million last year.

Moving on to the Slide 12, relating to results in Freight Management. So you have here the impact, again, of FX. So we're posting 820 -- $812 million of revenue; EBITDA, and this is EBITDA before specific items, of $17 million at 2.1% margin for the quarter. And on the half year, $1.6 billion, $30 million EBITDA, again, before specific items and share-based compensation, 1.9% margin.

The details on Slide 13 of Freight Management show that we have, compared to Q2 2018, reduced the share of Air because of what Nicolas had explained earlier on, mainly reduction in volumes. And you see that basically the 9 -- the quarter [$918] is comprised of $323 million in Air; 270 -- $267 million on Ocean; and other FM, $328 million. Other FM includes CC Log to the tune of $106 million.

On the full half year, we have also, let's say, $637 million of Air, which is about 37.1% of the revenue. And then Ocean, $543 million. $535 million for the rest. Air is obviously going down from last year, 42% of the revenue to 37%. But we have, as Nicolas had indicated, positive momentum in net revenue on these activities.

As far as Contract Logistics is concerned, on Slide 14, we have a reduction in terms of also a turnover. We are posting $899 million revenue. EBITDA -- EBITDA before specific items, it's at 3% -- 3.4%. So you see here that the EBITDA margin of the second quarter is ahead of the average of the full half year, moving in the right direction here. Again, $53 million for the half year.

On the Anji-CEVA results, which have been commented by Nicolas, there isn't much to say again. But we see that they've been hit, of course, by the automotive situation in China, and there is a slight reduction in EBITDA margin. Overall, for the quarter, we're posting a $16 million net income and [$33 million] EBITDA margin.

Moving on to one aspect of things which I wanted to sort of reduce in the -- in our Q -- this is Slide 16 here, in our overall reporting, the specific items. So you see here that on a, let's say, half year basis, to go directly there, we have reduced specific items by $20 million to get more clarity on what we're doing in terms of, let's say, Freight Management and Contract Logistics, I don't want any specific items to be taken out. And you see that when we compare on the Q2, it's even more drastic, and the gap is down $29 million compared to last year. It provides better clarity on the true nature of EBITDA.

Moving to Slide '17. Maybe on the cash flow, operating cash flow, one important thing is that operating cash flow is practically breakeven, minus $6 million for the first half, but in fact, $18 million for the Q2. The figure doesn't show here, but we have $18 million positive for the -- for Q2. And also worth noticing, free cash flow improvement, quite significant, $89 million.

Possibly moving on to Slide 18 on a refinancing update. As you know, we've been spending quite a lot of time on this first half year on refinancing question in Q1 and in Q2, so both -- in Q1, as we all had already indicated, we have replaced the Term Loan B, $475 million.

On the revolving credit facility, which was a facility who was exposed on the change -- to the change of control clause, we -- 9 of the 11 banks have agreed to follow. We've had to cancel facility for 2 banks. But one -- we were able to catch one new bank, so that the facility has been reduced overall by $75 million net. And with one of the banks, actually, we have negotiated a parallel line, which will terminate end of November 2019.

On the EUR 300 million, the new thing maybe is the senior notes. So you know that we had issued a tender offer for the senior notes on the 10th of May at 101% plus accrued interest. EUR 284 million have come to the tender, and they were repaid on the 9th of July. And we have also issued a notice to cancel and repay the remaining notes, which we did on the 22nd of July.

We -- to repay these notes, we have a bridge facility of EUR 297 million. The aim is to, let's say, replace this bridge facility by possibly a new issue, which would be -- which would have to be issued in the next year. If not, we have a fallback position, which is the bank loan validity 2025, which was the former validity of the Term Loan B facility and the bonds.

Debt maturity profile on the presentation, Page 19 -- on Page 19, well, this is pretty straightforward. Maybe worth commenting here is the shareholder loan, which is the loan that we have with CMA CGM for the acquisition of CC Log. And other than that, you see revolving credit facility mature in 2023; and bridge facility and Term Loan B, 2025. We're working on the securitization, which is a maturity 2020 to have it replaced, by the way.

Net working capital, moving to Slide 20. So we've, let's say, worked on this quite, I'd say, diligently. We are -- we have been reducing, factoring in the countries where factoring were -- was pretty expensive, and we have increased factoring in other countries where we -- the price is less. We have, let's say, worked on the collection to reduce the outstanding of the collection. And so this has resulted in a more stable cash profile. And as you can see from -- as you have seen from our cash flow, improved cash flow condition and change in net working capital.

Moving on to Slide 22 for Nicolas, back to Nicolas.

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [5]

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So the final slide is on the outlook 2019. We see 2019 in line with our expected trajectory to reach our medium-term objectives, which were set at 4.5% to 5% of EBITDA margin. Top line growth above market and with a target in 2021 of adjusted EBITDA at between $470 million to $490 million, and this is by 2021.

Free cash flow is expected to turn positive in quarter 4 of 2019. And then we are still very much engaged in the reorganization of CEVA with the new operational center, which is now set in Marseilles, and we are working on the transformation of CEVA.

This is the end of the presentation. And now, we are ready to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question is coming from Mr. Michael Clerico of HPS.

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Michael Clerico, HPS Investment Partners, LLC - Vice President [2]

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Just looking at results here, they've obviously been a little bit weaker than we expected at least at the time of the combination, yet you guys are reaffirming your medium-term outlook. Just given that you've had some contracts drop out, results are kind of not going the way you want, macro is getting a little bit weaker, what gives you confidence that you're going to hit those results?

And if we think for the balance of 2019, 2020, it's a lot of ground to make up to get to where you think you could be, so what do you see as the biggest drivers given the various headwinds that have emerged since you laid out these targets? Just how do you square up those 2 things and think about the balance of the year and 2020?

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [3]

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Okay. So I'll start and maybe Serge Corbel will complement. Why we are saying that we are on target is because we have -- in terms of business development, we have a solid pipeline, both in Contract Logistics and Freight Management, so -- which is looking positive in terms of top line.

We are and we have been addressing, like I indicated, the loss-making part of our activities. So this is mostly in Contract Logistics. We've had this Italian situation, which is, I would say, almost in control now, we fixed one severely loss-making contract. We are busy finalizing the other one, which has really been a sore point in our activity. At the same time, still in Contract Logistics, we are systematically addressing the low-margin contracts. So that's, let's say, on the revenue side.

Then we have put in place a cost-improvement program, which is starting to yield results. We have put in place a professional procurement, which is bringing some savings. We are starting to move position to shared service centers, which was not in place before at CEVA and which will translate in additional cost. And overall, we are keeping our cost and labor situation very much in control.

And the last element is for new business, again, with the Italian situation in mind, we are probably much more diligent than we were in the past as to accepting new contracts. We have a very solid ICAP program to review the new opportunities. And we do not hesitate to reject opportunities if we believe that they are not presenting sufficient yields.

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Michael Clerico, HPS Investment Partners, LLC - Vice President [4]

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Yes. And then can you just address the loss of the contract in Ocean, in Ocean freight? Was that related to, I guess, the integration of CC Log and customers reacting, I guess, to the new business, the business combination there? And (multiple speakers)

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [5]

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No. No, not at all. It's -- I mean, it's -- it was one of the, I would say, historic contracts that CEVA had been holding for years. And there was -- what happened in Freight Management or Contract Logistics, there was simply a tender. We lost part of the tender. We have kept a part of the tender. We lost China, and we are keeping [Indian] continent. So it's a very big contract that we have unfortunately lost. We don't see any negative impact by the joining of CC Log. We have not lost any customer as a result of this.

On the other hand, CC Log is bringing to CEVA additional volumes. And the additional volumes, in turn, are giving us a better position when it comes to negotiating with ocean carriers and what is being seen in our improvement of yields. So there has been no negative impact whatsoever by getting CC Log on board.

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Michael Clerico, HPS Investment Partners, LLC - Vice President [6]

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Okay. So I mean that was one of the rationalizations for the combination of CMA and CEVA, is that cross-selling, right? The migration of customers from CMA to CEVA and vice versa.

So kind of where are you in that process? Like how far along? And when can we start actually seeing results come through the P&L of customer introductions that CMA is providing CEVA and that kind of cross-selling benefit? Right now, I mean, all we're seeing is we're seeing, quarter after quarter, customer losses, it's actually going the other way. So...

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [7]

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Let me say -- let's say, we are seeing -- I think we are seeing different things. In Air, we are not losing customers. We are seeing down-trading with the existing customers, but we are not losing customers. We have in Air what I have indicated, is we are positioned, for the time being, of course, we are busy diversifying our customer base. We are -- currently, you see, let's say, the legacy of CEVA Logistics, we are very much positioned in automotive and high tech. Of course, we want to keep those positions, but we want to move to different verticals, less cyclical.

So in Air, there is no loss of customer. In Ocean, yes, there is loss of one prominent customer, which is impacting Q2, as you can see. At the same time, you see that we are progressing nicely in quarter 1 in Ocean.

Now coming to your question of cross-selling. So this is a program which is very much in place. We have dedicated teams, both in CMA and in CEVA. And we are systematically addressing the customer list of CMA CGM to gain new business for CEVA. So we have also recorded good progress in this respect, and we'll continue to do so. And the impact will translate in the coming quarters.

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Michael Clerico, HPS Investment Partners, LLC - Vice President [8]

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Yes. And if I could just press you on the outlook for the balance of the year. I know you said you think you could get to cash flow positive by 4Q. How does that translate to like an EBITDA outlook? Do you think EBITDA can be up year-over-year, especially as you think in 3Q, we start to lap the large provisions you took on the Italy contract. Do you think EBITDA will be positive into -- in the second half?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [9]

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Yes. I mean definitely, and this was by construction, by the way, on the budget, our EBITDA is back-loaded on the year. And I could say, roughly, a rule like 35%/65%. And so we expect the -- one of the aspects which you must have in mind here is that the sorting out of the Italian situation is going to impact significantly the second half plus some, let's say, momentum on restructuring, et cetera, which we shouldn't see in the second half of the year. All of this seemed to [have assumed]. We are confident that we will see a much stronger H2 EBITDA, if only because the last quarter of 2018 was, you may remember, totally hit by the Italian situation.

So we think we will be in a situation where -- just as I've said about Q2, which is better than Q2 last year and better than Q1 this year, I think H2 this year is going to be better than H2 last year and H1 this year, and significantly by [a buyback], this is what we had planned budget-wise.

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Operator [10]

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Our next question is from Mr. Tom Gibney, Bank of America Merrill Lynch.

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Thomas James Gibney, BofA Merrill Lynch, Research Division - Research Analyst [11]

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Just a follow-up on that last point, you were talking about EBITDA. And I just wondered, does the same apply for adjusted EBITDA? Do you expect that to be up year-on-year in the second half?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [12]

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Yes. I mean I'm trying to -- as indicated, I'm trying to -- we're trying to dispose of specific items, as much as possible, it will be true of adjusted EBITDA as well. Our adjusted EBITDA was very much impacted also last year, not directly through the Italian provision piece because this was out of the adjusted EBITDA, but because of the loss in Italy itself. So we -- this having been sold, we think we will have also a positive momentum on adjusted EBITDA.

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Thomas James Gibney, BofA Merrill Lynch, Research Division - Research Analyst [13]

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Okay. Great. And then the contract loss in Ocean. When exactly did the volumes under that contract stop during the second quarter?

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [14]

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It stopped in May of '19. So we lost 2 months of, again, a large-volume contract. And again, we lost part of the contract. And we kept, let's say, some of the business. But it started in May '19.

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Thomas James Gibney, BofA Merrill Lynch, Research Division - Research Analyst [15]

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And if I look at the volume growth in Ocean, it seems to switch from about plus 7% down to minus 6% between the first and second quarter. Is that pretty much all explained by that contract loss?

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [16]

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Majority-wise, yes. But also, the second quarter was a bit slower, but the majority of the reduction is coming from the loss of this contract, correct.

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Thomas James Gibney, BofA Merrill Lynch, Research Division - Research Analyst [17]

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So if I was to think about that contract as being worth maybe 10% to 15% of Ocean volumes, that wouldn't be too far off?

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [18]

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Correct.

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Thomas James Gibney, BofA Merrill Lynch, Research Division - Research Analyst [19]

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Okay. Got it. And then looking at the Air freight volume growth. Obviously, your performance versus the market seems to have worsened from the first quarter to the second quarter. Do I understand correctly that that's because of your mix, because you're focused on auto and tech, and that's done worse than the overall air freight market?

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [20]

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Yes, that is the main explanation. Again, what we are seeing is that we have not lost any customers, but each of them are -- is down-trading the volumes that they are carrying because of the specific verticals is less than what they were carrying in the same quarter last year.

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Thomas James Gibney, BofA Merrill Lynch, Research Division - Research Analyst [21]

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Okay. And has there been any improvement in that in the start of the third quarter at all?

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [22]

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What we are -- what we will see is -- step by step, we will see the outcome of our effort to diversify from those sectors where we are heavily exposed. And we expect to get -- the peak season in Air is around September and October, so it will impact both Q3 and Q4.

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Thomas James Gibney, BofA Merrill Lynch, Research Division - Research Analyst [23]

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So you've won contracts in other sectors apart from auto and tech?

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [24]

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Correct.

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Thomas James Gibney, BofA Merrill Lynch, Research Division - Research Analyst [25]

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Got it. Got it. And then just last couple of questions. The yield in Air freight, why exactly is the yield going up? Is it partly because of pass-through of cost? Or is there something else there?

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [26]

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No. Again, overall, and again, we are clear, our performance in Air is worse than the market. The market itself is negative. We are below even the performance of the market, we recognize that. But when the market is down, obviously, the opportunities for reprocurement are there. So we are carrying the freight -- the condition of 2018, but we are able to improve our buying rates. So this is what is explaining the better margins.

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Thomas James Gibney, BofA Merrill Lynch, Research Division - Research Analyst [27]

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Okay. And last one, just what was the EBITDA contribution of CC Log in the second quarter?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [28]

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$2 million.

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Operator [29]

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Next question is from Ms. D. Ward, JPMorgan.

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Danielle Ward, JP Morgan Chase & Co, Research Division - Analyst [30]

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This is Danielle Ward from JPMorgan. My first question was a follow-up on Tom's question just then on the Air freight market weakness and on the underlying market conditions. I think Tom might have alluded to this, but have you seen any kind of improvement or change in July so far? And are you able to talk a little bit about how the phasing looks in April versus May versus June within Q2 for the underlying market conditions? And then on your guidance for free cash flow to be positive by Q4, could you just talk us through the drivers there? And do you expect cash flow to remain positive into 2020 as well?

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [31]

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What we are seeing here, again, I'm commenting on the first part of the question. We see in July a stabilization of the performance, and we see also one of the customers we are exposed to is a Chinese customer and we have seen that this customer was badly hit in May and June. And we are seeing a step-by-step recovery on the volume, which will help July and will help the remaining months of the year. So that's for the Air freight part.

Maybe, Serge, for the second part of the question?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [32]

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Yes. So on the cash flow, free cash flow positive, which you know that on the financing conditions, we are improving the situation. And we had been hit in the first half of 2019 by refinancing costs because we have to refinance the debt, the TLB, we had to refinance the bonds, so these costs will no longer be there in the second half of the year.

And on top of that, we are, as Nicolas has indicated, on the business itself, we are working on improving the Italian situation, so there will be less of an impact on the Italian, let's say, results improving, working on the low-margin contract as well. So all of this, from what was -- the figures we have, which are not, let's say, pushed back, which are reasonable, we see Q4 free cash flow positive. And indeed, for 2020, we are on the basis of a free cash flow positive.

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Danielle Ward, JP Morgan Chase & Co, Research Division - Analyst [33]

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And just to clarify on the first question, so the stabilization in July. Is that specific to you guys because of the customer issue that you talked about? Or is that the market underlying that you're (multiple speakers)

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [34]

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This was just an illustration, giving you one specific example. But otherwise, besides this very specific customer, which was severely hit in May and June, we are seeing, let's say, a stabilization of the volume, which means no growth yet because we are not yet clearly in the peak season. The peak season will come later as indicated in September, October, but we are seeing a stabilization of the volume.

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Danielle Ward, JP Morgan Chase & Co, Research Division - Analyst [35]

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And if I could just ask one more question. On the securitization program, you mentioned you're refinancing that. It might be too soon to us, but do you have any indication of how terms and size will look on new facilities versus the old facilities?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [36]

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On securitization, it's basically about, let's say, a question of a turnover of the company, yes. So we are today at around $450 million. We would replace this by a similar amount, with possibility to increase as the turnover of the company grows.

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Danielle Ward, JP Morgan Chase & Co, Research Division - Analyst [37]

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And on the bridge facility that will convert to a term loan, this is my last question, are you able to disclose what the coupon would be if that converts to a term loan?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [38]

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We have disclosed this in Q1, Pierre -- no? No. So we're not disclosing this.

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Operator [39]

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Our next question is from Mr. Ventsi Stoichev of Symphony Asset Management.

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Ventsi Stoichev, Symphony Asset Management - Analyst [40]

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A couple of questions. Going back to the 35%/65% comment on EBITDA. It would imply a full year EBITDA that's roughly flattish versus last year. Is that a fair assessment of kind of what you're thinking for the year?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [41]

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Now you do the math. You did the math.

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Ventsi Stoichev, Symphony Asset Management - Analyst [42]

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Right. So is that a fair way to look at it?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [43]

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Yes. I mean it's a fair approach. Yes, I'd say.

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Ventsi Stoichev, Symphony Asset Management - Analyst [44]

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Got it. And then how much of the EBITDA improvement for second half is in your hands versus market dependent?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [45]

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It's the question a little bit of the -- it's the question of resolution of problems, which we had on our hands. And as Nicolas has indicated, this is very much under control.

And then it's a question of the pipeline, maybe (multiple speakers)

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [46]

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Right. So it's a mix, right, so it's a mix between the top line and cost control. So we are definitely progressing on our cost control. We see in Ocean and Air a good procurement, the possibilities we have compared to last year, which is important. We have our cost in the U.S. on the ground in control, which is an important factor because this was a major cause of our results not being so good last year. And we see that the costs are under consolidation. I'm referring to the situation of drivers in the U.S., and we have anticipated the situation. So we expect to be in a very good position for the second part of the year in the U.S., in the ground in the U.S., which is also the peak season.

So again, Italy under control, elimination of loss-making contracts one by one, reprocurement opportunities in Ocean and then cost control in motion. So it's fairly nice, again, barring major catastrophes in the economy.

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Operator [47]

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Our next question is from Mr. Stainton, HPS.

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Chris Stainton, HPS Investment Partners, LLC - Managing Director [48]

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I just want to clarify on one of your comments you made. On Q2 '19 versus '18, you were seeing improvements. If you could just clarify on that. I mean the way I'm looking at freight, FM is down, CL is down, CEVA -- Anji-CEVA, it's flat, so I'm not quite following you.

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [49]

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So here, this is the question of, precisely, adjustment. FM and -- because we compared them to last year, but all those figures are before specific items. And so before specific items, you had -- sorry, $37 million of specific items in 2018. So when you reduce, when you deduct those specific items, then you see the truer picture.

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Chris Stainton, HPS Investment Partners, LLC - Managing Director [50]

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Okay. So these EBITDA number, I thought these were adjusted EBITDA number to start with.

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [51]

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Yes, precisely, being adjusted. They are -- adjusted EBITDA means -- and it's a concept I'm trying to do away with. But adjusted EBITDA means EBITDA before specific items and share-based compensation.

So adjusted EBITDA for the year -- for the half year is the $85 million before specific items, plus the $19 million of Anji-CEVA, $104 million. But the true EBITDA for the half year is $66 million. And so when you look at the figures of FM and CL, you come up -- those are figures before specific items.

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Chris Stainton, HPS Investment Partners, LLC - Managing Director [52]

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Okay. So do you think the unadjusted EBITDA is a better measure for the business now?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [53]

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I mean you must keep an eye on unadjusted EBITDA because it's the norm, let's say, of the industry. I know all the metrics at Anji-CEVA are based on adjusted EBITDA, which again includes -- excludes specific items and share-based compensation and adds back 50% of Anji-CEVA EBITDA. But at the end of the day, in our profit, we have the, I'd say, the unadjusted EBITDA, yes.

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Chris Stainton, HPS Investment Partners, LLC - Managing Director [54]

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Okay. Then on Italy. I understand that is -- the resolution is on the way. I just wonder if you can elaborate on that, understanding one of the contracts is being resolved, the other still not, and as far as I can recollect, it's been a year. So what is the time line, and why does it take you so long?

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [55]

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So you are right. It took a lot of time. It's -- those are major contracts with large companies, complex negotiations. Once again, the good message is that out of 2 contracts, 1 is done. And again, done means the productivity, the performance, the operational performance in the site is good, the customer is satisfied. And two, he has accepted major increases, and now is -- on that basis, he has extended the contract, which is a good signal, especially for us now that the contract is making money for us. And four, we are talking to do an extension.

So I think we have normalized the situation for 1 of the 2 contracts. And the other one, the discussions are ongoing as we speak. We also believe that we will conclude in a positive way for us. Arguably, it takes time, but at least, we end up delivering.

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Chris Stainton, HPS Investment Partners, LLC - Managing Director [56]

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Okay. I understand. And from a financial standpoint, when can we start seeing stabilization in Italy? Will be that a Q3 event, Q4, 2020?

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [57]

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Q -- we need to -- again, as you said, it took us a long time to finalize the contract, so I don't want to give promises which we cannot deliver. But clearly, we are on the right track to rectify by the last part, the quarter 4, quarter 4 of '19.

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Chris Stainton, HPS Investment Partners, LLC - Managing Director [58]

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Got you. I understand. And then you guys mentioned all these, obviously, good initiative of you guys in undertaking cost-cutting, reorganizing, et cetera, but yet, we're seeing new issues popping up, right, I think across the board now. It wasn't just Italy anymore. It's Air freight. I mean you guys have been declining faster than the market. Ocean is also seeing headwinds. So in -- you were seeing -- looking at a [2 20] EBITDA right now, and do you think you can double that in a year, 1.5 years, 2 years?

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [59]

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I mean we are, again, taking a lot of measures on the cost procurement, shared service center. We are catching up on IT efficiency. We are controlling the cost. We are reorganizing the way we operate, for instance, in Europe. So we are really addressing the cost aspect of our business very systematically.

We are also now focusing on execution, which means that we have now this one common center. Before, the company was extremely decentralized, with sometimes a lack of follow-up on the measures which we had taken. Now we are all in the same building when we take measures and we follow them, we execute. So on that aspect, I think we are -- of course, it's not -- I mean I have been in a position now of -- since the 1st of June. But it's not instant on your side, it takes just time to be in position.

And in terms of, again, top line, we have the CMA CGM support. We have a systematic, also cross-selling, between Freight Management and Contract Logistics or rather vice versa, be it from a Contract Logistics customer, to Freight Management customers. We have been hit by specific, let's say, items in Ocean and Air freight in quarter 2. So again, we look at the second part of the year as much more positive.

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Operator [60]

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Our next question is from Mr. Peter Jurik of Tresidor Investment Management.

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Peter Jurik, Tresideor Invesment Management LLP - Partner [61]

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I just have 3, hopefully, quick ones. The first one is just coming back to the loss of the Ocean contract. So if I look at your net revenue in Ocean and Air, it seems like you're more weighted towards Air but not by much. But in general, which of those 2 Freight Management divisions is more profitable? As in the loss of the contract, the contract will have an equal effect on the loss of profitability equal to the volumes you lost, or is Ocean simply less profitable than Air?

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [62]

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Well, it's not -- you cannot really compare the 2. The net revenue per ton for Air or the net revenue per TEU is not exactly the same metrics in terms of maybe with the EBITDA margin for both activities.

Serge, do you have those numbers?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [63]

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Hold on. I'll...

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [64]

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Okay. So maybe we move to -- we'll give you the number before the, of course, the end of this call. If you would, your second question was we are giving you the relative profitability of the 2 businesses...

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Peter Jurik, Tresideor Invesment Management LLP - Partner [65]

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Okay. Sure. The second question would be you mentioned that your finance charges in H2 will improve versus H1 because you had the one-off costs relating to the refinancing of the term loan and calling the bond. Could you tell us what that one-off financing charge was in H1 that won't repeat in H2, just to have an idea of what we should be modeling for H2 interest costs?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [66]

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Well, these are our usual things, the bank fees when you do a refinancing to the tune of $475 million, plus the fact that the refinancing in itself included the parts relating to the -- sorry, to the bonds, the EUR 300 million bond. So you take the fee of whatever on this, 1%, and you have your type of figure.

Then there are other things which are not cash, which is amortization of the similar fees that we have put in place in 2018. And because we have a new financing in place in 2019, we had to depreciate the one which was supposedly going to be depreciated over 7 years from 2018. And this is, overall, about a $15 million depreciation, which we have to take in one go on the first half.

As far maybe as the EBITDA is concerned, Air is marginally better in our models to the tune of about 0.5% EBITDA margin than Ocean.

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Peter Jurik, Tresideor Invesment Management LLP - Partner [67]

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Okay. And that $15 million that you mentioned in the first half, is that the total amount, and is that the cash number?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [68]

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No, no. It's not the cash number. It's -- back in 2018, we issued debt, along with the IPO. And along with the debt, we were able to depreciate the issuance cost of this debt. Plus, we did the same on the bonds. So we had about $4 million relating to the bonds and $11 million relating to the debt. All of this because we reimbursed the debt, all of this debt in the first half of 2019. The depreciation relating to '18 had to be taken upfront.

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Peter Jurik, Tresideor Invesment Management LLP - Partner [69]

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Okay. So what would be the actual one-off cash number? I mean the fees and everything. So...

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [70]

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There is a new cash number, which is a similar magnitude, you could say, which is replacing the one paid in 2018. And this one, new one, is being depreciated until 2025 again.

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Peter Jurik, Tresideor Invesment Management LLP - Partner [71]

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Okay. Sorry, maybe I'm not being clear. I guess I'm confused then in the sense that you're guiding to better free cash flow in the second half of the year. And part of that reason is lower cash interest rate or lower interest figures in the cash flow statement. And I thought part of that was due to one-off cash costs related to the refi of the term loan and the bonds. And I'm just looking for that one-off cash cost number that won't repeat from H1 into H2.

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [72]

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It's been about -- in other words, you issue debt for $475 million and EUR 300 million. Back in 2018, we -- this had a cost, an overall cost, of $15 million, which was depreciated over the length of the facility, 2025, 7 years. We do the same in 2019. Because of a change of the control costs, we had to repay all of this debt and reissue new debt, same type of cash settlement, cash payment. We have to cancel the depreciation of the one issued in 2018 and replace it by the depreciation of the one issued in 2019. So cash impact half year 2019, about $15 million, I'd say, if you want, and which won't happen in the second half of 2019.

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Peter Jurik, Tresideor Invesment Management LLP - Partner [73]

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Okay. Fine. So the $15 million is cash then?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [74]

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Yes.

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Peter Jurik, Tresideor Invesment Management LLP - Partner [75]

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Okay. And then I can follow up off-line. Sorry, I guess I'm not being clear. The last question I have is just in relation to the one-off cost of the reorganization and rebranding that you're undergoing. Obviously, you're moving people to Marseilles or perhaps hiring new people in Marseilles. You have a new brand, a new nice-looking brand. And I guess that means you're going to have to rebrand some of your vehicles, et cetera. I'm wondering what are the total costs that you will incur as part of the reorganization or rebranding, et cetera, this year, which I guess won't repeat to the same extent next year, just to have an idea.

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [76]

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We're talking limited cost here. We're not going far. There are a couple of, I'd say -- it's not like coming from a container shipping company. It's not like if you had 2.5 million containers to rebrand. It's much more limited. It's in the thousands of containers -- of trucks.

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [77]

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Yes, but we will -- and we will do it over time.

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [78]

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Yes, yes.

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [79]

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It will not be instantaneous, and we will do it over time. We will not do the exercise immediately. We will -- of course, we do it for the presentation, for the cards. We will do it when we exhaust our own stock. So we will not be spending a lot of money on that. When it comes to the relocation in Marseilles, the number, Serge, is in the region of...

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [80]

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$3 million to $4 million.

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [81]

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$3 million to $4 million. That's for the Marseilles relocation, which is including setting up the office and moving people, as you described, from various locations into the operational center in Marseilles. So that's the, let's say, the budget, which is at stake for this relocation.

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [82]

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And I would say, we're closing up offices in Baar, we're closing up offices in Holland, of course.

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Operator [83]

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The next question is from Mr. Sheharyar Malik of CQS.

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Sheharyar Malik, CQS Investment Management Limited - Hedge Fund Investment Analyst [84]

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I had a couple of clarifications and a couple of questions on the cost. And let's start with the cost savings first. In your medium-term target, I'm assuming there's a difference then that comes from potential cost savings that you're working on right now. How much of that contribute -- can you quantify that contribution?

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [85]

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So on cost savings, we have a plan where we see a progression year-by-year because some of the measures, for instance, the shared service contracts, you ramp up, so you move people year after year. So we have a plan where, initially, the annualized savings are in the range of $80 million for the first year. And then we ramp up year-on-year.

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Sheharyar Malik, CQS Investment Management Limited - Hedge Fund Investment Analyst [86]

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Okay. But then the medium-term target, the way I look at it, you're targeting a run rate of $470 million to $490 million of EBITDA. When you...

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [87]

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Just to EBITDA...

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Sheharyar Malik, CQS Investment Management Limited - Hedge Fund Investment Analyst [88]

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How did you get to that? Yes, at EBITDA. Once you ultimately get to that, how much of that -- how much contribution is coming from cost savings? I know it will be $80 million at the start, but by the time you fully ramp up, how much of the savings would you have realized?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [89]

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There is a factor in that going to $260 million, let's say, which is a function of the increase in the turnover. Basically, for instance, we have the addition of the -- of CC Log EBITDA in our plan, and this is, we anticipate, $20 million EBITDA per year.

Then there is the addition of the turnover itself because there is growth on the market. So overall growth of volumes of -- and of market is about $80 million, and the rest is a cost saving relating to the fact that we have synergies with CMA. We have synergies between CC Log and CEVA, and we have more buying power because of the combined CEVA and CC Log and also more buying power with CMA CGM on certain, let's say, purchase.

On the other side, as Nicolas has indicated, why is this cost many? We come from -- we know that in companies like CMA CGM, the shared service center are very widely used. It is not the case at all in CEVA. And there is a plan here to use them more for a REIT. This brings a quite significant cost saving in the -- on the cost base.

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [90]

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Just service center only, we are probably improving as we speak now because in our shared service center in Manila, there's 60 people. And we have a plan by 2021 to reach 1,600. We have already identified the position. So -- and again, we will ramp up 1,600 positions by 2021. And for instance, we are looking at an annualized impact for the shared service center only of USD 35 million. So we have a combination like that of cost-saving measures that we are deploying gradually.

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Sheharyar Malik, CQS Investment Management Limited - Hedge Fund Investment Analyst [91]

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Okay. And in terms of the cash flow position for H1, it was better than H1 last year, and $54 million of that delta was from working capital. How much of that is expected to be reversed in Q3?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [92]

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No. I mean we're working here on, let's say, improving the working capital situation and stabilizing that working capital situation. So again, we have -- but this will come, I hope, this will come from EBITDA itself, the improvement, whereby we would -- and again, I've said it, Q2, we are operating cash flow positive to the tune of $18 million. We want to increase. We are on track to increase EBITDA on Q3 and Q4. And we should see improvement, let's say, on the basis of operating cash flow itself.

And of course, the part, the financing part, is that the finance expense are pretty much reduced. And will stay pretty much reduced for the second half of the year.

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Sheharyar Malik, CQS Investment Management Limited - Hedge Fund Investment Analyst [93]

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Okay. And just a follow-up on the earlier question on financing costs. Can you give us the number for financing costs in H2?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [94]

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You mean what's per percentage or amount?

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Sheharyar Malik, CQS Investment Management Limited - Hedge Fund Investment Analyst [95]

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Rough amount.

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [96]

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But there is a debt of $1.4 million. You can imagine. I mean, we'd say to give you a comparable figure, we have more than half of the expenses of 2018.

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Sheharyar Malik, CQS Investment Management Limited - Hedge Fund Investment Analyst [97]

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Got it. And then, finally, just on the RCF. You mentioned that 2 bank facilities were canceled, but then one was replaced. So what is the availability of the RCF now? If I understand correctly, you said from $585 million, it's down by $75 million. So it should be $510 million right now. Is that right?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [98]

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Yes, indeed.

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Operator [99]

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Our next question is from Ms. Areti Loizou of Boundary Creek Advisors.

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Areti Loizuo, Boundary Creek Advisors - Analyst [100]

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Can I just check? Have you guys given the impact from the Italian contracts for Q3 and Q4 of last year? Is there a number that you can give us in terms of what the EBITDA impact was?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [101]

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We have not shown -- I mean we have shown the impact. If you -- we have shown the impact last year, which was, I think, $42 million. $42 million because we have taken provisions. You know that we have taken a provision last year of about $30 million. We have added another $10 million in Q1. We have added another in Q1 2019. And we have released a little bit in Q2 2019, considering the situation which Nicolas has described.

But overall, the Italy situation, you may remember, was very much also impacted by the premium contracts where -- which happened end of Q2 2018, where we had to increase cost of labor after the bankruptcy of this premium cooperative. And this is filtering through half. So half year to half year, we bear the cost of this additional workforce, which is to the tune of about $1.5 million per month. But this was already, let's say, in place as soon as Q3 2018.

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Areti Loizuo, Boundary Creek Advisors - Analyst [102]

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And does that now stop from -- so far, for the third quarter of '19, you don't have any extra? No?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [103]

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No. No, the workforce knew -- let's say, the salary base is a fact. So we must -- this is why we're increasing contract terms, as Nicolas has described, with the people in the...

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [104]

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Publishing sector.

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [105]

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Publishing sector. But it's, I'd say, something which is now in the market for everyone too in Italy. So this is a sort of a new data. A new data from last summer, it's already -- it's been there since July, I think, 2018.

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Areti Loizuo, Boundary Creek Advisors - Analyst [106]

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Okay. And the second Italian contract that you're working on sorting out, what's the timing of that? Before the end of the year?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [107]

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Yes.

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Areti Loizuo, Boundary Creek Advisors - Analyst [108]

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Okay. And then on the securitization, I think Danielle asked the question before. Again, what's the timing for completing that refi? What are you aiming for?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [109]

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In terms of timing?

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Areti Loizuo, Boundary Creek Advisors - Analyst [110]

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Yes.

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [111]

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Yes. I mean we're -- I'd say, we are practically done, but there is no major hurry on that one, I must say, because the current securitization is valid until mid-2020. So we're working on it. I think we have agreements from most of the banks. And it should be possibly Q3 2019.

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Areti Loizuo, Boundary Creek Advisors - Analyst [112]

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Okay. Okay. And then, I mean, related to the previous questions about the 2021 guidance, the increase that you're actually now giving on your adjusted EBITDA, so it's about $100 million uplift that you guys did. Can you give me a bridge in terms of what are the elements that are going in there that are -- that led to the uplift?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [113]

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Well, we had provided an uplift in the Q1 or in the various presentation we did. And 2019 is -- well, from recollection, I mean, we had a $13 million, let's say, $13 million synergies with CC Logs, $30 million synergy with CMA, $20 million EBITDA relating to CC Log. We had then improvement of margin on CEVA itself, going from the current margin, EBITDA margin, which is 1.9%, to something like 4.5% to 5% EBITDA margin, which, as you know, would only put us back in the middle of the pack. We wouldn't be an outstanding company with that, so we think it's a reasonable target.

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Areti Loizuo, Boundary Creek Advisors - Analyst [114]

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Okay. And then just to double-check what you were saying before about adjusted versus unadjusted EBITDA. So this guidance that you're giving, is this with adjustments? Or do you expect it to be kind of like the same by 2021? Like you don't expect to have any more specific items to add back?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [115]

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No, but the -- yes, I mean, we will try and reduce it as much as possible and to come back to standard EBITDA as much as possible. But the figure we are quoting on $470 million, $490 million is adjusted EBITDA, so far, as it includes a valuation of Anji-CEVA EBITDA to the tune of about $60 million.

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Operator [116]

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Our next question is from Mr. [Jung Lee], The Carlyle Group.

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Unidentified Analyst [117]

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I just wanted to clarify. On the Italian contract that was renegotiated, are you saying that it's now profitable? Or is it just less negative? And are you releasing any provisions as a result of the new terms?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [118]

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We are releasing a little bit of provisions. And with the one -- on one of the contracts, we have a deal. And as Nicolas has explained, we're discussing on the longer term now, possibly even very long term. That's where we stand. And on the second contract, it's a discussion happening now.

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [119]

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So we have normalized the situation, both in terms of productivity, in terms of margin and in terms of relation with the customers. So it's a complete turnaround for one customer. And now we are working hard on delivering the same outcome for the second customer.

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Unidentified Analyst [120]

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Okay. So the first, just to be clear, so that now -- I understand the operational part is perfect and it's -- the customer is happy with it, but the profitability for that contract under the new terms, it's now at least breakeven to profitable. Is that correct?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [121]

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Yes, correct.

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Unidentified Analyst [122]

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Okay. Okay. And then what's the amount of provisions you're releasing?

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [123]

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Amount of provision...

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [124]

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2-point-something million...

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [125]

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For the first half...

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [126]

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For the first half, yes.

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Unidentified Analyst [127]

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Okay. And what would that be for the second half? What was -- did you just annualize that, is that the way...

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [128]

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Sorry?

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Unidentified Analyst [129]

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So the provision you released for the first half is $2.2 million. So for the second half, under the new terms, should you be releasing $4 million or $5 million? Is that the right way to think about it?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [130]

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We see -- we want to be on the prudent side. We'll see how it comes and how the provision -- situation evolves. The overall provision we still have in our accounts is around $31 million for all those Italian contracts.

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Unidentified Analyst [131]

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Okay. Great. And then my second question was sort of along the lines of the margin improvement. So should we be thinking of it as some sort of sequential improvement over the next few quarters? Or is it going to be quarter or specific year related, so back-end loaded, where we see sort of the increase to the $470 million to $480 million by 2021?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [132]

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No, it should be a linear improvement quarter-by-quarter until we reach the targets that we have indicated of close to 5% EBITDA margin by 2021.

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Unidentified Analyst [133]

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Okay. And then the -- your improvement, that's on an adjusted EBITDA basis. So you're giving yourself the benefit of some of these things that you are going to save, but you haven't realized from a cash EBITDA basis. Is that right?

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [134]

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No, I mean, we -- again, we want and as much as possible bar the question of Anji-CEVA addition to adjusted EBITDA. We want EBITDA before specific items and share-based compensation. By the way, there is no more share-based compensation. We want EBITDA to be as, I'd say, natural as possible. So adjusted EBITDA should only be EBITDA plus Anji-CEVA, 50% Anji-CEVA EBITDA.

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [135]

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Okay. So we'll take one last question, if any, and then we'll close the call.

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Operator [136]

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And the final question is from the line of Mr. Adey Delbridge of Onex Credit.

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Adey Delbridge, Onex Credit Partners, LLC - Research Analyst [137]

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Just 2 questions or -- yes, 2 questions, 1 related to your contract losses. So you lost in your Contract Logistics business the supply chain contract. Was there a particular reason for that? And then just confirming on the Ocean contract, that was not related to the new relationship between CMA CGM. And I just have one follow-up.

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Nicolas Sartini, CEVA Logistics AG - CEO & Member of Executive Board [138]

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Yes, starting with the second question, the loss of the contract we are referring to is purely on the basis of a tender. So this is obviously the practice both in Contract Logistics and Freight Management. And there is a regular tender annually for Freight Management every 2 or 3 years for Contract Logistics. So in Ocean, this is not related whatsoever to the CMA situation, and it's purely, we lost the tender. We have not been aggressive enough in the rates the customer was looking for. And your -- the first quarter -- the first question on the Contract Logistics. The contracts that we have lost, in fact, it's big in gross revenue. It's in the U.S., but it's very low in terms of margin. So of course, we never like to lose business. But in that case, the margin was extremely low. So the impact on the net revenue is not so big. But it's also on the basis of a tender, which we, again, we -- in that case, we didn't want to be too aggressive so we lost it, and that's the situation.

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Adey Delbridge, Onex Credit Partners, LLC - Research Analyst [139]

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Okay. And then I just wanted to make sure I heard it properly. I think when you mentioned sort of the 35%/65% sort of first half/second half EBITDA sort of breakdown, is that adjusted EBITDA, EBITDA? I'm just trying to figure out which one it is.

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [140]

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Let me think. Because we still have -- no, we have -- we still have $17 million EBIT, so it would be more like adjusted EBITDA.

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Adey Delbridge, Onex Credit Partners, LLC - Research Analyst [141]

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Okay. So the $104 million, roughly is 35%. Okay.

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Serge Corbel, CEVA Logistics AG - CFO & Member of Executive Board [142]

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Yes. No, it's not, of course, pure arithmetic. It's a sort of a guidance.

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Adey Delbridge, Onex Credit Partners, LLC - Research Analyst [143]

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Okay. Fair enough. I just wanted to understand directionally. Okay.

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Pierre Bénaich, CEVA Logistics AG - SVP of IR [144]

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Thank you. So we're closing the call for today. Thank you very much, and we'll talk to you in the third quarter. Thank you. Bye-bye.