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Edited Transcript of KNIN.S earnings conference call or presentation 1-Mar-17 1:00pm GMT

Thomson Reuters StreetEvents

Full Year 2016 Kuehne und Nagel International AG Earnings Call

Zurich Jun 27, 2017 (Thomson StreetEvents) -- Edited Transcript of Kuehne und Nagel International AG earnings conference call or presentation Wednesday, March 1, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Detlef Trefzger

Kuehne + Nagel International AG - CEO, EVP Contract Logistics

* Markus Blanka-Graff

Kuehne + Nagel International AG - CFO

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Conference Call Participants

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* Mike Foeth

Bank Vontobel AG - Analyst

* Aymeric Poulain

Kepler Cheuvreux - Analyst

* Alex von Gelfman

- Analyst

* Marco Strittmatter

Zurcher Kantonalbank - Analyst

* Christopher Combe

JPMorgan - Analyst

* Neil Glynn

Credit Suisse - Analyst

* Robert Joynson

Exane BNP Paribas - Analyst

* Damian Brewer

RBC Capital Markets - Analyst

* Ken Pryce

Baader Helvea - Analyst

* Bruce Chan

Stifel Nicolaus & Company, Inc. - Analyst

* Christian Obst

Baarder Bank - Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. And welcome to the Kuehne + Nagel FY16 results analysts' call, hosted by Detlef Trefzger, CEO; and Markus Blanka-Graff.

My name is Harry, and I will be your coordinator for today's conference. (Operator Instructions).

I am now handing you over to Detlef Trefzger, to begin today's conference. Please go ahead.

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [2]

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Thanks, Harry. Good morning, good day, and good afternoon, ladies and gentlemen. Thanks for joining the analysts' conference on our full-year 2016 results.

We are in the SIX Stock Exchange in Zurich, and the room is packed with people, analysts, and colleagues of yourself. And we are happy to lead you through the final results 2016, and all the details that matter to understand our business performance better.

I'm here with Markus Blanka-Graff, our CFO. And we will lead you through the presentation and slide pack that we have distributed earlier today, via our website.

Let's get started with the highlights of 2016, and we get started in the slide pack on page 4. We set ourselves some business targets for 2016, and we are very pleased of having achieved, and partly over achieved, them.

We can show another record result with CHF270 million (sic - see slide 4, "CHF720 million") in net earnings for the year 2016. All business units contributed to that result, to that improvement, and all business units were able to considerably increase their gross profit; in total, by CHF300 million.

We saw strong volume increases, both in seafreight with 233,000 TEUs shipped; and also, in airfreight, with 54,000 tons increase in 2016.

Our overland business showed a record EBIT of CHF28 million, and a sizeable contribution to our overall success.

In contract logistics, we were able to manage 10 million square meters of warehousing space, and a strong positive EBIT margin development from 2.8% to 3.3%.

And, at this point of the presentation and analysts' conference, I would very much like all our Kuehne + Nagel colleagues and logistics experts for their outstanding performance in 2016.

Let's continue on the next slide, slide 5. Net turnover development in constant currencies shows a stable turnover, despite historic-low freight rates in the first-semester 2016.

We also show a strong increase in GP across all BUs, I said before, both in the shown -- with CHF300 million gross profit growth, and in constant currencies CHF389 million improvement; and a strong EBIT growth and improvement of 8.8% in constant currencies, all operationally achieved.

Let's go through the business units, and we continue on the highlights of seafreight on slide 6. Strong volume growth, 6.1%, especially with LCL and reefer shipments, but also in the pharma sector; confirming, clearly, our number-one position in global seafreight, and maintaining a very high conversion rate above 30%.

The details of the performance of the business unit seafreight can be seen on page 7. We see the improvement of gross profit and the foreign exchange impact here.

The EBIT improvement -- the EBIT development, with an EBIT of CHF445 million, slightly below the EBIT of previous year, mainly driven by a soft oil and gas market; and also, a maintained conversion rate, high conversion rate, industry-leading, with 31.4%.

Last year, we saw market growth, especially in the last quarter. The market growth overall has been 3%.

And we have seen certain margin pressure, especially through the historically low freight rates in the first semester that have changed and regained again, a bottom out, in the second semester.

The example that I used in our first-quarter call 2016 has been the Shanghai to [Zantosh] rates, which, at that time, were historically low with $25 per TEU shipped. End of last year, we were back to a rate, a normal rate, of $2,000 to $3,000 per 40-foot container from Shanghai to [Zantosh], so the same route has significantly changed.

Also, rate volatility has been reduced over the last-quarter 2014.

As of the second-quarter 2016 onwards, quarter by quarter, we shipped more than 1 million TEUs per quarter: in total, exceeded the 4 million TEU volumes shipped in 2016.

And we have seen Asia exports growing again, both in the market, but much more in our network, a solid growth back from China to North America and to Europe; and also, intra-Asian volumes growing double-digit.

We grow our volumes strongly, and our target remains to get market share also in 2017.

We expect, in the first couple of months in 2017, margins to remain at a lower level as the carriers, firstly, drive the increase of freight rates. This stabilizes the market in a meaningful manner and will enable Kuehne + Nagel to gain further market share and achieve market-leading margins again in 2017. We will come to an overall outlook at the end of our presentation.

Let's continue with the performance of airfreight, which you can see on slide 8. In airfreight, we have seen an excellent performance and another record result in 2016, a strong volume increase.

And, if may remind you, we had not seen much of market growth until September last year. The markets were flat, slightly negative, depending on the trade lanes you were looking at; but then we saw volume growth. We clearly outperformed market growth with 4.3% more tonnage shipped.

We clearly expanded our global number-two position, and we have achieved a leading conversion rate clearly above the 30%.

Airfreight, in detail, all KPIs show growth and outperformance for 2016. A stable turnover led to a 6.6% increase in gross profit, and a significant improvement in EBIT by 12.5%.

The EBIT-to-gross profit, the conversion rate, ended or resulted in 30.9%; a very high conversion rate in airfreight.

The gross profit per 100 kilogram increased slightly over the course of last year by 74% (sic - see slide 9, "CHF74"). This is the result of our innovative industry-specific airfreight solutions which we deployed, and which drove our volume growth in 2016.

We have seen strong export business in all markets, Asia, Europe, and North America; and especially an intra-Asia growth, also in airfreight, which was double-digit.

In the last-quarter 2016, and you've seen this on the left side of that slide deck, we have seen a volume growth of [10.4%] as the market, the export market in general, have started to pick up again.

Let's continue with page 10, and the overland business unit. A strong net turnover increase of 11.9%, which is outstanding, because we have gained, clearly, market share; but more important, an operational performance that significantly improved and showed a record result for overland for 2016.

On slide 11, the details of the business unit show growth in net turnover and gross profit; and also in EBIT. And the operational improvement in EBIT leads to a 10% increase, because we had some anti-trust funds for France that we had to pay in 2015 that were amounting to CHF11 million in the figures that we have presented for end of 2015. So, operational improvement, clearly, by CHF10 million.

The growth is driven by both trade lanes and cross-border international lanes in Europe, as well as in North America. Especially, Germany and France picked up in Europe second-semester 2016, and the full integration of ReTrans, which leads to an offering of KN domestic transportation offering for all Kuehne + Nagel customers in North America.

The overland business unit is an integral part of our KN's industry solution, of the industry solution, especially for pharma and other products that we deploy; and our driving digitalization, both inbound and outbound, so sourcing of carriers, carrier rates, and carrier capacity, with a platform like Transporeon; and addressing new markets and market niches with KN FreightNet in our overland business unit very well.

We continue with slide 12, the contract logistics business unit. And here, it remains to address that the strategy, clearly, proves to be successful. The strategy of focusing on solutions, on scalable solutions, industry solutions, integrated partly with our network solutions, we were able to increase the square meterage, managed and operated, by 10 million; and we saw a strong EBIT growth of 23.5%.

The details of the contract logistics business unit, which we show on slide 13, shows that we gained market share with a growth of 5.7% in net turnover; a strong improvement in gross profit and EBIT; but, more important, that we have sold and efficiently deployed pharma solutions and other solutions in the eCommerce sector to our customer base.

50% of the 100 new projects that we have successfully implemented in 2016 were outside of Europe. Some of them were scaled solutions. But more important is that the implementation went flawless. It's not about winning customers; it's about making the customer's business more successful. And here, contract logistics set another benchmark in our industry.

And that all results into a strong EBI- to-net turnover margin of 3.3%, which is an improvement of 0.5% versus previous year.

Thank you very much for following the details on the business units. And I'm pleased to hand over to Markus Blanka-Graff, our CFO, to lead you through the detail of financial figures.

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Markus Blanka-Graff, Kuehne + Nagel International AG - CFO [3]

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Thank you, Detlef. Welcome, also from my side, ladies and gentlemen.

Everybody who knows me knows that, that slide, page number 15, is probably the one that I like most, because it has so many insights into how the business works and how the quality of the Company is displayed on the income statement.

I think I have two messages, and one reminder, on that slide. The two messages are on the right-hand bottom corner: leverage continues, and all business units contribute.

All business units contribute, why becomes that more important? I think we have been, over the last two years, explaining that our business is an integrated logistics business. Of course, we manage business units operationally, according to their own KPIs, but the overall service is an integrated logistics service.

That is important to reach our target, the above 5% EBIT in relation to turnover, so that we sustainably can expand that number.

You will say, and I said it already last time, well, the target you reach, like every quarter, easily. Let's not forget every move by 0.1% or 0.2% means a couple of millions more every month.

So you will say we have increased our EBITA line by 60 -- or, sorry, our EBIT line by CHF68 million; that means more than CHF5 million more every month that we deliver.

Where does that come from? And that is where the leverage is: my second message.

When you look at that slide, which is basic, which I admit, on the gross profit improvement, it's a -- right beside the right of the blue box in the middle, which is an increase of CHF299 million. This is the increase in our gross profit.

How much does that increase in gross profit really delivers at the bottom line? And whatever bottom line you want to choose, it's somewhere between 18% and 23% of that incremental gross profits that the Company has managed to achieve in the year 2016. So the leverage of running an operation which is efficient is every incremental business that comes in has a high return.

These are the two messages on that slide.

The reminder is when you look at the currency translation impact we sometimes intend to forget that there was Brexit. Because we all wait what's going to happen, actually. But on the translation impact, you will see British pound has a devaluation of 9%.

Why is that important? We are, from all business units, most exposed in contract logistics into the British pound. So you will see, and you have seen, on the presentation, towards the contract logistics, that the exchange rate impact in contract logistics is the biggest.

A new slide. And I promise I'm not going to put any new slides any more in the future. This is a slide that I think is important for a year-end presentation. Certainly not for a quarterly but for a year-end presentation, with some explanations on an EBIT reconciliation.

I think most of you have seen the quarterly Q4 results, and might have seen some extraordinary impact or one-off impact through the real estate so, hence, I thought it would be helpful to give you some guidance of what happened.

And I'm starting on the EBIT 2016 as reported. And you will see there is an impact of CHF34 million in the P&L, positive, of net profit on sale of real estate.

Just to explain that, we do pursue, for many years a very clear real estate strategy: that we run an asset-light business model. And wherever we need to expand, or we need to move from areas in the real estate to larger or better-located facilities that we have owned, either acquired or through historic reason, we actually sell those.

That has an impact of net CHF34 million, against which we have provided for three onerous contract locations; that means locations in contract logistics, where we structurally expect a loss in the year 2017 for about CHF13 million.

The foreign exchange impact, as I just explained on the previous slide, is CHF6 million, mainly driven on the British pound; and this, again, in contract logistics.

Putting everything together, call it the adjustments, and, I promise, I'm not going to use that word any more, are adding up to around CHF50 million that are 95% attributable to the contract logistics area.

So I'm pre-empting some of the questions I think you would have had on the fourth-quarter 2016.

Overall, 7% growth on an operational basis means CHF60 million growth, means CHF5 million every month, if that would be that easy.

Financial overview, I quickly spoke about the gross profit already, and the EBIT; again, CHF300 million, or CHF299 million, more gross profit, CHF68 million more EBIT.

Very dynamic income statement. It's a lot of movement in there. We can maybe later talk about the turnover development, or things like these. But I'm confident that, especially on the turnover, you all understand that it's mainly driven through rate, rather than anything else, in sea and airfreight.

What is that based on? The lower part of that slides shows clearly the stability on the balance sheet. We have a total balance sheet value of around CHF6.3 billion, and an equity ratio of around 42%.

Solid cash flow of around CHF1 billion, with a year-end position on cash and cash equivalents of around CHF820 million, CHF830 million. That is a high cash position.

I remind you, dividend payment is in May. So we are not expecting, and we are not saying, CHF800 million is our base of cash that we want to keep on the balance sheet. I'm very explicit on this. If you want to know this numbers, that's probably the half-year balance sheet you should look at, and you will probably find around CHF300 million, CHF400 million mark.

Dividend. Based on what I just said, and our intention to have a progressive dividend policy, we are proposing, obviously, a dividend of CHF5.50 million to the Annual General Meeting. That means we increase our dividend by 10% compared to last year.

Technically correct, the dividend 2016 paid out in 2017 is 10% higher than the dividend 2015 paid out in 2016.

Balance sheet, as every year, no change.

And I have read the first reactions in the news today on our results. And one of the journalists had made with a, I think, slight ironic undertone: he said, Kuehne + Nagel is extremely boring, which I think, for the balance sheet, is correct.

We have still our biggest item on the balance sheet, trade receivables, CHF2.6 billion.

We've run an insured sales ledger, 60% are insured; 30-ish-% are what we call blue chip investment-grade customers; and the remainder, we have secured with operational securitization, be it cash against document, or similar operational securitization matters.

Cash flow, very healthy. Maybe a couple of highlights to that. CHF1 billion operational cash flow: you see here the changes in working capital in 2016 are [neglectable] CHF2 million. So we are keeping our required working capital at the same level of 2015.

If you like, you could say, when you look at the variants, we are putting CHF17 million more into the operation to actually generate an increase in net profit after tax of CHF41 million.

Income taxes paid, you know, as well as I do, that's not necessarily in our power to decide when to pay taxes. So has nothing to do with the tax line in the P&L; it's just when the tax authorities show up they want to have their money.

That leaves us with cash flow from operating activities that is at CHF850 million.

Cash flow from investing activities, last year, 2015, we had the acquisition of ReTrans, which was boosting that position to CHF400 million.

Cash flow from financing activities, this is predominantly dividends, dividend payout. Out of the CHF670 million you see in 2016, CHF599 million, so CHF600 million, are out of dividend payment: CHF5 times 120 million shares.

Working capital development, I think, I know, that my team, the operation, and myself, we are proud that the net working capital remains at a nearly identical level of around CHF600 million. So we need net working capital of around CHF600 million to run the CHF20 billion business.

That means the working capital intensity sits at 3.1%, driven through two main drivers: DSO, so the time when our customers pay us, around 45 days with a lot of pressure that customers put on us for extended terms, and DPOs that have been extended by five days, so we pay our suppliers in our books around five days later.

Major driver for that are supplier finance solutions. We are partnering up with a very innovative international American bank that is helping us on the supplier finance solution to be very successful in its execution.

You take all that together, return on capital employed, whatever it's worth, it's one of the KPIs that we all look at, around 70%.

I don't stop saying that with the current setup of the balance sheet, the structure of the business, the mix of the business in the business units, and the geographical mix, that is the level if would expect this business to run.

With that, I would hand back to Detlef for the key drivers of our success.

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [4]

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Thanks, Markus. Selling complex end-to-end supply chain solutions and implementing them flawlessly, driving volumes up and gaining market share, a strong EBIT improvement, a solid balance sheet, as well as a well-managed working capital, were some of the ingredients that led to another record result in 2016.

What is our outlook for 2017? Our success is based on the agility of the organization through flexible structures, finding the right markets to grow with, the right customers to expand with, and to do integrated service for.

Our ambition is to deliver solutions, complex solutions, and the operational excellence, not only implementing them, but running them days and nights without any interruptions on behalf of our customers. The focus on efficiency and cost control, which continues to be part of our success and leads to the leverage effects that we have described before.

And innovation, by creating new customer solutions, new customer values, and [entering] new markets.

All this will lead to, 2017, our ambition is to increase market share through strong volume growth, and to improve our EBIT further in 2017.

And having said so, we will close the presentation for now, and we will start with questions and answers.

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Questions and Answers

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [1]

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And for those in the analysts' conference call, somewhere remote, we will start with the ladies and gentlemen here in the room, in Zurich; and then, we'll expand the Q&A to those abroad. Thank you very much. And the room is open for questions.

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Mike Foeth, Bank Vontobel AG - Analyst [2]

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Mike Foeth, Bank Vontobel. Just one question. You mentioned, in the press release, that you expect to accelerate growth also through acquisitions. I was wondering if that's a change in the strategy, if you're accelerating your growth, if you become a more active consolidator in the market. What do you mean by that phrase? Thank you.

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [3]

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We have shown that acquisition is part of our growth strategy with the takeover of the ReTrans intermodal and truck brokerage business in the US. And in order to gain footprint, or to get solutions on board faster, we will continue to pursue M&A.

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Mike Foeth, Bank Vontobel AG - Analyst [4]

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So same sort of strategy as in the past?

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [5]

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Yes.

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Mike Foeth, Bank Vontobel AG - Analyst [6]

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Okay. Thank you.

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [7]

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Other questions here in the room?

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Aymeric Poulain, Kepler Cheuvreux - Analyst [8]

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Aymeric Poulain, Kepler. The gross profit per TEU pressure you have suffered from in the second half, what's the outlook for 2017? Do you expect that to be recovered now that the rates have stabilized?

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [9]

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We believe that it will stay on that level for the next couple of months, so stabilizing would be the right word, and then will develop further and grow again at the second semester this year.

But to be seen, therefore, we drive volume growth in order to participate from a stabilizing, and, hopefully, increasing, margin in the second-semester 2017.

Other questions, here in the room?

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Aymeric Poulain, Kepler Cheuvreux - Analyst [10]

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Just one more. You explained the dynamics of your net working capital and the increase in DPOs to offset the pressure. My question is how long do you think can you sustain or offset that pressure from DSOs? Or is there a risk that at one point your customers become stronger than you come versus your suppliers?

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Markus Blanka-Graff, Kuehne + Nagel International AG - CFO [11]

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Well, I think it's active choice of customers, as well as suppliers. And I think on the DPO side, the financial instruments that we are deploying currently, they are not entirely used yet. I rather think that, for foreseeable future, we will be able to drive that development at a similar pace than what we do right now.

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Unidentified Audience Member [12]

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What do you expect from the latest information from the Trump politician situation [with protectionism]? Do you have an expectation how that could get an impact on earnings when taxes will be increased, or new taxes will be implemented?

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [13]

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It's all about consumption. And wherever the source of the consumer comes from we could, or can, participate because we have a strong domestic product in the US as well. So that we'll have.

But I think there is a lot of speculation in the market. At the moment, we see consumer confidence increasing all over, and have not seen any signaling of a market stagnation, or other.

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Unidentified Audience Member [14]

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(inaudible) in the market, in the competitive environment, you are number-one in seafreight, how are the two other ones doing? And the same question, the airfreight, are you catching more and more up? You've told us you gained market share, but maybe we would like a little bit more insight.

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [15]

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Thanks for this question. We will not comment on our competitors. You have to ask the competitors how they see their market and their development.

We concentrate on our customers and deploying complex solutions, and that also answers your second question. We don't sell pure transport. In all our business units, we are engaged with customers in an end-to-end supply chain, in complex solutions.

Take airfreight, for example, they are market-leading in pharma, in pharma transportation. We have won a major account with GSK, one of the few customers we can mention, doing the whole transport globally, organizing via a control tower all flows for GSK in the pharma sector. And those solutions help us to drive margins up and to increase our footprint with customers.

The other example would be perishable and reefer. Both are segments we are strong in; we see growth in these markets. And we have stations around the globe and a network established that helps to drive volume growth.

So with a focused approach on industries or industries and solutions within those industries, we are very confident to drive volume growth. And you have seen that this was possible also in 2016. In the flat airfreight market, as I mentioned before, we were able to grow with more than 4.3%; and in a market of maybe 3% growth in seafreight, we were able to grow volumes double the size of the market growth.

Does this answer your question? Okay, thanks.

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Unidentified Audience Member [16]

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And again, with this [engine] problems, and you told us this will now stabilize, the freight situation, next quarters and then it will get better. That's your outlook then for the (multiple speakers)?

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [17]

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We will see. Our topic in the market has been rate volatility, erratic rate volatility. Whatever rates are more stable or longer in the market will help to stabilize and improve the market conditions, and this is what we expect in the next couple of months to happen.

And this is supported by strong export growth at the moment. Fourth quarter, as you saw, showed in the markets, all over the globe, stronger consumer confidence and export volumes. Both together will help to stabilize a sluggish seafreight market.

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Unidentified Audience Member [18]

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And this airfreight growth in Q4, was it up a little bit, the substitution of (inaudible), because of the problems in the seafreight?

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [19]

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No, I don't think -- I think that is an independent topic. The airfreight market growth in Q4, and it started in September, and we commented on that in our Q3 analysts' call last year, was induced by growing exports out of China again.

And you know that we have discussed missing exports, or lower exports out of China one year ago, or 15 months ago, and this has clearly changed in Q4, or the last three, four months in 2016. That helped a lot to show market growth.

And again, this is not market growth, this is our volume growth. The solutions that we are -- that we were able to position with our customers and implemented flawlessly, helped also to pick up the volumes.

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Alex von Gelfman, - Analyst [20]

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[Alex von Gelfman]. Looking at contract logistics, at first glance, performance looks amazing. Then, you mention, on slide 16, this sale of real estate, CHF34 million. I don't see that on the slide of contract logistics. Where is it booked? Is it booked above the EBIT line?

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Markus Blanka-Graff, Kuehne + Nagel International AG - CFO [21]

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Yes.

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [22]

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Above the EBIT line. But you also see a booking of onerous contracts on slide 16, and that is also offsetting the one-time effects of real estate. We have also revaluated real estate in 2016.

So the result improvement that you see in contract logistics, and that is what Markus has explained before, it's an operational improvement.

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Alex von Gelfman, - Analyst [23]

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Okay. So the real estate impact is CHF34 million all in all, in this division?

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [24]

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The singular real estate result is CHF34 million. And the onerous contracts, and the foreign exchange and other effects are offsetting this effect. Slide 16.

More questions here in the room? One more question, and then we extend to the colleagues outside of the room.

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Marco Strittmatter, Zurcher Kantonalbank - Analyst [25]

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Marco Strittmatter, ZKB. Just, regarding the volume development, has this momentum from the Q4 now also -- yes, could you take it also in the first quarter? How is your current situation? We don't expect 10% growth in airfreight, obviously, but --

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [26]

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And we don't expect that, either. But it's too early to say, because Chinese New Year was different this year, or in a different month than last year. We will see that when we close the books for February.

But, at the moment, as I said before, there's consumer confidence in the market, and exports are running much better than a year ago. What that leads to in numbers, I can't judge, or we can't judge at the moment.

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Marco Strittmatter, Zurcher Kantonalbank - Analyst [27]

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But you would be more confident now than (multiple speakers)?

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [28]

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But it's more -- we are more confident with regards to volumes at the moment than we were one year ago, clear.

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Marco Strittmatter, Zurcher Kantonalbank - Analyst [29]

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Okay. Thanks.

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [30]

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Then, ladies and gentlemen, on your phones, we open the call for other questions.

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Operator [31]

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(Operator Instructions). Christopher Combe, JPMorgan.

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Christopher Combe, JPMorgan - Analyst [32]

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I've got a couple of questions. The first one relates to one of your largest suppliers focusing increasingly on digitization efforts, becoming more sophisticating in interacting with its clients. What, if any, measures are you taking to defend elements of your seafreight gross profit from these efforts? And how do you expect that to play out over this year and next?

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [33]

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Okay, that's your question? We are happy that digitalization is also happening with our suppliers, because that helps us to interface with suppliers, and also customers, more seamlessly.

And this trend has started not this year, or last year, it's an ongoing trend that we have seen in the past four, five years. And we can only encourage all suppliers to go on platforms and to interface with us and other players, seamlessly, via our platform.

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Christopher Combe, JPMorgan - Analyst [34]

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Okay. And just to follow up, how do you assess the risks of potentially losing, or the [liners] reclaiming, perhaps, some of the value chain as a result of those efforts?

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [35]

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We don't assess this risk to be high. As I said before, we have solutions. We don't just sell a port to port, or airport to airport transport, we sell solutions.

We are integrated in the value chain, in the business of our customers. And it's a very complex integration. Whatever touchpoints we can automate further will help to drive productivity and efficiency in the supply chain. But we don't think that there is a risk of being -- of losing part of that supply chain.

We take over the responsibility of providing goods on time, in full, undamaged, from one location, into production or into merchandise of our customers.

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Christopher Combe, JPMorgan - Analyst [36]

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That's clear. Thank you. And one last question on logistics. Can you comment a bit on the impact of start-up costs quarter by quarter, and the extent to which they may have impacted the underlying fourth-quarter result versus, let's say, the first half, or the third quarter? Thank you.

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Markus Blanka-Graff, Kuehne + Nagel International AG - CFO [37]

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Chris, start-up costs in contract logistics, as you know from -- they are always there.

We are implementing 100 new projects a year for customers. For internal purposes, of course, we know what are the start-up costs; but from year-to-year development, there is nothing significant that changes on the start-up costs. You see that, when you look at how much additional business we put into contract logistics, we are very successful at doing that.

So, I have to tell you, if you want the number of start-up costs 2016 versus 2015, not relevant.

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Christopher Combe, JPMorgan - Analyst [38]

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That's clear. Thank you.

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [39]

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And there are different models in the market how to recover from those start-up costs: many of them are directly recovered after flawless implementation.

Also important to know is that, out of those 100 new customer projects that we have implemented, 50% of them were outside of Europe, and majority of them have been [scale] solutions. So we have a certain efficiency in starting up and ramping up projects like for the same or for similar customers.

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Christopher Combe, JPMorgan - Analyst [40]

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Thank you.

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Operator [41]

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Neil Glynn, Credit Suisse.

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Neil Glynn, Credit Suisse - Analyst [42]

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First question, just on headcount, it was up about 7% in average, in FTE terms, through 2016 and I was wondering as to whether you could give us any color as to how that looked by division?

The reason for the question is with seafreight volume growth of 6%, and airfreight volume growth of around 5%, I had thought, generally, the business should be able to absorb about 5% volume growth annually without adding much headcount, so just looking to bridge the gap there.

Then, the second question, just going forward, if it were possible to give us some kind of color on overland amortization charges in FY17 and onward, because I think we maybe should be expecting a drop down in amortization imminently. Thank you.

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [43]

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Neil, let me answer the headcount question. We are having -- we have grown our contract logistics business significantly, so 95% of the headcount improvement, or increase, has been -- or is attributable to the contract logistics business. This also caused by many implementations. We always have [over-headcounted] our implementation in order to secure a safe and fast and smooth KPI-oriented ramp up.

The leverage effect that you have spoken about in sea and airfreight remains. Our volume growth also in Q4, both in seafreight and airfreight, airfreight was 10.5% and seafreight with 9%, this volume growth were more or less managed by a similar amount of people.

The overland amortization charge?

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Markus Blanka-Graff, Kuehne + Nagel International AG - CFO [44]

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Your second question, Neil, on the overland, I would love to confirm that the amortization is going to be reduced significantly in 2017. I do not see that because, obviously, the amortization of intangibles that are pertaining to ReTrans are still active; we only bought in 2015, and some of the others that are over time, obviously, falling off.

There is going to be a drop in 2018 going forward, but 2017 will be very similar to 2016.

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Neil Glynn, Credit Suisse - Analyst [45]

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Understood. Many thanks.

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Operator [46]

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Robert Joynson, Exane.

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Robert Joynson, Exane BNP Paribas - Analyst [47]

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Three questions from me, if I may. First of all, on airfreight, where the conversion ratio was over 30% for the first time last year, could you provide some color on how we should think about that metric going forward? In particular, with respect to how much upside remains on what is already a very good number. That's the first question.

Second question on seafreight, just looking at the gross profit per TEU, I appreciate that you expect an improvement during the second half of this year, as you mentioned before, but would it be reasonable to assume that the gross profit per TEU for 2017, as a whole, will be lower than 2016? Or is it just too early to say?

Then, final question on the dividend, with the payout ratio now at 92%, or so, how should we think about the payout ratio going forward?

And a similar question on special dividends. With most of the free cash flow now being paid out via the ordinary dividend, how should we think about special dividends going forward? Thank you.

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [48]

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Sure, Robert, let me answer the question. On the airfreight conversion rate, our guidance is clear: we will achieve a conversion rate above 30%. That is our ambition; that is our target. How high we will end the year 2017, we will discuss in one year from now. But our guidance is clear, above 30%.

We have achieved that in the last three years. We came from 25% and below, and we are proud, and the whole airfreight team can be proud, for having achieved a conversion rate clearly above 30%.

The GP per TEU guidance, also I mentioned that before. Versus Q4, we don't see a significant change, or we don't expect a significant change in the first-semester 2017. Then, we will see how exports and volume growth kick in and will drive both margin and the absolute EBIT development.

Too early to say what the outcome will be. But we believe that we have seen the bottom of the market during the second-semester 2016, and [currently].

On special dividend, I hand over to Markus.

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Markus Blanka-Graff, Kuehne + Nagel International AG - CFO [49]

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On dividend policy, I think, yes, indeed, we are currently, over the last two years, between 89%, so around the 90% mark. I think what is important is, and I mentioned it, there is a progression in dividends year over year on ordinary dividends.

We do keep, as you know, a certain liquidity available. When you look at the half-year balance sheet you would probably see that amount being the relevant number. But what is important is that we are committed to grow the business, and we are accelerating, we are intending to accelerate the growth of the business. However, the dividend policy, on its ordinary dividend, I think, is still, as I said, a progressive one.

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Robert Joynson, Exane BNP Paribas - Analyst [50]

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And could you just comment about the special dividends going forward? I guess, most of the free cash flow now is now being paid out by the ordinary dividends, so would it be fair to conclude that you'll still do some special dividends, but with less frequency than in the past?

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Markus Blanka-Graff, Kuehne + Nagel International AG - CFO [51]

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I think the headroom for special dividend and the opportunity to put liquidity into the business development is a concurring interest.

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Robert Joynson, Exane BNP Paribas - Analyst [52]

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Okay. Thank you.

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Operator [53]

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Damian Brewer, Royal Bank of Canada.

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Damian Brewer, RBC Capital Markets - Analyst [54]

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Two questions, please. First of all, just coming back to the Q4 developments with ocean volumes up 8% year on year, unusually up Q4 on Q3 as well by almost 1%, but the GP per TEU down about 10%, could you elaborate a little bit more, i.e., pull apart, were there any certain trades or products, beyond what you said about LCL and reefers, which did better or worse than average? And what the reasons behind that were? And, therefore, to allow us to think about what happens in 2017.

The second question on contract logistics, notably, the EBIT margin is rising there. But also, it's notable that the CapEx-to-revenue ratio fell from 0.8% to 0.7%, so it appears you're doing slightly better margins with a little less capital intensity. Again, could you talk a little bit more about what lies behind that?

Has there been a shift in the type of contract you're writing there? Or is this just merely part of the recovery from the trough you saw? Thank you.

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [55]

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Damian, let me answer both questions. Ocean volumes up in Q4, as we have stated for airfreight, in total, all markets picked up in exports. And you can't isolate a single industry or a single market. We have seen exports soaring, well, growing again, from Asia to Europe and both North America; as well as exports from Europe to North America and to Asia; and also, from North America to both Europe and Asia.

More important is that the Asian consumer confidence and the imports are also increasing, so that leads to stronger exports from Europe and North America.

We will see how this develops. But, as I said before, the consumer confidence index, OECD indices, if you look to those, and business confidence indices, are showing high marks, both for October and November 2016. Let's cross fingers that this continues.

Also, the port statistics, and I can only talk about the sea ports at the moment, show higher volumes and activity in Q4 [2014]. And that's all over the board -- all across the globe.

[See] EBIT margins, we have implemented, and started, the biggest investment ever outside of Europe, the Singapore logistics hub. That, for sure, was a major investment and led to a change in CapEx.

We are ramping up this hub. It's running well. It's a pharma hub; it's part of our pharma strategy, the solution strategy for the pharma industry. It has our [licensees] and operates, as I said before, well. So that, for sure, had an influence on the CapEx side to contract logistics in 2016.

But our strategy remains to continue with an asset-light model in all our business units.

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Damian Brewer, RBC Capital Markets - Analyst [56]

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Okay. Thank you.

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Operator [57]

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Ken Pryce, Baader Helvea.

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Ken Pryce, Baader Helvea - Analyst [58]

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A conceptual question, really, and it's with a view to understanding what room there is still for margin expansion, given your talk of record and industry-leading margins, and your commentary on leverage.

There was one line in the press release regarding your overland business, which I think helped stitch this together, and helps us understand a little bit more about excess capacity, or the room left to continue taking share of existing customer wallets. And that line reads overland activities are increasingly integrated into a business provided by other business units.

I was wondering how much of business, between overland and the rest of your other divisions, that are still being done by third parties that has yet to be done by your own existing capacity, and thereby might lead us to continued expansion in margins in overland, and, ultimately, also, the rest of the divisions that are trying to do the same thing?

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [59]

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Ken, I'm more than happy to answer this question. We have -- I have two examples for you.

With the acquisition of ReTrans, we went into the intermodal market in the US. While we were outsourcing these services in the past for our international network customers in the US to third-party intermodal providers we operate this now ourselves. The intermodal business of ReTrans runs an overland.

And the KN pharma chain solutions, that we have explained and described before, goes across all business units. So collection and distribution of pharma goods and products are organized via the pharma control tower also for overland. So overland is an integral part of our solution fulfillment in the pharma industry.

And we have other examples: luxury goods distribution, hi-tech goods distribution. Overland is a very important part in our portfolio of activities to drive end-to-end supply chain solutions, complex end-to-end supply chain solutions, for our customers.

Does this answer your question, Ken?

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Ken Pryce, Baader Helvea - Analyst [60]

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Yes. I was trying, ultimately, to get to an understanding of how much more of your -- what more share of your existing customers' wallets you have left to obtain just by squeezing out rival truckers, for example, from overland business that's being done by third parties?

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [61]

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No, it's not about squeezing out customers; it's driving a solution with standards that are Kuehne + Nagel standards, and not other's standards.

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Ken Pryce, Baader Helvea - Analyst [62]

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[I'm talking about rivals.]

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [63]

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It might be the same trucker, but it might be organized by Kuehne + Nagel overland instead of a third-party overland organization with totally different quality standards.

A percentage, I know you're trying to convert that into your model, we will not give any figures. But we see a lot of growth momentum in that area, especially in Europe and in North America.

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Ken Pryce, Baader Helvea - Analyst [64]

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Understood. Thank you very much.

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [65]

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You're welcome, Ken.

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Operator [66]

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Bruce Chan, Stifel.

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Bruce Chan, Stifel Nicolaus & Company, Inc. - Analyst [67]

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Just speaking generally on the topic of air-to-ocean substitution, I'm wondering have you seen a bottoming in this trend, given some of your expectations for increasing and stabilizing ocean rates? And is there any reason -- or, excuse me, is there any reversal of the substitution trend built into your growth outlook for airfreight?

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [68]

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The substitution trend from airfreight to seafreight is mediocre for seafreight, if I may so, with all respect to airfreight. But the volumes you can carry in a 777 freighter or a 747 freighter easily fit in three, four, five, six containers. So whatever is substituted from airfreight, it's not significant for seafreight.

But we have seen a reversal. And I think we mentioned that 1.5 years ago, we have seen a reversal. Right after the so-called financial crisis a lot of hi-tech were seafreight-oriented and didn't fly at all any more; this trend has clearly come back, that new product launches and fast replenishment of hi-tech volumes are back to airfreight.

So there is no clear trend. I would say whatever trend you might extract, it's not significant for either of the two businesses.

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Bruce Chan, Stifel Nicolaus & Company, Inc. - Analyst [69]

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Great. Thank you.

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Operator [70]

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Christian Obst, Baarder Bank.

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Christian Obst, Baarder Bank - Analyst [71]

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You have invested, between 2010 and 2014, approximately CHF180 million in property, plant and equipment; and over the last two years, approximately CHF240 million. I know you are running an asset-light business model, but what do you need for further planned organic growth going forward? Is it more in the line of CHF240 million? Can we expect something like that?

And for the consolidation going on in the entire -- [in the interior] segment, where is your main blank spot? And what do you think you might acquire going forward, in what kind of region, or what kind of segment? Thank you.

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [72]

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Christian, the consolidation in the market is ongoing for many, many years. This blank spot is not existent, but we are impatient and we want to be faster, and we want to accelerate in certain areas. So wherever we see opportunities to sell complex solutions, and we are not able to deploy those solutions ourselves seamlessly immediately, that might be guiding M&A activities.

The other question, the CapEx question, on organic growth, we have significantly increased gross profit and the volume of our activities over the last -- in the contracts since 2010, but over the last four years we have added 2.5 million square meters, 2.6 million square meters warehouse space.

And the competence of contract logistics, and the control tower activities associated to that, help also to drive end-to-end solutions in our networks. It's a complementary product. We have an integrated approach across all business units, and that is helping us to drive gross profit and volumes in all business units.

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Christian Obst, Baarder Bank - Analyst [73]

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But this also means that you have to invest, going forward, at least CHF240 million per annum?

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [74]

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No, our guidance would be it's based around CHF200 million. That would be our guidance. I look at markets here, which you can't see and --

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Markus Blanka-Graff, Kuehne + Nagel International AG - CFO [75]

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No, I think, Christian, what is important is not the ownership. It's not a matter of who owns the asset that we operate. It's always like how much more space we need to operate profitably and grow the business. So, in that sense, you have to look into CapEx and commitment, obviously. And you can see that in our financial statement, financial commitment numbers to that.

So CapEx, I think, for us, is very clear: we would only invest into locations, like Detlef has alluded to, like in Singapore, where there is a clear real estate market that has not been able to provide the space to grow our business.

In these situations, or in simple terms, if there is nothing to rent you have to build something to [cause] the business opportunity there. So in these instances, there is no way out. But our asset-light business model would, on a running base, not require more than the CHF200 million.

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Christian Obst, Baarder Bank - Analyst [76]

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Okay. And the last one on this, going forward, companies also have to activate lease commitments in 2019, I guess. Would that change your balance sheet massively? When do you like to give us an indication for that kind of development?

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Markus Blanka-Graff, Kuehne + Nagel International AG - CFO [77]

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Okay, I don't like to give you an indication. Or if you can just look at the financial statements you will see financial commitments are approximately CHF1.2 billion; our balance sheet is CHF6 billion, so big numbers. It's an extension of balance sheet. So these are the numbers that are going to influence the balance sheet.

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Christian Obst, Baarder Bank - Analyst [78]

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And you will change that with the 2018 numbers?

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Markus Blanka-Graff, Kuehne + Nagel International AG - CFO [79]

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Yes, that's right. IFRS 16 implementation, yes.

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Christian Obst, Baarder Bank - Analyst [80]

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Okay. Thank you very much.

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Operator [81]

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Christopher Combe, JPMorgan.

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Christopher Combe, JPMorgan - Analyst [82]

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Could you please remind us where we sit with the IT initiatives, and how much contribution we should see in 2017 and 2018 from those efforts in sea and airfreight?

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [83]

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First off, thanks for asking. The import modules, both in sea and airfreight, have been deployed seamlessly across the globe, in all our locations, 750, 800 sea and airfreight locations.

As mentioned in some of the previous calls, we will deploy the export modules in the next couple of years. So full deployment, as per plan, is ongoing, and will be finalized end of 2019.

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Christopher Combe, JPMorgan - Analyst [84]

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Thank you.

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Operator [85]

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Damian Brewer, Royal Bank of Canada.

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Damian Brewer, RBC Capital Markets - Analyst [86]

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Just one question, really, coming back to what Markus mentioned about the EBIT GP incremental margin and the 23% for the full year, but obviously H1 was 19%, whereas H2, despite the GP per TEU pressures, was closer to 40%. I'm just wondering, in terms of when we need to think about what the appropriate run rate for the business is, is it closer to what you did in H1, or closer to the potential of what H2 delivered?

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Markus Blanka-Graff, Kuehne + Nagel International AG - CFO [87]

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If we would face in a situation to have such a clear view on every quarter, and the stability of the result and the mechanics around it, I think we would not be in that industry.

There is, obviously, a clear view on what 2016 have delivered on the first half year and the second half year, and I think Detlef has already explained in each of the business units the different dynamics.

The first half was, especially on the network business, on the sea and airfreight business, a successful one. The second half, obviously, was successful in ramping up the contract logistics and the overland business, and the overland business very successful in the fourth quarter as well. So there is always ups and downs in each of these business units, because they have different dynamics.

So my answer is take the full-year result and you may have the best indication what's going forward.

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Damian Brewer, RBC Capital Markets - Analyst [88]

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All right. Thank you very much.

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [89]

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Our indication for the whole year is volume growth and EBIT improvement, and this is what the whole organization is striving for.

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Damian Brewer, RBC Capital Markets - Analyst [90]

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Thank you.

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Operator [91]

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We currently have no further questions in the queue, so I'll hand back to you, Detlef, to close today's conference. Thank you.

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Detlef Trefzger, Kuehne + Nagel International AG - CEO, EVP Contract Logistics [92]

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Thanks, ladies and gentlemen, for joining in. Thanks for the good discussions. And I'm sure we will continue our discussion, and will follow up on those topics, in our Q1 call, on April 20, this year. Thanks. Bye-bye.

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Operator [93]

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Thank you for joining today's conference call. You may now replace your handsets.