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Edited Transcript of PWTN.S earnings conference call or presentation 2-Mar-17 1:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Panalpina Welttransport Holding AG Earnings Call

Zurich Mar 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Panalpina Welttransport Holding AG earnings conference call or presentation Thursday, March 2, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Stefan Karlen

Panalpina Welttransport Holding AG - CEO

* Robert Erni

Panalpina Welttransport Holding AG - Group CEO

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Conference Call Participants

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* Michael Foeth

Bank Vontobel AG - Analyst

* Tobias Sittig

MainFirst - Analyst

* Mark McVicar

Barclays - Analyst

* Neil Glynn

Credit Suisse - Analyst

* Damian Brewer

Royal Bank of Canada - Analyst

* David Ross

Stifel Capital Markets - Analyst

* Stuart Todd

Lloyd's - Analyst

* Bernd Laux

Blackwall Capital - Analyst

* Aymeric Poulain

Kepler - Analyst

* Marco Strittmatter

ZKB - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good morning or good afternoon. Welcome to the Panalpina Full Year Results 2016 Conference Call and live webcast. I'm Sarah, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. After the presentation, there will be a Q&A session. (Operator Instructions) The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Stefan Karlen. Please go ahead, sir.

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Stefan Karlen, Panalpina Welttransport Holding AG - CEO [2]

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Good afternoon, everybody, and thank you for joining us today here in Zurich and also over the phone for the 2016 full-year results of Panalpina. I'm here with our Group CEO, Robert Erni, that I'm sure all of you are already familiar with. Together, we will walk you through the presentation that was sent out earlier today, along with the media release and the consolidated financial statements. Once we have gone through the presentation, we will first take questions here in Zurich and then open the line for question over the phone. So, let's get started.

2016 has not been an easy year for Panalpina and neither has it been for the industry. A lot of efforts that Panalpina has invested were in driving organic growth, while at the same time we were focusing on productivity improvements, cost reductions, and increasing the effectiveness of the organization.

Contrary to our expectation, we have faced many partially unexpected challenges in 2016. However, we have also had many positive developments as I would like to guide you through here today. First of all, let me address the challenges. Overall, the market remained soft. So, we have seen, especially in the first part of last year, a very soft market, so there was -- the rates were slow on the one side. On the other side, there was also no much growth that we have seen in the market and [neither] does have Panalpina in its volumes. We have seen a small single-digit growth basically in the market. However, in the second half, there have been a lot of changes that were unexpected and starting with a peak season -- a peak season that was the strongest since 2008 that has started earlier and anticipated but also lasted longer than we all thought. In Ocean Freight, capacities were tight, mainly triggered as a result of the Hanjin bankruptcy that we have experienced at the end of August, also something we haven't seen in the past.

As a consequence of both those incidents, the rates soared in both Air and Ocean Freight, putting strong pressure on our GP margins during the second half of 2016. Additionally, Panalpina had much lower volumes in oil and gas, something that you heard before, compared to previous years. Total negative impact of the decline in the oil and gas volumes accounted for CHF74 million, which is 5% of Panalpina's gross profit. So, a very strong headwind that we encountered here that certainly we could do without.

Nonetheless, not everything was negative, and we have some remarkable upside to report. We achieved solid volume growth in both products, in our core products, Air and Ocean Freight. First of all Air Freight; we grew by plus 10% and rest of the market grew by about 1% to 2%. Out of the 10%, 4% were organic and that shows that we have been able to grow the volume in a market where we had a limited growth. So, basically, we have outgrown the market on the organic part. Additionally, we had 6% of growth seen in the perishable sectors; basically the company Airflo acquired in 2015 and successfully integrated in 2016.

On the Ocean Freight side, yes, we have decreased. So, I said earlier, we grew the volume. So, overall on the yearly basis, we have decreased our volumes by 7%. However, the positive development the way we see is, we have been able to grow on a quarterly basis since 2016 and the volumes shipped at the end in Q4 2016 were slightly above 2015 Q4. A part of the business that we are managing realistic is the costs. So, we have well maintained, managed our costs. We have reduced our costs in line with the exposure that we have faced basically, particularly in the oil and gas parts. It is also noteworthy to mention that Panalpina has a strong cash conversion and we can probably say that has now become part of Panalpina's DNA. The cash position remained very healthy. And we have roughly about CHF390 million at the end of 2016, which is almost the same then a year before.

In summary, due to the diminishing yields, our margin and our overall profits were impacted in this very challenging year. However, we are pleased to report our positive volume development. Going forward, volume will be key to restore our profitability as we firmly believe that the margin pressure will ease as of Q2.

Moving on to slide number 5. This slide gives you an overview of the figures for 2016 in comparison to 2015, including adjusted figures for EBIT and profit. The adjusted figure excludes the one-off costs for the restructuring spend of CHF28 million. It is important for us that we highlight it and we come in the next slide where we explain the different incidents that happened and exposed our business to understand the underlying operational performance. The gross profit decreased by 3% to CHF1.425 billion. Again, it's worth mentioning that the impact of the oil and gas alone was minus 5%. The adjusted EBIT decreased by 6% to CHF110 million and the adjusted profit decreased by 9% to CHF80 million.

This slide is where probably well known to all of you and we have decided to include it one more time in this slide deck in order to explain the different incidents, which were significant, but also helps to better understand the development and the actual underlying results. It shows how the different events have impacted -- the EBIT, while the gross profit at first, the EBITDA and the EBIT compared to 2015.

First column, energy and project solutions. The oil and gas sector as a whole has been impacted by the low oil price. For Panalpina, as one of the market leaders in this industry, it had a negative gross profit impact of CHF74 million for the whole year. As pointed out during previous Analyst Call, many oil and gas projects have come to an end, they were completed either at the end of 2015 or early 2016 already. As a result of this, not only the volumes dropped, but also had fewer activities in the highly profitable marine chartering business, a well-known Panalpina competency. We have counted the negative GP development in energy solutions by reducing personnel costs of CHF39 million and other operating expenses of CHF19 million, which softened the negative impact, at the bottom line CHF15 million.

The acquired business. On the acquisition, we can see that the business was successfully acquired in 2015 and generated an incremental profit of CHF13 million in 2016. While this business came in with lower GP per kilo margin than our traditional business, it did generate a high EBIT to GP conversion. This is in line with our Board on acquisition strategy and we will see more of this as we go forward.

Organic growth. The rest of the business grew by an encouraging 2% on GP level or an equivalent to CHF28 million. Margin decrease. As you know, the market has undergone a lot of pressure in the second half of 2016 that has impacted margin increase. There are different drivers that led to this, which I will come in a minute. After stripping out energy and project solution in the acquired business, we had an impact as stated of CHF17 million. This was mainly in the Air Freight.

In summary, 2016 was a very eventful year and not only for Panalpina. Even so Panalpina has been proactive and successfully compensated its downward trend in the oil and gas business with organic growth, in other industries and managed costs well. We can conclude that during the last two to three years, while we have concentrated, our efforts on growing our business and volumes, we have also been able to improve our cost efficiency at the end of 2016. The biggest challenge was yield management. Going forward, Panalpina clearly has to further improve yield management in a continuous volatile market environment. It is important that Panlapina also regains market share, in Ocean Freight, in particular. In this context, I would like to highlight the Panalpina has recorded a positive volume development in Ocean Freight for four consecutive quarters since the beginning of 2016 and then above market volume growth in Air Freight.

Robert will now walk you through that operating and financial review with a more detailed look on the products.

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Robert Erni, Panalpina Welttransport Holding AG - Group CEO [3]

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Thank you, Stefan, and good afternoon. I will, as always, start with Air Freight on slide 8. So, as already mentioned, volumes grew by 10% compared to a market growth of 1% to 2%. The acquired perishable business have since the beginning of the year accounted for about 6% volume growth and together with 4% organic growth Panalpina was re-gaining market share. We have seen very strong volumes during the peak season, during the second half of the year, which resulted in significantly higher procurement costs that we have not been able to pass timely on to our customers.

GP per ton decreased 7.5% year-on-year in 2016 as it came down to a little below CHF650 per ton. Excluding acquisition, GP per ton would have decreased 4.3% year-on-year. It goes without saying that the impact in Q4 was much higher. Overall, GP increased 2% from CHF584 million to CHF592 million. So, if we would not have had the Q4 incident, so to speak, we would certainly have ended the year with a record result. When we look at the EBIT, you can see that's helped by a lower cost. The adjusted EBIT increased 5.6% to CHF94 million. Adjusted conversion increased slightly from 15.2% to 15.7%. So, overall kind of a robust result in Air Freight.

Ocean, little different story, unfortunately. In ocean, we saw volumes go the opposite direction when comparing 2016 to 2015. As a result of the discontinuation of managed solutions, customer and lower volume from oil and gas, volumes were in decline for the first three quarters in 2016. The trend has however been reversed in Q4 when volumes grew by about 1%, and please be in mind that that 1% is still being suffering from lower volumes from the oil and gas sector. So, excluding that effect, we would certainly have been growing in line with the market.

For the full-year 2016, volumes were down by 6.6%. So, when the carriers tightened capacity following the Hanjin collapse in August, the rates went up and our margins came under pressure, a phenomenon that you have seen impacting the whole industry, not just Panalpina. In Q1 2016, when the rates were still falling, our GP per TEU contribution was a healthy CHF339 and then when the rates started to increase in the second half of 2016, our margins decreased to a little more than CHF250 [per TEU]. This demonstrates how rate volatility impacts our business model. It goes without saying that we cannot offset margin pressure by simply reducing headcount when volumes are growing.

Overall, GP declined by CHF36 million from CHF480 million to CHF444 million. Lower volumes and margins from the oil and gas sector alone accounted for CHF33 million of the decline. Even here, if it would just have been the oil and gas impact you would most probably not have felt the impact in the business. When these two issues came together, we had the perfect [double rhyming] -- the margin increase or rate increase impacted the margins, and the oil and gas impact that we were carrying along for the full year.

So, to sum it up, Ocean has not only, as I just mentioned, to absorb most of the GP drop from the oil and gas sector, but also additionally hit hard by margin pressure in the second half. This [drove] the Ocean product into a CHF5 million loss in Q4, not nice. For the full-year 2016 adjusted EBIT came in at CHF11 million after an EBIT of CHF27 million a year ago. 2016 has been a very challenging year for the Ocean product despite all the efforts already made.

So, we are currently reviewing our operating model in Ocean Freight in order to restore profitability. So, what that means is, basically we have to do a little more, a little faster. But overall, we need Ocean to be a complementary business offering to our customers that are asking for integrated service offering all over the globe.

Logistics. GP decreased 5.8% to CHF386 million as a result of reduced oil and gas activity. Adjusted EBIT, however, increased to about CHF6 million up from CHF2 million. In the past two years, we have been focusing mainly on restoring profitability. You remember three years ago, it was a CHF40 million loss in logistics. So, in 2017, now, we have to build up a strong sales pipeline in order to increase our top line. The target remains the same. The target is to reach an EBIT over (inaudible) margin of about 5% from 2019 onwards. So, back to you Stefan.

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Stefan Karlen, Panalpina Welttransport Holding AG - CEO [4]

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Thank you, Robert. This brings us to the outlook and priorities for 2017. Unsurprisingly, the political and macroeconomic uncertainties will make planning for this year even more difficult than in the past. The market environments in air and ocean freights will remain challenging and we expect both markets to grow by about 2%. At Panalpina, we anticipate to outperform the market in both air and ocean freights. For the first two quarters, we expect GP margin to still be under pressure, but we still expect the mid-term freight rate and the margin to normalize and we talking here the end of Q2, beginning of Q3.

That's what our priorities are; they have not changed. We will continue to drive organic growth through increased sales performance, further diversify the industry mix, accelerate growth through selected bolt-on acquisition and maintain strict cost control and discipline. However, it goes without saying that our immediate focus is on increasing the margins in order to improve and restore profitability as of Q2. These were our remarks for 2016 full-year results. We're now happy to take questions first here in the room and then on the participants on the call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Michael Foeth, Bank Vontobel AG.

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Michael Foeth, Bank Vontobel AG - Analyst [2]

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Few questions, could you update us on how your customer segmentation is looking now large customers versus SME customers standard wise. And how is your industry vertical rebalancing going on? What is your exposure? Have you been able to reduce exposure to those markets or industries which are less favorable in your mix? And then finally, could you update us on the countries that you've rolled out with your new as SAP TM system so far? Thank you.

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Stefan Karlen, Panalpina Welttransport Holding AG - CEO [3]

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I will be taking the first and second question and Robert will comment on the vertical dependency. So, first of all, our customer mix. In Air Freight, we have the majority of our customer are big-size customers, so when I say majority, it is about 60% plus or minus, that are multinational companies, so global accounts as we call them. In the Ocean Freight, it is the opposite. In the Ocean Freight, we have about 75% to 80% are small and medium customers, also reason being for what Robert mentioned earlier that we need to have an efficient process in place to handle the small and medium customers.

In terms of the IT platform -- the rollout, we are now live in four countries, at Switzerland, Singapore that were previously the pilot countries and now also successfully rolled out in Canada and in Italy at an acceptable pace and without any major incidents. So, that gives us confidence for the further rollout of the system and we're starting with or on track for Germany to start in May this year.

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Robert Erni, Panalpina Welttransport Holding AG - Group CEO [4]

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So, on the industry verticals, in the past, we were very -- telecom and oil and gas, certainly exposed to these sectors most. So, today, we have little better balanced portfolio, not that perfectly well-balanced portfolio, but cer4tainly little better balanced. When I look at the current portfolio, so then we have auto with about 20%; we have to telecom about 20%; retail and fashion about 15%; oil and gas by now 10%, you remember that was most probably 25%, 30% not even two years ago. That has dropped drastically. You saw the impact CHF74 million. So, that's now about 10% and then all the others a little shy of 10%.

So, perfect, if I would have a wish -- a perfect portfolio will be one where we would have equally balanced verticals with -- you need to be specialized in a couple of verticals. You cannot be the darling for everybody. But you would most probably want to have a portfolio when not the verticals are at more of -- a share higher than 15%. But, certainly, we can slowly but surely getting there.

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Operator [5]

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Tobias Sittig, MainFirst

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Tobias Sittig, MainFirst - Analyst [6]

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A couple from me please. Firstly, on what you call a normalized margin for the second half of the year, could you give us an idea of where you roughly see that, especially in Sea Freight, you've been around CHF300 and after pricing out some contracts, it has been up CHF340, now we're back to CHF250, so just where you see that? Then, on the way your contracts are structured, my understanding is that more and more contracts are back to back and that you passed the rates through, but your contract structure is different, and are you more exposed than your peers to the kind of rate increases that we're seeing? Thirdly, the impact of the own-controlled air network and the whole context shouldn't have that protected you a little more against the squeeze in air freight rates in the fourth quarter? And lastly, with the restructuring measures you've been taking this year, how much of OpEx are you expected to cup into 2017? So, what will be your cost base going into the year then? Thank you.

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Robert Erni, Panalpina Welttransport Holding AG - Group CEO [7]

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I will take the first, normalized margins. I mean, the higher the better, of course. But if you look at 2016, you have seen that we started the year with very high margins, almost CHF340, then came down to CHF250. So, normalize for us means somewhere around CHF300.

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Stefan Karlen, Panalpina Welttransport Holding AG - CEO [8]

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On the contracts and back-to-back contracts, first of all, our customer mix, as I mentioned earlier, have a lot SME customers, so the duration of those contracts are not extensive. So, that gives us the opportunity, the ability to obviously renegotiate rates on the one side. Then, yes, we do get for some longer-term duration contracts we get back to back, now they are 100% (inaudible). Obviously, we want to make sure that we can play also with the market and when they are ups and downs. That's one side. And the other side, obviously, we all see a dynamic now that, especially the carriers they are much more disciplined in working on yield management. So, that certainly also has an impact in our procurement strategy.

With regards to Air Freight and Panalpina charter network that's about 10% of our overall Air Freight, so that went smooth and actually supported us partially in some of the lanes. But on other lanes where we don't have our own charter network capacity, obviously, we had a certain exposure. We have procured before the peak season, so called BSA, block space agreements. However, the significance of the peak season -- the last time we've seen that is in 2008, so it started earlier and partially maybe also driven by the uncertainty of the Ocean Freight, but also it's not a clear and transparent. That was it and then the fact that it also dragged through in December and then Chinese New Year was also much closer towards the year-end, so didn't really see a big drop here.

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Robert Erni, Panalpina Welttransport Holding AG - Group CEO [9]

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Restructuring cost, say, in the CHF28 million -- the cost savings that we are going to see in 2017 is roughly CHF15 million, so it's about two years payback. They were all infrastructure costs in the field of oil and gas. So, it will certainly help us to keep overall cost the ROE at 2016 level. Obviously, it goes without saying that we have in some countries, we have cost inflation but there will be little cost increases in some places off the road but again for the full group, I think we can maintain cost even if it is going to go 2%, 3% air and ocean, we should maintain cost at same level.

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Operator [10]

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Bernd Laux, Blackwall Capital

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Bernd Laux, Blackwall Capital - Analyst [11]

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I'd like to follow up on the IT question that we had before. You mentioned that four countries are live with the new SAP system. Could you compare the conversion rate of, let's say, the same freight forwarding when there is the starting country and the destination country on the old system and what you have experienced in terms of progress as a result of using the new system for the same route? Thank you.

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Stefan Karlen, Panalpina Welttransport Holding AG - CEO [12]

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So, yes, we measured that in terms of productivity, and yes, we do see a certain impact that we have with the system being live. However, the actual productivity improvements will be generated once more stations or more countries are on the network because it's one platform, which is a more heavy on the export side because of the data entry; that's more data being entered and then actually the productivity improvement really comes then at the import stations, because they can take over the same data. So, we're actually avoiding a lot of double entries, not only the quality, but obviously then the productivity and that we can see and we do expect after three months of implementation of the system to be back to the productivity levels we had when we started implement -- before we started the system and then obviously to drive productivity improvement.

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Operator [13]

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Aymeric Poulain, Kepler

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Aymeric Poulain, Kepler - Analyst [14]

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The oil and gas impact you said it was CHF74 million of gross profit reduction, including CHF33 million in the Ocean Freight, could you give us the impact in Q4 and now that we've had the most of the collapse, I guess, in the oil and gas CapEx, do you see this as the end of the oil and gas pressure or are there still some leftovers of this pressure to be expected in the year 2017 numbers and from the conversation you have with your customers and given the volatility we see across the spectrum of businesses, do you have any indication of potential surge in volume in this space at some point, and also what would be the impact on freights on the GP per ton, if that were to happen?

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Robert Erni, Panalpina Welttransport Holding AG - Group CEO [15]

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Maybe I can start with the first part. The CHF74 million has been almost quarter-by-quarter seen same impact. And I think reported back in half year that we had kind of CHF35 million, that's continued when it comes to -- what you see in the marketplace that (multiple speakers).

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Stefan Karlen, Panalpina Welttransport Holding AG - CEO [16]

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Obviously, the oil price has increased, encouraging news. I think what we see and hear from customers and predominantly from the big oil companies, there is more optimism in the industry. They are only recently a number of projects have been sanctioned -- have been signed off. However, until they materialize, obviously, it takes quite a bit of time. So, they do believe that more projects and those that have been approved will most probably towards the end of this year, beginning on next year, start to trigger in and then generate volumes. The normal activities so far we have not seen really a pickup. When I say normal, it is the so called OFS, the oil field service companies, because there is no increase in drilling activities as such at the moment, but there're ongoing volumes going on right now.

Now, what are our expectations when the volumes are coming back? Obviously, the industry has gone through a tremendous shake up, as you all know. The companies have set up themselves differently than what they were before. So, I think they will certainly look much more into solutions, into optimized transportation means that will come at lower margin. But still that remains to be seen there, because once the project goes live and the urgency is there, they may change again. However, I think we look it as an opportunity because these companies, they also want start to request some more supply chain solutions and more concept to optimize to have better visibility. At times you have equipment all around the world that needs to be shipped. I think that's become much better knowing where their equipment are and how to efficiently move them into the location where they need them.

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Operator [17]

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(inaudible)

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Unidentified Participant [18]

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Just on the automotive side of the business, there is some protectionism in the US. Do you see that as a topic for you guys? On the retail and fashion part of the market, we are seeing the emergence of online aggregators, such as Amazon and Zalando. They tend to use their own logistics, how do you cope with that? And on the oil and gas, which level of price do you budget in your assumptions for 2017? Thank you.

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Stefan Karlen, Panalpina Welttransport Holding AG - CEO [19]

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On the automotive industry, yes, recently the over the news we all got to know them about it. I think we have to still see the actual impact on it. It will eventually change some of those volumes because of the potential will be produced in the US; the potential will also be exports. I think we're not yet very clear on how that's going to impact. But then again, a lot of those parts will have to be shifted to the US instead of Mexico as a matter of fact. So, I think there will be flows. And I don't think that they will all be produced with all parts in country. So, that will certainly impact shift and redirect certain volumes on a different trade lane or different destination as a matter of fact.

On Amazon, in particular whom we working together with and we are also working together very closely with their provider in terms of their own aircraft, yes, they will have an impact certainly on the business that they are targeting for themselves. I think what we see is certainly for our customer base, they will continue to be not just international part, and I think that's where we continue to play an important role is actually on the overall end-to-end solution. That's not just international part and I think that's certainly where we have seen and started to expand on local value-added services and the value creation that we have compared to those companies. They will disrupt to some extent the market, but it remains to be seen to what I have said just.

And the third one was the oil and gas -- on the focus on the margin in the oil and gas, how we budget in.

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Robert Erni, Panalpina Welttransport Holding AG - Group CEO [20]

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To be honest, we don't. I could ask you give me your number -- now we talk to our customers. We try to get their best sense of how they budget their CapEx and maintenance and that's how we try to basically budget for our own numbers, but everything else would not be there -- oil prices have been so volatile lately. So, no, we don't do that.

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Stefan Karlen, Panalpina Welttransport Holding AG - CEO [21]

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And maybe to add on again on the online platforms or Amazon of these words, I think it also important to understand the flow. So, it is often that they look at their one-way flow of what they have today. I think that certainly where we also in our business in our strength and certain without Panalpina charter network where we see the two-way flows. It is where we actually optimize and are able to then offer to also customer really the competitive advantage with the competitive rate. I think for them predominantly today is the availability of capacity and that's why they're investing in their own equipment.

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Operator [22]

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Marco Strittmatter, ZKB

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Marco Strittmatter, ZKB - Analyst [23]

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Have you formulated the dividend policy now? It's a very nice dividend for last year, but have you target to reduce the cash pile somewhat or what can we expect in the future years?

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Robert Erni, Panalpina Welttransport Holding AG - Group CEO [24]

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I think it's in line with -- I wouldn't say policy, because we have not really guided for a dividend policy lately for the last three years, but what we have seen is that Panalpina has increased the payout the amount -- dividend year-by-year, and yes, I think at the time where we cannot make better use of the cash, we will continue to invest as much as we can into the business; at the times where we cannot make a better use of cash, we should not hold it and should certainly not pay negative interest. So that's why, and by the way, nothing really has changed on our belief that we can achieve sustainable profitable growth going forward and that's why we believe it's the right signal to the market that we at least going to honor their patience and we are going to increase the dividend.

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Stefan Karlen, Panalpina Welttransport Holding AG - CEO [25]

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We will also be to increase each it year if possible.

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Robert Erni, Panalpina Welttransport Holding AG - Group CEO [26]

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Yes, if our cash conversion -- we have a couple of positives that you can see that the Company is maturing, one is cost management, the other one is cash conversion and as long as cash conversion is at current rates, it was actually in 2016 as good as in 2015, yes, we have no reason to change.

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Stefan Karlen, Panalpina Welttransport Holding AG - CEO [27]

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If there are no more questions in the room, then we will open up for the questions on the phone.

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Operator [28]

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Mark McVicar, Barclays

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Mark McVicar, Barclays - Analyst [29]

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I have two questions, I think, one for each of you. First one to Robert. On the exceptional items of the restructuring charge, the CHF28 million, was there any tax credit or it's the tax that you charged really on the underlying business?

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Robert Erni, Panalpina Welttransport Holding AG - Group CEO [30]

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Unfortunately, this charges (inaudible) countries there we're not taxable at this point of time, mainly in the US. So, it did not really help for 2017, if that is your question -- count on the 25% average tax rate.

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Mark McVicar, Barclays - Analyst [31]

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And then really for Stefan, this is a Sea Freight question, but to a degree it applies to Air Freight as well. As you went through the quarter and you saw the rates going up and the GP being squeezed, was there not a point to it, but what you think really first two as that was going on -- did you end up with negative GP on part of your volume? And the second question is why did you not just turn off more of that volume sooner if it was going to be coming to you at the wrong GP?

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Robert Erni, Panalpina Welttransport Holding AG - Group CEO [32]

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Good one, Mark. Thank you.

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Stefan Karlen, Panalpina Welttransport Holding AG - CEO [33]

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Good question, yes, indeed. Yes, we have had some negative GP on some of the customers where we had commitments. We have not had a back-to-back, so we had to basically eat a bullet. I think it goes in a view of a long-term relationship that we have done that and I think we have obligation towards the customer and that was for us always important that we fulfill. We have whoever, not just taken that for granted, we have been in very close communication with customers and some of them we have been successful on doing that versus to the others.

The dynamic that we have experienced, in particular, in Ocean Freight, because of the Hanjin has taken us by surprise. That's the situation that we've never had in the past and I think there we were certainly overwhelmed by the complexity of that. And that's not just -- it's a bankruptcy as such and there's one shipping line less, there was the number seven in the world with a high number of ships that all of a sudden didn't come available anymore for shipping and for booking.

And I think that is then when you need to shift those volumes to other carriers. So, our impact I think on the Hanjin in particular was limited. I think we have managed that okay, but then this had an impact on the rates to the whole industry. And I think that is one of the items and where I think the shipping industry, in particular the carriers in the ocean freight side, and partially also on the air freight side have done a much better job in their view in terms of yield management than they have ever done before.

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Mark McVicar, Barclays - Analyst [34]

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And then looking forward to 2017, if you listen to the carriers whether its Maersk Line or Hapag-Lloyd, they all have ambitions to get freight rates to up further -- $1 billion EBIT improvement on that profit improvement that Maersk Line has used in its forecast is on average 5% increase in the average rate 2017 over 2016. If they continue to be successful with those, let's say, modest rate increases, forget about the Hanjin spike, are you going to be at a catch up or are you going to be playing -- you going to be running behind and therefore your GP margins will stay pressured for longer than the first quarter or the first half?

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Stefan Karlen, Panalpina Welttransport Holding AG - CEO [35]

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Right. So, yes, they are having all focus on continue to prove the yield management. I think just finishing tender season, so there is new contracts coming up that obviously we also have incorporated the adjustments. What we don't see is today is that type of volatility we have seen in the past. I think it is much more stable and I think that just to add on the previous question is, there was a steady increase and they stayed firm on it, again, which they have never done in the past.

So, we expect that as the second quarter or in the second half that to restore the profitability to previous levels.

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Operator [36]

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Neil Glynn, Credit Suisse.

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Neil Glynn, Credit Suisse - Analyst [37]

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If can I ask three questions; the first one with respect to GP per unit, your priority is restoring margins as you said earlier, but you're also trying to outgrow the market, which seems to bear an inherent contradiction or at least a difficulty. Can you expand on how you expect to outgrow the market while also restoring margins at the same time? The second question related to that market share gain seems to be an increasing priority across the industry and your competitor touched on that yesterday, while pricing continues to disappoint. You've also mentioned the potential disruptors earlier in the call, which can't be helpful to pricing. So, it just makes me think, does this impact your planning as a risk of structurally lower pricing point would mean a structurally lower margin potential without an offset? So, interested in thoughts on that. And then just finally, if we could just confirm amortization levels in 2017, how they should play out relative to 2016?

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Robert Erni, Panalpina Welttransport Holding AG - Group CEO [38]

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So, yes, the GP per TEU or the GP per unit in both products really our aim and how we want to restore that. There is a variety of different measures that we are anticipating, it is not just the international carriers but obviously all the pre and post, where we need to further or want to further optimize. Our strategy is clearly, and as you mentioned that, to outgrow the market not at any price; however, we want to (inaudible) in order to restore profitability, we obviously also need to have volumes. Without volumes, there is a difficulty to restore that and will only go into the cost and that is clearly not our aim. We need to get more agile, more efficient in how we operate in order that we get the profits that we have better down to the bottom line.

And also, to your second question, if I understood correctly the need for growth, yes, we need to grow. We want to remain amongst the top five players in the air and ocean freight, and that's clearly our aim and that's through organic growth, but also through a bolt-on acquisition, which we have clearly outlined in our strategy and we continue that.

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Stefan Karlen, Panalpina Welttransport Holding AG - CEO [39]

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Yes, maybe Neil to that point, also, you know our system, our marketplace is still very fragmented and that has not changed. It's not that a couple of players are playing the whole market. The top five in air freight have not even 15% of the market; top five in ocean below 10%. So, there is no need for starting a war on rates or stealing business away from each other. The market is still big enough. And amortization, you can actually take 2016 as a running rate for 2017. Remember the IT -- the capitalized amortization cost -- capitalized development cost of the IT system will drop off the P&L in that CHF17 million, will drop of the P&L in 2019. So, it ends 2018 [starts back] in 2019.

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Operator [40]

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Damian Brewer, Royal Bank of Canada.

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Damian Brewer, Royal Bank of Canada - Analyst [41]

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Three questions from me, first, coming down to the cost effects in the business, the last year, your SG&A costs per unit were down nearly 9% to 10% in air and nearly 8% in ocean at least on a headline basis. Could you give us a feel for how much of that was organic as well as the mix effect of acquisition? And therefore, if we look at 2017, what that sort of run rate of efficiency could look like if we just extrapolate it from that? Secondly, I'm afraid it is coming back to the GP per unit question again, but what factors give you confidence that you should see normalization in sort of end of Q2, beginning of Q3 this year.

I'm very aware that when one looks back, the last decade, there is very clear evidence that when growth rates accelerate GP per unit comes under pressure when growth rate slow you recover that, but is there anything specifically beyond that you can see looking out for this year that gives you increased confidence? And then very finally, coming back to the dividend, capital allocation question, back to the presentation, you still mentioned sort of M&A. At this stage, has the balance change between dividend or M&A or is it still already very much a case-by-case basis?

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Robert Erni, Panalpina Welttransport Holding AG - Group CEO [42]

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Hi, Damian. I'm not sure whether I understood the first, but at least give you an answer and you tell me whether that is the answer to your question. The cost of the acquisition was about CHF10 million -- the operating cost of the acquisition was about CHF10 million. Is that what you're aiming for or --?

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Damian Brewer, Royal Bank of Canada - Analyst [43]

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Really just trying to understand the way you got it, the unit cost decline per unit handled, how much of that if you like is transferable into 2017?

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Robert Erni, Panalpina Welttransport Holding AG - Group CEO [44]

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Per unit you talk about in Air Freight or --?

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Damian Brewer, Royal Bank of Canada - Analyst [45]

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In Air and Ocean, because when I look --

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Robert Erni, Panalpina Welttransport Holding AG - Group CEO [46]

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No acquisition impact in Ocean, it was all Air. So, the GP per kilo of the acquisition and I think it's mentioned in the appendix under where you see the Air Freight the P&L, at the bottom, you see a line of which acquisition Airflo that's the GP per kilo of the acquisition is roughly CHF0.20.

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Damian Brewer, Royal Bank of Canada - Analyst [47]

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But I'm trying to get out is --

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Robert Erni, Panalpina Welttransport Holding AG - Group CEO [48]

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Yes. That can figure out. I think we mentioned it even the GP per unit excluding acquisition. So, if you do me a favor and pick up these numbers, otherwise I'm going to send them to you in separate mail.

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Damian Brewer, Royal Bank of Canada - Analyst [49]

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But I was trying to understand that when you look not at the GP, but the SG&A cost per unit, that actually fell, I think last year 9.4% on the SG&A cost per TEU handled in Ocean fell 7.8%. So, what I'm trying to understand is -- if is there any parts of the way through the IT process, how much of that if you like efficiency run rate transfers into 2017?

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Robert Erni, Panalpina Welttransport Holding AG - Group CEO [50]

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That is a tough one. Yes, I think we let's talk over the phone, unless it's a question that everybody is interest -- you better understand what you really aiming for. But the acquisition impact -- the cost impact from the acquisition was very, very low.

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Stefan Karlen, Panalpina Welttransport Holding AG - CEO [51]

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So, may be to your second question, restoring the GP per unit. In the Ocean Freight side, in particular where we -- it takes a little bit more time, I think it's also for the customers to understand the dynamic that is in there. I think with the shortage of capacity or artificial shortage created with blind loops, where ships departures or slings are being canceled. And now also with the impact that the new consolidations will bring with the new schedule as of end of March, I think it's also something where customers will have to understand that you may be able to negotiate a lower rate, but you simply don't get the space.

And I think that it's a dynamic what I mentioned earlier that the carriers have introduced a way of optimizing the real management in a much better way than they used to do that in the past. They're still I believe after they announced GRI, shortly after one or two weeks later, they're going to drop again and you go continue to the next -- to the same level of rates. That is at the moment not going to happen.

There's a lot of, I think, big shippers, so called BCOs that actually are frustrated with certain developments, because they don't have the leverage of finding alternative capacity and I think that will certainly -- they will manage to continue that and they're all signs at the moment that they will, that this will drive the price up and then we have different discussion with customers. And again, I want to reiterate, it is not just the port to port, it's really the solution offering to the customer, the value creation, and I think that has a different impact and will have a positive impact also on the margins.

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Robert Erni, Panalpina Welttransport Holding AG - Group CEO [52]

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The third one, give me another chance, Damian, on allocation of capital. (inaudible) first priority would have to invest as much as we can into the business. If you see the return of the capital employed on that particular acquisition that we have been talking about this year, there was more than 20% return on capital employed. So, the more of these acquisitions we could do the better would be for shareholder value.

It's honestly a limit up for what acquisitions in size and complexity we can do at this point of time. And believe me or not, in some cases, we have to convince these target companies to sell; it's not that there is freight in Panalpina to resign a check. So, that makes it sometimes a little more challenging. So, does that answer your question?

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Damian Brewer, Royal Bank of Canada - Analyst [53]

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Yes, absolutely. Thank you very much.

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Operator [54]

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David Ross, Stifel Capital Markets.

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David Ross, Stifel Capital Markets - Analyst [55]

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Yes, so give you a break on the Ocean Freight for a second and talk about Air, but then I will come back to Ocean. Did you see Air Freight strength continue into 1Q? You have it 2% for the year, but we've heard that it's much stronger than that at least started the year off much stronger that, want to see kind of what you're getting out of the current air freight market?

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Stefan Karlen, Panalpina Welttransport Holding AG - CEO [56]

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I'll take that question. Yes Air Freight -- we have seen that the volumes have not considerably dropped. Actually, a China New Year was much closer towards at the end of December, meaning there was not such a gap -- there was not sufficient gap, I would call it, to drop in terms of volumes and also rates. Also here, the carriers probably learned from the ocean carriers on how to do a better yield management. So, we see -- our own volumes that we see currently there are strong and I think the rate level has eased a little bit, but it's still on the higher end.

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David Ross, Stifel Capital Markets - Analyst [57]

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So, if volumes continue strong then I would assume that 2Q through 4Q probably estimate it flat for the year, if we going to get 2%?

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Stefan Karlen, Panalpina Welttransport Holding AG - CEO [58]

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Right.

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David Ross, Stifel Capital Markets - Analyst [59]

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And then on the Ocean Freight side, you mentioned an increased focus on yield management and I get the part on adding the value-added services around the port to port move in part of it, but in general, is that focus on yield management more of a systems focus, a process focus or something else? Also, what is more difficult than you'd previously thought about turning the Ocean Freight around what's not working that you might have tried and what can be done from an efficiency standpoint, prior to the complete of the SAP TM rollout to really drive the GP per unit in margins higher there?

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Stefan Karlen, Panalpina Welttransport Holding AG - CEO [60]

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So, I think on the yield management, I think it's more the complexity of the service offer to the customer that we see and we have engaged and we have some larger business wins that we have towards the end of last year that are in implementation phase and that are going on. So, I think that is something that we certainly continue to work on. And I think what didn't go well is, as I said, the dynamic in the complexity of these of the approach from the carrier that surprised us and actually challenged us in the stress situation where we have learned out of in how to respond to that and with the right transparency of data that the relevant people need to have. The whole -- what we have been focusing over these last years and as we continue to do that, just at an accelerated speed, is really about the productivity that we're working on that partially the SAP TM. However, that will, as earlier explained, still take some time until we really see the productivity impact, because we need to have major stations on the platform in order to see that, but we don't have to wait for that and there's other measures we do internally in terms of process optimization. And also centralizing as well as outsourcing where we started already over the last year successfully with transferring transactional processes to the shared service center, so at a much lower cost environment, but not simply driving wage arbitrage, but certainly process standardization and efficiency gains.

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David Ross, Stifel Capital Markets - Analyst [61]

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And then last question, it's for Robert. Do you have any guidance for 2017 in terms of further restructuring costs? If we look at CHF28 million as the baseline for last year, is it going to be about the same this year, little bit less, little bit more?

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Robert Erni, Panalpina Welttransport Holding AG - Group CEO [62]

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I hope that I don't have to report any restructuring cost separate. I mean, there will always be -- we will constantly have to restructure business here and there, but that's to me, a normal business. So, we adjusted our numbers only because the magnitude of the oil and gas restructuring was fairly big. And I think investors for the benefit of us being or providing a little more information, that's why we adjusted for it. Other than that we would normally not do that.

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David Ross, Stifel Capital Markets - Analyst [63]

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But we should expect restructuring costs to continue as the SAP roll out is not finished?

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Robert Erni, Panalpina Welttransport Holding AG - Group CEO [64]

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Yes. But we pushed it into P&L. We did that already the last couple of years. So, the IT spend, if that what you're referring to stays that roughly to CHF60 million project cost that is the same number as in 2015. It's going to be 2017, CHF60 million and then it should slowly, but surely drop while we're making progress in the implementation.

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Operator [65]

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Stuart Todd, Lloyd's.

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Stuart Todd, Lloyd's - Analyst [66]

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It's on Ocean Freight. There are some reports -- media reports yesterday that the Maersk Line had stopped booking export containers from Europe to Asia and Middle East. Is that something you picked upon as well?

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Stefan Karlen, Panalpina Welttransport Holding AG - CEO [67]

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I haven't understood the first part of the question. Can you just come again?

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Stuart Todd, Lloyd's - Analyst [68]

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Sorry, there are media reports that Maersk Line had stopped booking export containers from Europe to Asia and the Middle East. This was yesterday. I'm just (inaudible) runs into 2017 March. Are you aware of the situation there; if they stopped bookings, (inaudible)

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Stefan Karlen, Panalpina Welttransport Holding AG - CEO [69]

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No. I'm not aware of it.

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Operator [70]

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There are no further questions from the phone.

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Robert Erni, Panalpina Welttransport Holding AG - Group CEO [71]

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So, just as a little information to Q1 -- Q1 really we saw that -- we have been informed that there is a conflict of two companies reporting at the same time. So, let's sort this out and let you know how we deal with it. So, we will most probably (inaudible) will inform you if our dates would change.

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Stefan Karlen, Panalpina Welttransport Holding AG - CEO [72]

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So with this, I'd like to thank you very much for your interest and for coming here today and for those on the call, we will now be closing the call here, and as Robert just mention we'll inform you about presentation of the Q1 results. Thank you very much, and good bye.

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Operator [73]

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Ladies and gentlemen, the conference is now over. Thank you for choosing chorus call, and thank for participating in the conference. You may now disconnect your lines. Good bye.