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Edited Transcript of PWTN.S earnings conference call or presentation 21-Apr-17 12:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Panalpina Welttransport Holding AG Earnings Call

Basel Apr 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Panalpina Welttransport Holding AG earnings conference call or presentation Friday, April 21, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Robert Erni

Panalpina World Transport (Holding) Ltd. - CFO and Member of the Executive Board

* Stefan Karlen

Panalpina World Transport (Holding) Ltd. - CEO, President and Member of Executive Board

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Conference Call Participants

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* Damian Brewer

RBC Capital Markets, LLC, Research Division - Analyst

* David Griffith Ross

Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Transportation Analyst

* Michael Foeth

Bank Vontobel AG, Research Division - Analyst

* Tobias Sittig

MainFirst Bank AG, Research Division - Senior Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good afternoon. Welcome to the Panalpina Q1 Results 2017 Conference Call and Live Webcast. I'm Alice, the Chorus Call operator. (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 World Transport (Holding) Ltd. - CEO, President and Member of Executive Board [2]

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Thank you, Alice. Good afternoon, everyone, and thank you for joining us today for the 2017 First Quarter Results Analyst Conference Call of Panalpina. I'm here with our group's CFO, Robert Ernie. Together, we will walk you through the presentation that was sent out early today, early this morning, along with the media release and the consolidated financial statements. As always, we will take questions over the phone, once we have gone through the presentation. Let's get started with Slide #4. As you probably noticed, we have merged 2 slides into 1, however, the information is still the same. This slide shows the financial highlights, the achievements and the challenges for the first quarter 2017. As expected and already indicated during our last analyst call in March, the financial results for Q1 came in below the previous year period. While volumes were still growing strongly both in Air and Ocean, margins remained under pressure. And as a result, gross profit of the group decreased by 9%. Despite the fact that we further reduced our costs by 7%, EBIT and net profit decreased from CHF 24 million and CHF 17 million in Q1 2016 to CHF 60 million and CHF 12 million in Q1 2017, respectively. When looking at some achievements in Q1 2017, then we certainly take comfort in the continued strong growth in both Air and Ocean, where we clearly won the market share. This is a sign that our product offering and high service levels are well received by our customers. Furthermore, we saw strong activities towards the quarter end in Logistics, which delivered the highest quarterly EBIT ever with CHF 2.4 million. It goes without saying that EBIT means nothing, if it cannot be converted into cash. And hence, we are pleased to report a continued strong cash conversion respectively, a further increase of our cash position to CHF 400 million. This brings me to the challenges. Since not everything went well, we also had some challenges, and let me highlight what we faced up in Q1 2017. The margins in Air and Ocean Freight remained under pressure. However, they are recovering, since we saw a strong opportunity in unit profitability, compared to the last quarter in 2016. We are confident to see a further improvement of margin in Q2 2017. The main issue we had, and again this is not -- this doesn't come as a surprise, was the profitability in Ocean Freight. While we are pleased with the strong volume growth and more than -- of more than 7%, we are still facing margin pressure, which resulted in the second consecutive quarterly EBIT loss. It was, however, smaller than in Q4 2016. In hindsight, the market as well as Panalpina has underestimated the consequences of the Hanjin collapse for the whole Ocean Freight industry. The carriers have clearly been doing a better job of not only increasing rates, but also keeping them pretty stable at these levels. They have become more disciplined. And in this new situation, with persistently higher freight rates, we have to be more effective in passing on these higher rates and extra cost to our customers. The market dynamics, in the both Air and Ocean Freight, have both changed and they will continue to challenge us also in the future. However, in the long run, higher and stable carrier rates are also in our interest, since they will help us to restore margins to normal levels and then to maintain them. To quickly summarize Q1, we can conclude that what Panalpina can control, such as outgrowing the market, maintaining strong cost discipline and converting EBIT down to cash, that we have worked and we have done very well. However, that it unfortunately not compensates the impact from lower Air and Ocean Freight margin and hence we have to report the results that came in below Q1 2016 levels. Last, but not least, before you ask the obvious question, I can give you a quick update on our SAP TM project. As we speak, we are busy passing milestone-by-milestone for the system implementation in Germany, in May this year. So far so good and we hope to report on a successful go-live shortly. Robert, will now walk you through the operating and financial review with a more detailed look at the products.

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Robert Erni, Panalpina World Transport (Holding) Ltd. - CFO and Member of the Executive Board [3]

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Thank you, Stefan. As always, I will start with Air Freight on Slide 6. Volumes grew by 8% in the first quarter compared to a market that grew by an estimated plus 6%. Growth was mainly driven by the Far East trade lanes through Asia to Europe and vice versa. From a vertical perspective, we saw a strong growth from consumer goods and fashion, auto, both growing in double digits and the high tech and telecom sector. Furthermore, we can conclude that in line with our strategy, we are clearly growing to share a wallet of our existing customers. Gross profit per ton decreased 10% to CHF 620, but was up quarter-over-quarter from little more than CHF 560 in Q4. The clear indication that we are catching up in passing the increased procurement cost on to our customers. So total gross profit decreased slightly from CHF 149 million in Q1 to CHF 145 million in Q1 2017. Due to efficient cost control, EBIT and conversion -- EBIT conversion remained stable at previous year levels, with CHF 70 million, respectively 12%. So now let's move from a very stable air product to a little more challenging ocean product on the next page. So on Slide 7, to start with, volumes have been growing strongly in Ocean. They increased 7% compared to an estimated market growth of about 4%. So in Ocean, growth was mainly driven by strong activities in the Transatlantic and Far East trade lanes and mainly coming from consumer goods, fashion and the auto industry. From the oil and gas sector, no volume recovery can be reported. But as a result of our customers continuously tendering their logistic activities, we have seen margins further eroding. Same as in Air Freight, GP per TEU has been recovering from the lowest level in Q4 2016 and with little more than CHF 280 per TEU it's now almost back to what we call a normalized margin of about CHF 300 per TEU. Overall, gross profit dropped substantially from CHF 118 million in Q1 '16. That was a time when rates were falling and we recorded high margins. We're falling now down to CHF 106 million in Q1 2017. So bottom line, Ocean unfortunately recovered -- recorded -- sorry, recorded an EBIT loss of CHF 3 million compared to a loss of CHF 5 million in the last quarter '16. Whilst the strong volume growth is good news, it is clear that further measures such as centralization of operations and offshoring operations to low labor countries need to be accelerated in order to turn the products back to black numbers. Ocean is certainly the most important construction site left and you can rest -- be rest assured that improving profitability has our highest priority.

From Slide 8, Logistics. While gross profit went down to now CHF 83 million, we actually recorded the highest quarterly EBIT to date. We saw strong quarter end activities in many of our Logistics sites all over the world, but at the same time, we continue to exit more underperforming sites in the first 3 months of the year. As a result, gross profit came down further. These exits and further improvements in profitability, however, meant that we achieved an EBIT of CHF 2.4 million. Now the Logistics products has reached quite a high level of maturity, the focus lies now entirely on growing our top line. So back to you, Stefan.

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Stefan Karlen, Panalpina World Transport (Holding) Ltd. - CEO, President and Member of Executive Board [4]

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Thank you, Robert. This brings us to the outlook for 2017. As mentioned earlier, we are faced with new market dynamics and they will continue to challenge us for some time. However, we have to adopt to them as fast as possible, and overall, we're making further progress to better manage continuous rate and volume volatilities. We are also cautiously optimistic that we can keep up the strong volume growth in Air and Ocean Freight and further gaining market share. However, we are very disciplined in not taking too much risks in a still very volatile environment. As for our priorities, they have not changed. So our focus lies and continues to lie on driving organic growth through increased sales performance. I think we've done a lot of improvement here but we continue to drive that even more going forward. We are working on restoring Ocean Freight profitability, is certainly highest in our priority list. We are further diversifying our industry vertical mix. Also here we have done a lot of or we have achieved a lot in the past and we continue to optimize the mix between the different verticals. We continue to accelerate the growth through selected bolt-on acquisitions and I'm confident that we will be able to report on some developments here in the near future. And last but not least, we continue to maintain a strict cost discipline. So these were our remarks for the 2017 first quarter results. We are now happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question comes from Tobias Sitting, MainFirst bank.

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Tobias Sittig, MainFirst Bank AG, Research Division - Senior Equity Analyst [2]

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I got 2 actually. Firstly, I'd like to dig a little deep into what you call a normalized margin, especially on sea freight side, you said CHF 300 is normalized, when I look back at 2011, '12, '13, where basically we're at, at least CHF 330 then that went down to CHF 300. Then beginning of last year, you priced out roughly 10% of your volume saying that we were unprofitable and you were back at CHF 340, and now, CHF 300 is the new normal. What makes you confident that CHF 300 is the normal that is there to stay in a normal freight rate environment and why will it not be CHF 270 or CHF 250, 2, 3 years from now? What can you say about the pricing, you're having the declines and how that evolves? And the other one is that Yang Ming, they stopped trading on the equity market last -- yesterday I think, does it call panic in the industry or something or is that nothing of a big concern item?

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Stefan Karlen, Panalpina World Transport (Holding) Ltd. - CEO, President and Member of Executive Board [3]

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Tobias, I'll take the first. I don't know what is normal anymore in this world. But that CHF 300 obviously is more a result of us looking at the recent stuff that we have been seeing, the margins from, and also business from the oil and gas sector coming down. So what I feel is here that the margin dropped from the very profitable oil and gas business and the rest is -- and that brings me close to CHF 300. So if market conditions further improve and we get to a situation where demand is getting stronger and stronger, and its more about capacity then yes, that number can certainly go up. It can also go up by us extending the service level from more port-to-port customer into door-to-door. But it can also go -- it will also go certainly or become a little -- it can go under pressure or will be under pressure when we grow into the bigger customer vertical. So I think in a mix, the CHF 300 is a number that we feel is certainly a good assumption going forward also for our internal planning. But yes, I think nobody can give you the right number at this point of time. But is that answer to your question?

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Tobias Sittig, MainFirst Bank AG, Research Division - Senior Equity Analyst [4]

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Yes. Just following up shortly, how do you look at your port-to-port share at the moment? How much is just port-to-port and how much is more service around that?

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Stefan Karlen, Panalpina World Transport (Holding) Ltd. - CEO, President and Member of Executive Board [5]

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Yes, roughly 60 plus is still port-to-port, obviously still far too high, and therefore, we want to get into, that is more like the SME base that we are covering. Therefore, we want and we have been successful in the past growing into bigger segment, where the service offering is more tuned to a door-to-door. But 60% plus is today the current number of port-to-port.

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Tobias Sittig, MainFirst Bank AG, Research Division - Senior Equity Analyst [6]

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But that was around 80%, 2 years back or something. That was not good.

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Stefan Karlen, Panalpina World Transport (Holding) Ltd. - CEO, President and Member of Executive Board [7]

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Yes, correct.

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Robert Erni, Panalpina World Transport (Holding) Ltd. - CFO and Member of the Executive Board [8]

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Yes, Tobias. On your second question, Yang Ming, I think there is a lot of obviously changes in the market. I mean, no wonder with last years or the fact that the profitability of the carriers, they have published the results and I think that was, again, a high loss that was recorded by the whole Ocean Freight community, right, I mean, by the shippers. So there will be changes, especially on them, to improve profitability. What impact this will have? I mean, what we're doing is from our side, we have clear risk management. We are very closely watching obviously all these developments. Yet to be seen what impact this will have on the market and how this will continue. But I think they have, after their shareholder meeting back in December 22, I think they have announced that there will be potential changes. So I think we are watching this very carefully, what dynamic it may have on the overall market, that's yet difficult to see.

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Operator [9]

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The next question comes from David Ross with Stifel.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Transportation Analyst [10]

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To talk about the Ocean Freight market a little bit, I wanted to know why it's growing as much as it is, if it's losing money in theory. We would think it would be rationalizing the book of business and taking on good freight that pays and getting rid of customers that are not making money. What are your thoughts there and why is that not happening?

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Stefan Karlen, Panalpina World Transport (Holding) Ltd. - CEO, President and Member of Executive Board [11]

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David, thanks for your question. Just from a perspectives of the carriers or you're looking at more from the perspective of Panalpina?

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Transportation Analyst [12]

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Yes, from Panalpina. So if your ocean volumes dropped 7% and EBIT negative, you would think that there is business in there that you should just not loser per customers?

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Stefan Karlen, Panalpina World Transport (Holding) Ltd. - CEO, President and Member of Executive Board [13]

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Right. I think obviously we are selective of, in terms of what kind of business we're going after. I mean some of the business that we have secured in earlier rounds and they're kicking in, I think the volumes are growing. We are growing with existing customers that have bigger order books. I think we have today a very detailed transparency in terms of profitability per customers where we can analyze, again, the profitability of those individual customers. What is certainly our drive and where we see going forward to also be able to improve the margin is on the port-to-port or beyond port-to-port. So I think all the value-added services and that is obviously an access to those volumes that we need to have in order to be able to work on those. So I think we do have today that profitability. I think what we need to get better at is and I think that was elaborated by Robert earlier is to get the GP down to the bottom line. So I think improving on how we're operating and how efficient and effective we are and how we can transfer some of our operating cost into low-cost environment, so where we have labor arbitrage but also there we can drive profitability, in terms of true productivity improvements.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Transportation Analyst [14]

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Do you need SAP TM to be completely rolled out to do that or there are things you can do in the meantime to expand the margins and lower costs?

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Stefan Karlen, Panalpina World Transport (Holding) Ltd. - CEO, President and Member of Executive Board [15]

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Right. So obviously TM is important for us. That's why I think we have gone through that road. However, also because of the, put it, delay in the initial rollout, I think we have started already aggressively centralizing operation and optimizing processes and going into shared service centers. So we have shared service centers meanwhile in 4 different locations, which is basically doubling the footprint that we had about a year ago. So I think that goes in the right direction. And no, we are not waiting for that. We already well on track and we have a clear agenda on topics that we're working on in order to improve the profitability. So -- and that's what we referred to earlier on what we can control, I believe we are controlling very well. So it's really a margin topic, and I think that is something that is also very high on our agenda but that has a different flavor and dynamic to it.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Transportation Analyst [16]

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And then Robert, just to make sure I'm not missing anything, are there restructuring expenses or other non-recurring charges flowing through the Ocean Freight segment right now? Is your shipping people around that maybe holding back the EBIT from what a normal run rate might be?

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Robert Erni, Panalpina World Transport (Holding) Ltd. - CFO and Member of the Executive Board [17]

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Nothing material.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Transportation Analyst [18]

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Okay. And the shared services benefit, is that expected to -- I mean is that in the numbers now or is that something you we're going to see maybe in the second half of this year or how should we think about it?

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Robert Erni, Panalpina World Transport (Holding) Ltd. - CFO and Member of the Executive Board [19]

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No. That is not entirely in the numbers, because initially obviously you have top up costs. So you can call that one-off, we don't, because that's part of the transition. But it's also not of a nature where I think it would explain the losses. So therefore, we -- for me, it's not a one-off. The full impact of these people that we shift will certainly be towards the second half of the year. But, again, it's not like that we are now suddenly moving 50% of the ocean population to these places. I mean, it goes in sequence, country-by-country, branch-by-branch, and that will happen, that we will continue doing for the next 2 years. So some of that benefit comes little earlier, some little later. We will, however -- initially we thought we would rather do that after the TM implementation. Now we -- since we are running delays in the TM implementation we can accelerate it in some places.

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Operator [20]

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Next question comes from Michael Foeth, Bank Vontobel.

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Michael Foeth, Bank Vontobel AG, Research Division - Analyst [21]

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Just a follow-up on the previous question in terms of the impact of those shared service centers and centralization in general. In terms of your personnel expenses and other operating expenses, how should we see those develop into the second quarter and for the rest of the year, in light of what you just said?

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Stefan Karlen, Panalpina World Transport (Holding) Ltd. - CEO, President and Member of Executive Board [22]

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Michael, so what basically happened is that all these initiatives are obviously going to help us to maintain our cost base, while we are growing our business. So I think the way I look at it is, for 2017, they are all going to help us to compensate for cost inflation, salary increases, and we therefore, can keep the overall cost and ROE compared to '16 at the same level, while hopefully we are growing our business most probably not at 7%, 8% as in Q1 but at 4%, 5% till the end of the year. And I think that is how we're going to look at it for the next couple -- let's say, next 2 years that we can keep on growing our business and with further deployment of TM and the higher productivity that comes along, eventually, we should be able to maintain our cost base as per 2016 numbers.

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Michael Foeth, Bank Vontobel AG, Research Division - Analyst [23]

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And maybe just another one. Given that you talk about the gross and how it should sort of normalize going forward. Are you still expecting that sort of a normal growth for Sea Freight 2% to 4% and Air Freight around 1% to 2%? Is that still the expectation or has anything changed in the market?

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Robert Erni, Panalpina World Transport (Holding) Ltd. - CFO and Member of the Executive Board [24]

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The 2%, 3% has been given as a guidance when we announced our full year results back in March. And I think back then the whole market did not really expect growth rates to come in so strongly as they actually did in Q1 for the whole market. Therefore, I think the 2% to 3% is most probably now an outdated and too conservative number. It's most probably going to -- as we look at it, to be little higher than that. But I think we have -- I think it is a fact that we don't really have -- nobody really has visibility beyond 3 months, and therefore, let's wait and see. But I think right now, it looks as the growth rate should go up a little higher than 2%, 3%. What do you think Stefan?

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Stefan Karlen, Panalpina World Transport (Holding) Ltd. - CEO, President and Member of Executive Board [25]

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Yes, I think it’s a fair statement. It's a bit blurry to understand whether that dynamic is going to continue. So far what we hear is Q2 should also be strong again. But beyond that it's difficult to estimate at this stage. But certainly, looking at what we saw while a month back, I think it looks that is going probably to go beyond that. So we're conservative from today's point of view.

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Operator [26]

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Your next question comes from Damian Brewer, RBC.

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Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [27]

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Three questions please. First of all, just in terms of the sequential GP per unit development, obviously, up 10%, 11% Q1 on Q4. Could you give us a little bit more or elaborate a little bit more on how that developed through the course through January, February, March. Are you on improving trend or has it been more volatile? Anything you can give on that would be useful, particularly as you talk of the scope for normalization coming beyond Q1. Secondly, on the cost base. The other expenses fell year-on-year but also quarter-on-quarter. So I'm just interested to know how much of that was reducing facility rents in the contract Logistics business, how much is related to lower IT spend and how much of that washes through the rest of the year? And then very finally, you've already alluded to it with the sort of the running delays in the TM program. Could you give us an update on where that now sits in terms of any sort of revised rollout schedule versus what you're talking about last autumn on the Capital Markets Day?

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Robert Erni, Panalpina World Transport (Holding) Ltd. - CFO and Member of the Executive Board [28]

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Fully loaded, you really want to work, let me work for my money on a Friday afternoon.

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Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [29]

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I'm afraid we'll have to.

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Stefan Karlen, Panalpina World Transport (Holding) Ltd. - CEO, President and Member of Executive Board [30]

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First, let me give thoughts on the sequential GP per unit development in Ocean and Air. I think in Air we've seen a steady recovery. So January, February, March each being little higher than the previous months. In Air , March came somehow a little lower than the previous months. That has to do with the fact that in some places Air Freight rates have gone up. You've heard of the lots of ocean-to-air conversion due to certain space issue, Europe to Asia. So that I think was felt in the margin development. On the -- does that answer your question?

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Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [31]

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On that one, yes. That's very helpful.

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Stefan Karlen, Panalpina World Transport (Holding) Ltd. - CEO, President and Member of Executive Board [32]

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Okay. So that's 1 down. Then the next 1 on the cost. When you look at the cost development quarter-by-quarter, then we have obviously some volatility in these numbers that comes from us charging the project cost, the IT project cost when cost occur. And so that is always a little volatile quarter-by-quarter. So in Q4 these costs have been rather low. Now it went up in Q1 '17, the majority of that goes into the other OpEx. Then, you mentioned it on Logistics. The exit of these stations, they are roughly bringing the OpEx and Logistics down by about more than -- little more than CHF 3 million. So it's really in these 2 corners where the majority of these lower costs are coming from.

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Robert Erni, Panalpina World Transport (Holding) Ltd. - CFO and Member of the Executive Board [33]

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Damian, I will take the last question on SAP TM. So back in September, we were talking about the implementation of Italy and Canada in Q4 and that went successfully. So we have done those and actually have been on schedule or faster-than-expected schedule and also the stability of the platform, the template, as we call it, has been good. So I think within short period of time, we have been able to on-board all the shipments on the platform, which is encouraging to see. Now the next big milestone is Germany. And as mentioned earlier, in May, we're going to be starting the rollout and that's a big milestone in the rollout of SAP TM. And then next ones are on as communicated back in September its then the U.S. and China and a few selected countries. So basically U.S. starting also this year to '17 and starting with China, the preparation and then that is scheduled then for rollout to '18 with selected few countries in Western Europe and that is according to schedule. So the delay that was mentioning earlier one was more about the bigger picture from the start of it, when we have planned on improving profitability and those productivity. Meaning then ultimately the profitability. So I think that was the delay, but at the moment, we are not encountering any delays and we are well on track.

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Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [34]

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Just to be clear that you are doing better sequentially in GPP units and the TM rollout plan is on track on the revised track, just to be absolutely clear?

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Robert Erni, Panalpina World Transport (Holding) Ltd. - CFO and Member of the Executive Board [35]

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Yes.

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Operator [36]

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Ladies and gentlemen, there are no more questions at this time.

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Stefan Karlen, Panalpina World Transport (Holding) Ltd. - CEO, President and Member of Executive Board [37]

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Okay. Then I think if there are no more questions then I would like to thank everybody for your time and your interest. We will now close the call here. Before we do so, I would like to point out that our Annual General Meeting will take place May 3 and the half year results will be published on July 20, 2017. Thank you very much. Wish you a good day and a good weekend. Bye-bye.

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Operator [38]

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Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.