K+N targets high-margin verticals, capturing carrier business to guard profits

A focus on yield management and market share development helped Kuehne+Nagel, the world’s largest freight forwarder, profitably shrug off lower ocean and air volumes during the third quarter amid a slowdown in global trade.

The Schindellegi, Switzerland-based logistics powerhouse on Tuesday posted strong earnings growth across all business sectors, and its best nine months in history, despite supply chain volatility caused by geopolitics, recurring COVID lockdowns, inflation and high fuel prices.

Management said it expects to remain profitable despite the building economic headwinds by offering premium service customers are willing to pay for, focusing on key accounts and high-margin medium-size customers, and reducing headcount through normal attrition. K+N also expects lower costs for freight transport as carrier capacity continues to increase and bottlenecks subside.

“What we will not tackle is commoditized business with very low margins which we had in the portfolio years ago” and instead focus on industries, such as health care, perishables, aerospace and high-tech with complex end-to-end supply chains, CFO Markus Blanka-Graff said in a briefing for analysts. “We will pretty much focus on complexity because this is where we can add value and create value for our customers.”

Executives say they are differentiating the company by prioritizing the customer experience, based on high service quality, agility and reliability.

Chief Financial Officer Markus Blanka-Graff (Photo: K+N)

Untapped growth areas include semiconductor shipments that move by air freight, and the renewable energy sector. Wind and solar components are already kicking in for the sea freight business, and K+N expects to win air freight business for aftermarket parts as well as for warehouse and distribution services within domestic markets, Blanka-Graff said.

About half of the 500 top accounts involve newer clients in key verticals that have huge growth potential.

K+N expanded its health care contract logistics network in the U.S. with the September opening of a multiclient distribution center adjacent to Indianapolis International Airport. Indianapolis has a heavy concentration of pharmaceutical companies that require high-quality, temperature-controlled distribution facilities. The Indianapolis investment follows similar expansions in Memphis, Tennessee, to manage vaccine distribution and in Southaven, Mississippi, where K+N handles medical devices.

The financial results were presented for the first time by new CEO Stefan Paul, who recently succeeded Detlef Trefzger.

Third-quarter net revenue increased 16% to $9.9 billion and operating profit moved up 17% year over year to $924 million, Kuehne+Nagel said. During the first three quarters, earnings before interest and taxes jumped 73% to $2.3 billion.

Third-quarter revenues from managing ocean shipments grew 27% from 2021 to $5 billion despite a 5% drop in volumes to 1.13 million twenty-foot equivalent units. K+N generated $2.8 billion from air logistics activity, a 7% gain from the prior year, on a 16% drop in tonnage. The world’s largest ocean and airfreight forwarder by volume and revenue said it maintained high yields in both domains. Year to date, unit gross profits jumped 55% and 37% for ocean and air, respectively.

Executives attributed part of the decline in air freight volumes to reduced production in China because of city closures for COVID reasons rather than reduced demand.

Although demand fell for both ocean and air products, K+N said it gained market share from smaller businesses during the third quarter. And CFO Blanka-Graff said that 3PLs like K+N have an opportunity to gain more market share from carriers in a declining market because they have the flexibility to find capacity at the best value. Shippers that were direct customers of carriers and accepted high rates to guarantee space during pandemic times are looking for an alternative now, he explained.

“I do not see any effect coming from the vertical integration in some of our liner competitors at this point,” he added in reference to Maersk, CMA CGM and Mediterranean Shipping Co. rapidly expanding logistics and air cargo products.

Trucking and contract logistics, smaller parts of the company, also posted robust EBIT gains.

K+N is conservatively estimating EBIT of $2.3 billion in 2023.

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