Higher freight rates and margin pressure subdue profits at Panalpina

7/23/2017

Higher freight rates and margin pressure subdued profits at international freight forwarding and logistics group Panalpina in the first half-year of 2017 despite “robust” volume growth in both its air and ocean freight businesses.

And the group expects higher air freight rates will continue to impact the profitability of the group’s air freight unit in the second half of this year, while “higher but stable” ocean freight rates will support the recovery of profitability within its ocean freight unit.

In its other outlook predictions for the remainder of 2017 and beyond, the Switzerland-headquartered group said it expected a strong air freight peak season, while in the ocean freight sector it expects “stable volume growth and further carrier consolidation”.

Commenting on the outlook after publishing the group’s half-year results today, Panalpina CEO Stefan Karlen said: “We expect ocean carriers and airlines to be much more disciplined than in previous years in managing transport capacity and sustaining freight rates. While we are confident that we can improve unit profitability in Ocean Freight in the second half of the year, unit profitability in Air Freight will remain under pressure. We will therefore concentrate on what we can influence directly: controlling cost very effectively and pushing ahead with our operations transformation programme.”

In the first half-year of 2017, the company said that while higher freight rates and margin pressure “persisted in a continuously challenging market environment”, Panalpina had managed to increase its reported pre-tax profits (EBIT) by 21% to CHF 42 million and increased reported consolidated profit by 37% to CHF 29.9 million for January to June 2017.

“Thanks to strict cost management we improved EBIT quarter-on-quarter in the first half-year of 2017 and restored profitability in Ocean Freight in the second quarter,” says Panalpina CEO Stefan Karlen. “With the successful implementation of our new IT system in the key market Germany, we also gained further momentum in our operations transformation programme.”

But analysis by logistics investment analyst Jefferies was less generous, noting that Panalpina’s second-quarter EBIT fell 30%, 8% below the consensus of analysts’ expectations, “reflecting market share losses and ongoing pressure on yields and conversion ratios”.

Nevertheless, Panalpina highlighted its higher reported EBIT in the first two quarters overall and higher consolidated profit for the first half. As a result of continued margin pressure, group gross profit decreased 9% to CHF 673.1 million in the first half of 2017. At the same time, costs were “reduced considerably” as total operating expenses decreased 6% to CHF 609.8 million

Reported EBIT and consolidated profit increased year-on-year, but decreased when compared to respective 2016 figures adjusted for restructuring costs. Meanwhile, the EBIT-to-gross-profit margin stood at 6.2%, up from 4.7% last year last year.

Panalpina’s Air Freight volumes increased 7% in the first six months of 2017, “in line with an estimated market growth of about 8%”, although some analysts put overall market growth at closer to 10%. It said high demand for air freight capacity “pushed up rates which put margins under continued pressure”.

Gross profit per tonne decreased 10% to CHF 623, resulting in a gross profit overall of CHF 294.6 million, compared with CHF 304.5 million last year. Reported EBIT in Air Freight increased from CHF 33.1 million to CHF 39.1 million, while the reported EBIT-to-gross-profit margin for the first half of 2017 came in at 13.3% compared to 10.9% a year before.

In Ocean Freight, Panalpina’s volumes in the first half-year increased 5% year-on-year, which was above an estimated market growth of about 4%. However, gross profit per TEU decreased 12% to CHF 283 (HY 2016: CHF 323), resulting in a gross profit overall of CHF 214.6 million (HY 2016: CHF 232.9 million).

Ocean Freight reported an EBIT loss of CHF 2.6 million for the first half-year, down from a profit of CHF 1.3 million in 2016 (adjusted HY 2016: CHF 10.9 million), but returned to profitability in the second quarter.

In contract logistics, as the turnaround of underperforming sites continued, the group’s Logistics gross profit decreased 18% to CHF 163.9 million in the first half-year (HY 2016: CHF 198.9 million), but profitability increased further in the meantime: Logistics posted a reported EBIT of CHF 5.4 million for the first six months of 2017, compared to CHF 0.3 million (adjusted HY 2016: CHF 4.1 million) for the same period of last year.