Profits hit as recovery eats away at margins

The logistics industry has capitalised on the recent economic recovery, but it has come with rising pressure on margins in some areas, such as freight forwarding. Correspondent Phil Hastings reports

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Some of the leading global 3PL (third party logistics) providers active in Asia report a currently mixed industry picture, with a general improvement in contract logistics business but continuing margin pressures in other areas of activity.

On the positive side, most such companies published much-improved financial figures for the second quarter and/or first half of this year compared with 2009.

"The entire logistics industry has capitalised on the economic recovery, resulting in rising transport volumes and increased warehouse utilisation," said Reinhard Lange, chief executive officer of Switzerland-based Kuehne + Nagel International.

Reflecting that trend, Kuehne + Nagel reported an overall 2010 first half turnover up almost 16 percent on the comparable period last year to US$9.45 billion, EBITDA (earnings before interest, tax, depreciation and amortisation) nearly two percent ahead at $456 million and a net earnings improvement of almost nine per cent to $270 million.

Commenting specifically on its contract logistics activities, Kuehne + Nagel said a "favourable market environment" had supported improved capacity utilisation and accelerated warehouse throughput.

"In particular, multinational companies showed great interest in providers offering global competence and standardised services," it claimed.

Kuehne + Nagel added that a near five percent increase in net turnover (excluding currency impact) for that business reflected new business wins the group had concluded and implemented in the first half of this year.

The latest half-year results from the Netherlands-based CEVA Group provided further evidence of the recent strength of the global contract logistics market but also highlighted the pressures being felt in other areas of logistics activity such as freight forwarding.

The group's overall first half revenue was up 22 percent on the comparable period last year to $4.16 billion and EBITDA was 18 percent ahead at $151 million.

However, John Pattullo, CEVA's chief executive officer, pointed out that while the group had finished the first half of this year with "results which show continued growth of our business and progress in implementing our strategy", its second quarter results had been impacted by freight management "margin compression" and "one-time contract logistics start-up costs".

Going into more detail on those latter points, CEVA stated that its overall 2010 second quarter revenue growth of 30 percent had been driven by strong freight volumes, "particularly in the Americas and Asia Pacific". But group EBITDA had declined six percent year-on-year in the second quarter.

Freight management EBITDA before specific items had decreased by $2.6 million, "largely a result of margin compression caused by rapidly rising transport costs which offset higher volumes", while the comparable contract logistics EBITDA figure had declined by $3.9 million, in part due to "one-time costs incurred in establishing new operations".

The impact of freight business margin pressures was also cited in the 2010 second quarter results statement from Kuwait-based worldwide logistics provider Agility. The group said revenue generated by its Global Integrated Logistics (GIL) business in that period was up 23 percent on the comparable quarter last year to almost $1.06 billion.

"The growth is a reflection mainly of the increase in both the overall freight forwarding market over the same timeframe in 2009 and additional customer wins," the company told investors.

However, continued Agility, net revenue margins for GIL in this year's second quarter had stood at just on 24 percent compared with 32 percent in the 2009 quarter, a net decline of eight percent.

"This decline in margins is a result of two main factors: increased price competition resulting in industry-wide erosion of margins; and a greater demand in air and sea products, which have lower margins than contract logistics," stated the company.

Australian group Toll, which claims to be the Asian region's leading provider of integrated logistics service, also recently reported a mixed business picture, with its Singapore-headquartered international supply chain solutions business Toll Global Logistics doing well but some other areas of activity showing signs of a slowdown.

In a recent update, the company stated that while group operating profit be-fore interest and tax for the 2010 half year was expected to be up five to 10 percent on the same period last year, trading conditions had recently "softened" across some parts of the business in Australia and continued to be "challenging" in New Zealand. Lower customer volumes were having an impact on the non-express parts of the business in particular, it added.

"Offsetting the lower volumes in Australia and New Zealand, we have seen stronger trading performances from the Toll Global Logistics and Toll Global Resources businesses," continued the group. "Toll Global Forwarding is also beginning to see improving volumes and the benefits of recent acquisitions."

Assessing the current state of the global 3PL industry as a whole, Thomas Cullen, chief analyst with UK-based worldwide logistics industry research and analysis company Transport Intelligence, suggested a recent bounce-back in the automotive sector had boosted the recovery of many major contract logistics service providers.

"Generally, revenues are now bouncing along quite nicely although it does depend a bit on where you are positioned," he said.

"With freight forwarding, the position is different. Although volumes are still rising quite a lot, there are intimations that this is may be beginning to turn. There are suggestions the balance between demand and supply is beginning to change and that rates are beginning to soften.''

However, Cullen played down a suggestion that any new softening of freight rates might have a negative impact on contract logistics margins.

"The time horizons are different. The purchasing of transport is a much more cyclical business. Contract logistics tends to have a time horizon of at least a year when it comes to setting rates whereas transport prices vary from week to week and even day to day."

Overall, suggested Cullen, the global contract logistics sector looked set to remain fairly stable. "I don't see any huge explosion in growth, in fact growth might be quite hard to come by, but equally I don't see any real collapse in business or margins," he said.

However, Karl Gernandt, executive vice chairman of Kuehne + Nagel International, did sound one note of caution. He stated that due to the group's "convincing start" to 2010, it was "optimistic" about the further development of the business. "However, continued credit risks in some southern European countries and the situation in international finance markets still require great vigilance," he warned.
(Source:www.cargonewsasia.com)