Print this article | Return to Article | Return to CFO.com
Amid strict cost and credit control, the CFO of the Swiss logistics giant discusses growth in the downturn.
Janet Kersnar, CFO Europe Magazine
May 11, 2009
As with so many companies, the fourth quarter of last year was a turning point for Kuehne Nagel, one of the world's largest logistics groups. "It's as if someone pulled a switch and, all of a sudden, nothing moved," recalls CFO Gerard van Kesteren. Unlike other companies, however, the SFr22 billion (€14.5 billion) Swiss firm started battening down the hatches relatively early, in October, when air and seafreight volume began to decline. It was an usual situation for K + N executives to find themselves in, having enjoyed double-digit revenue growth ever since the appointment of a new management team — including van Kesteren — in 2000. But since last autumn, the managers' mantra has been a mixture of strict cost and credit control, "even if it means less growth," van Kesteren admits. The firm's fast reactions have left it with a balance sheet heavy in cash and light on debt, allowing it to keep its acquisition strategy active at a time when talk of any sort of M&A is rare at most other companies.
The uncertainty that companies now face is making planning and forecasting virtually impossible in many sectors. What's the situation at Kuehne + Nagel?
Even if we don't believe the downturn is something that will end soon, we need to look at what's happening as a marvellous opportunity to make our company lean after excessive growth and to prepare ourselves for the next phase of development.
But uncertainty is an issue. To give you an idea, before the 2009 budget was finished late last year, the management board had to adjust it, and before the adjustment was finished, we had to adjust that too. So we asked the supervisory board for permission to move to rolling forecasts, by business volume, field, cost, margins and so on.
It's a completely new concept. The whole annual bottom-up budgeting exercise can be so time consuming, and can paralyse the organisation for months. Of course, we do need an annual budget from a cash flow and from an investment point of view. But we can do it at corporate level because we know the business so well. As for operational budgets, I'm hoping that we'll continue to use the three-month rolling forecasts.
What is the biggest risk that Kuehne + Nagel faces in the downturn?
The biggest risk for us lies with customers. By way of example, K + N Hong Kong pays the freight to a shipping line for a container that's exported to Europe, and it takes four weeks for the container to arrive. In today's turbulence, the customer might go bankrupt during that time.
But we don't use agents or distributors, so we control the money from the beginning to the end. If Hong Kong pays $4,000 for a 40-foot container to Rotterdam on behalf of a customer, we have a pro forma ledger for any payments that are outstanding, even if they hadn't been invoiced yet. So if a customer goes bust, the moment the container arrives via the bill of lading, we control ownership of the goods.
Is that happening more often today?
Absolutely. But in order to protect K + N's SFr2.3 billion of receivables with more than 250,000 customers, we have increased the level of credit insurance. At the beginning of 2008, we were running at 55%, we're now at 60%. We are now receiving cancellations of credit insurance daily. The outstandings are still covered, but we have to look for future solutions, which may mean reducing credit terms or other securities (such as bank guarantees or cash on delivery), and ultimately we may have to cease trading with such customers.
To stay on top of this, it also helps that we're decentralised, and we've pushed responsibility for day-to-day working capital management out to our 5,000 profit-centre leaders. Since 2005 department heads receive their individual income statements as well as capital employed figures (fixed assets plus working capital), as well as information such as days sales outstanding.
DSO as of March, by the way, was 42.6, about the same level as March 2007, while DPO was 52.9 days compared with 47.6 days over the same period.
Managing through the downturn clearly requires a focus on cutting costs. How does this work at Kuehne Nagel?
If you control your costs, you control the cash, and that's what we're doing. The most important focal point is labour. If you look at the structure of the income statement, around 65% of our costs are labour related. So there's a golden rule in the company: if volume goes down, labour must be adjusted accordingly. We have a payroll of about SFr270m a month so we cannot afford to be relaxed. Last year, profit after tax was SFr588m on revenue of SFr22 billion — a vast number of transactions with relatively low margins. If you lose focus, any of the key elements — cash, working capital or productivity — then margins disappear.
Last March, we confirmed our plans to reduce staff by between 5% and 10%, and we are able to [realise] that by natural staff turnover and reducing temporary staff and overtime. We're putting responsibility with the profit-centre leaders — from Shanghai to Rotterdam to Southampton to Hamburg.
But while you are cutting in some parts of the business, you're growing in others — a case in point being the recent acquisition of J Martens Holding of Norway. Are acquisitions hard to justify in this climate?
On the one hand, we are reducing costs in line with reduced volume. But we're also increasing headcount in sales by 15%, from 2,500 to 2,900 — of which 95% is in our sea- and air-freight businesses, costing the company between SFr30m and SFr35m. We are convinced that via this we will grow faster, or slow down more slowly than the rest of the market; ie, obtain more market share.
And we are looking continuously for acceptably priced acquisitions, such as J Martens. I was involved in the due diligence, and it was clear that the multiples were very acceptable and the management solid.
The transport and logistics sector has a lot of scope for consolidation. Don't forget K N is one of the top players in the world, number one in sea-freight, but we have a market share of 3%. So we are operating in a very fragmented market.
We have SFr1 billion of cash on the balance sheet and no debt. That is a very comfortable situation. As a result of being so independent, we can determine our own destiny.
Janet Kersnar is Editor-in-Chief of CFO Europe.