Sustainable and profitable growth

An Interview with the Chairman of the Board of Directors and the Chief Executive Officer of the Panalpina Group about the past financial year, how the Group has adjusted its management structures in response to current market conditions, and the challenges it will face in the future.

What sort of market environment has Panalpina been confronted with during the past year? Was Panalpina able to take advantage of new developments?

Rudolf W. Hug: A strong recovery took place following the financial and global economic crisis suffered by most countries, and our industry recorded major growth in volumes, especially in the first half of 2010. However, growth slowed in the third quarter. This was partly because the baseline was higher, and partly because inventories were not being built up so fast. In addition, we noticed changes in the normal industry cycles, with ocean freight, for example, experiencing an unusually short high season.

Our focus on profitability, our customer and product-oriented organization, together with our customer-focused growth strategy, allowed us to benefit from this growth more than most. At the same time, we kept costs under control. The positive impact on our share price was very obvious: our share has risen 83% in the past twelve months.

Monika Ribar: We have reached our targets and again won significant market shares. Overall, we posted strong volume growth of 22% year on year for Air Freight and 13% for Ocean Freight. We thus beat market growth in both these segments. Profitability per freight unit also improved. Gross profits increased by 7.5%, or 11.4% after adjusting for currency effects. Costs rose only moderately and were consistent with the higher volumes shipped. The number of people employed went up, mainly in Asia and North America, to cope with the larger freight volumes handled on behalf of existing customers and with the new contracts gained. Our strategy proved itself to be effective, since our productivity increased by 12% in 2010.

You mention a customer-focused organization and growth strategy – what do these mean for Panalpina Group?

Rudolf W. Hug: In line with our strategy we are steadily developing from a product-oriented company principally focused on air freight, ocean freight, road freight and other logistics services into an organization that focuses primarily on appropriate solutions for different customer segments. Our longterm objective, however, is to provide global supply chain management: that is, to assist our customers throughout the supply chain and meet their changing needs. Naturally, our products remain an important component of this supply chain, but they are being complemented with a whole series of value-adding supplementary services that benefit us as well as our customers.

Monika Ribar: We adjusted our organizational structure in the second quarter of 2010 in order to be able to react to changing market conditions faster and more decisively in future. Another reason for making this adjustment was to boost growth in all product areas and industry segments. Sales, procurement and operational functions were therefore brought together under the direction of the COO.

We have also differentiated or expanded our customer segments, known as “industry verticals”, with the result that the solutions we offer our customers throughout the world now fall into ten specialist areas: automotive, hi-tech, telecom, consumer and retail, fashion, manufacturing, healthcare, chemicals, oil and gas, and Panprojects (for large industrial projects). When we speak of customers, we are of course referring to all of them: not just the global players but also companies in the medium and smaller-sized segment. We strive to achieve a balanced customer mix, and we focus on interesting niche routes with growth potential as well as on the major trade routes.

Our products continue to play a major role, as is evident from the way we have appointed managers with industry-wide reputations to the relevant key positions in air freight, ocean freight and logistics (which also includes road haulage). It is clear that our focus on customers, key industries and strengthening the product areas is steadily helping to boost our market share and profits.

Were there any other factors that improved Panalpina's position?

Rudolf W. Hug: We were finally able to close the chapter on two lawsuits that had kept not only us, but also many of our competitors, very busy in recent years. In October we announced that an agreement had been reached with the US Department of Justice (DOJ) on proceedings in connection with violations of US antitrust law (the Sherman Antitrust Act). Under the terms of this agreement, Panalpina entered into what is known as a “plea agreement” with the DOJ. The plea agreement releases the company from prosecution for any conduct related to the sale of air freight forwarding services.

Administrative competition proceedings related to such conduct – which, in our view, did not affect the price structure for customers – are still ongoing in the European Union, Switzerland and New Zealand. The Brazilian competition authorities announced an investigation into the international freight forwarding and logistics industry in mid-August 2010, but similar cases in Canada and Australia were dropped.

The second case involved proceedings related to violations of the US Foreign Corrupt Practices Act (FCPA). Under the terms of a plea agreement, Panalpina entered into a deferred prosecution agreement with the DOJ, which agreed to defer any criminal prosecution of the company for three years. In return, Panalpina undertook to continue to improve its compliance policies and procedures and provide regular reports on the company's progress. If the obligations with regard to compliance are met in future, all charges against the company will be dropped at the end of the three-year period.

In addition, the US subsidiary of Panalpina World Transport (Holding) Ltd., Panalpina Inc., agreed to enter a guilty plea to charges brought by the DOJ and the US Securities and Exchange Commission (SEC) relating to violations of the accounting provisions of the FCPA. This resulted in a fine.

Monika Ribar: The DOJ praised Panalpina's exemplary cooperation and extensive remediation efforts, and the dramatic change in its management culture and business conduct, particularly in countries with a high risk of corruption. Panalpina has established an industry-leading compliance structure and programs aimed at ensuring rigorous adherence to the FCPA and other anti-bribery laws. We are now in a position to build on the strong and sustainable compliance culture we have put in place. Our new management culture and the substantial improvements in our compliance systems make us a significantly stronger company today. We are also finding that our business relationships with customers that had discontinued or scaled back business activities with Panalpina during the investigations are now starting to revive again.

Cooperation with the oil and gas customer group suffered as a direct result of the investigations – are positive signals from these customers resulting in new investment in this business area?

Rudolf W. Hug: We are still the global market leader in forwarding and logistics services for the oil and gas industry – nothing has changed in that respect. We are constantly investing in this segment – as an asset light company we are investing in our highly trained employees in particular, as well as in specific oil and gas terminals, for example. In August of the year under review, for instance, we brought an oil and gas logistics terminal into operation in Singapore. This was the first logistics center of any global transport company in Singapore to specialize in the very latest supply chain management solutions for the oil and gas industry.

Monika Ribar: This modern facility is a prime example of Panalpina's commitment to the oil and gas sector in Singapore and elsewhere. The southeast Asian markets are of central importance to us. Singapore represents a major strategic center for boosting Panalpina's market share on the transpacific route. The new logistics hub supports our global upstream network and connects the region with other major oil and gas centers in Houston, Aberdeen and Dubai.

Talking of Dubai, there have been interesting developments there and elsewhere, haven't there?

Monika Ribar: Indeed. In June, Panalpina's new, 42,000 square meters, state-of-the-art logistics hub in Dubai came into operation. Situated in the Dubai Logistics City free trade zone next to the new Al Maktoum International Airport and the Jebel Ali seaport between Dubai city center and Abu Dhabi, this unique infrastructure will provide Panalpina's customers with improved cost and service efficiencies in the United Arab Emirates and across the Persian Gulf region.

In the third quarter of the year under review, we also launched our own additional air freight service linking Luxembourg with the new Dubai World Central Al Maktoum International Airport. This was the first all-freighter service to fly to the new, ultra-modern airport. Panalpina now runs regular services to Dubai as part of its new, round-the-world route linking Luxembourg, Dubai, South Africa, Hong Kong, North America and Latin America. As a result, we can now offer our customers a unique and very flexible solution for time-definite air freight consignments with short transit times between arrival and final delivery.

Panalpina also introduced a new express service to Brazil. An extremely short transit time from Hong Kong to São Paulo via Huntsville, Alabama allows Panalpina to meet the buoyant demand for fast, reliable connections between Asia and Brazil. These activities also show that we are striving to exploit growth in the emerging markets in particular.

The crisis, and the subsequent rapid recovery in some areas, has pushed the themes of environmental protection and sustainability into the background for many companies – does this also apply to Panalpina?

Monika Ribar: Quite the contrary! We have stuck determinedly to our environmental targets, and the results speak for themselves: experts from SGS, the leading inspection and certification company, audited our 80 national organizations. Following a thorough audit process, SGS awarded Panalpina's environmental management systems global certification to ISO 14001:2004 at the beginning of the year under review. Achieving certification was part of our ambitious PanGreen program, the aim of which is to reduce CO2 emissions. Panalpina was the first company in the industry to receive global certification to ISO 14001:2004 for its global activities within the framework of a single integrated management system and certification structure – a milestone for the PanGreen program.

Rudolf W. Hug: Both as individuals and as employees of a globally active company, we have a moral and social responsibility to do everything in our power to ensure that our business activities have the smallest possible impact on the environment. PanGreen is a major element in our strategy. We have made explicit commitments to reducing our paper consumption, recycling, waste management, limiting business trips by air, and cutting electricity and water consumption. We are thus minimizing our use of global resources and reducing our internal CO2 emissions. In addition, we aim to keep on reducing the ecological impact of our business activities. This involves consolidating consignments, the judicious use of all transport modes, and handling hazardous goods safely. Other initiatives are to follow, such as measuring CO2 emissions by customers, partners, and subcontractors.

How do you see business developing over the medium to long term?

Monika Ribar: The environment remains volatile, but we have learned that constant change is the new normality – and we have adjusted our organization and processes accordingly. We are now able to react in a considerably faster and more targeted manner to market fluctuations, such as freight rates or capacity adjustments by our freight partners, as well as to the increasingly rapid changes in safety regulations.

Rudolf W. Hug: We foresee a second wave of globalization over the longer term. The emerging markets, and the BRIC countries (Brazil, Russia, India and China) in particular, will have a different role to play in the structure of the world economy in future. Of the 500 largest companies in the world, 70 are already based in the BRIC countries. Today, an increasing number of hi-tech products are being exported by these firms, instead of simply commodities and bulk goods. In the coming decades, a new middle class with high purchasing power will arise in the emerging countries: the number of new consumers falling into the medium income bracket is forecast to rise by 70 million each year from now onwards.

As a provider of supply chain management solutions present in 80 countries – and represented by agents in 80 more – we are ideally positioned to take advantage of this trend alongside our customers and to continue to build on our expertise.