Panalpina Annual Report 2006

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Bearing the above in mind, overall growth in net forwarding revenue of ocean freight was influenced by volume growth in highrevenue trade lanes, decreasing freight rates, continued pressure from customers. Supply chain management review Supply chain management (SCM) services are specifically offered in specific geographical areas and as integrated solutions for targeted industry verticals including oil and gas in order to meet the entire range of customer’s requirements. The offering of supply chain management services also supports crossselling opportunities for existing customer segments in air and ocean freight. The growth derived from SCM of 4.7% in 2006 was substantially lower than in 2005, where the Group recorded an increase in net forwarding revenue of 22.5%. 2005 was an exceptional year influenced in particular by the award of a major contract by one of the world’s leading mobile phone manufacturers in South America. It was also attributable to the integration of Grampian International Freight, a successful acquisition with main activities in supply chain management in the oil and gas sector. In 2006 however, supply chain management solutions have been offered to new accounts in the automotive industry in the USA, supporting their continuous penetration of the North American market. Contribution margin (gross profit) The most significant driver of freight forwarding profitability is the contribution margin (gross profit). This margin is basically the difference between the buying and selling rate on perunitofweightorvolume (i.e. kilograms, tons, TEUs) basis. Contribution margin (gross profit) per unitofweightorvolume basis is generally driven by available capacity, competition, and supply/demand imbalances. An important factor that influences the contribution margin (gross profit) is changes in buying rates that have a direct impact on the cost of forwarding services from third parties. Management believes that until 2005, freight capacity has been strained causing frequent increases in freight rates, especially in ocean freight. The trend turned to the opposite during the course of 2006. Management also believes that cyclical trends in freight capacity tend to be shorter for air freight than for ocean freight. The time span before additional capacities are realized and released in ocean freight is, due to the nature of the business, longer than those in air freight. During a period of accelerated demand for freight services, owners of freight capacity impose substantial rate increases, taking advantage of their enhanced pricing power. In turn, freight forwarders attempt to pass on these rate increases to their customers. However, there is typically a lag between these two events, leading to a short term rise in capacity costs that are absorbed by the forwarders. This leads to temporary margin pressure that persists until freight rate increases can be fully passed on to customers. Pressure on the contribution margin (gross profit) is eased as additional capacities are released and/or forwarders successfully pass on rate increases to their customers. In the Group’s experience, the converse applies in periods of declining freight rates, when the lag effect leads to temporary margin improvements. The Group’s contribution margin (gross profit) increased by 13.0% from CHF 1,408 million in 2005 to CHF 1,591 million in 2006. The currency development during 2006 had a favorable impact of 1.0% or CHF 14 million. The contribution margin (gross profit) as a percentage of net forwarding revenue increased slightly from 20.3% to 20.6%. Change in contribution margin (gross profit) in million CHF 2006 2005 Change vs. Previous year in % Net forwarding revenues 7,735 6,949 11.3 Contribution margin (gross profit) 1,591 1,408 13.0 As percentage of net forwarding revenues 20.6% 20.3% 0.3 percentage point The Group’s contribution margin (gross profit) was impacted by several factors during 2006 namely: • a strong start in 2006 compared to previous years; • overall reduction of freight buying rates due to overcapacity on the main markets and trade lanes; • less fuel surcharge volatility than in 2005, impacting less on the gross profit margins; • the full year impact of the previous year’s bolt on acquisitions in the oil and gas sector, which lives a striving period. These acquisitions count for 1% of the contribution margin (gross profit) growth. Report of the Executive Board Panalpina Annual Report 2006 1
Report of the Executive Board 18 Panalpina Annual Report 2006 Forwarding services/ expenses in million CHF 2006 Contribution margin (gross profit) share per region Asia/Pacific North America 6,144 2005 5,541 Central and South America Europe/Africa/Middle East/CIS in million CHF Contribution margin (gross profit) 19.3% 8.6% 57.6% 1,408 14.5% The development of the share of gross profit in 2006 was relatively balanced across the regions. Europe/Africa/Middle East/CIS (Emea) regained share of the Group’s contribution margin, increasing by 70 bps from 56.9% to 57.6%. This gain happened to the detriment of Asia/Pacific (Apac). Central and South America (Latam) as well as North America remained stable. Full year 2006 1,591 Regional development of contribution margin (gross profit) Panalpina invoices a service based on customer requirements. For example, air freight services sold and invoiced in Europe may cover the transport of goods from Asia to Europe. Invoiced revenues in such a case are fully reflected within Europe. However, a portion of the contribution margin (gross profit) is shared with Asia in line with revenue sharing agreements and responsibilities. Therefore, when comparing Panalpina’s geographic region reporting, no final conclusions can be drawn based solely on the amount of revenues or contribution margin (gross profit) derived from the regions and various trade lanes. However, management believes that comparing a geographic region’s revenues yearonyear reveals trends within that region and helps explain business development. The following table shows the percentage shares and growth rates of the contribution margin (gross profit) as well as the contribution margin (gross profit) as a percentage of net forwarding revenue per region for the years 2005 and 2006. GPM* in % It needs to be mentioned that the 2005 contribution margin (gross profit) for the region Europe / Africa / Middle East / CIS was negatively impacted by the effect of the onetime incident in the air freight division of Panalpina Airfreight Management Ltd. of CHF 22.4 million. The substantial increase of the contribution margin (gross profit) in this region in 2006 can be ex plained by different factors: on the one hand, the further development and expansion of the oil and gas sector from existing customers out of the traditional African oil and gas countries, but also from emerging energy producing geographical areas like Central Asia (Kazakhstan, Azerbaijan a.s.f.). On the other hand, the constantly increasing demand for goods produced in Asia, either from European or, more and more, upcoming Asian companies, is the reason for the volume growth into Europe. Not to forget the full year impact of the acquisitions realized in 2005 in Norway accounting for 1.2% of the contribution margin (gross profit) increase of this region. At the same time, the Group was awarded various additional multinational accounts in the telecom industry that contributed to the achieved increase. The North American region continued on the growth path it engaged on during 2005 to the difference that the margin erosion stopped and even reversed slightly to end the year with positive results. Important contributors to these gains are multinational accounts in the different industry verticals but mainly in the oil and gas sector as well as the mining sector. Central and South America could record a considerable contribution margin (gross profit) level thanks to project business in the mining sector as well as the positive development of Asian imports. The Asia / Pacific region solely experienced a gross profit margin reduction mainly resulting from the increasing air freight rates that were most significant in the fourth quarter, where capacity traded at high levels because of high demand. Fierce competition which forced price reductions to customers and some modal shifts on the Asia – Europe – Asia trade lane affected the margin as well. ∆ per year in % share in % Full year 2005 Europe /Africa / Middle East / CIS 916 20.7 14.4 57.6 801 20.3 56.9 North America 307 18.1 12.5 19.3 273 17.8 19.4 Central and South America 137 20.4 14.2 8.6 120 18.1 8.5 Asia / Pacific 231 24.4 7.9 14.5 214 26.1 15.2 GPM* in % Total 1,5 1 20.6 1 .0 100.0 1,408 20.2 100.0 * GPM: gross profit margin (gross profit in percent of net forwarding revenues) share in %
Page 1 and 2: Panalpina Annual Report 2006 A Pass
Page 3 and 4: A world-class provider of forwardin
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Page 7 and 8: Interview with Gerhard Fischer 6 Pa
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Page 11 and 12: Executive Board Sandro Knecht Regio
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Page 15 and 16: Report of the Executive Board 14 Pa
Page 17: Report of the Executive Board 16 Pa
Page 25 and 26: “Demand soaring on a global scale
Page 27 and 28: Reporting Regions European Regional
Page 29 and 30: Reporting Regions Noram Regional Co
Page 31 and 32: Reporting Regions Apac Regional Com
Page 33 and 34: Marketplace India Soon to be the wo
Page 35 and 36: Marketplace India 4 Panalpina Annua
Page 37 and 38: “Rapid tonnage growth: one millio
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Page 41 and 42: Core Activities 40 Panalpina Annual
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Page 45 and 46: “The balance between large, mediu
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Page 49 and 50: Customer Groups 48 Panalpina Annual
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Page 53 and 54: Sustainable Growth 52 Panalpina Ann
Page 61 and 62: Corporate Governance 60 Panalpina A
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