How profitable is European Road Transport?

European road transport is a fragmented business. Is it a profitable business though? The big European road transport operators are earning EBIT margins between 1-4%. These levels are undoubtedly not peak-efficiency, and also well below their aspirations.

Measuring Road Transport Business Profitability

The best metrics for road transport businesses are EBIT margin and conversion ratio. The EBIT margin is just EBIT divided by revenue.

The EBIT margin is independent of financing and taxation decisions and independent of asset ownership decisions. EBIT margin allows for a comparison between asset-light businesses (where all directly transport related costs are included in direct costs) and asset-heavy businesses (where directly transport related costs are split between direct costs (fuel, driver wages, maintenance) and depreciation (for the use of the asset).

The conversion ratio is EBIT divided by Gross Profit. It is a measure of back office process excellence, capturing all costs that are not directly related to the actual provision of the transport.

The Benchmark

Waberer’s is a roughly EUR 500m pan-European transport business, and together with competitor Girteka the largest fleet owners in Europe. In fact, both claim to have the largest FTL fleets at around 4,000 trucks each. It is a good pick as a benchmark for the industry, given the focus on mostly undifferentiated forms of transport.

The company currently runs its International Transport division doing pan-European FTL transport at a 3.7% EBIT Margin, and an 18.8% conversion ratio. It exhibits a capacity utilisation (loaded ratio) of 91.4%.

Waberer's at estimated peak efficiency

Source: Waberer’s financial report 2017, TNX Logistics

In a recent interview, CEO Ferenc Lajkó outlined his aspiration to improve utilisation to 95% and use digitalisation and automation to take out between 10% and 20% of operating expenses. Applying this to their FY 2017 figures indicates “Peak-Efficiency” of 8.5% EBIT margins and a conversion ratio of 37% .

Enter the Big Six

Waberer’s has around EUR 500m annual revenue. The big six of European road transport (DB Schenker, DHL, DSV, Dachser, Kuehne + Nagel, and Geodis) range from EUR 3bn to EUR 4.5bn revenue. How do these businesses stack up to Waberer’s margins?

Being a non-listed company, Dachser doesn’t report a sufficient amount of financial information for comparative analysis. This leaves DHL, DB Schenker, DSV, Kuehne + Nagel, Geodis.

EBIT margin comparison of European transport companies, FY 2017

Source: Company financial reports, TNX Logistics

For DHL, DB Schenker, DSV and Kuehne + Nagel the figures are only for the road transport segment, while the Geodis figures are for the whole transport business unit (including ocean, air, and some ancillary logistics services). But we can proceed by using an industry average that suggests Ocean and Air margins are 3x Road margins, indicating that Geodis’s road margin is probably in the 1-2% area.

We’ll be focusing on EBIT margins as there are some conceptual challenges comparing conversion ratios between businesses because some cost allocations may be inconsistent between operating expenses and direct costs between those businesses.

DSV shows EBIT margins approach consistent with Waberer’s, while DB Schenker, DHL, Kuehne + Nagel and very likely Geodis are only at 1-2% margin.

Anyone Noticing?

DSV has publicly committed to targets for each of their business units. For road transport that is EBIT margin of 5% and an operating margin of 25%. That’s a good goal, but still below what I believe can be expected from a peak-efficiency business.

DHL is the most open about their dissatisfaction with the Status Quo, not just of road transport in particular, but the whole DHL Global Forwarding, Freight segment of their business. They’ve hired Tim Scharwath from Kuehne + Nagel as the new division CEO in mid-2017 and are rolling out a new IT system. Having been spooked by their SAP roll-out disaster in 2015 one can only imagine that there is a reasonable level of anxiety coming along with the roll-out.

Further, DHL is one of two business that gives guidance as to a target operating level, having committed to improving conversion ratios from the current sub-10% levels to 15%. That is probably similar to a commitment of an EBIT margin of 3%.

The others – DB Schenker, Kuehne + Nagel, Geodis – make little mention of targets or details.

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