Report on Economic Position

Macroeconomic conditions

Multiple crisis environment hampers global economy

At the beginning of 2022, it appeared that we could slowly put the coronavirus pandemic and production obstacles such as supply bottlenecks for components behind us, and the outlook for the business year was quite positive.

This did not, however, hail in a period of strong economic expansion. The Russian invasion of Ukraine in February 2022 had an unprecedented impact on the global economy. The escalation in Ukraine brought about a crunch on energy supplies and sent energy prices through the roof – especially in the summer of 2022. Many other goods also became more expensive, and inflation in many countries rose to levels not seen in 50 years.

In addition to the continuing uncertainties triggered by the war in Ukraine, monetary policy, which was tightened in the face of inflationary pressure, also had a braking effect on the global economy. The major central banks responded to the significant rise in inflation by raising key interest rates at a historically steep rate.

After a weak first half-year, the rise in global output temporarily strengthened in the third quarter, driven in particular by the absence of curbing effects such as the extensive pandemic-related lockdowns in China.

The situation on the energy markets also eased noticeably toward the end of the year, while governments introduced further fiscal measures to provide relief for private households and companies. Nevertheless, global economic momentum diminished significantly by year-end, with the major national economies in particular now facing a phase of weak economic activity.

_{Sources for this section:
Deutsche Bundesbank, Monthly Report, January and February 2023
IfW Kiel, Kiel Institute Economic Outlook, No. 97 (2022|Q4)
IMK, IMK Report No. 178, December 2022}

The situation in Germany was similar to that described for the global economy. High inflation and uncertainty surrounding the war in Ukraine also weighed on the German economy. By year-end, the situation had brightened to the extent that wholesale prices for electricity and gas had fallen – although they remained at a high level. According to surveys by the ifo Institute, the business climate also improved. Despite the economic cooling off, the labor market is proving robust, mainly on the back of continued high demand for skilled labor.

Overall, gross domestic product (GDP) rose by around 1.9 percent in this environment, slightly exceeding the pre-pandemic level. The catch-up effects in connection with the post-pandemic reopening of the economy were, however, constrained by Russia’s war of aggression on Ukraine and the resulting new supply chain problems, coupled with high inflation and uncertainties regarding energy supplies.

_{Sources for this section:
Deutsche Bundesbank, Monthly Report, January and February 2023
IfW Kiel, Kiel Institute Economic Outlook, No. 98 (2022|Q4)}

Situation in the logistics sector

The demands on logistics are changing at an ever-increasing pace. These changes are being driven by ongoing globalization, shorter product life cycles, digitalization and urbanization. As a result, the sector continues to benefit from the increasing demand for logistics services, which is amplified by the growth in e-commerce business and reverse logistics processing in the business-to-consumer segment. Challenges concern in particular continued pressure on margins, demographic trends and growing competition in the search for specialists, managers and young talents. Other factors are the importance of online retailing, which has once again been amplified during the coronavirus pandemic, increasing customer requirements with regard to speed, flexibility and the quality of supply, and raised environmental awareness among the population. The sector is currently experiencing staff shortages particularly in the areas of warehouse workers, vehicle drivers, engine drivers and IT managers.

In addition, when it comes to outsourcing activities, logistics companies are expected to be very willing to invest and highly innovative. A key focus here is to invest in transshipment, distribution and order-picking centers in conveniently situated locations. Contracts with customers are frequently concluded with terms of only a few years and space and handling equipment are often rented or leased.

Increasing customer requirements have greatly expanded the use of end-to-end information and communication technology along the process chains. Logistics service providers must increasingly adapt to changes such as the growing role of advancing automation and digitalization of process chains.

The logistics industry in Germany is the largest sector of the economy after the automotive industry and commerce. This is attributable to the fact that as a logistics location, Germany generates a large share of its economic output in industry and the retail sector. Other reasons include the traditionally high export share, its central position in Europe and the resulting hub function that it fulfills. The quality of its transport infrastructure and the available expertise in logistics technology also contribute to making Germany an attractive logistics location.

The war in Ukraine, energy costs, inflation, skills shortages, climate change and enduring pandemic conditions – these multiple crises of 2022 also made for a very challenging business environment in the logistics sector.

The business model of the global economy is based on finely tuned and seamlessly interwoven logistics spanning the globe. This global network of supply chains is very fragile and was already put to the test with COVID-19. In line with economic activity, the SCI LOGISTICS BAROMETER performance indicator was at a similarly negative level at the end of 2022 as at the beginning of the coronavirus pandemic in March 2020, a development significantly influenced by the war in Ukraine. Looking back, the business situation continued to stabilize in the final months of the 2022 financial year, with a majority characterizing the current economic situation as “normal” (71 percent) or “good” (16 percent) in December 2022. The shortage of skilled workers and the resulting dearth of suitable applicants pose additional difficulties for the logistics industry.

The German Logistics Association (BVL) Logistics Indicator also developed negatively in 2022 (see also the graphic chart in the Outlook) and the business climate remained well short of its full potential. Demand momentum fell off sharply in recent months and the order backlog was frequently characterized as too low, with the catch-up effects seen in the previous months having been largely absorbed and in many sectors fears of a prolonged period of weak demand setting in. This was compounded by increasing cost pressure due to persistently high inflation.

Global goods flows by container ship suffered considerable disruptions in the 2021 financial year and well into 2022. The reasons for this are manifold and were presented in the prior-period Annual Report. At year-end 2022, supply chains were increasingly returning to normal – in particular due to lower transport volumes as a result of consumer restraint, the threat of recession, and other factors.

_{Sources for this section:
BVL Logistics Indicator, 4th Quarter 2022, including commentary
SCI Verkehr, SCI Logistics Barometer, December 2022
NDR.de dated 12/29/2022 “Schifffahrtsbilanz 2022: Schwierige Zeiten für Reeder,” retrieved on February 1, 2023; 4:05 p.m.}

Board of Management’s overall assessment of the business environment

BLG LOGISTICS started 2022 with the hope of light at the end of the coronavirus tunnel, unaware that the next crises were brewing on the horizon. Since February, we have been waking up in a new world every day. The crisis has become the norm rather than an exception. The war in Ukraine, energy costs, inflation, skills shortages, climate change and enduring pandemic conditions – these multiple crises made for a very challenging business environment.

Nevertheless, BLG LOGISTICS closed the 2022 financial year considerably better than anticipated, which was a respectable achievement given the large number of crises and challenges. However, we know that the economic uncertainties will continue to grow in 2023 – and are preparing accordingly.

The situation in the AUTOMOBILE Division remains tense. The reasons for this are in many cases due to problems in the industry:

• stocks of slow movers and unfinished vehicles waiting for missing parts such as semiconductors, cable harnesses and wiring systems, leading to heavily utilized storage areas and low productivity;

• bottlenecks in the provision of traction locomotives for road and rail vehicles;

• lower volumes and fewer sailings due to plant closures, parts shortages and erratic shipping schedules.

The causes thus often lie beyond the ports, yet this is where the problems are most visible. Ports are the hubs of logistics. Rail and road converge on the quayside, and in the latter case the situation is additionally complex. While demand for transport capacities by rail is, on the one hand, high, there are constraints due to bottlenecks in the provision of traction locomotives by rail transport companies. These are mainly due to a shortage of locomotive drivers, a large number of construction sites on the Europe-wide track network and the prioritization of other goods on the railroads. The limitations on rail capacities are leading to high demand for truck transport as an alternative. However, in the trucking sector, too, capacities are very tight, resulting among other things from the high shortage of truck drivers.

BLG AutoTerminals Bremerhaven has been undergoing restructuring since mid-2022. As part of this process, an employment protection contract was agreed with the collective bargaining parties. The primary goal is to ensure the long-term stability of the Bremerhaven site even without a collective agreement to safeguard employment. To achieve this, efficient processes and modern structures are essential for a site the size of our terminal.

The CONTRACT Division provides contract logistics at more than 40 locations in Germany and around the world. In the past, contract logistics was divided into the industrial logistics and retail logistics business areas, but now the division has been given a new organizational structure. From 2023 on, the locations and countries will be integrated into a regional structure.

Consumer goods and e-commerce services in particular were again in demand. We responded to rising energy prices at an early stage and concluded cost-sharing agreements with our customers.

Since December 1, 2022, Matthias Magnor has been responsible as Chief Operating Officer (COO) for the AUTOMOBILE and CONTRACT Divisions. The closer cooperation between these two divisions allows us to network capacities and expertise and at the same time leverage synergy effects.

Although handling volumes in the CONTAINER Division at the two smallest EUROGATE terminals in Germany were slightly above plan in 2022, the three largest terminals, and thus the German sites as a whole, fell well short of expectations. However, this was more than offset by extremely high storage fees. While positive, these storage fees are one-time effects and therefore only have a temporary impact.

The industry is currently undergoing structural and lasting changes. Competition for container volumes is becoming increasingly tough, making it imperative to forge ahead with implementing the transformation measures aimed at stabilizing the future of the EUROGATE Group.

The trend on the part of the shipping lines to commission additional ultra-large container vessels continues unabated. Given this trend, the EUROGATE is also expected to see an increase in the number of ultra-large container ships calling at its terminals.

BLG LOGISTICS has leveraged the opportunities presented to us by the pandemic and initiated many changes that make us – even in times of multiple crises – robust, adaptable and fit for the future. Nevertheless, the market environment remains volatile. To enable us to meet these challenges, we are continuing to relentlessly tackle topics such as flexibility, digitalization, automation and sustainability and are working intensively to constantly improve BLG LOGISTICS’ economic position.

This assessment is based on the results of the consolidated financial statements for 2022 and takes into account business performance up to the time the group management report was drawn up in 2023. The business development at the beginning of 2023 was in line with our expectations.

Business performance

Financial performance

In the 2022 financial year, Group revenue increased by EUR 68,542 thousand year on year to EUR 1,118,980 thousand. This increase was attributable with EUR 61,793 thousand to the AUTOMOBILE Division, and was mainly due to higher revenues in the transport segment and to storage fees.

¹ The "Reconciliation" line presented here and in the following tables includes the derecognition of the CONTAINER Division (due to equity accounting) and the figures for the central departments (Services).

Furthermore, handling volumes and thus revenue development at the Neustädter Hafen site in Bremen increased.

The increase in the CONTRACT Division amounted to EUR 5,393 thousand. This was due in particular to the expansion of our business in the Sports & Fashion area.

In the CONTAINER Division, handling volumes (in TEUs) decreased by 2.8 percent overall on the back of the tense global economic situation. Nevertheless, disruptions in the global supply chains and the shipping companies’ diverging schedules resulted in a significant temporary increase in storage fees, so that revenue in the 2022 financial year rose by EUR 39,143 thousand to EUR 345,098 thousand. Since the EUROGATE Group, which represents the CONTAINER Division, is included in the consolidated financial statements using the equity method, this revenue is not included in the reported Group revenue.

² On account of the significant contribution of the CONTAINER Division to earnings, income from equity investments is included in EBIT.

Other income was down only slightly year on year (EUR 1,331 thousand). Income from the disposal of property, plant and equipment was EUR 7,089 thousand lower than in the previous year due principally to the sale of the high-bay warehouse facility at the Bremen location in the previous year (retail logistics business area). In contrast, income from the reversal of provisions relating to various one-off items rose by EUR 6,235 thousand.

Net profit from equity-accounted entities primarily included the net investment income from the measurement of EUROGATE GmbH & Co. KGaA, KG (EUROGATE) accounted for using the equity method with EUR 76,705 thousand (previous year: EUR 61,879 thousand). For further information, please refer to the remarks below relating to the CONTAINER Division. This was contrasted in the reporting year by expenses for write-downs of the carrying amounts of investments accounted for using the equity method in the amount of EUR 2,109 thousand.

With 9.0 percent, the cost of materials increased slightly more than revenue (6.5 percent) due to general price increases in particular for external staff, materials and energy in an environment of high inflation.

Personnel expenses decreased in the reporting year to EUR 475,075 thousand (previous year: EUR 479,303 thousand). This corresponded to the reduction in the number of employees (excluding the CONTAINER Division) by 483. This reflected in particular the loss of the Leipzig location in the CONTRACT Division, which was no longer included in the 2022 financial year due to a switch of service provider, as is customary in contract logistics.

Other expenses in the reporting year increased by EUR 37,229 thousand and, in addition to general cost increases due to high inflation, reflected expenses for the recognition of provisions for expected losses and infrastructure measures in the reporting year. Consulting costs also increased slightly as a result of our involvement in various projects to make us future proof.

Depreciation and amortization expense and impairment rose by EUR 6,174 thousand in the 2022 financial year. While depreciation and amortization expense was slightly lower (EUR 1,446 thousand) year on year, impairment losses rose substantially. In the reporting year impairment losses amounting to EUR 7,836 thousand were attributable to write-downs of software.

Net financial income/net finance costs improved compared with the previous year by EUR 421 thousand to EUR –8,860 thousand. The improvement was attributable to higher interest income from lease contracts with customers. Higher interest rates for non-current loans and other financial liabilities resulting from the increase in the general level of interest rates had an opposite effect.

Overall, net profit increased slightly compared with the previous year. This was attributable exclusively to the high net investment income from the CONTAINER Division, which compensated for the lower-than-expected earnings in the AUTOMOBILE Division. EBIT rose accordingly year on year by EUR 3,075 thousand to EUR 64,582 thousand. Earnings before taxes (EBT) similarly increased by EUR 3,496 thousand to EUR 55,722 thousand. Due to the likewise increased revenue (+ EUR 68,542 thousand), the EBT margin in the reporting year remained constant compared to the previous year at 5.0 percent.

Income taxes in the reporting year were EUR 4,116 thousand (previous year: EUR 1,660 thousand). The increase is explained by higher expenses for prior periods (EUR 3,537 thousand) and lower income from tax reimbursements (EUR 1,216 thousand). In contrast, income from deferred taxes rose significantly by EUR 1,684 thousand.

As a result of the developments described, consolidated net profit for the period increased by EUR 1,040 thousand to EUR 51,606 thousand.

AUTOMOBILE Division

The AUTOMOBILE Division is a leading technical and logistics service provider for the international automotive industry. In this business area, the company offers multimodal transport concepts with global logistics reach and dovetails individualized and innovative technical service packages.

Along the global value chains of the automotive industry, various factors influenced developments in the AUTOMOBILE Division in the 2022 financial year. Especially at the beginning of the year, the effects of the coronavirus pandemic were still being felt as a result of the zero-COVID strategy in China, putting pressure on the availability of components. With the start of the war in Ukraine, the pressure on supply chains further intensified, and sales markets came under additional strain. In Russia in particular, demand for new vehicles fell significantly with the start of the war. The energy crisis and rising inflation made the situation on the procurement markets very challenging. Enormous price increases weighed on the value chain and also dampened consumer spending. Despite the challenging conditions, volumes of 4.7 million vehicles were handled, almost matching the previous year’s level.

In the seaport terminals business area, overall throughput in financial year 2022 remained at the low level of the previous year. As in the prior period, the Bremerhaven car terminal handled 1.7 million vehicles. Handling volumes at AutoTerminal Cuxhaven were also almost identical. In addition to the weak volume situation, absenteeism rates were above average, with the result that expenses for external staff additionally depressed earnings. Lower productivity and the above-mentioned price situation on the energy market also exerted pressure on the earnings situation. At the Cuxhaven terminal, additional business for storage, warehouse maintenance, handling and washing of vehicles made a positive contribution to earnings. Overall, exceptional effects from the write-down of software projects, restructuring expenses and provisions for infrastructure measures weighed on the business area's earnings.

The high & heavy segment was unable to reproduce the positive development of the previous year. Partly as a result of the war in Ukraine and various lockdowns in China, the throughput volume of 1.1 million metric tons was around 0.3 million metric tons below the previous year.

Capacity utilization at the Neustädter Hafen site in Bremen was high, in particular due to high volumes of steel and forestry products. Tonnage (ship-side handling) increased from 1.3 million metric tons to 1.6 million metric tons with a corresponding positive effect on earnings. Additional expenses for replacement equipment and maintenance caused by the permanently high capacity utilization, as well as increased energy costs, depressed the result somewhat, but could not spoil the positive overall picture.

The challenges described above and their impact on volumes nevertheless had a significant impact on the situation at the seaport terminals and meant that the business area closed the year with a clear overall loss.

The inland terminals business area increased vehicle handling by 7 percent compared to the previous year and exceeded expectations at the Kelheim, Dodendorf and Hamburg sites. Reduced volumes with the regular customer base due to the challenges on the automotive market were offset by additional (technical) value-added activities on the vehicles and a range of spot business.

The Neuss terminal consistently experienced significant capacity utilization problems due to reduced volumes from the main customer there. Although spot business was temporarily able to cushion the decline in revenue somewhat, the location nevertheless fell far short of expectations.

The AutoTransport business area handled spot transports at very adequate rates in the 2022 financial year. However, in the course of the year, there was also increased price pressure from subcontractors, who were able to push through higher charges on the back of scarce market capacities. The divestment of the Schöps branch office generated income of EUR 470 thousand. The rail business area, on the other hand, faced a number of challenges.

A lack of available lines due to construction works, a shortage of skilled locomotive drivers and at times high absenteeism rates had a significant impact on productivity and earnings, with the result that expectations in the rail segment were not met.

The Southern/Eastern Europe business area, and in particular the representative offices in Russia and Ukraine, were hard hit by the outbreak of the war. Operations temporarily came to a complete standstill. The imposed sanctions and fluctuating exchange rates also negatively affected the earnings situation. In response to the developments in both countries, the investment in Ukraine was written down in full and the investment in Russia was deconsolidated. While the Gdansk site benefited from extraordinary business, it was unable to compensate for the losses in the other areas.

Due to the challenges described above, especially in the seaport terminals business area, EBT in the AUTOMOBILE Division for the 2022 financial year decreased from EUR –1,076 thousand to EUR –11,696 thousand, which was well below the previous year’s figure and thus also below expectations.

CONTRACT Division

The CONTRACT Division manages complex projects and offers its customers reliable logistics solutions. We work at our logistics centers and our customers’ production facilities and plants at over 40 locations in Europe and overseas.

In the multiple crisis environment, the CONTRACT Division succeeded overall in achieving its targets in financial year 2022. In many places, the order situation and volumes processed were above expectations, although the high prices, for example for energy, had a negative impact.

Conditions in the CKD (Completely Knocked Down) and body-in-white areas at our largest industrial logistics site in Bremen were difficult in 2022. These were affected in 2022 by low volumes, productivity difficulties and the loss of volumes for Russia. It was possible to mitigate the effects of this through countermeasures such as cost reductions and process improvements.

In some cases, there were also production interruptions at our customers in the industrial logistics business area in 2022, which had negative repercussions on the volume and earnings situation.

At our overseas industrial logistics locations, BLG LOGISTICS saw a very positive development in 2022, particularly in South Africa. The site – including new business – was able to close the year much better than originally expected. In contrast, business in the US closed the 2022 financial year below plan, due in particular to declining volumes among manufacturers and a delayed start to new business. Volumes at the joint ventures in India and Malaysia were below expectations. BLG LOGISTICS withdrew from these two joint ventures at the beginning of 2023.

The retail logistics business area also developed positively in the 2022 reporting year. At individual locations, supply chain disruptions (lack of product availability, shortage of sea containers, etc.) and production interruptions by manufacturers severely restricted operations. However, despite high costs for energy and similar, overall it was possible to compensate for this through good volumes and new business at other locations.

Overall, the CONTRACT Division was able to meet the earnings expectations in a challenging environment, and EBIT increased year on year by EUR 2,539 thousand to EUR 11,256 thousand.

CONTAINER Division

The CONTAINER Division of BLG LOGISTICS is represented by half of the company shares in the joint venture EUROGATE GmbH & Co. KGaA, KG. This company operates – in some cases with partners – container terminals in Bremerhaven, Hamburg and Wilhelmshaven (Germany), at the Italian locations La Spezia, Ravenna and Salerno, in Limassol (Cyprus), as well as in Tangier (Morocco) and Ust-Luga (Russia). The EUROGATE Group also has holdings in several inland terminals and railroad transport companies.

In addition, EUROGATE became a shareholder in the “Damietta Alliance Container Terminal S.A.E:” joint venture in 2022, which will be responsible for realizing the construction, development and operation of a new terminal in the port of Damietta/Egypt. The joint venture has three main shareholders: Hapag-Lloyd Damietta GmbH (39%), Eurogate Damietta GmbH (29.5%) and Contship Damietta Srl (29.5%). Two further partners, Middle East Logistics & Consultants Group and Ship & C.R.E.W. Egypt S.A.E., each hold 1.0% of the shares.

The CONTAINER Division’s business mainly involves container handling. Intermodal services, such as the carriage of sea containers to and from the terminals, repairs, depot storage and trading of containers as well as cargomodal services and technical services are also offered as secondary services.