Kuehne & Nagel International's (KHNGF) CEO Detlef Trefzger on Q3 2016 Results - Earnings Call Transcript

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Kuehne & Nagel International AG (OTCPK:KHNGF) Q3 2016 Results Earnings Conference Call October 18, 2016 8:00 AM ET

Executives

Detlef Trefzger - Chief Executive Officer

Markus Blanka-Graff - Chief Financial Officer

Analysts

Mark McVicar - Barclays

David Ross - Stifel Nicolaus

Neil Glynn - Credit Suisse

David Campbell - Thompson, Davis & Company

Damien Brewer - RBC

Frans Hoyer - Jyske Bank

Michael Foeth - Bank Vontobel

Rolf Kunz - Bank am Bellevue

Tobias Sittig - Main First Bank

Stuart Todd - Lloyd's Loading List

Operator

Good afternoon, ladies and gentlemen. And welcome to the Kuehne & Nagel nine months 2016 results analyst call, hosted by Detlef Trefzger and Markus Blanka-Graff. My name is Simone and I will be your coordinator for today's conference. For the duration of the call, you will be on listen-only. However, at the end of the call, you will have the opportunity to ask questions. [Operator Instructions]

I am now handing you over to Detlef Trefzger to begin today's conference. Please go ahead.

Detlef Trefzger

Good morning. Good day, good afternoon and good evening to all of you and welcome from Switzerland to the Kuehne & Nagel International AG analyst conference call on our nine-month 2016 results.

In good manner, Markus and are sitting here in Switzerland and we will lead you through the presentation and will be focusing on Q&A then afterwards. We have sent around the details of our nine-month results earlier today and I would like to lead you now through the information pack distributed.

Let's get started on page four. In the first nine months of 2016, we were able to increase gross profit with 6.3% or in constant currencies with 7.1% and the EBIT was 5.9%, respectively, 6.1% versus a flat net turnover development.

This shows the continued success of Kuehne & Nagel Group in the first nine, but also the last three months of 2016. We will continue now on page six with the details on our Seafreight business effect. And the headline for Seafreight from our point of view is stable performance in rough seas, with turnover reduced by 10.6% versus previous year. This shows the unhealthy rate development which continued in 2016.

Gross profit, we were able to increase by 4.3% and EBIT by 1.5%. And the second month in a row, we were able to operate and ship more than 1 million containers with 1.039 million TEUs transported in Q3 2016. But more important is the market still shows only little signs of growth, 1 to 2% maximum, and only Asia exports and intra-Asia showed strong volume growth in the market.

KN was able – Kuehne & Nagel was able to outperform market growth clearly with minimal double market growth over a volume growth that you see here and we were able to grow on all trades globally.

More important for you is the Q3 result. The volumes and trade lanes developed all grade in Q3 2016 from a volume perspective. We have expected rate increases in our industry and we have stated so, but in a managed process. We were surprised by the development in September, like all other market participants and, therefore, we have lost CHF16 per TEU GP in quarter three. Given the rate – the volume development in September, but also August and July, we were able to keep our gross profit in Q3 stable CHF362 million for the Seafreight business unit.

The consolidation of the shipping industry continues. We had one bankruptcy this year and three carriers that gave up because this is a reflection of the unsustainable rates in the market and I would like to give you one example. Asia export for Latin America east coast, from somewhere in Asia to Santos or Buenos Aires. You pay for 40-foot container port-port at the moment rates of US$25. For US$25, you can enter a taxi in New York, but you will not go far. And that shows the unsustainable rate level of sea freight at the moment.

I would like to continue on page eight with the Airfreight business unit. Strong volume growth and overall EBIT improvement in a declining market characterizes our Airfreight performance for the first nine months, but also in Q3. The turnover reflected the rate reductions also in Airfreight with minus 3.7% versus previous year. Gross profit increased by 6.4%; EBITDA, 6.5%; and overall, EBIT improved by 8.9%.

The EBIT growth per quarter shows a 7.4% improvement in Q1, an 8.8% improvement in Q2, and a 10.6% improvement in Q3. The volume increased further in Q3 with 3.8% and for the first three quarters with 2.2% versus a market that approximately decreased or declined by 1%. Our volume was generated by both, equally perishables as well as hard cargo on all major trades.

Very, very strong export business, we have seen, from Asia, both TransPac, but also to North America – to Europe and the Middle East in the last quarter. Hence the stable conversion rates of about 30% show that we are able to scale and sell solutions to our customers in that market segment.

Overland, slide 11, we have a performance that is stable in Overland and expansion in net turnover and gross profit, driven both out of acquisitions and organic growth of 16.9% in net turnover and 9.4% in gross profit and an EBIT improvement of 5.9%. The Overland business has a focus on organic growth, especially in Europe and also in some of the Asian markets. And we have gained growth in all those markets.

Q3, traditionally is the weakest quarter, reflecting seasonality in Overland, especially it was European – some European markets and we have seen a US intermodal market that continued to contract with a reduction of volume in that specific market of 3 to 4% per month.

The fall in Q3 freight rates for rail, combined with trucking overcapacity, and less market demand reduced the price advantage or the incremental cost advantage of intermodal services in general in the US and we have participated in that trend as well. But we have not lost any customers or agents, but we have one business, but our existing customers are volume down-trading in Overland in the US at the moment.

Overall, the momentum we have developed in Overland, we were able to keep and we're optimistic about the next quarter to come.

I would like to continue on slide 13, Contract Logistics. The Contract Logistics business unit was very successful in winning and implementing new business successfully. This is reflected in our key figures as well. Net turnover increased 5.2%, gross profit improvement 6.4% and an EBIT improvement of 16.3%. In Q3, we were able to implement additional business and to also confirm a operational improvement of 5% to 10% quarter-over-quarter.

The flat EBIT development in Q3 of CHF30 million shows or reflects an operational improvement of CHF10 million as we had an extraordinary income booked in 2015 quarter three through the sale of our IT company, DSIA, and the associated software rights, which reflected an extraordinary income in 2015 quarter three of CHF10 million.

The business unit, Contract Logistics, has scaled industry-specific solutions in the area of pharma, in the industries of e-commerce fulfillment successfully, and a lot of customers and customer contracts were retained as well. Thus we were able to expand our square meterage warehouse space operated or in operation at the moment by 4.8% or 450,000 m² and also to reduce our aisle space from 3.4% in the previous year’s nine months to 3.2% this year.

Before I hand over to Markus, I would like to conclude that the KN Group has been operationally very successful and is on good track, taken into consideration the negative effects from the sea freight in the last months, the market consolidation and the one-time effect in Contract Logistics in 2015.

And having said so, I now hand over to Markus.

Markus Blanka-Graff

Thank you, Detlef. Welcome, ladies and gentlemen. Moving on to page number 15, as you know, it’s my preferred slide and it’s going to stay my preferred slide, whatever numbers are on it because it gives a very transparent view on our business model. This time, we talk about leverage effect and again I’m going to talk about it.

The business model, Sea and Airfreight, is a leverage model. And I’m guiding you maybe quickly the ones that haven’t looked at it yet at the quarter-over-quarter comparison. And when you look into the Airfreight development over the first three quarters and I’m looking at EBIT increase year-over-year, I can read plus 7.4%, plus 6%, plus 10%. That model has not changed.

In Seafreight, the same is true. The model has not changed. So we are – as Detlef has already in detail looked into, we are in the third quarter facing a market situation that gives us, for the third quarter, particularly a deleveraging effect for Seafreight. I'm very confident that that is a temporary effect that we see in the market, but also as Detlef alluded to the rate level, rates at a very low level on a sustainable long-term view are not going to be helping the profitability.

So, looking forward, I think that leverage effect is still in place and Seafreight, clearly, for me, going into the next quarter and also for the full year as well as Airfreight is going to continue to deliver good results.

Technically – and I’m now going back into slide number 15. Technically, for your information, you see on the right bottom corner, our exchange rates, to preempt some of the questions, the British pound – I’m sure there’s going to be some questions around impact of Brexit. To preempt that, British pound in our consolidation has 6.4% negative impact in numbers that actually translate on an EBIT level to CHF2.6 million year-to-date.

Moving on to page 16, and no change in our concept and our structure. Net earnings, for the period, you can read that out of the documentation, has increased CHF21 million from CHF510 million to CHF531 million. Cash and cash equivalent has increased from CHF508 million to CHF717 million. So still hugely and highly cash generating business unit and business model.

Moving on to page 17, balance sheet, same magnitude CHF6.1 billion, around that number. Trade receivables, CHF2.5 billion. Equity ratio above 30%, 32.8%.

Cash flow, page 18, you see increase in cash and cash equivalents, third line from the bottom, CHF533 million, better than last year. That comes from two bigger blocks. It comes from the ReTrans acquisition cash-out in 2015 that obviously we have not in here in 2016 and also a reduced dividend payment.

However, CHF35 million came out through a better operational cash flow. So what I explained to you on the page 15 on the business model, nothing has changed. The same structures and concept are in place.

Page 19, working capital development, we are very happy that our working capital intensity in a year-over-year comparison is at a very low level of 3.2%. We have managed well our DSOs. They have not increased. I think it is an uphill fight every day, but all my team and the whole organization is very aware of this. And we were able to manage our DPO on a slightly better level.

Page number 20, regional capital employed and it confirms what I keep saying over the last couple of quarters, given our profitability in that business model and the structure of the balance sheet underneath that business model is going to give us a return on capital employed around the 70%, and that this confirmed quarter-over-quarter.

After this, couple of explanations on numbers, I would like to hand over back to Detlef on page 21.

Detlef Trefzger

Thanks, Markus. Page 21, ladies and gentlemen, our market approach and our strategy has been confirmed. The business model is intact and working well. Therefore, we are confident about the business development for the fourth quarter 2016 and we should be able to meet all our targets for 2016, be it volumes, market share or EBIT development.

Thanks for listening. And now I hand back to the operator to go through Q&A.

Question-and-Answer Session

Operator

[Operator Instructions]. So the first question comes from the line of Mark McVicar from Barclays.

Mark McVicar

Thank you. Good afternoon, guys. I have two questions. If we look at Seafreight in Q3, what proportion of your volume was affected by the rate spikes after Hanjin went bust, declared bankruptcy, and did you end up in some instances with a negative GP on some of that volume?

Detlef Trefzger

Well, these are the two questions. We never go after negative GP, first of all. So that is not our business model. We go for positive GP. But the GP margin went down because rate spiked immediately after the Hanjin bankruptcy has been filed, I think August 31. And that shows that despite the low rate level, a controlled process or managed process of rate development is helping the industry to move back to a healthy equilibrium rather than erratic rate changes that are, so to say, unpredictable.

Okay. So your question – the question on the volume that was affected, directly our exposure to Hanjin was relatively low. Indirect market rates reflected immediately the bankruptcy and then started to drizzle again.

Mark McVicar

Okay. But just as a quick follow-up to that, you’re quite happy that you’ll get back to where you would have expected to be on GP per TEU once the rates hikes have been absorbed and/or if there’s been some sort of pushing back on rates. It’s clearly cyclical relating to the Hanjin effect essentially.

Detlef Trefzger

Yes.

Mark McVicar

Okay. My second question was, could you say a little bit more about what's been going on with US intermodal? So this people running trunks longer distances because it's cheaper to do than used trucks and trains together, is it?

Detlef Trefzger

Exactly. We have an overcapacity of trucks at the moment in the market and the incremental cost advantage of going intermodal has been reduced. And, therefore, we see less demand for intermodal at the moment in the market. That’s a reflection of consumption, but to a major extent also to a reflection on oil price development. With the oil price stabilizing and increasingly improving again, that should find a different direction soon.

Mark McVicar

But do you think consumption of the products that you’re carrying should still be growing, is it not, in the States?

Detlef Trefzger

Sure. Yeah, yeah. Sure. But they are carried by trucks rather than by trains and trucks. That’s the message. I’m talking about a general consumption effect. I’m talking about the choice or the alternatives between rail road and truck.

Mark McVicar

Got it. Lovely. Thank you very much.

Detlef Trefzger

You’re welcome.

Operator

Thank you. The next question comes from the line of David Ross from Stifel. Please go ahead.

David Ross

Yes. Good afternoon, Detlef and Markus.

Detlef Trefzger

Hi, David.

David Ross

The Airfreight market, you said, declined by about 1% in the quarter, which was different from some of the headline numbers we’ve been reading out of a couple of the data sources. Can you explain, one, I guess, what the difference that you're seeing in the market is, as to why you think it was shrinking in 3Q rather than growing? And then second, why were you able to get solid yield increase in a shrinking market?

Detlef Trefzger

To start with the latter question, we sell solutions. We are concentrating on certain industries, but focus on solution selling, which we scale for customers rather than the pure transactional airport-airport business model. I'm saying the market is declining first nine months 2016, minus 1%. There is a slide – it’s a more stable market in Q3, while the reduction in Q1 was in the market, talking market, David, was more significant due to the West Coast strike, the so-called port workers’ strike that caused some additional airfreight volumes Q1 2015. Does this answer your question?

David Ross

Yes. And then – and, Markus, you’ve got a lot of cash available. Historically, you’ve preferred to pay that out of the dividend. What is the thought on potential share buyback and what stock price level would that be considered?

Detlef Trefzger

I think, David, my standard answer is that the Board of Directors has looked into various options and they came always to the conclusion together with management board that dividend is the appropriate way to payout the excess cash. I think I have no indications that so far that opinion would have changed.

David Ross

Thank you.

Operator

Thank you. The next question comes from the line of Neil Glynn from Credit Suisse. Please go ahead.

Neil Glynn

Good afternoon. If I could ask two questions please. The first one with respect to – or both with respect to Seafreight, but the first one, specifically with respect to GP per TEU, clearly, it’s natural that you get the margin, the gross profit margin compression as rates go up. But what is a realistic timeframe for you to get back to whether the second quarter GP for TEU levels are some kind of a normal level as you pass on those rates to customers? Can we see that in the fourth quarter or is – do we need to be a little more patient? And then the second question, just interested, in terms of how you're working with the liners which are consolidating? In one sense, I could expect the weaker liners may be more dependent on freight forwarders or some of the ones that, as Detlef described, have given up. Is there scope for their new parents to be trying to renegotiate terms or how much does the consolidation change for you in terms of how you negotiate contracts?

Detlef Trefzger

Neil, let me start with the latter question. As we see in the market rates, in general, the so-called consolidation is happening with regards to alliances and groups that for more and more formerly independent companies under one umbrella or one owner and leadership, but the capacity is still in the market. And what we discussed, the consolidation has to happen on the numbers of vessels in the market. So unless the industry – the shipping industry does not scratch it more actively and to a broader extent, then this will not lead to any significant rate exchange other than the erratic rate spikes or changes when another carrier is changing its alliance or partnership. The first question, there’s no reason to renegotiate rates. Our surprise has been that rates went up virtually within 24 hours after the Hanjin bankruptcy and we were committed to our customers to ship on certain volumes as we have agreed. And, therefore, we had to buy more expenses than with a rate that we would have negotiated one, two, three weeks in advance. And that led to the margin dilution for mainly September 2016. When do we find equilibrium again? We would all love to know it. But we see it and Markus and I have stated that it's a temporary deleveraging or non – not finding equilibrium. It should find back to a normal market situation again. Does it take October and November or October, plus November and December, to be seen. We are confident it will find balance again this year.

Neil Glynn

Understood. If I could just round back on the second question, just trying to get some insight in terms of what actually changes in terms of how you actually deal with the carriers. So a simple example. You would have dealt with somebody from CMA CGM; you would have dealt with somebody from NOL. Now, potentially, you're only dealing with one person or one team. Does that bring a challenge or does that bring opportunity for you?

Detlef Trefzger

That’s not the way the market is working, Neil, I have to say. And maybe during the next analyst road show, we can go into details here. We deal with all carriers. And we negotiate rates and volumes with all carriers permanently. There are slot exchanges between carriers, so directly affected volumes on Hanjin ships. We’re also – there was an indirect volume that was also affected by the Hanjin bankruptcy due to the slot exchange agreements amongst the carriers. And we have carrier warning system and all things in place to select the right carrier for the right rate and customer in order to assure we are not affected much. And from our point of view, we were not affected a lot. We were surprised, but we were not affected a lot by the Hanjin bankruptcy.

Neil Glynn

Understood. Thank you.

Detlef Trefzger

But the problem in the market, Neil, if I may say so, what – the example I stated before. The rates in the market in principles are on a taxi ride level and that is not sustainable for no carrier. And either the rates find its way back to a normal rate level or the market stays in the saw chain pattern, rates up, rates down, rates up, rate down that we have seen in the last, I don’t know, 24 months or so.

Operator

The next question comes from the line of David Campbell from Thompson, Davis. Please go ahead.

David Campbell

Good afternoon, everybody. Thank you for taking my question. Detlef and Markus, I see substantial growth in airfreight in the industry in September, both year-to-year and compared to August. I wondered if you saw the same thing in September and why you think it was so strong in the industry in September.

Detlef Trefzger

We saw it, David, as well as you see our growth in quarter three has been 3.8% in volume and you see this in the detail sheet that we have submitted earlier today. And we saw this accelerating throughout the quarter. Why is that so? Maybe new industries find a way into Airfreight again and the overall rate level reflecting the oil price situation and fuel surcharges and so on maybe becomes attractive again for certain industries that have partly or fully moved away from that industry – from airfreight. One example may be the high-tech industry [indiscernible] every single item has been shipped sea freight. Initial product launches and relaunches of products, those waves are coming back or have come back to airfreight again.

David Campbell

Do you see any reason to think that some sea freight was moving by air because of the sea freight situation with Hanjin bankruptcy?

Detlef Trefzger

I can't judge. I would be surprised. It would be minimal.

David Campbell

Okay. Thank you very much.

Detlef Trefzger

Thank you, David. All right.

Operator

Thank you. The next question comes from the line of Damien Brewer from RBC. Please go ahead.

Damien Brewer

Yes. Good afternoon, everybody. I have three questions please. First of all, I think so far we focused on the immediate impacts of the Hanjin disruption. Could you talk a little bit more about how that’s changed customer retention rates and whether you're finding any change in customer attitude towards, for example, a flight to quality of supply rather than just price or whether they've already forgotten about the disruption? Second question, I'm afraid it does come down to the UK. And you have sizeable cash on the balance sheet, could you update us about how your treasury functions vis-à-vis sort of UK cash exposure and how you’re managing that? And then, very finally, just for the sake of Q4, maybe if Markus could call out any one-off gains we need to be aware of going into Q4 in terms the comps. Thank you.

Detlef Trefzger

Thanks, Damien. Let me answer customer reflection on the market situation. Seafreight, customers that have a certain quantity expectation are willing to pay for the right carrier and for the right service of a forwarder for the whole supply chain and have always been. Maybe that becomes more aware now to those that were playing around a bit and were shipping as – were shopping and shipping with the lowest rates. Our exposure with Hanjin has only been with goods that were not time-critical in agreement with customers, so scrapping waste paper, recycling material, whatever, whatever good. So there has been no critical goods on it. And a solution that we offer to all of our customers in Seafreight is that we assess risks or a secure supply chain and give advice on alternative routings, alternative ports by the way, but also alternative carriers in order to be able to operate a sustainable and secure supply chain. The other two questions, I think, are more related to Markus.

Markus Blanka-Graff

Damien, on the treasury function, I think relates to the UK. You understand that we have – in our entire network of companies, we have kind of a three layer of coverage for transactional exposure on currency, natural hedge to payable/receivables in same currency on a country level. That, obviously, is also the case for the UK. Then on the interior companies, so between Kuehne & Nagel stations around the world, there is a netting system in place on a monthly netting in US dollar or euro. So the transactions that are internationally going into the UK or out of the UK are covered by that and the rest is being – so the long or forward position on a top level which is in a framework of plus/minus CHF10 million still is covered through a straightforward hedge. For the cash available in the UK, so the profit out of the UK operation in pounds, we are maintaining a very strict policy of upstreaming any available cash into Swiss franc for a simple reason. Because my biggest cash outflow is Swiss franc for the dividends. I think that is in that. In short term, two sentences how we manage that, and that would be the answer for any legal entity around the world within the KN network.

Third question, and I’m glad you're asking this, is there any one-offs in Q4 2015? That needs to be considered in any comparison going forward for Q4 2016. And I think the most significant one-off in the Q4 2015 was the impact of the fine in the Overland business for the business that we had acquired in France, Alloin, and that was impacting the business unit in the fourth quarter with CHF12 million. That is the most significant one-off going forward.

Damien Brewer

Okay. Thank you very much.

Markus Blanka-Graff

Thank you.

Operator

Thank you. The next question comes from the line of Frans Hoyer from Jyske Bank. Please go ahead.

Frans Hoyer

Thanks very much. Thank you. I understand the point about the rates going up very suddenly and you couldn't react by passing on the higher rates to customers immediately. I was just wondering how much of a spillover effect is there going to be. How long are your commitments? How much damage are you going to see from this same factor into Q4?

Detlef Trefzger

I wouldn't call it a damage. It's a lower margin. As I said before, Frans, we don't have negative GP in Seafreight or any of our business units. So as I said, it will take a couple of weeks, maybe a month or two, to find its equilibrium again. Also, customers were hesitant to close our fuse because they were not sure about the market situation. All this has to balance again. And I would assume this month, latest next month to find equilibrium again.

Frans Hoyer

Excellent. Also, a question, I’m seeing the media comments about how shippers respond to the Hanjin issue and they want to vet their carriers for financial strength. Are you also seeing that from your customers? And how much of a headache is that going to be when you put – can you control precisely which vessel your containers will go on if you ship with the alliance with six different operators, one of which might be deselected by one of your customers? How much of a headache is that going to be to control?

Detlef Trefzger

We have full control on where our containers are. That’s the solution we provide. And that is the strength of our organization. We exactly know where the containers are. And if customers give a certain advice on which carriers they prefer, we follow this advice. And we also advise them or consult them on what would be the best – routing the best carrier, the best port to use in order to have a sustainable supply chain, as I said before. So we do this. It’s not a major trend, I have to say. At the end of the day, with whomever you talk in the industry, price cuts.

Frans Hoyer

Yeah. Okay, all right. Thank you so much. Thank you.

Detlef Trefzger

You’re welcome.

Operator

Thank you. The next question comes from the line of Michael Foeth from Bank Vontobel. Please go ahead.

Michael Foeth

Yes, good afternoon. I had a question regarding the whole Samsung situation, if there is any potential exposure that you have or even a positive effect from all the logistics that they have to do with exchanging their phones. If you could give us an idea on that, please.

Detlef Trefzger

Michael, thanks for the question. But I really ask for your understanding, we never disclose any details of existing or potential customers. So for avoiding to answer this.

Michael Foeth

No problem. And then maybe an add-on, if I can, coming back to this Hanjin effect. Very often, you have back-to-back agreements with customers, if I understood correctly, in terms of the rates that you pay and that you charge them. How much of your – of the volumes that you handle are sort of not – or exposed to a situation where you don't have back-to-back agreements?

Detlef Trefzger

I’m not sure I understand that question. All our agreements are back to back. But if the carriers are not existent anymore and if all of a sudden rates develop or you don't get slots assigned – there was a scarcity – in the moment a bankruptcy was filed, all of a sudden, 80 ships or whatever it was precisely, we’re put on change. So there was a supply of capacity scarcity and carriers made use of that, rightly so. But we all were surprised. And trying to give the best service to our customers, for sure, we do not start on that and we try to organize and operate a undisrupted supply chain. And that maybe was then the effect we have seen.

Michael Foeth

Okay. So a normal rate spike that you see in the market without any disruption in capacity would not lead to such an effect?

Detlef Trefzger

No, we anticipate also rate developments. We discuss it openly with customers. We even have index rates with customers. And, therefore, we were not surprised. You saw our development over the last two, three years.

Michael Foeth

Yeah, absolutely.

Detlef Trefzger

That is reflecting exactly that mechanism. But if all of a sudden, a significant – the seventh largest sea freight carriers moves out of the market and it’s not operational for a couple of weeks before the containers and ships can be unloaded, that has an effect on the market. It would be naïve to think that has no effect in the market. And that was a surprise. I said before, a managed process of finding the right balance in the sea freight industry and the market again, as you know, it’s for us what we would like to see. But an erratic change virtually overnight, even with our low exposure, has an effect on the whole market. And that is what we saw in end of August and early September.

Michael Foeth

Sure, thank you.

Detlef Trefzger

You’re welcome.

Operator

Thank you. The next question comes from the line of Rolf Kunz from Bank am Bellevue. Please go ahead.

Rolf Kunz

Good afternoon, everybody. Three questions from my side, please. First, in Overland, you show strong growth, almost 17%, with the main driver being the ReTrans acquisition. Despite the strong growth, nine-month EBIT is only up CHF1 million. So why is there not more operating leverage or will this kick in later actually?

And then, secondly, with the US intermodal market contraction, is there a risk that we might soon see probably a goodwill impairment from the ReTrans if the contraction continues?

And the last, in Contract Logistics, the depreciation and amortization line has seen quite some swings year-over-year in the first nine months. What should we expect here for 2016 and maybe also for 2017? Thank you.

Detlef Trefzger

Sure, Rolf. Let me try to answer all these questions. Overland, in total, we see growth in net turnover and gross profit, organically. But the margin in the market in the US is not what we have expected, also with existing business. We have an oil and gas cross-border business in the US. Obviously, the volumes there are not that sustainable and that strong as they were in the past. The Overland performance, in total, and I’ve stated this, is keeping momentum. We have a strong development in Europe. We have volume growth and GP growth in the main markets. So from that point of view, I would say, we are confident that this will get even more momentum in the quarters to come.

Intermodal market, we are not expecting goodwill impairment. Otherwise, we would have booked it immediately. It's a normal breezing of the market, as I said before, reflecting the trucking rates as well as the oil price. So if that bounces back, there will be – there will be growth again. We have won customers. We have not lost customers. We have not lost any agent or any other thing that is material for us. Even the Intermodal business with ReTrans in the US and therefore we are very confident that this will show the right impact in the P&L and balance sheet, positive impact in the future.

And CL depreciation, I'm not sure.

Markus Blanka-Graff

I think you referred to the second quarter where the 32 spike is there and that includes – I think we have briefly talked about it. That includes an impairment in Greece for real estate to the amount of CHF7 million. So when you normalize that, you have 22, 25, 29 and that is along with our growth rate within Contract Logistics.

Rolf Kunz

Okay. Okay, that’s clear. Thank you.

Detlef Trefzger

Thanks a lot.

Operator

Thank you. The next question comes from the line of Tobias Sittig from Main First Bank. Please go ahead.

Tobias Sittig

Yes, good afternoon. Two questions from me, please. Firstly, you've slightly reduced your CapEx guidance to below CHF215 million. If you could help us quantify that a little bit better. And also, if you think this is just that the stuff that you wanted to buy comes in cheaper or that we should mentally add that to the CapEx budget next year.

And secondly, when you look at the next two/three years, are there any significant step-ups in productivity coming from new systems? Or is it just a gradual process of getting more productive every day? And also, in that context, we're hearing about digitization initiatives of the carriers which seem to be more prominent now. Is that something that could help you accelerate your own productivity as well?

Detlef Trefzger

Sure. Tobias, let me start with the latter question. The next two, three years will be our deployment of the new sea and airfreight operating systems. And we get a lot of traction here. We are extremely fast enrolling it out. The systems are stable. So we always said, in 2019, the rollout will be fully accomplished and then the years after we will see how we will be able to harvest from these systems with regards to productivity. So at the moment, we work on improving our productivity day by day and we see traction in all business units involved.

The CapEx guidance, nothing material or – I’m looking at Markus here. Nothing special. There’s no postponement of investments to 2017 for sure. Not that I'm aware of. Maybe the overall assumption on what we would have to buy and what the rates in the market will have been are slightly different, but it's not a material change in our guidance, right?

Markus Blanka-Graff

Tobias, just to be clear, you’re asking 250 to 215 or why we have changed to below 215 rather than…

Tobias Sittig

Basically, you’re coming from 215 to below 215 and [indiscernible] half of that in the first nine months. So there could be some leeway, which could be somewhat significant to what we've got in our models basically.

Detlef Trefzger

Then the answer is clear.

Markus Blanka-Graff

The answer to the 215 is, obviously – there is no deferral of projects. But the system – the operation has a certain pace and rate how we grow. We give that budget at the beginning of the year. And sometimes we’re a bit too rich, let’s put it that way. I would still think that for the year 2017 we will still go for a very similar level.

Tobias Sittig

Very helpful. Thank you.

Operator

We currently have no further questions in the queue. [Operator Instructions] There is another question from the line of Stuart Todd from Lloyd's Loading List. Please go ahead.

Stuart Todd

Hi. Good afternoon, gentlemen. Just a couple of quick questions. You mentioned the need for more ship scrapping. The report recently that 2016 will be a record year for ship scrapping, what is your reaction to that? If the lines come – are to scrap more ships, what other alternatives do they have?

Detlef Trefzger

Postpone new ships to come to the market. Stuart, I can’t judge the sea freight industry, but the capacity in the market for sure, despite a spike or a high – all-time high or long-term high in scrapping vessel capacity is given. So, therefore, the market will not find its equilibrium if the capacity stays at that level or increases even.

Stuart Todd

So your next move will be to lay off more and more ships. Is that what you’re asking the shipping lines to do?

Detlef Trefzger

We’re not asking the shipping lines to do anything. That could be a solution that you described. But the shipping lines define their own strategy. We’re not defining the strategies, Stuart. I would assume that like in other markets, eventually there will be a certain capacity adaptation or a reduction. If not, then then we will see the rates declining or staying at this unsustainable rate.

Stuart Todd

Yeah. That’s very clear. Just a final question. The peak season, are we seeing the peak season in airfreight? And if so, what kind of – on what trade lanes and what kind of products and how would you compare with a year ago?

Detlef Trefzger

At the moment, in airfreight, we see all trade lanes developing very well despite LATAM. So that is maybe reflecting a market situation in some of the major Latin American countries.

Stuart Todd

Okay, thank you.

Detlef Trefzger

You’re welcome.

Operator

There was again a question from the line of David Campbell from Thompson, Davis. Please go ahead.

David Campbell

Yes. Just following up on that last comment about airfreight, you seem to be fairly confident that the growth will continue in the fourth quarter. You haven't identified any unusual impact from industries or companies that would make that growth unsustainable in the fourth quarter. You seem to have experience, beginning experience of normal seasonal peak. Is that correct?

Detlef Trefzger

That is correct, David. Otherwise I would not have expressed my confidence for quarter four.

David Campbell

Okay. And what about airfreight rates? Do they increase in September or stay about the same as previous months?

Detlef Trefzger

I will not comment on single month rates, David. I ask for your understanding. There's no – but, in general, there’s no disruptive movement with regards to airfreight rates to my knowledge in the market at the moment.

David Campbell

Okay, thank you very much.

Detlef Trefzger

You’re welcome.

Operator

Okay, thank you. There are no further questions. So I will hand you back to Detlef Trefzger to close today's conference.

Detlef Trefzger

Thank you very much. Ladies and gentlemen, thanks for joining in and for the good Q&A session with you. As I said before, we are confident about the business development in the fourth quarter. And we’re also confident about achieving our or meeting our 2016 targets in all areas of volume, EBIT, margin or EBIT and market share. Thanks for joining in. And all the best to you.

Operator

Thank you for joining today's conference call. You may now replace your handsets.

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