Kuehne & Nagel International AG (KHNGF) CEO Detlef Trefzger on Q2 2018 Results - Earnings Call Transcript

About: Kuehne & Nagel International AG (KHNGF)
by: SA Transcripts

Kuehne & Nagel International AG (OTCPK:KHNGF) Q2 2018 Earnings Conference Call July 19, 2018 8:00 AM ET


Detlef Trefzger - CEO

Markus Blanka-Graff - CFO


Daniel Roska - Sanford C. Bernstein

Robert Joynson - Exane BNP Paribas

Edward Stanford - HSBC

Damian Brewer - RBC

Joel Spungin - Berenberg

Christian Obst - Baader-Helvea

Neil Glynn - Credit Suisse


Ladies and gentlemen, good afternoon. Welcome to the Q2 2018 Results Conference Call. I am Maura, the chorus call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. After the presentation, there will be a Q&A session. [Operator Instructions]

At this time, it's my pleasure to hand over to Dr. Detlef Trefzger, CEO of Kuehne & Nagel. Please go ahead, sir.

Detlef Trefzger

Thanks, Maura. Good morning. Good day. Good afternoon and good evening to all of you and welcome to our analyst conference call half year 2018 results of Kuehne & Nagel International. Our CFO, Markus Blanka-Graff and I will welcome you from sunny Schindellegi and will lead you through the slide deck that we have published earlier today.

And as always, we start on slide 3. During the first six months, in 2018, the Kuehne & Nagel Group performed successful in a changing landscape. We posted group’s EBIT for the first half of the year was CHF501 million, which is 11% above previous year. We have achieved a strong volume growth in Seafreight of 8%, with 172,000 TEUs more shipped and transported in our Seafreight networks.

Our Airfreight division showed a strong volume growth of 18% with 132,000 tons more in our Airfreight networks. Overland posted a substantial net turnover increase of 18%, while Contract Logistics strongly performed and increased - improved its net turnover of - by 11%.

On page 4, we have a summary of the key KPIs and highlights for the first half year 2018. For the first time, in a half year period, the Kuehne & Nagel Group has posted a net turnover of more than CHF10 billion. Also, the EBIT was CHF501 million has never been as high as in the first six months 2018. Earnings per share increased by 9.8%, reflecting the strong group’s performance.

Let’s go into the details of our two business units, Seafreight and Airfreight. The short overview, you can find on page 5. In Seafreight, we accelerated volume growth in quarter two with 11.1%. This, ladies and gentlemen, is the second largest volume growth in Seafreight at Kuehne & Nagel in a quarter. We improved -- have increased Seafreight TEU by 121,000 in the second quarter 2018. Also, Seafreight continued to counter the pressure on gross profit margin by operational cost control and I will lead you through more details later on.

Airfreight, we have posted a couple of Airfreight perishable acquisitions and they show a solid performance in the first six months 2018. Despite that, we have seen a strong organic volume growth with our industry solutions. What are industry solutions? I might remind you of the chain solutions that we published, pharma chain, interior chain, engine chain or battery chain, all these solutions show a strong market performance and growth.

Let’s deep dive into the two business units. Slide 6. Our investments in sales showed first results in quarter two and the volume leverage leads to high conversion rates in quarter two of 30.1% with increased EBIT per TEU versus quarter one. Our new business wins on digital end-to-end solutions were extremely encouraging. You know that we have published in March this year two digital platforms that we launched, the KN enterprise service platform, KN ESP as well as the Sea Explorer.

And we have an extremely high customer acceptance. This morning, when I came into the office, we first of all published the results, but only an half an hour later, at 7 o'clock, I got a message from our Head of Seafreight who spoke me about another great Seafreight win based on KN ESP. Congratulations to our Seafreight team. This is the performance that we have envisaged when we launched the two digital platforms. We had seen growth -- very strong growth has been seen in Asia and North America.

Moving to Airfreight, we have to say it's a remarkable performance in Airfreight with strong volume growth in Pharma, Healthcare, Aerospace and e-commerce, contributing to an increased net - gross profit margin and the leverage effects of the global network for the perishable market and our perishable customers can be seen in the figures. Also here, strong volume growth were posted in Asia and North America.

We have spoken about the volume growth. Let’s go into some details on slide 7. Seafreight, to start with. After a slower start in quarter one, with 5% growth or 51,000 TEU increased, the second quarter showed an 11.1% increase in volume -- Seafreight volumes in our network or 121,000 TEU more. That’s our second largest volume growth in a quarter ever. Our investments into dedicated sales structures, targeted trade lane development clearly shows traction and I can assure you that with this experience, we will continue to grow our Seafreight sales force throughout the group.

Also, Airfreight. Strong volume growth in Airfreight quarter two with 15.7% or 60,000 tons more in our network, followed by a very strong quarter one summarizes to a strong development in the Airfreight network.

Page 8, how did we perform in Seafreight with regards to gross margins, cost development and net margins per TEU. While margins continued to stay under pressure, our operational leverage and our productivity measures clearly showed the expected effects. This is what we can influence and therefore we are happy to say that we show a stable net margin EBIT per TEU. This is the focus of our Seafreight as well as our Airfreight organization, managing the net margins per unit.

As always, I will give you some details on the volume, margin, cost and EBIT effects. So the gross profit effects, volume driven, were CHF55 million in the first six months 2018. The margin effect, CHF5 million in the first six months 2018, while we posted a cost effect of 46 million negative, resulting into an EBIT improvement of 14 million in the Seafreight business for the first six months 2018.

Let's have the same look at our Airfreight business. We have seen slightly improving margins in -- especially in the first and second quarter 2018. This is driven by the margin increases in hard cargo while the perishable margins remained stable. With a stable cost per 100 kilo, we were able to improve our EBIT per 100 kilo versus the same period in the previous year by CHF3. Also here, volume, margin and cost effects, the volume effect in Airfreight has been CHF89 million. The margin effect in Airfreight, CHF5 million, the cost effects were driven by the strong volume increase, CHF63 million, resulting into an EBIT improvement of CHF31 million.

Our Overland business which we have detailed on page 11 and 12 performed extremely strong as well. And it may be boring for you, but our strategy - our clear focus, our target accounts, our integration of the Overland business in our chain solutions showed traction more and more and the leverage of the top line growth drives the profitability improvement as well. In Overland, we have posted a growth of 11% in net turnover, 8% in gross profit, and 44% in EBIT and may I remind you that we had a one-time effect in - in quarter one 2018 through the disposal of our Overland business in Brazil of 6 million, so the net performance, the organic growth of Overland is more than 20% for the first six months 2018, an outstanding performance.

Contract Logistics, we continued to drive top line growth, gross profit growth through scalable logistics solutions and as we have informed you and posted in our quarter one call this year, we are investing into the rollout of a new WMS solution and new warehousing technology which continues throughout the year 2018.

Have a look at the figures on slide 14. Growth in Contract Logistics, 6.2%; EBIT reduction as expected to CHF66 million. This is due to the investments into new warehousing management system worldwide, new technology and our invest in growth business plan for the UK, which impacted the EBIT as we have calculated.

With this short overview on the four business units, I’m happy to hand over to Markus to give you some details on the financial figures.

Markus Blanka-Graff

Thank you, Detlef and welcome from my side, ladies and gentleman. I’m on the page 15 of the presentation, income statement and I think the most important message is that, in both quarters, first and second quarter 2018, we have been able to increase and improve our operational performance quite significantly. You see that absolute variance of earnings before tax is 44 million, of which 25 in the first quarter. You may remember what Detlef just mentioned, a one-off in the Overland business unit of 6 million and 19 million in the second quarter.

Some of the improvement certainly comes out of the ForEx -- of the FX change impact and I want to talk about that for a minute in terms of the euro and pound being increased on the translation of the P&L quite significantly, whereas the US dollar was a decrease of 2.5% to 3% has actually weakened the GP per TEU, we all [indiscernible] dollar denominated. So the process, how you need to look at it from a GBP trade perspective is that less dollar has been made on a GP per TEU basis, so that’s the translation has then offset and even over compensated the negative effect of that translation.

That means as the mix in our P&L, we have currently a positive exchange rate impact of 3.7%. Tax rate also here, no new, around 23%. This is what we expect until the end of the year 2018 and I can give you really some guidance for 2019, that will not change significantly. Our conversion rate, we confirm with our long-term target, 2022 for 16%, despite everything, what we actually don't know, how the next half year is going to look like or whatever else impacts you will have to expect from market conditions. We remain confident that we can achieve the 60% conversion rate, because it had also to do how we can control our cost and I think that is where we are pretty good in.

Moving on to balance sheet, number 16, page number 16. Again here, no big changes. Out of the balance sheet, total of 7.7 billion, around 50%. You can see the 3.8 billion of trade receivables on the balance sheet. A lot of that management goes into that bucket, credit limits, collection efforts. So it's a high retention area. Equity ratio currently is around 26%. Contradicted at year end, we will again look in to the 30% equity ratio area.

For all of you, I think you have already seen, we have adopted IFRS 15 on the revenue recognition and such as also the classification in the balance sheet for contract assets, contract liabilities. This change for us from a profitability point of view has made no significant impact. You can only see that positions on the balance sheet now would have been, in earlier days, a work in progress in our contract assets and associated contract liabilities on the balance sheet.

So as we talk IFRS currently, IFRS 16, I haven’t mentioned that here on the first half year 2018, but for you to give you bit of guidance, what we expect, we expect roughly between CHF1.4 billion to CHF1.5 billion expansion of the balance sheet for the income statement, it means we’re going to have an EBITDA increase of around 400 million to 500 million, it’s all annualized numbers I’m talking about and depreciation going up in nearly the same amount, because our financial expense associated with these contracts, I would estimate around 40 million to 50 million max. On EBT, as expected, I do not foresee currently any impact out of that adoption of IFRS 16.

Still on the balance sheet, page number 16, I think what is important is the net cash position. When you compare our net cash position as compared to 30 of June 2017, you will see that was around 340 million. Now in 2018, you will see around 110 million.

Leading straight into the page 17, where does it come from? Cash and cash equivalents, we have made a little bridge to follow through a bit easier. I think first line, cash and cash equivalents, as of 1 of January 2018. You see we have already started with a lower balance of around 127 million, lower balance coming in to the year, ‘18. Operational cash flow, very important, very strong, still 25 million higher operational cash flow than in the same period last year.

Changes in working capital [Audio Gap]

Detlef Trefzger

[Audio Gap] The landscape seems to change a bit. And we have posted that we are accepting and seeing these changes, especially in trade conditions. We hear about Brexit impact but haven't seen them yet. And our own global Kuehne & Nagel world trade indicator which is at the moment 10% higher versus previous year shows a stable outlook. Nevertheless, as Markus has just mentioned that, our full year estimate of the markets is a bit lower than we have posted in the beginning of the year.

As consumer confidence and spending stay high, we stay confident and extremely ambitious for the second semester of 2018 that our performance will continue to develop as in the first semester and that we will meet our targets. Why are we confident? You could rightly ask. We are confident with our own performance, our strengths and what we can influence. We can influence our cost control and it's the leverage effect. We can also influence our volume growth, strong growth leverage, leveraging KEMs, operating strength and networks.

We can influence our digitization and we have seen very strong traction in that the last three months, especially with the two Seafreight platforms and we can expand our footprint with existing and new customers, regarding value chain services. This is true for the pharma industry already and also for the so-called omnichannel e-commerce fulfillment and I think we have given you some details on that in our previous call. And for sure, we stay tuned for acquisitions as the accelerator for further growth. Having said so, growing GDP and growing world trade and high consumer confidence and ongoing spending makes us very confident for the second semester 2018 to achieve our ambitious targets.

Thank you very much so far and I hand back to Maura, the operator, to open the call for Q&A.

Question-and-Answer Session


[Operator Instructions] The first question is from Daniel Roska from Sanford C. Bernstein.

Daniel Roska

And first question around the digitization. And did you see more pickup in the digital offerings from larger and large cap customers or SME and are you switching to word digitization away from eTouch. And second question around, we've talked about the investment phase in the past. You hinted before that the key investments kind of would be in place by now. Is that still the case or would you be looking to extend that investment phase a little bit longer across the different business units as you’re so successful in growing your revenues.

And maybe lastly, a little bit more strategic on the Contract Logistics side and as it’s getting -- more and more competitors are kind of eyeing the Contract Logistics space and are making noise about wanting to grow more in Contract Logistics, I was just wondering how you're seeing the competitive landscape in Contract Logistics changing with more logistics players entering the market and also the robotics and automation companies entering that market too. Thanks.

Detlef Trefzger

Daniel, thanks for your question and it's not only sunny, it’s pretty hot in Schindellegi. But that is only due to the weather. Digitization and eTouch are complementary words. I think what I alluded to was the two platforms we launched in early March 2018 or this year, the Sea Explorer as well as the KN ESP. And these platforms typically address the needs of big shippers. So they offer solutions that nobody else at the moment can offer for the big shippers and therefore we were so successful and therefore I’m also happy this morning when I got this major business win on KN ESP with a blue chip customer. eTouch is the way we operate business. From the origin of the demand, so from our customers throughout the quotation or acceptance, the booking with carriers as well as the, track and trade and the delivery of an invoice or claims handling at the end of the day.

This is something we will not achieve overnight, we will, and we have promised this post our relative figures of eTouch shipments on the system during this or for this business year. But the platform business independent of that is another part of digitization. We also work with blockchain, we work with sensors, we have posted our collaboration with some of the big chip OEMs. So there's a lot of things going on in that arena.

Our eTouch business with carriers for example in Seafreight is close to 100% or above 97%, 98%. But it’s only one part of the whole supply chain. You will see details on eTouch. We have not forgotten. We work on it full speed, fully concentrated, but it’s a different thing than the platforms that we have established for our customers to interact with us on certain trades on certain demands they have through our systems.

The third question, is CL landscape changing. We, at the moment, made the change in the Contract Logistics landscape. Please take into account that this year is the year of transforming our operating model in Contract Logistics, including a big business, a big operation, a big customer operation in the UK. And we do this consciously, it's planned, it's part of our planning and it's clearly within the bandwidth or the framework of the plan. Next year, we will see the effects of this transformation and I'm pretty confident having seen the new WMS increase and having seen how we very efficiently can implement omnichannel e-commerce fulfillment centers that we will get a lot of traction with our transformation in Contract Logistics.

And the third question was about key investments in place. I think our investment strategy has not changed. We have - we stay asset light where we need to invest, we do our investments. But usually, our business model has not changed in any case. Maybe -- I hope that answers your question.

Daniel Roska

Yeah. I think maybe the follow up on that last one that we talked in the past about kind of also you - kind of gaining more revenues to build the scale. And I'm just trying to get kind of a sense of where we are in that overall, so maybe investment was the wrong word here, but in that process of kind of ramping up two different growth rates, if we can kind of expect the current state that we see to continue in that way or whether you’d foresee any changes into ’19?

Detlef Trefzger

Okay. First of all, you saw the scale effect of volumes clearly in the second quarter. We have - maybe the word investment is misleading, but we have invested heavily into our sales structure. We have a very modern and agile salesforce in place. Especially, in Seafreight, this shows a lot of traction with the clear trade land and solution focus combined with the e-platforms that we have established. Our enterprise service platform in combination with sales showing traction and you saw that the volume effect in Seafreight has been 55 million this year, the first six months.

The same is true also for Airfreight. I mean, Airfreight, I haven't spoken about slide 10 on purpose, because you have digested the figures already in detail from all our reports that we posted this morning. But if you look at the KPIs of Airfreight for the first six months, it’s almost a management paradox on that they have achieved. They have grown organically and acquisitions, but organically, they have grown by 18% and they have increased at the same time their margin per unit and their overall EBIT and the conversion rate. You would not be taught this at any of the management calls. I can only say this shows that a clear focus on solutions, trade lanes, customer segment as well as a very slick operation leads to the desired effect.

And if I may add, at the same time, the whole Airfreight community is geared up to implement the Airlock [ph], which we want to accomplish by end of this year as you know. So at the same time, the whole community, despite the growth and their success and productivity increases, implement a new software seamlessly. So I stopped applauding for our Airfreight community, but think about this for a minute, it's a fantastic management and operational achievement that the Airfreight team has achieved this year.


The next question is from Robert Joynson from Exane BNP Paribas.

Robert Joynson

I have three questions if I may, it’s probably easier if we take them one by one. First of all, if we look at the Airfreight business and specifically the cost base, if we measure the costs in euro, which I think is the best like for like comparison, it was almost exactly the same in Q2 as it was in Q1, which was obviously very good, given that the volumes were 5% higher quarter on quarter. If we look a little bit further ahead, in the year towards peak season in Q4, when obviously the volumes will be significantly higher, will it be possible to hold the cost base relatively flat then versus Q2 or would that be too optimistic?

Detlef Trefzger

Yeah. Robert, thanks for your question. First of all, we measure the cost in Swiss francs because we have a Swiss balance sheet. In the Airfreight, the cost very much originate in the country where we start the exports. So mirroring that euro might be a very nice approach for European perspective, but it's not true for all global networks. And to answer your question, yes.

Robert Joynson

Okay. Good answer. So I guess Airfreight may be your most profitable business by Q4, but we’ll wait and see I guess.

Detlef Trefzger

Robert, that’s your model and don’t underestimate our Seafreight guys. You see what they have achieved in Q2 and they’re extremely successful. And once they have implemented what they have announced internally this morning, guys, you will see this impact in our P&L as well.

Robert Joynson

The race is on. Let’s see what happens.

Detlef Trefzger

Race is always on. We are a very competitive organization.

Robert Joynson

So the second question on the Ocean freight business, if we look at the GP per TEU in dollars, as you mentioned before, it did decline quite significantly in Q2 versus Q1 by around $33 on my numbers. And of course that was despite freight rates declining during the quarter. Could you just provide some color on whether there were any significant mix effects which biased the GP per TEU downwards in Q2 or was the reduction mainly just due to underlying pressures in the markets?

Detlef Trefzger

I think it’s both. The margin pressure doesn't go away, but we can manage it in a different way. But the answer is what you have asked, it’s the cargo mix. We had different cargo mix. A lot of business intra-Asia, double digit growth, strong double digit growth in Intra-Asia as well as more of the commodity volumes that have grown in the first - sorry in the second quarter. The margin pressure stays, but it’s on us to manage that. And therefore, we look - I know you look always at the margin per TEU. We look at EBIT per TEU. That is the figure we look at. And don’t forget, I mean, we very much underestimate the effects of [indiscernible] oil price is hitting not only Seafreight, but also Airfreight, and we haven’t spoken Overland for the third and fourth quarter this year where there is a tight capacity and higher oil prices, there will be cost pressure in the market and it’s on us to manage that.

Robert Joynson

And then just final question on M&A. You said on the previous conference call that when the right acquisitions target is found, the right financing will be available, maybe just, if you could talk in general terms about how easy or how difficult it is at the moment to find good acquisition targets where you’ve obviously got a seller who is willing to sell at a reasonable price? Thank you.

Detlef Trefzger

Interesting question, Robert. My question would be, it’s not about a seller to be willing to sell at a reasonable price, it's on us to select the target that fits into our demand, our needs. We will and we have said also at the Capital Markets Day last year, we will not buy anything for an equity story, we need market access, synergy, scale effect, whatever it is and this is what we are looking at. And then we will find the right price for that.


The next question is from Edward Stanford from HSBC.

Edward Stanford

First of all, I know it's early days, but have you seen any impact on your business from the introduction of the tariffs by the US on Chinese goods? And secondly, I was interested to hear your comments on the KN ESP and the Sea Explorer and how it's gaining traction with a larger customer. Could you perhaps provide a little bit more detail on why it is so competitive and what it offers that your competitors currently do not? Thank you.

Detlef Trefzger

Edward, to answer your first question, we have not seen any impact on the tariffs imposed on certain goods. And we have seen impacts and we have mentioned that from a changed imports regulation in China on recycling material, this market has virtually disappeared and we missed for the first six months 20,000, 25,000 TEU in that specific market. But from the -- what it's called in the press, trade war, whatever that means, we have not seen any effect.

And also, I mean I would like to mention that as long as consumers are willing to pay the taxes or the customs duties or whatever it is on their respective goods, we will not see any major change. But if consumers and that was our message before, if consumers start to become unsecure and don't want to pay higher prices for goods that they are willing to consume, then we might see an effect. At the moment, we have not seen anything and there is no sign. You know that as the World Trade indicate and we can look forward, 55 days with a certain assurance about market trends and we see slower growth, but we still growth. Remember 10% higher last Monday, this week Monday than previous year. So there is a high growth momentum still in the market.

So -- and the other question on KN ESP and Sea Explorer, I mean Sea Explorer, you have to see it online. I have to say it’s -- I've been in a team meeting a couple of weeks ago with some very experienced people and they said, it’s unbelievable. That was the quote now. So the Sea Explorer is the first time that we offer visibility on all global vessel operations and services. And we say all, I can reiterate this message. We see all vessels.

We know they are routing and we can judge the vessels, the individual vessels and obviously the operator carrier according to sustainability, so CO2 footprint on that ship because we know the engine and the emission of the engine on that very ship and we can also judge timing. So the reliability of the schedule. We can and we make it then with weather data and other information, we can even anticipate the routing that would take. This sounds like a bit like, I don't know, Star Wars or so, but it's reality.

What it offers is, first of all, the selection of the right routing, the selection of reliable port, the selection of the operator and carrier that suits our customers’ requirements best and in the steering of the supply chain, a proactive interference in order to optimize the supply chain. Customers are able to manage inventory. And that is what especially big volume shippers appreciate a lot. I’m sure that this will also be a very strong and interesting tool for our small and medium sized customers, but at the moment, we operate that for them, because they don’t need to do it themselves. I hope this answers your question.


The next question is from Damian Brewer from RBC.

Damian Brewer

Good afternoon, everybody. Two question please. First of all, coming to the half year. Just looking, you did about 12.7% more GP, off 10% more FTEs. So broadly a 3% efficiency run rate in H1. Is that now, given the performance in their ocean, a relatively good rule of thumb on efficiency run rate or is there anything you'd like to elaborate on that?

And then secondly, just looking at the longer term and if I look back over the last 15 or so years, your H1 EBIT now of about 500 million is bigger than the entire full year EBIT of 2005, despite recession, euro crisis, et cetera et cetera and it looks like your net assets have hardly moved to do that, despite the cycle. Given the H1 performance, is that going to change in any way you think about sort of stepping up the capital allocation either in special dividends or M&A or are your thoughts largely unchanged on that?

Detlef Trefzger

Okay. Let me start, Damian. First of all, hi, Damian and let me start with the latter question, the capital allocation or the dividend allocation is a decision that will be proposed by the Board of Directors and will be decided by the general annual assembly. We will not influence that. We have the means, we have the investment means that we require to run and grow our business and we have no discussion on prioritizing investments or anything else. So from that point of view, no reason for us to change our policy at the moment.

With our first question, I’m not sure. I want to help you to populate your model, if you may allow. I think what we are looking at is something totally different. We look at conversion rate and we manage conversion rates. We always said so. We manage net profit per unit and we manage conversion rate. And if you see, especially the two major business units, Seafreight and Airfreight, their conversion rate is around 30% with the management paradox which I mentioned before in Airfreight that they grew everything virtually in the last six months.

But that's what we look at and this allows investments where required because it creates or these investments create the return that we desire or that we have calculated. Therefore, from my point of view, the efficiency is driven by other business units. It’s including or it’s leveraging our operating experts, our forwarding experts, blending with the latest technology and these two create this momentum and whether it’s 3%, 4% or 5% or 2%, we look at conversion rate.


The next question is from Joel Spungin from Berenberg.

Joel Spungin

I have got two please. First of all, I was just wondering thinking about the working capital movements and obviously the increased networking capital. Obviously, I understand some of the moving parts within that. But I was just curious to understand, to what extent, if at all the working capital is a factor in winning business. So when you go out to sort of compete business [indiscernible] significantly come up as an issue or do you have standard terms that you apply to pretty much all customers, regardless. So that was my first question.

And then my second, this is a more general question in terms of understanding your thoughts about the second half. I see, you were talking about your well trade indicator showing a stable outlook, but you're also saying that you expect the growth dynamic to reduce. I understand this and specific factors like acquisitions dropping out and things like that. You've also reduced your views on market growth. I mean what is the messaging here? Are you saying that the growth will slow materially in the second half? Or is it not that negative?

Markus Blanka-Graff

So Joel, thank you for the first question and we are never ever selling volume over financing capabilities. We're not the bank and we’re a logistics company. Inevitably, there is not one set of payment terms for the entire world. I would wish that would be possible and I would wish that would be 15 days. But that's not possible. And I think what's -- what we do over many years is a very stringent, very tight credit management with reasonable payment terms. Logically and as industries are and some industries, payment terms have established and are a bit longer than another industry, equally for geography. Typically when you would ask me, how larger customers longer payment terms, the answer would be, well, there is a tendency that that is right, but also not all for all geography. I think it is important to keep a tight lid on what we do with that and notwithstanding our corridor of 3.5% to 4.5%. We manage growth with reasonable payment terms and not payment terms with reasonable growth.

Detlef Trefzger

Okay. And then Joel, your outlook on the second half, I think we were pretty clear, we expect GDP and World trade growing, continuing to grow and on slide 20 that Markus has presented, we accept that there's a certain uncertainty. Do we know whether these outlooks are true or not? We don't know. That's market. Our ambitions stay, grow, grow organically, maybe try as fast as the respective market. That's true for all of our business units. And as we have said, we can leverage our network.

We can achieve strong volume growth through our capabilities, our sales force as well as our solutions and we are driving productivity up year-over-year, quarter-by-quarter, month-by-month, because that’s part of our operating philosophy and that continues to be the case for the next six months. Therefore, we are confident that our targets that we have set last year will be achieved. What we wanted to reflect in those figures and statements is, we hear see that there's more uncertainty because there's a lot of noise in the market, in the market at the moment versus like six months ago. We need to stay confident and haven't seen any irritating influence in our networks so far.


The next question is from [indiscernible].

Unidentified Analyst

Just a question on the calendar effects in volume growth in the second quarter in both the Sea and Air. Do you have an estimate of what the calendar effect might have been in those two areas in Q2?

Detlef Trefzger

To be honest, we don’t have it. I kind -- we don’t use it as an excuse. It comes as it comes, Chinese New Year every year. But in a different week, Easter is in a different month or quarter. So, that is what we should look at. And one or two calendar days might be influencing very much, especially for Overland but not in general, should not have such an effect in general that we can explain a quarter with calendar days.

Unidentified Analyst

Understand. And now with regard to the market outlook for 2018 for instance in the Seafreight, you’re looking for 3%. What was the market in your estimate in the first half in Seafreight?

Detlef Trefzger

I am not sure I understood the question, right, because you’re very difficult to understand. But for all business units, which we have shown on page 20, we have reduced the market outlook for 2018 by 1% each. So 4% for Seafreight, 5% for Airfreight, 4% for Overland and Contract Logistics each.

Markus Blanka-Graff

So like in the Seafreight, it was -- in the first quarter, it was around 4%. In the second quarter, it was 3%. So we expect sort of full year now.

Unidentified Analyst

And Air?

Markus Blanka-Graff

In Air, it would be like 5, 4.5 and then we expect 4 to the end of the year.

Unidentified Analyst

And finally, I understand, you haven’t seen any effect of the stocking or customers trying to beat tariff increases or anything like that in the first half. And your indicator, as you mentioned, you look 55 days ahead. Do you included discussions in your, with your customers on their plans and do you detect any signs from them in your discussions with large customers that with the stocking cycle going on here.

Markus Blanka-Graff

No. At the moment, no. Not yet. Rather the opposite, everybody is concerned about the peak season coming in a couple of months that they can secure enough capacity. That would be my response to that. No signs or signals or discussions of what you’re asking.


The next question is from Christian Obst from Baader-Helvea.

Christian Obst

I like to look a little bit more to your 2022 targets and your main area of influence is mainly your cost base and how do you handle it. So can you give us -- I know you can talk about of hours about that part, but short summary on your plans already you like to implement further, IT applications going forward, how the ramp up of this IT applications and what are kind of applications should deliver the highest leverage going forward, so where do you expect most of the leverage coming from and will that be more some kind of a linear development or will there be some kind of special step up in, I don’t know, 2019, 2020 or obviously something like that.

Detlef Trefzger

Christian, I like this question. It’s a question on how the design of the screw in the engine room looks like in the year 2022. And I’m more than happy to give you a bit of a flavor of that. You will smell oil now and other components. So first of all, Christian, the target and your initial part of the question, it's not only productivity and cost that we manage, we manage trade lanes, customer solutions. We drive sales. Without that, our engine as such would not fully run. So therefore, it's a lot of different things. Front end, so customer facing, two areas, the platforms, the e platforms as we call them to actually win and operate new business and to link with our big e-commerce omnichannel platforms.

The second topic is the eTouch area. So that’s - it’s not only the direct part of the supply chain, but also the operation. The more we can automate, also with our operating system, the more eTouch we will have throughout the whole supply chain. But this serves different customer segments. Therefore, our investment into developing new solutions, expanding the value chain and our investment into a slick, cool and very experienced salesforce will drive that top line or the volume part. All this together gives us still the confidence and high confidence that our targets for 2022 will be achieved.

Whether this is linear or exponential, I think at the moment, we are still in the investment phase and all those activities and investments are here at the moment, embedded in the first six months and will be part of our investment. And please do not forget Sea and Airlock. We will have fully rolled out Sea and -- Airlock by the end of this year and Sealock by end of - early 2020. And once that is fully rolled out in all our locations, with all Seafreight and Airfreight operators, being not only trade, but seeing confident and securely operating on the system, our files will increases, sorry, our productivity will increase. And with this, we are able to operate 40% eTouch, up to 40% eTouch business in our network.

Christian Obst

And one follow-up, where have you seen the main hiccups via the implementation of the Air and Sealock system so far or one of the other more important systems, starting with eTouch or something like that?

Detlef Trefzger

We haven’t had any hiccups, what’s the question, we didn’t have any hiccups. We deployed the rollout of our system as planned.


The next question is from [indiscernible].

Unidentified Analyst

I have actually three. One is, you had already touched on it a couple of times on the Airfreight. But still, I mean the performance was really astonishing. So congratulations on that. But my question is really how sustainable is that? I mean, is that 33% conversion ratio and CHF69 keyload gross profit per ton and 100 million EBIT like the new level, due to like internal factors like the Airlock and stuff like this or should we see some reversal of that performance in H2 and then going forward?

The second question would be on price. Can you remind us how do you pass on increasing price to your customer? Is there a straight through negotiation going on and processing going on?

And the third question is on EBIT. I don't understand the difference between your internal outlook, which seems to be quite healthy. You seem to be quite bullish on trade and your indicators prone to ongoing strong growth versus you having taken down the outlook for the overall market by a percentage point across the division.

Detlef Trefzger

Felix, let me then answer with the latter question and what you say again. First of all, we see a market and the market growth and the market development might be a bit slower the second semester. Our confidence has not changed, because we have won a lot of new business, because we have solutions in place and customers that are uptrading, developing well and we don't get any signal at the moment other than from the global press, if that makes sense that the landscape seems to be changing. We don't see any volume effect. There was the question before. We don't see any volume effect on the transport.

Our strongest growth, both in Seafreight and Airfreight has been related to Asia Pacific and North America, the US. So at the moment, we are confident that nothing material is changing. But also our market shares only globally across all business units may be 2.5%, 2.3%. So there's no excuse if maybe the environment or the landscape becomes a bit tougher, not to grow, because we have the best solutions and services in place. And I mean it. So therefore, this is our target, this is our approach. But to give you the flavor that it's not easy double digit growth market anymore. This is why we have given that signal on the market outlook. I hope that is understandable.

Airfreight. I think it's a totally different topic. The answer to Airfreight is, we grow - our target is to grow without acquisitions twice as fast as the market and we are able to grow twice as fast as the market. And if you look at into the perishable market, with our perishable network, which is the largest -- by far, the largest network globally, we are able to capture new customers and integrate their volumes into our network and have very strong growth.

In hot cargo, and I've said so, when I started my little presentation, in hot cargo, we have developed what we call chain solutions, let me reiterate, pharma chain, not only for Airfreight, but for the whole business units, interior chain for the Aerospace industry, engine chain for the aerospace industry, battery chain for the automotive industry or high tech industry. We have a lot of products and these solutions are end-to-end solutions and they are very public and they can't be copied overnight by any of our competitors.

So we have a very strong performance in hot cargo, not only growing twice as fast or higher than twice as fast as the market, but being able through our solutions and services to increase our GP per 100 kilos. And that is, I think, why should that change. I mean, we don't see any reason. We see that with that approach, we're very successful.

And price, I mean that's always the same game, depending, we have some contracts, long term contracts where the bank is included and all others are either back to back and the long term contracts by the way are back to back with the carriers. So we can’t expect short term changes here. Back to back with customer, back to back with carrier. And short term customers, we quote new and it includes the bank surcharge and the customer accepts it or not.


The next question is from Neil Glynn from Credit Suisse.

Neil Glynn

Good afternoon. And if I could ask three questions please. The first one is, sorry, but a bit of a technical question. The GKNI, you mentioned that that was up 10% based on what you can see over the next 55 days. I’m just interested how that tallies with global trade flows usually. Obviously, we're not seeing that kind of level of trade flow growth. Is there some kind of a structural overshoot within the GKNI, just interested in understanding what that actually means to you guys? I appreciate all that you've said, so not looking to retrace all ground.

The second question, with respect to Airfreight. It’s airshow week here in the UK, but we’ve seen a number of orders of freighter aircraft over recent weeks and it does seem with the e-commerce trends, controller capacities becoming a bigger theme, but those expensive global networks require returns and I just wonder are you seeing more bargaining power with the airlines that you deal with.

And third question with respect to your individual products. You mentioned at the start of the call, the chain products, clearly for into a more uncertain global trade flow environment, you’re underlying your self-help story, if you will, will become more and more important. You’re obviously very focused on solutions. And I'm just interested, can you give us an idea as to the maturity level of the main products there. I know they’re all developing and growth prospects are high, but anything tangible you could provide to help us think about that would be welcome.

Detlef Trefzger

Sure. Neil, let me answer your question. The chain products to start with, they have a different maturity, but also the industry they’re serving have different maturities as well. More important is they are only part of our hot cargo solution. We have general cargo as well. We have solutions for commodity customers as well. But margin increase that I have mentioned, a significant one, the margin increase we have seen in hot cargo for sure is driven by the chain solutions. And the chain solutions are not only in Airfreight approach usually, but have links to the other business units as well.

The freight order as we are aware of it, and maybe as the big freighters that we have expected to come, because remember 18 months ago or spring - early 2016 and 2017, we missed freighter capacity in certain markets. So at the moment, we would say that it’s great to see the freighter capacity kicking because the e-commerce business, the e-commerce market is growing 20% to 25% year over year. We post even a much higher growth, not only in Airfreight. So therefore, as more capacity, it’s not an increase of bargaining power. It's an hedging of capacity needs with the demand with the supplier.

And GKNI trade flow, I think it's a very technical question indeed and we have -- I think, we have posted on index, GKNI, the way it’s computed and have been set up, the algorithm of the GKNI and the Citibank has been quoted in a couple of statements with a 70% reliability, which is higher than any of the other indices that they had referenced. So maybe that gives an indication. We’re not saying that’s the truth. What we show is there is consumer confidence and for us, it relates directly to world trade flow, whether the world trade flow directly translates into a container flow. So something different, because the GKNI also composes intra-Asia business for example.

Detlef Trefzger

Thank you very much then ladies and gentlemen. Thanks for joining us. Thanks for asking many questions and we wish you a continuation of a warm and sunny summer. Some relaxing days and look forward to talk to you about the Q3 results in approximately three months from now. Thank you very much and bye-bye.


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