Kuehne + Nagel International AG (KHNGF) CEO Detlef Trefzger on Q4 2021 Results - Earnings Call Transcript

Kuehne + Nagel International AG (OTCPK:KHNGF) Q4 2021 Earnings Conference Call March 2, 2022 8:00 AM ET

Company Participants

Detlef Trefzger - Chief Executive Officer

Markus Blanka-Graff - Chief Financial Officer

Conference Call Participants

Alex Irving - Bernstein

Sathish Sivakumar - Citigroup

Muneeba Kayani - Bank of America

Sam Bland - JPMorgan

Michael Foeth - Vontobel

Gian-Marco Werro - ZKB

Nikolas Mauder - Kepler Cheuvreux

Detlef Trefzger

Good morning, good day, good afternoon and good evening to all of you and welcome to the Analyst Conference Call on the Full Year 2021 Results of Kuehne + Nagel International AG. Our CFO, Markus Blanka-Graff, and I welcome you from Switzerland.

We prepared an analyst presentation, but given the current situation, I would like to make a short statement before we go to the details of last year’s performance. Russia’s acts of war in Ukraine has shaken the world deeply as a company operating in more than 100 countries, employing people of different nationalities and actively fostering cultural diversity, our values are based on neutral respect, trust and democracy. We believe in the principles of the United Nations and the peaceful resolution of conflict amongst nations to secure a sustainable future for all. Our thoughts are with the people of Ukraine, our colleagues and their families. Thank you for listening.

And now we get started with the analyst presentation. And as always, we get started on Slide 3. The year 2021 has been another remarkable year. Our net turnover increased by almost 50% organically, while the results more than doubled. This is an extension of the strong trend that we have seen from the start of the year 2021, a confirmation and an acceleration of our strategy and the deployment of the strategic programs in all business and functional units.

The key figures you see here we have achieved almost CHF9.9 billion in gross profit, which is up 32% versus previous year or organically 8%. We have generated a free cash flow of CHF1.79 billion, an increase of 23% versus previous year and 73% from a pure business operational point of view. And we have generated earnings per share of CHF16.92, which is up factor 1.5 versus previous year.

Please follow me on Slide 4, details on the group and some of the highlights of the business units. The EBIT of the group has landed, so to say, or has generated CHF2.946 billion with a conversion rate of almost 30%. If you see the sequential increase of the conversion rate, quarter 1, 21.3%; quarter 2, 26.2%; quarter 3, 31%; and quarter 4, 37.1%. You see that we got more and more traction with our programs and that the volume increase as well as the automation and technology impacted our business very fruitfully.

Sea Logistics generated an EBIT of CHF1.5 billion with a very high service intensity still ongoing and a positive effect from the product mix. We will share some more details later. But I can tell you already now that the chaotic market situation is continuing all through 2021, but also until virtually today. Air Logistics, strong volume and yield increase, both from acquisitions as well as K and standalone and an excellent collaboration with our colleagues from Apex. They contributed or acquisitions contributed. The majority is Apex to an EBIT of CHF442 million in 2021. It’s great to see, and I said so in the last call by chance, but it’s great to see the entrepreneurial spirit of our colleagues at Apex. It’s a very synergetic approach, and I will tell you some more details when we come to the Air Logistics business unit. Road Logistics, an EBIT of CHF94 million.

Volume growth, strong volume growth in Europe, also domestically and cross-border High demand for digital solutions a very solid operation and our digital solutions really are a game changer in this segment. And Contract Logistics posted an EBIT of CHF156 million, which is mainly due to a stronger margin post restructuring as well as a strong organic growth centered around pharma and e-commerce fulfillment. On the spot rational quality in all sites and a flawless implementation of many new projects last year show that this business is growing and is performing extremely well after the restructuring.

Having said that, now let’s look into the details of the business units, and please follow me on slide. Sea volume growth nominal 2% last year, organic growth of minus 3% last year, but if you look into the strong volume growth, where it matters, it’s on the Trans-Pac as well as on Europe North America. So Trans-Atlantic, we see double-digit growth in on both trade lanes. We have a very hot topic in the market that is also impacting the volume development, which is the sustained and expanding service intensity, the chaotic sea freight markets demand a lot of manual interference and optimization in order to get the shipments moving as flawless as possible. The market has shown a growth of 6%, and if you exclude our cargo mix shift, where we have moved away from low-margin businesses like forestry program, pulp and paper recycling material and the like, we would have seen an organic growth of most likely 3%, 4%. The market situation with port closures, congestions, equipment and driver shortages, rail congestion, natural disasters and the like are ongoing. And most likely, this will take longer to get resolved, given the same demand that we see in the market.

Our focus is on customer service and cargo mix and making the shipments move as flawless as possible. Air Logistics versus a market growth of 15%, we boosted our growth significantly, also partly from a model shift from sea freight to airfreight. And we have seen an organic growth of 1.8x market of the KN business, the KN stand-alone business and together with the acquisition impact from Apex and Salmosped, we have seen a growth of almost 60% volume in our networks. The focus is, as we said in the last quarterly calls, on pharma, aerospace, e-commerce, perishables and for the Trans-Pacific also automotive and consumer electronics. We have not seen any change in long-haul tax capacity. Therefore – the belly capacity. Therefore, our focus is on producing charters, block space rents which are expanding and long-term charters like what we have posted a couple of weeks ago.

On Slide 8, we can – into the KPIs, the key performance indicators for Sea Logistics. You see that we have seen a strong yield development reflect in bonds, what I’ve said before, the favorable portfolio mix, mainly focusing on blue-chip customers and small- and medium-sized enterprises and the gas in high-yielding market segment, especially those that require a higher service intensity, plus the geographic focus on Trans-Pac and Trans-Atlantic renewable energy and also LCL shipments. The yield expansion is more than compensated – has more than compensated for the sequential unit cost increase, and we don’t see any relaxation for the intensified workload that we experienced in the market and with our – at the moment to make. And I said this already two or three times, the shipments move as smooth as possible, EBIT full year at CHF1.5 billion, which is significantly higher than the previous year. And you have seen that we got a lot of momentum in this development in the quarter, quarter 4, 2021.

On Slide 10, you will see the KPIs and the details of the Air Logistics market, an excellent and strong performance also here. Like in Sea Logistics, We have seen organic yield increase significantly in quarter 4 of plus 9% versus the third quarter. We have seen organic cost development rather stable. That is also contributable our eTouch initiatives, which we will give some flavor on later on. And the – also the reflection of higher share of digital platform business that we will – that we have installed and incentified for our customers. The Apex yields are reflecting the tight capacities and the volume growth which is contributable to the focus of Apex on the Trans-Pacific and we also see clear evidence already from our joint procurement activities, so procurement synergies with Apex. EBIT full year, CHF1.167 billion and out of which almost 50% generated in the last quarter in an extremely tight and hot market where we have faced also here all – or we have done efforts to offer the best service quality that was possible in the given market environment. The next business unit, I would like to refer to in more detail is Road Logistics on Slide 12.

Road Logistics gained significant momentum in 2021 and the momentum sequentially increased quarter-by-quarter. A strong volume growth in core European markets especially domestic networks. I mentioned that initially. But also we see first signs of driver and capacity shortages in the forth, maybe partly at the end of the third quarter and a high demand for digital solutions, our visibility towards our Software-as-a-Service solutions as well as our customs platform. EBIT full year ended or were at CHF94 million, which is 52% above prior year, out of which quarter was almost generated in quarter 4 last year. And last but not least, Contract Logistics organic growth, I mentioned that centered around pharma and e-commerce.

And the details of the performance you will see on Slide 14, a very strong operational performance, organic quarter 4 net turnover growth of more than 10%, which led to an organic growth for the fiscal year of 7%, which is almost on market. Market, I think, was 5% to 6%. We had a bit of tailwind from the UK divestiture on EBIT level. But at the end of the day, the operational performance is extremely strong in Contract Logistics. And the trade in Asia and North America is 2x the trade of Europe, and that’s important because our geographic split was always intended to more – to balance our portfolio and Contract Logistics projects more. The drivers are, I repeat myself, pharma, health care, e-commerce, all with double-digit growth, and this is continuing, and we see a huge momentum that has been generated in Contract Logistics with an EBIT for the full year 2021 at CHF156 million, which is 95% above prior year and CHF42 million in quarter 4 alone, which is 52% above – 50%, sorry, above prior year.

And having said so, the details of the business units, I’m happy to hand over to Markus to give you some more inputs and insights into the financial figures.

Markus Blanka-Graff

Thank you, Detlef. Ladies and gentlemen, welcome also from my side. I think one can say that was a remarkably successful year. And let me start on the income statement, Slide #16. Busy slide, as always, at year aend, obviously, eight quarters and each individual year-to-date numbers on it. Let me just highlight 2 or 3 numbers on it. Increase of gross profit by CHF2.4 billion EBITDA nearly doubled and earnings before tax nearly tripled. I think a simple summary of that year, that’s what I said already, I think was remarkably successful.

Net earnings increased over the year at CHF1.2 billion. You can see two more noticeable components that I wanted to mention. One that is quite extraordinary as well. I think it did not happen since many years. I would have to check how many. But the exchange rate difference, the ForEx difference for once has not been negative against us. So the translation impact has been relatively neutral, that certainly, we have to consider also for the result. And as a result, and as a consequence of the Apex deal with Partners Group, we have the first time since a long period, significant non-controlling interest line which is in the year 2021 with CHF123 million. The vast majority of that is related to the Partners Group participation.

Let me continue on short reconciliation on income statement in terms of organic and operational performance. We have already made some comments around the acquisition that that is an accelerator and has given us a very significant contribution to our profitability. Nonetheless, also from a pure organic growth perspective, the Kuehne + Nagel organization has increased by 124% the EBIT, which translates into nearly CHF1.3 billion for the year 2021. And of course, balance sheet, something that reflects that development as well.

We have an expansion of the balance sheet of nearly CHF5 billion or a bit more even than 50% of previous year. So 30th of December 2020 total balance sheet. Where is that coming from? Three major components: one, trade receivable, an increase of CHF3 billion out of the CHF5 billion then the goodwill increase from the acquisition of Apex, roughly CHF1 billion, and the rest is basically smaller items and of course – balance that has increased CHF700 million on a year-over-year basis. On the liability side, for sure, similar picture trade payables increased for around CHF1 billion as well as accruals for trade payables increase of around CHF1 billion and the difference majorly in the equity.

Important for all of us and one of the significant KPIs we look at, obviously, cash and free cash flow. I’m already on Page #19 of the presentation. Let me start on the right side with the graphical picture of the last 3 years cash flow, free cash flow generation, you can see the pattern is very consistent. So I think we have repeatedly reported around these that the seasonality is very similar and just the numbers have increased quite significantly. On the left side, a reflection of what I just said in numbers. Operational cash flow increased by nearly CHF1.8 billion. Where did it go to? We had investment, obviously, into the Apex acquisition of around CHF1 billion and changes in working capital, I want to mention that specifically we have CHF800 million – nearly CHF900 million put into working capital. I will explain that in a minute, but that is the big picture summary of cash and free cash flow generation.

Page #20, you see here the net working capital I just mentioned the increase from a cash flow perspective, from a net working capital perspective, it is even on a CHF1.5 billion number that we have expanded our net working capital, a number that should make a thing, especially me as the CFO, what are we doing? But when you look into where it’s coming from, I feel more comfortable that we have a good control of what’s happening because when you look at the DSOs, so the numbers of days of sales outstanding, meaning our terms with customers, so the days when customers settle their invoices, we have hardly any movement actually, if so, to the better.

So our days of sales outstanding is at 49.2%. That translates from me, obviously, similar risk profile same number of days outstanding just on a much bigger sales ledger and where the variance comes from is from the days of purchase outstanding, so the DPOs. That is the time when we pay our suppliers and that is mainly driven through a change in our business model in airfreight that a lot of the capacity we currently purchase is not on a standard airline contract for Valley capacity, which you all know was usually cleared through IATA cash payments, but is much more on the charter basis, which has very little payment terms, if at all, if it’s not a prepayment arrangement altogether.

But that is something that is driven through the change in the business model and at the same time, it is at our discretion, if you like, to manage these payment terms with suppliers. So from that perspective, it looks like a big number and it is a big number, but I think for the right reasons.

Number – Page #21, return on capital employed. When I first looked at the slide, it looks – it looked a bit goofy to me, but that is the reality of what the numbers say. I think, again, here, I would look at the light blue, so the lower line of the – of the graph, which is indeed the return on capital employed. It’s certainly a top mark. You remember some of my comments in the past, I said around the 70% mark should be our standard performance, if you like, here. I think we have to rethink with the increased profitability and efficiency if we would give a new guidance, if you like, what is our standard return on capital employed. But it’s not everything about rates and margins.

Obviously, volume is one of the major drivers in the success of last year. Detlef has mentioned it already through the business units. And I don’t want to repeat most of it, but you can see here on the Sea Logistics side, as mentioned, influenced by capacity and product mix. On the Air Logistics side, I think a good split between the organic and the acquisition growth and for Road Logistics and Contract Logistics, both above the market. Looking forward, more and more importance will be on the efficiency of our operation, and that is a phenomenon for us for our eTouch initiatives in operation. So talking volume, as I did before, talking volume also mean talking efficiency.

And Slide #23 is really a recap on what is eTouch and how does this work? And this pictogram is nothing else than a way of simplifying and highlighting what we try to do. In simple words, you can read the text on the left side, but it is standardization than sequencing of the task, then centralizing some of the task and ultimately automating the processes. That’s really what it is all about. It sounds very simple, but I think you’ll appreciate that our processes might be very complex to begin with. And over the last 24 months, maybe even also changing quite frequently based on the rather challenging environment we’re working in. Why do we do that? Cost control for sure, is one of the reasons. But over the last couple of years, we have also realized that preserving more time of our operators for service-related matters, so to the benefit of customer service. and customer care is really what matters more in that context.

So we try to free up that time and dedicate it to quality and customers small snapshot, how does that look like from a – as an example, in the airfreight perspective, Page #24, a snapshot, as I say, is not a comprehensive reporting on all the eTouch initiatives. We picked a couple of milestones activity in the airfreight operation. Customer quotation and documentation, invoicing. What you see the first column is the number of our saved in thousands. Just to give you a bit of a context of this, when we look into the first one, 360,000 man hours saved, if you translate that into full-time equivalents, with the work hour of 8 hours a day and 220 days a year that would represent approximately 200 to 220 FTEs.

So the overall saving of 1.275 million man hours would approximately represent 750 FTEs. And that translates in the operation airfreight into an improvement of conversion rate of around 1.8% say, 2%. Is that what we have put out as our target? Not yet. You may remember, we said we want to improve conversion rate at around 3% for sea as well as airfreight.

We’re on the way getting there. The operational framework today, obviously, is far away from a standard normal routine job. I think the fewest job we currently have are routine jobs. But nevertheless, looking forward, automation, standardization, what I mentioned beforehand, is the key for efficient operation. All of that is a matter of technology and I think technological competence. And when we flip to the next page, which talks about technology and innovation, three main items, it means in simple terms, what do we provide as forward-looking information to our customers.

So real-time data in a proper data quality with a certain predictive visibility. So this is forward-looking. That’s what we do for the customer. The second part is how do we free up time for the customers. So how do I free up time from my operation to dedicate that to customers’ automation with a certain usage of Artificial Intelligence, also here being very transparent Artificial Intelligence is something we use. We don’t want to say experiment, but it’s still an area where I think we can do more, and we will do more.

And last but not least, I think very important in our modern way of thinking and customers is the easiness of doing business. So be easy, be simple, plug and play. We’re all used to download an application and start enjoying it. And exactly like that, the Kuehne + Nagel applications for our customers are designed today.

So now we talked about what’s in it for the customer, what was in it for efficiency. Last slide for me, if I may, what’s in it for the shareholder. And I think Page #26 is quite an impressive proof of that. Two lines about it. The proposal to the AGM is going to be CHF10 per share. That represents around 59% of net profit after tax payout ratio, which is exactly in the range that we have always indicated and represents just slightly above 3.5% yield based on the average share price of the year 2021.

With that message, I would like to hand back for Detlef on the topic that is also at the heart of our operation and strategy.

Detlef Trefzger

It is. And now it’s on me to talk about what’s in it for the environment. And despite all the market dynamics, supply chain disruptions, capacity and labor shortages and so on and so forth, we focus on transitioning to a global zero carbon future. And it has a couple of dimensions. One is the Scope 1 and 2 emissions, so our own mission, so to say, where we focus many initiatives to reduce them as much as we can and the science-based targets that we are offering to our customers with data-driven insights, design and optimization of supply chain solutions alternative transport modes as well as low carbon fuels such as SAF. And we are driving a transition to a zero carbon business model, and we support our customers in doing so, and we have many customers that have signed up and committed to the science-based targets initiative, SBTi as well.

On highlights. We have done a lot of – or we have pushed forward a lot of initiatives last year. But some of the highlights are really – they are close to my heart. We have promoted the first – world’s first power to liquid production of synthetic, sustainable aviation fuel, SAF. We have reduced the carbon footprint by 70% for one of our customers by just shifting the supply chain to – from truck to railways. We have installed Luxembourg’s biggest photovoltaic installation on the roof of our Contern site in Luxembourg, and we are already last year, have been using 78% of our own energy consumption based on renewable energy. We have a lot of plans to continue that journey to a low-carbon business model, and we see high demand and interest from customer partner and to make use of that approach.

Having said that, let us give a short outlook to 2022. Markets, we see GDP growth expectation still of 4.3%. But we also have a lot of – not a lot, but we have significant geopolitical uncertainties, the macroeconomic effects of – thus are not known yet. The inefficient supply chains with network disruption and congestion will continue. There is no sign of relief not from today’s perspective. And we see stabilization at the moment, not even with the consumption patterns, consumption is going on. And we will see infrastructure investments that we will have to foster in order to optimize global supply chains. That was the market perspective. Kuehne + Nagel, we continue with a very agile, high service quality and network reliability.

This will put high demand on our great colleagues that are close to our customers and that do their utmost to have on-time deliveries in all shipments that we channel through our networks. We will continue our investments in sustainable logistics solutions as well as into digital solutions, digital platforms. And we will focus on the profitability, but more important, leveraging the companies we have acquired in our network and for the benefit of our customers. And the digital transformation is in full swing. You have seen with eTouch, the first benefits out of that. We aim for more, and we will continue driving hard to achieve our targets.

With that, I thank you for listening so far. And I hand back to Alice for the Q&A session.

Question-and-Answer Session

Operator

The first question comes from the line of Alex Irving with Bernstein. Please go ahead.

Alex Irving

Hi, good afternoon. So three for me, please. First of all, on the ongoing situation with Russia and Ukraine, any comments on how this affects your business specifically across volumes, yields and OpEx, given you’ve had booking suspensions, space closures, sanctions and those kind of measures any further developments that we might be looking at is an outflow that has a meaningful impact?

Secondly, on airfreights, obviously, very good performance this quarter and Apex looks to be an extremely strong – you mentioned procurement synergies earlier on. how much of this improvement is sustainable? And how much do you think – and what do you think that looks like in a normalized world, especially on a GP and OpEx per ton basis? And then third and finally, one of your competitors have suffered quite a large cyber attack in recent weeks? How does that affect your business and growth prospects, maybe specifically along Trans-Pacific airfreight? Thank you.

Detlef Trefzger

Alex, thanks for your questions. Let me start with the Russia invasion to Ukraine and the effects. Locally, at the moment, we have stopped business, as you are aware, and we don’t see a big impact at the moment other than that we are concerned about the security of our people, and that’s the focus for the time being. The bigger picture is that overflights over Russian territory as well as Ukrainian territory are prohibited right now that will lead to longer lead times for the air cargo network towards Northeast of Asia, so Japan, Korea and the north of China. And this we need to provide for in our flight operation. The long-term macroeconomic outcome, nobody knows. And I think all the sanctions are geared towards stopping the invasion and that is what we all should focus and concentrate on and then see what will be, hopefully, the solution for stopping a war in Europe.

Your second question, Apex procurement, I think Apex has a great customer base, has a great solutioning and procurement is one aspect of the synergies which we see. I would expect that this will be ongoing also this year. The question really is, Alex, what is a normalized market. And we have mentioned that most likely transport and logistics rates will be higher in this decade, I’m not talking 2022, but longer than what we have experienced in the last decade, for many reasons, infrastructure investments, data connectivity and the like and also sustainability as an investment area. As long as the Trans-Pacific trade is strong, we will have a strong performance of Apex, and that is driven by the consumers in North America and the exporters in Asia.

And most likely, the seasonality will show its pattern. So quarter one is always a bit lower than quarter four, as you know. There is no Christmas season in the first quarter, unfortunately. And we will see this. But in principle, Apex will be – will continue to be a strong contributor to our growth as well as to the EBIT. Cyber, I think what shall I say? I think at the moment, we will – we concentrate on securing our networks and continuing with our operations. And we can only urge that not only companies but also nations collaborate in order to avoid and reduce the risk of cyber-attacks into critical infrastructure providers and critical companies. Thank you.

Alex Irving

Alright. Just on the cyber attacks question, I am referring mostly to the disruptions suffered by expeditors in the last couple of weeks and if you are seeing any additional volumes, any customers coming to you as a result of that?

Detlef Trefzger

Alex, I think my explanations were sufficient.

Alex Irving

Thanks.

Operator

The next question comes from the line of Sathish Sivakumar with Citigroup. Please go ahead.

Sathish Sivakumar

Thanks Detlef and Markus. I got two questions. So first of all, it’s on the customer mix. So, as your customer mix, if you compare say SMEs versus large corporates have changed due to the shift in the product mix because you are no longer getting some low-value cargo. So, how has it actually impacted your customer mix? What is your exposure to SMEs, say, in 2021? And the second one is around the cash conversion. The strong asset growth is actually impacting your working capital and also on cash conversion. In 2021, if you see the free cash flow conversion is around 60%. So, how should I think about cash conversion in normalized levels?

Detlef Trefzger

Thanks for your questions. Customer mix statement versus the value of the products our customers ship. So, also an SME customer can have high-value goods that can bear the transport cost currently in the market, and we are doing business with them. Our percentage of SME customers has not changed significantly. From a volume perspective, it’s around 20% to 30% of our volume.

Markus Blanka-Graff

Okay. Hi, Sathish. And on the cash conversion, obviously, yes, you are right. It’s a lot of that being through the expansion. I think assuming that rates either stay that way and volume growth is the only driver to that or even rates coming down slightly. I would expect a standard pretty much close to what we had in the past. So, I would think, and that is with the caveat, obviously, we would go in the range between 80% to 85%, again, as we had in the past. I think that is at least for the near future, something that we should envisage. Having said that, I could be a total fool if in 3 years from now, I don’t know, rates are coming down significantly. The sales ledger is contracting again, if we have a year with 110% conversion rate. But then we will see.

Sathish Sivakumar

Okay. Got it. Just a clarification, so 20% to 30% is the SME mix, right, portfolio across air, sea and road and contract, yes?

Markus Blanka-Graff

Correct.

Sathish Sivakumar

Okay. Thank you very much. That’s helpful.

Detlef Trefzger

Thanks Sathish.

Operator

The next question comes from the line of Muneeba Kayani with Bank of America. Please go ahead.

Muneeba Kayani

Hi. Good afternoon. I just wanted to follow-up on the earlier question on the impact of the Ukraine crisis and specifically on the sea market, how do you see that kind of impacting the sea ship freight market, if at all? And then secondly, do you think that airfreight rates and as well as container shipping rates could go higher in the next couple of weeks because of all this disruption? And then on M&A in the – we have seen kind of news flow pick up, at least in the press about DB Schenker being up for sale. Any comments there would be helpful to understand how you are thinking about kind of bigger M&A going forward? And then lastly, the union on the Port of LA Long Beach, the ILWU negotiations are starting off with the contract expiring mid this year. How do you see that impacting the sea freight market? Thank you.

Detlef Trefzger

Hello Muneeba, thanks for the firework of questions. The Sea Logistics market at the moment is not really impacted by the Ukraine crisis, at least not material for us or in our networks. And the biggest impact is on the – as I said, the over-flight rights on the Russian and Ukrainian territories, which will lead to rerouting of airfreight, which will take I don’t know, 12 hours, 14 hours longer than the average travel time for air cargo to North East and from Asia, Northeast Asia. The rates can always go higher and can go lower. At the moment, nobody can judge. Our disruption indicator shows a very stable situation for a couple of days. But on an extremely high level, we have 12.5 million TEU days waiting in front of ports. 80% of that is geared towards the West and East Coast of the U.S. And nobody knows how this will develop. This is also true for the unions on the West Coast and the upcoming negotiations, we experienced a lot of things 6 years ago, I think. And nobody knows how this will develop. The M&A DB Schenker, I think that’s almost a classical question. Our M&A strategy has not changed. We have always commented on that and size is not what we are looking at. It’s more competence and geography coverage of market segment solutioning and that is what we are interested in. Let’s see how this process continues and conclude when facts are communicated. Thank you.

Muneeba Kayani

Thank you.

Operator

The next question comes from the line of Sam Bland with JPMorgan. Please go ahead.

Sam Bland

Thanks for taking the question. I have two, please. First one is on the unit margins on Slide 10. It looks like most of the benefit in Q4 came from Apex. I can kind of understand why Apex benefited more than the rest of the air division, but may be surprised that the rest of the air division didn’t really see that much of a unit margin increase. Why is that? Why is the rest of the business not seeing an increase? And the second question is, you mentioned earlier in the comments that you are moving away from some low-margin items. Is your intention to take those back in the future as and when airfreight or – air or sea freight rates come down, or you think that’s kind of now permanently moving away from some of those lower margin or lower value items? Thank you.

Markus Blanka-Graff

Hi Sam, it’s Markus. So, for the air unit, Slide 10, I think first of all, yes, you are definitely right in your observation that most of the increase is coming from the Apex acquisition. But having said that, it truly comes from the Trans-Pac trade. So, also the KN business on the Trans-Pac trade has similar profitability. It’s just much smaller than on the effect, let’s – than what was the Apex volumes has. So – but Trans-Pac is the hot trade, clear. I think we have mentioned that. I think the access to capacity through Apex, one of the reasons why we have made that acquisition has been – has proven superior to many of the other competitors. So, I think we have done or Apex management together with us has done a very good way of securing capacity and of course, benefiting from a hot trade, which is Trans-Pacific. And that’s what you see in that quarterly development.

Detlef Trefzger

Then your last question on low-margin businesses, especially Sea Logistics, the sea cargo mix, we can plug in additional volumes if there is a desire for it. At the moment, we concentrate on the high yielding, but also high demanding customers because there is scarce capacity in the market, but it’s on us to open up additional volumes again. Once those customers can bear the freight rates, which might lower in the near or further away future.

Sam Bland

Understood. Thank you very much.

Detlef Trefzger

You’re welcome.

Operator

The next question comes from the line of Michael Foeth with Vontobel. Please go ahead.

Michael Foeth

Yes. Thank you. Good afternoon. Also three questions. First of all, on the DSOs or the positive DSO trend you have seen – can you explain if that relates to the fact that customers are willing to pay faster given the constraints currently, or is it just basically mix or regional mix related? That would be the first question. The second one is on your conversion margins, are you planning at all to provide any sort of mid-term targets on future conversion margins? And when would you be ready to do so? And then finally, on the road business, I was wondering if you could explain the profitability dynamics in road given that apparently volumes were stronger, but the profitability in the fourth quarter is down. Can you just explain what’s going on there? Thank you.

Detlef Trefzger

Sure, Michael. So, let me take the first one on the payment terms. The willingness of customers to pay early, I think I would answer that from what we see is more when customers need capacity and we do specific or even dedicated charters for that. We do have better leverage to say, well, we have to prepay the charter. We might ask for slightly reduced payment terms also from a customers’ perspective. I think it’s not so much the regional point. It’s far more the commitment of space dedicated for customers that gives us that angle to at least not slip on the DSOs, but keep them steady or eventually improve them a little bit. But you have seen the number is very small of improvement, it’s 1.2 days. I would be careful in reading a big trend of it. I would call it stable rather than reduced. Second question on the conversion margin, you are absolutely right. We are at the time where a new target needs to be announced, and I can say that in the second half of the year, we are planning a Capital Markets Day with the announcement of our further strategic program, of course, which will include also a mid-term target for the conversion rate. I don’t want to jump the gun here and come back with any numbers, but that is the plan.

Markus Blanka-Graff

Regarding Road Logistics, Mike, I am not sure we are talking about the same thing here. Road Logistics has seen a turnover growth of 20%, 14% gross profit increase and an EBIT improvement of 50%. Yes, we see higher demand for drivers and higher costs to get the drivers. But in total, this is a business that performed solidly and we don’t expect any major changes in that performance moving into 2022.

Michael Foeth

Okay. Understood. Thank you very much. Well done.

Detlef Trefzger

You’re welcome.

Operator

The next question comes from the line of Gian-Marco Werro with ZKB. Please go ahead.

Gian-Marco Werro

Good day gentlemen. First of all, congratulations on strong results and also on your decision to stop most of your logistics into Russia. Two questions from my side. First of all, in Air Logistics, can you give us an update in relation to the reliability of planning now logistics, again with the belly capacity of passenger airlines for intercontinental flights. And what, for example, also maybe was there also a step-up or an addition in some air supply helping to ease a little bit the situation for 2022 now, especially some cargoes? And the second question, mostly to the Russian conflict with Ukraine. How many or, let’s say, also how meaningful was the share of supply in Air Logistics from Russian and Ukrainian players prior to the escalation of the conflict?

Detlef Trefzger

Thanks for your questions, Gian-Marco and also thanks for your kind feedback. The Air Logistics planning reliability depends on intercontinental passenger flights. We don’t see a huge volume increase or capacity increase at the moment on intercontinental flights. Yes, we might see some flights from, I don’t know, Central Europe to Majorca, but they don’t really help for the demand that we have on regular transports amongst the major intercontinental business centers. So therefore, I would say our estimate has been that the intercontinental value capacity or passenger capacity will not increase quarter one and quarter two significantly. And we gave, I think one quarter or two quarters ago an outlook that we should see a major improvement not really before 2024, but that’s a bit of speculation from today’s perspective. From – regarding your – the Russia invasion of Ukraine and the air capacity, it’s a small market for us, it’s a small market related to mainly imports, which we stopped, as you know, and the capacity supply are very small as well. So at the moment, it’s more the rerouting across the continent or this territory that I mentioned before a couple of times, more that is causing delays and maybe a bit of a capacity shortage because the planes are longer used for one flight, then well than anything else. The main problem most likely will be the lack of Antonovs, the planes that you know, especially for project business, which are at the moment also banned from operations.

Gian-Marco Werro

Thanks.

Detlef Trefzger

Thank you.

Operator

The next question comes from the line of Nikolas Mauder with Kepler Cheuvreux. Please go ahead.

Nikolas Mauder

Good afternoon. Thank you. One question from my side on the supply-demand balance in the logistics markets, please. Assuming that consumers eventually give in on the inflationary pressures, would lower demand for transportation in general, do much to change the current price or yield environment or are current problems too much rooted on the supply side, i.e., the terminals, rail, etcetera? Thank you.

Detlef Trefzger

Nikolas, thanks for your question. And you see me smiling exactly that is what can be a solution. We hope that is not happening, to be honest, because we need growth again. We are still in parts of the segments and industry below the level of 2019, but less demand or demand reflecting on higher inflation rate for sure, will ease up the pressure on the supply side of the capacity in Sea and Air Logistics and also Road Logistics, especially. Thank you.

Nikolas Mauder

Yes. Thank you.

Operator

This was the last question. Gentlemen, back to you for any closing remarks.

Detlef Trefzger

Thank you, Alice. Thank you, ladies and gentlemen. Thanks for joining in. As you saw and heard Kuehne + Nagel stayed on course in 2021 and performed strongly. Thus far in the current year, the business outlook has been quite favorable and positive while geopolitical tensions and ongoing supply chain disruptions generate a certain uncertainty, which we commented on before. We are looking forward to take – to talking to you again and to take you through the details of our quarter one, 2022, performance on April 26, which is in eight weeks. And until then, stay healthy, take care and talk to you soon again. Thanks. Bye-bye.