Ladies and gentlemen, good day and welcome to the Allcargo Logistics Limited Q3 and nine months FY 2024 results conference call hosted by Dolat Capital. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Hemesh Desai from Dolat Capital. Thank you, and over to you, sir.
Thank you. Good evening, everyone. On behalf of Dolat Capital, I welcome you all to Q3 and nine-month FY 2024 earnings conference call of Allcargo Logistics Limited. We are pleased to have with us the management team represented by Mr. Ravi Jakhar, Group Chief Strategy Officer, Mr. Deepal Shah, Group Chief Financial Officer, and Mr. Sanjay Punjabi, Investor Relations for Allcargo Logistics Limited. We will have the opening remarks from the management, followed by a question and answer session. Thank you, and over to you, sir.
Yeah, thank you. Good afternoon, everyone, and thank you for joining us for the quarterly earnings call. I would take you through some of the business highlights and the macroeconomic environment and then hand over the line to my colleague, Deepal, to take you through the financial highlights. As you are aware, during the quarter ending December, we also announced the scheme of restructuring, which is currently under implementation, and we already filed the scheme with the exchanges, and the scheme is being pursued. Just to reiterate, under the scheme, the International Supply Chain business would get demerged into Allcargo ECU. The remaining business of Express and Contract Logistics, which currently is under multiple step-down subsidies, would all consolidate into Allcargo Logistics directly, thereby creating a very simple operating structure which will aid the management efficiency and provide for better financial flexibility, thereby creating platform for better growth across both the businesses. Coming to the macroeconomic environment on the International Supply Chain side, on one hand, from a global trade perspective, we have seen continued subdued demand. It is linked with the inflationary pressures in the Western economies.
The expectation is that with the interest rates and the federal rates likely to remain elevated for another couple of months, we see them not going up and perhaps stepping down during the later half of the calendar year 2024, which would lead to increased demand in combination with reduced inflation.
Basically, that should translate into increased global trade in the second half of 2024. Therefore, we estimate that 2024 second half, which is July to December, we should expect better volumes in the International Supply Chain business. In the near term, we have observed that Red Sea crisis has eliminated some bit of capacity on the shipping trade lanes, thereby somewhat balancing the excess capacity, which was on account of lower market demand. As an outcome of that, we have seen an escalation in freight rates. However, given the overall subdued economic environment, there has also been a marginal negative impact on the volumes. Therefore, the overall impact is marginally positive, not much, which we expect to see in the first half of the year as well.
At the company-specific level, we have endeavored to reduce cost, and this initiative started with planning around August. Subsequently, we have made certain decisions to bring down cost by way of outsourcing some of the operations from high-cost countries to low-cost countries, eliminating certain positions by way of digitization and bringing in other efficiency measures. All these initiatives are bringing in substantial cost improvements. We believe that a significant part of these costs benefit will start accruing from January. However, if you look at the quarter from January to March, there will also be a severance cost as many of these countries, as we terminate employment contracts, depending on the longevity, require significant payouts to be made. So overall, in the January to March quarter, we may still see a negative impact of the severance as compared to the cost reduction.
However, with all of that completed by February and with some bit by March, from April onwards, we believe that on account of cost reduction, the profitability should improve. In terms of the business volumes and the resulting gross profits, we have seen over the last couple of quarters the profits have bottomed out, and sequentially they have remained more or less flat in the International Supply Chain business. From April quarter onwards, initially on account of cost reduction and subsequently on account of renewed demand in global trade, we expect the profits to improve going forward. On the domestic side, economic environment remains strong. On the Contract Logistics business, we have a healthy pipeline, which gives us visibility that we should continue to see a good growth in the Contract Logistics business.
On the Express Logistics business, while we have increased the volume, the mix of product segments has resulted in lower yield. Thereby, revenue has not grown in line with the volume, creating an impact which has been negative on the bottom line, with investments on people costs and expanded warehousing infrastructure capacities to handle higher volume, which we have been forecasting and like I mentioned, have also been achieved. Detailed commentary on Gati business has also been shared separately in the Allcargo Gati call, considering the business is separately listed. Therefore, we tend to keep limited commentary on the Gati business in the Allcargo call. But these are the broad highlights in terms of how the business is performing. I would request my colleague, Deepal, to take you through financial highlights. Subsequent to that, we will be happy to take your questions. Thank you. Over to you, Deepal.
Thank you, Ravi. Good evening, everyone. I will now discuss the performance for the quarter ended December 2023. On the consolidated basis for Q3 FY 2024, our revenues stood at INR 3,212 crores as compared to INR 3,307 crores for the previous quarter, representing a marginal decline of 3%. EBITDA for the same period stood at INR 111 crores as compared to INR 118 crores, a 6% decline. Profit after tax more or less was similar to the previous quarter, which is at INR 17 crores as against the INR 16 crores for Q2 of FY 2024. The depreciation amount for Q3 is higher as compared to the similar quarter of previous year.
That is primarily on account of the acquisition or the completion of the balance shares acquisition of AACPL, which is the Contract Logistics business, and this increase on account of amortization charge on the intangibles recorded and depreciation on the leased assets. Exceptional gain during the quarter is on account of reversal of corporate guarantee given by Allcargo Gati, a subsidiary of Allcargo Logistics on behalf of GI Hydro Private Limited. Our balance sheet remains healthy. Our net debt stands at INR 214 crores as the consolidated net debt as of December 2023. Now, moving on the segment results. I will start by discussing the performance of the International Supply Chain segment. The demand scenario looks bleak, like Ravi explained, in the midst of a tough economic and geopolitical environment. However, economists expect a revival in the second half of the 2024.
LCL volumes for the Q3 stood at 2.2 million cubic meters as compared to 2.3 million cubic meters, flattish, one might say, with the previous quarter. FCL though has a volume of also remaining flat at Q3 year-on-year basis and stood at 152,500 thousand TEUs. The interactive supply chain business reported a revenue of INR 2,721 crores as compared to INR 2,795 crores, a marginal 2% decline. The EBITDA for the same period stood at INR 72 crores as compared to INR 62 crores in Q2 FY 2024. Moving on to the Express business operating under the GKEPL, subsidiary of Gati. The segment recorded in the volume growth around 11% for Q3 FY 2024 as compared to last year. This growth has come on the back of improved operational performance and sales acceleration initiatives.
The volumes for Q3 FY 2024 stood at 318 kt as compared to 287 kt in Q3 FY 2023. The revenue stood at INR 371 crores in Q3 FY 2024 as compared to INR 385 crores in Q2 FY 2024 and INR 379 crores in Q3 FY 2023. The EBITDA stood at INR 7 crores in Q3 FY 2024 as compared to INR 15 crores in the previous quarter and INR 21 crores in the last year's similar quarter. Moving into Contract Logistics business, which sits under the Allcargo Supply Chain Private Limited. Contract Logistics revenue stood at Q3 FY 2024, stood at around INR 78 crores as compared to INR 76 crores for the previous quarter. EBITDA for the quarter ended December 2023 stood at INR 35 crores as compared to INR 36 crores in the previous quarter. We share additional details on the performance of contract logistics segment in the presentation for a better understanding.
With this, I would like to open the floor for questions and answers. Thank you.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handset while asking your question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. We have our first question from the line of Radha from B&K Securities. Please go ahead.
Hi, sir. Thank you for the opportunity. Sir, I wanted to understand, considering the current freight rates and the CBM space that is expected to come in next quarter, what is the expected EBIT per TEU for next quarter?
We do not share quarterly or annual forward-looking guidance. However, as I mentioned, severance cost would be a one-off cost, so I do not think it would be appropriate to look at that in the analysis of EBIT per TEU. Also, as we have spoken in the past, we have two segments of business and over last 18 months we have, maybe now 24 months, we have been reporting the LCL and the FCL volumes separately and therefore for LCL business it makes sense to look at the CBM as a volume benchmark. For FCL business it is a TEU. In terms of the EBIT numbers, they are driven by gross profit and SG&A costs, whereby, as I mentioned, if you look at the FY 2025 as a whole year, we estimate the SG&A cost would not go up on account of various cost reduction initiatives that have been taken.
Therefore, despite all the investments, inflation increases, et cetera, the overall cost would remain similar or lower. Therefore, as the gross profit comes back on account of improved volume and improved margins on the back of better utilization, et cetera, we would expect the EBIT margins to expand as well. But I cannot share any specific guidance per se.
Okay, sir. Sir, how much are you expecting the severance cost to be?
I cannot share specific numbers on that. But as we report the numbers, we will be happy to give breakdown of what are the one-off costs in the quarter that follows.
Sir, okay. Sir, if I understood correctly, the SG&A costs we are expecting for FY 2025 to be same as FY 2024, despite the increase in volumes that we are expecting from FY 2025 onwards.
Yeah. SG&A, in the normal course of events, would have increased on account of inflationary increases, plus new employees added during the year, plus investments into some new initiatives. However, because of the cost reduction initiatives, all of that would be offset, and therefore we do not expect the SG&A costs to rise. While we expect the gross profit to rise on account of increased volumes and improved utilization leading to expanded gross profit margins as well. That is the broad narrative for FY 2025. For the immediate quarter, we do not see any significant change. The volumes have remained subdued. There has been some marginal impact of the freight rates, but there has not been very significant because there is a downward volume impact as well.
This quarter, which is January to March, we also have the Chinese New Year link holidays and the delays on account of transit as well. So overall, there is not going to be much significant impact in the Q1. But from April onwards, the cost reduction should show up as an impact in the P&L. In the second half of calendar year 2024, which is July to December, we also expect the volumes to rebound. A combination of all of these things should lead to improved profitability in the International Supply Chain business.
Sir, just wanted to understand any ballpark number also, if you can give or just an estimate as to how big this severance cost is expected to be, or will it be around INR 20 crores- INR 30 crores? Is that a correct way to look at it, or would it be higher than that?
No, it won't be that higher number, but I cannot share more specific details in that. We are not looking at that higher number.
Secondly, we are saying that volumes are expected to pick up from second half of FY 2024, so are we expecting any kind of customer additions?
Second half of calendar year 2024, that is what I said, and this I am talking about the industry. In terms of as a company, we have already been. The volumes actually, if you see, globally the market has shrunk for the LCL industry over the last 12 months or so. However, our volumes have remained flat. So we have maintained almost flat volumes by launching new trade lanes and by gaining marginal market share as well in some key countries on back of such initiatives. As we move forward, we are expecting industry headwinds to recede and the market as an overall to see improvement in volumes, and that would naturally benefit the company as well. Our growth rates would always be at par or better than market growth rates as we have maintained in the last several years and continue to remain confident about that.
In that improvement in volume expectations that we have, what are the key user industries wherein we are expecting a good improvement? If you could give a breakup of the user industries on a broad basis that we are catering to.
We carry 15% of the global neutral LCL consolidation trades, capturing 2,500 trade lanes across 180 countries. I am just trying to give a perspective that we truly represent the global trade. So all the commodities which get carried in the LCL trade would have an almost homogenous distribution representing global trade. So it is not dependent on any specific sectors or even trade lanes per se, because we have strong presence on almost all the key trade lanes, whether it is out of Asia into Europe, into U.S. or intra-Asian trade. We have significant presence in all the key trade lanes across the world. There is no reliance on any specific sectors or segments per se.
How much is e-commerce demand?
E-commerce is one of the contributors to LCL trade. However, from our perspective, we work with forwarders who are our customers, and we operate like, to put it simply, like an Uber of shipping where we do not own the shipping vessels, but we operate like a shipping line operating these trade lanes. In this asset-light business model, forwarders are our customers and many a times these forwarders carry loads for small and medium businesses, which includes cross-border e-commerce possibilities as well, wherein there could be shipments moving in from, say, a factory in China to some of these warehouses in North America for the end shipment to e-commerce consumers. But our participation in that is the B2B part of it, which is pickup and delivery from a warehouse and pickup from a warehouse and delivery into a warehouse across the border.
E-commerce and the emergence of small and medium businesses are two key drivers of LCL growth, which is why if you look at barring last 12 months, which have been a bit different, in general, LCL trade has been growing at 2x the rate of global container trade growth. While the container trade growth has been historically about 3% over the last several years, LCL growth globally was about 6%. E-commerce, like I said, is one of the key drivers to that.
Okay, sir. Thanks, and all the best.
Thank you.
Thank you. A reminder to all participants, you may press star and one to ask questions. We have our next question from the line of Payal Shah from Billion Investors. Please go ahead.
Hi, sir. Thank you so much for the opportunity. I have questions on CL. I just wanted to understand our performance in various sectors we are present in, like chemicals or auto or e-commerce. If you could please highlight something on it.
You are talking about the Contract Logistics business? I would say-
Yeah, please
Yeah. Across all these sectors, we have had steady performance. In terms of chemical, as you know, that is the biggest segment, which has historically been a much more dominating segment. Therefore, we would see more customers being added in the auto and e-commerce segments, and therefore the revenue growth would continue to be more on the e-commerce and auto categories and some new categories as well, as compared to chemical. Purely on account of chemical, we are already a market leader in an established segment, but the e-commerce, auto and the new segments offers much bigger opportunity. Therefore, you would continue to see the segmental enhancement in these two sectors. So that's the broad narrative on growth coming in from various sectors.
Uh-huh. Okay. So what are the sustainable margins for this business?
In this business, we have seen a steady performance over last several years, and we believe that the margins should continue to be range bound in the similar range as we see today. We have invested in certain amount of white space for the purpose of planning growth, so that we have ready warehouse space available. At the same time, that means that that has a negative impact on the margin. We have also invested in people capacity, which also means that there's a negative impact on the margin. As we grow, the white space as an absolute number would remain constant, but as a percentage it will reduce, which means that your white space cost will go down. There should be an operating leverage as well. So these are the two positive factors towards the EBIT margin.
However, at the same time, we also need to recognize that historically, chemical was a much higher percentage of our total business, and chemical, by nature of being a very niche business, has higher margins. As the share of chemical goes down, that would have a negative impact on the EBIT margin, while operating leverage reduction in white space as a percentage of total revenue would have a positive impact. Overall, we expect the margins to remain range bound and not much significantly different. Our EBIT margin is currently in the range of about 12%-14%, would remain broadly in that range in this business. This is, I am saying, EBIT margin.
Yeah, EBIT margin is 12%-14%, yeah.
Okay. That's quite helpful. My last question is following up on my above questions. Are we tapping any new sectors, as in what are our plans to scale this business, and it would be helpful to get some outlook on the business.
Yeah. We are looking at certain segments. For instance, we have been making inroads in consumer durables, IT products, furniture as some of these sectors that we have been looking at. If you look at the revenue contribution of these segments, you would find that the e-commerce and auto are more than twice of what they used to be, say about two to three years ago, and therefore a similar trend would continue wherein these sectors will also see a higher percentage allocation.
Ravi, just to add here. What we had is, a couple of years back, we had a very heavy chemical segment, and auto and e-com was much less. Now if you see, all of them are almost equal. We have diversified into various other segments, and we continue to do so to gain better market share and improve our utilization of warehouses space and also to increase the number of square feet under the overall management of Contract Logistics.
Yeah. If you look at chemical, which at some point in time was about 80%, had come down to 50%. Today it contributes about 35%-40% of our total revenue in the business, and it should perhaps come down to 25%-30% over the coming couple of years.
Okay. Thank you so much for the elaborate answers, sir. Thank you so much.
Thank you. A reminder to all participants, you may press star and one to ask questions. We have our next question from the line of Nirav Savai from Abakkus. Please go ahead.
Yeah, hi. My question is on the OpEx on the MTO side of the business. Sequentially, we have seen a decline there by almost about INR 40 crores. You said that the large part of this cost reduction measures we need benefits in Q1 FY 2025 onwards. What would be the sustainable OpEx going forward?
Wait a moment. Yes, I am not sure which cost you are talking about on the decline.
I am saying
Are you looking at the operating
OpEx. He is saying about OpEx.
OpEx for the MTO business is directly related to the freight. There is a large amount of freight which is passed through. If your revenue shrinks, your OpEx cost to that extent also shrinks by that amount.
Yeah.
Similar amount.
Our commentary on operating cost reduction was not only freight rate. I was talking about the SG&A cost reduction, which was on account of, I took some examples as well of how we are outsourcing from high-cost countries to low-cost countries, looking at eliminating certain.
Positions by way of automation, et cetera. These are all savings which will show up in SG&A.
Sure.
Operating expenses, we are already efficient and they are more driven by, one, freight rate environment and secondly, by utilization, which then should improve on account of improved volumes.
What is SG&A right now as a percentage of revenue per quarter? What was it last quarter?
Here again, as you would notice, and we mentioned in the past as well, the SG&A, again, I would recommend that for the fair analysis, it will be appropriate to look at SG&A as a percentage of GP or a ratio of that, because revenue can go up or down depending upon the freight rates. It is not only a factor of volume. As you would notice that freight rates have come down sharply. Our revenue has also actually come down without the decline in volume and alongside the operating expenses have also come down because freight rates are a pass-through expense. But at the same time, to answer your question, we can share the number. Deepal, would you share the number on the SG&A as a cost of
Yeah, approximately 20%.
Around 20%, but like I said, the revenue is fluctuating and therefore that number may not be the-
20% of gross profit is what you are saying, right?
Yeah. The revenue is the number, the question which you asked. What I am saying is that it will be more appropriate to look at the gross profit to SG&A ratio. Which we have been sharing as well. We have been sharing the gross profit and the numbers separately in the presentation. I am just sharing that that is the better way to look at the business because revenue and operating costs both have freight which is passed through.
Okay. When we say that quarterly gross profit is about INR 30 crores on the MTO side of the business, we are saying the SG&A cost is 20% of that?
Yeah.
Of the revenue, right?
No. You had asked about the revenue, so I would answer about the revenue.
It is on the revenue.
Yeah.
So if you are looking at a pure MTO business
Yeah
approximately, it is around 20% of the revenue.
Deepal, you can answer on the GP as well, because like I said, it is better to look at the GP because SG&A is
Okay
more-
You would be some INR 3,700 crores, so 20% would be INR 540 crores. Is that a SG&A cost?
Yes. 50% of the GP is SG&A cost.
Oh, 50% of the GP. What was it last quarter? Just trying to understand the quantum.
Valid for nine months approximately.
What has been the quantum of decline if we see on a quarter-over-quarter basis on the SG&A side?
Like I was mentioning, we have started with the initiative on the month of August, with positions being identified. There is typically a three to six-month notice period depending upon the country and tenure and the local laws. Therefore most of the terminations would happen, some may happen in the month of between mid-November and November to December, but most of them will be between January to March. In the quarter ending December, while there could have been marginal savings on account of reduced SG&A in December, they have also been offset by some of the severance cost. In January to March, we believe that there could be a negative impact of severance cost.
For the purpose of SG&A on a steady basis, it will be from 1st April that one would see the actual numbers. For the quarter of January to March, we would provide the time of results, what is the actual expenses incurred during the quarter and what are the one-off severance expenses. It will be a fair comparison of SG&A cost for the October to December quarter and January to March quarter.
Okay. As per our assumptions, any number if you can just highlight what would be the kind of SG&A going forward? I mean, assuming about 20% or 50% of your gross profit is around about INR 300 odd crores for the current quarter. So how do we see this Q1 FY 2025 onwards?
Like I was mentioning before, we would be more certainly able to offset any increase which happens on account of inflationary increases, investment into new people, capabilities, product, et cetera. All of that will be taken care of. So SG&A costs will be similar or lower despite all these increases, and therefore what it means is that the expansion in GP would straightaway pass through to the bottom line. In a normal situation where there was no cost reduction, you would typically find that remunerations and the admin cost on account of escalations, et cetera, would typically go up every year. Also you have people who join during the course of the year and therefore the costs go up for the entire year.
all of those positive, I mean, the increase in the cost would be offset by the cost reduction initiative, and we expect the cost to be same or lower despite all of that. Which means that the entire increase in gross profit would be carried down to the bottom line. That's the broad narrative we can share at this point in time.
Would we be safe to assume that about INR 310 odd crores is what SG&A cost this quarter is, this will continue to be similar or maybe lower, but would not increase next year?
Yeah. So the current ongoing rate, quarterly rate of SG&A would continue or be marginally lower while the gross profit is likely to grow in the second half of the year on the back of improved volumes and expectations on improved gross margins as well.
Okay. And initially, we had highlighted after the Chinese New Year, we will see some upward trend in the global trade. So the demand still continues to be sluggish, or you have seen any revival, at least in the foreseeable future?
We have indicated earlier that we expect the second half to be strong on the back of actual consumer demand coming in, which has to be driven by inflation adjustment and the rate cuts which will lead to inflation adjustment, and therefore disposable income being available with people. We have continued to maintain the same outlook that we expect second half of the calendar year 2024 to be better. Currently, the environment remains subdued. The Red Sea crisis has increased the freight rates for several trade lanes, which has led to slightly higher freight rates, but at the same time, slightly negative impact on the volumes as well. As a trade-off, it has not had any significant impact.
As the Chinese New Year comes to an end, there should be some pickup in volume, but we do not see any undercurrents of significant pickup, and therefore, we continue to maintain that the pickup is more likely in the second half of calendar year 2024.
Right. Currently, we maintain a guidance, which we had for FY 2026 or any revision in that?
For FY 2026, we would come back with some guidance as we complete this year business plan, et cetera, but at this point in time, there is no outstanding guidance for FY 2026.
All right. Thank you.
Thank you so much.
Thank you, sir. A reminder to all participants, you may press star and one to ask questions. We have our next question from the line of Mr. Jay from Dolat Capital. Please go ahead.
Good evening, sir. Thanks for the opportunity. My first question will be, you have a higher market share in the Nordic region and a few European countries. How much of an impact has the Red Sea crisis been on that business, and when do you expect the inflated freight rates to stabilize?
Yeah. We have a higher market share in several Asian countries, including India and Southeast Asia, as well as in Western Europe and Northern Europe. What we have seen is that Western Europe in particular, as well as Northern Europe to some extent, has been going through the weakest economic environment globally, and the maximum impact on volume has been in that part of the world. That had led to significant capacity being available on the trade lanes from Asia to those countries, and therefore it was a double impact of reduced revenues as well as reduced volume. However, the Red Sea crisis has led to an increase in freight rates. However, there has been no impact on the demand per se.
What we have noticed is that there has been a marginal improvement on the revenue side with some degree of impact on the overall profitability as well, but not significant. The volumes remain subdued in that part of the world, and in fact, that has been one of the key reasons for the continued subdued performance for the company, as Europe in particular has not been contributing significantly to the profits. We have not seen any significant impact of the Red Sea crisis on those trade lanes, to answer your question specifically.
Sure, sir. Thanks for the detailed explanation. Sir, I have another question. What are your future outlook plan and what specific area or purpose you plan to fund them primarily with?
Yeah. We have currently been looking at pockets of growth in geographies where we have relatively shallow presence. There are opportunities in Latin American market, for an instance, where we expect to consolidate our presence and enhance our volumes. It includes the market of Brazil, wherein we have made some management changes as well to drive growth. There are similar opportunities in other sections of other countries of Latin America, such as Colombia, Ecuador, Peru, and Chile. These are also the countries where we have relatively lower market share. We also lack penetration on the doors, and we also have fewer products in terms of, for instance, the FCL product is quite weak in this area. LCL also, we do not have market share like we have in other places.
For an instance, in Brazil, we would currently be number four, not even among the top three LCL consolidators, and the aspiration is to gain market leadership in the coming years. Latin America is one key geography that we will be focused on for growth. Besides that, we also see significant opportunities to go deeper in China. China is a highly fragmented market, and while we are currently the second-largest in China already, our market share is still close to 9%-10%, and we see an opportunity for that to be increased by going deeper into Chinese market. The third opportunity for us is actually in terms of turnaround of key countries, whereas on account of various issues, we have been running significant losses.
These two big countries are U.S. and Germany, which have been making negative contributions to our P&L, and we believe that during the coming months, we should be able to arrest the losses. As they come to the breakeven on a consolidated basis, there should be a positive impact on the profitability. These are some of the key drivers as we see for driving growth and profitability in the company in the coming year, 2024.
Sure, sir. Thank you. Thanks a lot for another detailed explanation. Yep, that's it from my side. All the best.
Thank you, sir. We have our next question from the line of Jiya Shah from Wealth Securities. Please go ahead.
Sir, I have t`wo questions. One is on the ISC business. The demand scenario seems muted. When do you foresee the demand to recover and the trade to come back to normalcy, or should we see this as the new normal?
Freight rates are normal, I would rather say, because of the recent Red Sea crisis, they have rather shot up and they might become slightly softer again. But that is going to have a limited impact on the consumer demand and the world trade. Like I mentioned before, we expect the demand to be back from second half, which is a function of consumer demand linked to inflation and economic environment, which based on the various forecasts that we see from leading economists on the decisions around interest rates and inflation across the world, we expect the second half of 2024, so July to December, to see recovery in demand.
Okay. Sir, another question that I have is that, if you can highlight on the region-wide performance, or rather how your trade lanes have performed. Are you seeing any recovery from any specific region and sensing slowdown in some other regions, like just some outlook on that?
Yeah. Like I mentioned, we have noticed that in the year gone by, there was lesser trade out of China and APAC, and we believe the region would bounce back this year. I was just mentioning about the profitability scenario in U.S. and Germany, which should see a turnaround, and our focus on Latin America would drive growth for us there. Western Europe has remained weak, and we do not see significant improvement in the near future on the Western and Northern Europe. That is likely to remain flat. So that's where we see in terms of specific regions.
Okay. All right. Thank you. That was helpful.
Thank you. We have our next question from the line of Ravi Shah from Opal Securities. Please go ahead.
Hi, sir. Am I audible?
Yes, we can hear you loud and clear.
Thank you, sir. So, sir, actually I have two questions. The first one will be on the International Supply Chain. We have been seeing some volatility in terms of margin as well as realization. Could you share some outlook regarding the same and where the business has headed in terms of profitability as well?
Sorry, I did not understand the first part of your question clearly. You are asking for an outlook on the-
Supply Chain business. Yeah. It has seen some volatility recently in terms of margins and realization. So I just wanted to know your outlook for the same.
Yeah. So like I mentioned, we have seen the decline in margins, which have now bottomed out over the last two quarters remaining almost similar on account of the subdued trade demand. And we expect the trade demand to bounce back in the second half of the year. But before that, we also expect the cost initiatives to also aid on the profitability in the quarter of April to June. So that is the broad commentary like I mentioned before. That is how we see the performance.
Understood, sir. Thank you for your detailed answer. Sir, my next question would be, we are witnessing some improvement on the SG&A to GP ratio. Can you highlight the measures that were taken to get to this improved operational efficiency?
Like I was mentioning, the majority of initiatives are focused on people costs, driven by outsourcing from high-cost countries to low-cost countries. For an example, moving payrolls from U.S. to Mexico, and by way of eliminating positions through automation and technology and reorganization of the overall management structure. Some of these initiatives have helped us identify redundancies and eliminate costs.
Understood, sir. Thank you so much, and all the best.
Thank you.
Thank you, sir. We have our next question from the line of Shailly Jain from Dolat Capital. Please go ahead.
Hi, sir. Thank you for the opportunity. Under Contract Logistics business, the share of e-commerce is increasing, which in turn has led to margin improvement. So what would be the ideal margin levels going on forward, and are these sustainable?
No. Let me reiterate. The margins are highest in chemical, which is the most niche specialized Contract Logistics. The overall blended margins are in the range of 12%-14%, which have remained in the same range. Chemical segment has much higher margins. However, chemical segment, which used to be 80% of the business at some point in time, is now only down to about 30% of the business, about 35% of the business. We believe that this 35%-40% might come down to about 25% in the coming couple of years, and therefore e-commerce and auto and other segments would grow. Therefore the margin would remain broadly range-bound in the 12%-14%.
Okay. Thank you, sir. What is the distribution of your revenue share among LCL and FCL?
On the LCL and FCL, like we mentioned, we as a company operate more on the gross profit because revenue as an ocean freight cost, which is more pass-through on the gross profit, which is a number to look at from a top-line perspective. Approximately 65%-70% comes from LCL and around 30% comes from FCL.
Okay. Sure, sir. Thank you so much.
Thank you. We have a follow-up question from the line of Nirav from Abakkus. Please go ahead.
Hi. My question is regarding this U.S. and German markets. Now you said they have been contributing negatively. What will be the quantum, if you were to see in terms of volume which comes from this market or in terms of gross margin, what would it be contributing?
Volumes are obviously positive and gross margins are also positive. The impact is on the SG&A cost, which, put together has led to a negative number because these are both high-cost operating countries, and we expect the business to rebound in these two countries. Also, when I was talking about the ACNA cost reduction, there are more sharper focus on these two countries and therefore they should see coming back to being profitable or breakeven in the coming months, and therefore that would have a positive impact.
I was just trying to understand how much does it contribute to overall volumes and at gross margin level, what is the contribution from these two geographies?
We would not be able to share country-specific details on this.
In this Western Europe, you expect it will continue to be challenging. You do not see any rebound there.
In the next three to six months, we do not see any changes. However, the expectation, what we read into the economic forecast is that the interest rates are not likely to rise and perhaps in the coming two, three months, they may start coming down, which might revive the consumer demand. Therefore, second half of 2024, we believe should be good globally in terms of the consumer demand and of course then Western and Northern Europe should also bounce back. But it has been most severely impacted amongst all geographies.
U.S. and Germany you feel will turn positive, but this would rather take some more time to contribute positively at EBITDA level?
Yeah, that is right.
All right. Thank you.
Thank you, sir. We have our next question from the line of Rajvi Shah from Bright Securities. Please go ahead.
Hi, thank you for the opportunity. I just had few questions on the Gati front. Can you share some broad outlook on the future of this entity?
Yeah, so we can share the broad outlook. So in Gati, we have been focused on three or four key initiatives. First has been improving operational capabilities, and we have seen significant improvement in the operational parameters. We have also been investing in the infrastructure upgrade, in terms of building new hubs and improving the capacity. All these improvements in operational capacity should allow us to expand the market share. We have seen good growth in the volume. However, the product mix has changed, with large accounts being the first ones to come on the back of improved service and therefore the fee, which is revenue per kg, has dropped in that business. We expect the mix to improve and that should lead to improvement in terms of the overall profitability. I would say that, and I would refrain from getting into too much of the details.
Like I said, it is a separately listed entity. However, broadly speaking, we should see continued expansion in volumes, which should now be backed by revenue growth as well. We have already invested in all the key hubs that were required and the personnel cost as well. Therefore, there should be an improvement in profitability in the business.
Okay. I had just one more question. How do you see the Express Logistics performing?
Gati is the Express Logistics business which operates under the Gati Express Supply Chain. There is no other business in Gati. And Contract Logistics business is in Allcargo Supply Chain. So I was commenting on Gati's performance, which is Express Logistics.
Okay. Yeah. Thank you. That helps.
Thank you. Ladies and gentlemen, that was the last question for today, and I would now like to hand the conference over to management for closing comments.
Yeah. Thank you all for joining in for the conference call. Please feel free to reach out to our investor relations team for any further questions or information that you may have. We intend to improve our communication from time to time and when we see certain questions coming on a repeated basis, we try to include the responses to that in the upcoming quarterly presentation. Our endeavor is to provide as much detailed information as we could. Please continue to engage with our investor relations team. Thank you for joining in today.
Thank you.
On behalf of Dolat Capital, that concludes this conference. Thank you for joining us and you may now disconnect your lines.