Ladies and gentlemen, welcome to the nine months 2020 results conference call and live webcast. I am Sandra, the call's call operator. I would like to remind you that all participants are in listen-only mode and the conference is being recorded. The presentations will be followed by a Q&A session. You can register for questions at any time by pressing star one on your telephone. For operator assistance, please press star zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Dr. Detlef Trefzger, CEO of Kuehne+Nagel. Please go ahead, sir.
Thank you, Sandra. Good morning, good day, good afternoon, and good evening to all of you. Welcome to the analyst conference on the nine months 2020 results of Kuehne + Nagel International AG. Our CFO, Markus Blanka-Graff , and I welcome you as always from sunny Switzerland. We published our nine months results and the respective slide deck early this morning, and we get started on slide three. Kuehne+Nagel manages the crisis successfully, especially in quarter three. In September in quarter three, we saw a gradual improvement of volume and gross profits, which continued across all business units. Our underlying earnings recovery outpaces improved volume trends, a reflection of control of cost control, favorable product mix, and improving market conditions. As a result of the strong operational performance, we were able to increase our free cash flow by 31.4% versus previous year.
Let's go into more details on the next slide. The group EBIT ended for the first nine months with CHF 790 million , which came almost on the same level as previous year, where we closed the first nine months with CHF 794 million . The quarter three performance showed an EBIT of CHF 371 million , up by 31%, an underlying operational improvement, EBIT improvement of 8.8%. Sea Logistics showed a very strong quarter three, ending the first nine months with an EBIT of CHF304 million and a conversion rate of 36.2%. Especially in Sea Logistics, and we will come to this later in our presentation, we saw increasing volumes of the small and medium-sized enterprise customers, and we saw a very favorable portfolio mix development, and a tight cost control, getting traction in quarter three.
Air Logistics continued a strong performance, closed the EBIT for the first nine months with CHF 350 million, the volumes in automotive and perishable industries came back in quarter three. Here, we will share some more details with you during the course of the presentation. Road Logistics closed the first nine months with an EBIT of CHF 38 million. We saw domestic transport volumes back to pre-crisis level in Europe, while the cross-border volume recovery is still lagging, we saw still low volumes in North America. Contract Logistics, our fourth business unit, closed the first nine months 2020 with an EBIT of CHF 98 million and posted market share gains in pharma and healthcare and in e-commerce fulfillment. A strict cost management led to a very strong operational improvement. Let me lead you through the business unit update on slide six.
The picture, the graph shows it all. Sea freight, Sea Logistics. Volume trends improved month-by-month, and let me give you some details on the figures. In June, we saw a minus 8% volume development. June marks most likely an inflection in the Sea Logistics market, while July, August showed a minus 6% volume decline, and September only a - 3% volume decline. We gained share in higher-yielding Asia to Europe trade and saw a significantly improved Europe and North America import business. The SME volumes, I mentioned that before, gradually came back and showed a very strong volume development in quarter three. Less dynamic were clearly automotive and U.S. agricultural products, for example, while the winners in the volume development were sports and garden equipment, furniture, pharma, reefer, and less-than-container load businesses.
Sea Logistics volumes in quarter three were down 5.1%, while for the first nine months, we posted minus 7.7% volume development. Air Logistics, the volume trend materially improved. We saw a quarter two volume decline of - 22%, while in quarter three, we saw a decline of only - 12.8%. Our market share is stable to maybe up on some trade lanes. We saw a very strong volume trend being evident in European export business. This was driven especially by automotive and perishables. Let's go into the details of the Sea Logistics business. I mentioned the positive small and medium-sized enterprise volume development, a reversal of a trend that we have seen in quarter two 2020, the strong increases of imports into Europe and North America from Asia, and a tight cost control.
That leads, on slide eight, to unit figures per TEU, with a very favorable above CHF 300 per TEU gross profit, a result of the portfolio development and the SME customers being back into our portfolio. A tight cost control with unit costs below CHF 200. We mark here a CHF 198 per TEU unit cost development. The highest EBIT ever, in Sea Logistics with CHF 113 per TEU. In quarter three, we posted CHF 378 million gross profit, which was 3.3% below previous year, while year-to-date, the gross profit development is - 10%. An EBIT, in quarter three, that was 12.3% above prior year. We continue in Sea Logistics on focusing on excellent customer service and have fully deployed the implementation of the concepts of Customer Care Location and Operational Care Center to get closer and most efficient to our customers.
Air Logistics. I mentioned automotive and perishable volumes recovering and a positive one-off impact of net CHF 63 million. The figures you see on slide 10 of the presentation, the Air Logistics figures, are unit KPIs adjusted for impairment of intangibles in quarter four 2019 of minus CHF 40 million and a Quick acquisition in quarter three 2020 of net positive CHF 63 million. If you look into the unit KPIs, unit meaning 100 kg, we see a normalization of the average yield, which is a result of the improving cargo mix, while still the long-haul PAX belly capacity is depressed. The active cost management in all business units, but especially also in Air Logistics, showed a stable unit costs, on the same level as previous year's quarter three.
We have an adjusted EBIT result of CHF 287 million, 9.1% above prior year, while in quarter three, we posted CHF 106 million adjusted EBIT, which was 19.1% above prior year. A very strong operational performance. As you know, we have made a statement in our press announcement, the whole KN Group, Kuehne+Nagel Group, but especially our Air Logistics colleagues, are well-positioned to serve ongoing COVID-related demand, and especially the potential distribution of COVID-19 vaccines. Our next business unit, the Road Logistics business unit. As mentioned before, the demand for domestic transports in Europe is almost back on pre-crisis level, while the high-yielding cross-border volumes are still lagging. North America volumes still lag except for pharma and e-commerce, and I would say that the Americas somehow are still in the eye of the hurricane, the COVID-19 hurricane.
From a performance point of view, Road Logistics is our hardest hit business unit, driven by three effects, which I would like to mention. A material drag from export and events. A shipment recovery almost on the same level as previous year, as mentioned before in Europe, but with lighter average weight, which drive obviously pressure on productivity, and North America still being distressed somehow by the COVID-19 situation. We see, nevertheless, sequential improvements continuing and expect this to continue in the next couple of months. We have a very positive market reaction on our digital platform, eTrucknow, which drove a lot of the volume development, especially in Asia during the last six months. Contract Logistics. We posted market share gains in essential goods sector, as well, continued with the strict cost management.
I don't know whether you remember what I said to you in our previous call. I have spoken about the two phases of Contract Logistics. The not so beautiful phase, were at that time the automotive sector, aviation, and industrial. The nice phases were pharma, healthcare, essential goods, and e-commerce. Today, I can say that we see improving trends in all sectors. There is no two phase for Contract Logistics anymore. Some are more shining than others. In detail, on slide 14, you see the Contract Logistics business unit excluding our real estate transactions, so the pure operational business performance. You don't see it, but let me mention that e-commerce accounts for more than 150 fulfillment centers globally.
That quarter three has been operationally the strongest quarter in the last seven years, the clear result of the consequent restructuring of the Contract Logistics business unit. The ongoing cost management shows more effects. We have seen the lowest idle space ratio ever with 2.4%. From an operational point of view, in quarter three, we saw improvement of CHF 15 million, one five million, to an operational result of CHF 49 million, adjusted by real estate as mentioned before, which was 44% above previous year. One can say that the restructuring plan of Contract Logistics will close on plan end of this year with quarter four and will enable Contract Logistics to shift then into a selected growth year again.
Before we continue going into the details of the financial figures, I would like to mention that all the figures that we have, that I have presented, that Markus is going to present, are driven and generated by the hard work and the full commitment and driving force of our colleagues, all our colleagues worldwide. I would heartily and heartfelt thank all of them, all of you that are participating in the call for your commitment and your support in a very special year. Now I hand over to Markus to give you details on the financial figures.
Thank you, Detlef. Also from my side, welcome to everybody, ladies and gentlemen. I'm going to the first page, income statement. What I want to open with is a confirmation that what we said in our half-year call would happen in the third quarter also happened. What we anticipated, I think, really turned out to be true. We have seen coming back most of the business units in a normal situation in terms of how volume and margins develop. You may remember we said after the second quarter, extraordinary high margins in Air Logistics, we would expect through normalization of gross profit margins per 100 kg, that the average comes down a little bit. At the same time, the mix has normalized again, some of the perishable volumes in business came back. Hence, all of that has happened, and we have seen that in the numbers.
Sea Logistics, I think Detlef already highlighted very clearly a very good development on cost. We were successful in the market to have a good gross profit margin here to you. One thing I want to mention before I go into the third quarter numbers, we have not experienced our regular seasonality. I think the year 2020 has been bare of any regularities. Also, the seasonality that we have usually seen has been different or certainly distorted. When you follow me into the column of the third quarter variance between 2019 and 2020, you see that sequentially, we have improved our development on the gross profit. You see here in the third quarter still that we are CHF 108 million in the quarter behind last year.
Notably, we should say that in Sea Logistics and Air Logistics, we are 3%, respectively 4% below last year, which is very little. We talk about 13 and 14 million. Very close already coming up to what we have seen in the year 2019. Second point I want to highlight is you have heard there is a significant positive one-off effect in Air Logistics amounting to net CHF 63 million. Having said that, when we look into the EBIT line of CHF 88 million, we would recognize that even without that effect, our growth would be between 8% and 8.5%. Quite remarkable, I think, when we look through the quarterly sequential development of the numbers.
Not to forget, all that development against a backdrop of currency, an average here, as you can see on EBT level, earnings before tax of 5.7%, looks like a small number, still represents CHF 45 million in absolute terms. For simplicity reason, we have provided a simplified bridge, a reconciliation of the EBIT for the nine-month period. Again, we have tried to keep it simple, and I acknowledge that many of you on the call would like to have far more details than what we have disclosed here. I appreciate that. We have addressed that in many of our calls already today in the morning, and I'm pretty sure that Chris Combé is going to be happy to answer some of the more detailed questions around it.
What the message on that slide clearly reveals is that we are very close to our performance 2019, thanks to cost control, motivation. Now it is really the time to keep that momentum into the fourth quarter and going forward. I think, echoing what Detlef has already said, it was the right decision to keep connected to our staff, to our employees, to our experts, and to bring them back into the business the moment we need the most, which is now at a time of recovery. Don't ask me what shape the recovery is going to be. The only thing I know is that it is happening at a point in time, and we are able to gain market share by bringing our people back into the operation. How can we do that? A solid foundation is something that is needed for that.
Everybody knows when I talk about solid foundations, I can only talk about balance sheet. Three topics or three highlights, if I may. First one, you see clearly the total value of the balance sheet has reduced around CHF 550 million. Simple calculation. You look quickly into the exchange rate impact that we have experienced in the P&L. Very similar, even a little bit bigger on that point on the balance sheet for the month end rate, September 30th, 2020. This is where the main driver is coming from. Secondly, we have paid dividend in the third quarter to the amount of CHF 4 per share, which is a cash outflow of roughly CHF 480 million. After that, equity ratio, as it stands, September 30th, is still at around 24% equity ratio. Last but not least, very important, everybody looks at it on a daily basis.
We do for sure. Cash and cash equivalents position. We are now at around CHF 1 billion cash on the balance sheet. Talking about cash and free cash flow, of course, you have on slide 19 of the presentation, the reporting on the cash and the free cash flow comparison on 2019 and 2020. One remark, which is technical nature, operational cash flow and changes in working capital. You see there was a huge operational cash flow improvement with that little footnote to it. This is the reclassification, if you like, comparable with the one-off item from the quick acquisition that we have mentioned in the air freight business. That also means our working capital management has been significantly better than last year. I will allude to that on the next slide to come. How does the trajectory look like?
The right side of the slide, we are currently at around CHF 811 million, as you see at the end of third quarter. Anticipating some of your question, how is the fourth quarter going to look like? Last year, you may remember we had some special items out of real estate divestment. I would expect this year that a small item around this topic is also going to reappear. We have been on the process of selling a second portfolio of real estate locations. Hence, my projection for the fourth quarter would be that we would probably create a free cash flow in and around CHF 350 million. Working capital, page 20. Extremely important message, and I reiterate that message as often as possible. We do closely monitor our receivable risk, our debtor risk.
Until now, I repeat myself what I said three months ago, we have had no significant problems. We have had no bad experience, no write-offs in significant numbers. However, we monitor extremely closely how the development is. We are cautious. The operation is in alert on that section. There is something we expect, but as so many things in these times, we don't know exactly what to expect and where to expect it. We just try to be as much prepared as possible. You see the working capital intensity at 3.3% currently, just below the lower end even of our corridor that we have set ourselves around between 3.5%-4.5%. It's a reflection of a very hard fight to keep the DSOs at a reasonable level and at the same time to manage the DPOs well.
My thanks go out again here to the operation, who is the main driver for that. Return on capital employed. We're on slide 21 of the presentation. You see that kind of wavy curve on the top. You may remember when we talked in 2019 about restructuring of Contract Logistics. That is exactly what you have seen there. There is a swing up. First quarter 2020, second quarter 2020, the dip through the COVID-19 development and, let's call it carefully, the recovery then back into the mid-60s on the return on capital employed level. We maintain our target of 70% return on capital employed, that we have already announced and already reiterated, for a longer period of time. Moving forward to page number 22, and whoever was waiting for it, now it comes. How do we reach our conversion rate of 16%?
eTouch is the answer, is still the answer, and will remain the answer. You can expect by our announcement for the full year 2020, a far more detailed progress report on eTouch, including financial implications of this. I can only tell one thing today, which is, and by no means I would like to say crisis is good, but there is always a momentum that is created by disruption. I think the disruption that we are living through and the crisis we're living through, I think has opened many doors for digitalization, automation, and a more remote approach to execution. I think this is exactly what has also propelled some of our eTouch initiatives. Again, confidence here that we can reach our targets 2022 with a 16% conversion rate.
For illustration, if you like, the third quarter, if you take the recurring EBIT, as we have reported it, you would find already a conversion rate in the third quarter, excluding one-offs of 16.2%. Return on capital employed, I have mentioned that 70% remains our target. The effective tax rate, as we have seen it here, we currently still work on the 24%-26% brackets. I can say through the extraordinary profits that we have seen this year, we might have a slight alteration in this tax rate. I would expect that by the year-end, we would move rather to the higher end of that bracket in 2020. So far, the financial targets for the business units and also the markets, our outlook for the fourth quarter, and you may appreciate that we have abstained, at least in the second quarter, of making any outlook.
We are now trying at least to have a certain view into the fourth quarter. We would expect currently market growth in Sea freight of around -6%, Air freight of around -14%. In both of the areas, I think our target clearly will be to be better than the market. I think we're working on that. We are getting there for the full year 2020. For Overland Logistics, we will have the market estimated around -8%, and for Contract logistics, -4%. You see our estimates are still rather on the cautious side, I think reflecting again uncertainties around not only the kind of next year what's going to happen, but I think already when we talk about December, there is plenty of uncertainty at that point in time how December is going to look like.
Take this outlook with certain precautions, but that is our current view, how things may develop until the year-end. With that little view forward, I would hand back to the operator and open our question and answer sessions for all the participants on the call.
We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment, press Star and One on the touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only hands-up for asking a question. Anyone who has a question may press star and one at this time. The first question comes from Daniel Roeska from Bernstein. Please go ahead, sir.
Good afternoon. Three for me. Number one, last time we spoke, you mentioned that your forward visibility of the business was very limited. Could you just comment on how that outlook over the next couple of weeks is shaping up, and if that's changed in the past couple of weeks, so you have a longer visibility this time? Then if volumes continue to recover, even if it's slowly, how should we think about the unit cost in Air & Sea? How much operating leverage can you capture as you grow out of this crisis? Lastly, connected to that then, if free cash flow continues on its trajectory, how would you think about the balance between dividend and, let's say, the war chest for M&A? May there be more room for a bigger dividend next year? Thanks.
Thanks, Daniel. Let me answer the first question and then hand over to Markus for the other two questions. Our visibility for the next couple of months has not changed. Our outlook is limited to, let's say, six to eight weeks maximum. That has given us the cautiousness of assessment of the markets, as well as what Markus has presented before on development. At the moment, as we have ended quarter three, we don't see a material change in the momentum that we have seen in September. That statement, Daniel, is good for four to six weeks, not longer. That would be our reading of the market because there are a lot of uncertainties still remaining. You know that we have regional lockdowns or a discussion of these. We have a lot of limits to leisure travel and business travel.
All this will have impacts on the consumption patterns and consumption as such, which will directly impact or indirectly impact transport volumes. We feel in good shape. We are in close contact with our customers and industries. As I mentioned before, we have seen most of the industries somehow starting a recovery. Different levels, different speeds, but they are starting a recovery. That should give us enough confidence that most likely in 2020, only in 2020, we might have seen the worst of the market situation already. For the other two topics, Markus will happily comment.
Daniel, I think the second question on the volume recovery and cost per unit, I mentioned cost a couple of times during my presentation. I think reflecting exactly what Detlef says. On the volume side, we have a certain visibility, maybe even shorter than what we normally have. We have to focus on what is our cost base to it. The cost-base efficiency gains that we have already demonstrated in Sea Logistics, and that for me is the big lever also going forward, that we can bring cost per below CHF 200. We may argue now there is also a currency effect in there that helps that. At the end, the trend goes in that direction, and I think this is where we keep our focus on.
Cost per unit, cost per TEU below CHF 200, that's something that we feel is also sustainable going forward. If we are, call it, halfway right, that there's going to be a recovery over time, and maybe we can expect until Chinese New Year that we have some traditional stronger trade lanes coming along. We should see a good operational leverage going forward. Again, the focus is on the cost side. Whatever comes then on the gross profit side, I think is something we need to be careful with. Free cash flow question, your number three, I think, fair question. First of all, first priority for us as the management team is creating the free cash flow. Second priority is our M&A strategy. You know that we are committed into the Asian area with a substantial view on step changing our game in Asia.
That has not changed. On the back of this M&A strategy that we have last at least 18-24 months and communicated as well, I think you should look into payout ratios as we had them originally planned at the beginning of the year. Which was reflecting around 60% as something that 60% of net profit after tax. That could be something that might also find the proposal going into the supervisory board, and obviously after that, into the general meeting. That is, I think, the connection somewhere around the free cash flow generation and the spending of the free cash flow that is coming out of that.
Perfect. Thanks so much.
Thank you.
Next question comes from Sathish Sivakumar from Citigroup. Please go ahead.
Good afternoon, everyone. Detlef, Markus, thanks for taking my questions. I have three questions. Firstly, on Air Logistics, could you please touch upon the booking window that you are seeing from shippers? I.e., how much of the volumes are booked on spot basis versus two to three weeks window? And how much of your air freight capacities are actually exposed to charter network versus freight versus the commercial airlines? Secondly, on SME segment, where you pointed a sharp recovery, could you please elaborate why you are actually seeing a sharp recovery by verticals and market? That'll be helpful. Finally, on the employee count, in the financial statement, the full-time equivalent of employees actually reduced from 78,000 to 72,000. Question there is, what will be the run rate into Q4? Is this number impacted by any short-term schemes?
Thank you, Sathish. I think I start with the last one on the employee count. We have to be very specific on this one. There is obviously the number of employees that are on the payroll, and then there is the FTEs associated with this. I think it's very important to understand that the short-term labor programs that we have been enrolling people into, that counts against the FTE numbers, of course. At the same time, we do see very clearly that we have also cost reductions and people reductions in place. All the cost reductions have not been at the back of the furlough or short labor programs. Unfortunately, there was also a number of people, of course, where such programs were not available. We had to let go. Your reading is correct in that terms.
Having said that, it's an amount of around 4% or 5% of our staff. That is, I think, reflecting fairly the situation on the employment side.
You ask, Sathish, about the Air Logistics window, and how we book our capacity. I have to say, we see the Asian market being very stable. We are seeing spot getting less particular, especially in quarter four, and there's still COVID-19 hedges that apply on a monthly or quarterly basis. We do not have an overproportional securitization of charter business, unless we would have clear customer demand on specific trade lanes. The sharp recovery, I'm not sure I've got the question, to be honest. We never spoke about a sharp recovery. We didn't even refrain from quoting any letter that would be a metaphor for recovery.
At the moment, we saw a sequential recovery month by month, especially the consumer products in Europe and LATAM and in North America, drive more and more sea freight volume. I mentioned leisure or sports equipment, garden equipment, and so on. Outdoor equipment, whatever. This is driving a recovery. Is this a sharp recovery? Is it sustainable? Too early to say.
Okay. Just on that point, just to follow up. You said about SME being a good positive contribution. Within the SME segment, which market are you seeing performing better than the other market? Is it mainly in Europe where you're seeing good performance from SMEs versus North America?
No, Sathish, I mentioned it before. It's Europe, North America, and Latin America, where we see the small and medium-sized enterprises coming back to production and thus starting to ship with us. This was a totally different situation in quarter two. Please do not forget that our volumes are still clearly behind previous year. We are talking about a sequential development quarter two or quarter three versus quarter two.
Perfect. Yeah. Thank you.
The next question comes from Andy Chu from Deutsche Bank. Please go ahead.
Yes, good afternoon. A couple of questions from me, please. One point that I picked up in terms of seasonality. You're saying that the business clearly isn't behaving, given the crisis in sort of typical seasonality pattern, and Q3 would normally be the strongest quarter. Wondered if you can make any sort of comment on Q4. Directionally, are you therefore saying that the seasonality goes out the window such that Q4 could be a stronger quarter than Q3 in terms of profitability, which I think would make sense given the trends that we're seeing into October? On the air side, in terms of your OpEx, which seems to have come down very nicely below sort of a couple of hundred million Swiss Franc. Is that the sort of run rate that we should be using going forward? Thanks very much.
Let me come back to seasonality, Andy.
30 years or more in this industry, I've never seen a quarter four outperforming quarter three, unless there were some special extraordinary items. I think it's absolutely not possible, especially with the insecurity of COVID-19, that quarter four will be outperforming quarter three. What we said, and that is maybe important to mention once more, that the momentum that we have seen in September seems to continue in October, but that's all we see. We can't even judge longer than six weeks, we said. Therefore, be careful in assuming that quarter four from a pure operation point of view, will outperform the previous quarter. We will nevertheless see a peak coming from Asia export. We will see a consumption peak around Thanksgiving and Christmas.
That's a normal seasonal pattern. We will see a preparation for Chinese New Year, which sometimes has an effect end of the year or early the following year. Nothing extraordinary or specific that we would need to state already today. With regards to your OPEX statement, or cost statement, it's CHF 200 or below CHF 200 per TEU. That is something that was driven by a lot of cost activities. I mentioned Customer Care Location and Operational Care Center. A new way to operate in Sea Logistics, by the way, we have implemented that in Air Logistics as well, which drives efficiency gains. That is something we have always stated, that through an improved process and IT infrastructure, we will be able to harvest from efficiency gains. I think this quarter or last quarter has shown we can get there.
Apologies. Probably that's my line or my way of explaining things, I was just wondering about the Air Logistics OPEX, sorry, in absolute terms, not per unit, being running below CHF 200 million.
Okay. Understood
if I'm not making that clear. Thank you.
Sorry.
No, yeah. No worries. I think the right way of looking at it is still the cost per unit, because this quarter in air freight, and that's what we're talking. In air freight, we have the distortion around the extraordinary impact of the quick acquisition. If you look into the production cost air freight per 100 kg, we are at CHF 59 per 100 kg. From our perspective, that should be sustainable. A sustainable number going forward, unless, of course, the odd chance happens that there is all of a sudden a massive increase in volumes that we have to manage. Under the current circumstances, CHF 59 should be a number that we should look at from a sustainable basis.
Fantastic. Could I just ask one point of clarification, I guess. Again, apologies if it whether it's my line, but, I think you're very clear around Q4 free cash flow, Markus. Did you say CHF 350 or CHF 300 for Q4? Maybe both?
Okay, let's settle for between CHF 300 and CHF 350. No, I would be inclined to say CHF 350 should be a number we should be able to reach.
Fantastic. Brilliant. Thank you very much. That's really helpful. Thank you.
Thank you.
The next question comes from the line from Mark McVicar from Barclays. Please go ahead.
Good afternoon, Detlef. Good afternoon, Markus. Couple of questions, really. Two questions. First of all, because you mentioned it, Detlef, with the COVID-19 potential vaccine rollout next year. The two questions are, do you see that being organized at a very international level? I mean, is something like the WHO or the UN going to be involved, or is this going to be a bit more piecemeal than that and more country by country? The other half of that question is, I guess, do you think you'll be able to handle that business on normal commercial terms? Are governments and those international bodies going to put pressure on you to do this at cost or cost plus or something like that? There's no clear view at the moment, I just wondered what you thought you were seeing so far.
Sure. Mark, let me answer this question. How will this be organized? I think it will be, first of all, dependent on which OEM or OEMs, manufacturers of pharmaceuticals and vaccines will make the race. Depending on that, there will be most likely supranational bodies that will influence the distribution of vaccines, plus governments. The European community has already asked the national governments to come up with their national vaccination plans, that will get involved. To your second question, nobody can force us to do business. We are a stock listed company. We are not a government body. I think the market- play will be applicable here as well.
There will be providers that will offer solutions, and there will be a demand side that will seek solutions, and they will, as always, RFQ the business and will not only look for the cost of handling and distribution of COVID-19 vaccines, but also the experience, the compliance with the GxP standards, as well as the ability to deliver on time, undamaged, without any privilege. There will be a huge market potential, and we will look for those segments in the market that we have the best solution for. There will be different demand per region, and we believe that there will not only be, on the long or mid-term, not only be one provider, OEM producing it, but we will have contract manufacturers as well as a second or a third provider that might have a listed and registered vaccine to offer to the market.
That will ease up the constraints that might be there in the first couple of weeks or months, nobody knows, throughout the course of the time.
Yeah. That sounds sensible, doesn't it? The second question I had, again, I think it's for you, Detlef, is that, with the kind of Q1 and then the Q2 results, you said you were seeing a certain amount of flight to quality, and that you expected, and inquiry levels were high, and you expected to see market share gains. Has that followed through? Obviously I'm looking at the financial targets page and the piece on volumes, and it doesn't look as if you're expecting to significantly outperform the markets other than a little bit in air. Is that just Markus being very conservative with his forecasting, or has that market share gain kind of normalized a bit?
We always try to be realistic with our forecast. At the moment, we didn't show a 2024 forecast on our slide 22. Be careful. We show the performance that we have seen so far. Our growth or the basis is our year-to-date performance. Our ambition is still for the two network businesses, Air Logistics and Sea Logistics, to gain market share. We will see at the end of this year whether the mid-sized forwarder logistics companies were able to cope with market demand in a way that we were able to cope. For me, it's still the same, Mark. Our ambition stays, and I think we are in a good shape and have a good run rate to show that we are gaining market share in a contracting market.
Okay.
By the way, let me add, we have one substantial business, Mark. We would not have said so if we would not have seen our RFQs or our response to RFQs being successful.
Okay. That's great. Thank you very much.
Thank you. Thanks, Mark.
The next question comes from Sam Bland from J Morgan. Please go ahead.
Afternoon. I have two questions, please. You've mentioned the strong September exit rates and trends in September. Obviously, you gave the monthly volume progression in Sea Logistics on the call earlier. Is the September strength you saw broader than that Q3 Sea Logistics volume? Was it strong in September in other areas as well? I just wondered if you could give some detail there, please. Then on the Sea Logistics unit margins, it's up quite strongly. Well, it's up year-on-year. I guess it's up even more strongly in U.S. dollar terms. I appreciate why it's stronger than it was in Q2 because you get the SMEs come back. I just wonder why it might be up so strongly on a year-on-year basis. Thank you.
Sure. Sam, September was stronger across all business units. I think I mentioned that in my initial or introductory statement. We saw a sequential improvement. I stated some figures for Sea Logistics or sea freight, but not only. Across all BUs, we saw an acceleration of volume recovery versus previous or sequentially versus previous months. On the unit margins, I think, Sam, it's obviously a very important question for all of us. You're absolutely right. The increase, third quarter versus second quarter is significant. Taking the U.S. dollar in consideration also versus last year. The GP margin that we always report here has various components, one of which is clearly the mix. SME better improvement means at the same time as a cross-read, if you like, that commodity business has been reduced or had been on a lower share from our product mix in total.
Third quarter was maybe not so unexpected, but third quarter was clearly a lower share on commodities versus a higher share in the SME business. Of course, as the complexity towards it, and you know that in sea freight, we also have to look into some of the trade lane development, right? Some of the trade lanes have a rather tight market.
A lot of these conversations went through the press as well, Trans-Pacific eastbound. There is tightening in the market, which always gives a bit of margin opportunities. Combination of mix, so better SME versus lower commodity, plus some of the trade lanes in a tight situation, I think has helped the development. I would not bank necessarily on that development going forward at the same time. It's pretty much what I said during my presentation. I think we are more confident in where our cost level is than what we can forecast on the GP level. For the third quarter, that is the explanation.
Okay. Thank you very much.
Thank you.
The next question comes from Alexandra Thrum from Morgan Stanley. Please go ahead.
Hi. Thank you for taking my questions. I just have two quick ones left. Just on the air freight market. Markus, I think you mentioned we've seen some normalization in the air freight profitability already. I just wanted to ask what you see as the normalized level, because it seems that CHF 89 per 100 kg is still above the sort of 2018, 2019 level. The second question, just on Contract Logistics. I have seen some decent margin improvement there, with the conversion rate of around 5.96% in the quarter. How much of this improvement would you say is sustainable? How much has been driven by cost restructuring, versus, say, some of the equivalent furlough schemes or the higher margin growth in e-commerce? Thanks.
Hi, Alexandra. Thank you for asking the question because I think you're absolutely right on the air freight. I have been maybe a bit, or not precise enough. When I talk about normalization, which we normalized for Kuehne+Nagel's product and cargo mix. That meaning, you know that around 30%, 35% of our volumes traditionally going back into 2019 had been out of the perishable sector. Our GP at that point in time was always around the CHF 80 mark. What I meant is, coming from the second quarter where there was hardly any perish-- a lot of special transports on PPE, which was giving an extraordinary GP per unit, but at very low volume. Obviously, that is a trade-off to that. We are now slowly developing back into regular whatever. Hard cargo, the mix with perishables, with pharma, with e-commerce.
That mix starts balancing a bit closer to what is our normal cargo mix, and hence that GP comes from above CHF 100 into now into the region of CHF 90. Probably, going forward back into the CHF 85 region. That is what I meant with normalized. Normalized for our product and customer mix.
Understood.
To your Contract Logistics question, Alexandra. What we have shown on slide 14 is from our point of view an operational performance. The improvement very much comes from portfolio mix, a strong development in e-commerce, as well as with pharma customers, pharma healthcare customers. I think I mentioned that when I presented that slide. Also a cost program that we have started years ago that gets more and more traction. Your question regarding furlough. Furlough is not to make profit. Furlough is the benefit of our employees, and it's a cost coverage to keep them in employment. That's a totally different scheme. From our view, the performance in Contract Logistics with an improvement versus previous year quarter three of CHF 50 million or 44 something percent is sustainable.
That was the aim of our restructuring. The targets and the Contract Logistics business unit and all colleagues involved hit those targets or meet those targets.
Okay, great. Thank you.
Thank you. You're welcome.
The next question comes from Neil Glynn from Credit Suisse. Please go ahead.
Good afternoon, everybody. If I could ask two of Markus and then maybe one for Detlef. First of all, on the CapEx side, Markus. Your last couple of years before this year, you had over CHF 300 million a year. I guess this year is probably below CHF 200. I'd love your thoughts on next year or what kind of a CapEx level is reasonable to think about. Second question with respect to the impressive working capital management. I guess the DPOs lengthened, which is quite impressive given the tight supply on the air and the ocean side. Can you give us some flavor as to whether this is more on air or ocean, or whether there's anything else to consider within the DPOs? Finally for Detlef on the M&A side, you brought it up again today.
I'm just interested, when you look towards Asia, would you prefer to buy a company that's firing on all cylinders and has had a good pandemic? Is there a bigger opportunity to find a company with good market presence that requires your expertise?
TLC, perhaps.
Thanks, Neil. CapEx, yes, you're right. Over the last couple of years, we were around and above the CHF 300 million expenditures. Some of it being driven also through real estate investment that we have done. I think this year we will be around the CHF 200 million mark. Most likely not substantially below, but somewhere in that area. Going forward, we have to consider that we have restructured our Contract Logistics business quite significantly. I'm not only talking about the divestments we have executed or are in execution, we also talk about how efficiently we are making use of our own capital allocation. I would feel comfortable with a number between CHF 200 and CHF 250 even, going forward. I'm very clear that we will not reach the CHF 300 million number in the foreseeable future. Working capital, very good observation.
The DSO side, obviously, we have been managing, as I said in my presentation, as hard as possible. It's a hard fight, it's a daily fight, clearly. On the DPO side, yes, business pattern have changed slightly. When we look into the air freight market, of course, everything before was, if you like, regulated. Capacity, belly capacity, was paid through IATA and CASS on a monthly payment. Still that's happening, but not much is flown on that capacity. There is a bit of a different way of managing currently the DPOs. Is that sustainable? I would like to think as long as we are in the situation as we are right now, that should be sustainable. For us, the bigger focus or the more prominent focus certainly is having access to a good supplier relationship rather than stretching our relationships because of the DPO.
If something would have to give, if you ask me, then I think we would probably give half a day on the DPOs rather than not being available to service the customer.
Neil, your question regarding M&A. Thanks for putting M&A on the agenda because, we didn't mention it really. Our strategy has not changed. We have mentioned our criteria before, and I think it's agnostic to the COVID-19 situation or development of some of the targets. We are looking to strengthen our domestic or local footprint, access to Asian customers, access to Asian distribution networks, and the like, and maybe also access to e-commerce solutions and infrastructure, IT infrastructure, for those that could be scaled to the rest of the world. Having said that, we are in contact with some of the targets that we have identified.
It's not related to any of the recent developments that we have faced altogether during the last six months or so.
Understood. Thank you very much.
The next question comes from Frans Hoyer from Handelsbanken. Please go ahead.
Good afternoon. Thank you very much. We've seen a very tight market in parts of the Sea market and especially on the Asia, North America. I was wondering whether you might have some comments on that issue, please.
My comments would be we have no complaints. We see the market being liquid, so to say. We helped a lot of our customers to get the right space on vessels that were full. We are seeing that some of the lanes, Asia to LATAM, for example, are very constrained, but you get access. From that point of view, I wouldn't mention any constraints.
Okay. Thank you. Just one more, regarding the consumer electronics vertical this autumn, whether you might offer any comments on your view of that season this year, please.
Consumer electronics is a very specific question. This is a seasonal business, and through e-commerce fulfillment or e-commerce orders, as well as through countries or regions going back to a lockdown-like situation, we will see demand continuing on a high level.
Thank you very much.
Thank you.
Next question comes from Christian Obst from Baader Bank. Please go ahead.
Thank you very much, and hello. Small balance sheet questions. Two small balance sheet questions are left. One is, can you give us some kind of a framework, your underlying framework for the impairment charges of CHF 53 million for Quick you booked? The last one is on assets held for sale increased by approximately CHF 100 million and the same amount of CHF 150 million of liabilities held for sale related to the U.K. activities, which you intend to divest in Q4. Can you also give us the idea why you increased that kind of numbers? Thank you.
Sure, Christian. I guess these are two questions for me, or? Just joking.
I'm kidding him.
No, clearly. Give a bit of flavor around the impairment charges. Clearly, the acquisition of Quick was hugely successful. The two operating units, if you like, were mainly around pharma and healthcare, which is very strong. The other one is around the aerospace industry. You can imagine that is an industry that unfortunately has taken a huge hit by COVID-19 and continues to have a huge hit on this. As it is with IFRS reporting, of course, and impairment testing towards that part has led us to make a justified impairment into that area.
Sorry. Maybe an add-on that. What is the share of aerospace-related business within Quick?
I think we are not disclosing this.
Okay. Thank you.
Okay. Second question, the assets held for sale and the associated liabilities, very well spotted. I think it's a natural evolution around the fact that a transaction takes a bit of time, and I think the buyer as much as ourselves, we would have liked that transaction to be closed at the point when we talk already. Naturally, when you continue to operate a business, there is some right of use assets. Renovation or renewal, sorry. Renewal is the right word, of longer lease liabilities and right of use assets associated with it. It's a moving number that we're looking at.
You may remember that that is a quite large activity in the U.K. Contract Logistics business, and hence you will see at the point of taking on new assets to operate and/or transforming assets that had been owned in the past now into longer-term lease agreements. You will see these assets and liabilities as being a moving target at that point in time. It's all associated with the way we have to report according to the IFRS reporting standards for assets held for sale, but it's an ongoing business, right.
You are still very confident to close the deal in Q4?
We are very confident that that's going to happen. I think we are waiting for regulatory authorities to approve this. Clearly, the filing for the regulatory authorities is from the seller side. Sorry, it's from the buyer side, it's not from the seller side. We are supporting here the process. We hope that the U.K. authorities will deliver the answers before the year end. Yeah, absolutely.
Maybe they have to do something else in due course. Of course. Thank you very much.
Okay.
All the best. Thank you.
Thanks, Christian. Take care.
Sir, so far there are no more questions.
Thanks, everybody, for joining our analyst conference today on the nine months 2020 results of Kuehne+Nagel International. We say goodbye to all of you and wish you good health. Stay healthy and full of energy. So do we. We will talk again for the full year 2020 results on March 3rd next year. Take care. Bye-bye.
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