Ladies and gentlemen, welcome to Kuehne + Nagel's half year 2020 results conference call. I am Sandra, the conference call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your your telephone. For operator assistance, please press star and 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, and welcome to the analyst conference on the semiannual half year 2020 results of Kuehne + Nagel International AG. Our CFO, Markus Blanka-Graff, and I welcome you from sunny Switzerland. We published our half-year results and the respective slide deck earlier today, and as always, let's get started on slide three. Over the first half of the year, the Kuehne + Nagel Group successfully managed to deliver excellent service for customers in the face of unprecedented challenges posed by the COVID-19 pandemic. This started with the very abrupt halt to Chinese exports in February, followed by lockdowns in March, and a deliberate pace of day-to-day recovery.
Thanks to our dedicated colleagues and a seamless transition of approximately 45,000 staff to home office in a matter of days, our customers faced no degradation of service quality despite extraordinary volatility and demand for essential goods. This culminated in substantial market share gains across all transactional business units. From a financial perspective, the group's performance in quarter two is a testament to our flexible asset light business model and our efforts to optimally variabilize a meaningful portion of our short-term fixed costs. Looking at those four key figures that are in front of you will see that the net turnover decreased by 7.5%, heavily impacted by an FX effect of 5.9% versus previous year. Gross profit went down by 9.1%, the EBIT by 18%, down to 419 million CHF in the first half of 2020. Earnings per share landed at CHF 2.58 per share.
Please follow me on the next slide four, with a couple of details on the group and the business units. Group earnings for the period of the first six months were at CHF 309 million, we generated a strong free cash flow of CHF 383 million. Looking at the four business units, let's start with Sea Logistics. We have seen an EBIT of CHF 167 million, which were 28% below previous year as a result of a shift in cargo mix, less SME volumes, and a positive reefer and pharma development. Also, the demand for rail solution, especially at China, started to pick up strongly as of June last quarter.
Air Logistics, an EBIT of CHF 181 million has been achieved, which is 4% higher than previous year based on a high demand for crisis goods. Also, a demand for special solutions such as sea and air volumes, which more than tripled in quarter two 2020. Road Logistics ended the first semester with an EBIT of CHF 26 million. All networks were maintained, Europe now is slowly recovering while the Americas are still suffering from the effects of the pandemic. Contract Logistics ended the first semester with an EBIT of CHF 45 million, 21% below previous year, seeing a high demand of essential goods and answering the gross profit decline with strict cost management, almost matching the gross profit development. On slide six, we will discuss briefly the volume development in Sea Logistics and Air Logistics. Please let me start with Sea Logistics first.
We have a pronounced effort in Sea Logistics, especially on maintaining our own network capacity, which yielded in significant market share gains across all segments, but especially in pharma and reefer and the e-commerce segment. The cargo mix, I mentioned that before, showed a significantly lower SME volume. This is higher yielding, as we have mentioned in some of our previous calls. The market demand is continuously recovering over the course of quarter two. It's still below previous year. Let me give you some hints on how our volume developed month by month in quarter two. We saw April was a 15% volume decrease. Gaining market share ended our volumes in May by only -12%. The June volumes already showed a -8% volume decrease.
Gradually we see volumes picking up again, but still lower than previous year. In total, we shipped 217,000 TEU less in our networks, which resulted into an 11.7% reduction in quarter two and a 9.1% reduction in volumes for the first semester 2020 for Sea Logistics. Air Logistics saw a significantly lower demand for dry cargo and perishables, and both are lower yielding, as you know. A strong demand for essential goods, which were higher yielding and mainly produced or operated in a charter or via charter business, because the recovery of belly is not expected to see or show significant effects before quarter four this year. A soaring demand for sea and air solutions and also a monthly development that was rather stable by minus 23% to minus 20% April to June. In total, the first semester, a reduction in volume of minus 15.5%.
How does this translate now into the unit performance of the business units? Please follow me on slide seven first. Sea Logistics, mentioned this already two times, now for the third time. Cargo mix is lower SME volumes. Volume gains in pharma, e-commerce and reefer, and a stable margin development per unit in constant currency. On the next slide eight, you see the details of the development. The gross profit mix is the driver of the unit profitability. With an FX effect or a currency effect of 6%, minus 6% on the unit basis, you see a constant development or a constant margin per TEU, in quarter two this year. All cost measures were intact and, including the tailwind from FX or from currency, we saw a reduction in the cost level per unit as well.
The EBIT per TEU is well below our normal EBIT per TEU, this includes also a headwind from currency of 6%. In total, we are at the lower end of the range that we usually pursue, the CHF 80-100 per TEU, EBIT per TEU. It's recovering and we also see some seasonal effects kicking in. We are focusing, especially in Sea Logistics, on excellent customer service, we have one significant business which already related or resulted in less volume reductions than one might have expected from the market development. Quarter two has been stronger and improving month-by-month with regards to both volume, margin and unit profitability. Slide nine. Air Logistics, the general cargo volume declined significantly. I will comment on this on the next slide. The demand for higher yielding crisis goods has soared.
The market demand has been much weaker in quarter two, as anticipated, we have to say. The regular dry cargo, so the general cargo, the normal cargo that we transport, especially in the belly capacity, has been down by -40% to -50%. This has been offset by crisis volumes, essential goods, but not only PPE, but also packaged food, as well as e-commerce volumes went into that segment. A recovery started already in June, and we also see hard cargo or general cargo coming back step by step as of June this year. We had a spike in charter business while belly was not existing, which led to unit figures that are skewed by a different way of producing Air Logistics.
Our unit yield, as you can see, is clearly above our normal range of CHF 70 to CHF 85 per 100 kg. Per ton, sorry. No, per 100 kg, for the normal volumes transported in our networks. The unit EBIT is also above normal despite higher currency headwinds, this marks a 50% increase in Q2 versus previous quarter due to the beneficial volume mix, the cost consciousness also in this business unit, as well as the first AirLOG efficiencies that we have seen kicking in into that segment. Slide 11, a short overview on Road Logistics. Europe is slowly recovering, while the volumes in America stay at a low and very low level at the moment. This is true for both intermodal as well as truck brokerage. Slide 12 now.
We have seen a fast and massive deterioration of volumes in Europe at the start of quarter two, I think we mentioned that when we had our quarter one analyst call with you. The order of magnitude has been higher than 50% volume reductions, but that was true for two, three weeks only. We see a steady volume recovery step by step, especially in domestic transports in Europe at the moment. U.S. followed with a sharp volume decline end of April, especially intermodal more or less collapsed. We see a steady recovery since June in Europe and a stabilization on a low level in the U.S. at the moment. International and cross-border, which is the higher-yielding business, those transports are still lagging. Also here we see volumes coming back.
All our networks have been maintained. We are ready to deal with the cargo kicking in. In some markets, I will not say the geography, we have even had to reject certain volumes because our networks were filled again in June. That's true for domestic transports. We saw a very strong growth in bookings on our digital road platform called eTrucknow now. We have been able to roll this out even in a virtual environment over the last couple of months in many Asian countries, and we see the volume soaring on that platform at the moment. While EBIT was 42% below previous year, we generated a positive EBIT of CHF 26 million. In our best-case scenario, we would not have expected a positive quarter two in Road Logistics given the character of our networks.
We are very proud of what has been achieved here, countering volume reductions with cost measures. Slide 13, Contract Logistics. I have to say Contract Logistics showed high resilience, and it showed two phases. The ugly phase, if I may say so was industries that clearly were downtrading. Automotive and industrial to name two. We had complete shutdowns by customers and sometimes by governments in those industries for two, three, four, six, up to eight weeks. Some of the volumes have not recovered even to a sizable level again than prior to the crisis. There was a couple of nice phases that we saw or up-trading industries, the pharma and healthcare industry, the industry for essential goods, which is packaged food and consumables, and also e-commerce.
Here the volumes were well above seasonal peaks, and we had extra shifts that we had to introduce, especially on the weekends, to cope with the soaring and spiking demand. 90% or up to 85%-90% of our sites remained open throughout the whole crisis. Currently, we only have 12 sites that are still closed out of more than 600 sites globally. We see a clear confirmation that 50% of our solution portfolio is related to essential goods, and this demand has never stopped or has never been reduced. Some details on the Contract Logistics business unit on slide 14. The implementation of the COVID-19 SOPs, our operating procedures across all operations were introduced, but they also added a lot of cost and a loss of efficiencies. While we were doing everything to protect our staff, we lost clearly efficiencies.
Cleaning, disinfection between shifts, no overlap of shifts anymore, segregation of workflow between shifts led to a lower productivity, and higher costs, obviously. The excellent cost management that Contract Logistics introduced immediately with the crisis becoming one, so as of February, clearly showed progress. We were excluding the pressure from the exchange rate. We were able to counter the top-line revenue pressure with cost measures almost entirely. That is for such a huge business unit employing so many people, that's a huge effort and a great result. The high portion in our solution portfolio of essential goods showed high resilience and the lease that largely backed by contracts with customers back to back. We have more than 50% of our sites are so-called dedicated sites. We were not exposed to an overproportionate lease without any activity in too many sites.
Nevertheless, we saw a development end of quarter one and early quarter two. If you look into the figures, the overall performance, including the FX effects, is only 11.3% lower net turnover and in EBIT, almost on the level of previous year, quarter two. Having said so, I am happy to hand over to my colleague, Markus, to lead you through the key financial figures.
Thank you very much, Detlef. Welcome to all participants, also from my side. A very special second quarter indeed. A time that was characterized by unusual business pattern. I think we had quite some opposite focus, or business management focus in the business units. Air Logistics can be described by just make it happen. Times where customers, as much as on the carrier side, I think a lot of creativity was being required to make things happen. On the other side, as Detlef mentioned, in Contract Logistics, a clear focus on cost containment and cost management. A lot of times we have been confronted with the fact that traditional KPIs, key performance indicators, have been not extremely helpful. We needed to look differently at the business because it was a very special situation.
And I want to lead you on to page number 16, I think the result ultimately was a quite good one. When you look at the magnitude of impact, what such an unusual business can happen is, when you look at the gross profit development from the first and the second quarter compared to last year, we have actually lost in the second quarter CHF 265 million gross profit compared to last year. That is 2.5 times more than in the first quarter. On an EBITDA level, we actually have been at the same, even better level than compared to the first quarter. We only, if you like, still a big number, but only had a reduction in EBITDA of CHF 30 million out of a gross profit reduction of CHF 265 million.
There's quite a lot of the cost containment and the cost management in between that I think you can appreciate was quite a piece of hard work to get that done. Going further down in the P&L, of course, on an EBT level, yes, we are around 18% behind last year on a half year basis, CHF 90 million. Of which, and that's not an excuse, just a fact, of around CHF 20 million are coming out of foreign currency exchange. CHF 70 million from an operational perspective reduction versus last year. In relative terms, I believe the second quarter, and that's also very apparent, was even better than the first quarter. Page number 17, let's talk about Air and Sea Freight in that context, the eTouch project and the automation initiatives behind that.
We have presented the potential of the eTouch initiatives in commercial terms at our full year 2019 presentation. What you see here is merely an update where we stand. It's not a new assessment of values. It's just an update on progress. I think you can appreciate we have set the baseline in many areas in Air Freight. Our operating system, AirLOG, is fully rolled out in 2019, which is a prerequisite for many of the eTouch initiatives, not all of them, but many of those. You can see, despite the fact that Q2 had been a challenging environment to put through projects, but we have continued to drive eTouch initiatives, and we made pretty good progress, at least in one of the five core areas, the one that is customer booking and order entry.
I think the message here is, yes, do not expect any miracles right now in the current situation with still over a good three months, people working partially from home, partially just what I said, trying to keep up service in an excellent manner, that some of these projects have a slight delay. The message that I want to give you here is eTouch is on track. Page number 18, balance sheet. I am only going to talk about three, four components, of course, some of them housekeeping. First one, trade receivables, biggest item on the balance sheet, CHF 3.2 billion, CHF 3.3 billion by the end of June 2020, compared to CHF 3.6 billion. Not surprisingly, again, here we see a position where business volume has reduced slightly, you know it is a function basically of rates and volume.
Of course, a currency impact also on that position that is reducing the overall amount. Secondly, and arguably more important, cash and cash equivalents. I think our balance sheet is strong with a gross cash position here of nearly CHF 1.2 billion. Translated into net cash of around CHF 760 million, which compares to roughly CHF 900 million, respectively CHF 480 million by the end of the first quarter 2020. Simple terms, a very good development in cash generation.
In light, I think, of the decision, and you have read it in the news today, in light of the decision to propose the distribution of a dividend to the shareholders of CHF 4, we have calculated a pro forma net cash position at that point in time, and that would still be positive with CHF 280 million. Just as a housekeeping topic here, you're aware that we have a revolving credit facility available to us, which is entirely undrawn, so nothing has been used so far in the extent or at the frame of CHF 750 million. Coming back to the next item on the balance sheet, asset held for sale. Also here, information purposes. This is the value that we have, or that is the scope of the business that we have signed a contract of divestment with XPO.
You can see here, very transparent asset held for sale, CHF 400 million. Liabilities associated with this asset held for sale, CHF 300 million. The net asset value of that business to be carved out is around CHF 100 million. Equity ratio, I'm sure you have already calculated that yourself. From December, 23.6% an increase to 25.9%. I think the solidity of the balance sheet is also, in these rough times and unusual times, a benefit. Nevertheless, balance sheet is one thing. Cash is king. Main topic, cash. Going swiftly to page number 19. Operational cash flow, you can see that here in the first half 2020 at around CHF 804 million. Similar level than last year, with around CHF 872 million. However, when we go down a little bit and look at the total cash and cash equivalent situation, we have an increase on the cash balance of around CHF 666 million.
Be reminded, at that point in time, that included last year a dividend payment to the amount of CHF 720 million. Comparably, at similar level. Free cash flow generation, really what we are looking at, very resilient. The free cash flow generation also in the second quarter, so I'm talking second quarter, not half year. In the second quarter of CHF 227 million, which compares to CHF 223 million. Let's talk about crisis or non-crisis. Free cash flow generation has been at the very same level as last year. Excluding some of the disposals, and this gives you a bit of an idea on how much extraordinary components are in there. Excluding the disposals, the underlying free cash flow for the second quarter was still CHF 221 million. The swing that we talked due to disposals is a very neglectable, I think, CHF 6 million out of the free cash flow.
For everybody who runs some of the models, I think you can see here from the investing activities, the gross CapEx, the run rates or the CapEx that we spend into the business, is currently aiming at around CHF 200 million on an annual basis, which is significantly lower than we had seen over the last couple of years. Some of the drivers, of course, is the Contract Logistics disposal of part of the U.K. business. At the same time, we're also very diligently working on the usage of long-term leases according to IFRS 16, rather than outright purchases. Looking at the pattern in time, so the trajectory of the free cash flow, I think when you look at the curves on the page 19 on the right side, there is no reason to believe that should look differently, at least in the third quarter than it was last year.
Again, be reminded, in the fourth quarter, we had some extraordinary impact in 2019. We should expect a more even development into the fourth quarter also for 2020. Going to page number 20, I only touched the accounts receivable quickly on the balance sheet when I talked about the balance sheet. Here you see trade receivables have decreased year-over-year by around CHF 400 million. The reasons that I mentioned already. Trade payables by around CHF 260 million. Our net working capital is down around CHF 146 million. What's more important, our KPIs on DSOs and DPOs, we were able to keep, especially on the DSO side, days of sales outstanding, a number around 54, 55. We have a deviation of 0.4 days. Many questions coming along our way, obviously, is there pressure from customers on extended payment terms? Yes, there is. Very clear, yes, there is.
I think we will see more pressure coming in the third and fourth quarter. We are holding up quite well. I think service is one of the important arguments to maintain the DSOs. At the same time, I think our focus moves towards the risk profile behind the counterparties. I do expect going forward for the next two to three quarters, an increase in the risk profile on counterparty risks. Nothing bad happened so far. I want to underline that. It's no big defaults or anything like that. I would expect that the pressure is also here getting higher, until the end of the year and maybe into the first half year 2021. Return on capital employed, page number 21. You see that little inflection point that we had here from 60% up to 66%, 67%, and I think that was a good sign.
Now we see a little bit the COVID-19 effect that pushes down to 62% again. Very clear, and I just wrote it for clarity, just beside it, the sudden decrease of the profitability that we have seen also on the P&L on a very similar asset base, is obviously mathematically leading to a bit of a compression on this one. However, from a target perspective, we maintain our financial targets, with around 70% return on capital employed. That should be possible. The good news, and at the same time, I think the expected also from some of you news, is on the next page number 22. Dividend proposal, just to put also some clarity around conversations we had over the last years. You know that we never had a formal written dividend policy.
As it is, all decision-making power remains with the board of directors and the general assembly. That having said, the actual payout ratio in the recent years was always consistent with also our verbal communication to a distribution of around 75% of the net profit after tax. Clearly, now the BOD's proposal is based on the assessment of the market conditions and also the group's performance and likely ongoing performance. As you can see here, the proposal to the extraordinary general meeting on September 2nd will be to pay out a dividend of CHF 4. Financial targets, and the last slide from my presentation. I think you see on the left side, the group financial targets. Conversion rate, 11%-16%. I think everybody's clear, one of the main drivers, eTouch. Return on capital employed, I just spoke about it.
I think when we come back to regular profitability based on our asset base, 70% is in reach. Working capital intensity, I want to talk about that first. Working capital intensity currently at 3.9%, and you might have noticed, I have intentionally widened a little bit the corridor from top end 4.5%-5% for a simple reason, because I believe that is anticipating a reflection of pressure on counterparty risk and potential DSOs for the next four quarters. Tax rate. Tax rate, I think, very important to look at this one. It's a housekeeping topic for you also to update on your models. We expect a group effective tax rate of around 24%-26%, up from around 24%-25% as per our latest communication. This is just reflecting the current shift in the business and geographic mix. Just that you're not surprised on your models.
Right side, the four business units. You see in the first line our actual performance in volumes. Underneath the part that everybody was really waiting for, that is the update on the market expectations for 2020 and the outlook. As you can imagine, I think we're in line with many of our peers. We are not giving any. I think the performance that the group has shown so far gives us a certain confidence in our ability also to manage through what we believe is going to still be a volatile and highly uncertain market also for the rest of the year. As the market outlook remains extremely uncertain to us as well, we offer, again, no explicit financial guidance for the group, nor volume guidance until the end of the year.
Very sorry for that. At the current stage, we will all have to live with guess working and a bit of color of what we said on our past performance. With that little lack of outlook, I will hand over to Detlef.
Thank you, Markus. The lack of outlook maybe marks the whole year, because in the pandemic, we have to fly on sight. That is the saying we have. As far as we can look ahead, we initiate measures and activities, and the rest is agility, adaptivity to a situation that you can't really predict. On slide 24, I want to make a couple of remarks. Logistics is and will stay people's business, even in a more and more digital environment, and we have embarked on this route. Our Roadmap 2022, which started in 2018, and we are in the middle of that roadmap deployment, blends customer technology and people.
We believe that the COVID-19 pandemic in the last six months has clearly shown that we have embarked on the right strategy. We stayed fully operational throughout the crisis and continued serving our customers with our high-quality services throughout the world. I would heartily like to thank our colleagues for their commitment and passion, and to our customers for their trust and loyalty. Thank you. Without you, the first semester would have looked differently, and that's the energy and passion of the best logistics team in our industry. Having said so, I would like to hand over back to Sandra to open Q&A.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touch-tone telephone. You will hear a tone to confirm that you have entered a queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question comes from Daniel Roeska from Sanford Bernstein. Please go ahead.
Gents, good afternoon. Thanks for taking the questions. Three if I may. Could you elaborate what is enabling the market share gain, especially during a crisis like this one, in your view, and kind of who's losing it? How much of that market share gain will you be able to retain as things move more back to normal? You also talked a little bit about your cost reduction efforts, and in today's report, you showed about 87,000 employees, down from about 98,000, last year at the same point. Now, how much of that decrease, let's call it a rough 10,000 employees, is driven by the temporary furlough programs, and how much due to actual sustainable reductions that then will benefit you as you ramp back up? Tying this also to eTouch, back at the financial year results, you talked about CHF 20 million annualized savings so far.
Any indication on how this has progressed in the past six months? Do you expect that the automation will enable you to keep staff numbers lower as volumes go back up? How are you thinking about really driving eTouch through the business? Thanks.
Thanks, Daniel. Let me answer those questions. Let me start with the latter one because we have alluded to that a couple of times. It's not about staff reduction. eTouch is enabling us to do more business and to drive business segments or growth in business segments with a traditionally lower margin, but with the high conversion rate, still very attractive to us. That is eTouch. Market share gains. We have mentioned that. We were able to gain market share because we changed the whole organization into addressing actively customers after Easter. We were engaged with all existing customers and potential customers, target customers, as we call them. We had interaction virtually with all of them a couple of times throughout the week and months. We won business. We won business without having met the customer physically.
We were winning business because we were operational, and many of our mid-sized and smaller competitors were not operational. They struggled to keep operations up and running. That also would allude to answering your question, who lost? The lower part of the pyramid is the one that is under highest pressure. Technology, connectivity, and also functionality of operating systems is a big challenge for many of them. Especially in a unprecedented situation that we all went through worldwide over the last three, four, or five months, that proved to be a big risk and a big problem because you couldn't overcome any of those deficiencies by just calling someone or going somewhere. You had to prove your systems and technology are working. How much can we retain? I would say we convince our customers by quality. We don't convince by price. We are a quality supplier.
The customers that have made the experience over the last 6 months or in the past in general, they stay with us. We have a lot of customers that we retain because of our high-quality service, and that's part of our Roadmap 2022 strategy. Customer excellence is at the center of all the topics we do. We don't want to win transactional business just for the sake of winning it and operating it for one, two, or three months. We want customers to stay with us and see how much of our solution portfolio can generate benefits for them. Cost reduction efforts. I think we have made a lot of efforts with all the programs that are in place, but not only. We have optimized our workforce.
We have reduced capacity where required, but we shifted capacity to those operations, sometimes in the same city or even the same warehouse, where demand spiked. There is no rule. We have only a few temporary labor, I think it's 2,000, a bit more than 2,000 temp labor, less than we had a year ago. This is driven by the effect that we see much higher demand still in some of the essential goods segments, especially pharma, healthcare, and e-commerce. This, from our point of view, sustainable volume. This will stay. In different words, Daniel, I would say we made a organic growth experience compressed in five months maybe, or four months, that we usually would have gone through in our customers in a period of 18 months. I would say that is to a large extent, sticky and stays and will not be reversed.
Right. Thanks.
The next question comes from Sathish Sivakumar from Citigroup. Please go ahead.
Yeah. Thank you. Good afternoon, Detlef and Markus. Thanks for taking my questions. I have three questions. Firstly, could you please elaborate on volume trends through the quarter from SMEs? Which markets are actually seeing weakness versus the relative strength? Secondly, in 2019, on your SG&A expense was around CHF 445 million. Could you please update on the current run rate on SG&A? Finally, what has been your workforce return rate from remote working across key markets?
Can you repeat the last question, please? I didn't hear.
In terms of workforce returning back to office, what has been the return rate so far across key markets?
Okay. Volume trends, which markets? As you know, the whole pandemic started mid of January already in Asia, and usually this is not an SME market, or we have a much higher portion of blue-chip customers there. In Europe, it's mainly the SME customers that dropped out of business very fast. The recovery is starting or has started now in June, I would say. The first sign of a recovery of SME customers has been seen in June in Europe and partly in other markets, but mainly in Europe. This will take time. It will not come overnight. At the moment the pandemic is hitting the Americas and we see that we have still volumes that are down and not recovering. Here, I would say it has bottomed out.
We are more positive today than we were three months ago when we discussed the quarter one results. I would say, despite regional and local setbacks, the pandemic is not over, but we have all managed and understood how to handle it, and governments have initiated enough protective health measures, in order to secure the people and make them continue consuming. The SG&A run rate has a lot of components. It starts with travel, for example. I do not expect travel to come back this year, to say this clearly. Intercontinental travel, I would not expect to see any of the flights intercontinental with Kuehne + Nagel stuff on it, before September, if at all.
Then we have made such a positive experience on winning new customers and such a positive experience with winning customers and so on, online and virtual only that you could say every second trip can be spared in general moving forward. Then we have a currency effect here as well. There is a currency effect in SG&A, because we translate everything into hard currency Swiss franc, and that has an effect in itself as well. I hope that answers your questions.
The next question comes from David Kerstens from Jefferies. Please go ahead.
Thank you. Good afternoon, gentlemen. Three questions please from my side. First on Sea Logistics. It turns out that the volume development is better than expected as the quarter progressed. I was wondering, did you see a noticeable impact from a shift from air to sea freight due to the lack of capacity in air freight? Secondly, in Air Logistics you benefited from, I think, in constant currency, a 34% higher yield. Now with the air freight market starting to normalize again, would you expect that that air freight yield also normalizes back to the range that you indicated in your presentation of CHF 70-CHF 85 per hundred kilogram? Do you expect to be able to continue to do better than that range?
Finally on Road Logistics, I think the organic revenue was down 20% in the second quarter, but that's a mix of Europe and North America. Can you provide some color on how weak North America really was? With a decrease of 20%, does that still imply that you gained market share in the second quarter? I think some of your peers refer to the market down only 15% in the second quarter. Thanks very much.
Sure, David. Let me answer your questions. Sea Logistics, yes, we had a better volume development than expected. Any shift from air to sea is insignificant for sea. Sorry for saying so, yeah. One freighter has 100 tons, and we are talking about, I don't know, six, eight containers. It's a different business model. You can't compare it. What we saw is, and that is a good combination, and I mentioned it, is the air-sea combination. Yeah? You go into Dubai via sea, and then you go into final distribution, even to South America via air. This combination, this solution, in light of the lacking supply side of freighter capacity, especially in China, got a lot of tailwinds. I mentioned that our volumes here spiked more than three times the normal volume that we see. This combination showed a certain progress.
Air Logistics, I think I mentioned that during the presentation. We expect, especially in the second semester, that the higher yield was a result of a very special supply and demand situation in quarter two, and that the normalized yield of CHF 70-CHF 85 per 100 kg will come in or will kick in again gradually, not overnight and not on a fingertip, but gradually. Road Logistics, I think our comps. We have so many different figures in the market, not being able to predict even what has happened or describe really what has happened is I think what all of us have to be very careful with. Let me describe a situation that we experience in Europe, then I come to the U.S. Europe, we have volume reductions of 50%-60% within weeks. This happened in the first 1-3 weeks in April.
This bottom out and the recovery gradually started already as of May. The figure you see is an average figure of a volume development that had a lot of slumps and spikes and a lot of shifts over the last weeks. At the moment, I or we all believe that the volumes are gradually coming back and they stay. It's not a one-time shot. In the U.S., I think we are still on a very low level, but as I mentioned, it has bottomed out. Long story short, it was a disaster and it's recovering.
Okay, great. Thank you very much.
You're welcome.
The next question comes from Sam Bland from JP Morgan. Please go ahead.
Afternoon. Could I ask, I think, three questions, please? First one is on the sea freight conversion rate. That's held up pretty well, but I guess there wasn't any benefit from eTouch in that segment. Just be interested in, did you do any specific cost savings programs in sea freight, or what helped the conversion rate in the quarter? Second question is on, I think there was CHF 57 million of employee government support in the quarter. Could you just talk about sort of roughly which divisions that came in? Was it mostly in Contract Logistics? Could you see that support be withdrawn before the market recovered back up to normal rates, so there's basically a lag, and your profitability is impacted by that? The last question would just be an update on M&A plans. Obviously, you paid the dividend.
Should we read into that any M&A ambitions are a bit less in the short run, or you still got plenty of firepower to look at that? Thank you.
Okay. Sam. By the way, guys, you can also ask less than three questions. It's not a standard routine that you have to ask three questions. Only as a short hint to you. We have cost savings in place, and there's no eTouch yet. Because as mentioned many times, the prerequisite is the fully deployed new transport management system called SeaLOG, as a basis for running eTouch activities in Sea Logistics. The government programs that you allude to, 80%-85% is related to Contract Logistics, but people were out of work. As volumes are coming back, also in the normal operation, people are in employment and we pay them. That's not the point. We avoided to lay off people, which is beneficial for our staff and also for the government related to this.
The business, the operational run rate of Contract Logistics has been extremely strong. All the restructuring measures showed the desired effect, and we will see in the second semester when things are cleaning up more and more, especially in the quarter four figures, how strong Contract Logistics will phoenix-like come back out of all the restructuring activities. Your question related to M&A ambition, I'm a bit surprised because our dividend proposal has not changed to the one that we made prior to COVID-19. When we posted our annual results 2019, there was a dividend proposal of CHF 4 per share. Cautious as we are, we postponed a decision on this and did not decide on a dividend given the insecurity and unpredictability of the pandemic.
Now as we see that cash flow is strong and we weathered the situation strongly, we are in a situation that the Board of Directors decided to propose the same dividend again for the general assembly. Our M&A ambition, our M&A strategy has not changed at all. Physical meetings in Asia are restricted at the moment, so whatever we do is based on video calls.
Okay, understood. Thank you.
You're welcome.
The next question comes from Mark McVicar from Barclays. Please go ahead.
Hello, Mark? Mark, hello.
Hello.
Hello. You were shocked when I said less than three questions, Mark.
Yeah, I know.
Please go ahead.
No, it's not that. I'm only going to ask two questions, you'll be pleased to hear.
Okay, very good.
Just for variety, really. Just to come back on the air freight and capacity question, could you give us a sense for how much of your air freight in Q2 went in freighters rather than belly hold. Do you see that changing significantly certainly in Q3 and maybe even into Q4? My sense is that the airlines are bringing back capacity, but much more of it is short and medium haul, rather than the long haul stuff, which is typically what you use.
Exactly. Whatever belly comes back at the moment, it's short and medium haul, and that doesn't help us. Usually that is not where we transact the majority of our business. Yeah? I would expect in the second semester, 60%-70% of our volume to be transported with freighters, main deck capacity. Yeah? Belly will not recover too soon. I would say it will take maybe two years that we see a significant network activity which allows for using belly capacity again. Yeah.
Yeah.
Yeah, go ahead.
Sorry, the 60% to 70% that you think is going to go in freighters in the second half would compare to what? 90%, 95% in Q2 because there was so little belly capacity around.
Yeah. I'm not sure. No.
So-
No, no, Mark, I'm not sure. End of this year, we will have 60%-70% of the belly capacity that should be back.
Oh, okay.
We will still rely on freighter capacity to a major extent, and that will gradually transform or change throughout quarter three and quarter four. We are talking end of the year, whereas at the moment, I think it's 90%, if I'm not mistaken, or early quarter two, middle of quarter two, the majority, almost all is freighter capacity. We have a lot of belly still in North America or the Americas, which can be used. We use partially belly capacity for perishables out of African countries.
Yeah. When you talk about the GP normalizing or coming back towards the longer-term range, that's much more the mix, because I guess the like-for-like GP from using a freighter isn't going to be different in August than it was in April, particularly, right?
Absolutely. Yeah. It's the mix, clearly.
Yeah. Okay. The second question, a straightforward one. Could you just remind us where you stand on sort of credit insurance on debtors, how much you use it?
Thanks, Mark. That I also get a question once.
Hey.
No. Credit insurance, a very interesting topic right now. Without disclosing too much details, you know that we work with the two main credit insurers on a global basis. A lot of conversations going on right now. I don't want to say that insurers have all the similar patterns of obviously when business goes well, there's a lot of insurance coverage available. When business goes not so well, it goes down very quickly. We are having a good partnership with them, and we try to manage as much coverage as possible. As I said in my presentation, until now, no significant defaults or fallouts or bankruptcies or anything like that. However, the horizon is a bit darker than what it usually looks like, so there's a lot of cautiousness going forward. How much we pay, you can see that of the annual report.
We pay every year around CHF three and a half to four million on insurance premium. I think that is given our sales ledger of more than CHF 3 billion, a reasonable number when you assume that around 70% of that is being covered.
Yeah. Broadly, as you go into the second half, your level of cover is unchanged, yeah?
Our level of cover is, on a total number, probably unchanged. When you look into some of the industries, it may vary. Like aerospace industry might actually be reduced a little bit, some industries will be increased. Overall, the risk profile is shifting within the industries, but overall remains very stable.
Okay, lovely. Thank you both very much.
You're welcome.
The next question comes from Neil Glynn from Credit Suisse. Please go ahead.
Oh, hello. Neil from Credit Suisse. If I can ask firstly another question of Markus.
If that works, to give you another opportunity.
Thanks, Neil. Much appreciated.
My pleasure. Then I'll have one for Detlef too, if I may.
Keep it to two. The first one, Markus, you obviously spent some time talking about working capital and increasing risk to some of your SME customers. Just wondering, as it pertains to sea freight, and the negative mix effect on GP per TEU, as you plan beyond 2020, do you plan for a smaller proportion of SMEs relative to normal? How do you think about that as it relates to GP per TEU over the medium term? The second question, and I guess it could be for either of you. Just following on from the AirLOG comments on how it's evolving and obviously SeaLOG is to come. How relevant is this to your M&A ambitions that you obviously outlined, to an extent at the full year?
I guess on one hand, optimization of those two TMSs might be ideal before any major transaction. Is that the way you think about it, or is that something that will ultimately take care of itself if you find the right deal in advance?
Okay. Maybe, Neil, I take the latter question, if you don't mind. First of all, we concentrate on our own business and optimizing our own business based on AirLOG and followed by SeaLOG, and the eTouchability of that business, make eTouch happen. We make progress here. We're in Air Logistics, as we have pronounced. M&A is independent of this. This needs cultural fit. We are looking for access to certain Asian customers, a solutioning that is not yet part of our own solutioning, maybe. Yes, it would be much easier to transfer an acquisition directly on SeaLOG, to name this, than on our current legacy system. If that would be needed, we can do so as well. We have proven that this is not a big exercise for us.
That is not a criteria that would influence our M&A approach or delay any M&A. It's more getting acquainted to those targets and also building up a basis of trust. That needs physical, personal meetings, and you can't do this via video calls. We always said when we announced this, because there were rumors in the market, we always said it's a two years exercise. It doesn't happen overnight. We made progress. We never stopped. We didn't change approach. From that point of view, I'm quite confident that eventually, we will be able to announce the right acquisitions.
Neil, on the first question, I think it's interesting angle that you come from on the working capital and the risk profile to the SME.
I think we see now the SMEs volumes coming down in the second quarter just for a simple reason, because most of the businesses, due to the curfews, have been just shut. That doesn't mean they reopen again. I think what we are looking at in sea freight is that temporarily there is going to be a shift in mix away from the SME. I think ultimately is even going to be a bigger portion. When you look at the market share, it's a very small market share we cover right now. It's an absolute attractive, and we are totally committed, as you know, in our customer base to the SME customer. This is our backbone of our operation. There is still a massive potential to grow in a very profitable market in the SME.
How the margin is going to look like, I think also here, there is a time that we need to look at for the normalization. There is no systemic structural reason why the margin for SME should be lower than it has been in the past. I think, rightfully so, our backbone SME customer base, we will even get a bigger portion of that, and the profitability is going to be run exactly, if not above the level that we had until now.
Understood. Many thanks, both of you.
You're welcome.
The next question comes from Frans Hoyer from Handelsbanken. Please go ahead.
Thank you very much. Good afternoon. Also a question regarding the mix shift in Sea towards SME. Could you try and describe how much of a shift in the mix you saw and what was the effect on the yield that you saw in the Sea business?
I think those details we will not disclose, but the majority of the SME business has not been able to sustain their operations, their business models throughout the pandemic, at least for four, six weeks, and that has caused the reduction. We see them gradually coming back. As Markus said before, some of them do not come back at all because their basis, their financial savviness is not given. SME is everything. Be careful. It is also very niche products that has not seen an increase in demand at the moment. Whether you have hand-painted tiles that are produced in Northern Italy and the demand is coming back now in Denmark, for example, is rather questionable, Frans. That is maybe how you should think about it. Eventually that will come back. Our business is, and we are strong in SME business.
Our business is skewed towards SME. That gives you a bit of a flavor. It's a result of the pandemic and not of a, how should I say, conscious mix decision.
No, I understand. Okay, the second question, final question, is around the M&A market and whether You mentioned that you're winning markets, gaining market shares, and those that are losing it are typically the small or mid-sized competitors that are having difficulties on the technology front, connectivity, and so on. You also talk about credit risks escalating. There might be an uptick in the M&A opportunities that you see. Maybe you can talk about that.
Yeah. We monitor the market for many years and we are active in the market, as you know. Not everything that looks shiny is of interest for us. To fulfill our strategic targets and to continue our growth path that we have embarked on many years ago, we don't need M&A. We have defined targets, what we want to achieve with an M&A approach.
If we find targets that are fulfilling those requirements, we will become active. If not, we don't. For us, the market has not significantly changed at the moment. We always looked at targets, also in the past, that were successful with their business model, in their geography or in their solutioning. We are not looking for a restructuring case. That's not our business driver.
Okay. Understood. Thank you very much.
Thank you.
Thanks.
The next question comes from Christian Obst from Baader Bank. Please go ahead.
Yes, hello. I have some more technical questions. One is concerning the decision concerning CapEx or long-term leases. We have seen an increase in depreciation of right- of- use assets from CHF 237 million to CHF 254 million in the second quarter this year. What is the trigger for a decision going for CapEx or for long-term leases, and how is the current market for long-term leases developing? What is the main trigger for any decision in either way? Second one is, you are talking and, of course, there is diesel pressure. Are you currently supporting some of your customers for longer payment terms or something like that to keep them into your network? The last one is, can you give us a guidance for any kind of income from disposals in the second half? Thank you.
Christian, right of use assets, I think your question has two answers. The first one is, what is the decision-making reasons to it, and the second one is what is the increase in the second quarter? There are two different reasons for that. Maybe the more technical first, you know that we have the asset held for sale related to the disposal of the business in the U.K., which also includes right of use assets. As per the IFRS standards, you have to stop depreciations at the point of signing and then keep that frozen, if you like, until the point of closing. That is the simple reason why you have the variances in the second quarter and continue to have until closing has been executed. That is the technical part. The question around what makes us deciding into one or the other pace.
Main and most important piece to it is that because we talk most of it of locations, of Contract Logistics facilities. What is the perspective of that Contract Logistics facility? Is that a facility that is an operational optimal position? Obviously we want to keep our flexibility most of the time back-to-back with customers, where we say we have a five or, I don't know, 10 years customer contract. I'm just making an example. We match that with our lease commitment. It's flexibility that is driving our asset light business model. If you ask us, each answer is going to be the more flexible, the better. We only make investment decisions where locations do not provide the required quality of facility. I give you one example.
A few years back, we were investing into a pharma hub in Singapore because there was no such pharma space available. With a couple of ups and downs, right now it became a very good decision, in the current circumstances, to have that space available. This is really the exception where there is a good reason why to invest our own money. In all the other cases, a lease agreement back-to-back with the customer will be preferable. DSO, second question. DSO, we never sell on payment terms. We don't. This is irrespectively of any pressure, demand or anything like that. We sell because we have a very good service. We are fully operational. We are competitive in the market. We are not selling on terms.
Okay, that's clear. The last one?
I didn't write down the last one. Can you repeat?
CapEx long-term lease and income from disposals.
Oh, income from disposals in the first half?
No, in the second half.
Second half, I think.
Oh, in the second half. We have a second real estate portfolio is out for sale. I do not expect material impact on the P&L out of that. It's going to be less than CHF 10 million.
Okay. Thank you very much.
Thank you.
The next question comes from Muneeba Kayani from Bank of America. Please go ahead.
Hi. Is it possible for you to quantify the benefit from lower perishables in air GP in 2Q, as well as the impact on volumes from lower perishables? As that normalizes, how we should be thinking about it in 3Q and the second half of the year? Secondly, what have you seen from the digital forwarders during the COVID crisis? Have you seen a higher or lower presence from them during the crisis?
Okay, let me answer your question.
Okay.
The latter question, I don't know what digital forwarders are. I would believe our digital solutions got a lot of pickup during the crisis. We have not seen many of our competitors in general being active or aggressive in the market. I would say a handful have been, the rest somehow disappeared, and I'm not exaggerating. I will not name any, and I will not give any comments on single forwarders. The quantification of the benefits from perishables, first of all, perishables are low margin business, and we had less perishables, one-third less approximately volume, one-third less perishables in the first semester. That led to the cargo mix to a higher yield independent on whether charter was available or required or the rate spiked or not.
We believe that this perishable volume comes back gradually in the second semester, and thus the mix would reinstate with a lower yield. The CHF 70-CHF 85 per 100 kilo will become a reality also all because of the cargo mix, with one-third of our total volume being perishable. I hope that helps.
Thank you.
You're welcome.
The last question comes from Sebastian Vogel from UBS. Please go ahead.
Hello, I got two questions. The first one would be on Contract Logistics. You mentioned there your cost, your expenses came down quite a fair bit. I was wondering if you can add more granularity how the different cost items, i.e. personal costs and the other one, SG&A, have contributed to this development in the second quarter. The other question I have, if I calculated correctly, your conversion ratio, in particular in Asia, was quite high in the second quarter. Is that mainly a function of the transport mode exposure of that region?
Sebastian, first of all, we don't look at conversion rates per region because it depends on the terms our customers apply on where to invoice and pay transport bills. It's skewed. Be careful. We have a profit-sharing model, so that is within or internally between regions. That will not really help. Conversion rate for sure is influenced by the performance of the different business units. Yes, in quarter two, Air Logistics has been extremely successful. The question on Contract Logistics and cost development, the majority of the cost is people, colleagues, and the second cost factor is lease. I gave an answer on the lease already because 50% or a bit more of our contracts are all back to back. We dedicated with single customers. The fixed cost coverage is usually part of our contracts. That is not an exposure.
The rest is capacity, and we breathed with the volume very well. Yes, we did not have a mass layoff, and we stated so many times it's not necessary because from the beginning of the pandemic, we said this would be in a situation that is limited by time. It would not end up in a permanent situation. That is exactly what we see. Many of the operations are back. I mentioned that only 12 operations out of more than 600 Contract Logistics sites are still locked down, and 11 out of them are in one country because some infrastructures have not opened yet. The rest is fully operational or has started to become operational again. Maybe not a three-shift operation or weekend shifts.
If you look into China is maybe We can learn from China or Asia because they went through this pandemic very early and gradually. We have full employment in our operations in China. We have additional shifts introduced in our line feeding, automotive production line services, spare parts services, and we see increasing and strong demand for a lot of goods out of China. Therefore, we see that a lot of our customers start picking up in volume again. Is this V, T, W, O, or whatever letter, forget it. It's not as fast as we thought, but the slump was not as severe as we anticipated before. I hope that helps to answer your question. Personal cost is the main factor, and we are almost in full employment again in Contract Logistics.
That means we have a gross profit related to that activity, and the rest is lease cost and our idle capacity has not changed significantly. We are below 3% in idle capacity. That's a leading indicator in our industry.
Perfect.
Thank you, Sebastian.
Gentlemen, that was the last question.
Thank you, Sandra. Ladies and gentlemen, logistics is people business, and we are proud of our people. They have managed this crisis extremely well. We are honored by our customers, their loyalty, and their business that they awarded to us during the last, especially last quarter. We will see how we progress over the next quarter three, and we are looking forward to talking to you again middle of October. In the meantime, stay healthy, don't travel too much, don't forget to use masks because we need you as end consumers like millions and billions of others, because end consumers drive our business model, and we want to see a strong quarter three when we talk next. Thank you very much and talk to you again soon. Have a nice summer. Bye-bye.
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