Ladies and gentlemen, welcome to the Q3 2019 Results Conference Call. I'm Andre, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. 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 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.
Thanks, Andre. Good morning, good day, good afternoon, and good evening to all of you, and welcome to the Kuehne+Nagel analyst conference call on the nine-month 2019 results. We published our results this morning and also the analyst presentation earlier today. As always, our CFO, Markus Blanka-Graff, and I will lead you through the presentation.
Let's get started on slide three. In the first nine months of 2019, this year, our results greatly improved, and especially in the last quarter. We closed the first nine months with group earnings at CHF 598 million. Our earnings per share growth accelerated, and the free cash flow improved further. In addition, our conversion rate improved to 14.3% as well.
This was due to a strong EBIT development in sea freight of CHF 357 million in total, which resulted into CHF 33 million above last year's first nine months period. A very satisfactory EBIT in air freight of CHF 263 million despite reduced volumes, a solid performance in quarter three with EBIT on previous year's level.
In overland, the net turnover grew by 2%, a strong operational improvement led to an EBIT improvement, especially in quarter three. Contract Logistics improved its EBIT operationally by CHF 7 million, excluding the one-off profits from sale of real estate. Here we saw the first signs of the restructuring activities and initiatives getting traction. Let's continue on slide four of the slide deck very briefly.
Despite a challenging market environment, we have spoken about that in detail when we had our analyst meetings during the last couple of months, we increased net turnover, gross profit, EBIT, and earnings per share. The figures on slide four speak for themselves. I think I don't need to go into more details at the moment.
Let's continue on the two network businesses, sea freight and air freight on slide five. Sea freight, our selective growth strategy with a volume growth of +4.3% year to date showed traction. We have a very strong focus on customer service, as you know, especially for the small and medium-sized enterprises, we got a lot of traction with establishing a very unique service proposition for that.
Our cargo mix as well as strict cost control, a part of the Kuehne+Nagel DNA, as you all know, plus the growth with small and medium-sized enterprises drove the conversion rate up in sea freight, air freight. The air freight market continued to be under pressure, especially automotive and the high-tech sector showed significant volume declines.
While we were able to grow and saw growth in the pharma healthcare as well as the perishables and the time-critical sectors. Our organic gross profit development remains robust, though, and we were able to fight the market conditions quite well. Let's go through the details of sea and air freight volume development on slide six of the slide deck. Also in sea freight, we saw a slight deceleration of the market in quarter three. Not really significant, but not to be not mentioned.
Therefore, we reduced the guidance slightly to 1%-2% for the market, but not for Kuehne+Nagel. Our growth and our ambition to outperform markets 2x as much as market growth remains. We have seen in the first nine months, a growth of 4.3% in sea freight or year to date, additional volume in our sea freight network of 152,000 TEU.
Where does the growth come from? Clearly, transatlantic eastbound, partly westbound, but mainly eastbound, Asia imports, especially from Europe, and Asia exports to North America. What we clearly saw to be weaker as a consequence of all those trade wars and noises and discussions and ongoing disputes was the Asia imports from the U.S. The energy and the projects business, as well as reefer and less container load, contributed strongly to growth and gross profit development.
The air freight market contracting for the last nine months or even longer, as you know. The market volume continued to deteriorate, and there was no meaningful change in quarter three versus quarter two. Volume pressure is still existent in automotive and high-tech, I mentioned that before. While we see pockets of growth in pharma, aviation, healthcare, and also e-commerce fulfillment.
The trade lanes where we see relative better volume growth is U.S., North America to Europe, and exports from Europe to Asia, but a weaker Asia export on the transpac, I mentioned that briefly before. Let's continue on the unit performance for both business units s lide seven. We saw in sea freight an increased unit profit versus previous year, quarter three, of CHF 95 per TEU versus CHF 92 per TEU. This was driven by our selective growth, which I mentioned before.
The cargo mix, more reefer and LCL business in our network, and the sequential reduction of our costs, especially in quarter three. Also here, as in all business units, our cost and productivity program showed first signs of traction.
We have mentioned those programs, by the way, when we posted our annual results 2018, in our call, I think end of February this year, and we see now first time in quarter three that all those measures that we have initiated and implemented got traction.
We are focusing also in sea freight on leveraging our IT solutions. We have implemented a couple of platforms, you're aware of those. Automation, and also they had to drive not only volume growth, but also productivity. As always, and Markus will give some more details, but as always, I would like to share our year to date variance analysis with you in million Swiss franc.
From a gross profit perspective, the volume effect in sea freight contributed to CHF 48 million more. The margin effects contributed to CHF 9 million more year to date, first nine months. Additional costs through the volume effects contributes to CHF 24 million higher costs i n total, an EBIT improvement or resulting into an EBIT improvement of CHF 33 million more.
Next slide, slide eight. Let's go to the unit development in air freight. You see that unit margins and profits in air freight also improved year-over-year. The margins in air freight improved, the gross profit per 100 kg improved by 16% year-over-year, with two-thirds of this improvement being organic and 1/3 attributable to the Quick acquisition, our time-critical business that we acquired end of last year.
The EBIT per 100 kg improved year-over-year by 10% or CHF 2 per 100 kg, which is directly attributable to the Quick acquisition. You see that the contribution of Quick is accelerating and all the figures that you see are after our amortization of intangibles, which we usually apply for acquisitions. Also here, in air freight, the year to date variance analysis, CHF 1 million, if you may.
On the gross profit side, the volume effect contributed to CHF 57 million less GP in air freight this year. The margin effect, though, contributed to CHF 159 million additional GP. Cost effect of CHF 110 million negatively, an EBIT that was almost flat or - CHF 8 million year to date in our books. This is the short overview on sea and air freight. Let me continue with our overland business on slide nine.
A very strong performance of the European network continued, although also here in overland, we saw a certain slowdown or less growth in quarter three. The digital platform that we launched in Asia, in two markets already in Asia, showed traction already in overland and especially in those markets where our footprint is rather new and unique.
The strong operational performance, and I'm moving on to slide 10 of the slide deck now. The strong operational performance of overland continued in quarter three, especially year-over-year. The question is, why is that happening as globally the volumes do not grow significantly anymore? Gross profit improved due to our improved capacity management. Capacity management is one answer to why are we continuing to be successful.
Also the U.S. PLM business performed very strong, while, and we have mentioned that already in our last call, intermodal volumes were down by 10% year-over-year in the U.S. The European groupage and LTL business is resilient at the moment and performs well. As with all other business units, our pharma solutions show a lot of traction and growth continuously.
The overall performance you see on slide 10, compared in the chart on the bottom of that slide. CHF 17 million EBIT per quarter three, generated in quarter three versus CHF 14 last year, quarter three, and CHF 7 million in quarter three 2017. A strong and continuous improvement in the operational performance of the overland business.
I would like to also point out, next slide, Kuehne+Nagel remains active in bolt-on acquisitions, and we very often get questions on acquisitions, but also is active in the M&A market, as you all know. Our recent example is the Jöbstl acquisition, and I'm looking forward to exchanging some details on that acquisition with you on slide 12.
Jöbstl is a family-owned forwarding business, mainly overland business, established 95 years ago in Southern Austria, serving the Austrian market or Eastern and Southern Austrian market, as well as Eastern Europe, with a high cultural fit with Kuehne+Nagel. We have a continuation of our network expansion in Europe ongoing, and Jöbstl is a perfect fit for us.
The acquisition became effective in September, as you can see, and it's mainly international and domestic groupage business that Jöbstl is pursuing and that now will be fully integrated into our own networks. With a revenue of CHF 70 million, approximately 550,000 shipments per year, and 180 employees employed in five or six locations in Austria and Slovenia, Jöbstl has been very successful.
I heartily welcome all our new colleagues from the Jöbstl Group and look forward to blending strengths and customer proximity, especially with small and medium-sized customers. Contract Logistics on slide 13 and 14. We have mentioned that for the last quarterly review calls or analyst calls, we focus on restructuring and cost management very strongly, and we also continue to review our real estate portfolio.
Having said so, slide 14, I mentioned that in the beginning, our restructuring of the Contract Logistics portfolio yielded first results. We are really happy to see that in quarter three operationally, we were able to improve our net profit again in Contract Logistics.
The Contract Logistics restructuring includes the review of the entire contract portfolio with a clear focus on scaling high-margin solutions, especially those that have cross-selling effects or that are of interest for our other business units, like pharma, aerospace, e-commerce fulfillment.
The discontinuation of unattractive businesses, especially those which do not fulfill the requirement of being scalable as such, which are isolated to certain markets. This discontinuation will eventually result into slower growth of that business unit, we have mentioned that.
Continued review of our real estate portfolio, also an exercise that has been ongoing for a couple of years, I would even say, that we continuously look into where are locations that we want to continue business with and where are locations that eventually are not needed anymore due to consolidation.
Our Contract Logistics EBIT improved operationally by CHF 7 million, excluding the one-off profits from sale of real estate. As mentioned, slower growth and operational improvements shall continue in the next quarter. This exercise of restructuring in Contract Logistics will continue. Net growth is slowing down. You can see in the table that is shown on slide 14.
While we saw a net turnover growth of 5.1% and a gross profit improvement of 4.9% respectively, these figures were 5.7% and 5.2% last quarter, so quarter two, and 6.7% and 6.8% gross profit growth, respectively in quarter one. It's a clear slowdown before any effects of currency or acquisitions can be noted. While the EBIT is improving operationally to the set level before.
One additional remark on Contract Logistics, the idle space through all our restructuring activities reduced to a historic low level of 2.8%. We will continue to focus on consolidation, restructuring, and ensuring that the space that we provide is fully utilized. With this statement on Contract Logistics, I'm happy to hand over to Markus, our CFO, who will give you the details on the nine months 2019 results. Markus.
Thank you, Detlef. Welcome, ladies and gentlemen, also from my side. I'm on page number 15 of the presentation. Everybody who has been participating on the call knows that is one of my preferred pages. I'm glad that we see in Q3 2019, the first time, what I call some leverage of the operation, some leverage effect positively. I think we have seen a turning point in the group conversion rate.
We can say, and I hope we continue to see that through the quarters to come, that we are on our way to the 16% conversion rate that we have been targeting and still target for the year 2022. As we have heard from Detlef, the markets were not heavily supportive in the third quarter. However, our results have greatly improved.
As you can see from our disclosures in the information deck, there is a one-off gain of real estate to the amount of CHF 22 million within the numbers. Usually, we have not disclosed any one-off items for a simple reason, because we are of the opinion that a reshaping of a footprint that predominantly is being used for Contract Logistics is something that is pertaining to an ongoing business development.
Hence you will find, and you have found also in the past, quite regularly items like those in the P&L. At the same time, which was a positive fact on the real estate side, we also have to consider that the nine-month results contain negative impact from an exchange rate to the amount of around CHF 21 million on the EBT line. Again, we never mentioned that specifically. We never point out the numbers.
Just to show you that we have to live with exchange rate as much as we have to manage our footprint within the real estate actively. Coincidentally, if you like, these numbers are very close to each other. However we look into one-offs or not one-offs, the fact remains, I think, the third quarter has been a self-helped through cost control, very little support from the market result that have marked a turning point in our journey towards the 2016 target.
On the back of that, let's go forward to the page number 16, a balance sheet. Two items that I point out regularly, impact of IFRS 16, so right of use assets and long-term lease liabilities and current lease liabilities. We have added around CHF 1.7 billion onto the balance sheet, which is now standing at a total value of the balance sheet of around CHF 10 billion.
At the same time, I want to talk about two pages from now about the cash flow development, which obviously has not only high interest from the outside world, but also high interest from ourselves managing working capital as much as managing free cash flow. Page number 17 on the impact IFRS 16, no changes to the numbers that we have been publishing in the past, with one exception y ou will see on the right side of the slide.
You will see the SG&A expenses had been previously slightly estimated below the number that we are seeing now. We are now seeing around CHF 490 million-CHF 510 million. That was before a little bit lower. On an EBIT and profit before tax, so EBT level, there is no change.
The brackets we have now a bit made smaller because obviously we know better now what's going to be the estimated outcome for 2019. You see there, we have a negative impact from the IFRS 16 adaption in the year 2019 at EBT level between - CHF 5 million and CHF 10 million. That is clearly to the vast majority in Contract Logistics.
Tangible common equity, something as you know I like to look at, because for me it's one of the indicators how equity develops against potential goodwill or against goodwill and what is the residual value to it. I would expect with the enlarged balance sheet, let's not forget the December 31st is still the balance sheet that is without the adaption of IFRS 16. We would expect a tangible common equity ratio at year-end above 10%, so around CHF 1.2 billion. Cash and cash equivalents.
I think also in our morning fact sheet, we have pointed out that free cash flow has greatly improved compared to last year. I only want to point out three drivers, if you like, two that are marked here on the slide number 18.
We have a high operational cash flow, so yes, because we are making more profit and we have the bigger part to it, the working capital improvement of around CHF 250 million. Since I know in our conversations around the Contract Logistics restructuring and reshaping business, I want to point out that at the current stage in Q3 or until Q3 2019, there has only been very little impact yet on the cash flow from our changes in the Contract Logistics area. From a cash flow perspective, that is still going to come in the next 18 months that we will see then an additional positive impact.
Free cash flow development, page 19. I think the graph is self-explanatory. We do have a very good free cash flow development since beginning, if you like, Q1. I'm very glad that there is a sustainable improvement from the working capital management. We will see, being asked that question already once or twice today, and a couple of times also in the second quarter, how the trajectory of that line is going to be.
It's very clear the fourth quarter always has been cash generating, and I see no reason why that wouldn't be the case. I think we can comfortably expect that there is a dividend coverage out of the free cash flow 2019. Working capital, page 20. A couple of details around what I have been mentioning already.
We are running comfortably in our 4.1 or in our self-set, let's say, corridor between 3.5% and 4.5% working capital intensity. 4.1 is the current situation. Quite remarkable if you compare that to December year-end close position, which is normally quite favorable position, that also during the year we can reach that level.
Return on capital employed, page number 21. Let's remind ourselves, we have here two graphs. The top graph is excluding the acquisition impact. The lower one is including the acquisition impact. You have still, as that I have alluded to, you have to consolidate it as per the 10th of September 2019. Coming across with the balance sheet, but not coming across with a lot of P&L as of yet. You see the difference between these two lines is making that impact.
Looking forward, in the fourth quarter 2019, we will still have that gap in the way we disclose these two numbers. When we start then into the first quarter 2020 and going forward, obviously, this acquisition impact, at least for Quick and Sincero, will start to fade away.
Financial targets. Again, looking at conversion rate, we are now at the level of 13.3% on a year to date basis for the group. In the quarter, we have achieved a 14.3% conversion rate. When we look into the run rate of that KPI, I think we should be looking forward at something above what is the current year to date number.
Assumptions for our target, again, only as a reminder for modeling the long-term impact until 2022. We always said conversion rate target is based on a business unit mix that had been in effect 2016 b ecause you know that both business units, overland and Contract Logistics, would be diluting the conversion rate if they were to grow exponentially.
We talk about stable macroeconomic environment, whatever that means in our new world, if you like. I don't know what stable means anymore, but at least without any huge disruption. We would not have considered acquisitions into this target. I think when we look at CapEx, that is the last topic that we usually talk about also in the Q&A section.
You will see here now currently a CHF 250 million, CHF 246 million CapEx. We would expect at year-end the CHF 280 million-CHF 300 million mark to be there, which is not significantly reduced yet compared to last year, because the reshaping of Contract Logistics has really not taken a lot of effect on the CapEx .
Outlook. We have seen a couple of notes already around today. You have all seen that in sea freight, we have reduced the market outlook for 2019 from around 2% to 1%-2%. We still remain confident that we can outperform that market by factor two.
Also, in the third quarter, if I may just give that little detail. Also in the third quarter, we have added 14,000 TEU to our volume, which was even 13,000 TEU more than in the second quarter 2019. Despite the fact that there is a slowdown, there is still an ability of the organization to gain market share. Air freight, also on this side, we have taken down a little bit the market outlook just to reflect the development in the third quarter that we have seen to -5% to -6%.
To be perfectly honest, in a market that is going backwards to the extent that we are expecting right now, I think we are probably somewhere in line with market, which we can manage.
Overland and Contract Logistics, they are both in more domestic market conditions. We both see the market at around 2%-3%, whereby in overland, our aim is clearly to outperform the market, and in Contract Logistics, due to the reshaping of the organization, as a net impact, we will be in line with market and focus on the growth areas that we have selected.
Before I hand over to the operator, Andre, I would like to point out that we have now published a stat book. A book for the statistical values that you can download from our homepage. I think that should most likely make some of the modeling a little bit easier for you and also look into some of the historic data. With that more technical comment, I would like to hand back to Andre and open the Q&A session.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touchtone telephone. 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 handsets while asking a question. Anyone who has a question may press star and one at this time. The first question comes from the line of Sivakumar Sathish from Citi. Please go ahead.
Hi. Thanks for taking my questions. I have two. Firstly, on the improvement in working capital, out of the CHF 250 million improvement we have seen in 2019 versus 2018, it would be helpful if you could give me the split or the mix effect due to the scale down in Contract Logistics versus the decline in volumes in air freight and the measures that you have taken, like getting better terms with your suppliers. Secondly, what is your optimal net debt to EBITDA ratio prior to any major acquisitions that you would like to target?
Okay. Sathish, sorry that I tried to interrupt you in that question. I think, in all fairness, this is a level of detail that we can discuss offline.
Okay. Got it. Yeah. Okay.
Thank you.
Yeah.
The next question comes from the line of Damian Brewer from RBC. Please go ahead.
Hello, everybody. Thanks for taking the question. Two question areas from me. Contract Logistics. Given you mentioned there's just 2.8% idle space in the business at the moment, could you give us an update on sort of what the surplus real estate potential of that business is?
Secondly, it probably ties into it, of the contract mix at the end of Q3, what proportion was sort of either nil or minimal contribution and therefore potentially would release further real estate in future? Just trying to get an understanding of how much capital could flow into the business in cash as real estate comes out.
Secondly, on the Air business, clearly you can't see it for Q4, are you seeing any signs from your customers that the continual decline in that market could come to an end? Does it seem, given the forward-looking or limited forward-looking nature of that business, there's no end in sight to the decline?
Right. Damian, Detlef speaking. Let me answer your Contract Logistics questions first. The review of the real estate portfolio is almost independent of the restructuring and operational review of all the contracts in our portfolio. We regularly look for what is real estate we need to have in our network in order to stay close to markets, to customers, and to fulfill the growth ambition that we still have in Contract Logistics.
This review, to come back to your question, is not related to lower margin business. These are two separate sectors. We optimize the real estate portfolio under real estate conditions. We partly lease back if we need the site for another couple of years, but we want to free up our assets on the balance sheet for real estate that is not mission-critical or important for our future development in Contract Logistics.
The review, it's normal, as Markus has said, and we will see those disposals happening in the next quarters as well. I think I made a statement that by summer next year, maybe the majority of all those real estate portfolio adjustments should have been done, but you will always find a site or a location that doesn't need to continue as owned real estate in our portfolio.
Secondly, the contribution of the mix of the lower versus higher margin business is something we usually do not disclose, and I will not disclose it now. We know all our contracts. We know exactly the contractual terms. We know the margin. We know a scope creep effect. We know what requirements customers have, how we can scale a solution with that customer, and we are in open dialogues with those customers.
When it comes to renewal, we would usually either ask for price adjustments to show a minimal margin that we are looking at or for a discontinuation, but in a spirit of open communication and understanding of each other's position. That would be my review here.
Obviously, it's not the majority of the contracts, but there are still contracts in our portfolio that do not meet our future requirements of a high-end, fully integrated Contract Logistics contract portfolio. Air freight, our outlook. Yeah.
The question is how big is your glass bowl versus my glass bowl, and can we find a mutual understanding? At the moment, I would say the decline will not stop this year, and neither the next two quarters or the first two quarters in 2020. There is no major change at the moment.
I would assume that next year we might have a flat market versus 2019, while the current trend in air freight is not really changing. We would need some impulse and some momentum generated from GDP development, trade growth, again, that would ask for a higher proportion of air freight, which is more costly, as you know. That is my reading.
What happens then in 2021 and following years, we will see. Too early to say, but I would like to remind all of us once more, last year, 2018, was an exceptional year. We saw growth in our network of 20 and more percent organically, which is also not normal.
Remember when we had calls in 2016, 2017, we discussed 2% growth of the market and 4%, 5% for Kuehne+Nagel as being the normal situation obviously markets have to rebalance again, and that is for sure also a reflection of all the trade discussions and trade noise that are ongoing.
Okay. Thank you.
I hope that answers your question.
Almost. Just far from one thing.
Okay.
There's always another question.
We know your name.
Too true. Where you've remarked historically about the kind of margins you'd like to get to and where you are now. One can sort of try and back solve it, and it suggests somewhere between sort of 10% and 20% of Contract Logistics is either low or minimal contribution. Would you push back against that estimate or just choose not to comment on it?
No, I would rather choose not to comment on this. It's for sure a figure that is rather I would not comment on it. I stop here.
All right. Thanks very much.
Each and every comment would give you a hit.
Thank you.
The next question comes from the line of Daniel Roeska from Bernstein Research. Please go ahead.
Thanks very much, gentlemen. Good afternoon. Maybe first of all, looking at the softer outlook for growth, is there an opportunity to reduce some OpEx by taking out overhead or organizational layers in the regions? If you're considering any kind of changes in your layers or the way you organize the business, could you share some details and targets around this?
Secondly, some comments around what you're seeing in the market given the consolidation in the market, how do you see the balance of risk and opportunity, given the recent merger and how competitors are behaving towards winter? Maybe also if there is a difference between the behavior on sea and on air.
Thirdly, a longer-term question possibly for Markus, because if you're reducing your Contract Logistics exposure right now, isn't there potential to think about a different ROCE targets in 2022, given that you kind of already hinted on the slide that it's a constant business mix for that target slide you have. If you're changing the Contract Logistics business to being a slightly smaller portion of the group, would that consequently imply that there is upside to the ROCE targets? Thanks.
Right. Daniel, let me answer the organizational question, which is really interesting. We always review our organizational set up. As we have said, I think, in the quarter one call or when we posted our annual results 2018, we clearly stated we will review the set up not only of regions but also countries, as we have added more than 30,000 jobs, including temporary labor, to the organization over the last five years.
We want to reduce administration and layers wherever possible in order to ease up decision-taking. That is not reflecting a macroeconomic environment. That's a part of the Kuehne+Nagel Continuous Fitness Program, to have an organization as lean as possible with the metrics we operate in very successfully. There are always risk and opportunities at the moment.
I would say at the moment, I wouldn't see any specific behavior of competitors that would lead me to any statement, to be honest. We concentrate on our customers. We concentrate on winning that business that is of interest to us, especially with those customers in those industries that are up trading or that are successful in their respective space. With regards to recent mergers, the markets are extremely fragmented.
Our market share is only 2.5%, and we are second largest player in the industry. There's enough room for us to grow. As we have said many times, especially in the small and medium-sized sector and enterprise, we race not against the major 3PLs or logistics companies, but more against the local heroes, the specialists, the trade game specialists. Here we are successful because our technology, our connectivity, seems to offer benefits to our customers.
I was the first. Are you?
I think, Daniel, from a target perspective, yes, you're right. Proportionally Contract Logistics would take a smaller part in the entire pie of the business unit mix, the targets would move upwards. I think on the target 2022, when we look at what restructuring of a business unit means, reshaping means, we have not said we step away from Contract Logistics.
That was never the intention to do that. There's an integral part of our business. It is about doing the right things. In that context, we are basically in 90 days in 2020, and until everything is being done, we are probably at the back end of 2021. Yes, there might be a minimal impact towards that overall group conversion rate target.
It would be fair to assume if we were to give another five years target from 2022, let's say until 2027, I think you're absolutely on the right side to expect a higher conversion rate.
Thanks. Could I kind of try and get another answer out of Detlef for the first question? You said you're always looking at things, which of course is well warranted. Are there any specific decisions you'd call out that we could expect to have some impact, or is this more all going business as usual in terms of your organizational review, or have there been any kind of conclusions from that so far?
No, Daniel. No specific decisions that need to be mentioned here. The overall productivity improvement and less SG&A costs within the overall cost pattern is what you should expect relative to GP development or turnover development. That is what we are looking at.
Great. Thank you. Thanks very much.
You're welcome.
The next question comes from the line of Tobias Sittig from MainFirst. Please go ahead.
Yes, good afternoon. Thank you for taking my questions. Three for me, please. Firstly, on the cost and productivity development on the sea freight side, it's quite unusual to see you basically reducing operating costs quarter-over-quarter from Q2- Q3 in the peak season quarter. Maybe can you elaborate whether you did any particular cost reduction measures or what drove the productivity gains that we see when we compare Q3- Q2 there?
Secondly, on the real estate disposals, could you give us a little bit more granularity on the timeline and magnitude of the disposals that you're planning for the next couple of quarters and how that will impact 2020 and when that will have ended? Thirdly, just a technicality, on the overland side, you report 6% growth in turnover, only -1% in net turnover. It was the other way around in Q2.
Can you just explain what's driving the different pattern there? Thank you.
Okay. Hi, Tobias. Let me answer your OpEx cost per TEU question. I think I mentioned that when I went through slide seven, I think it was. It's a mix of cost activities. It's a mix of productivity gains also through platforms. We have customers that have onboarded with us on a platform directly and do business transactions, semi-automated, so to say, already.
It's a mix of business growth in net container load , as well as in reefer, which structurally have different cost patterns as such. I would say all these together relates to that effect that you see in the slide seven with CHF 211 per TEU shipped. Our operating systems in air freight are new. In sea freight, we are still preparing for the rollout of SeaLOG, which will start in a year or eight months from now, as you know.
These productivity gains have not yet been incorporated, but that is what we are driving with our new operating systems that gear for productivity wins in the way we operate our business. Your second question on real estate. On average, I would say we own less than 10%, I think it's 8.5% or so, if I'm not mistaken, of the real estate we operate or that we make use of.
Out of this, we constantly review locations. There is no plan to reduce by X percent or something at the moment. There are locations that we have identified that do not fit to our future growth ambition, especially sector growth versus location. Sector meaning, we grow fast in e-commerce fulfillment and pharma chain solutions, also in Contract Logistics. We are very interested in pharma sites.
We are interested in e-commerce fulfillment sites as well as semi-automated sites, while the classical pallet in, pallet out site, and forgive me for that wording, is not really strategic for us anymore. Therefore, we look at those sites. If we can make a good deal and can sell it for a decent price, we will do so.
I thought there was a larger portfolio of assets that you now consider to divest over the next 12-18 months. That is not the case?
Absolutely. No, we look at the whole portfolio. Whether it's large or small, depends on market conditions and opportunities. We look at the entire real estate portfolio at the moment.
Okay. Mm-hmm.
Tobias, last question on the overland. The answer is very benign. Don't read anything into it, let me put it that way. There is nothing. It's like more or less customs clearance, obviously, because that is the difference between turnover and net turnover. There is no pattern, nothing to interpret on this one. It's purely, let's say, if there is more or less customs clearance.
The turnover development obviously has two effects. On the one side, there is margins. On the other side, there is rate. On the other side, there is volume. We have obviously different shifts with the development in Europe versus the U.S. That is from a turnover development, that is explainable. The customs duties piece of it is really more customer-driven rather than from our side, managed number.
Okay. Thank you.
Thank you.
The next question comes from the line of Christian Obst from Baader Bank. Please go ahead.
Yes, hello and thank you. Coming back to the working capital. Given that very good development you have shown in Q3, is there any chance that you can reach some kind of working capital intensity below four going forward? That you must lower maybe your range there, as you are working to free more capital going forward and working on that.
Second one is, can you give us the main reason how you gain sea freight volume? Is it price? Is it quality? Is the average margin of the new business you are generating, is that above the average level? Would you exclude any new contract below that level or how is the policy there? Do you see any special developments for the current Christmas season? Is there some kind of special building up or reducing of stocks? Thank you.
All right, Christian. Let me take the question on working capital. Yes, working capital is a delicate matter, if you like, because working capital is also a function of business growth. Yes, we can drive working capital below 4%. Our range is between 3.5% and 4%. I would not make that as a singular target, right? I don't want to say, "Yes, we want to go to 3% working capital or 2.5% working capital," because it kind of suffocates the development opportunity of the business.
3.5%-4.5% was our target that works in combination with the growth ambitions that the company had and the fluctuations that are from volume and rate growth. You know, when rates go down, obviously the functions work to the extent that working capital intensity is impacted also by a three-month rolling turnover number, right?
I would think at the current stage, I would feel comfortable that we are somewhere right at the middle or maybe, and forgive me that I'm not going to estimate right now on the 0.1%, but in the 4%, maybe a bit below range at the year-end. We would like to keep our capabilities to grow in the markets as well through taking on additional volume.
Right. The other two questions, Christian. I start with the Christmas season or peak season. First of all, at the moment, and that's true for sea freight as well as air freight, there's no peak season to be seen that we need to speak about. Yes, we see a seasonal pattern, and we always see a seasonal pattern in September, October, and November, but nothing that would allude to any special hint or remark at the moment.
The way we gain business, you asked for sea freight, but I would like to answer in general first and then for sea freight specifically, if you allow. We gain business because our solutions are superior. Our quality of executing the business is seen as a benefit for our customers. We never win business purely on price. That has not been our style and is not the style of our market approach.
In sea freight, the margin has not changed. What we win is in line with the margins that you have seen, especially as we are focusing on small and medium-sized enterprise and continue to focus on those. Delivering then on those businesses that we have won, that's the key to success, and that is our customer excellence programs that have been implemented, and they show traction.
From that point of view, I would say we win business at decent margins comparable to the figures that you've seen, and then retain that business and evolves with the customers further. That is true for all business units, sea, air freight and also overland, so the network businesses. In air freight, we have not lost major business, I would also like to point out, in the past quarters.
We have customers that are downtrading given their market has changed or their customer's demand has changed. Therefore, we are quite confident that our market approach and the way we position our solutions and our network competence in the market is successful. It depends on the overall development of our customers, whether the growth is then 2%, 3%, 4%, 6%, 8%, or 10% or whatever. Yeah.
Okay. One additional question on SG&A expenses. We have seen an ongoing downward trend through the three quarters now, coming from CHF 360, CHF 345, and now CHF 362. Is there some kind of a natural end where this decline will or must stop more or less? Are you able to lower these costs further going down?
We aim at lowering those costs further down. We have mentioned our operating systems, and eventually with eTouch, the incremental cost for an additional shipment in our system will be, and I'm not exaggerating, close to zero. From that point of view, we aim at driving those costs down. When will that happen and is that really then for the mass of the shipments becoming reality? We will see.
It's an interesting development. It's more or less CHF 20 million per quarter now, coming down.
Christian, that's the figure, that's the fact. As just said, we focus on optimizing both the market side with volume growth, as said, and optimizing cost. Not only this year, we do this for years, and it takes time to show the effect in the P&L. You see the first effects of all our programs now on the P&L.
Okay. Thank you very much.
Thanks.
The next question comes from the line of Mark McVicar from Barclays. Please go ahead.
Good afternoon, everybody. Two sort of follow-up questions, really. First of all, within the 16% conversion ratio target for 2022.
Right
Do you have in your mind that there will be any significant contribution from property disposal proceeds at that point? Will the main bulk of the restructuring have been done by then, so we should think of that as an absolutely clean number, clean target?
I would like to answer directly. That has nothing to do with our one-off gains from real estate disposal or other restructuring effects. Our target is in the mix, I think we mentioned this a couple of times, of our 2017 business unit contribution. That is the basis for our 16% conversion rate.
Okay, thank you. Then one follow-up on working capital, just apart from the short-term math. You seem more comfortable with the working capital pressures out there than you probably did 12 months ago or 18 months ago. I mean, do you think that some of the pressure on debtor days and things like that has eased a bit from the customer side? Or is it just that you got better at managing it and getting paid on time?
I think the working capital, as you know, there is always two sides. There is the customer side and also the supplier side. I think we have been starting quite a while ago, when we talk about a couple of years actually, to set up various supply chain finance programs or [inaudible] . I think that has taken on more and more volume and also significant volume.
Also, and I guess that is an industry topic, accuracy of billing. You usually don't talk about it, but accuracy of billing is something that can be a very low number or very high number. The effect of not having a good accuracy of billing is that customers are rightfully disputing invoices and extending by such, obviously, some of the cash inflow.
I'm not saying payment terms, it's just cash inflow because of the dispute. We have worked on these two ends, basically, where we said billing accuracy has improved the first time right, if you like, bill. Hence, the payment terms can be honored as the customer would like to honor them, obviously, when the invoice is correct. On the other side, it's more the payable side.
Okay, that's great. Thank you both very much.
The next question comes from the line of Sam Bland from JP Morgan. Please go ahead.
Hi. I've got two questions, please. First one is on air freight volumes. Obviously, for the year as a whole, you're targeting growth in line with the market, but I guess in Q3, organically, volumes in air freight were probably down 9% or so.
Do you think that 9% down was in line with the market, or was it a little bit weaker? If so, what might get better in future periods? The second question is just on the initial feedback and thoughts on the AirLOG rollout. Basically, how has it been received by employees? Has the rollout been smooth? Is it doing what it's expected to do? Thanks.
Sure. Let me answer the two questions. First of all, the AirLOG rollout went according to plan. We have all thousands of employees trained. The systems have been running. I think we mentioned that in our last quarterly call as well.
Now it's on us to drive productivity again. As always, when you have a new system, it takes time to search through that system more or less blindly, and have all those shortcuts and tools and macros and so on available to ease up the processes. That's working well, and I think that was the right path forward, and I'm looking forward to see AirLOG being part of our overall automation and productivity improvements in the years to come.
The air freight growth, yes, we for sure have been more exposed with automotive and high-tech than maybe the market, but we believe that with our growth and still ongoing growth in the pharma sector, in the e-commerce fulfillment sector, partly in the aerospace sector, that will counterbalance.
Our ambition or our estimate for this year in total is that we will shrink the volume in air freight in line with market. We will see whether we are able to achieve that target when we comment on the full year 2019 results on February 27th. At the moment, I would say it's possible, and our biggest fallout, so to say, is automotive, as we had very special high density, high weight transports, axles, for example, dashboards, last year in our network, and those have virtually gone.
Okay, understood. Thank you.
You're welcome.
The next question comes from the line of Sebastian Vogel from UBS. Please go ahead.
Hello, good afternoon. Can you hear me?
We hear you well.
Perfect. I've got three questions. The first one will be on Contract Logistics. We have seen the growth rates were coming down. For 2020, do you foresee that also moving into negative territory? Do you expect some restructuring costs arising from that one? The other one would be on in air freight and sea freight, how much did lower shipping rates help you in the quarter three?
The last one is, if you can remind me on the FX and M&A impact on net forward and revenues in Air and the FX impact on net forward and revenues in Sea, that would be appreciated.
Right. CL growth. At the moment, our organic growth is assumed to be on market. I do not expect any negative growth at all. With the reduced growth, I'm quite confident we are able to reshape our Contract Logistics portfolio. Air and Sea, lower shipping rates, no. I think there's no effect from that side.
The rates have no support, and it doesn't really help us at all. It's more how are different trade lanes developing? Where is growth and where do we see flat market developments also in sea freight? That is what we are focusing on. There's no head or tailwind from the shipping rates at the moment. The trend, as you know, is that the rates will increase by the end of quarter four in preparation of the IMO 2020 additional cost for sulfur, yeah? All right.
I think last question was on currency impact in sea and air. We have roughly 4% in sea and 2% in air. If you want to have a exact split, what is acquisition, what is FX or other than that, I think Chris is more than happy to help you offline.
That would be perfect. Yeah, I just want to have one follow-up because I wasn't getting the answer with regard to the costs on Contract Logistics. Do you foresee some restructuring costs coming up out of this whole restructuring exercise?
No, all the restructuring costs, all those costs are part of our P&L. You have seen them already, so to say, in the figures that we have displayed, there is no major restructuring costs to be expected in quarter four or next year's quarters. Yeah? It will always be part of our P&L.
To come back to your shipping rates topic, our strategy is not to sell rates. Our strategy is to sell solutions. With solutions like time-critical shipments with our friends from Quick, and with solutions for the different industries, we are very successful in the market, and we continue to grow with customers that are up trading in their respective business units.
Many thanks.
You're welcome.
Sorry, we have a follow-up question from Christian Obst from Baader Bank. Please go ahead.
Yeah. Thank you very much. Just a small follow-up. You mentioned some special sectors and the solutions you are providing, of course, and the decline in auto and then tech and better in pharma, e-commerce. Other quarters before, you heavily mentioned the perishables, and you increased your network there. Can you give us a current status of this business, and what do you expect going into 2020 from the perishables business? Thank you.
Christian, perishables are resilient to economic cycles, usually, or to the major extent. We have made some acquisitions as well, smaller ones. We expect the perishable sector to continue to grow, and we expect a strong year 2020 with regards to perishables. Our strategy is focusing on KN FreshChain, which is incorporating our perishable business, and we are market leader here. As a market leader, we continue to grow that business.
Okay. There's no pressure on growth or margin in this business.
There's no pressure on growth, and I think we mentioned that during the analyst conference. We are also selective in our growth. Even the growth you show is already the result of being selective with where are markets, where are solutions, and where are industries or sectors where we want to grow in, and where are those that we find not so attractive at the moment.
Okay. Thank you for taking the last question.
Sure. You're welcome.
The next question comes from the line of Andy Chu from DB. Please go ahead.
Yes, good afternoon. Two questions, please. Is it possible for you to give an outlook maybe for the sea freight market for next year? I think you gave a sort of pretty good answer in terms of looking to the next six months or the remainder of this year into next year, talking about a sort of flat sea freight market.
Clearly, there has been a breakdown in terms of the sort of multiplier to real GDP growth, given the volatility in the market. Is your expectation that the sea freight market sort of returns to a little bit better growth than sort of 1%-2% for next year? On your acquisition in Austria, I know it's pretty small, but just in terms of a contribution, what sort of margin should we be thinking about for that business? Is 2%-3% be a good starting point for that acquisition?
Thanks very much.
Right. Andy, let me answer your sea freight play or the market outlook. There's no reason not to believe that the GDP growth being in line with volume growth in the market, one to one, as we know at the moment, should change next year. From that point of view, GDP growth will be more or less the volume growth expectation for the sea freight market in 2020. It might be different for trade lanes.
The trade lanes have shown a different development already during the last years or this year, and that will be ongoing on our point of view in 2020 as well. M&A acquisition in Austria, I think it's really small. Please assume the same average margin that we show in the overland business per se in Europe or per se. There's nothing specific, neither above or below our average margin.
Their focus on small and medium-sized customers for 95 years, as I mentioned, is our focus as well. From that point of view, I would say we are happy with the Jöbstl acquisition, and you should not see any deviation from that. Yeah.
I thank you all for participating in our call on the quarter three and year to date, January to September results of Kuehne+Nagel International. We look forward to talking to all of you in between the next couple of months during our road shows and analyst meetings. Also more important, when we comment and publish and comment on our 2019 full-year results, which will happen on February 27th, 2020. In the meantime, take care and look forward to talk to you again. Bye.
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