Ladies and gentlemen, welcome to the half year 2019 results conference call. I am Moira, 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 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 Detlef Trefzger, CEO of Kuehne + Nagel.
Thanks, Moira. Good morning, good day, good afternoon, and good evening to all of you, and welcome to the Kuehne + Nagel analyst conference on the half year 2019 results. Our CFO, Markus Blanka-Graff, and I welcome you from sunny Switzerland. We published our results in the associated analyst presentation earlier this morning, and as always, we will start on slide three of the slide deck. In the H1 year of 2019, we achieved a high-level result in a tough environment. The group earnings were stable at CHF 384 million for the H1 year, despite significant headwind from currency. Strong EBIT in sea freight were recorded at a level of CHF 235 million, which were CHF 25 million above the previous first semester of 2018.
A stable EBIT in air freight was recorded at CHF 174 million, which was only CHF 8 million below the record year 2018. Net turnover growth in overland of +3.3% and a strong operational improvement of EBIT. I will lead you through some details later during the presentation. Net turnover growth in contract logistics of 4.4%, whilst restructuring the entire contract portfolio, as mentioned earlier in some of our previous calls this year. On slide four, you see the overall group performance in some key figures. Despite a tough market environment, we increased net turnover, gross profit, and EBIT, with a stable earnings per share, in the first six months 2019, versus last year's first six months. I know it's more interesting for you to go through the details of the business unit.
Therefore, we directly continue on slide five of the slide deck with some highlights on sea freight and air freight. Sea freight. We pursued a selective growth strategy with reduced growth of 3% in the Q2, 2019, but still twice as fast as market growth. We have a strong focus on customer service, and especially for our small and medium-sized customers, this service is adamant to retain and grow their business. The cargo mix and cost control show traction. All these measures were already initiated end of 2018, and we mentioned those measures when we posted our annual results 2018. They show traction in sea freight clearly. Air freight, the market continued to be under pressure, with a negative growth rate on some of the trades being double digits.
We clearly posted lower automotive volumes and also lower volumes in the industry sector, which we call industry or industrial. We continue to grow with our pharma and healthcare customers, as well as with time-critical solutions and perishables. Also here, the selective growth led to new business wins, which have not yet been posted or recorded in our volume development. On page six or slide six, you will see the volume development for sea freight and air freight. Let me start with sea freight. Very robust volume growth of 103,000 TEU or 4.5%, reflecting our selective growth strategy. We saw strong growth on the Transatlantic westbound, Asia, Europe, westbound and eastbound, and we saw a very weak Transpacific development, east and westbound. Our products, reefer and less container loads, continue to really perform well.
We saw double-digit growth in both of them, and there were a specialty that we recorded that forestry products got a lot of traction, almost compensating the lost volume or non-existent volume in scrapping material, recycling material, from last year. Air freight, I mentioned that already. Market decreased significantly. The volume in our networks decreased accordingly by 50,000 TEU or 5.8%. This is mainly driven by European exports to Asia Pacific, sorry, and Asia export to North America and vice versa. The Transpac, again, saw declining volumes.
A sharp decline in automotive and industrial volumes, as well as a strong performance and growth ongoingly, not being cyclical at all in pharma, healthcare, and perishables. We posted a couple of new business wins, and we didn't lose any major business, but our existing customers down-traded, especially on the Transpac, as mentioned before, and the new wins have not yet been recorded in our networks. Let me continue on some details of the Sea Freight business on slide seven. Sea Freight recorded improved yield, and through an active cost management, we were able to improve the EBIT per TEU significantly and recorded CHF 99 per TEU in Q2 this year. This was driven by the selective growth, a better cargo mix, more small and medium-sized customers in our business.
You know that they have already a 75% share, and more reefer and LCL business in the network growing fast, as mentioned before. Sequentially, we posted a cost reduction of CHF 14 per TEU and slightly higher than previous year cost per TEU, and a significant improvement, as mentioned before, of EBIT per ton. As always, let me share some year-to-date variance analysis data with you. For Sea Freight, the volume effect in gross profit has been CHF 32 million for the first six months. The margin effect in gross profit for Sea Freight has been CHF 17 million. The cost effect, CHF 24 million, resulting into a total effect of an improved EBIT of CHF 25 million. Let's go through the same exercise on slide eight for Air Freight.
The headline already alludes to our Quick acquisition, but not only it's Quick that drives our yield improvement. First of all, the trend of underlying yield strength also extended in Q2 . In Q1 2019 and Q2 2019, we saw yield strength and yield improvements. The margin improved in total by 22% year-over-year, with two-thirds of that improvement or CHF 10 or 15% being driven by the organic growth or organic legacy business that we run. The balance being attributable to the Quick acquisition, which amounted to 7% or CHF 5. The EBIT per 100 kilo improved by 15% or CHF 3 sequentially, and were stable compared to previous year Q2 EBIT per 100 kilo.
The clear contribution of Quick can be seen in the figures on this slide. I will not go into more details here, but you see that Quick is a driver of margin and EBIT with a very focused solution that is seeing a lot of traction and demand in the market. Also here, the year-to-date variance analysis GP. Volume effects in GP, -CHF 34 million, so less volume, CHF 34 million less revenue or GP harvested. The margin effect, counterbalancing clearly CHF 114 million positive margin effect in GP, in gross profit. The cost effect, -CHF 88 million, resulting into only CHF 8 million less EBIT than previous year. Let me continue with the other two business units on slide nine, Overland. I jump directly into slide 10. I think it's important to reiterate an outstanding performance.
The strong operational performance of Overland business continued in Q2 2019, and this is for sure true through the strong European network performance, especially in France and Germany, as well as launch of digital solutions. The last launch has been a new platform in Asia. What contributed to the strong performance of Overland? As said, European groupage and LTL business, the pharma solutions being part of our integrated approach towards the market, and new digital solutions. Despite the headwind, which you can see clearly here in the figures displayed, the headwind from currency, we saw a strong net turnover growth of 3.3%, a gross profit growth of 4.9%, and an EBIT improvement of another CHF 2 million for the first six months of 2019. If I may remind you and allude your attention or attract your attention on the footnote two.
Last year, we had a one-time off effect of disposing a Overland business in Brazil of CHF 7 million, this has been fully compensated and even over-compensated in the first six months through our organic performance, through the organic performance of our Overland business unit. As said, an outstanding performance, we can only congratulate the entire team for the successes achieved so far. Let's jump to the next business unit, Contract Logistics. Here, I would like to mention that the focus on restructuring our contract portfolio and active cost management in Contract Logistics is ongoing, you see the first effect already in Q2. I will come to that later. The role of our new warehouse management system, as well as the warehousing technology or the picking technology, is ongoing.
On slide 12, you see some details. I would like to reiterate what I've already stated in our last analyst conference calls. We continue to restructure our contract logistics business and contract portfolio. This includes the review of the entire contract portfolio and contract logistics, with a clear focus on scaling high-margin solutions, creating benefits for the business units or our leverage areas, as we call it. An ongoing investment in technology, especially picking enhancement and new warehouse management systems, and a more selective organic growth in 2019 and beyond on those projects and contracts that we can scale further. You see already, if you look into the variance analysis of the business unit, you see already a slower net turnover and GP growth and improving, but still weak performance on EBIT level.
If you look into Q2 versus Q1 2019, the comparison with previous Q1 and two show that we get traction and get closer to previous year's performance. The EBIT contracted in total by CHF 9 million, of which only CHF 1 million were recorded in Q2 2019. In total, I would state that this is a clear improvement versus previous year performance, and we see that the measures implemented show first signs of traction, but it's still a longer way to go. I know that the entire contract logistics team is adamant to make this restructuring a success. Now I'm pleased to hand over to our CFO, Markus Blanka-Graff, to give you some details on the financial performance 2019 H1 year.
Thank you, Detlef, and also from my side, welcome to all ladies and gentlemen in the audience. I'm on the income statement, page 13. Should be a lucky number at that point in time. Page 13 of the presentation. Let me start with GP growth over the first six months. We have 5.5% GP growth. Let me jump straight into EBIT of 2% growth, which is CHF 10 million. I think Detlef has already spoken about it. FX impacts or currency impact from translation becomes an, unfortunately, a bigger impact in times of slower growth for the industry altogether. When you look at the ForEx impact that we report here for about 2.6%, that actually translates into CHF 13.13 million on an EBIT level. Let me just preempt some of the question maybe that may come up on the Q&A session.
Let me get a little bit courageous here and think about what is the currency development for the rest of the year. I think when we look at the current spot rate, we would probably think that there isn't going to be a greater ForEx headwind to expect for the H2 year. You see here then we have, for the main currencies, we have currently an impact of EUR -3.4 and GBP -3%, and only the US dollar is currently with 3.1%. Maybe there is our assumption at least that the US dollar tailwind may actually appear to dissipate for the rest of the year, while the Euro and the pound weakness could potentially remain the same or even intensify.
On the pound development, for sure, I think you would agree all with me that it's highly unpredictable what's going to be in line with what are the next steps for the Brexit process. Having said that, it is a material point that goes into our P&L. Nevertheless, when we look into the conversion rates that we all try to manage positively, you see in the Q2 2019, our conversion rate that we target at 16% has improved sequentially from 12.2%-13.2%. Let me quickly jump into net earnings, because earnings for the period, something obviously that is impacted by various factors. When you go down through the income statement, you will see that there is a bit of heavyweight underneath or below EBIT. Some of these impacts, three of them, I would try to shed some light on it.
The first one we talked about is currency impact on an earnings for the period level, the CHF 13 million probably turn into CHF 10 million. We have what we have alluded to in the contract logistics area. We have a front loading of the IFRS 16 lease contract, which would have a net impact to after-tax of around CHF 2 million negatively. You have noticed that most likely, we have a slight increase in the effective tax rate for the group, which accounts for around CHF 3 million.
Taking these variances that are more extrinsic than anything else into account, we talk about an impact of around CHF 15 million on an earnings for the period level. Having said that, CHF 384 plus CHF 15 million, CHF 16 million adjustment would probably end in around a CHF 400 million operational earnings for the period situation, which means a real operational improvement of 2%-3%.
However, we want to become better. When I can ask you to flip to page 14. The way we want to become better is eTouch. I think the term is around for quite some time in the industry. Some of the interpretation of this seems loaded with some questions around it. Let us just clarify what we understand under eTouch so that we're all on the same page. eTouch is, and you can read that, is not a platform. It's not a customer portal. The portal that is proprietary to Kuehne is KN FreightNet. eTouch is not a product, so there is no customer who can phone us and say, "I want to buy an eTouch shipment." It's not a product. It's not a service. eTouch is nothing else.
We call it like a banner or a name for a bundle under which we understand all kind of automation initiatives that are driving operational efficiency. Understandably, operational efficiency through IT is a pillar of our technology strategy. Based on the above statement, an eTouch is defined by the fact that it has a conversion rate above 60%-80% because it is being executed virtually without any human interaction or very little of that. How is that going to unfold? Page number 15, and again, addressing on the back of the definitions that we have just given, what is the deployment plan, if you like?
Understandably, the eTouch returns will come with, call it a hockey stick effect, with a lot of backloading into the years 2021, 2022, because you need to do a lot of automated steps to link them together to derive the conversion rate that we were talking about. It's most likely biased towards air freight business units rather than the sea freight business units. Clearly, the targets that we have given from a volume and from a conversion rate, which we always said, are we going to achieve in 2022? We're not going to stop in 2022. That would mean we're going to stop automation in 2022, and obviously, we're not going to do that. It was a randomly chosen, if you like, date because we went to the capital markets day in 2017 and we thought five years is a good horizon for planning.
Automation is an ongoing process and efficiency gains will really take off after the year 2022. Under the strict definition of no human interference for any shipment, we would have to report today that there is hardly any shipment, if not any at all, that is entirely automated process as of today. There might be some of them, but not on a significant level. You may ask us why do you actually feel comfortable on embarking on a five-year journey where I think everybody can understand our endeavors to do that and our ambitions to do it and what we try to target with this. The answer is simple. I think page number 16 tells the whole story. I think we have and we want to have and remain in the position to have a very, call it, rock solid balance sheet.
Since 2018, the end of 2018, December 2018, we have loaded a debt position on our balance sheet. When you look today, as of June 30th, 2019, you can easily see our net debt position is around CHF 299. I think going forward, you will see that we remain absolutely committed to a small long-term net cash position that we want to have, giving our ongoing efforts to demonstrate that quality of the balance sheet to our stakeholders as much as to our customers. Our currently net debt position demonstrates on the other side very clearly that our willingness to sustain some degree of debt in support of the right kind of acquisition for a certain period of time. Page number 17 is a more technical reminder for all of us. What is the impact of IFRS 16 onto the balance sheet, which we see on the left side?
Expansion of the balance sheet of around CHF 1.7 billion-CHF 1.8 billion. On the right side, what is the impact or the estimated impact for the full year, which would take most likely the half year 2019 times two. You will see what is the impact. Here are the CHF 3 million impacts that I was talking about pre-tax from the frontloading of IFRS 16 contracts, which when you discount it for the tax rate, for the tax shield, you would probably come to around a 3% left. Page number 18, cash and cash equivalents. I think over the last six months, we have been quite discussing intensively with some of you about what is our cash generation capabilities and what is the free cash flow generation of the business.
I have to say, I think the Q2 free cash flow performance is an extension of the success that we have seen in the Q1 to improve our working capital performance, mainly on the back of a much better intensified discipline across all business units. Clearly, we're not going to stop now. We're going to continue building upon this success also into the H2 and going forward into 2020. You have heard from Detlef that the restructuring of the contract logistics business entails some of our freeing up of working capital and capital itself. So far, the H1 year results 2019 does not include any significant gains of that project of the reduced contract logistics scale.
You see here on the page 18, we have the net working capital as the main driver, CHF 157 million, more than we did in the same period last year with cash and cash equivalents net at the point in time, CHF 385 million more than last year. Page number 19, just to refer back to our conversation a quarter ago, I think one of the questions had been how it's going to be the trajectory because we have shown the CHF 140 million as free cash flow development in the Q1. I said at that point in time, well, the starting point is higher, the trajectory should actually be the same as it has been in the last couple of years. I think the Q2 confirms that development. More details on page number 20, where it's coming from.
Maybe as a more closer reference point, the Q1 2019 has shown a net working capital of CHF 1,141 million and is now CHF 1,033 million. From a quarter to a quarter, we have improved by CHF 108 million, which also explains that we are now sitting comfortably again within our corridor of net working capital intensity between 3.5% and 4.5%, right in the middle at 4%, where we were still in the Q1 2018 at 4.5%. That manifested itself obviously also on return on capital employed, page 21. Again, we have these two lines, the one including the acquisition impact and the dark line excluding acquisitions, which is nothing else than the consolidation of the balance sheet of the two acquisitions of Quick and [Santara], the difference between these two.
You see operationally, we think we have reached the inflection point in the Q4 2018 with around 58%. Leading finally to page 22, where the left side of the slide confirms our financial targets going forward. Conversion rate 16%, I talked about it and also underlines the importance of the eTouch initiative to get to that point. Return on capital employed excluding acquisitions up above 60% again, so walking slowly the path towards 70. Effective tax rate at around now 23.5%. We will see how that's going to play out further in the year. Working capital intensity currently at 4% with confirmation of the corridor 3.5%-4.5%. With that summary and confirmation of our financial targets that we want to achieve, I would hand over back to Detlef for the volumes in KN 2019 and Sea Market.
Thanks, Markus. Let me start with the market outlook. We have confirmed the market outlook for overland and contract logistics and have also confirmed the market outlook with a 2% growth for the whole year 2019 for Sea Trade. We have nevertheless changed the market outlook for air freight. Given the Q2 market in air freight, there is no reason to believe that we will see a 5%-8% growth in the second semester, which would have been required in order to show a flat market development in air freight for the whole year 2019. We assume that the market will stay at a level of -4% to -5% volume growth in 2019. If you compare last year's growth rates and if you look back to 2017, that would still imply a year-over-year market growth of approximately 2% year-over-year.
Our ambition is to outperform market growth in all business units. And there's a big but, we have focused more and more on a selective growth. In Sea Freight, we will, and we have seen that in Q2, we are more selective with the customers we grow with, especially our focus on small and medium-sized enterprises do not provide high volume, but interesting business. Here we will continue to focus on. In Air Freight, we are not aggressively replacing lower volumes at all prices, so we focus here also on sustainable business. I told you already when I explained some details on the Air Freight performance that we have not lost any major customer in Air Freight, but we have down-trading customers in the sectors of automotive and industrial.
We have one new business which we believe will become part of our volume, the volumes will become part of our networks throughout this year. We will for sure grow better than market. At the moment we are a bit cautious to give a financial or a figure with regards to our volume growth rate. The ambition stays, but not at all price or cost or at all margins, so to say. Overland, no change. Eventually, we should see some lower volumes in the market reflecting an air freight market, not to be seen yet. Our ambition is to grow twice as fast as market, so more than 4%. In contract logistics, we mentioned that before, the restructuring of the contract portfolio will eventually lead to an effect, a wanted effect of lower growth, a consolidation.
We expect long-term or mid-term to grow on market level in contract logistics, exactly with those contracts, with those customers in those industries, which we can scale throughout the organization and which have cross-selling effects also to our network business. All this leads to a market outlook that we stay cautiously optimistic for a second semester 2019, that our targets and ambitions in total for the group shall be achieved, but it will be a tough ride in a tough environment, and this is what we all, our whole colleagues around the globe will be working for. Thank you very much, and I hand back to Moira, to open the Q&A.
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've entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only hands that while asking a question. Anyone who has a question may press star and one at this time. The first question is from Aymeric Poulain from Kepler. Please go ahead.
Yes, thank you for taking my question. I've got two set of questions. The first one is on your eTouch definition that has been now narrowed to a certain extent, and the chart that you put in the slides about the back-end weighting of the progress. Just to be clear, does that mean that we should not expect a major move in the conversion ratio of the air freight division until 2022? Or should we expect to see some progression as the automation of the back office and the rest of the operation continues to grow? Secondly, you mentioned some initiative in Asia with the rollout of a digital platform for road. Could you give us a bit more detail in terms of the size and the ambition in the region with that platform? That would be helpful. Thank you.
Aymeric, hello, it's Markus. I think clearly eTouch is, as I said, is a bundle of automation initiatives. Yes, there is going to be a gradual improvement on the conversion rate, for sure. The bigger effect comes when, and we talked about it on several occasions, the bigger effect is going to come when multiple steps within an execution are being automated and being linked together. There is various other drivers for conversion rate. When you look into our first and Q2 results in air freight, we have already improved conversion rate again from 24.5% to 27.5%. I try to avoid confusion here because you were talking about the back-office function. Back-office functions obviously are on a, let's say, different pace. They go into shared service center, into knowledge center, into automation on their own, but this is not directly connected with the eTouch initiatives.
Back office is always going to move forward in their endeavor to be more efficient. The eTouch is what I said, there is a gradual deployment of automated steps within an execution chain, and that will obviously benefit in many different ways, each and every shipment. The significant impact that you will see in that context, not so small income statement, that is going to be back in 2021, 2022. Good afternoon, Aymeric. Detlef speaking. Regarding the digital platform in Asia, the question related to Overland. First of all, let me say we have a couple of digital platforms out in the market for many months and years. The most important one is KN FreightNet. Markus mentioned that. A quote book track platform that we launched five, six years ago, which offers solutions across all business units.
We have myKN out for customers to book directly on our operating system and to get access in a self-parameterized dashboard, for their specific needs, access to our operating system and KPIs and information and everything. We have real-time predictive analytics platform, our seaexplorer is one that we mentioned, KN ESP or KN Fetch. Overland has always been part of that digitalization strategy. They are part of a KN FreightNet approach in Europe very successfully, and they have started in Thailand, a platform for FTL, LTL business asset-light, no assets on our side, to start with, and that will be rolled out in Southeast Asia Pacific. Full stop. There will be no other market that we will address this solution in Asia with, for the time being. That is the answer for digital platform in Asia.
We have global platforms running across all business units, and there's a very specific approach made by Overland in Thailand, which I mentioned before. It's called eTrucknow.
Okay. Thank you.
The next question is from Damian Brewer from RBC. Please go ahead.
Good afternoon. Three questions if I can please. You already alluded to the air volumes down over 8% in Q2, clearly the automotive industry in particular was a challenged environment then, that generally seems about a 10th of air freight volume. If we're to look at that business ex auto, could you say a little bit more about what that looked like and whether there's anything to pull out there beyond the perishables and pharma that did a little bit better than that? Secondly, just looking at the supply chain durations now in terms of sort of like product to end consumer, whatever that end consumer is in the supply chain. They now look like they are sort of approaching levels of the Euro crisis and almost close to 2008, 2009.
If we do begin to see supply chains pull out a bit, how ready is the air business if there is suddenly a surge in restocking demand, and how do you ensure that gets staffed without putting extra fixed costs into the business that might not be sustainable in the long term? Very finally, on contract logistics. Obviously, you mentioned that some of the restructuring efforts have yet to come. Can we take from that most of the working capital developments in H1 was due to the low volumes in the air and sea business, and that actually there's better on the working capital to come from contract logistics? If so, could you give us an idea of what you can do there? Thank you.
Right. Okay. Let me start with the air volumes down. First of all, automotive is significantly down. We were the market leader in Germany and in Europe in automotive air freight, working for all the OEMs and suppliers. We see a big reduction in the demand of main deck capacity, as well as in our network. The perishable volumes, and you know that approximately one third of our entire volume is perishable, is agnostic at the moment to any cycle or consumption pattern. We see steady growth in perishable volumes throughout our network on all trades. The same is true for other industries, like the consumer goods industry. Consumer growth consumption is ongoing. It's really automotive, and I would include industrial as the two verticals that are down-trading. Automotive is significantly down-trading double digits at the moment.
We expect no stabilization at the moment or no bounce back or return to growth again. Maybe a stabilization of the volumes in quarter four. Too early to say how the next couple of months will progress. You saw profit warnings of the OEMs and supplier industries. I think there was one supplier announcing figures today in Germany. It was a huge profit warning. We see that these volumes that they continue to ship, they try to avoid the more costly air freight, obviously, but they continue to do business with us in other modes of transport.
Duration and the restocking cost.
The restocking question is a very good question. There might be a certain effect of stock levels having been built up and are now being used or deployed for the markets. If we will see a restocking effect, we should see that in quarter four, prior to year-end. There are no new trade noises in the market. Remember, there was a hard push to improve or increase stock levels end of last year. All this virtually evaporated H2 of December 2018 when the final decisions on any new trade tariffs has been postponed, not for infinity, but I think at that time it was postponed to March or so. These effects we might see. At the moment, we would not have any special effect. No sign of restocking at the moment. We also have no sign of a peak season.
Remember, two years ago, we had a similar situation. At the moment, both in sea and air freight, we have a normal seasonality, but not the hard push, the hard move for a higher demand going through a peak season. That would be my feedback on the supply chain and working capital. Maybe Markus can give you some flavor on that.
I think Damian, yes, you're right. I think [Anna] also mentioned it, that the improvements in working capital in the H1 have been predominantly coming out of the network business, the sea, air freight, and overland. The effect from the contract logistics restructuring remains still open. I think it's safe to say that we at least anticipate as much as a CHF triple-digit million reduction in working capital. Obviously, that's not going to happen in 2019. I would expect the full impact of this in the year 2020.
Okay. Very clear. Thank you.
The next question is from David Kerstens from Jefferies. Please go ahead.
Good afternoon, gentlemen. Two questions, please. First, on the follow-up question on the developments in air freight, particularly the yield improvement. I appreciate the mix effect from the Quick acquisition. With the perishables growing and automotive and industrial down in the quarter, would that not have led to a negative mix effect on the yield? What has been offsetting that effect? If you could provide more color on that, would be very helpful. On the sea freight volume momentum. I think the market picked up somewhat in the Q2 based on your commentary. Your volume slowed in the Q2. What was driving that? Is that the more selective approach with customers? What are you seeing on the transpacific following the increase in tariffs on U.S. and Chinese imports to 25% as of May?
Is that the main reason why you keep the guidance for the year at 2%, despite a somewhat better-than-expected development in the Q2? Thanks very much.
Right. David, let me start with sea freight volumes. First of all, we don't see any additional effect on the transpac than what we have seen already through the tariffs. For sure, higher tariffs have a volume effect, but eventually the strong consumption in U.S. is offsetting that, and the consumer is willing to pay the loaded cost of the tariffs per product. We see this happening at the moment. The sea freight volumes, we are not inducing a price war. We are very carefully growing our business. There's a strong focus on SME accounts, but small and medium-sized enterprise, the word already implies per customer, lower volumes, higher maintenance. We will not see spikes in volumes through one or two new contracts that we win. We win a lot of business in sea freight, but it's all in the SME arena.
The transpac at the moment, I would say, is bottoming out, and I would expect that it's picking up again, and that would be a good signal for the peak season, the Christmas season, to also say that we would expect. Too early to say. At the moment it's getting a bit more tailwind on the transpac. Nevertheless, our selective growth approach in sea freight remains, and the same is true for air freight. In theory, your negative mix effect is true, what you have stated before, perishable and stable automotive downtrading. We have a lot of market opportunities in the current utilization of the carriers to find the right carrier for the demand of our customers. Also, we grow in pharma, I mentioned that before, and also in aerospace. There are market segments that still pose strong growth.
The aerospace sector as such is not only served by Quick with time-critical shipments. But may I remind you of the KN InteriorChain? We have won more than 250 planes to be refurbished, the interior to be refurbished with 10,000 serial numbers going into each and every single plane. We post a lot of volumes coming from that side. We have a preferred carrier policy, so we are very selective with our carriers, which helps to partner in a tough environment for both sides.
Great. Thank you very much.
You're welcome.
The next question is from Robert Joynson from Exane BNP Paribas. Please go ahead.
Good afternoon, Detlef and Markus. I've got a few questions, if I may, mainly focused on the cash flow. If I start off with working capital. Since 2008, the cash flow from working capital movements has been better during H2 than it has been in H1 during every year other than 2009. 10 years out of 11. Is there any reason why that seasonality won't repeat in 2019? That's the first question. The second question on CapEx. It was obviously higher during H1 of this year than it was during H1 of last year. Is the expectation, though, that the CapEx for 2019 as a whole will be lower than that seen during 2018? The final question. There was some talk in the market this morning that the improved cash flow was helped by higher reverse factoring.
Could you perhaps just comment on whether that was correct? Maybe also just help to quantify the impact, if possible.
Absolutely, Rob. Very good questions, actually, and I like the exercises that go further back than 2008. Maybe we find some that go till 1994. Yes, there is no reason to believe that seasonality has changed dramatically because, as I said, also in the last quarter, the trajectory for the year should be remaining the same. Interesting enough, I think you actually hinted to the answer yourself on this one. We have a little bit higher CapEx in the H1 in 2019 compared to 2018. Yes, there is a stronger cash flow coming in in H2 or in Q2 than it was in the Q1. Albeit that we also had a little bit of higher CapEx offsetting that. I would not see any change in pattern in that context.
My conviction is that for the H2, so Q3 and Q4, we would pretty much be in line on the same trajectory as we have been, at least for the recent future. The question is the CapEx going to be lower than 2018 total number?
I don't think so. We have all the adjustments that we have planned for the restructuring or out of contract logistics, as I mentioned, the majority will be effective in year 2020 rather than 2019. We're still running on a similar CapEx budget than it was in 2018. Factually, I might be wrong when we then look into the Q4 in isolation, because there is a clear expectation from my side that, as well as from the management side, is that in the Q4 2019, we will see a reduced CapEx. However, it's not be enough that we go back into the level of 2018. Last question on the reverse factoring. We call it our supply chain finance concept. It is a reverse factoring as such, a program that picks up since years speed.
We are now processing around $500 million-$550 million volume through that supply chain finance system. The change between Q2 to Q1 would not be significant enough that it would drive a lot of the improvement of the cash flow.
Maybe just one final question, just using my same spreadsheet that goes back to 2008. If I look at the free cash flow excluding acquisitions and disposals, I actually get the same conclusion, but it's been better during H2 than H1 during every year other than one, which was actually 2009. We all know what happened then. Is there any reason why we won't see the same seasonality for 2019? I guess you may have answered the question.
As I said, Q3, Q4 I think will follow the same trajectory as such the same seasonality as it had been for many years. Let's not forget, the major driver is still an improved profitability. At the end of the day, we will improve profitability in the H2.
Great.
I like that.
Sounds good. Thank you very much. Yeah. Sorry, my spreadsheet doesn't go back to before 2018 quarters, but there we go.
Even don't try to contact us to fill the spreadsheet back to 1994. Okay, Robert?
Thanks, [inaudible]. Have a good day.
Bye-bye. Thanks.
Next question is from Bruce Chan from Stifel. Please go ahead.
Yes, good morning, gentlemen, and thank you for the time. I want to ask quickly about IMO 2020. I know that we've talked about it on previous calls, the party line is that it's going to be a pass through. If we look at the balance of this year or the early part of next year, what kind of rate increases are you anticipating and what do you think the magnitude of effect on gross margins will be for next quarter or for Q4? Is there anything special about how you're positioning ahead of the increase?
At the moment, and we have made a couple of statements on IMO 2020. From a sustainability and responsibility point of view, that's very desired to have a low sulfur solution in place and forced into the market. That will load or that will lead to tariff increases. There are different scenarios, but we will see a tariff increase that reflects the higher cost. For us, it will be a pass through. We have discussions with certain customers already that we can offer alternative solutions, hedging that risk if it was a risk. At the end of the day, the higher cost will be the cost of shipping containers with vessels with lower sulfur. I would assess that the overall cost increase per TEU will be around CHF 150. It depends on the trade, and depending on the trade, might be higher or lower.
That could be a good indication. For us, a pass through, no effect on gross profit to answer this part of your question.
Okay. Even temporary.
Sure. Because it's not a surprise we know about it.
Do you think that the rest of the industry has been planning similarly, or do you think that there are other factors?
You have to ask the industry, Bruce. Sorry, Bruce, you have to ask the industry. At the moment, there have been different conferences, and we are all in the same boat, virtually. I would be surprised if somebody acts differently, but hard to say.
Okay. That's fair enough. I'll leave it there then. Just a second question. I think you mentioned that despite some of the lower volumes on air freight, you are seeing some business wins that maybe haven't hit the books yet. Are those coming from customers that may be leaving some of your competitors ahead of a tie-up, or is there another source?
I think you find customers always going for our Kuehne + Nagel to look for a strong and reliable solution. Yes, our new customer wins reflect our strength in air freight and the solutioning behind our air freight network. You know that we sell a lot of the KN whatever chain solutions. I've mentioned KN InteriorChain, but we have KN BatteryChain, we have KN PharmaChain and so on. The customers are very alluded to those solutions. We will see.
New customer wins becoming part of our air freight network in the second semester. These customer wins will show a certain effect, but that will be far away from an annualized volume effect, because we have to be ramped up. Volume starts then in August or September and will slightly increase. Don't expect wonders in your models from that side. It gives me, as CEO of the group, the confidence we have not lost any big business. We are able to win business with our high-end and complex solutions, and can create a benefit for our customers, and that should speak for a very solid second semester in air freight.
Okey-dokey. Thank you for the time.
The next question is from Christian Obst from Baader Bank. Please go ahead.
Yes. Hello, greetings to Switzerland. First of all, you issued a very favorable CHF 400 million bond. Have you any special idea what is the idea behind that and where you would like to use the proceeds for? Going towards CapEx, what are the plans until 2022? Currently, do we stay at the current level, or when we come to 2022, is there an increase in acceleration of cash out, maybe for IT or something like that? I have to come back to the IMO issue. Is there any early import, maybe to the U.S., before the Christmas season? Maybe because of some scarcity of capacity going into the H2. The last one, do you see any volume impact from the DSV, Panalpina issue? Thank you.
I will start with the last two questions, Christian. First of all, no volume effect from any merger in the industry, also not from CEVA being bought by CMA CGM or others. Customers continue with their normal RFQ pattern and waves, and we select those customers we want to do business with and either successful or not. Nothing has changed here. The IMO 2020, we do not expect any rush volumes or stock build-ups through IMO 2020 because it's not a one-time effect. It's an ongoing tariff improvement and increase. Building up stock is also very costly. Given the size of the IMO, the expected size of the additional cost driven by IMO, we would not expect any special peak or stock build-up, as said before. Yeah.
Okay.
For CapEx and bond, I'm happy to hand over to Markus.
I think let me start on the CapEx. You're aware of the restructuring of the contract logistics business. I think we should see, in the next couple of years, we should see a slightly reduction on the CapEx and then we go through the year 2020, 2021, maybe on a reduced level. Eventually, I think when we find the right size of the business with the right returns, then that it will come to that level that we like to have. From that level, I cannot determine yet from a 2022 perspective. What I can say is, because you mentioned IT, that there is no capitalized IT cost on our balance sheet as it has been for forever. Right?
Yeah.
IT is not driving any of that. The first question obviously on the bond, or the two bonds actually that we have issued, CHF 200 million each. I think, the very clear answer is the financing of the Quick acquisition has been done with an intermediate stack from December until the issuing of the bond in June. That bond replaces literally that bank debt that we had taken on in December.
Okay. Thank you very much.
Thank you.
The next question is from Frans Hoyer, from Handelsbanken. Please go ahead.
Well, good afternoon. Thank you very much. A question regarding the effect of automotive. I understand it has been quite heavy in the air freight operation. Has it had any impact on any of the other business segments, please?
Good afternoon, Frans. For sure. If the automotive industry can avoid flying axles or gearboxes and put them into containers again, it has an effect. You know that one freighter main deck capacity ends up in eight to 12 containers maximum. It's homeopathic volumes in the sea freight.
business. It's significant missing volumes in air freight. That is maybe the equation.
Got it. Has there been any fallout from this in the road business at all?
Not to my knowledge.
No. All right. Thank you very much.
Yeah.
The next question is from Alex Irving from Bernstein. Please go ahead.
Hi, good afternoon. Two questions from me, please. Both on eTouch. First of all, you've previously set up targets for 2%-4% of sea freight volumes and 10%-20% of air freight volumes as eTouch by 2022. If you can please confirm whether there have been any changes to your thinking around those targets. Secondly, can you please give us some color around how shippers and carriers are responding to automation initiatives in air freight? Are you encountering any barriers to adoption there, and how you're thinking about finding ways around that? Thanks.
Alex, I think first question, yes, entirely confirmed the number. Yes, we want to have by 2022 have automated volume on sea freight 2%-4%. Actually in air freight, excuse me, in air freight, we were saying 20% of the addressable volume, which was 45%, so that would translate into 9%. That's just to get the numbers in line. On the second question on how receptive carriers are. Of course, carriers are actually very supportive and very cooperative as it will also support their own cost structure. From a, let's say, conversation perspective, we are in sea and air freight, in both areas, we are a top customer, if not number one customer of the carriers as well. We find a lot of open doors, if you like.
Since, and that is, I think, reality, since it has to do with IT, some of these questions or some of these open doors seem easy to walk through, but not necessarily easy to get into reality. I think we find a lot of, as I say, cooperation and everything, because I think there is a win-win situation. Since it's going to take out a lot of manual work on both sides. There is also the reality that needs to put electronic communication between machines in place.
The next question is from Sebastian Vogel from UBS. Please go ahead.
Good afternoon. I have three questions. The first one would be if you can remind me of the FX impact on net forwarding revenues in both sea and air. The other question would be, in the press release, you mentioned that you are addressing currently the significant changes in the air freight market conditions. Was wondering if that coming, this addressing these issues, would that cause some cost raising in terms of making people redundant and so on? The last one would be on the SG&A cost as a percentage of gross profit on the group level. That came down in the Q2. Is that a sort of a run rate we can think of going forward, or how should we think of that? That would be my three questions.
Okay. Sebastian, let me answer maybe the last two. I think the SG&A cost, the run rate, I would confirm, it's our aim to improve productivity and overhead cost permanently. It's not new. It's not related to this year or the previous years. Air freight market changes. Also, in air freight, we employ temporary labor, and we will breathe with the market. At the moment, there is no major redundancy wave running throughout the organization, if that was your question. We don't see any necessity. Experienced forwarders are a scarce resource, if I may say so, are very rare in the market, especially in some of the growth markets like Asia or even in North America. We have to make sure that our experts stay in the organization and pursue their career within the organization. That were the answers for the two questions.
FX and sea and air. FX impact on turnover for sea freight is around 3% and air 2%, each of them minus three and minus two.
Many thanks.
All right. Thank you.
Sir, no more questions at this time.
Thank you, Moira. Let me close the call. First of all, thank you to all of you for joining us on our analyst conference for the half year 2019 results of Kuehne + Nagel International AG. We enjoyed the call as always very much. As said, I've posted this internally to all of our colleagues worldwide, we face a tough market environment and even markets that are consolidating. At the same time, we have surfed the high waves very well, and we are confident that the second semester, we will be able to achieve our targets. In total, as Markus has said already, show higher results at the year-end 2019. To see whether we got traction in quarter three, we invite you to join our next analyst conference call on the 22 October.
We look forward to this, and in the meantime, we wish you a summer break, and enjoy the time with your spouses and families. Bye-bye.
Ladies and gentlemen, the conference is now over. Thank you for choosing conference call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.