Ladies and gentlemen, welcome to the Half Year 2019 Results Conference Call. I am Myra, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference has been recorded. The presentation will be followed by a Q and A session. The conference must now be recorded for publication or broadcast.
At this time, it's my pleasure to hand over to Detour Streltscher, CEO of Kuehne Nadell.
Thanks, Maura. 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 twenty nineteen Results. Our CFO, Markus Blanka Graf, 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 3 of the slide deck.
In the first half year of twenty nineteen, we achieved a high level result in a tough environment. The group earnings were stable at CHF384,000,000 for the first half year despite significant headwind from currency. Strong EBIT and sea freight were recorded at a level of CHF235,000,000, which were CHF 25,000,000 above the previous first semester of 2018. A stable EBIT and airfreight were recorded at CHF 174,000,000, which were only CHF8 1,000,000 below the record year 2018. Net turnover growth in Overland of +3.3 percent and a strong operational improvement of EBIT.
I will lead you through some details later during the presentation. And 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 4, you see the overall group performance in some key figures. And despite a tough market environment, we increased net turnover, gross profit and EBIT with a stable earning per share in the 1st 6 months 2019 versus last year's 1st 6 months. And I know it's more interesting for you to go through the details of the business unit.
Therefore, we directly continue on Slide 5 of the Slide 8 with some highlights on sea freight and airfreight. 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. And the cargo mix and cost control showed tractions.
All these measures were already initiated end of 2018, and we mentioned those measures when we posted our annual results 2018, they showed traction in Seafood clearly. Airfreight, the market continued to be under pressure with a negative growth rate on some of the trades being double digit. We clearly posted lower automotive volumes and also lower volumes in the sector, which we call industry or industrial. And 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 6 or Slide 6, you will see the volume development by for C3 and Airfreight. Let me start with C3. A 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 inner load, continued to really perform well.
We saw double digit growth in both of them. And there were speciality 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. Airfreight, I mentioned that already. Market decreased significantly. The volume in our networks decreased accordingly by 50,000 TEU or 5.8%.
And this is mainly driven by European exports to Asia Pacific, sorry, and Asia exports in North America and vice versa. So 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 Seafreight business on Slide 7.
Seafreight 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 quarter 2 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 this is already a 75 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 toil. As always, let me share some year to date Orion's analysis data with you.
For sea freight, the gross profit, the volume effect in gross profit has been CHF 32,000,000 for the 1st 6 months. The margin effect in gross profit for seed trade has been CHF 17,000,000. The cost effect, CHF 24,000,000, resulting into a total effect of an improved EBIT of CHF 25,000,000. Let's go through the same exercise on Slide 8 for airfreight. And 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 quarter 2. So in quarter 1 2019 and quarter 2 2019, we saw yield strength and yield improvements. The margin improved in total by 22% year over year with twothree of that improvement or CHF 10 Swiss francs of 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 5.6. The EBIT per 100 kilo improved by 15% or CHF3 sequentially and were stable compared to previous year quarter 2 EBIT per 100 kilo.
And the clear contribution of Quick can be seen in the figures on this slide, and 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, minus €34,000,000 so less volume, €34,000,000 less revenue or GP harvested. The margin effect counterbalancing clearly EUR 114,000,000 positive margin effect in GP gross profit. The cost effect minus €88,000,000 resulting into only €8,000,000 less EBIT than previously.
Let me continue with the other two business units on Slide 9, Overland, and 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 quarter 2 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 platform a new platform relations.
So what contributed to the strong performance of Overland? As said, European Groupon 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 strong net turnover growth of 3.3%, a gross profit growth of 4.9% and an EBIT improvement of another CHF 2,000,000 for the 1st 6 months of 2019. And if I may remind you and allude your attention or attract your attention on the footnote too, last year, we had a onetime off effect of disposing a business, an overland business in Brazil of CHF 7,000,000, and this has been fully compensated and even overcompensated in the 1st 6 months through our organic performance through the organic performance of our Overland business unit. As said, an outstanding performance, and 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, and you see the first effect already in quarter 2. I will come to that later. And 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.
And I would like to reiterate what I already stated in our last analyst conference calls. We continue to restructure our contract logistics business and contract portfolio. This includes the revenue of the entire contract portfolio in contract logistics with a clear focus on scaling high margin solutions, trading benefits for the business units or our leverage areas, as we call it, an ongoing investment in technology, especially picking enhancement in new warehouse management systems and a more selective organic growth in 2019 and beyond on those projects and contracts that we can scale further. And you see already, if you look into the Verion's analysis of the business unit, you see already a slower net turnover and GP growth and improving but still weak performance on EBIT level. And if you look into quarter 2 versus quarter 8 quarter sorry, quarter 1, 2019, the comparison with previous quarter 12 show that we get traction and get closer to previous year's performance.
The EBIT contracted in total by CHF 9,000,000, of which only CHF 1,000,000 were recorded in quarter 2 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. And I know that the entire contract logistics team is adamant to make this restructuring a success. And now I'm pleased to hand over to our CFO, Markus Blanka Graft, to give you some details on the financial performance 2019 first half 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 1st 6 months. We have 5.5% GP growth.
And let me jump straight into EBIT of 2% growth, which is CHF 10,000,000 And I think that FS has already spoken about it. FX impacts or currency impact from translation becomes an unfortunately 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 CHF13 13,000,000 on an EBIT level. And let me just pre end some of the question maybe that may come up on the Q and A session. And let me get a little bit courageous here and think about what is the currency development for the rest of the year.
And I think when you look at current spot rates, we would probably think that there's going to be a greater ForEx headwind to expect for the second half year. You see here, Dan, we have for the main currencies, we have currently an impact of euro of minus 3.4 and pound minus 3%. And only the U. S. Dollar is currently with 3.1%.
And maybe it's our assumption at least that the U. S. Dollar tailwind may actually appear to dissipate for the rest of the year, while the euro end account weakness could potentially remain the same or even intensify. On the account 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 presence. But having said that, it is a material point that goes into our P and L.
Nevertheless, and 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% to 13.2%. Let me quickly jump into net earnings because earnings for the period is 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. And some of these impacts, which is 3 of them, I would try to shed some light on it. The first one we talked about is currency impact.
On earnings for the period level, the CHF 13,000,000 probably turning to CHF 10,000,000 Then 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 €2,000,000 negatively. And we have you have noticed that most likely, we have a slight increase in the effective tax rate for the group, which accounts for around €3,000,000 So taking these variances that are more extrinsic than anything else into account, we talk about an impact of around €15,000,000 on earnings for the period level. Having said that, €384,000,000 plus €15,000,000 €16,000,000 adjustment would probably end in around €400,000,000 operational earnings for the period situation, which means a real operational improvement of 2% to 3%. However, we want to become better.
And when I can ask you to flip to Page 14. And the way we want to become better is eTouch. And I think the term is around for quite some time in the industry. And some of the interpretation of this seems loaded with some questions around it. And 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, it's not a platform. It's not a customer portal. The portal that is proprietary to KN is KN FreightNet. And eTouch is not a product. So there's 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, call it, like a banner or a name for a bun boom under which we understand all kind of automation initiatives that are driving operational efficiency. And understandably, operational efficiency through IT is a pillar of our technology strategy. Now based on the above statements, n eTouch is defined by the fact that it has a conversion rate above 60% to 80% because it's being executed virtually without any human interaction or very little of that.
So 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 back loading 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 airfreight business units rather than the sea freight business units. And clearly, the target 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 are going to stop automation in 2022. And obviously, we're not going to do this. It was randomly chosen, if you like, date because we went to the Capital Markets Day in 2017 and we thought like 5 years is a good horizon for planning, but automation is an ongoing process and efficiency gains will really take off after the year 2020. 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.
So you may ask us why do you actually feel comfortable on embarking on a 5 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 16 tells the whole story. I think that 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 provision on our balance sheet.
And when you look today, as of June 30, 2019, you can easily see our net debt position is around 219,000,000 And 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, given our ongoing efforts to demonstrate that balance of quality of the balance sheet to our stakeholders as much as to our company. 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 last slide, expansion of the balance sheet of around SEK 1,700,000,000, SEK 1,800,000,000 and on the right side, what is the impact or the estimated impact for the full year. We just take most likely the half year 2019 times 2, and you will see what is the impact. Here are the CHF 3,000,000 impact that I was talking about pre tax from the front loading of IFRS 16 contracts, which when you're discounted for the tax rate for the tax shield, you would probably come to around a 2% less.
Page number 18, cash and cash equivalents. I think over the last 6 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. And I have to say, I think that 2nd quarter 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 second half and going forward into 2020.
You have heard from Detlef that the restructuring of the contract logistics business entails some of the freeing up of working capital and capital itself. So far, the first half year result twenty nineteen 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 working capital as the main driver, EUR 157,000,000 more than we did in the same period last year, with cash and cash equivalents net at the point in time SEK385 1,000,000 more than last. Page number 19, just to refer back to our conversation a quarter ago. I think one of the questions has been how it's going to be the trajectory because we have shown the SEK 140,000,000 as free cash flow development in the Q1.
And I said to that point in time, well, the starting point is higher, but the trajectory should actually be the same as it has been in the last couple of years. And 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 the net working capital of EUR 1,141,000,000 and is now EUR 1,033,000,000. So from a quarter to a quarter, we have improved by $108,000,000 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 manifest 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 2 acquisitions of Quick and Centira, so the difference between these 2. And you see operationally, we think we have reached the inflection point in the Q4 2018 with around 58%. Moving finally to Page 22, where the left side of the slide confirms our financial targets going forward. Commercial rate 16%.
I talked about it and also underlines the importance of the eTouch initiative to get to that point. Return on the capital employed, excluding acquisitions, up above the 60% again. So walking slowly the path towards the 70% and 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 the 4% with confirmation of the corridor of 3.5% to 4.5%.
With that summary and confirmation of our financial targets that we want to achieve, I would hand over back to Detle for the volumes in KN twenty nineteen and CE Markit.
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 Seafreight. We have nevertheless changed the market outlook for airfreight. Given the quarter 2 market in airfreight, there's no reason to believe that we will see a 5%, 6%, 7%, 8% growth in the 2nd semester, which would have been required in order to show a flat market development in airfreight for the whole year 2019.
So we assume that the market will stay at a level of minus 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 year over year market growth of approximately 2% year over year. Our ambition is to outperform market growth in all business units. But and there's a big part. But we have focused more and more on a selective growth.
In sea freight, we will and we have seen that in quarter 2. 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. And here, we will focus continue to focus on. And in airfreight, 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 performance that we have not lost any major customer in airfreight, but we have down trading customers in the sectors of automotive and industrial.
And we have one new business, which we believe will become part of our volume will become or the volumes will become part of our network throughout this year. So we will, for sure, grow better than market. But at the moment, we are a bit cautious to give a financial or a figure with regards to our volume growth rate. But the ambition stays, but not at all price or cost or at all margins, so to say, yes. Overland, no change.
Eventually, we should see some lower volumes in the market reflecting an airfreight market, not to be seen yet. But our ambition is to go twice as fast as market, so more than 4%. And 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. And 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 2nd 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 Mora to open the Q and A.
We will now begin the question and answer session. The first question is from Aymeric Poulin from Kepler. Please go ahead.
Yes. Thank you for taking my question. I've got 2 set of questions. The first one is on your eTouch definition that has been now narrowed to 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 Airfreight 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? And 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.
Hi, Eric. Hello, it's Markus. I think clearly, it achieves then is
a bundle of automation
initiatives. And yes, there is going to be a gradual improvement on the conversion rate for sure. But there is going to be a 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. And when you look into our first and second quarter results in airfreight, we have already improved conversion rate again from 24.5% to 27.5%.
And I tried to avoid confusion here because we 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. So back office is always going to move forward in their endeavor to be more efficient. The InTouch 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. But the significant impact that you will see on our in that context, not so small income statement, that is going to be back in 2021, 2020
6. Good afternoon, Aymeric. Detle 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 years.
The most important one is K and TraceNet. Markus mentioned that a codebook track platform that we launched 5, 6 years ago, which offers solutions across all business units. We have My Kilometers 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. And we have real time predictive analytics platform. Our C Explorer is one that we mentioned, KNESP or KN Fetch.
Overland has always been part of that digitalization strategy. They are part of a KN Freight Net approach in Europe very successfully, And they have started in Thailand a platform for FTL, ATL business, Asset Light, no assets on our side to start with, and that will be rolled out in South Asia Pacific full stop. There will be no other market that we will address this solution in Asia with for the time being. So 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 eTruckNOK.
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, but clearly, the automotive industry, in particular, was a challenged environment then and that generally seems to be about a 10th of airfreight volume. If we were 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 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're sort of approaching levels of the euro crisis and almost close to 2,008, 2009. So if we do begin to see supply chains pull out of it, how ready is the air business if there was suddenly a surge in restocking demand? And how do you ensure that gets stopped without putting extra fixed cost into the business that might not be sustainable in the long term? And then very finally on contract logistics, obviously, you mentioned that the sort of the some of the restructuring efforts is yet to come. So can we take from that 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?
And if so, could you give us an idea of what you can do there? Thank you.
Right. Okay. Let me start with the air volume. So first of all, automotive is significantly down. We were the market leader in Germany and in Europe in automotive airfreight, working for all the OEMs and suppliers, And we see a big reduction in main deck capacity, in the demand of main deck capacity as well as in our network, yes?
The perishable volumes, and you know that approximately onethree of our entire volume is perishable. It's agnostic at the moment to any cycle or consumption pattern. We see steady growth in perishable volumes throughout our network on all trades. And the same is true for other industries like the consumer goods industry. Consumer growth consumption is ongoing.
So it's really automotive, and I would include industrial as the 2 verticals that are down trading. And automotive is significantly down trading double digit at the moment. We expect no stabilization at the moment or no bounce back or return to growth again and maybe a stabilization of the volumes in quarter 4. It's too early to say how the next couple of months will progress. And you saw profit warnings of the OEMs and supplier industries.
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. The second question was the supply chain Duration
and restocking cost.
So the restocking question is a very good question. So there might be a certain effect of stock levels having been built up and are now being used or deployed for the markets. And if we will see a restocking effect, we should see that in quarter 4 prior to year end. There are no new trade noises in the market. And remember, there was a hard push to improve or increase stock levels end of last year.
And all this virtually evaporated second half of December twenty eighteen when the final decisions on any new trade tariffs has been postponed, not for Infinity, but I think that time, it was postponed to March or so, yes? And these effects, we might see at the moment, we would not have any special effect on no sign of restocking at the moment. But we also have no sign of a peak season. And remember, 2 years ago, we had a similar situation. And at the moment, both in sea and airfreight, we have a normal seasonality, but not the hard push, the hard move for a higher demand going through the feed season.
So that would be my feedback on the supply chain. And working capital, maybe Markus can you just
say on the I think Damien, yes, you're right. I think I also mentioned it that the improvements in working capital in the first half has been predominantly coming out of the network business this year, freight and overlap. The effect from the contract logistics restructuring remains still open. And I think it's safe to say that we at least anticipate as much as a triple digit €1,000,000 reduction in working capital. But 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 airfreight, particularly the yield improvement. I appreciate the mix effect from the Crick acquisition. But 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?
And what has been offsetting that effect? If you could provide more color on that would be very helpful. Then on the Seaford volume momentum, I think the market picked up somewhat in the Q2 based on your commentary, but your volume slowed in the Q2. What was driving that? Is that the more selective approach with customers?
And what are you seeing on the Trans Pacific 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 Seaplane volumes. First of all, we don't see any additional effect on the Transpac than what we have seen already through the tariffs. And 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 to our product. And we see this happening at the moment. The sea freight volumes, we are not inducing a price war. So we are very carefully growing our business.
There's a strong focus on SME account, but small and medium sized enterprise, the word already implies per customer lower volumes, higher maintenance. So we will not see spikes in volumes through 1 or 2 new contracts that we will. We win a lot of business in Seapray, 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, but at the moment, it's getting a bit more tailwind on the trans side. Nevertheless, our selective growth approach in sea freight remains, and the same is true for airfreight. In theory, your negative mix effect is true, what you have stated before, perishable and automotive perishable stable automotive down trading. But 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.
So there are market segments that still post strong growth. And the aerospace sector as such is not only served by quick with time critical shipments, but may I remind you of the Kayan interior chain. 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. So we post a lot of volumes coming from that side. And we are very 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 2,009, so it's a 10 years out of 11. Is there any reason why that seasonality won't repeat in 2019? So 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, Beau, that CapEx for 2019 as a whole will be lower than that seen during 2018? And then 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?
And maybe also just help to quantify the impact, if possible?
Absolutely, Rob. Very good questions actually. And I like the extra sheets that go further back in 2008. Maybe we find them that go until 1994. But yes, I mean there is no reason to believe that seasonality has changed dramatically because as I said, also in the last quarter, there is 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 first half in twenty eighteen 2019 compared to 2018. So yes, there is a stronger cash flow coming in, in half 2 or in the second quarter than it was in the first quarter, albeit that we also had a little bit of higher CapEx offsetting that. So I would not see any change in pattern in that context. Hence, my conviction is that for the second half, so quarter 3 and 4, we would predict 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 out of Compute Logistics, as I mentioned, the majority will be effective in year 2020 rather than 2019. So 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 must 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, so it is a reverse factoring as such, A program that picks up since years' speed, we are now processing around $500,000,000 $550,000,000 volume through that supply chain finance system. The change between quarter 2 to quarter 1 would not be significant enough that it would drive a lot of the improvement of the cash flow.
And maybe just one final question, just using my same spreadsheet, it that goes back to 2,008. 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 1, which was actually 2,009. So we all know what happened then. Is there any reason why we won't see the same seasonality for 2019? I guess you may answer the question.
As I said, Q3, Q4, I think, will follow the same trajectory, such the same seasonality as it had been for many years. And let's not forget, the major driver is still an improved profitability. And at the end of the day, we will improve profitability in the second half.
Great. Sounds good.
Yes. So sorry, my spreadsheet doesn't go back to before 2018 quarters, but there we go.
Even don't try to contact us to fill this budget back to 1994, okay, Robert?
Thanks, Dans.
Have a good day.
All right. 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 and the party line is that it's going to be a pass through. But 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
out of the increase? So at the moment, we have made a couple of statements on IMO 2020. From 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.
And for us, it will be a pass through. We have discussions with certain customers already. We can offer alternative solutions hedging that risk if it was a risk. But 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, but it depends on the trade.
And depending on the trade, might be higher or lower. But that could be a good indication. Fast, a pass through. No effect on gross profit, to answer the part this part of your
question. Okay. Even temporary?
Sure. Because it's not a surprise, we know about it.
And do you think that the rest of the industry has been planning similarly or do 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. And I would be surprised if somebody acts differently, but hard to say.
Okay. That's fair enough. I'll leave it there then. And just a second question. I think you mentioned that despite some of the lower volumes on airfreight, 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 the tie up? Or is there another source?
I think you find customers always going for RQs to look for a strong and reliable solution. And yes, our new customer wins reflect our strengths in airfreight and the solutioning behind our airfreight network that we sell a lot of the KN whatever chain solutions. And I've mentioned interior chain, but we have battery chain, we have pharma chain and so on. And the customers are very alluded to those solutions. So we will see new customer wins becoming part of our air freight network in the 2nd semester.
And 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. But 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 create a benefit for our customers, and that should speak for a very solid second semester in Africa.
Okey dokey. Thank you for the time.
The next question is from Christian Obst from Baader Bank. Please go ahead.
Yes. Hello and greetings to Switzerland. First of all, you issued a very favorable €400,000,000 bond. Any special idea what you what is the idea behind that and where you would like to use the proceeds for? Then 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 and acceleration of cash out maybe for IT or something like that? Then 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 second half? And the last one, do you see any volume impact from the DS-three Panalpina issue?
So I will start with the last two questions, Christian. So first of all, no volume effect from any merger in the industry, also not from CEVA being bought by CNA, CGM or others. So customers continue with their normal RQ pattern and waves, and we select those we do not expect any rush volumes or stock buildups through IMO 2020 because it's not a onetime effect. It's an ongoing tariff improvement and increase. And building up stock is also very costly.
And given the size of the IMO, the expected size of the additional cost driven by IMO, I would not we would not expect any special peak or stock buildup as said before. 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 as a 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. And 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'd 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 forever, right? So IT is not driving any of that. And the first question, obviously, on the bond that or the 2 bonds actually that we have issued, dollars 200,000,000 each. I think the very clear answer is the financing of the Quick acquisition has been done with, let's say, an intermediate start from December until the issuing of the bond in June. And 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.
Good afternoon. Thank you very much. A question regarding the effect of automotive. I understand it's been quite heavy in the airfreight 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. But you know that one freighter main deck capacity ends up in 8 to 12 containers maximum. So it's homeopathic volumes in the sea freight. It's the sea freight business.
But it's significant missing volumes in airfreight. And that is maybe the equation. Got it. And has there been any fallout from this in the road business at all? Not to my knowledge.
No. All right. Thank you very much.
The next question is from Alex Fierling from Bernstein. Please go ahead.
Good afternoon. Two questions from me please, both on eTouch. First of all, you've previously set up targets for 2% to 4% of sea freight volumes and 20% of airfreight volumes as eTouch by 2022? And 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 airfreight?
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. So yes, we want to have by 2022 automated volume on sea freight 2% to 4%. And actually, in airfreight, 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 construction. And from a, let's say, conversation perspective, we are in sea and airfreight in both areas. We are a top customer, if not number 1 customer of the carriers as well. So we find a lot of open doors, if you like.
But since and that is,
I think, reality. So 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. So I think we find a lot of, as I say, cooperation and everything because I think there is a win win situation.
I think it's going to take us a lot
of manual work on both sides. But 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 on of the FX impact on net forwarding revenues in both sea and air. And the other question would be in the press release, you mentioned that you're addressing currently the significant changes in the airfreight market conditions. I was wondering if that coming addressing these issues, would that cause some cost raisings in terms of making people redundant and so on?
The last one would be on the SG and A cost as a percentage of gross profit on the group level that came down in the second quarter. 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 2. I think the SG and A cost, the run rate, I would confirm It's our aim to improve productivity and overhead cost permanently. And it's not new. It's not related to this year or the previous years.
Airfreight market changes, we also in airfreight, we have or we employ temporary labor, and we will breeze with the market. At the moment, there is no major redundancy wave running throughout the organization, that was your question. We don't see any necessity. Fore borders, experienced fore borders 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. So we have to make sure that our experts stay in the organization and pursue their career within the organization.
So that's the answers for the two questions. And FX and C and L?
So FX impact on the turnover for sea freight is around 3% and air 2%, each of them minus 3% and minus 2%.
Many thanks.
All right. Thank you.
There are no more questions at this time.
Thank you, Mora. Then 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 twenty nineteen results of Kuehne and Magdal International AG. We enjoyed the call as always very much. As said, and I've posted this internally to all of our colleagues worldwide, We face a tough market environment and even markets that are consolidating.
But at the same time, we have served the high waves very well, and we are confident that the 2nd semester, we will be able to achieve our targets. And in total, as Marcus has said already, show higher results at the year end 2019. And to see whether we got traction in quarter 3, we invite you to join our next analyst conference call on the 22nd 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.
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