Ladies and gentlemen, welcome to the Q1 2019 Results Conference Call. I'm Andrea, the call's operator. I would like to remind you that all participants will be listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing Star and One on your telephone. For operator assistance, please press Star and Zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Dr. Detlef Trefzger, CEO of Kuehne + Nagel. Please go ahead, sir.
Thanks, Andrea. Good morning, good day, good afternoon, and good evening to all of you, and welcome to the Kuehne + Nagel Analyst Conference on the first quarter 2019 results. Markus Blanka-Graff, our CFO, and I welcome you from beautiful Switzerland. We have published our analyst presentation earlier this morning. As always, we start on slide three. Kuehne + Nagel continues to grow. We got off to a good start in 2019, with group earnings stable at CHF 181 million in quarter one. A strong EBIT improvement in Sea Freight to CHF 112 million, which amounts to an increase of CHF 15 million above quarter one 2018. A stable EBIT in Air Freight of CHF 80 million, which is CHF 1 million below the record year 2018. A strong net turnover growth in Overland, which resulted from a strong operational improvement of EBIT.
A net turnover growth in Contract Logistics of 6.3% whilst consolidating our contract portfolio. Let's continue on slide four with some key figures. Despite the market's weakening, we mentioned so already during our last analyst call when we commented on the full year 2018 results, our first quarter this year has been very successful. The consistent implementation of our business strategies in all business units has been decisive for this success. Net turnover improved by 7.7% to CHF 5.2 billion. Gross profit improved by 7.3% to CHF 1.978 billion, almost CHF 2 billion. EBIT improved to CHF 242 million or by 2.5%. Earnings per share were slightly down to CHF 1.50 per share, almost on the same high level as in the previous year's quarter one.
I think we hear Andrea making some noises in the background. Maybe you can drop off or go on mute. We have, on slide five, a short introduction to our two network business units, Sea Freight and Air Freight. Sea Freight, we are number one globally with the volume transport in our networks. We saw significant business wins with our new digital platform. We have launched KN ESP already last year. We have mentioned that a couple of times. We have a lot of bookings. The trend is increasing on this platform. I'm really proud that we also launched a new solution on a platform a week ago called KN Pledge. I'm sure you have noticed this. This is the first and only full container load quote book track solution in the market that offers guaranteed lead times and even a money-back guarantee.
We see a lot of traction with that solution in the sea freight market. The strong volume growth, and we will detail where the growth comes from in a minute, is paired with operational leverage in Sea Freight, resulting into an EBIT improvement of CHF 50 million, as stated before. Air Freight, a very successful integration of our bolt-on acquisition of The Quick Group, a niche market player in a market that is growing fast and offers strong margins, high margins, and margin improvements. We continue our success with industry solutions that we have deployed, and that continue to see highest interest of our customers. I would like to mention KN InteriorChain once more and KN PharmaChain as well. Let's detail the volume development of Sea and Air Freight on slide six of the slide deck. Let's start with Sea Freight.
We saw a very robust volume growth in TEU of 6.2%, which resulted into the highest volume ever in a quarter one. 1,146,000 TEU shipped in our networks in quarter one 2019. While the market growth was clearly, or has clearly been below 2%, or 1%-2% in quarter one this year. Our Asia-Europe volumes expanded double digit despite a declining market on these trades. Our products, LCL and Reefer perform extremely well. We also were able to leverage our proximity and our solutioning for small and medium-sized enterprises, the customer segment we concentrate on for many years. In Air Freight, markets have been different, and we have stated so already when we commented on quarter four or year-end 2018 results on our last call. In a declining market, our volumes declined as well by approximately 3%, which was in line with market.
We saw a decline already in quarter four. Remember, we saw a decline of -2% in quarter four 2018, versus quarter four previous year. Europe export to Asia, as well as NAM, North America export to Asia, declined, while the Europe to North America and the North America exports to Europe, so vice versa, increased. We had trades that declined, and we saw still volume growth on some key trades throughout our network. Let's talk about the key figures of Sea Freight on slide seven. Sea Freight improved yields and benefited from active cost management. Both led to a record result in quarter one 2019. At CHF 333 per TEU, the average margin improved sequentially by 7%, which also represents a year-over-year improvement still of 1%. This reflects the improved mix of the segments we are working in.
I mentioned already LCL as well as Reefer, but also the small and medium-sized enterprises we are focusing on. The year-over-year expenses per TEU were down by 2% or CHF 5 per TEU, resulting into a high EBIT per TEU of CHF 97, which is a significant improvement, versus previous quarters or sequentially of almost 20% and year-over-year by CHF 7 or almost 8%. As always, I quote the year-to-date variance analysis in million Swiss francs. The GP effects coming from volume in Sea Freight were CHF 23 million in quarter one. The margin effects in GP coming from the first quarter were CHF 2 million. The cost increase due to the volume was under proportional with only CHF 10 million, resulting into an EBIT improvement in quarter one 2019 of CHF 50 million.
Let's do the same exercise and the details on Air Freight on slide eight. The trend that we saw already in the last two quarters of underlying yields strength continued and extended into quarter one 2019. The margin improved by 19% year-over-year, with more than half of this improvement coming from the organic growth or organic development of Air Freight. The balance, as you see in the slide, is attributable to the acquisitions of Pan Atlantic and especially Quick. The EBIT per 100 kilo improved by 5% and sequentially as well as year-over-year or CHF 1. The clear contribution of the Quick acquisition can be seen in the figures that we have outlined here. The EBIT of the Quick acquisition is still suffering from the intangible amortization as well as the integration costs in the first quarter after the acquisition.
Also here, I would like to go through the year-to-date variance analysis in million CHF. The volume effect on gross profit has been CHF 9 million negative, lower volumes, lower GP. The margin effect in gross profit has been positive with CHF 52 million, clearly to be seen, CHF 80 per 100 kilo versus CHF 67 per 100 kilo previous year, quarter one. The cost effect has been minus CHF 44 million, resulting into an EBIT effect of minus CHF 1 million for the first quarter in Air Freight. The impact of the Quick acquisition I mentioned already also in the figures before, you see these on slide nine again. I would like to state a couple of messages here or focus on a couple of messages here. We bought one of the more global market leaders in time-critical shipments.
I have to say, the product Sterling for the aerospace AOG solutions as well as the QuickSTAT solutions for the healthcare and pharma industry are outstanding. The deeper we look, the more impressed and happy we are. The integration is ongoing as planned. Cross-selling, business case confirmed, all those topics. I think more important for all of us is we see a high fit, a high complementarity of cultures and the way of doing business. The team, the spirit, and the way the colleagues at Quick do their business, match and interface seamless and integrate seamlessly with our business. Quick is a niche solution, as you know. In the high margin, high growth segment of time-critical shipments and a very low volume of the business. The overall tonnage moved in the first quarter 2019 in the Quick networks with time-critical shipments was less than 3,000 tons.
As you saw, we have a very positive EBITDA contribution of more than CHF 5 million from Quick, but with a slightly negative EBIT effect due to the intangible amortization, and some of the integration costs. This bolt-on acquisition will show also in the future, a lot of impact in our Air Freight P&Ls. Let's continue with another very successful business unit on slide 10. Overland. The strong performance of our U.S. intermodal business, as we already stated in our last call, is ongoing and the strong operational improvements is matching the quarter one 2018 figures in a nominal way. The figures last year, as you remember, included a material one-off gain of more than CHF 6 million from the disposal of a business in Brazil. Operationally, the business unit Overland improved their contribution by this amount. What contributed to the strong performance?
As said, intermodal shipments for our major customers in the U.S., the U.S. economy is still running well. The European groupage and LTL business, FTL business, and the integration of the Overland business in our industry solutions. The pharma solutions, KN PharmaChain has also solutions or part of the solution is vested or is based on the performance and the Overland network, and also their digital platform sales, especially in Europe. Strong top-line growth and GP growth, we have seen in Q1, and this growth reflects both the volume expansion, we count the volume in Overland and shipments, but also improved pricing. As said, the result included this one-off gain or compensated the one-off gain that we benefited from a year ago and operationally Overland is in an excellent shape and continues to deliver their growth as well as the EBITDA flows.
Let me continue on page 12. Contract Logistics. Also here we have posted a story in our last call already. This is ongoing and will be ongoing for the whole year. We consolidate or we focus on the consolidation of the contract portfolio and Contract Logistics as well as very active cost management. At the same time, we continue to roll out our new WMS solution worldwide and our picking enhancement technology investments, our automation investments in the warehouses in order to improve productivity. All this is putting pressure on the P&L or the EBIT in Contract Logistics. The headline here that we choose is reshaping the business. We review the entire project portfolio in Contract Logistics and we focus, as we have said already on scaling high margin solutions that also benefit or cross-sell to the other business units.
We invest into technology picking enhancement in warehousing software, which I mentioned before, and we are very selective or more selective with the growth in 2019. While we saw an organic growth of 6% in Q1, which was in line with the 6% that you saw in Q4 2018, we believe that with the typical contracts implementation cycle for a Contract Logistics project of 6-12 months, in total for the year 2019, we would expect a significantly lower growth as we plan to consolidate and focus on scale solutions and high margin businesses. All this has been highlighted during the last call. Therefore the EBIT contracted to CHF 26 million compared to the CHF 34 million in Q1 last year, which reflects the investment and the cleaning up and reshaping of the business.
With this walkthrough for business units and the overall group performance, I hand over to Markus, who will lead you through the details of the financial figures.
Thank you, Detlef. Hello from my side also to all participants. I am on page number 14, income statement. First quarter, if I may, just three topics I want to address. First, GP growth. We have added CHF 135 million of GP, of which CHF 25 in Sea Freight, CHF 43 in Air Freight, so the two international network businesses with CHF 68 million additional GP. You have heard from Detlef's explanation, Sea Freight with CHF 25 million more GP has returned CHF 15 million more EBIT, so conversion rates increase. Air Freight, I think we have explained with the acquisition of Quick being the first quarter on the consolidation, including intangible assets of around CHF 5.5 million. Overland adding CHF 21 million on the GP line and on the nominal value remaining at the very same level as the first quarter 2018.
Please be reminded, in first quarter 2018, we had a positive one-off effect of a disposal of a business in South America amounting to around CHF 7 million. Operationally, as we have heard, a very good performance. Second topic, IFRS 16 impact. You can see that here very clearly on the development on the EBITDA versus the development of EBIT. We have CHF 115 million of depreciation of right of use assets that are reclassified below the EBITDA line. Hence, if you compare EBITDA like for like, you would see CHF 289 in the first quarter 2018 versus CHF 303 in the first quarter 2019. Just for explanation, I am sure you are all aware of that, just to highlight where you can find the impact easily. Thirdly, the exchange rate impact, negative for us, 1.7% on the EBT line. That translates into roughly CHF 4 million EBT.
On a constant currency situation, we would be very much in line with last year. Balance sheet, moving on to page number 15 of the presentation. Again, a reiteration of what is the extension of the balance sheet through IFRS 16. You see right of use lease assets around CHF 1.75 billion versus on the liability side, split into non-current and current lease liabilities, depending on the maturity of the contract. For easier read and reference, we have added on page number 16 a quick summary of all the impacts on IFRS 16 on the balance sheet, as I have explained right now, and on the right side on the P&L development of the income statement. You can see here the depreciation value of CHF 115, which I pointed out earlier.
On EBIT level, we are around CHF 3 million impacting, and the profit before tax has a not so significant impact of minus CHF 1 million in the quarter, predominantly in Contract Logistics, as you can imagine, through the so-called front-loading impact of the IFRS 16 methodology. We expect that CHF 1 million on a quarterly basis to continue throughout the year, and a full year impact will be around CHF 4 million-CHF 5 million negative impact on EBT for the group, of which you can attribute the majority to Contract Logistics. Coming back to balance sheet equity ratio. The current equity ratio after the extension of the balance sheet is around 25.1%, coming from 29.5%. I think everybody needs to adjust their KPI to relate to reference points.
I have added something that I think is interesting in conversations around how stable balance sheet development and how well managed balance sheets is going within the companies. I have added something that is usually used also in the banking sector, a tangible common equity, nothing else than equity minus goodwill, and put that into relation to the value of the entire balance sheet. That would show you a bit where we sit on the tangible equity value, around 13%, even after extension of the balance sheet. Going to cash and cash equivalents, page 17. A summary, I think, we have a very healthy Q1 development. Also here, you imagine there is an IFRS 16 impact and reclassification, which we have then pointed out on the next page, on page 18. Let me just walk you through quickly on the individual items.
We started in the year with a bit of a lower balance than it had been a year before, CHF 488 million, which is CHF 222 million lower than it was a year before. Quick jump to the conclusion, we end up with the cash and cash equivalent at the end of the first quarter with only CHF 67 million lower than last year. Hence, with all the reclassifications in between and the complications, if you like, we can safely say around CHF 114 million, we have had a better cash inflow than it had been the year before. Look on to page 18, which is the free cash flow development. On the right side, you see the quick restatement on like-for-like comparison for IFRS 16.
You can see quarter one has returned very healthy on CHF 114 million free cash flow, which is a very good result, taken that Q1 also historically has a seasonal impact of usually not returning too high free cash flow. We have worked diligently on receivables, payables, but also have diligently worked on growth in all the business units and how much cash or capital allocation goes into the various business units. Working capital in numbers, page 19. We are staying within our corridor with 4.5%. Clearly, we are not stopping to grow, hence a bit of an increase also in working capital and hence net working capital. You will see here we have increased to CHF 166 million compared to a year ago, with a spread between DSO and DPO that have narrowed from 12.9% to 7.2%.
Let's be mindful on this one when we look into the year-end result and also on the last year, we have seen that spread moving between the 12 days, which was the maximum, if you like, also down to 5 days. I think 7 to 9 days should be our corridor that we want to work in. Return on capital employed, page 20. Very familiar slide with the spread or with the separation into return capital employed with and without acquisitions. Acquisitions have, from day one, the full balance sheet and only the build-up of the P&L over the 3-month period rolling that we use as a reference. The upper line, the dark blue line or the darker line, is the one that is excluding the acquisitions. You see the first time that we go after the infliction point of 58%, again into the direction 60%.
Anticipating what is on page 21, we remain with our guidance on a midterm target 2022 that our return on capital employed, excluding acquisitions, is technically possible at 70% and hence remains our target. Page 21, financial targets, and on the right side, a bit our outlook for the market assessment. Financial targets have not changed. Conversion rate 60% for the group, assuming a constant mix of business units compared to our starting point, 2017. Effective tax rate around 23%. I have given ourselves a bit of leeway, 23%-24%, but I think we will be somewhere around the 23% line. Working capital intensity, we remain within the corridor and also don't change the corridor. Business outlook, if you like. Market for Sea Freight, we currently see around 2%. I'm trying to be specific here.
We have had a bit of feedback on our way, how we write down approximately. Plus/minus does not mean between minus and plus 2%, it means around 2% mark, so approximately 2%. For KN, we expect a growth double the market, in this case, above 5%. Air Freight, we see currently, or our expectation is after the first quarter with a reduction in market volume, so a reduced market. We see still the market for the full year 2019 on a zero level, hence we imply that for the months to come, for the next three quarters, there is going to be a positive development in effect. For ourselves, the only thing we can say, we want to grow our volumes. Overland, 2%-3% in the market. We want to grow double the market.
Contract Logistics with the more selective approach to growth and customer portfolio that already has, that was alluded to. We will target to grow in line with market. This would conclude my brief explanations towards the financials. You will then find obviously in the annex of the presentation, our financial calendar and as usual, the quarter-over-quarter comparison. With these details on the financial figures and the outlook on market and our performance for 2019, we are open for your questions.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone 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 handsets while asking a question. Anyone who has a question may press star and one at this time. The first question from the phone comes from Daniel Röska from Sanford C. Bernstein. Please go ahead, sir.
Thanks very much. Good afternoon, gentlemen. Three questions, if I may. Number one on the IT rollout in AirLOG. Could you give us a little bit of a color. If that's progressing, how that's progressing, how the speed is going, just an update on that. And whether also the volume weakness in air is attributable fully to the market or if there's also slowdown here as you're rolling out the new IT on air. Secondly, I'll come back to eTouch on your path to digitize more of your workflow. I'm wondering, have you had conversations with customers about this? I bet you do. The question comes, what's the feedback you're getting? What's the progress you're making? How excited are customers about your initiative, and what kind of impact does that have on your plans going forward? You already touched a little bit on Contract Logistics.
If I may just ask you to give us a little bit of a plan, so to speak, for the next four to eight quarters. You're rolling out the IT, you're reworking the contracts. What's the sequencing? How do we think about the next four to eight quarters in Contract Logistics? Thanks.
Thanks, Daniel. I will answer your questions in the sequence you have asked them. We are done with the AirLOG rollout as per plan, all countries are rolled on. It's on us to start using the software and the tool in the most efficient way and to drive productivity. That will for sure be a task for this year or the next 18 months. The effects you will not see before maybe end of the year. The final rollout has been in Germany and the U.S. end of last year, early this year. That for sure had a sort of a productivity or cost issue, but not on the volume on the market side. That is, from my point of view, the most important message. eTouch. Not only our customers are excited, we are all excited about eTouch.
We have a lot of initiatives running, and it's different per business unit. I mentioned briefly the digital platform business that got a lot of traction in Overland. This is transforming more and more into an eTouch kind of business as we defined it in our last call. The KN Pledge platform, the solution that we have posted in Sea Freight is a clear eTouch solution. This has been developed together with customers. This has got a customer empirical feedback, and we get a real wow effect, a positive wow effect from the market. eTouch has been discussed with customers, and they are excited. That is the conclusion. We will give an update, as we have agreed in our last call, every second call, every half year.
In summer, when we come back to you with the half-year results, you will get an update on how much traction do we get with eTouch. The Contract Logistics plan for the next couple of quarters is pretty clear. I think what you should be thinking about is that for the next four quarters, we are in that mood that we have described already in the last call. Investments into technology, picking enhancement, productivity improvement, reshaping of the contract portfolio, optimization of our organization, all this is running at the same time. It's a holistic reshaping of our business, and a more seamless interface of the Contract Logistics business with the rest of the network business. We should see clear benefits in a year from now, the latest. That would be my ambition, to say the least, also pretty clear.
I hope that answers your question, Daniel.
All right. Thank you very much.
You're welcome.
The next question from the phone comes from Sathish Sivakumar from Citigroup. Please go ahead.
Yes, thanks. Good afternoon, Detlef and Markus. I have a couple of questions, actually. Firstly, on the cost. Is there any cost that has been the main focus as part of your cost management strategy? If you could list some of the key measures that you have taken to bring the cost down by about CHF 76 million in Q1 this year. Secondly, on the working capital, what are the main drivers that would result in the improvement in working capital? How do you see the role of reverse factoring or trade factoring impacting the working capital in the next few quarters?
Sathish, first of all, good afternoon. Let me answer the cost question, if I understood the question right. You were very difficult to understand. We have an active cost approach and cost management approach, which is part of the DNA of Kuehne + Nagel, one could say, in each and every business unit. For Air Freight, with the implementation of AirLOG and now the getting to know the system as we got to know the system we were working on the last 25 years and this training and so on. Yes, there's a certain cost burden associated with it, but I will not give any details or figures on that. For sure, that has an impact on our cost development. Nevertheless, productivity improvement and process optimization, process re-engineering in the operational processes has always been a task for each and every business unit.
As we grow the business, we can't just add volume into the same sort of pipeline. That is what we are working on. There will be eventually a certain relief in costs that are associated with the AirLOG implementation or has been associated on AirLOG implementation.
To what extent, maybe we can share that when we know all details end of the year.
What is actually driving the cost reduction? Your SGA because the productivity, everything goes under the other operating expenses, right?
I think, Sathish, when you look into the quarter-over-quarter comparison, I think on the Sea Freight, you see very clearly when you take cost per TEU, that not only we have increased the GP, but that is one thing by CHF 2 per TEU, but also costs came down by CHF 5 per TEU. That our improvement of CHF 7 on EBIT per TEU is mainly coming from the cost side. That is personal cost, obviously, that is operating costs. That includes obviously also the usual thing where we develop our IT systems, our products for further IT. The reductions that you see is usually coming out of productivity gains. When, like in the Air Freight arena, sorry, in the first quarter, when we have a bit of a reduction of volumes, that obviously we are not building additional resources.
We are being very careful in the way we add resources. Even in the Air Freight arena, when you were to take out the consolidation impact of Quick, which obviously adds GP and cost. When you take it out and look at the business that is excluding Quick, we would actually have. You have it also in your presentation, the comparison like for like, for Air Freight, and you would see that on a cost per 100 kilo, we would actually have an at a CHF 2 improvement on EBIT. A bit more additional cost, but the majority coming from the higher value services that need a bit more cost. Higher GP, bit higher cost, and in total, a higher EBIT per 100 kilo. Another driving factor, obviously, for Air Freight is we always look at the 100-kilo ratio.
The workload is on order level. When orders become smaller, then your work actually remains the same because you have the same number of orders that operate these. The effort remains the same, but obviously the chargeable revenue is coming down. A couple of moving factors, but I think what we do is strict and very tight cost control on operating costs.
Okay, perfect.
Working capital is a very straightforward answer to that. I think in the first quarter, we have been working diligently on receivables and payables. I think more on the payable side than on the receivable side. Going forward, clearly we are not going to suppliers and say, "Okay, now there's only going to be suppliers that we're going to pay in 120 days." No. There is the offer of supply chain finance solutions that we have put in place over the last two, three years already. I think I spoke on the same calls already a couple of times about it. It's a very renowned solution and it picks up volume very well, which is a win-win situation from a supplier side as well as from our side.
Secondly, I think when we talk about more selective growth going forward, in the next couple of quarters, most likely spilling over into 2020, you should see also a bit of a reduced requirement for CapEx and/or capital allocation in the business unit where we don't want to grow exponentially above the market.
Okay, got it. Very clear. Thanks very much.
Thanks, Sathish.
The next question comes from the line of Neil Glynn from Credit Suisse. Please go ahead.
Good afternoon. Neil Glynn from Credit Suisse. I think the line might be poor, but I'm going to try anyway. Just two questions from me, please. The first one, just on the quarterly progression of GP per TEU. Markus, we obviously talked about it this morning, but is it possible to give any kind of breakdown in terms of how meaningfully helpful reefer versus LCL versus SME benefits were quarter-on-quarter? I'm just interested, those premium aspects of your product portfolio, would you classify them as more volatile or less volatile to your average product across the portfolio? A second question just on the developments within Contract Logistics. Is it possible to provide some color as to the proportion of customers using both Contract Logistics on either Sea Freight and Air Freight?
To what extent is the ongoing work in Contract Logistics likely to bring more alignment between service and customers?
Hi, Neil. Detlef speaking. Let me answer both questions that you have asked, as you spoke to Markus already earlier this morning. GP per TEU. Yes, we know the structure, but we don't disclose it. What I can say is that all business solutions and all products contributed to a higher EBIT in quarter one this year. This is true for FCL, LCL, reefer, and all the premium solutions that we have placed in there.
All of them contributed to the overall EBIT improvement and higher margin. The cross-selling effect of Contract Logistics, yes, we know the Contract Logistics cross-selling effect. We plan that the solutions will be more and more integrated with the network. That's our target and ambition. Even if they continue to be based on separate contracts, the approach to work for global key accounts with what we call scaled solutions, is ongoing in Contract Logistics. We are still having some of the legacy businesses in our portfolio, and that is what we focus on in cleaning up the business or reshaping the business that are under proportionally offering cross-selling possibilities that are standalone, have no synergies, even on a country level with other Contract Logistics or network businesses. That is what we are going to change and to optimize.
Many thanks, Klaus. If I could just come back on that first question, just on the subject of volatility or predictability. Do you see any distinct difference between those premium products, higher-value products within Sea Freight relative to the standard Sea Freight product portfolio?
Yes, it's a premium market. We see that certain customers tend to use an LTL solution, naturally, more likely if the rates are increasing throughout the year or if they anticipate a rate improvement throughout the year. At the same time, we see a structural change at the moment. We haven't mentioned that for Air Freight, but what is true for Air Freight is also true for Sea Freight. The shipment, the number of files, is more or less flat in Air Freight, and it's improving in Sea Freight. The cargo on file, the number of TEU or 100 kilos per file is decreasing. We see smaller lots being shipped. Not a high proportion of smaller lots, but we see that there's more shipments necessary to move the same amount of tonnage or TEU in the market.
That is a typical trend. We are cautious with the outlook, as you saw, for quarter two. We are very positive and excited about the whole year. That is a trend that when people do not build up stock too heavy or do not see high increases in their consumption in the markets they work in. That is reflected in the shipment whereas TEU or tonnage figure that I mentioned before. LTL, we see further growth as the rates for Sea Freight, we anticipate will grow further throughout the year.
Many thanks, Klaus.
You're welcome.
The next question comes from David Kerstens from Jefferies. Please go ahead.
Good afternoon, gentlemen. two questions, please. First of all, on the conversion ratio in Air Freight. I understand the first quarter was impacted by the Quick acquisition impact, the amortization, and integration cost. Has that now all been completed, and do you anticipate a normal level for the conversion ratio going forward? Can you maybe indicate whether the Quick acquisition is accretive to your group conversion ratio? My second question, you highlighted that you expect Air Freight volume growth to recover in coming quarters. What are the drivers, and what's your view on the relative performance of Air Freight versus Sea Freight? Why is Air Freight so much weaker at its current point in the cycle despite secular growth trends such as growing e-commerce? Thank you very much.
Let me answer the latter question first, David. The Air Freight is an early cycle solution in the market. We see Air Freight volumes being flat for two reasons. First of all, the anticipation of growth in the market and the overall outlook that I mentioned before. Secondly, we compare the Air Freight market with a massive and all-time high, never seen before, I'm not exaggerating, growth in the market as well as in our networks last year, quarter one and quarter two. With a more normalized market in the second semester 2018. This comparison also helps a lot. Pharma and aerospace, we see continuous growth. We see a lot of stable performances. What we are missing at the moment are the economy-induced ad hoc shipments for the automotive industry, for example, which we saw last year.
They tend more with less time pressure to ship via Sea Freight. That is one reason. The stock built up in the excitement of whatever trade wars and Brexits that we have discussed with you in the past is gone. The stock levels are still high or higher or high enough to ship with Sea Freight rather than with Air Freight. If you compare the Air Freight performance over a two-year period, just from 2017 to 2019, our volume is still significantly higher than 2017. We had 350,000 tons in our network. Now we have 409,000 tons. Take the 59,000 tons, we are talking about a year-over-year growth of 6%-7%, which is extremely high in such a market environment. All this creates a certain confidence that in the second semester, markets will show a maybe small or lower, but normalized growth again.
Your question on conversion rate in Air Freight Yes, there are a couple of impacts. First of all, lower volume. We did not react with cost to the same extent. First of all, there's always a time lag. We believe in the scenario. I don't need to reiterate that message. We had the Quick acquisition, and Quick will have an impact on the Air Freight conversion rate. Low volume, less than 3,000 tons. This will continue quarter by quarter, and a very high GP. An EBIT that is still loaded with the intangibles or the write-off of the intangibles, which we will continue to do for the next quarters to come. Maybe Markus can give some more details on that.
You asked very specifically on intangibles, if that's going to continue.
Yes, intangibles will continue over a certain period of time. That is very clear. You can see that out of the divisional statements. You should look at the variance of the amortization of intangibles. You will see there is a CHF 5.5 million-CHF 6 million impact per quarter on it. Yes, that will continue. Obviously, you will have to disregard that, if you like, from assessment of quality of the acquisitions. Secondly, integration costs. Of course, it's the first quarter of integrating. Have we finished with that? It depends on what we understand under integration. That is an acquisition that we made not for cost synergies. That is an acquisition that we made for bolt-on know-how, time-critical shipment of a company that is very strong in the North American market.
Our task is going to be to develop that, to leverage that know-how throughout the organization. In that context, integration is only going to be completed when everywhere in the world we can offer the same service under the same standards that currently we can do on the North American market. Has integration progressed well with people systems and so on? Yes, they have. Are there extraordinary costs, if you like, towards that integration within the first quarter? Yes, there are. Are they of a magnitude that we would mention them? No. What I can tell you is the conversion rate without Quick is comparable to 2018. 2018, we had 20.6%, I think, without Quick. In the first quarter 2019, we have 27.7%. A slight decline in conversion rate. That is what also Detlef said.
We work on productivity. Obviously, number of orders remain the same, shipment size goes down. Is our primary focus without losing the quality to the customer? That ultimately counts. Is going to be the conversion rate of Quick accretive? Obviously, it is. It will be. I think our business case would not have worked. Let me just say, I'm not going to disclose after the first quarter too many details on that.
Very clear. Thank you very much, gentlemen.
You're welcome.
The next question comes from the line of Damian Brewer from RBC. Please go ahead.
Good afternoon, everybody. Thanks for taking the question. I've got three, please. First of all, for March alone, given the confidence you've expressed in air ticking up, could you tell us what the March ocean and air volume growth rates were year-on-year, please? i.e., stepping away from Chinese New Year and some of the inventory stocking, de-stocking effects of January and February. March only volume growth for ocean and air. Secondly, given Contract Logistics has historically been quite a capital-hungry business, can you elaborate a little bit more on what the sort of re-dimensioning of that business and the refocus of that business does on capital allocation, but also on the CapEx intensity of the group as a whole going forward? Very finally, I remember in Q4 you talked about picking up the baton on cost optimization and cost reduction.
Rather than the sort of the average rate the quarter, could you give us some feeling for what the cost optimization or reduction run rate was like exiting Q1, i.e., to give us a feel of what we could expect to see in Q2 going into Q3? Thank you.
Hi, Damian. Let me pick up your questions. March growth rates. Yes, we know them. We know them even by day or week. We don't disclose them. I would state there's no specific pattern that would require us to mention any certain deviation from the normal trend in a quarter one. CapEx and capital allocation and Contract Logistics, for sure once we are through all those activities and reshaping initiatives and optimization initiatives, there will be an effect. I think it's too early to state this effect. We need to go down this path another one or two quarters, and then we will be able to disclose more precisely what effect you can expect.
Cost optimization, we have a clear plan on how to optimize SGA costs and what to do. Also from a structural point of view, you would not see any benefits because whatever costs are associated in implementing the cost reductions, this has been part of quarter one and will be for sure in quarter two. You should see benefits, let's say quarter three or more likely in quarter four.
All right, thank you. If you were to remove the underlying or if you look at the underlying without the implementation costs, could you give us a feel of the progress you're making, given it was such a critical issue on the Q4 miss?
Damian, we are on track with our plan. That is what we can disclose. I will not be in a position or willing to disclose the figure as such at the moment. We have set up a plan in quarter four or end of quarter three, early quarter four, and we are pursuing this plan and we are on track.
All right, thank you. We'll wait for the Q3 report. Thank you.
Thank you, Damian.
The next question comes from the line of Marco Strittmatter from Zürcher Kantonalbank. Please go ahead.
Yes, thank you. Hello, take care. Hello, Markus.
Hi, Marco.
Small question remaining for me. In the income statement, you have an other operating income of CHF 8 million. Maybe you can tell us which division it came out and what it is.
Hi, Marco. Pretty straightforward as always. We were continuing our real estate streamlining and at that point in time, that was a smaller portfolio that we have put on the market. You can also see it in the cash flow statement, the gross value, if you like. The benefit on the P&L is a bit less than CHF 8 million actually. On that portfolio, it's about CHF six and a half. The rest is smaller components.
It's in the Contract Logistics division then?
Yes. Correct. That's correct.
Okay. Thank you.
All right. Thanks, Marco.
The next question comes from the line of Aymeric Toulain from Kepler. Please go ahead.
Yes, thank you. Good afternoon, everybody. Three question, if I may. The first one is on Air Freight. I'm puzzled by the swing in gross profit per ton, and obviously the mix is quite important with a Quick acquisition and here, obviously you have a quite sizable perishable business. I'm just wondering how this mix effect worked in Q1 and also as we extrapolate for the rest of the year, how you see the GP per ton evolving throughout the year, given the very high level we had in Q1? That's the first question. Second is on Contract Logistics.
Given the importance of this division for IFRS 16 forecast, I'm just wondering if I understood correctly that you're planning to have that division effectively flat for the rest of the year and then gradually reaccelerate or recovering into next year as you are happy with the productivity measure and therefore you should grow as of 2020 more in line with the rest of the group, or do you plan to keep it flat from now on? On the third question, looking at the outlook for the market that you reiterated, I'm just wondering, as we enter into the seasons for the bookings for the peak season very soon, what are your clients telling you about the general economic activity and is there a hope for trade deal? You mentioned the Brexit having led to some restocking.
There's quite a lot of moving parts and question around the true underlying trend as we move into the second half. I'm just wondering what's your feeling about this recovery in the second half is at this stage. Thank you.
Sure, Aymeric. Let me pick up the first question. Air Freight mix effect. The Quick acquisition and Quick has above average, significantly higher GP per 100 kilo. We talk about eight to 12 times higher GP per 100 kilo. That has an influence, obviously, with the low tonnage that we ship in the Quick networks. Perishable is ongoing. We are the strongest player globally in the perishable sector. We have made an acquisition last year, Panatlantic, as you remember. All this is running well. As the business or as the overall market is not as bullish at the moment in the demand of capacity, carriers are also more easier to be accessed with perishable shipments. That eases up our position in the market as well.
The overall outlook for Air Freight, the GP per tonnage will decline slightly given the fact that volumes will come back, especially in the second semester this year, that the demand in the market will show a certain smaller growth rates again. The mix will stay in a normalized or in a balanced structure. If you look on slide eight, Aymeric, you see exactly the Quick acquisition effect on GP per ton and the hard cargo mix perishable effect. The pure Quick effect is a CHF 5 per 100 kilo higher. Or offers 5 kilo per 100 kilos higher GP for the entire volume shipped in that period. I will skip the second question and outlook peak season, as said, market should normalize. Second semester market growth mainly back to one to two%, that in total our market outlook, as you saw, has been zero.
We were a bit cautious here. To come back to our general macroeconomic outlook, we have positive fundamental data in most of the major economies. Low unemployment rate, high tax reductions, high incomes, purchasing power of the households, and so on and so forth. I will not give you a lesson now. You know much better. There's one thing that is still in the room. The white elephant in the room is trade war. If we come to conclusions eventually, trade agreements again, U.S. and China, also a Brexit solution, I would see that confidence comes back to the consumers as well. If you open a newspaper today, or if you see the news on TV, watch the news on TV, you can't but become cautious. That's a bit our approach at the moment.
As stated in our last call, we hope that those two major white elephants, as I call them, will be resolved. Your second question, Aymeric, I didn't get fully. You said something IFRS 16 forecast-
Yeah
We didn't capture that question here, maybe you can-
It's because you mentioned most of the IFRS 16 lease effect are effectively driven by the Contract Logistics or the growth of Contract Logistics, or the lack of growth must affect the forecast IFRS 16 impact for the coming year. I think you mentioned that having restructured the business, you're planning to keep it pretty much flat for the rest of the year. As we move into 2020, should we assume that this business start to grow again, which would obviously impact the IFRS 16 lease effect or should we assume it flat for the foreseeable future? Again, it's a technical question on the accounting side, but because this strategic effect have an accounting impact, it's quite important.
Aymeric, now I get it. I mentioned that briefly when I presented the Contract Logistics business unit. The typical project cycle is 6-12 months. You would expect still growth in the Contract Logistics business. Above market, be careful, above market this year. Maybe on market level, we reduce growth. Next year, a flat development. That is what you should expect. We didn't say we don't want to grow. Here we have to be very careful. We are more selective in the growth that we pursue within the group. If we grow in 2020 slightly below market and on market again in the following years, that would be ideally from our point of view. Yeah? It's more the portfolio of contracts that we grow this than the absolute percentage figures.
For this year, you should expect a growth that is for sure higher or on market level or slightly higher than market given the order intake and project and implementation. Next year, as I said, slightly on market level or slightly below. Yeah?
Okay. Thank you.
That then has an impact on IFRS and all this. Yeah?
Okay. Very clear. Thank you.
Okay. Thank you, Aymeric.
The next question from the phone comes from Sebastian Vogel from UBS. Please go ahead.
Hello, good afternoon. I have three questions. The first one would be on, if you can outline the acquisition and forex effects on Air Freight and Sea Freight on the net turnover. The second one would be on net working capital. You mentioned already earlier on your trade finance offering, i.e., reverse factoring. Is it possible to share with us the share of your payables that are currently already covered by these sort of reverse factoring facilities? Speaking of net working capital, speaking of DSO and DPO in that regard, had the Quick acquisition some effect on these numbers, or was it not sizable in that regard? Last but not least, again, with IFRS 16, what is the level of right of use additions that we have seen in the first quarter? Something that we should see as a sustainable level going forward?
That would be my three questions.
All right, Sebastian. In my count, it would be four, that is probably also agreeable. For the first question, what is the impact on the turnover? I think for each of the business units of the Quick acquisition and other acquisitions, I think we can take that offline. If you contact [inaudible], we can give you the numbers.
Sure.
Trade finance. Trade finance, the program that we share with our partners, Tradeshift and Citibank, is currently attracting around CHF 500 million turnover a year. We are expecting a growth rate this year for roughly another 20%, so another CHF 100 million. Major target or major participants at the current stage are mid-size suppliers
Basically in the European and the U.S. market. The net working capital DSO DPO impact of Quick. The impact of Quick actually is Quick has a very healthy DSO and DPO health and a very good DSO DPO development. Obviously, from a consolidation point of view, yes, we are now in the first quarter recording the first three months of turnover. At the point in time it take over 31st of December 2018, all the receivable payments, the whole balance sheet went over. Of course, from a seasonality point of view, it's slightly lower. You could argue from a pure technical point of view that there is a lower revenue than probably the receivables, which we have taken over at that point in time in the balance sheet have been referring to. Technically, it might have actually a bit of a negative impact.
Overall, the DSO DPO development for that business is better than the average of the KN group. IFRS 16, right of use asset level of CHF 1.75 billion. I think this is a first-time recognition. At that point in time, you know how it's built up, all the contracts, all the base contracts being added together and discounted for their lifetime. Yes, there will be variances to that, but I think if there is going to be a reduction to that, it can only come out of two reasons. Either we reduce the overall number of contracts, or we shorten the period. The sheer number that is here on the balance sheet actually doesn't tell us anything about is there a business growth or not. I could exchange 10 short-term contracts for each of them one year with a 10 years contract. You know what I mean?
That number doesn't necessarily make a big comment or a big analysis of the business growth. Hence, I would think that number is going to stay pretty much around that level.
Many thanks.
Thank you.
The next question comes from Mark McVicar from Barclays. Please go ahead.
Good afternoon, Detlef. Good afternoon, Markus. Hopefully one quick question.
Hey, Mark
One quick question for each of you. Let's start with you, Detlef. On the KN Pledge product, can you just explain to us how you protect the volume from You've got a guaranteed lead time, and you've got a money-back guarantee. How do you protect the business from the inevitable, the ship is late, the weather's bad, the port's shut, the trucker doesn't turn up, all that kind of stuff. How do you protect or price that product? Related to that, I think, how big do you think this could become as a product?
Yeah. Thank you for that question because, for sure we have discussed this intensively when we set up this product.
Sure.
Mark, this is based on a platform that allows FCL booking per se. Quote book track for FCL with an instant quoting, which is unique in our industry as such. The pledge effect, the guaranteed effect, is based on big data and predictive analytics. We have the data. We have the information. We can design the routing as safe and as predictable as possible. We can't foresee an explosion or an earthquake, most likely, but all other effects, even weather conditions for a certain period we use, and all this is part of that platform solution. When you request a quote as a customer, the system behind offers more secure, less secure, different routings and timelines and so on, and the pricing is associated to that. I think we have a unique product in the market.
Too early to say how much of a product will that be. For sure, it forms the basis for what we have established already before with LCL shipments on a platform solution based, the KN FreightNet solution for LCL, which we posted, I think, 3 years ago. Now we have an FCL solution with KN Pledge and a CO2 neutral approach. I think you can count that to be a blockbuster, for sure in that area. Mark, too early to say what contribution will it bring to the Sea Freight P&L as such. I have to say, I'm proud of the Sea Freight team and the way they used and leveraged our platform knowhow, our predictive analytics and big data competence, as well as the classical Sea Freight knowhow with instant quoting and price confirmation, booking slot confirmation from the carrier side.
Sure. Depending on how successful or otherwise you are with this product, could you see yourself rolling out more KN Pledge products? I get that it's based on average delay, average whatever it is. That, okay, that's fine. That looks to be a pretty attractive product. Could you roll it to LCL?
I wish we.
Could it.
I wish I could give you.
Other Air Freight products?
You know Kuehne + Nagel, we have a lot of ideas. We will not disclose things that we will do. We only disclose what we do and what we do well and/or where we have room for improvement, whatever it is. Mark, it's not easy to be copied. It's almost impossible. We have a unique system running. We have the platform, we have the automatic interface with carriers and with other suppliers. All this runs into this or is incorporated in that solution. Based on a platform and open for our customers only and for sure not for competitors who try to get into that. That is part of our, and I think I mentioned that before, it's part of our eTouch strategy. This unique solution drives the overall eTouch implementation in Sea Freight or rollout of the eTouch approach in Sea Freight.
As we have similar approaches in other business units.
Okay, thank you. Then just another question or a quick question for Markus on Quick. Without trying to go over old ground. Could you just give us a better steer or pointer on your current accounting basis, including all the amortization, when do you expect it to be earnings enhancing? Is it 2020 or do we have to wait 2021? Perhaps if I ask the other question the other way around, what is the amortization period? Is it five years or three?
I think we can be very clear on the earnings accretive. I think it's going to start being earnings accretive as soon as in the next quarter. The financial or the economic power of Quick is definitely higher than the amortization of intangible. We would expect the Quick acquisition to be earnings accretive by second, third, and fourth quarter already this year. We are not talking 2020, 2021. The amortization of intangibles at the current stage is around five and a half million per quarter, as I mentioned before. Call it 22 million in a year. That will continue over a couple of years and the amount of years or the number of years is going to be between five and seven.
Between? Sorry, Markus, I didn't hear the last bit.
Sorry. The number of years is going to be between five and seven.
Five to seven. Okay, that's brilliant. Thank you both very much.
All right.
Thanks, Mark.
Bye-bye.
Bye-bye.
There are no more questions at this time.
Thank you, Andrea. Ladies and gentlemen, thanks for joining our call on the Quarter 1 results of the Kuehne + Nagel International AG. We have started the year pretty good from our point of view. We continue to grow with all the outlook that we have shared with you. Having said so, we look forward to talking to you again on the semi-annual results on July 23rd, so in three months from now. Bye-bye and take care.
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