Ladies and gentlemen, welcome to the Q1 2019 Results Conference Call. I'm Andrea De Colos, call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. The presentation will be followed by a Q and A session. The conference must now be recorded for publication or broadcast.
At this time, it's my pleasure to hand over to Doctor. Detlef Bratzker, CEO of Kryn and Nagel. Please go ahead, sir.
Thanks, Andrea. Good morning, good day, good afternoon and good evening to all of you, and welcome to the Kunle and Nagas Analyst Conference on the Q1 2019 results. Markus Lanter Graf, our CFO, and I welcome you from beautiful Switzerland. We have published our analyst presentation earlier this morning. And as always, we start on Slide 3.
Kuehne and Nagel continues to grow, and we got off to a good start in 2019, with group earnings able at CHF 181 1,000,000 in quarter 1, a strong EBIT improvement in Seaprates to CHF 112,000,000, which amounts to an increase of CHF 15,000,000 above quarter 1, 2018. A stable EBIT in airfreight of CHF 80,000,000, which is CHF 1,000,000 below the record year 2018 a strong net turnover growth in Overland, which resulted from a strong operational improvement of EBIT and a net turnover growth in contract logistics of 6.3% whilst consolidating our contract portfolio. Let's continue on Slide 4 with some key figures. Despite the markets weakening, and we mentioned so already during our last analyst call when we commented on the full year 2018 results, our Q1 this year has been very successful. The consistent implementation of our business strategy in all business units has been decisive for this success.
So net turnover improved by 7.7 percent to CHF 5,200,000,000. Gross profit improved by 7.3 percent to CHF 1.978, almost CHF 2,000,000,000 EBITDA improved to CHF 242,000,000 or by 2.5 percent and earnings per share were slightly down to CHF 1.50 per share,
I think
I think we hear Andrea making some noises in the background. So maybe you can drop off or go on mute. We have on Slide 5 a short introduction to our 2 network business units, Seafreight and Airfreight. Seafreight, we are number 1 globally with the volume transport in our networks, and we saw significant business wins with our new digital platform. We have launched KN ESP already last year, and we have mentioned that a couple of times.
We have a lot of bookings and the trend is increasing on this platform. But I'm really proud that we also launched a new solution on a platform a week ago called KN Pledge, and I'm sure you have noticed this. This is the 1st and only full container load quotebooktrack solution in the market that offers guaranteed lead times and even a money back guarantee. And 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 50,000,000 strength as stated before.
Airfreight, a very successful integration of our bolt on acquisition of the Quick Group, a high niche market player in a market that is growing fast and offers strong margins, high margins and margin improvements. And 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 Interior Chain once more and KN Pharma Chain as well. Let's detail the volume development of sea and airfreight on Slide 6 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 the quarter 1.
1,146,000 TEU shipped in our networks in quarter 1 2019, while the market growth was clearly or has clearly been below 2% or 1% to 2% in quarter 1 this year. Our Asia Europe volumes expanded double digit despite a declining market on these trades. And our products, LCL and reefer, performed extremely well. And 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 airfreight, markets have been different, and we have stated so already when we commented on quarter 4 or year end 2018 results in our last call.
In a declining market, our volumes declined as well by approximately 3%, which were which was in line with market. And we saw a decline already in quarter 4. Remember, we saw a decline of minus 2% in quarter 4, 2018 versus quarter 4 previous year. Europe export to Asia as well as NAM, North America export to Asia declined, while the Europe to North America and the Europe exports the North America exports to Europe, so vice versa, increased. So 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 7. Sea freight improved yield and benefited from active cost management, both led to a record result in quarter 1 2019. At CHF 333.13 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 CHF97, which is a significant improvement versus previous quarter, so sequentially, of almost 20% and year over year by CHF7 or almost 8%. As always, I quote the year to date variance analysis in CHF 1,000,000. So the GP effects coming from volume and sea freight were CHF 23,000,000 in quarter 1. The margin effect in GP coming from the Q1 were CHF 2,000,000. The cost increase due to the volume was under proportional with only CHF 10,000,000 resulting into an EBIT improvement in quarter 1 twenty nineteen of
CHF 50,000,000.
Let's do the same exercise and the details on airfreight on Slide 8. The trend that we saw already in the last two quarters of underlying yield strength continued and extended into quarter 1 2019. The margin improved by 19% year over year with more than half of this improvement coming from the organic growth of organic development of airfreight. And the balance, as you see in the slide, is attributable to the acquisitions of Panadantik and especially Quick. The EBIT per 100 kilo improved by 5% and sequentially as well as year over year CHF 1.
The clear contribution of the Quick acquisition can be seen in the figures that we have outlined here. And the EBIT of the Quick acquisition is still suffering from the intangible amortization as well as the integration costs in the Q1 after the acquisition. Also here, I would like to go through the year to date variance analysis in CHF 1,000,000. The volume effect on gross profit has been CHF 9,000,000 negative, lower volumes, lower GP. The margin effect in gross profit has been positive with CHF 52,000,000 clearly to be seen CHF 80 per 100 kilo versus CHF 67 per 100 kilo previous year quarter 1.
The cost effect has been minus CHF 44,000,000, resulting into an EBIT effect of minus CHF 1,000,000 for the Q1 in FX. The impact of the Quick acquisition, I mentioned already also in the figures before, you see these on Slide 9 again. And 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. And I have to say, the product sterling for the aerospace AOG solutions as well as the QuickStat solutions for the health care and pharma industry integration is ongoing as planned. Cross selling, business case confirmed, all those topics. But 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. So 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. High margin, high growth in the high margin, high growth segment of time critical shipments and a very low volume of the business. So the overall tonnage move in the Q1 2019 in the Quick network with time critical shipments was less than 3,000 tonnes. And as you saw, we have a very positive EBITDA contribution of more than CHF5 1,000,000 from Quick, but with a slightly negative EBIT effect due to the intangible amortization and some of the integration costs. So this bolt on acquisition will show also in the future a lot of impact in our airfreight P and L.
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 1 2018 figures in nominal in a nominal way.
But the figures last year, as you remember, included a material one off gain of almost CHF 6,000,000 or more than CHF 6,000,000 from the disposal of our business in Brazil. So operationally, the business unit Overland improved
their contribution by this amount.
What contributed to the strong performance? As I said, intermodal shipments for our major customers in the U. S, so the U. S. Economy is still running well.
The European Group Edge and LTL Business, FTL Business and the integration of the Overland Business in our Industry Solutions, the pharma solution, 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 quarter 1, And this growth reflects both the volume extension, we count the volume in overland and shipments, but also improved pricing. And 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 growth. So let me continue on Page 12.
Contract logistics, also here, we have posted the 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 and L or the EBIT in contract logistics.
And 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 across sell to the other business units. We invest into technology picking enhancement in new warehousing software, which I mentioned before. And we are very selective or more selective with the growth in 2019. So while we saw an organic growth of 6% in quarter 1, which was in line with the 6% that you saw in quarter 4 2018, we believe that with the typical contracts implementation cycle for a contract logistics project of 6 to 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. So therefore, the EBIT contracted to CHF 26,000,000 compared to the CHF 34,000,000 in quarter 1 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, Bartlett. Hello from my side also to all participants. I'm on Page number 14, income statement. 1st quarter, if I may, just 3 topics I want to address. First, GP growth.
We have added $135,000,000 of GP, of which EUR 25,000,000 in sea freight, EUR 43,000 in air freight. So the 2 international network businesses with EUR 68,000,000 additional GP. You have heard from Douglas' explanation, seafreight with €25,000,000 more. GP has returned €15,000,000 more EBIT, so conversion rates increased. Airfreight, I think we have explained with the acquisition of Quick being the 1st quarter on the consolidation, including intangible assets of around CHF 5,500,000.
Overland adding CHF 21,000,000 on the GDP line and on the nominal value remaining at the very same level as the Q1 2018. But please be reminded, in Q1 2018, we had a positive one off effect of a disposal of a business in South America amounting to around CHF 7,000,000. So operationally, as we have heard, a very good performance. Second topic, IFRS 16. In fact, you can see that here very clearly on the development on the EBITDA versus the development of EBIT.
We have EUR 115,000,000 of depreciation of right of use assets that are reclassified below the EBITDA line. So hence, if you compare EBITDA like for like, you would see SEK 289,000,000 in the Q1 2018 versus SEK 303,000,000 versus in the Q1 2019. And just for explanation, I'm sure you're all aware of that just to highlight where you can find the impact easily. Thirdly, the exchange rate impact, negative for us, 1.7 percent on the EBT line. That translates into roughly €4,000,000 EBT.
So 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 point 75,000,000,000 versus on the liability side split into noncurrent 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 and L development of the income statement.
You can see here the depreciation value of €115,000,000 which I pointed out earlier. On EBIT level, we are around €3,000,000 impacting. And the profit before tax has a not so significant impact of minus €1,000,000 in the quarter, predominantly in contract logistics, as you can imagine, through the so called front loading impacts of the IFRS 16 methodology. We expect that SEK 1,000,000 on a quarterly basis to continue throughout the year. So and full year impact will be around €4,000,000 to €5,000,000 negative impact on EPC for the group, of which you can contribute or you can attribute the majority to contract adjustment.
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 KPIs 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 sheet is going within the companies. I have added something that is usually used also in the banking sector as 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 it's we have a very healthy Q1 development. Also here, you imagine there is an IFRS 16 impact on reclassification, which we have then pointed out on the next page on the Page number 18. But let me just walk you through quickly on the individual items.
So we started in the year with a bit of a lower balance than it has been a year before on €488,000,000 which is €222,000,000 lower than it was a year before. And quick jump to the conclusion. We end up with the cash and cash equivalents at the end of the Q1 with only CHF 67,000,000 lower than last year. Hence, with all the reclassifications in between and the complications, if you like, we can safely say around €140,000,000 we have had a better cash inflow than it has been the year before. Looking to Page 18, which is the free cash flow development.
And on the right side, you see the quick restatement on like for like comparison for IFRS 16. And you can see quarter 1 has returned very healthy on EUR 140,000,000 free cash flow, which is a very good result taken that Q1 also historically has has a seasonal impact of usually not returning to high free cash flow. So 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. So hence, a bit of an increase also in working capital and hence net working capital. You will see here we have increased the €166,000,000 compared to a year ago with spreads between and DTOs 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 a 5 days.
I think a 7 to 9 days should be our corridor that we want to work in. Return on capital employed, Page number 20, very familiar slide with the spread or with the separation into return capital employed with and without acquisitions. You know acquisitions have, from day 1, the full balance sheet and only the buildup of the P and L over the 3 month period, rolling that we use as a reference. So the upper line, the dark blue line or the darker line is the one that is excluding the acquisitions. And you see the first time that we go after the inflection point of 58% as you enter the direction 60%.
Anticipating what is on Page number 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% to 24%, but I think we will be somewhere around 23% line. Working capital intensity will 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%. And I'm trying to be specific here.
We have had a bit of feedback on our way how we write down approximately. Plusminus does not mean between minus and plus 2%. It means around 2% mark, so approximately 2%. And for KN, we expect a growth double the market, in this case, above 5%. Airfreight, we see currently or our expectation is after the Q1 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 month to come, for the next three quarters, there is going to be a positive slowdown in the effect. For ourselves, the only thing we can say, we want to grow our volumes. Overland, 2% to 3% in the market. We want to grow double the market.
Contract logistics with the more selective approach to grow customer portfolio that already has that has 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.
And 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 The first question from the phone comes from Daniel Ryszka from Sunpro C Bernstein. Please go ahead, sir.
Thanks very much. Good afternoon, gentlemen. Three questions, if I may. Number 1, on the IT rollout in Air Log. Could you give us a little bit of a color if that's progressing, how that's progressing, kind of how the speed is going, just an update on that and whether also the volume weakness in air is attributably kind of fully to the market or if there's kind of also a slowdown here as you're rolling out the new IT on air.
Secondly, I'll come back to etouch kind of on your task to digitize more of your workflows. And I'm wondering, have you had conversations with customers about this? I bet you do. And then 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? And then you already touched a little bit on contract logistics. If I may just ask you kind of give us a little bit of a plan so to speak for the next 4 to 8 quarters kind of you're rolling out the IT, you're reworking the contracts. What's the sequencing?
How do we think about kind of the next 4 to 8 quarters in contract logistics? Thanks.
Thanks, Daniel. I will answer your questions in the sequence you have asked them. AirLock rollout, we are done with the airlock rollout as per plan. So all countries are rolled out. Now 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 will be a task for this year or the next 18 months. But the effect, 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.
So that for sure had a sort of a productivity or cost issue, but not on the volume on the market side. And that is from my point of view the most important message. ETouch. Not only our customers are excited, we are all excited about eTouch. And we have a lot of initiatives running, and it's different per business unit.
So 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 CFAIL is a clear eTouch solution. This has been developed together with customers. This has brought customer and carrier 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, so every half year. So 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 regards. The contract logistics plan for the next couple of quarters is pretty clear.
So I think what you should be thinking about is that for the next 4 quarters, we are in that mood that we have described already last in the last call, yes? So investments in the 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. You should see clear benefits in a year from now, the latest. That would be my ambition to say that it's also pretty good.
Good. I hope that answers your question then.
All right. Thank you very much.
You're welcome.
The next question from the phone comes from Sakish Sivakumar from Citigroup. Please go ahead.
Yes, thanks. Yes, good afternoon, Douglas and Markus. I have a couple of questions actually. Firstly, on the cost, is the SG and A cost that I've seen in being the main focus as part of your cost management strategy? Because if you could list some of the key measures that you have taken, it brings the cost down by about CHF 76,000,000 in Q1 this year?
And secondly, on the working capital, what are the main drivers that would result in the improvement in working capital? Or do you see the role of reverse factoring or trade factoring impacting their working capital in the next few quarters?
So, Zatin, first of all, good afternoon. Let me answer the cost question. If I understood the question right, you were very difficult to understand. But we have an active cost approach and cost management approach, which is part of the DNA of Kuehne and Nagel, one could say, in each and every business unit. And for airfreight, with the implementation of AirLock 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 would not dare I will not give any details or figures on that. But for sure, that has an impact on our cost development. Nevertheless, productivity improvement and process optimization, process reengineering in the operational process, it 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. And that is what we are working on.
So there will be eventually a certain relief in costs that are associated with the airlock implementation or has been associated to an airlock implementation. To what extent maybe we can share that when we know all details end of the year.
So what is actually driving the cost reduction and you're selling general and administrative expenses? Because the productivity, everything goes under the other operating expenses, right?
So I think, Satish, when you look into the quarter over quarter comparison, I think on the sea freight, you see very clearly when you take cost per toy that not only we have to increase the GP, but that is one thing, by CHF 2 per toy, but also cost came down by CHF 5 per toy. So that our improvement of 7 Swiss francs on EBIT per toy is mainly coming from the cost side. And that is personnel cost, obviously, that is operating cost. And that includes, obviously, also the usual thing where we develop our IT systems, our IT our product for further IT. So the reductions that you'll see is usually coming out of productivity gains.
And when like in the airfreight arena, sorry, in the Q1 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 to it. So even in the airfreight arena, when you were to take out the consolidation impact of Quick, which obviously adds to the end cost, when you take it out and look at the business that is excluding Quick, we would actually have and I have made you have it also in your presentation, the comparison like for like for airfreight. And you would see that on the cost per 100 kilo, we would actually have CHF2 improvement on EBIT, a bit more additional costs, but the majority coming from the higher value services that need a bit more cost. So higher EBIT, a bit higher cost and in total, a higher EBIT per 100 kilo.
So another driver and factor obviously for air freight is we always look at the 100 kilo ratio, but the workload is on order level. And when orders become smaller, then your work actually remains the same because you have the same number of orders that offer latency. And the effort remains the same, but obviously, the chargeable revenue is coming down. So 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 Q1, 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 is only going to be suppliers that we're going to pay in 120 days. Now there is the offer of supply chain finance solutions that we have put in place over the last 2, 3 years already.
I think I spoke on the same calls already a couple of times about it. It's a very well known solution, 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 20%, 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. Yes, very clear. Yes, thanks very much.
Thanks, Atish.
The next question comes from the line of Glyn Knit from Credit Suisse. Please go ahead.
Good afternoon. Neil Glyn from Credit Suisse. I think the line might be poor, but I'm going to try anyway. Just two questions for me, please. The first one just on the quarterly progression of GP per Troy.
Marcus, we obviously talked about it this morning, but is it possible to give any kind of breakdown in terms of how meaningfully helpful REFR versus LCL versus SME benefits were quarter on quarter? And I'm just interested, those premium aspects of your product portfolio, would you classify them as more volatile or less volatile your average product across the portfolio? And then 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 seafreight and airfreight? And to what extent is the ongoing work in contract logistics likely to bring more alignment between service and customers?
Hi, Neil. Detek speaking. Let me answer both questions that you have asked as you spoke to Marcus already earlier this morning. GP per toy. 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 1 this year. This is true for FCL, LCL, reefer and all the premium solutions that we have placed in it. So 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 assume that or we plan that the solutions will be more and more integrated with the network.
That's our target and ambition. But even if they continue to be based on separate contracts, the approach to work for global key account 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 cost selling possibilities that are stand alone, have no synergies even on a country level with other contract logistics or network businesses. And that is what we are going to change and to optimize.
Many thanks, Natla. 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 SeaFide relative to the standard SeaFide product portfolio?
Yes. It's a premium market, and we see that certain customers tend to use a 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 airfreight, but what is true for airfreight is also true for sea freight. The shipment, the number of fires is more or less flat in airfreight, and it's improving in sea freight.
But the cargo on fire, the number of TEU or 100 kilos per fire is decreasing. So 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. And that is a typical trend for we are cautious with the outlook as you saw for quarter 2. We are very positive and excited about the whole year. But 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 look at.
And that is reflected in the shipment versus CU or tonnage figure that I mentioned before. So LTL will see further growth as the rates for sea freight will we anticipate will grow further throughout the year.
Many thanks,
The next question comes from David Krastens from Jefferies. Please go ahead.
Good afternoon, gentlemen. Two questions, please. First of all, on the conversion ratio in airfreight, I understand the first quarter was impacted by the quick acquisition impact, the amortization and integration costs. Has it now all been completed? And do you anticipate a normal level for the conversion ratio going forward?
And can you maybe indicate whether the Quick acquisition is accretive to your group conversion ratio? Then my second question, you highlighted that you expect airfreight volume growth to recover in coming quarters. What are the drivers? And what's your view on the relative performance of airfreight versus sea freight? Why is airfreight so much weaker at the 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. So we see airfreight volumes being flat for two reasons. 1st of all, the anticipation of growth in the market and the overall outlook that I mentioned before. But secondly, we compare the airfreight 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 1 and quarter 2, with a more normalized market or more normalized market in the 2nd semester 2018.
So this comparison also helps a lot. But 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, industry, for example, which we saw last year. They tend more with less time pressure to ship in to ship via secret.
So that is one reason. Then the stock build up in the excitement of whatever trade wars and Brexit 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 airfreight. But if you compare the airfreight performance over a 2 year period just from 2017 to 2019, our volume is still significantly higher than 20 17. We had 350,000 phones in our network.
Now we have 409,000 phones. Take the 59,000 phones, we are talking about a year over year growth of 6%, 7%, which is extremely high in such a market environment. So 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 France. Yes, there are a couple of impacts.
First of all, lower volume and we did not react with cost to the same extent. First of all, there's always a time lag and we believe in the scenario that I just so I don't need to reiterate that message. And then we had the Quick acquisition. And Quick will have an impact on the group on the sorry, on the airfreight conversion rate. Low volume, less than £3,000 and this will continue quarter by quarter and a very high GT, but 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.
And maybe Markus can give some more details on that. Because you asked very specifically on intangibles if that's going to continue. So yes, intangibles will continue over a certain period of time. So that is very clear. You can see that out of the divisional statement.
If you look at the variance of the amortization of intangibles, and you will see there is a CHF 5,500,000 impact per quarter on this. So yes, that will continue. But obviously, you will have to disregard that, if you like, from an assessment of quality of the acquisition. Secondly, integration costs. Of course, it's the Q1 of integrating.
Have we finished with that? Have we finished? 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.
And our task is going to be to develop that, to leverage that know how throughout the organization. So 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. But has integration progressed well with PayPal systems? And so yes, they have. Are there extraordinary costs, if you like, towards that integration within the Q1?
Yes, they are. Are they of a magnitude that we would mention then? No. So what I can tell you is the conversion rate without quake is comparable to 2018. 2018, we had 20.6%, I think.
Without Quick in the Q1 2019, we have 27.7%. So a slight decline in conversion rate. That is what also Detlef said. We work on productivity, but obviously, number of orders remain the same, shipment size goes down is our primary focus without losing the quality to the customer because that ultimately counts. It's going to be the conversion rate of quick accretive.
Well, obviously, it is. Otherwise or it will be. Otherwise, I think our business case would not have worked. Let me just say I'm not going to disclose after the Q1 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 questions. I've got 3, 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, destocking effects of January February, so 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 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? And then 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 ex in 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, but we don't disclose them. I would state there's no specific pattern that would require us to mention any certain deviation from a normal trend in the quarter 1.
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 1 or 2 quarters, and then we will be able to disclose more precisely what effect you might or what 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 1 and will be for sure in quarter 2. But you should see benefits, let's say, quarter 3 or more likely in quarter 4.
All right. But if you were to remove the underlying or if you'd 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?
I mean, David, 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 4 or end of quarter 3, early quarter 4, 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, Daniel.
The next question comes from the line of Marco Stitmater from Zurcher Kantonal Bank. Please go ahead.
Yes, thank you. Hello, Marcos. Just a quick and small question remaining for me. In the income statement, you have an other operating income of €8,000,000 Maybe you can tell us which division it came out and what it is.
Hi, Marco. It's 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 that in the income sorry, in the cash flow statement, the gross value, if you like.
The benefit on the P and L is a bit less than €8,000,000 actually. On that portfolio, it's about €6,500,000 The rest is just smaller components.
So from the it's in the contract logistics
division then? Correct. Yes, that's correct.
Okay. Thank you.
All right. Thanks, Marc.
The next question comes from the line of Pierre Poulain from Kepler. Please go ahead.
Yes. Thank you. Good afternoon, everybody. Three questions, if I may. The first one is on airfreight.
I'm puzzled by the swing in gross profit that's on and obviously the mix is quite important with quick acquisition and here 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? And that's the first question. 2nd is on contract logistics.
Given the importance of the division for IFRS 16 forecast, I'm just wondering if I understood correctly that you're planning to have that division effectively flat in for the rest of the year and then gradually recovering into next year as you're happy with the productivity measure and therefore should grow as of 2020 more in line with the rest of the group? Or do you plan to keep it flat from now? And on the 3rd 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? Or you mentioned the Brexit having led to some restocking.
So there's quite a lot of moving parts and question around the true underlying trend as we move into the second half. So I'm just wondering what's your feeling about this recovery in the second half either at this stage? Thank you.
Sure. Aymeric, let me pick up the first question. Airfreight mix effect, The Quick acquisition and Quick has above average significantly higher GP per 100 kilo. We talk about 8 to 12 times higher GP per 100 kilo. And that has an influence, obviously, with the low volume that we are the low tonnage that we ship in the quick network.
Perishable is ongoing. We are the strongest player globally in the perishable sector. We have made an acquisition last year, Pan Atlantic, 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 shipment.
So that eases up our position in the market as well. The overall outlook for airfreight, the GP per tonnage will decline slightly given the fact that volumes will come back, especially in the 2nd semester this year and that the demand in the market will show certain smaller growth rates again, yes? And the mix will stay in a normalized or in a balanced structure. If you look on Slide 8, Emilek, you'll see exactly the quick acquisition effect on GP per toy and hardcargo mix perishable effect. So the pure quick effect is a CHF5 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. 2nd semester market growth may be back to 1% to 2%. So that in total, our market outlook, as you saw, has been 0. So we were a bit cautious here.
And to come back to our general macroeconomic outlook, we have positive fundamental data in most of the major economies still. Low unemployment rate, high tax reductions, high incomes, purchasing power of the household and so on and so forth. I will not give you a lesson now. You know much better. But there's one thing that is still in the room.
The white elephant in the room is trade war. And if we come to conclusions eventually and trade agreements again, U. S. And China and also a Brexit solution, I would see that confidence comes back to the consumers as well. But if you open a newspaper today or if you see the news on TV, watch the news on TV, I mean, you can't but become cautious.
And that's a bit our
approach at the moment.
As stated in our last call, we hope that those 2 major white elephants as I call them will be resolved. Your second question, Aymeric, I didn't get fully. If the you said something IFRS 16 forecast and then we didn't capture that question here. So maybe you can
Yes. It's because you mentioned most of the IFRS 16 lease effect are effectively driven by the contract logistics. So the growth of contract logistics or the lack of growth must affect the forecast IFRS 16 impact for the coming year. So as you I think you mentioned that you're having restructured the business, you're planning to keep it pretty much flat for the rest of the year. But then 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's flat for the foreseeable future? And again, it's a technical question on the accounting side, but because this is the strategic effect of an accounting impact, it's quite important.
No, I get it.
Well, I mentioned that briefly when I presented the contract logistics business unit. The typical project cycle is 6 12 months. So you would expect the growth in the Contract Logistics business above market be careful, above market this year, maybe on market level, so we reduce growth. And next year, a flat development. That is what you should expect.
We didn't say we don't want to grow. Also here, we have to be very careful. We are more selective in the growth that we pursue within the group. So 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, yes? But it's more the portfolio of contracts that we grow with than the absolute percentage figures.
For this year, you should expect a growth that is for sure higher on market level or slightly higher than market given the order intake and projects and implementation. Next year, as I said, slightly on market level or slightly bigger.
Okay. Thank you.
And that then has an impact on IFRS in August.
Okay. Very clear. Thank you.
Okay. Thank you, Amari.
The next question from the phone comes from Sebastian Vogel from UBS. Please go ahead.
Hello and good afternoon. I have three questions. The first one would be on if you can outline the acquisition and forex effects on airfreight and sea freight on the net turnover? And the second one would be on net working capital. You mentioned already earlier on your trade finance offering, I.
E. Reverse factoring. And is it possible to share with us the level of the share of your payables that are currently already covered by these sort of reverse factoring facilities? And speaking of net working capital, speaking of DSO and DPO in that regard, was the quick or had the quick acquisition some effect on these numbers? Or was it not sizable in that regard?
And last but not least, again, with IFRS 16, what is the level of write off use additions that we have seen in the Q1 something that we should see as a sustainable level going forward? That would be my three questions.
All right, Sebastian. In my case, it would be 4,
but that is probably also agreeable. So for the first question, what is the impact on the turnover? I think for each of the business units the Greek acquisition and other acquisitions, I think we can take that offline. If you contact Chris, 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 €500,000,000 turnover a year. We are expecting a growth rate this year for roughly another 20% to another €100,000,000 Major target or major participants at the current stage are midsized suppliers basically in the European and the U. S. Market.
The net working capital DSO GPO impact of Quick. The impact of Quick actually is a very Quick has a very healthy DSO and GPO healthy and very good DSO, GPO development. Obviously, from a consolidation point of view, yes, we are now in the Q1 recording the first 3 months of turnover. And at the point in time, it's take over 31st December 2018, or the receivable pay. So the whole balance sheet went over.
So quarters from a seasonality point of view is slightly lower. So you could argue from a pure technical point of view that there's a lower revenue than probably the receivables that are that we have taken over at that point in time in the balance sheet have been referring to. So technically, it might have actually a bit of a negative impact. But overall, the DSO, DPO development for that business is better than the average of the KNCO.
IFRS 16, right of use asset level
of SEK 1,750,000,000. I think this is a first time recognition. So at that point in time, these are all the 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 2 reasons: either we reduce the overall number of contracts or we shortened the period. So 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 1 year with a 10 years contract. You know what I mean? So that number doesn't necessarily make a big comment or a big analysis of the business growth. So hence, I would think that that number is going to stay pretty much around that level.
The next question comes from Mark McVicar from Barclays. Please go ahead.
Good afternoon, Dennis. Good afternoon, Marcus. Hopefully, one quick question
for each of you. So let's start
with you Detlef. On the Kilometers 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. So how do you protect the business? Probably inevitable, as the ship is late, the weather is bad, the port is shut, the trucker doesn't turn up, all that comes up. How do you protect or price that product?
And related to that, I think how big do you think this could become as
a product? Yes. I thank you for that question because for sure, we have discussed this intensively when we set up this product. Marc, this is based on a platform that allows FCL booking per se. So quote book track for FCL with an instant quoting, which is unique in our industry as such.
But 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. I mean, 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.
So when you quote sorry, 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. And I think we have a unique product in the market. Too early to say how much of a product will that be, but for sure it forms the basis for what we have established already before with LCL shipments on a platform solution based with the care and treatment solution with the clear and treatment solution for LCL, which we posted, I think, 3 years ago. Now we have an FCL solution with a pledge and a CO2 neutral approach, I think you can count that to be a blockbuster for sure in that area. But Marc, too early to say what contribution will it bring to the Ctrip P and L as such.
But I have to say I'm proud of the Ctrade team and the way they used and leveraged our platform know how, our predictive analytics and big data competent as well as the classical sea freight know how. If there's instant quoting and price confirmation, booking slot confirmation from the carrier side.
Sure. And depending on how successful or otherwise you are with this product, could you see yourself rolling out more pledged products? I mean, I get that it's based on average delay, average whatever it is. So that's okay, that's fine. But that looks to be a pretty attractive product.
Could you roll it to LCLs?
I wish we I wish I could give you
other airframe products?
I mean, you know, Kiena Lang, we have a lot of ideas. But 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. Marc, it's not easy to be copied. I mean, it's almost impossible.
If you don't, we have a unique system running. We have the platform. We have the inter automatic interface with carriers and with other suppliers. So all this runs into this or it's incorporated in that solution based on the platform and open for our customers only and for sure not for competitors who try to get into that. But we are that is part of our and I think I mentioned that before, it's part of our eTouch strategy that drives this unique solution, drives the overall eTouch implementation in Secret or rollout of the eTouch approach in Secret as we have similar approaches in other business units.
Okay. Thank you. And then just another question or a quick question for Marcus on Quick without trying to go over old ground. Could you just give us a kind of a better, I don't know, steer or pointer? On your current accounting basis, including all the amortization, when do you expect it to be earnings enhanced in?
Is it 2020? Or do we have to wait 2021? And perhaps if I ask the other question the other way around, what is the amortization period? Is it 5 years or 3?
So 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. And the financial or the economic power of quake is a little bit higher than the amortization of intangible. So we would expect the Quick acquisition to be earnings accretive by 2nd, 3rd and 4th quarter already this year. So we're not talking 2020, 2021.
The amortization of intangibles at the current stage is around €5,500,000 per quarter, as I mentioned before. So call it 22,000,000 in a year. That will continue over a couple of years. And the amount of years or the number of years, it's going to be between 5 7.
Between sorry, Markus, I didn't hear the last bit.
Sorry. The number of years is going to be between 57.
5 to 7. Okay. That's brilliant. Thank you both very much.
All right. Thank
you, Mark. Bye bye. There are no
more questions at this time.
Thank you, Andrea. Ladies and gentlemen, thanks for joining our call on the quarter one results of the Kuehne and Nagel International AG. We have started the year pretty good from our point of view, and we continue to grow with all the outlook that we have shared with you. And having said so, we look forward to talking to you again on the semiannual results on July 23, so in 3 months from now. Bye bye and take care.
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.