Ladies and gentlemen, welcome to the CUNY and Nagel Q3 2018 Results Conference Call. I'm Sherry, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. The presentation will be followed by Q and A session. The conference must not be recorded for publication or broadcast.
At this time, it's my pleasure to hand over to Doctor. Dok Lev Trefzger, CEO of Kuehne Nagen. Please go ahead, sir.
Thanks, Jerry. Good morning, good day, good afternoon and good evening to all of you, and welcome to our analyst conference on the 9 months 2018 results of Killeen Nagel International AG. Our CFO, Markus Blanka Graf, and I welcome you from Sunny Scheenelegg in Switzerland. As always, we will lead you through the slide deck published earlier this morning. And as always, we start on Slide number 3.
The success of the Kuehne and Nagel Group in gaining market shares and improving profits continued in quarter 3. For the 1st 9 months, the group's EBIT posted an increase of CHF 60,000,000 over last year. Strong volume growth in sea freight were gained with 8.8% or 280 4,000 TEUs more shipped in our sea freight networks. Strong volume growth also in airfreight posted with plus 16% or 180,000 tons more in our airfreight networks. We've seen overland with substantial net turnover growth of 16.2% and contract logistics with a strong net turnover growth of 10.6%.
As always, a short overview on the key KPIs on the following page, Page 4. Net turnover, plus 13.6 percent gross profit, plus 11.7 percent EBIT improvement CHF 60,000,000 or 8.8 percent and earnings per share were up CHF 0 point 3.3 or plus 7.3%. I assume it's more interesting to go into the details for you, and we continue with Sea and Air Freight on Slide 5. Sea Freight posted strong volume growth in Q3 with more than 10%. It's the 2nd quarter with a growth of more than 100,000 TEU or to be very precisely 112,000 TEU in our networks shift in addition to the previous quarter 3 this year.
The margin pressure continues, but we were able to offset this margin pressure by operational leverage and our cost measures, and we will come to the details of that very soon. The tremendous success of our airfreight operations continued both with perishables, but also with our industry solutions. And I will go into more details on the following slides.
Slide 6.
The success of our seafreight sales colleagues, combined with the excellent performance of our sea freight operators and the sea freight solutions, led to a strong volume growth. This volume leverage supports the high conversion rate of almost 30% in quarter 3. We launched 2 digital platforms end of quarter 1, and these platforms got a lot of traction with our customers. The new business wins are based on KEN ESP, our digital end to end solution, and they attract a lot of new customers for the Seafreight organization. Our investments in digitalization in the seafreight business is ongoing and will continue fast forward as we see the leverage in the market.
With regards to trade lanes, we saw strong growth in exports from North America and Asia. And looking down to the airfreight details, we have seen the same strong volume growth in the airfreight network from both from exports from North America and Asia. Airfreight successfully deployed our solutions in the pharma, healthcare, aerospace and e commerce sector, contributing to an increased gross profit margin. And the remarkable performance of Airfreight is also based on the seamless integration of the perishable acquisitions that we posted in the previous quarters. As you know, we operate the largest by far largest perishable network globally, and this attracts more and more customers to get the solutions, the perishable solutions from Kuehne and Nagel.
Let's go into some details of the volume growth on Page or Slide 7. Volumes in the sea freight market, our volume growth increased or stayed double digit in quarter 3, while the market slowed down in the last quarter. Especially Asia Europe stagnated or maybe it was a bit negative, although all markets show high consumption and high purchasing powers. Into trade lane development and digital platforms and solutions showed the expected traction, and these investments we will continue with. And the growth that we have posted, the 8.8% or plus 284,000 TEU equals more than the controlled annual volume in sea freight of some of our competitors.
Only the incremental growth in the 1st three quarters of the control business is outperforming some of the annual volumes of our competitors. With regards to airfreight, we have seen also the airfreight market slowing down last quarter slightly. And our strong growth is generated based on 2 facts or maybe three facts. First fact is our compelling solutions, the solutions I mentioned before, K and PharmaChain to mention 1, which were good for 8%, 9% of our growth. And the perishable integration and the perishable solutions
for the rest of our growth.
We will give more guidance on the market developments at the end of the presentation. Sea freight on Page 8. Quarter 3 versus quarter 2, you see this on the upper part of the slide, margins are stabilizing. They have stabilized in quarter 3, and our operational leverage and the operational and the productivity measures show the expected results. We have a stable net margin EBIT per toy of CHF 90, CHF 92, CHF 94.
And as always, I would like to give you a bit of a flavor of the volume, margin and cost effects. In GP, the volume effect in sea freight for the 1st 9 months has been CHF 92,000,000. The margin effect only minus CHF 7,000,000. The cost effect through the high volume increase CHF 67,000,000, so that the EBIT and incremental EBIT summed up to CHF 14,000,000 for the 1st 9 months. And these are the aspects that we can influence.
On Page 9, you find the same details on airfreight. Margins continue to improve slightly. We have posted a margin per 100 kilo of CHF 70 in quarter 3, which is mainly driven by hard cargo and our solutions business and a stable margin in perishables. The cost of implementing our new IT software, the AirLock software, as well as dealing with the high volume growth showed an operational cost per CHF 100 kilo or CHF 50. On average, we assume that CHF 48 per 100 kilo would be the normalized cost that we expect in airfreight.
And
we see
a strong EBIT per 100 kilo
of CHF
20 in airfreight for quarter 3. Also here, some details on the margin, volume, cost and EBIT effects for the 1st 9 months. The volume effect in airfreight has been CHF 120,000,000 for the 1st 9 months 2018. The margin effect has been plus CHF 26,000,000 and the cost effects have been minus CHF 102,000,000, resulting into an incremental EBIT improvement of CHF 44,000,000. Let's move to Slide 11 to our Overland business.
Another record quarter for Overland, and the improvement in Overland is going on. Currently, we see high rates and margins in the market, the highest since December 2016. We also see a strong demand and have a strong pipeline in the U. S, and we expect less of the overheated market for quarter 4 but a continuation in the strong demand. Details of the Overland business you will find on Slide 12.
As you know, Q3, quarter 3 usually is the weakest quarter per year. Also this year, it's the weakest quarter. But to be clear, it has been the best quarter 3 for Overland in the history of our company with EUR 40,000,000 EBIT incrementally or absolutely generated in quarter 3. The performance of the Overland business has improved throughout the last quarters. And despite the onetime effect of a a disposal of the Overland business in Brazil that we informed you about in quarter 1, the overall performance in Overland is incrementally higher than 35% year over year.
We always said it's fun to do overland business. Remember, 5 years ago, 4 years ago and with quarter 3 2018, for sure, we have proved that this business, it's a very not only important part of our integrated solution offering, but as a stand alone business, a very profitable and attractive one as well. Contract Logistics, Slide 13. I have to say, it's also fun and important to do contract logistics business, and you have seen this during the past years. But this year, and we said so when we posted quarter 1 results, the Core Track Logistics business is influenced by our investments into new operating platform, into technologies for picking enhancement, into a new warehousing management system and as well as the restructuring of our drinks logistics business in the UK.
All this as planned. Nevertheless, we see a decreasing EBIT year over year in contract logistics for this for the 1st 3 quarters 2018, and we assume this will be ongoing for another couple of quarters. On the market side, we see a lot of success in contract logistics, strong net turnover growth and gross profit growth of more than 10% and as said before, impacted by the investments into the new operating platform. Where does the growth come from? The growth comes from e commerce fulfillment.
We have seen year over year growth of 40% in new operations for e commerce fulfillment and in pharma more than 20%. All these new wins lead to start up investments, start up costs
that will be recovered throughout the course of the contractual period.
I think that in total was EUR 27,000,000 EBIT for quarter 3 EUR 93,000,000 EBIT for year to date 2018. The contract logistics business has done a tremendous job while transforming the whole portfolio of activities. And having said so, I would like to hand over to Markus, who will lead you through some of the details of our figures.
Thank you, Detlef. Good afternoon, ladies and gentlemen. I'm on Page number 15, income statement. And the most important number on the income statement is the net profit earnings for the period. And I think what we have achieved in the 1st 9 months is we delivered CHF 580,000,000 net profit after tax, which is $40,000,000 more than last year or 7.5% more than last year.
From my side, we could actually conclude the call at that moment because that is what we are here for. We're here for delivering bottom line and 7.5% increased bottom line for the 1st 9 months is our starting point. But let's look at some of the KPIs a bit closer. So we have increased our gross profit by EUR 600,000,000 and out of EUR 600,000,000 additional gross profit, we have generated EUR 60,000,000 or 10% more EBIT. That is below our target for 2022, which is a 16% conversion rate for the group.
When I look into the quarters, quarter 1 was around 14%, quarter 2, 10% quarter 3, 6.5%. That is a slowdown, but it is exactly what Detlef was explaining in the investments and the business growth that we are initiating in the contract logistics and also in the strong growth in the sea freight business unit.
Overall,
a few technical details. We have exchange rate impacts that had been a bit stronger at the beginning of the year until the 1st 6 months. At the current stage, in the mix that we are having in the currencies in the income statement, we are having a positive FX impact of +2.4 percent. Tax rate, we're still expecting to maintain a stable tax rate around 23%. Leading to next Page, number 16, the balance sheet.
Only three things I want to highlight. The first one, equity ratio. In December 31, 2017, we started the year with the equity ratio of 31%. We are now 9 months in the year after payment of dividends at 28% equity ratio. This is a very healthy equity ratio.
This is a very healthy balance sheet. To preempt some of the questions, I know I have spoken about it last time already. There are new components in the balance sheet on the asset as well as on the liability side called contract assets and contract liabilities. In simple terms, IFRS 15 is requiring a reclassification for this. So work in progress was it called in the past, contract asset is it called now and associated contract liabilities are shown at a specific line in the balance sheet.
IFRS 16, the integration of lease commitments into the balance sheet as of 1st January 2019. For information purposes, so that everybody is prepared, that will add approximately EUR 1,400,000,000 on both sides of the balance sheet, so an extension to the balance sheet, of which we would expect our balance sheet to have an overall size of around SEK 9,000,000,000. But let's get away from the more technical part into the more real part, cash and cash equivalents, Page 17. Cash is all that matters, if you like. And we continue and confirm a very diligent and tight cash management.
When you look at the year to date results out of the cash balance, you can see that we started the year with around EUR 700,000,000 cash. And you will see through the cash flow 3 components what reflect our growth strategy that reflects higher rates within the business. I'm talking Seaford, airfreight rates and the reflection of the largest share of contract logistics in the sales ledger. Especially the changes in working capital, we have put $310,000,000 into the working capital in the 1st 9 months, which is an increase of $136,000,000 over last year, which is driven by the 3 components that I just said. Kuehne Inaugro is growing very strongly and with large volumes.
Hence, volumes grow and rate growth is driving the working capital. Cash flow from investing activity, which is mainly CapEx, that is the part where contract logistics plays a major role, is $167,000,000 in the year 2018, around $70,000,000 over last year, which is CapEx.
And last but not least,
we paid in May 2018 approximately EUR 30,000,000 more dividends than we did in 2017. Adding all that together, we have a current cash balance of EUR 218,000,000 on the balance sheet, which is around EUR 350,000,000 below last year out of the reasons that I have just explained. So let's have a bit of a closer look at working capital since that is the bigger item. Page number 18, working capital intensity, 4.3%, still within our corridor, 3.5% to 4.5%, which we have extended 1.5 years ago exactly to accommodate growth strategy. How did we achieve that?
To remain also in the DSO, GPOs or on the spread between the DSO and the DPOs around 11 to 12 days. DSOs, as we all know, customer pressure, DSOs are expanding. It's just the fact of how the industry works. We are mitigating this pressure with enlarging of GPOs mainly through our supply chain finance solution that we have developed together with Citibank and has a very good acceptance rate in the industry. So going forward and especially in the light of tariffs or additional higher rates and bigger volume growth, I see that the working capital intensity will remain at an elevated level.
I cannot foresee that the higher tariffs will lead to a lower working capital. That is not logical and what's not logical is not finance. So at the end of today, we will probably see even more pressure on the working capital intensity. Having said that, Page number 19, and I apologize at least on my side that page doesn't have a page number. The return on capital employed, we are currently at 60%.
60% is the value excluding the acquisitions. The mix effect that I have been talking about 3 months ago is still valid. We have a stronger growth relatively in contract logistics, which leads to a higher asset allocation as it is in the sea and airfreight. As well as the currency effect, which is wearing off a little bit compared to 3 months ago, but it's still valid. No matter what, our opinion how we drive return capital employed up again to the 70%, which we still maintain as our target based on the business mix and the balance sheet composition is a simple answer to that question, we will increase profitability.
Hence, financial targets for 2018, Page number 20. We confirm our targets 2022. Conversion rate for the group, 16 percent return capital employed, 70 percent effective tax rate in the corridor, 20 2, 20 3 working capital in the corridor of 3.5% to 4.5%. So the long term targets, I think, are not impacted either positively or negatively. We are very well on track to get there.
Short term and short term means market 2018. I appreciate that we are mid of October. So that is 2.5 months ago. We believe market in the sea and air freight is going to settle at around 3%, which you can easily translate to that there is a slowdown that Detlef has already mentioned, Overland and Contract Logistics at around 4%. With that page, I would like to hand over back to Detlef for the further part of the call.
Thanks, Markus. While indicators signal lower growth, We are very confident about our own performance. We have proven over the last 9 months that we can outperform market growth by factor 2 to 3, and there's no reason to believe that this should change. We are able to control our costs well in order to ascertain the leverage effects that you are known or that you know from us. Our investments into digitalization as a game changer in Seafreight, in Airfreight, in the contract logistics business units and overhand continue and help us to drive better services and improve productivity further.
And we have shown, for example, with perishable acquisitions that we made, that the acquisitions as an accelerator help to drive the overall performance of the network as we are able to integrate additional volumes seamlessly in our networks. Our roadmap 2022 is in full swing of implementation and well on track. We invest successfully and will continue for the next quarters in the digitalization, new platforms and also eTouch and of which the benefits we will see in the future as per our detailed explanation and presentation during the Capital Markets Day. And as promised, dear friends, we will inform you about the details on how much traction we got in eTouch or we will get in eTouch this year during the next analyst call on the full year results 2018. Based on what we have presented to you and the very good results of the 1st 9 months, our full pipeline of new customer contracts as well as the cost control programs well underway, plus the transform investments into transforming our business, we expect to close this year, the year 2018, successfully again.
Thank you very much. And I hand over to Sherry to open up the Q and A.
We will now begin the question and answer session. The first question is from Mark Madrykar from Barclays. Please go ahead.
Good afternoon, Detlef. Good afternoon, Marcus. Thank you
both very much for that. 2 or 3 questions really. First of all, because it's a much asked question this morning, could you give us an idea of the proportion of your airfreight and sea freight volume that goes across the Pacific?
Yes. Continue with the questions, Mark.
I will
pass it up, and please continue with the questions.
Right, fine. Okay, thank you. All right. So that was the first question, proportion of total volumes on the Transpac. Yes.
Second question was, you're obviously in the middle of your budgeting process. What are you saying to your people? What are your people saying about the likely rate of volume growth on that Transpac route in 2019? And how do you work a budget given the uncertainty? And then the final question is, I took a point, Detlef, that consumer confidence is quite strong in most of Europe.
We in the UK are waiting for Armageddon, of course. But to what why do you think those Asia Europe volumes are down a little bit year on year?
Okay. So let's start with the Transpac volume. We have around 8% to 10% of our total volume is Transpac spec related for both C and Alfred. The budgeting process is in full swing at the moment. And as said before, there's no reason not to aim for market gain market share gains as well as strong volume growth.
We have compelling solutions, Marc. We have solutions that matter for our customers. We have customers moving back. And the growth that we anticipate is still, let's say, strong double digit, yes? The only unsecured in the market might be quarter 1 next year, to say this also.
Clearly, as we at the moment don't know whether the unsecurity of new trade regulations being becoming effective January next year might cause some higher volumes to be shipped and stock levels to be increased in quarter 4. That is to be seen. But in total, low taxes, high purchasing powers, increasing decreasing unemployment rates, I would say, that speaks for high consumer confidence and ongoing investments into consumption. I think the third question, Marc, what was that again?
Yes. It was given that Europe is actually in pretty good shape at the moment, why do you think the Asia Europe volumes are flat to very slightly down, as you rightly
said? Asia Europe, the I think it's the consumption pattern has shifted slightly. There has been a strong double digit growth on Europe North America, so vice versa. So some of the sources for consumer goods have shifted. Is that a permanent shift?
I wouldn't say so. You know that some of the Asian economies have concentrated their market on Asia as well. So we benefit we have strong double digit growth on Inter Asia. So we benefit from the overall market development. On this trade, at the moment, we see this to be flattish, maybe is the right word.
Okay. That's great. Thank you very much.
Next question is from Satish Silhouette Kumar from Citigroup. Please go ahead.
Yes. Good afternoon, Markus and Detlef. Hi, Alex. How are you?
How are you? How are you? Do you
see any changes to your dividend policy on the back of free cash flow coming in well below the dividend for this year?
At least we had problems to understand your question. Can you please ask again?
Yes. So do you see any changes to your dividend policy on the back of free cash flow coming in well below the dividend?
No. Satish, we have been with the conversations between the boards, and I think we have a very healthy cash flow. At the current stage, we have not discussed any changes in the dividend policy, which to remind everybody again is between 75% 100% of the net profit after tax.
Okay. So
just on that follow-up, right. So do you foresee any long term targets around free cash flow coverage of dividend? Because you said you're just discussing with the Board.
So is there any
I cannot well, it is natural, obviously, that we are updating our Board on a quarterly basis with the Supervisory Board meetings on the financial performance of the group. So that is very quickly that is discussed. And there is no such discussion going forward.
Okay. Yes. Thanks very much.
Next question is from Damian Brewer, RBC. Please go ahead.
Good afternoon, everybody. I've got one question, please. And I just wanted to come back to the airfreight business. Given you've had significant expansion in the perishable business, which one would expect to normally be both GP and margin dilutive. Can you talk a little bit more about what the air business would have looked like just on the non perishables and give us a feel of what's going on there?
Clearly, the industry platforms have helped, but it'd be interesting to get a little bit more flavor of what's going on under the surface there.
Yes. Good afternoon, Damian. Our Airfreight business shows improving margins in the nonperishable sector. And I said so when I went through Slide 9, I think it was when we post or when we sell our solutions, we are able because we usually sell end to end solutions and have reflected the specific industry and customer demand in those solutions, we are able to have a robust or even strong margin for this business, while perishable stays at the moment on the known much lower margins. Okay.
And just as a follow-up, if
you're able to characterize your business on the air side, how much of the volumes you handle would you say are perishables nowadays versus nonperishable volume?
So our perishable business is good for around 32% to 35% of our total volume. Again, this gross profit or the margin per 100 kilo is flat, while the improvement in margin is due to our investments into solutions business, KN chain solutions, as we call them, battery chain, pharma chain, secure chain, interior chain for the aerospace industry. We have a lot of those solutions up and running, and they drive both volume growth as customers are extremely interested in those solutions, but also stable or improving margins.
Okay. That's very helpful. Thank you.
You're welcome, Damian.
Next question is from Damian Wurska from Bernstein. Please go ahead.
Gentlemen, good afternoon. Looking forward to Q4 and more detail on eTouch, but would you be willing to share kind of progress on eTouch and what the current penetration rate across the 2 main modes Air and CE are? And then secondly, you of course talked about the continued investment into the different businesses. Could you give us some more color when you would now expect those investments kind of to end or at least decrease again? And thirdly, then that of course, I would assume translates into improvement in conversion, but could you break the 13% to 16% increase on the conversion rate you're targeting into broad buckets?
How much of that is eTouch? How much of that is kind of lower investments? And what the other components may be? Thanks.
Sure, Daniel. Let me start with your first question. We presented the eTouch mechanism at the Capital Market Day September, and we started the whole roadmap 2022, 9 months ago. So to answer your question, you will all get details altogether in our end of February call on the overall 2018 performance. And here, we will detail eTouch not only structural but also by business unit.
The penetration to see this also clear is slow at the moment because we still invest into the full eTouch and automation, digitalization of the supply chain. Your question when do investments stop at the moment, we are focusing on the internal process optimization. There are 3 elements of eTouch: the carrier side, the internal and the market side customer side. We focus at the moment on the internal part because that will drive our productivity immediately or seamlessly. One example is AirLock.
We invest at the moment, and we have said so in the last quarter review calls, into deploying the new operating system for airfreight called AirLock by end of this year. When the rollout is fully established, then we can with the new system in place and switching off the legacy system, by the way, then we can invest into or then we can implement the eTouch elements for our internal processes. The carrier processes and sea freight, for example, have already 80%, 90%, 95% eTouch for carriers, but it's only the carrier side. Our sea freight operating system called C Log will not be fully deployed before end of 2020. So there's also a certain time lag here because we have to roll all those systems out in each and every location to 10,000 of employees.
We have to train them on the new system. And we have with China exports, for example, in Seaford, only 25% of the vendors online at the moment with regards to eTouch from a vendor side. KNESP, those platforms, the operating system, CLOG, they are all elements of what we call eTouch. All this space into eTouch. And what I've mentioned before with contract logistics also here, our growth with e commerce fulfillment and pharma, 40% for e commerce fulfillment and 20% for pharma, both are based on our capability of a seamless interface with our customers.
100,000, millions of order lines per location per day can only be processed in what we call eTouch, in an eTouch environment. And these are the investments we are currently making. When will this stop or be reduced? That was your second question. For sure it will continue next year.
I mean, we are in the 9th or 10th months now of deploying our Roadmap 2022. And our targets remain firm for 2022. This is what we said before, yes? We still aim for 20% to 40% eTouch shipments in the year 2022, gentlemen. We have 9 or 10 months out of 60 already in our strategy.
Don't expect wonders immediately. You can expect wonders, but don't expect them overnight.
And then maybe on the last question, any other big buckets aside from eTouch and lower investment in the step up from 13
to 16?
No. I think it's the overall volume growth. Our systems are capable for much stronger volume growth once we have deployed them. No other recipe that we would apply. I think we are showing with our figures a net profit improvement of SEK 40,000,000 year over year for the 1st 9 months this year that we get traction with our strategy while we are investing and transforming the business at the same time.
We are rebuilding our plane and ship and truck and warehouse, so to say, in full swing while running from one all time high record result per quarter to the next.
All right. Thank you very much.
You're welcome.
Next question is from David Kerstase from Jefferies. Please go ahead.
Hi, good afternoon gentlemen. Two questions, please. First on your yields in sea freight. Container rates were up 17%, which you seem to have fully passed through to customers. Would you say that you have been helped by the bunker surcharges that were announced by most carriers back in June?
And in relation to this, what is your view on the IMO 2020 surcharges that have been announced and will be implemented in January 2019? Do you expect you'll be able to offset those as well and in your discussions with your customers? And secondly, regarding your airfreight volumes, I think if you back out the acquisition effects, would that imply that your Q3 volume was up only 2%? And since you're highlighting exactly the same verticals as last quarter, I was wondering what is holding back that volume number? I think 2% is roughly in line with the YAPA volume numbers.
Thank you very much.
Okay. So David, let me answer your bunker surcharge question as well as the sulfur induced bunker cost increases becoming effective early 2020. We have stated so at the JLC conference, these costs have to be borne by customers eventually. So we prepare our customers on this already. At the moment, we see different strategies with regards to bunker cost with the different carriers.
But our customers start to understand this is market and the cost structure of shipping containers with carriers is changing. So yes, we will be able to offset these costs eventually with our customers. Then your question with regards to, I think, the airfreight volume for quarter 3, I think we have seen a slowdown in the market. Our growth was more than twice as fast as market, while we were concentrating on stabilizing yield and improving yield. I would even say our organic growth despite the acquisitions have been higher than clearly higher than market.
4% to 6% would be my answer.
4% to 6% organically in Q3?
Yes.
Is that okay. Okay, great.
Thank you very much. And maybe can
I ask one follow-up, please, regarding the comments on the weakness on Asia Europe? Are you saying that the Chinese imports into Europe are being replaced by more imports from the United States and other markets? Or is that general weakness that you see going into Europe?
Yes. At the moment, I would not mention any structural change in markets. I think it's a general weakness. But if you look into the pure import pattern of Europe from all markets, there is no decrease in imports. From that point of view, they must have been substituted by other markets, whether this is North America or Middle East or South America, too early to say and whether that leads to a longer lasting structural change, too early to say.
We watch this carefully. At the moment, no change in the trade patterns, no permanent change in trade patterns. It's a weakness more nothing more.
Okay,
great. Thank you very much.
And maybe I should say, Asia, Europe is weak in Seafreight, but in airfreight, it's still growing.
Thank you.
Next question is from Neil Glynn, Credit Suisse. Please go ahead.
Good afternoon. And really just one last from me with respect to contract logistics. Just interested, your customer dialogue with respect to pivoting supply chains away from China to the extent that you're having any at the moment. I realize this is a this is something that can't change that quickly, but just interested in terms of your expectations and understandings of customer intentions there. And also, what proportion of your contract logistics business is actually based in China operating for international customers?
Let's Neil, first of all, good afternoon to you. Pivoting supply chains away from China, it's an interesting question because I think it's the answer is twice fold. We have a strong consumption and growth going on in China. Many of our customers producing in China concentrate more and more their production on the local Chinese market, while they set up new productions or mirrored production in neighboring countries serving for exports. At Trent, by the way, that was exist or that is existent already for, I don't know, 5, 10 years, a decade most likely.
I would say this trend is accelerating at the moment, but it's also based on the clear 5 years plan of the Chinese government that has been published, I think, October or so 2016, which concentrates more and more on the local domestic Chinese market. And supply chains, because you were alluding to supply chains, are very agile. They can react like overnight. That's not a topic. The topic is more of can our customers find a Tier 1, Tier 2 supplier who can produce the same quantity in the desired quality in a different market.
I think that's the challenge for our customers. Supply chain is not
the challenge. We are very agile and adaptive.
Understood. If I can actually And the percentage of our business our business in China is concentrating, so to say, on international customers.
Understood. If I could just follow-up with one more actually, sorry. In 2015, you took a bit of a new approach to sea freight, a far more selective approach given the challenges in the market at the time. And it just that's brought to my thinking given the outlook for 2019 given how uncertain it is. With networking capital far more selective approach to volume in 2019?
Or should we be thinking business as usual in terms of 20 eighteen's trend continuing?
No. I think, Neil, business as usual never exists in our businesses. It is changing very quickly. But our strategy is clearly geared towards volume growth. Why is that clearly geared to it?
Because with the new systems, with Sanlog coming in place over the next two and a half years, The leverage on operational efficiency will be higher the bigger the basis we work on. So volume growth clearly is our aim to achieve.
Understood. Thanks, Markus.
Next question is from Michael Suss, Vontobel. Please go ahead.
Yes. Hi,
gentlemen. Two questions really. You were talking previously about the pricing trends in airfreight underlying, and I was wondering what those pricing trends in sea freight look like. There's always a lot of mix in freight lane effects in there. It looked like GP per toy was stable sequentially.
But can you talk the underlying trends really that you're seeing? Is that under pressure? That will be the first question. And the other one is you were also talking about investments before, but I'm not sure whether you were talking about investments for the entire company. I was interested in the contract logistics specific investments that you had in Q3 and for how long we should expect those to remain high.
Thank you.
Sure. For air, Michael, first of all, good afternoon to you. For airfreight, we expect stable airfreight rates now moving forward to the next couple of months. And the only topic is how do oil prices and there was fuel prices develop, but that's the only major variable that is difficult to assess. But it will not impact the overall development from our point of view in the next couple of months.
The investments that you were asking related to contract logistics, we mentioned that a couple of times. It's investment into new generation of wealth management systems. As I mentioned before, we see 40% volume growth in e commerce fulfillment or e commerce fulfillment in contract logistics. And for sure, these investments will continue in the next quarters, 1st or in 2019. We invest into picking enhancement, into new technologies to drive our picking efficiency.
And also this will be ongoing. And then Q3, Q4 2019, these investments shall be completed and shall show the respective effect. The effects we are aiming for is higher productivity in the warehousing space we operate as well as a faster capability to integrate high volume solutions in certain locations. As said, we have locations that see up to 1,000,000 order lines per day and our systems need to deal with these volumes. They do today.
But if we continue to grow with 40%, we are preparing for future growth here.
Okay. Very good. Thank you. Just a follow-up on the first question. You were talking here about airfreight, am I correct?
And I was wondering about the trends in sea freight as well.
Sea freight, for sea freight, we see trades like Transpac continue to grow. That's our ambition. That's what we anticipate and plan for. Some of the other trades are rather flat or with a very low growth. And I think the rates because of 2020 rates, not margins, the rates because of 2020, Cipher being part of the rate structure shall go up over the next quarters.
That's our assumption. That's the way we read the market.
Okay. So pricing will remain under pressure in that respect for you as well, GP Why
should that be the case? We negotiate rates with our customers usually back to back. If this is a process that is not as agile or iteration as we have seen this 2, 3 years ago when I was alluding to saw chain patterns, remember, then I shouldn't see any irritation in our pricing moving forward.
Okay.
Thank you very much. You're welcome.
Next question is from Andy Chu from Deutsche Bank. Please go ahead.
Thank you. Good afternoon. Just two questions from me, please. First one is on the airfreight volume growth. That you mentioned organically was doing sort of 4% to 6%.
And I just wondered with your comments that Asia Europe is still growing. Can you put that Asia Europe growth into context versus the growth of 4% to 6%? And then secondly, just in terms of numbers, IFRS 16, balance sheet adjustment
of EUR
1,400,000,000, what is the D and A adjustment, please? Is it roughly sort of a €200,000,000 something of that order?
Thank you.
Sure. So Asia Europe, our volume growth is higher than market growth on these trades. And I think that's the answer to your question very briefly. And the second question
is on the leases, IFRS 16, the balance sheet intervention. The SEK 1,400,000,000, I would expect currently an EBITDA impact of around EUR 400,000,000 and an interest portion of around EUR 30,000,000.
Thank you very much. And then just sorry, just for clarity in terms of Asia, Europe, when you said market growth, do you mean the sort of overall market was 3% you're pointing to It's above 3% of the growth rate on the Asia Europe trade line, which I guess I don't know at this point in time, sorry to dig a little bit more on that growth rate? Thank you.
So what is your precise question, Andy? I was talking about the market growth, and we grow and our ambition is and we are able to achieve that ambition to grow minimum twice as fast as market. At the moment, we grow double digit on these trades.
Okay. Thank you very much.
Okay. Good.
Next question is from Poulin Hameric from Kepler. Please go ahead.
Yes. Good
afternoon, everybody. I've got 2 questions. The first is on the operating leverage side and obviously, the difficulty we have to separate what is the underlying cost inflation from what are self inflicted investments. So I understand you said that the 2 francs 100 kilo cost increase, extra cost increase you saw in air freight will not recur in Q4. But could you confirm that?
I think you gave a clear explanation on contract logistics. But on the seafreight, I was wondering, given the investment that you're planning, what we should expect in terms of the fixed truck cost that you alluded to? And also just to get a sense of the underlying inflation that you budget for cost in the current or the remaining of the year in 2019? That's for the first question. And second question is, obviously, your drive for scale is very visible on the organic side, but we currently see a bit more movement on the consolidation side with the DSP approach on CEVA and DASCO seeing North and so forth.
So I'm just wondering what's your stance on this? Last year, you mentioned reduced spread in big scale M and A. I'm just wondering what's your thought on that process at this stage?
Aymeric, good afternoon to you. Sure. Let's start with the latter question. The consolidation is ongoing, and we clearly posted we have an active M and A process. And more we will not disclose until we post a press announcement.
But we are active in the market, and we always said we will not buy any potential target just for the sake of an equity story. We are looking for niche markets, for footprint, for competence in order to leverage our networks based on our strong organic growth further. That this is a positive that we can develop positive momentum we have shown with the takeover of CFI, commodity, forwarders, INC in the U. S, the perishable market leader in the U. S.
And a seamless integration into our networks, always retrains in the U. S, the intermodal provider that we integrated into the Overland business and purchased 2 years ago. And you can expect other stories here as we have an active process. And we are our belief is, yes, we talk about the big acquisitions in the market. Whether they pay off eventually, it's on you to judge or on us.
But the consolidation in our market is happening from the bottom of the pyramid. The local specialist freight forwarder that serves a trade lane for certain customers in a commodity like coffee or beans or whatever. And all of a sudden through e commerce, their customers are asking for other trade planes. And these providers, these local forwards are not able to serve them. And here's a very strong consolidation to notice.
That's one reason why we are able to grow minimum twice as fast as market. We capture market shares most likely from those. We don't know them individually, but our global networks become more and more compelling for small and medium sized shippers in other parts of the world because we can offer them access to world market. And therefore, our drive for scale will continue, as Markus said and I said before, because Airframes, your first question or
initial question,
Airfreight, your first question or initial question, what we said is we didn't give any guidance. We said a normalized or a normal cost structure per 100 kilo would be CHF 48. But CHF 48, CHF 49, CHF 50. And that was what we mentioned before. And you saw that volume and margin effects in airfreight clearly outperformed the cost effect.
That's for us the most important message. Likewise, and we have seen this for the first time in sea freight in Q2. For sea freight, where we see that the rates are stable now or the margins not the rates, sorry, the margins are stable now. And also the costs per TEU are stable, and we leverage via the volume the overall performance of our Seafreight network. I hope that answers your questions.
Yes, more than less. Thank you.
Hopefully, more than less, Erik.
Next question is from Bruce Chan from Stifel. Please go ahead.
Yes. Good afternoon, gentlemen. Just a couple left on my side. With regard to contract logistics, can you share with us what the cost development would have been like absent the platform investments? And then also maybe just a point of clarification, Detlef, you mentioned that there was a decrease in year over year development in contract logistics EBIT for the 1st three quarters, and that you assume that that's ongoing for a few more quarters.
Should I take that to mean that the investment impact will be taking place for the next few quarters or that decrease in EBIT will be taking place for the next few quarters? And maybe this is a good time to ask when you expect that EBIT margin to inflect or to begin increasing again?
So the decrease will continue versus previous year for the next couple of quarters because a year into platform ramp up of new projects as well as the new warehouse management software annually, not per quarter, annually.
Great. Okay, that's very helpful. Thank you.
Sure.
Next question is from Edra Stanford, HSBC. Please go ahead.
Good afternoon, gentlemen. Two questions left for me. Has there been any evidence of stock building ahead of the tariffs that's already been introduced by the U. S. And China?
And secondly, can you give a flavor of how you see the peak season, particularly in Ocean developing this year? It was particularly difficult, as I understand it, last year with capacity issues. Can you give us a flavor of how you see it this year? Thank you.
So we have not seen any evidence of stock building yet. People are talking about it, but we haven't seen it. And therefore, that's maybe then the one of the variables for the remaining months not yet to be seen. The peak season, from our point of view, with a slowdown in quarter 3, I would say maybe it's on the same level than previous year because at the moment our capacity is secured. Whatever comes in, we are able to capture and the order intake customers at the moment doesn't show any deviation or significant deviation, yes?
Our peak season, I would say in airfreight peak season, we are prepared for it and we can even better execute than previous years because capacity is secured. And for seafreight, as said before, orders are well underway. But don't expect a special season or a overheated season. I said so also for Overland before. It will be the normal heat in the remaining months, not an overheated situation, which leads to margin pressure.
Thank you. Sure.
The next question is from Sebastian Fergel, UBS. Please go ahead.
Hello and good afternoon. Just one actually left from my side. As with regard to the airfreight side of things, you mentioned a couple of times over the course of the call that there is a slowdown. I guess that slowdown was also expressed in your reduction of your market growth there. With regard to the slowdown, is it broad based one?
Or can you pinpoint more into direction where this is more pronounced? That would be great help.
The slowdown we have seen is Asia exports. That is Transpac related. That's the only significant deviation that we but it's an important stream. There might be effects all over because as you remember, a year ago, all of a sudden, the market starts to spike, but it's too early to predict. Asia exports usually is an early indicator, so that guides a bit our cautiousness for the overall performance of the market in Q4.
Just one follow-up. You said Asia Transpacific, right, the exports?
Yes.
And keeping what you said earlier, I mean, that was one of the trade lanes that was showing quite decent volumes, right, in particular with regard to Asia, Europe, for example, right?
Yes, year to date.
Got it, mate.
Thanks. Okay.
Sure.
There are
no more questions at this time.
Then gentlemen, ladies and gentlemen, thank you very much for calling in and listening to our Q3 and 1st 9 month 2018 review. We look forward to have you with us in the review of the full performance of the year 2018 February next year. And as said before, based on the very good results of 1st 5 months and our full pipeline with new customer projects, our cost control, paired with the investments into leveraging our networks further, we are very confident that we will be able to close the year 2018 successfully. In the meantime, I wish you all the best and talk to you again soon. Bye bye.
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