Ladies and gentlemen, good afternoon. Welcome to the Q2 2018 Results Conference Call. I'm Moira, the conference call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing star and one on your telephone. Should you need assistance, please press star and zero to call an operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Dr. Detlef Trefzger, CEO of Kuehne + Nagel. Please go ahead, sir.
Thanks, Moira. Good morning, good day, good afternoon, and good evening to all of you, and welcome to our analyst conference, Half-Year 2018 Results of Kuehne + Nagel International. Our CFO, Markus Blanka-Graff, and I welcome you from sunny Schindellegi, and we'll lead you through the slide deck that we have published earlier today. As always, we start on slide three. During the first six months in 2018, the Kuehne + Nagel Group performed successfully in a changing landscape. We posted group EBIT for the first half year with CHF 501 million, which is 11% above previous year. We have achieved a strong volume growth in Sea Freight of 8% with 172,000 TEUs more shipped and transported in our Sea Freight networks. Our Air Freight division showed a strong volume growth of 18% with 132,000 tons more in our Air Freight networks.
Overland posted a substantial net turnover increase of 18%, while Contract Logistics strongly performed and improved its net turnover by 11%. On page four, we have a summary of the key KPIs and highlights for the first half year 2018. For the first time in a half-year period, the Kuehne + Nagel Group has posted a net turnover of more than CHF 10 billion. Also, the EBIT, with CHF 501 million, has never been as high as in the first six months 2018. Earnings per share increased by 9.8%, reflecting the strong group's performance. Let's go into the details of our two business units, Sea Freight and Air Freight. A short overview you can find on page five. In Sea Freight, we accelerated volume growth in quarter two with 11.1%.
This, ladies and gentlemen, is the second-largest volume growth in Sea Freight at Kuehne + Nagel in a quarter. We increased the Sea Freight TEU by 121,000 in the second quarter 2018. Also, Sea Freight continued to counter the pressure on gross profit margin by operational cost control. I will lead you through more details later on. In Air Freight, we have posted a couple of air freight perishable acquisitions, and they show a very solid performance in the first six months 2018. Despite that, we have seen a strong organic volume growth with our industry solutions. What are industry solutions? I might remind you of the chain solutions that we published, KN PharmaChain, KN InteriorChain, KN EngineChain, or KN BatteryChain. All these solutions show a strong market performance and growth. Let's deep dive into the two business units. Slide six.
Our investments in seeds showed first results in quarter two. The volume leverage leads to high conversion rate in quarter two of 30.1% with increased EBIT per TEU versus quarter one. Our new business wins on digital end-to-end solutions were extremely encouraging. You know that we have published in March this year two digital platforms that we launched, the KN Enterprise Service Platform, KN ESP, as well as the Sea Explorer. We have an extremely high customer acceptance. This morning, when I came into the office, we first of all published the results, only a half an hour later at 7:00, I got a message from our head of Sea Freight, who informed me about another great Sea Freight win based on KN ESP. Congratulations to our Sea Freight team. This is the performance that we have envisaged when we launched the two digital platforms.
Where did we see growth? Very strong growth has been seen in Asia and North America. Moving to Air Freight, we have to say it's a remarkable performance in Air Freight with strong volume growth in pharma, healthcare, aerospace, and e-commerce, contributing to an increased gross profit margin and the leverage effects of the global network for the perishable market and our perishable customers can be seen in the figures. Also here, strong volume growths were posted in Asia and North America. Spoken about the volume growth. Let's go into some details on slide seven. Sea Freight to start with. After a slower start in Q1, with 5% growth of 51,000 TEU increased, the second quarter showed an 11.1% increase in Sea Freight volumes in our network or 121,000 TEU more. As said, second largest volume growth in a quarter ever.
Our investments into dedicated sales structures, targeted trade lane development, clearly shows direction. I can assure you that with this experience, we will continue to grow our Sea Freight sales force throughout the group. Also Air Freight. Strong volume growth in Air Freight in Q2 with 15.7% or 60,000 tons more in our network, followed by a very strong Q1, should summarize this to a strong development in the Air Freight network. Page eight. How did we perform in Sea Freight with regards to gross margins, cost development, and net margins per TEU? While margins continue to stay under pressure, our operational leverage and our productivity measures clearly showed the expected effects. This is what we can influence. Therefore, we are happy to say that we show a stable net margin, EBIT per TEU.
This is the focus of our Sea Freight as well as our Air Freight organization, managing the net margin per unit. As always, I will give you some details on the volume margin cost and EBIT effects. The gross profit effects, volume-driven, were CHF 55 million in the first six months, 2018. The margin effect, CHF 5 million in the first six months, 2018. While we posted a cost effect of CHF 46 million negative, resulting into an EBIT improvement of CHF 14 million in the Sea Freight business for the first six months, 2018. Let's have the same look at our Air Freight business. We have seen slightly improving margins, especially in the first and second quarter, 2018. This is driven by the margin increases in hard cargo, while the perishable margins remain stable.
With a stable cost per 100 kilo, we were able to improve our EBIT per 100 kilo versus the same period in the previous year by CHF 3. Also here, volume margin and cost effects. The volume effect in Air Freight has been CHF 89 million. The margin effect in Air Freight, CHF 5 million. The cost effects were driven by the strong volume increase, CHF 63 million, resulting into an EBIT improvement of CHF 31 million. Our Overland business, which we have detailed on page 11 and 12, performed extremely strong as well. Maybe boring for you, but our strategy, our clear focus, our target accounts, our integration of the Overland business in our chain solutions shows traction more and more. The leverage of the top-line growth drives the profitability improvement as well.
In Overland, we have posted a growth of 11% in net turnover, 8% in gross profit, and 44% in EBIT. May I remind you that we had a one-time effect in Q1 2018, so the disposal of our Overland business in Brazil of CHF 6 million. The net performance, the organic growth of Overland is more than 20% for the first six months, 2018. An outstanding performance. Contract Logistics, we continue to drive top-line growth, gross profit growth through scalable logistics solutions. As we have informed you and posted in our Q1 call this year, we are investing into the rollout of a new WMS solution and new warehousing technology, which continues throughout the year 2018. Have a look at the figures on slide 14. Growth in Contract Logistics, 6.2%. EBIT reduction as expected to CHF 66 million.
This is due to the investments into new warehousing management system worldwide, new picking technology, and our Invest in Growth business plan for the U.K., which impacted the EBIT as we have calculated. With this short overview on the four business units, I'm happy to hand over to Markus to give you some details on the financial figures.
Thank you, Detlef, and also welcome from my side, ladies and gentlemen. I'm on page 15 of the presentation, income statement. I think the most important message is that in both quarters, first and second quarter 2018, we have been able to increase and improve our operational performance quite significantly. You see that the absolute variance of earnings before tax is CHF 44 million, of which CHF 25 in the first quarter. You may remember what I just mentioned, one-off in the Overland business unit of CHF 6 million and CHF 19 million in the second quarter. Some of the improvement certainly comes out of the ForEx, of the FX change impact. I want to talk about that for a minute in terms of the euro and the pound being increased on the translation of the P&L quite significantly.
The US dollar, with a decrease of 3.5%-3%, has actually weakened the GP per TEU. You all know Sea Freight is basically USD denominated. The process, how you need to look at it, from a GP Sea Freight perspective is that less USD have been made on a GP per TEU basis, but the translation has then offset and even overcompensated the negative effect of that translation. That means as a mix in our P&L, we have currently a positive exchange rate impact of 3.7%. Tax rate, also here, no news, around 23%. This is what we expect until the end of the year 2018. I can give you already some guidance for 2019. That will not change significantly. Our conversion rate, we confirm with our long-term target 2022 for 16%.
Despite everything, what we actually don't know, how the next half year is going to look like or whatever else impact we'll have to expect from market conditions. We remain confident that we can achieve the 16% conversion rate, because it has also to do how we can control our cost. I think that is where we are pretty good in. Moving on to balance sheet, page 16. Again, here, no big changes. Out of the balance sheet total of CHF 7.7 billion, around 50%, you can see that CHF 3.8 billion is trade receivables, the biggest asset on the balance sheet. A lot of management goes into that bucket. Credit limits, collection effort. It's a high attention area. Equity ratio currently at around 26%. I'm confident that at year-end, we will again look into the 30% equity ratio area.
For all of you, I think you have already seen we have adapted IFRS 15 on revenue recognition and such, and also the classification in the balance sheet for contract assets, contract liabilities. This change for us from a profitability point of view has made no significant impact. You can only see the positions on the balance sheet now, what has been in earlier days a work in progress is now contract assets and associated contract liabilities on the balance sheet. Since we talk IFRS currently, IFRS 16, I haven't mentioned that here on the first half year 2018, but for you to give you a bit of guidance what we expect. We expect roughly between CHF 1.4 billion and CHF 1.5 billion expansion of the balance sheet. For the income statement, it means we're going to have an EBITDA increase of around CHF 400 million to CHF 500 million.
It's all annualized numbers I'm talking about. Depreciation going up in nearly the same amount because our financial expense associated with these contracts, I would estimate around CHF 40 million to CHF 50 million max. On EBT, as expected, I do not foresee currently any impact out of that adaption of IFRS 16. Still on the balance sheet, page 16. I think what is important is net cash position. When you compare our net cash position as per 30th of June 2017, you will see that was around CHF 340 million. Now in 2018, you will see around CHF 110 million. Leading straight into the page 17, where does it come from? Cash and cash equivalent. We have made a little bridge to follow through a bit easier. I think first line, cash and cash equivalent as of 1st of January 2018.
We have already started with a lower balance of around CHF 127 million, lower balance coming into the year 2018. Operational cash flow, very important, very strong still, CHF 25 million higher operational cash flow than in the same period last year. Changes in working capital, not increased significantly. We are still having a lot of working capital driving the volume increase in predominantly Sea Freight, Air Freight and Contract Logistics. We have rate increases, going together with volume increases in Sea and Air Freight. Let's not forget Contract Logistics, you have certainly realized that is a business unit that grows a lot on receivables, but there's hardly any payables against that. The major part of the cost is payroll. What has further driven the deterioration of the cash position, cash flow from investing activities, we have spent a bit more on CapEx, PPE, and on acquisitions.
These two together is around CHF 80 million. We have spent around CHF 30 million more on the cash out for the dividends that we have paid in May 2018. What has happened is basically lower starting point, CHF 120 million and more expenses to the extent of CHF 110 million, mainly through CapEx and dividends, which leads then to the differential in the cash position of CHF 230 million as per 30th of June 2018. Working capital, we are still within the corridor, page number 18. I have alluded to the corridor between 3.5%-4.5%. Not repeating myself, driven through volume growth, rate growth, and you can see also an expansion on the DSOs that are making that number increasing. Return on capital employed, page number 19, the following page. We are looking at a little downturn on the percentage on return on capital employed.
Two effects, I spoke about it already last quarter. We have a currency effect. First, a technical impact, let's say that with increasing exchange rates in EUR and GBP, our balance sheet has a tendency to have a higher valuation at that point in time than the average exchange rate for the translation of the P&L. The mix effect, I spoke about it already on the cash balance. When Contract Logistics growth significantly, which is good from a business perspective, but it also leads to a slightly higher asset allocation than when that growth would have been in the asset-light Air Freight area. Financial targets, page number 20. You see our confidence. We have not changed any of these financial targets. Target 2022, we remain on the conversion rate for the group around 16%, with return on capital employed, excluding acquisition impact, obviously, of 70%.
Effective tax rate, I have confirmed already, working capital intensity corridor between 3.5%-4.5%. You might have seen on the right side our numbers for the half year 2018 for the four business unit in conversion rate and volume growth. Besides that is the expectation or the estimate, our Kuehne + Nagel estimate for the market development for the full year 2018. Comparing that number to the first quarter number that we have published, we have taken down each of the full year estimate for the market by 1%. Sea Freight has been 4%, it's now 3%. Air Freight was 5%, it's now 4%. Overland is 4%, it's now 3%. Contract Logistics was 4%, it's now 3%. What does that mean? It only means I think we also don't know exactly what's going to happen.
We confirm our targets to outperform market growth by a factor of 2, and we are not changing our ambition and financial targets as they are written down on the left side of the slide. 16% conversion, 70 return on capital employed, working capital intensity 3.5%-4.5%. With that, I hand over to Detlef to give you the outlook and the mechanics of we react to market development.
Thanks, Markus. In a world with growing GDP and growing trade, the landscape seems to change a bit. We have posted that we are accepting and seeing these changes, especially in trade conditions. We hear about Brexit impact, but haven't seen them yet. Our own global gKNi World Trade Indicator, which is at the moment 10% higher versus previous year, shows a stable outlook. Nevertheless, Markus has just mentioned that our full-year estimate of the markets is a bit lower than we have posted in the beginning of the year. As consumer confidence and spending stay high, we stay confident and extremely ambitious for the second semester of 2018 that our performance will continue to develop as in the first semester, and that we will meet our targets. Why are we confident, you could rightly ask.
We are confident about our own performance, our strengths, and what we can influence. We can influence our cost control, and it's a leverage effect. We can also influence our volume growth, strong volume growth, leveraging KN's operating strength and networks. We can influence our digitalization, and we have seen very strong traction in that the last three months, especially with the two Sea Freight platforms, and we can expand our Footprint with existing and new customers regarding value chain services. This is true for the pharma industry already and also for the so-called omnichannel e-commerce fulfillment. I think we have given you some details on that in our previous call. For sure, we stay tuned for acquisitions as an accelerator for further growth.
Having said so, growing GDP and growing world trade and the high consumer confidence and ongoing spending makes us very confident for the second semester 2018 to achieve our ambitious targets. Thank you very much so far, and I hand back to Moira, the operator, to open the call for Q&A.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. You will hear a tone to confirm that you've entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only hands for asking a question. Anyone who has a question may press star and one at this time. The first question is from Daniel Roeska from Sanford C. Bernstein. Please go ahead.
Good afternoon, gentlemen, and to sunny Schindellegi. London is a little bit cloudy at this time. First question on the digitization. Did you see more pickup in the digital offerings from larger, large-cap customers or SME? Are you switching to the word digitization away from eTouch? Second question around, we've talked about the investment phase in the past. You hinted before that the key investments kind of would be in place by now. Is that still the case, or would you be looking to extend that investment phase a little bit longer across the different business units as you are so successful in growing your revenues? Maybe lastly, a little bit more strategic on the Contract Logistics side, as more and more competitors are kind of eyeing the Contract Logistics space and are making noise about wanting to grow more in Contract Logistics.
I was just wondering how you're seeing the competitive landscape in Contract Logistics changing with more logistics players entering the market and also the robotics and automation companies entering that market, too. Thanks.
Right. Daniel, thanks for your questions. It's not only sunny, it's pretty hot in Schindellegi. That is only due to the weather. Digitization and eTouch are complementary words. I think what I alluded to were the two platforms we launched in early March 2018 or this year, the Sea Explorer as well as the KN ESP. These platforms typically address the needs of big shippers. They offer solutions that nobody else at the moment can offer for the big shippers. Therefore, we were so successful, and therefore, I'm also happy this morning when I got this major business win on KN ESP with a blue-chip customer.
eTouch is the way we operate business from the origin of the demand, so from our customers, throughout the quotation, order acceptance, the booking with carriers, as well as the track and trace and the delivery of an invoice or claim sensing at the end of the day. This is something we will not achieve overnight. We will, and we have promised this, post our relative figures of eTouch shipments in the system during this or for this business year. The platform business, independent of that, is another part of digitization. We also work with blockchain. We work with sensors. We have posted our collaboration with some of the big chip OEMs. There's a lot of things going on in that arena.
Our eTouch business with carriers, for example, in Sea Freight, is close to 100% or above 97%, 98%, but it's only one part of the whole supply chain. You will see details on eTouch. We have not forgotten. We work on it full speed, fully concentrated. It's a different thing than the platforms that we have established for our customers to interact with us on certain trades, on certain demands they have through our systems. The third question, key Contract Logistics landscape changing. We, at the moment, see no major change in the Contract Logistics landscape. Please take into account that this year is a year of transforming our operating model in Contract Logistics, including a big business, a big operation, a big customer operation in the U.K. We do this consciously. It's planned.
It's part of our planning, it's clearly within the bandwidth or the framework of the plan. Next year, we will see the effects of this transformation, and I'm pretty confident, having seen the new WMS in place and having seen how we very efficiently can implement omnichannel e-commerce fulfillment centers, that we will get a lot of traction with our transformation in Contract Logistics. The third question was about key investments in place. I think our investment strategy has not changed. We stay asset-light, and where we need to invest, we do our investment, but usually our business model has not changed in any case. I hope that answers your question.
I think maybe to follow up on that last one, that we've talked in the past about kind of also you kind of gaining more revenues to build the scale. I'm just trying to get kind of a sense of where we are in that overall. Maybe investment was the wrong word here, but in that process of kind of ramping up to a different growth rate, if we can kind of expect the current state that we see to continue in that way, or whether you'd foresee any changes into 2019.
Okay. First of all, you saw the scale effect of volumes clearly in the second quarter. We have invested heavily into our sales structure. We have a very modern and agile sales force in place, especially in Sea Freight. This shows a lot of traction with the clear trade lane and solution focus combined with the e-platforms that we have established. Our enterprise service platform in combination with sales is showing traction. You saw that the volume effect in Sea Freight has been CHF 55 million this year, or the first six months. The same is true also for Air Freight. I mean, Air Freight, I haven't spoken about slide 10 on purpose because you have digested the figures already in detail from all our reports that we posted this morning.
If you look at the KPIs of Air Freight for the first six months, it's almost a management paradox on that they have achieved. They have grown organically, had acquisitions, organically they have grown by 18%, and they have increased, at the same time, their margin per unit and their overall EBIT and the conversion rate. You would not be taught this at any of the management schools. I can only say this shows that a clear focus on solutions, trade lanes, customer segments, as well as a very slick operation, leads to the desired effect.
Maybe you need a new course at KLU.
Sorry?
Yeah. Well, maybe you need a new course at the KLU in Hamburg. No, absolutely. Yeah.
Yeah. If I may add, at the same time, the whole air freight community is geared up to implement the Air Logistics, which we want to accomplish by end of this year, as you know. At the same time, the whole community, despite the growth and their success and productivity increases, implement a new software seamlessly. I stop applauding for our air freight community here, but think about this for a minute. It is a fantastic management and operational achievement that the air freight team has achieved this year.
Thank you.
You are welcome.
The next question is from Robert Joynson from BNP Paribas Exane. Please go ahead.
Good afternoon, Detlef and Markus. I have three questions, if I may. It is probably easier if we take them one by one. First of all, if we look at the Air Freight business and specifically the cost base, if we measure the costs in EUR, which I think is the best like-for-like comparison, it was almost exactly the same in Q2 as it was in Q1, which was obviously very good given that the volumes were 5% higher quarter-on-quarter. If we look a little bit further ahead in the year towards peak season in Q4, when obviously the volumes will be significantly higher, will it be possible to hold the cost base relatively flat then versus Q2, or would that be too optimistic?
Robert Joynson, thanks for your question. First of all, we measure the cost in CHF because we have a Swiss balance sheet. In Air Freight, the costs very much originate in the country where we start the exports. Measuring that in EUR might be a very nice approach for a European perspective, but it is not true for our global network. To answer your question, yes.
Okay. Good answer. I guess Air Freight may be your most profitable business by Q4, but we will wait and see, I guess.
Robert Joynson, that is your model, and do not underestimate our Sea Freight guys.
Yeah.
You see what they have achieved in Q2.
Yeah.
They're extremely successful. Once they have implemented what they have announced internally this morning, guys, you will see this impact in our P&L as well.
Well, the race is on. Let's see what happens.
Race is always on. We are a very competitive organization.
All right. The second question on the Sea Freight business. If we look at the GP per TEU in USD, as you mentioned before, it did decline quite significantly in Q2 versus Q1 by around $33 on my numbers. Of course, that was despite freight rates declining during the quarter. Could you just provide some color on whether there were any significant mix effects which biased the GP per TEU downwards in Q2, or was the reduction mainly just due to underlying pressures in the markets?
I think it's both. The margin pressure doesn't go away, but we can manage it in a different way. The answer is what you have asked. It's the cargo mix. We had a different cargo mix. A lot of business intra Asia, double-digit growth, strong double-digit growth in intra Asia, as well as more of the commodity volumes that have grown in the first six months. Sorry, in the second quarter. The margin pressure stays. It's on us to manage that. Therefore, I know you look always at the margin per TEU. We look at EBIT per TEU. That is the figure we look at. Don't forget, we very much underestimate the effects of bunker increases. Bunker oil price is hitting, not only Sea Freight, but also Air Freight. We haven't spoken Overland for the third and fourth quarter this year.
With a tight capacity and higher oil prices, there will be cost pressure in the market, it's on us to manage that.
Okay, thank you. Just the final question on M&A. You said on the previous conference call that when the right acquisition target is found, that the right financing will be available. Maybe just if you could talk in general terms about how easy or how difficult it is at the moment to find good acquisition targets where you've also got a seller who's willing to sell at a reasonable price. Thank you.
Interesting question, Robert. My question would be, it's not about a seller to be willing to sell at a reasonable price. It's on us to select the target that fits into our demand, our needs. We will, and we have said that also at the Capital Markets Day last year, we will not buy anything for an equity story. We need market access, synergies, scale effects, whatever it is. This is what we are looking at. Then we will find the right price for that.
Okay. Thank you very much.
Thank you, Robert.
The next question is from Edward Stanford from HSBC. Please go ahead, sir.
Good afternoon, everybody. Two questions, please. First of all, I know it's early days, but have you seen any impact on your business from the introduction of the tariffs by the U.S. on Chinese goods? Secondly, I was interested to hear your comments on the KN ESP and the Sea Explorer and how it's gaining traction with larger customers. Could you perhaps provide a little bit more detail on why it is so competitive and what it offers that your competitors currently do not? Thank you.
Sure. To answer your first question, we have not seen any impact on the tariffs imposed on certain goods. We have seen impacts, and we have mentioned that from a changed import regulation in China on recycling material. This market has virtually disappeared. We missed, for the first six months, 25,000 TEU in that specific market. From what is called in the press, trade war, whatever that means, we have not seen any effect. Also, I would like to mention that as long as consumers are willing to pay the taxes or the customs duties or whatever it is on their respective goods, we will not see any major change. If consumers, and that was our message before, if consumers start to become insecure and don't want to pay higher prices for goods that they are willing to consume, then we might see an effect.
At the moment, we have not seen anything, and there are no signs. You know that with the World Trade Indicator and our gKNi, we can look forward 55 days with a certain assurance about market trends, and we see slower growth, but we still grow. Remember 10% higher last Monday, this week Monday, than previous year. There's high growth momentum still in the market. Your other question on KN ESP and Sea Explorer. Sea Explorer, you have to see it online. I have to say, I've been in a team meeting a couple of weeks ago with some, how should I say, very experienced forwarders, and they said it's unbelievable. That was a quote now. The Sea Explorer is the first time that we offer visibility on all global vessel operations and services. All. We say all. I can only reiterate this message.
We see all vessels. We know their routing, we can judge the vessel, the individual vessel, and obviously the operator or carrier, according to sustainability. CO2 footprint on that ship because we know the engine and the emission of the engine on that very ship. We can also judge timing, so the reliability of the schedule. We can, we mix it then with weather data and other information. We can even anticipate the routing the captain will take. This sounds a bit like, I don't know, Star Wars or so, but it's reality. What it offers is, first of all, the selection of the right routing, the selection of reliable port calls or ports, the selection of the operator and carrier that suits our customer's requirements best, and in the steering of the supply chain, a proactive interference in order to optimize the supply chain.
Customers are able to manage inventory. That is what especially big volume shippers appreciate a lot. I'm sure that this will also be a very strong and interesting tool for our small and medium-sized customers. At the moment, we operate that for them because they don't need to do it themselves. I hope this answers your question.
That's very helpful. Thank you.
The next question is from Damian Brewer from RBC. Please go ahead, sir.
Good afternoon, everybody. Two questions, please. First of all, coming to the half year, just looking, you did about 12.7% more GP off 10% more FTEs, so broadly a 3% efficiency run rate in H1. Is that now, given the performance in Air Ocean, a relatively good rule of thumb on efficiency run rate, or is there anything you'd like to elaborate on that? Secondly, just looking at the longer term, if I look back over the last 15 or so years, your H1 EBIT now of about CHF 500 million is bigger than the entire full year EBIT of 2005, despite recession, EUR crises, et cetera. It looks like your net assets have hardly moved to do that despite the cycle.
Given the H1 performance, is that going to change in any way you think about sort of stepping up the capital allocation, either into special dividends or M&A? Or are your thoughts largely unchanged on that?
Okay. Let me start, Damian. First of all, hi, Damian, let me start with the latter question here. The capital allocation or the dividend allocation is a decision that will be proposed by the board of directors and will be decided by the general annual assembly. We will not influence that. We have the investment means that we require to run and grow our business, we have no discussion on prioritizing our investments or anything else. From that point of view, no reason for us to change our policy at the moment. Your first question, I'm not sure. I want to help you to populate your model, if you may allow. I think what we are looking at is something totally different. We look at conversion rate, we manage conversion rates. We always said so. We manage net profit per unit, we manage conversion rates.
If you see, especially the two major business units, Sea Freight and Air Freight, their conversion rate is around 30%. With the management paradox on which I mentioned before in Air Freight, that we grew everything virtually in the last six months. That is what we look at. This allows investments where required because these investments create a return that we desire or that we have calculated. Therefore, from my point of view, the efficiency is driven via the business units. It's including, or it's leveraging our operating experts, our forwarding experts, blended with the latest technology. These two create this momentum. Now, whether it's 3%, 4%, or 5% or 2%, we look at conversion rate.
Okay. Thank you.
Welcome. The next question is from Joel Spungin from Berenberg. Please go ahead.
Yeah. Hi. Good afternoon. I've got two, please. First of all, I was just wondering, thinking about the working capital movements and obviously the increased net working capital. Obviously, I understand some of the moving parts within that, but I was just curious to understand to what extent, if at all, working capital is a factor in winning business. When you go out to sort of compete for business in Air Freight and Sea Freight, are payment terms something that significantly come up as an issue? Or do you have standard terms that you apply to pretty much all customers regardless? So that was my first question. My second is just a more general question in terms of understanding your thoughts about the second half.
I see you're talking about your world trade indicators showing a stable outlook, you're also saying that you expect the growth dynamic to reduce. I understand there's some specific factors like acquisitions dropping out and things like that. You've also reduced your views on market growth. What is the messaging here? Are you saying that the growth will slow materially in the second half? Or is it not that negative?
Joel, thank you for the first question, we are never, ever selling volume over financing capability. We're not a bank, we're a freight forwarder, we're a logistics company. Inevitably, there is not one set of payment terms for the entire world. I would wish that would be possible, I would wish it would be like 15 days, but that's not possible. I think what we do over many years is a very stringent, very tight credit management with reasonable payment terms. Logically, as industries are in some industries, payment terms have established that are a bit longer than in other industries. Equally for geography. Typically, when you would ask me, have larger customers, longer payment terms, the answer would be, well, there is a tendency that that is right, also not for all geography.
I think it is important to keep a tight lid on what we do with that. Notwithstanding our corridor of 3.5%-4.5%, we manage growth with reasonable payment terms and not payment terms with reasonable growth.
Okay. Yeah, that's very clear. Thank you, Markus.
Joel, your outlook on the second half, I think we were pretty clear. We expect GDP and world trade growing. Continuing to grow. On Slide 20 that Markus has presented, we accept that there is a certain uncertainty. Do we know whether these outlooks are true or not? We don't know. That's market. Our ambition stays. Grow organically minimum twice as fast as the respective market. That's true for all four business units. As we have said, we can leverage our network, we can achieve strong volume growth through our capabilities, our sales force, as well as our solutions. We are driving productivity up year-over-year, quarter-by-quarter, month-by-month, because that's part of our operating philosophy, and that continues to be the case for the next six months.
Therefore, we are confident that our targets that we have set last year will be achieved.
Okay.
What we wanted to reflect in those figures and statements is we hear and see that there's more uncertainty, because there's a lot of noise in the market, at the moment versus like six months ago. We stay confident and haven't seen any irritating influence in our networks so far.
Okay. Thank you. That's very helpful.
The next question is from Frank Heuer from Proactive Independent Ideas. Please go ahead, sir.
Thank you very much. Just a question on calendar effects and volume growth in the second quarter in both the sea and air. Do you have an estimate of what the calendar effect might have been in those two areas in Q2?
To be honest, we don't have it.
Okay.
I can't quantify it, we don't use it as an excuse. It comes as it comes. Chinese New Year every year.
Yes
Here, but in a different week. Easter is in a different month or quarter. Frank, I think that is not what we should look at. One or two calendar days might be influencing very much, especially for Overland, but not in general, should not have such an effect in general that we can explain a quarter with calendar days.
Understood. Now, with regard to the market outlook for 2018, for instance, in the Sea Freight, you're looking for 3%. What was the market, in your estimate, in the first half in Sea Freight?
As Markus said, I'm not sure I understood the question right, because you're very difficult to understand. For all business units, which we have shown on page 20, we have reduced the market outlook for 2018 by 1% each.
Yes.
4% for Sea Freight, 5% for Air Freight, 4% for Overland and Contract Logistics each. Like in the Sea Freight, Frank, in the first quarter, it was around 4%. In the second quarter, it was 3%. We expect for the full year now 3%.
Understood. In Air Freight?
In Air Freight, it would be like 5%, 4.5%, we expect 4% to the end of the year.
Understood. Thank you. Finally, I understand you haven't seen any effect of stocking or customers trying to beat tariff increases or anything like that in the first half. Your indicator, as you mentioned, you look 35 days ahead. Do you include discussions with your customers on their plans, and do you detect any signs from them in your discussions with large customers that there is a stocking cycle going on here?
No. At the moment, no. Not yet.
All right.
Rather the opposite. Everybody's concerned about the peak season coming in a couple of months, that they can secure enough capacity. That would be my response to that. No signs or signals or discussions of what you have asked.
Great. Thank you very much.
Thank you.
The next question is from Christian Obst from Baader Bank. Please go ahead.
Yes, hello. I like to look a little bit more to your 2022 targets and your main area of influence is mainly your cost base and how do you handle it. Can you give us, I know you can talk about over hours about that, but a short summary on your plans, how do you like to implement further IT applications going forward? How is the ramp-up of these IT applications? What kind of applications should deliver the highest leverage going forward? Where do you expect most of the leverage coming from? Will that be more some kind of a linear development, or will be there some kind of a special step-up in, I don't know, 2019, 2020 or something like that? Thank you.
Christian, I like this question. It is the question on how the design of the screw in the engine room looks like in the year 2022. I am more than happy to give you a bit of a flavor of that, yeah? You will smell oil now and other components, yeah? First of all, Christian, the target and your initial part of the question, it is not only productivity and cost that we manage. We manage trade lanes, customers, solutions. We drive sales. Without that, our engine as such would not fully run. Therefore, it is a lot of different things. Front end, customer-facing, two areas. The platforms, the e-platforms as we call them, to actually win and operate new business and to link with our big e-commerce omnichannel platforms. The second topic is the eTouch area.
It is not only the "track" part of the supply chain, but also the operation. The more we can automate, also with our operating system, the more eTouch we will have throughout the whole supply chain. This serves different customer segments. Therefore, our investment into developing new solutions, expanding the value chain, and our investments into a slick, cool, and very experienced sales force will drive the top line or the volume part. All this together gives us still the high confidence that our targets for 2022 will be achieved. Whether this is linear or exponential, I think at the moment, we are still in the investment phase, and all those activities and investments are here at the moment embedded in the first six months and will be part of our investment. Please do not forget Sea and AirLOG .
We will have fully rolled out Sea and Air LOG, AirLOG by end of this year, and SeaLOG by end of early 2020. Once this is fully rolled out in all our locations with all sea freight and air freight operators being not only trade, but feeling confident and secure in operating on that system, our files will increase. Sorry, our productivity will increase. With this, we are able to operate up to 40% eTouch business in our network.
Okay. Thank you for that. One follow-up. Where have you seen the main hiccups by the implementation of the Air and Sea Logistics system so far? One of the other more important systems, starting with eTouch or something like that?
No, we don't have any.
Huh?
We haven't had any hiccups was the question. We didn't have any hiccups. We deployed the rollout of our system as planned.
Okay. No problems?
No.
Well, congratulations. Thank you.
Thank you.
Sure.
Sure.
The next question is from Felix Remmers, from zCapital. Please go ahead.
Yes. Thank you for taking my question. I have actually three. One is, you've already touched on it a couple of times on Air Freight, but still, the performance was really astonishing, so congratulations on that. My question is really how sustainable is that? Is like the 33% conversion ratio and CHF 69 per kilo gross profit per ton, and CHF 100 million needed, like the new level due to internal factors like the AirLOG and stuff like this, or should we see some reversal of that performance in H2 and then going forward? The second question would be on bunker price. Can you remind us how do you pass on increasing bunker price to your customer? Is there a straight-through negotiation going on and/or processing going on?
The third question is on, I don't understand the difference between your internal outlook, which seems to be quite healthy. You seem to be quite bullish on trade and your indicators point to ongoing strong growth versus, you are having taken down the outlook for the overall market by a percentage point across the division. This gap, I didn't fully understand.
Okay. Felix, let me then answer with the latter question and, this, what you say gap.
Good.
First of all, we see a market, and the market growth and the market development might be a bit slower the second semester. Our confidence has not changed because we have won a lot of new business, because we have solutions in place and customers that are up trading and developing well. We don't get any signal at the moment other than from the global press, if that makes sense, that the landscape seems to be changing. We don't see any volume effect. There was a question before. We don't see any volume effect on the Transpac. Our strongest growth, both in Sea Freight and Air Freight, has been related to Asia-Pacific and North America, the U.S. At the moment, we are confident that nothing material is changing. Also our market share is only globally across all business units, maybe 2.5, 2.3%.
There's no excuse if maybe the environment or the landscape becomes a bit tougher not to grow because we have the best solutions and services in place, and I mean it. Therefore, this is our target, this is our approach. To give you the flavor that it's not an easy double-digit growth market anymore, this is why we have given that signal on the market outlook. I hope that is understandable.
That's clear. Yeah. Thanks.
Yeah. Air freight, I think that's a totally different topic. The answer to air freight is, our target is to grow without acquisitions twice as fast as the market, and we are able to grow twice as fast as the market. If you look into the perishable market with our perishable network, which is by far the largest network globally, we are able to capture new customers and integrate their volumes into our network and have a very strong growth. In Hard Cargo, I've said so when I started my little presentation, in Hard Cargo, we have developed what we call chain solutions. Let me reiterate. KN PharmaChain, not only for air freight, but for all business units. KN InteriorChain for the aerospace industry, KN EngineChain for the aerospace industry, KN BatteryChain for the automotive industry or high-tech industry.
We have a lot of products. These solutions are end-to-end solutions, and they are very complex, and they can't be copied overnight by any of our competitors. We have a very strong performance in Hard Cargo, not only growing twice as fast or higher than twice as fast as the market, but being able, through our solutions and services, to increase our GP per 100 kilos. That is, I think, why should that change? We don't see any reason. We see that with that approach, we are very successful. Bunker price, there's always the same game, depending. We have some contracts, long-term contracts where the bunker is included, and all others are either back-to-back, or we. The long-term contracts, by the way, are back-to-back with the carrier, so we can't expect short-term changes here. Back-to-back with customer, back-to-back with carrier.
Short-term customers, we quote new. It includes the bunker surcharge, and the customer accepts it or not.
Okay. Thank you very much.
You're welcome.
The next question is from Neil Glynn from Credit Suisse. Please go ahead.
Good afternoon. If I could ask three questions, please. The first one is, sorry, a bit of a technical question. The gKNi, you mentioned that that was up 10% based on what you can see over the next 35 days. I'm just interested how that tallies with global trade flow usually. Obviously, we're not seeing that kind of level of trade flow growth. Is there some kind of a structural overshoot within the gKNi? Just interested in understanding what that actually means to you guys. I appreciate all that you've said, so I'm not looking to retrace old ground. The second question with respect to Air Freight.
It's air show week here in the U.K. We've seen a number of orders of freighter aircraft over recent weeks, it does seem with the e-commerce trend, controller capacity is becoming a bigger theme, those extensive global networks require returns. I just wonder, are you seeing more bargaining power with the airlines that you deal with? The third question with respect to your individual products. You mentioned at the start of the call the chain products. Clearly, if we're into a more uncertain global trade flow environment, your underlying, your self-help story, if you will become more and more important. You're obviously very focused on solutions. I'm just interested, can you give us an idea as to the maturity level of the main products there?
I know they're all developing and growth prospects are high, anything tangible you could provide to help us think about that would be welcome.
Sure. Neil, let me answer your questions. The chain products to start with. They have a different maturity, but also the industry they are serving have different maturities as well. More important is they are only part of our Hard Cargo solution. We have general cargo as well. We have solutions for commodity customers as well. Margin increase that I've mentioned, the margin increase we have seen in Hard Cargo for sure is driven by the chain solutions. The chain solutions are not only an Air Freight approach usually, but have links to the other business units as well. The freighter orders, we are aware of it, and maybe it's the peak cycle that we have expected to come because remember 18 months ago or spring 2016 and 2017, we missed freighter capacity in certain markets.
At the moment, we would say that it's great to see the freighter capacity kicking in because the e-commerce business, the e-commerce market is growing 20%-25% year-over-year. We post even a much higher growth, not only in Air Freight. Therefore, with more capacity, it's not an increase of bargaining power, it's an hedging of capacity needs with demand with supply. gKNi trade flow, I think it's a very technical question indeed. I think we have posted on LogIndex gKNi, the way it's computed and it has been set up, the algorithm of the gKNi. Citibank has been quoted in a couple of statements with a 70% reliability, which is higher than any of the other indices that they had reference to. Maybe that gives an indication. We are not saying that's the truth.
What we show is there's consumer confidence. For us, it relates directly to world trade flow, whether the world trade flow directly translates into container flow or tonnage in Air Freight also something different because the gKNi also composes intra-Asia business, for example.
Understood. That's helpful. Thank you, Detlef.
Sure.
Thank you.
Thank you very much, ladies and gentlemen. Thanks for joining us. Thanks for asking many questions. We wish you a continuation of a warm and sunny summer, some relaxing days. We look forward to talk to you about the Q3 results in approximately three months from now. Thank you very much, bye-bye.
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