Ladies and gentlemen, good afternoon. Welcome to the Q2 2018 Results Conference Call. I'm Moira, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference has been recorded. After the presentation, there will be a Q and A session.
The conference will now be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Doctor. Bert Lev Schrapsker, CEO of Kuehne and Nagel. Please go ahead, sir.
Thanks, Maria. Good morning, good day, good afternoon and good evening to all of you and welcome to our analyst conference half year 2018 results of Kolle and Megels International. Our CFO, Markus Blank Eberhard and I welcome you from Sunny Schindelegi and will lead you through the slide deck that we have published earlier today. And as always, we start on Slide 3. During the 1st 6 months in 2018, the OE and Nagel Group performed successful in a changing landscape.
We posted group's EBIT for the first half year with CHF501 million, which is 11% above previous year. We have achieved a strong volume growth in seafreight of 8% with 172,000 TEUs more shipped and transported in our secret networks. Our Airfreight division showed a strong volume growth of 18% with 132,000 tons more in our airfreight networks. Overland posted a substantial net turnover increase of 18%, while contract logistics strongly performed and increased improved expense turnover of by 11%. On Page 4, we have a summary of the key KPIs and highlights for the first half year twenty eighteen.
For the first time in a half year period, the Krieger and Nagel Group has posted a net turnover of more than CHF 10,000,000,000. Also, the EBIT was CHF 501,000,000 has never been as high as in the 1st 6 months 2018. Earnings per share increased by 9.8%, reflecting the strong group's performance. Let's go into the details of our 2 business units, Seafreight and Airfreight. A short overview you can find on Page 5.
In Seafreight, we accelerated volume growth in quarter 2 with 11.1%. This, ladies and gentlemen, is the 2nd largest volume growth in seafreight at Gudel Nagel in the quarter. We improved the or we increased the Ctrip TEU by 121,000 in the Q2 2018. Also, CIFR continued to counter the pressure on gross profit margin by operational cost control, and I will read you through more details later on. In airfreight, we have posted a couple of airfreight perishable acquisitions, and they show a very solid performance in the 1st 6 months 2018.
Despite that, we have seen a strong organic volume growth with our industry solutions. What are industry solutions? I might like to remind you of the chain solutions that we publish, PharmaChain, InteriorChain, EngineChain or BatteryChain, all these solutions show a strong market performance and growth. Let's deep dive into the
2 business units. Slide
6. Our investments in sales showed first results in quarter 2 and the volume leverage leads to high conversion rate in quarter 2 of 30.1% with increased EBIT per TEU versus quarter 1. Our new business wins on digital end to end solutions were extremely encouraging. You know that we have published in March this year 2 digital platforms that we launched, the KN Enterprise Service Platform, KN ESP as well as the C Explorer. And we have an extremely high customer acceptance.
This morning when I came into the office, we first of all published the results, but only half an hour later at 7 I got a message from our Head of Seafreight, who informed me about another great Seafreight win of on based on KNESP. Congratulations to our sea freight team. This is the performance that we have envisaged when we launched the 2 digital platforms. Where did we see growth? Very strong growth has been seen in Asia and North America.
Moving to Airfreight. We have to say it's a remarkable performance in Airfreight with strong volume growth in Pharma, Hetsky, Aerospace and E Commerce contributed to an increased net 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 growth were posted in Asia and North America. We have spoken about the volume growth. Let's go into some details on Slide 7.
Sea Freight to start with. After a slower start in quarter 1 with 5% growth of 51,000 TEU increased, the 2nd quarter showed 11.1% increase in volume, seafood volumes in our network of 121,000 TEU more, As said, 2nd largest volume growth in the quarter ever. Our investments into dedicated sales structures, target assets, trade lane development clearly shows direction. And I can assure you that with this experience, we will continue to grow our freight sales force throughout the group. Also airfreight, strong volume growth in airfreight in quarter 2 with 15.7 percent or 60,000 tonnes more in our network followed by a very strong quarter 1.
Should summarize this to a strong development in the airfreight network. Page 8, how did we perform in Seafreight 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 show the expected effects. This is what we can influence, and therefore, we are happy to say that we show a stable net margin EBIT per TEU. This is the focus of our Seafreight as well as our Airfreight organization, managing the net margin per unit.
As always, I will give you some details on the volume, margin cost and EBIT effects. So the gross profit effects volume driven were CHF 55,000,000 in the 1st 6 months 2018. The margin effect CHF 5,000,000 in the 1st 6 months 2018, while we posted a cost effect of CHF 46,000,000 negative, resulting into an EBIT improvement of €14,000,000 in the Seafreight business for the 1st 6 months 2018. Let's have the same look at our airfreight business. We have seen slightly improving margins and especially in the 1st and second quarter in 2018.
This is driven by the margin increases in hard cargo, while the perishable margins remained 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 3 Swiss francs. Also here, volume margin and cost effects. The volume effect in Airfreight has been CHF 89,000,000 the margin effect in Airfreight CHF 5,000,000 the cost effects were driven by the strong volume increase CHF 63,000,000 resulting into an EBIT improvement of CHF 31,000,000. Our Overland business, which we have detailed on Page 11 and 12, performed extremely strong as well.
And maybe boring for you, but our strategy, our clear focus, our target accounts, our integration of the Overland business and our chain solutions shows traction more and more, and 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. And may I remind you that we had a onetime effect in Q1 2018 through the disposal of our Overland business in Brazil of €6,000,000 So the net performance, the organic growth of Overland is more than 20% for the 1st 6 months 2018, an outstanding performance. Contract Logistics. We continue to drive top line growth, gross profit growth through scalable logistics solutions.
And as we have informed you and posted in our quarter one call this year, we are investing into the rollout of a new WMS solution and new warehousing technology, which continues throughout year 2018. Have a look at the figures on Slide 14. Growth in contract logistics, 6.2%, EBIT improved EBIT reduction as expected to CHF 66,000,000. This is due to the investments into new warehousing management system worldwide, new picking technology and our Invest and Growth business plan for the UK, which impacted the EBIT as we have calculated. With this short overview on the 4 business units, I'm happy to hand over to Markus, who will give you some details on the financial figures.
Thank you, Detlef, and welcome from my side, ladies and gentlemen. I'm on the Page 15 of the presentation, income statement. And I think the most important message is that in both quarters, 1st 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 €44,000,000 of which €25,000,000 in the Q1. You may remember what that I've just mentioned, one off in the Overland business unit of EUR 6,000,000 and EUR 19,000,000 in the second quarter.
Some of the improvement certainly comes out of the ForEx of the FX change impact, And 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 and L quite significantly. Whereas the U. S. Dollar with a decrease of 2.5% to 3% has actually weakened the GP territory. You all know the e freight business is basically dollar denominated.
So the process, how you need to look at it from a GP, the freight perspective is that less dollar have been made on a GP per toy basis, plus the translation has then offset and even overcompensated the negative effects of that translation. That means as a mix in our P and 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. And 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 60% conversion rate because it had also to do how we can control our cost. And I think that is where we are pretty good in. Moving on to balance sheet number 16, Page number 16. Again, here no big changes.
Out of the balance sheet, total of
SEK 7,700,000,000 around 50%. You can see that SEK 3,800,000,000 of trade receivables, the biggest asset on the balance sheet. A lot of management goes into that bucket, credit limits, collection efforts. So 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 as 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 twenty eighteen.
Good for you to give you a bit of guidance what we expect. We expect roughly between CHF 1,400,000,000 and CHF 1,500,000,000 expansion of the balance sheet. For the income statement, it means that we're going to have an EBITDA increase of around EUR 400,000,000 to EUR 500,000,000. It's all annualized numbers I'm talking about. Hence, depreciation going up in nearly the same amount because our financial expense associated with these contracts, I would estimate around SEK 40,000,000 to SEK 50,000,000 On EBT, as expected, I do not foresee currently any impact out of that reduction 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 June 2017, you will see that was around CHF 340,000,000. Now in 2018, you will see around CHF 110,000,000 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 equivalents as of 1st January 2018, you see we have already started with a lower balance of around EUR 127,000,000 lower balance coming into the year 2018.
Operational cash flow, very important, very strong still,
EUR 25,000,000 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 Seafreight, Airfreight and Contract Logistics. We have rate increases going together with volume increases in sea and airfreight. And let's not forget, contracts logistics, you have certainly realized that is a business unit that grows a lot on receivables, but there's hardly any payables against that.
So the major part of the cost is payroll. So 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 EUR 80,000,000 and we have spent around EUR 30,000,000 more on the cash out for the dividends that we have paid in May 2018. So what has happened is basically lower starting point by EUR 120,000,000 and more expenses to the extent of EUR 110,000,000 mainly through CapEx and dividends, which leads then to the differential in the cash position of EUR 230,000,000 as per 30th 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 increase. Return on capital employed, Page 19. So the following page, we are looking at a little downturn on the percentage on capital return on capital employed. 2 effects, I spoke about it already last quarter.
We have a currency effect. 1st, the technical impact, let's say, that with increasing exchange rates in euro and pound, our balance sheet has a tendency have a higher valuation at that point in time than the average exchange rate for the translation of the P and L. And the mix effect, I spoke about it already on the cash balance, when contract logistics lead 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 C and A freight area. Financial targets, Page number 20. And you see our confidence.
We have not changed any of these financial targets 2020 2, we remain on the conversion rate for the group around 16%, with return on capital employed excluding acquisition impact over the year of 70 percent. Effective tax rate, I have confirmed already, and working capital intensity corridor between SEK 3.5 billion and SEK 4.5 You might have seen on the right side our numbers for the half year twenty eighteen for the 4 business unit in conversion rate and volume growth. Besides that is the expectation or the estimate, our Cunenargo estimate for the market development for the full year 2018 and comparing that number to the Q1 number that we have published, we have taken down each of the full year estimate for the market by 1%. So sea freight has been 4%, it's now 3%, air freight was 5%, it's now 4%. Overland is 4%, it's now 3%.
Content Adjacent 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. But we confirm our targets to outperform market growth by a factor 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 how we react to market development. Thanks, Markus.
In a world with growing GDP and growing trade, the landscape seems to change a bit. And we have posted that we are accepting and feeding these changes, especially in trade conditions. We hear about Brexit impact but haven't seen them yet. And our own global Kuehne Nagel World Trade Indicator, which is at the moment 10% higher versus previous year, shows a stable outlook. Nevertheless, and 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 2nd semester of 2018 that our performance will continue to develop as in the 1st semester and that we will meet our targets. Why are we confident? You could rightly ask. We are confident about our own performance, our strength 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 KAN's operating strength and networks. We can influence our digitalization, and we have seen very strong traction in that the last 3 months, especially with the 2 C phrase 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 omni channel e commerce fulfillment, and I think we have given you some details on that in our previous call. And 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 2nd semester 2018 to achieve our ambitious targets.
Thank you very much so far. And I hand back to Maria, the operator, to open the call for Q and A.
We will now begin the question and answer The first question is from Daniel Roeska from Sanford Seberstein. Please go ahead.
Afternoon, gentlemen. To Fanny Schindellegen, 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? And are you switching to the word digitization away from eTouch? And 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? And maybe lastly, a little bit more strategic on the contract logistics side, as it's getting well, 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. And it's not only sunny, it's pretty hot in Jindaleghi. But that is only due to the weather. Digitization and eTouch are complementary words.
I think what I alluded to were the 2 platforms we launched in early March 2018 or this year, the C Explorer as well as the K and ESP. And these platforms typically address the needs of big shippers. So they offer solutions that nobody else at the moment can offer for the big shippers. And therefore, we were so successful. And therefore, I'm also happy this morning when I got this major business win on KNESB 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. But the platform business, independent of that, is another part of digitalization.
We also work with blockchain. We work with sensors. We have posted our collaboration with some of the big chip OEMs. So there's a lot of things going on in that arena. Our eTouch business with carriers, for example, in Seafreight 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, full concentrated, but it's a different thing than the platform 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 is CL 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 UK. And we do this consciously. It's planned. It's part of our planning and 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 omni channel e commerce fulfillment centers that we will get a lot of traction with our transformation in contract logistics. And the third question was about key investments in place. I think our investment strategy has not changed. We have we stay asset light and where we need to invest, we do our investments. But usually, our business model has not changed in any case.
Maybe I hope that answers your question.
Yes. 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. And I'm just trying to get kind of a sense of where we are in that overall. So 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 foresee any changes into 2019?
Okay. 2019, first of all, you saw the scale effect of volumes clearly in the Q2. We have and maybe the word investment is misleading, but we have invested heavily into our sales structure. We have a very modern and agile sales force in place. Especially in Seafreight, 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. And you saw that the volume effect in CFIT has been EUR 55,000,000 this year or the 1st 6 months. The same is true also for airfreight. I mean, airfreight, 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. But if you look at the KPIs of Airfreight for the 1st 6 months, it's almost a management paraladoxone that they have achieved.
They have grown organically and acquisitions, but 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 to Sorry?
Yes. Maybe you need a new course at EKALU in Hamburg. But no, absolutely.
Yes. And if I may add, at the same time, the whole airfreight community is geared up to implement the airlock, which we want to accomplish by end of this year, as you know. So at the same time, the whole community, despite the growth and their success and productivity increases, implement a new software seamlessly. So I stopped applauding for our airfreight community here, but think about this for a minute. It's a fantastic management and operational achievement that the Airfreight team has achieved this year.
Thank you.
You're welcome.
The next question is from Robert Joynson from Exane BNP Paribas. Please go ahead.
Good afternoon, Detlef and Markus. I have three questions, if I may. It's probably easier if we take them 1 by 1. First of all, if we look at the airfreight business and specifically the cost base, if we measure the costs in euros, 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?
Yes, Robert, thanks for your question. First of all, we measure the cost in Swiss francs because we have a Swiss balance sheet. At the In airfreight, the cost very much originate in the country where we start the exports. So measuring that in euro might be a very nice approach for a European perspective, but it's not true for our global network. And to answer your question, yes.
Okay. Good answer. So I guess airfreight maybe your most profitable business by Q4, but we'll wait and see, I guess.
Okay. We'll invest your model and don't underestimate our secret guys. You see what they have achieved in Q2 and they have been extremely success And once they have implemented what they have announced internally this morning, guys, you will see this impact in RPNL as well.
The race is on. Let's see what happens.
The race is always on. We are very competitive organization.
All right. So the second question on the ocean freight business. If we look at the GP per TEU in dollars, as you mentioned before, it did decline quite significantly in Q2 versus Q1 by around $33 on my numbers.
And 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 measure the pressure the margin pressure doesn't go away, but we can measure it in a different way. But the answer is what you have asked, it's the cargo mix. We had a different cargo mix. A lot of business in intra Asia as well as more of the commodity volumes that have grown in the 1st 6 months sorry, in the Q2.
The margin pressure stays, but it's on us to manage that. And therefore, we look I know you look always at the margin per TEU. We look at EBIT per TEU. That is the figure we look at. And don't forget, I mean, we very much underestimate the effects of bunker increases.
Bunker oil price is hitting not only seafreight but also airfreight and we haven't spoke global then for the 3rd Q4 this year. With the tight capacity and higher oil prices, there will be cost pressure in the market, and it's on us to manage that.
Okay. Thank you. And then just the final question on M and A. You said on the previous conference call that when the rights acquisition target is found, 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. And this is what we are looking at. And then we will find the right price for that.
Okay. Thank you very much.
Thank you, Robert.
The next question is from Idrad 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?
And secondly, I was interested to hear your comments on the KNESP 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. We have to answer your first question, we have not seen any impact on the tariffs imposed on certain roads. And we have seen impacts and we have mentioned that from a changed import regulation in China on recycling material. This market has virtually disappeared, and we missed for the 1st 6 months, 20,000, 25,000 TEU in that specific market. But from the what is called in the press trade war, whatever that means, we have not seen any effect.
And also, I mean, 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. But 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's no sign. You know that with the world trade indicator and our GPNI, 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. So there's high, high growth momentum still in the market. So couple of weeks ago with some, how should I say, very experienced forwarders and they said it's unbelievable. And that was a quote now, yes? So the first the Sea Explorer is the first time that we offer visibility on all global vessel operations and services, all.
And we say all, let's only reiterate this message. We see all vessels. We know the routing and we can judge the vessel, the individual vessel and obviously the operator or carrier according to sustainability. So CO2 footprint on that ship because we know the engine and the emission of the engine on that very ship. And we can also judge timing, so the reliability of the schedule.
We can and we mix it then with weather data and other information. We can even anticipate the routing the captain will take. This sounds like a bit like, I don't know, Star Wars or so, but it's reality. What it offers is, 1st of all, the selection of the right routing, the selection of reliable port, the selection of the operator and carrier that suits our customers' requirements best and in the steering of the supply chain, inventory, and 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.
But 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 AeroOcean, relatively good rule of thumb on efficiency run rate?
Or is there anything you'd like to elaborate on that? And then secondly, just looking at the longer term, and if I look back over the last 15 or so years, your H1 EBIT now of about €500,000,000 is bigger than the entire full year EBIT of 2,005, despite recession, euro crisis, etcetera, etcetera. And 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 even into special dividends or M and A? Or are your thoughts largely unchanged on that?
Okay. Let me start, Damian. First of all, hi, Damian. And let me start with the letter 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 means we have the investment means that we require to run and grow our business, and we have no discussion on prioritizing or investments or anything else. So from that point of view, no reason for us to change our policy at the moment. With 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, it's something totally different. We look at conversion rate and we manage conversion rates. We always said so. We manage net profit per unit and we manage conversion rates. And if you see especially the 2 major business units, Seafreight and Airfreight, their conversion rate is around 30%.
With the management paradox, which I mentioned before in airfreight, that they grew everything virtually in the last 6 months. But that is what we look at. And this allows investments where required because it creates or these investments create the business units. It's including or it's leveraging our operating experts, our forwarding experts blended with the latest technology. And these 2 create this momentum.
And whether it's 3%, 4% or 5% or 2%, we look at conversion rate.
Okay. Thank you.
The next question is from Joel Spongin from Berenberg. Please go ahead.
Hi, good afternoon. I've got 2, please. First of all, I was just wondering, thinking about the working capital, the 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. So when you go out to sort of complete the business in Air 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. And then my second, so just a more general in terms of understanding your thoughts about the second half.
I see you're talking about your World Trade indicator showing a stable outlook, but you're also saying that you expect the growth dynamic to reduce. I understand there's some specific factors like acquisition dropping out and things like that. You've also reduced your views on market growth. I mean, what is the messaging here? Are you saying that the growth will slow materially in the second half?
Or is it not that negative?
So Joel, thank you for the first question. And we are never ever selling volume over financing capability. So we're not a bank, we're freight forward, and we're a logistics company. Inevitably, there is not one set of payment terms for the entire world. I would wish that would possible, and I would wish that it would be like 15 days.
But that's not possible. And I think what we do over many years is a very stringent, very tight credit management with reasonable payment terms. Logically and 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 a larger customer that's longer payment terms, the answer would be, while there is a tendency that that is right, but also not all for all geographies. I think it is important to keep a tight lid on what we do with that.
And notwithstanding our corridor, 3.5%, 4.5%, the same, we manage growth with reasonable payment terms and not payment terms with reasonable growth.
Okay. Yes, that's very clear. Thank you, Markus.
And then Joel, your outlook on the second half, I think we were pretty clear. We expect GDP and world trade growing, continuing to grow. And we on Slide 20 that Markus has presented, we accept that there's 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 trials as fast as the respective market. That's true for all of our business units. And 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.
And we are driving philosophy and that continues to be the case for the next 6 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 in the market at the moment versus like 6 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 Frans Hoyer from
Just a question on calendar effects in volume growth in the Q2 in both 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. I can't quantify it. And we don't use it as an excuse. It comes as it comes, Chinese New Year, every year of the year, but in a different week. Easter is in a different month or quarter.
So, Hans, I think that is not what we should look at. And 1 or 2 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. And now with regard to my market outlook for 2018, for instance, in the sea freight, you're looking for 10%. What was the market in your estimate in the first half in sea freight?
It's CFA? Markus, I'm not sure I understood the question right because you are very difficult to understand. But for all business units, which we have shown on Page 20, we have reduced the market outlook for 2018 by 1% each. So 4% for sea freight, 5% for air freight, 4% for Overland and contract Logistics each.
So in the like in the seafreight, France, it was in the Q1, it was around 4%, in the Q2, it was 3%. So we expect for the full year now 3.
Understood. And in Air? In Air, it would
be like 5%, 4.5% and then we expect 4% to the end of the year.
That's good. Thank you. And then 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? And your indicator, as you mentioned, you look 55 days ahead. Do you include discussions in your 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. Rather the opposite, everybody is 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 Hopps from Baader EMEA. Please go ahead.
Yes, hello. I'd 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. So 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? And what kind of applications should deliver the highest leverage going forward? So where do you expect most of the leverage coming from? And will that be more some kind of a linear development?
Or will be there some kind of special step up in, I don't know, 2019, 2020 or something like that?
Christian, I like this question. It's the question on how the design of the screw in the engine room looks like in the year 2022. And I'm more than happy to give you a bit of a flavor of that, yes? You will smell oil now and other components, yes? First of all, Christian, the target and your initial part of the question, it's not only productivity and cost that we manage.
We manage trade lanes customer solutions. We drive sales. Without that, our engine as such would not fully run. So therefore, it's a lot of different things. Front end, so customer facing 2 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 omni channel platforms.
The second topic is the eTouch area. So that's the it's not only the book for 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. But 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 path.
All this together will gives us still the confidence, 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 1st 6 months and will be part of our investment. And please do not forget CN Air Lock. We will have fully rolled out CN Air Lock by end of this year and CN Lock by end of 2000 or early 2020.
And once this is fully rolled out in all our locations with all sea freight and airfreight operators being not only trade, but feeling confident and secure and operating on that system, our files will increase sorry, our productivity will increase. And with this, we are able to operate 40% eTouch up to 40% eTouch business in our network.
Okay. Thank you for that. One follow-up. Where do you have you seen the main hiccups by the implementation of the air and sealock system so far or one of the other more important systems starting the Z touch or something like that?
We haven't had any hiccups was the question. We didn't have any hiccups. We deploy the rollout of our system as planned.
Okay. No problems.
No.
Congratulations. Thank you.
Thank you.
Sure. The next question is from Felix Remmers from Zett Capital. Please go ahead.
Yes. Thank you for taking my question. I have actually 3. One is, you had already touched on it a couple of times on the airfreight. But still, I mean, the performance was really astonishing with a congratulation on that.
My question is really how sustainable is that? I mean, is that the 33% conversion ratio and €69,000,000 per kilo gross profit per tonne and €100,000,000 needed like the new level due to like internal factors like the airlock 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 over processing going on? And the third question is on a bit 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're having taken down the outlook for the overall market by percentage points across the division. So this gap, I didn't fully understand.
Felix, let me then answer with the latter question and this what you say gap. First of all, we see a market and the market growth and the market development might be a bit slower the 2nd 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. And 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 airfreight has been related to Asia Pacific and North America, the U. S. So at the moment, we are confident that nothing material is changing. But also our market share is only globally across all business units, maybe 2.5%, 2.3%.
So 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. So therefore, this is our target. This is our approach. But 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, yes. Thanks.
Airfreight, I think it's a totally different topic. We the answer to Air Freight is we grow our target is to grow without acquisition twice as fast as the market. And we are able to grow twice as fast as the market. And if you look at into the perishable market with our perishable network, which is the largest 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, and I've said so when I started my little presentation, in hard cargo, like with in hard cargo, we have developed what we call chain solutions.
Let me reiterate PharmaChain, not only for airfreight, but for the whole business for all business units, interior chain for the aerospace industry, industry, engine chain for the aerospace industry, battery chain for the automotive industry or high-tech industry. We have a lot of products and these solutions are end to end solutions and they are very complex and they can't be copied overnight by any of 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 by 100 kilos. And that is, I think, why should that change? I mean, we don't see any reason. We see that with that approach, we are very successful.
And bunker price, I mean, that'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 and the long term contracts by the way are back to back with the carriers. So we can't expect short term changes here back to back with customer, back to back with carrier. And short term customers, we quote new and it includes the BAKER surge 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 little bit of a technical question. The GKNI, you mentioned that, that was up 10% based on what you can see over the next 55 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 airfreight.
It's airshow week here in the U. K, but we've seen a number of orders of freighter aircraft over recent weeks. And it does seem that the commerce trend, controller capacity is becoming a bigger theme. But those expensive global networks require returns. And I just wonder, are you seeing more bargaining power with the airlines that you deal with?
And 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, will become more and more important. You're obviously very focused on solutions. And 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, but anything tangible you could provide to help us think about that would be welcome.
Sure. Nir, 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. But margin increase that I've mentioned, the significant part, the margin increase we have seen in hard cargo for sure is driven by the chain solutions. And 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 early 2016 2017, we missed greater capacity in certain So 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% to 25% year over year.
We post even a much higher growth, not only in airfreight. So therefore, with more capacity, it's not an increase of marketing power, it's a hedging of capacity needs with demand with supply. And GK and I trade flow, I think it's a very technical question indeed. And we have I think we have posted on log index, GK and I, the way it's computed and have been set up the algorithm of the GK and I. And the 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.
So maybe that gives an indication. We are not saying that's the truth. What we show is there's consumer confidence in it. And for us, it relates directly to world trade flow, whether the world trade flow directly translates into container flow or tonnage in airfreight or so, something different because the GK and I also composes intra Asia business, for example.
Understood. That's helpful. Thank you, Detlef.
Sure. Thank you. Thank you very much. Then ladies and gentlemen, thanks for joining us. Thanks for asking many questions.
And we wish you a continuation of a warm and sunny summer, some relaxing days and look forward to talk to you about the Q3 results in approximately 3 months from now. Thank you very much and bye bye.
Ladies and gentlemen, the conference is now over.