Kuehne und Nagel International AG

SIX:KNIN

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, good afternoon. Welcome to the Kuehne & Nagel International AG Three Months 2018 Results Analyst Call. I am Alice, the chorus call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. After the presentation there will be a Q&A session. [Operator Instructions]

At this time, it's my pleasure to hand over to Detlef Trefzger, CEO of Kuehne & Nagel. Please go ahead, sir.

[Detlef Trefzger, Chief Executive Officer]

Thank you very much Alice. Good morning, good day, good afternoon and good evening to all of you and welcome to the Kuehne & Nagel International Analyst conference call on the first quarter 2018 results. We are proud for a good start into 2018, and we have distributed a slide deck and we will lead you through the details of our results in the first quarter of 2018 as always join, jointly is my CFO colleague, Markus Blanka-Graff.

And as always, we start on Slide 3 of the slide deck expanding you in a short overview the results of the first quarter 2018. The group’s earnings for the first quarter with CHF184 million were again significantly over last year 12% higher. We saw strong volume increase in seafreight of 5%, or 72,000 TEUs transported in our networks. And we also saw a very strong volume increase in airfreight of 21% or 72,000 tons in our networks.

Overland closed the first quarter with substantial net turnover growth of 16%, and also in contract logistics, we closed the first quarter with a strong net turnover increase of 11%. In the first quarter of 2018, Kuehne & Nagel continued to grow significantly, above market in all business units in market areas, and we significantly expanded our market share. And at the same time, we were able to improve and increase group earnings over last year’s quarter one.

Let me give you a short overview on Slide 4 on the performance in first quarter. Net turnover growth CHF563 million or 13%, gross profit growth CHF195 million or 11.8%, an EBIT improvement of CHF27 million or 12.9% and earnings per share increasing from 100 – CHF1.37 in 2017 to CHF1.53 for the first quarter of 2018 plus 11.7%. Let's deep dive into the sea and air freight performance and for those details, I would like you have a look on Page 6 of the slide deck where we gave a short overview on the business development.

Let's start with sea trade. As a leader in applying technology, we accelerated our investments in the digital transformation and launched two digital transforms early this year in March of this year, sea Explorer and KN ESP. We got overwhelming reaction from our customers, and we see a lot of traction with these platforms being launched only six, seven weeks ago.

The change in import terms for recycling material in China or to China led to a reduction or a loss of 25,000 TEU export containers with waste in scrapping materials and recycling materials. We were able to compensate 10,000 of course 25,000 TEUs lost with other – on other trades, but the remaining 15,000 will not will not come back because this market has significantly changed. In addition, we saw strong growth in Asia exports and North America exports on all trades.

Airfreight, the two perishable acquisitions announced last year, end of last year, are fully integrated, which took us less than six months to complete. We see continued volume growth in perishables Pharma, healthcare, aerospace and e-commerce, and we are gaining market share in especially in those areas where we have specific industry solutions placed on the market. Also here, as in seafreight, strong growth in North America exports, and we launched another new industry solution KN InteriorChain, which also got a lot of market demand – saw a lot of market demand already.

Slide 7, airfreight and seafreight, seafreight and airfreight volumes. I mentioned already the effect of the waste and scrapping and recycling import terms to China, and the loss of 15,000 TEUs net imports to Asia. Organically, our growth was 5% or 51,000 TEU, a significant showing another all-time high quarter one volume in our networks.

Airfreight. 422,000 tons shipped in quarter one, which translates into 72,000 tons more in our networks versus previous year's quarter one, out of which, we saw an organic growth of 31,000 tons or 9%. And the integration of the two perishable acquisitions led to 41,000 tons or 13% growth in our networks.

Slide 8. Let's have a look on the margin development in seafreight. You saw that for the first quarter this year, we have seen for the first time increase in seafreight margins again. We ended the quarter one with CHF 331 per TEU margin.

And at the same time, we saw a cost structure, which slightly increased, usually that is the seasonality effect in the first quarter coming out of the previous quarter's investments. This led to a stable EBIT per TEU margin or EBIT per TEU profit of CHF 90.

As always, let me give you the variance analysis of the seafreight business unit. The volume effect in gross profit has been CHF 16 million for quarter one; the margin effect CHF 11 million for quarter one, the cost effect has been negatively CHF 23 million leading to an EBIT increase in total of CHF 4 million for seafreights in quarter one , 2018.

Airfreight. Page 9. Here we clearly, see the change in cargo mix through the acquisitions and the volume increase in the perishable business. While the hard cargo margins were slightly above previous quarters, we clearly saw that margin dilution of CHF 2 to CHF 67 per 100 kilo versus previous year was mainly induced by the perishable volumes in our networks.

Typical for perishable is a margin of CHF 30 to CHF 40 per ton versus the CHF 67, CHF 69 that we have seen in the previous mix of our cargo. The cost remains stable at CHF 48 per 100 kilos leading to an EBIT per 100 kilo of CHF 19. Let me also here refer to the variance analysis in million Swiss francs. Gross profit, the volume effect in gross profit has been CHF 50 million; the margin effect has been negatively CHF 8 million reduced.

Cost effect CHF 33 million leading to an positive EBIT effect of CHF 9 million. The majority of this is organic growth, it's our legacy business. On Page 10, we have summarized all the key financials for the two business units CNF freight, and you can also see that we have a small foreign exchange effect in seafreight, on EBIT level and a nil foreign exchange effect on EBIT level in airfreight.

Margin remains stable and seafreight, conversion rate remain stable and seafreight above 27% versus previous years. And in airfreight also very high and a stable margin of 28.6%, reflecting what I said before, the new cargo mix in order towards more perishables being shipped.

Let's move on to Overland. Slide 11, and let me start with reflecting on the continuous, the successful implementation and continuation of our strategy in Overland. The industry-specific solutions got a lot of traction in the market. We were able to drive topline growth significantly, and at the same time, leveraged our business model with improved bottom line effects. And also a Brazilian Overland business, we were able to sell and dispose in order to concentrate on those networks and those areas where we can create significant cost by benefit. But they are more things to come in Overland, and you can be sure, we are investing in a group-ish [ph] network in Italy, which we will launch end of the quarter two.

We have investments coming on these new terminals in Romania, Czech Republic, and other Eastern European markets and most important also in Overland the digital transformation is now. On European level, we have had some test markets and KN FreightNet for Overland is being rolled out throughout Europe for the next couple of quarters. So that will lead to another strong performance in Overland, when these investments have been fully implemented.

On Slide 12, you see the financials. Also here, very briefly quarter one 2018 had a specific book gain coming out of the disposal of our Brazilian Overland business of CHF 6 million. If you deduct the CHF 6 million, you see an operational performance of CHF 18 million versus CHF 7 million previous year, so a very strong organic development in Overland in quarter one, 2018.

Contract logistics. And I know I will repeat myself, but we are successful with scalable logistic solutions. With sustained customer base, we scaled all solutions in all core markets we are active in. At the same time, we are rolling out a new generation of warehousing – warehouse management systems and new warehousing technologies, and this is part of a investment plan in contract logistics to establish the next generation of operating models in that business unit, in order to enable future growth and faster growth with especially e-commerce fulfillment solutions.

On Slide 14, you see the details of the business units, contract logistics performance in quarter one. We post a slightly reduced EBIT for quarter one versus previous year, which reflects the investments in to the re-modernization of WMS and our technology that we place in our warehouses, and at the same time, it's very customer specific investment that we conducted in the U.K., we have mentioned that in a couple of calls previously, in order to go for the next decade of business with our customer, and the project is called invest in growth and it starts with investments. And the investments are due this year, and early next year in order then to form a mutually agreed platform for future profitable growth for the next decade of that business.

And as you know, all investments at Kuehne + Nagel will be fully expensed if possible, and therefore, we will – we have seen a slight reduction in EBIT in contract logistics quarter one as planned for this year.

And now, I'm happy to hand over to Markus, who will give you the details of the income statement and on financials.

[Markus Blanka-Graff, Chief Financial Officer]

Thank you, Detlef. Welcome ladies and gentlemen also from my side. I'm on Page 15 income statement as usual, for me the most important indicator the growth in our gross profit CHF195 million or 11.8%. Indeed, with our reporting currency Swiss franc, we have been able to record a translation impact on ForEx of 4.2%, but let me come back to that ForEx topic in a minute.

Our targets that we have also given ourselves for 2022 and our strategic target under conversion rate for the group meaning EBIT in percentage of gross profit. And in the incremental view, as you can see on this slide, that CHF195 million we have made CHF27 million out of CHF195 million GPS EBIT, which represents 14%. Clearly, we are not at 16% where we want to go, but we still have a bit of time to reach that level, but we have increased that conversion rate over the last quarter, sequentially when you look at quarter four 2017 versus quarter one 2018.

One can also look at slightly differently on that, one can look into seafreight income statement, and you will see that 5% volume growth translates in 4.3% EBIT growth. So a nearly one-to-one translation of volume growth into EBIT growth, I think that is something that we have been proud to record in our first quarter 2018 again.

If anybody would ask me where is that trace is going to lead us, I think we will see positive leverage going through the rest of the year. Another way of looking into the positive development of our conversion rates could be look into airfreight, and yes, 21% volume growth is also an expression and confirmation of our robust IT system and operational processes, to handle significantly more volume through our own systems.

Coming back to acquisitions, acquisition impact, as an information line for you on a gross profit is CHF21 million, EBITDA is CHF3 million, EBIT CHF1 million. We have added approximately 1,100 people from an employee and FTE perspective. Tax rate, currently, we are projecting roughly 23% and as I said previously, conversion rate target confirms for the group at 16% going forward as a mid-term plan.

Quickly coming back to the currency impact, yes, from a translation perspective, the euro plus 9% has helped as well as the pound plus 6%. So in the mix with the U.S. dollar that has a positive impact of around 3% as you can see on the levels EBIT or EBITDA or net earnings. What is remarkable is on the U.S. dollar, we have weaker U.S. dollar, which is significant for the seafreight.

Let's be clear on that, when we have seafreight business, which is dollar-denominated business, a weak U.S. dollar creates a slightly lower GP per TEU. On the same token, that slightly lower GP is then translated into a higher value Swiss franc, which is a bit of compensation for the negative impact. So long complicated explanation to something very simple, which means we are actually making local currency a bit less GP per TEU, but the translation is partially compensating for that. Let's not forget that topic, because the seafreight GP per TEU is still a very relevant number to manage our EBIT.

Going forward to Page 16 balance sheet, and you will certainly have noticed, we have two new lines on both sides, which is called contract assets and contract liabilities, nothing else as a reflection of disclosure change for IFRS 15, the old IAS 18, which when you look at the number is reflecting pretty much the work in progress. And the combination of contract liabilities and accrued trade expenses, deferred income pretty much the same number as it has been when it was only one line. For us, the change of IFRS 15 or the adaption of IFRS 15 has had no material impact for further details on what has changed, I would like to point out our quarterly results that we have our interim financial statement where we explained in the note of our accounting rules changes. Again, no material impact. And our top focus coming back from the pure representation issues, top focus remains receivables and payables, of course, that is the quality into value of our balance sheet.

Page number 17, cash flow, you see here the comparison of the first quarters and we all realize that that cash flow has a bit of seasonality in it. Seasonality is pretty much the same. You see the operational cash flow is in line with last year. We have put less into the working capital than a year ago, still that is a CHF200 million, so quite a significant number, but the growth rate needs to be obviously financed.

And what you can also see out of the next slide, Page number 18, the working capital development that the increasing at the consistent pressure on the DSL going up, now currently standing at around 55.1 days. So 55 days we were able to compensate through the DPOs, which as I mentioned many times in these calls with supplier finance solutions and strict management of our liquidity, we have managed to keep the working capital intensity within the barriers of 3.5% to 4.5%. I do expect that during the year, to stay around to 4% level as it is now.

Page 19 on return on capital employed, reflecting what we have discussed in our last call or what we have highlighted in our last presentation, we have introduced a second graph, which is actually representing to return on capital employed excluding acquisitions for a simple reason because as you know with the acquisitions you get the balance sheet 100% immediately, but obviously the business when you calculated on the rolling EBIT for a couple of quarters for four quarters, you only ramp up that EBIT over every four quarters.

So excluding acquisitions that is the dark blue line or the line which is on top for the ones that have black-and-white in front of you, that will be the return on our business excluding acquisition impact. We do confirm going forward our structural return on capital employed when we run the business with the current standard of the balance sheet and the business around 70%, you can see that very clearly.

That leads me to Page 20, financial targets. Again, a ramp up of what I think I have said over the last 3, 4 minutes. We confirm our financial targets with conversion rate of 16% on a mid-term basis, return on capital employed around 17%, tax rate 22% to 23%, and the working capital intensity 3.5% to 4.5%. Of course, there is a couple of assumptions around that and whatever our macroeconomic environment is giving us will impact these numbers, and we are generally not considering in our targets specific acquisition impact.

At the same time, on the right side of the slide, you have overview over our market assumptions or market observations for the first quarter. We are expecting the Seafreight market around 4%, the Airfreight market around 5%, Overland and Contract Logistics equally at around 4%.

With that little outlook, I would like to hand over back to Detlef to his presentation and then to the Q&A.

[Detlef Trefzger, Chief Executive Officer]

Thanks, Markus. As you know, there's a lot of transformation in the market and these transformations offer a lot of opportunities. Our focus topics for 2018 are cost control to a certain leverage of our business model are generated, we have again, in quarter one, achieved a lot of productivity gains.

Digitalization as a game changer for new solutions and productivity improvements, as you have heard and seen we have launched two unique groundbreaking digital platforms in Seafreight, we have a new industry solution in Airfreight, we have a digitalization rollout plan for Europe in Overland, and we have launched two innovation centers in Contract Logistics. With these investments, we will continue to lead the change and transformation from the technology and digitalization side in our industry.

In addition, with certain customers, we work on leveraging new opportunities with regards to value chain expansion and got some traction here. And as Markus already said, we do not include any acquisitions in our financial targets or figures unless they are done and close, but we have an active M&A process with a very robust and interesting pipeline. So this will lead our focus for the next nine months to come in 2018.

And with this, I would like to close the presentation based on the slide deck that we have distributed and hand back to Alice, the operator, to open the Q&A.

[Operator]

We’ll now begin the question-and-answer session. [Operator Instructions] The first question comes from Mark McVicar from Barclays. Please go ahead sir.

[Mark McVicar, Barclays]

Hi, thank you, and good afternoon. I have two questions. In the cash flow statement as well as CHF 7 million gain on disposal of subsidiary, you also got a net CHF 10 million of gains on disposal of property plant and the equipment, which look sort of unusually high. Could you, sort of, tell us what’s in there and, which division that fell in?

[Markus Blanka-Graff, Chief Financial Officer]

Hi Mark, this is Markus. That is related to the disposal of our Brazilian business, as that effect our refocusing on our main market and disposal of that unit if you like.

[Mark McVicar, Barclays]

But it’s essentially, CHF 17 million from disposal of this subsidiary and disposal of the associated…

[Markus Blanka-Graff, Chief Financial Officer]

Yes, that’s right. That’s right. Obviously, these are the gross values you don’t have a bit of write-offs in the investment that we had in our books. So net result is CHF 6 million, but obviously the gross values are higher than CHF 6 million.

[Mark McVicar, Barclays]

Do you think in that divisional P&L, there is about a CHF 6 million credit, if you like, from the net coming out of Brazil.

[Markus Blanka-Graff, Chief Financial Officer]

Correct. Yes. That is all recorded or you are asking, which business unit that is Overland.

[Mark McVicar, Barclays]

Only Overland that’s what I was thinking. My other question when you think about acquisitions, what sort of scale do you think you would consider? Are you only really looking for CHF 100 million Frank deals or CHF 500 million Frank deals or CHF 1 billion Frank deals? Can you give us some sense of the order of magnitude? And as follow-up to that is would an acquired business need to bring something more than just volume? Or would you be happy in the right circumstances and obviously at the right price? You know just a take volume that overlaps with stuff you’ve already got today.

[Markus Blanka-Graff, Chief Financial Officer]

So Mark, let me – that I was speaking. Let me answer this question. We have a clear set of criteria assessing potential targets. And the size is not the main criteria, it’s does it create synergies, market access or does it have a solution or competence that we couldn’t build as fast as competent as the respective target. And you have seen in the last couple of years that we pitched smaller and larger or midsized targets accordingly. So that is ongoing, but we are also not shy of more sizable targets, but the question is what are the right opportunities? We will not – we will always look for synergies or competence as the main criteria to assess and evaluate the target.

[Mark McVicar, Barclays]

Yes. Seriously, you want something more than just more volume to push them?

[Markus Blanka-Graff, Chief Financial Officer]

Exactly.

[Mark McVicar, Barclays]

Yes, okay. And then my final quick question, obviously, you’ve launched a number of initiatives around the KN and NextGen of that you talked to us about at the Capital Markets Day, last September. Do you expect to see March return on that investment this year? Or should we really be thinking much more about sort of 2019 and 2020 before you start a bit of materiality in terms of returns.

[Detlef Trefzger, Chief Executive Officer]

Mark, I should answer 2022 now, but I will not bear to do so. But no – but, Mark, really as I said so in my last comments we invest heavily into the new technology into digitalization of our business launching those platforms. And we have seen this before, it takes a couple of months and years and quarters until that is accepted in the market and gets certain traction.

Our targets that we have stated at the Capital Markets Day remain in place, there is no change. We want to have, and this is related to that statement, we want to have – we want to achieve 40% eTouch shipments in the year 2022, in our networks that has nothing to do with Contract Logistics obviously. And this is what we are aiming for. And this is what the whole technology investments and digitalization is focusing on. Where we see traction this year?

We have a great customer feedback on those platforms and solutions launched. Will it translate into a material P&L effect, this year most likely not. Next year to be seen, but for sure, in two years we will see as with KN fragment, we will see this get a lot of traction and help us to capture and do business in new markets or new sales channels in a much more automated way. Long answer to your question. It will not happen, it’s – we transform our own business model as you said at the Capital Markets Day, and will take time to be implemented, and it will take investments during that time and then it will generate an overproportionate return, otherwise we won’t go for that.

[Mark McVicar, Barclays]

Okay. That’s great. Very clear, thank you both.

[Detlef Trefzger, Chief Executive Officer]

Thanks.

[Markus Blanka-Graff, Chief Financial Officer]

Thanks, Mark.

[Operator]

The next question comes from Damian Brewer, Royal Bank of Canada. Please go ahead.

[Damian Brewer, Royal Bank of Canada]

Good afternoon, everybody. Three questions and since two actually follow-up from Mark. First of all just, could you give us a greater feel for the progression within the quarter, particularly how the underlying, i.e. organic volumes looked pre and post Chinese New Year within the business? That would be interesting just get a feel for the underlying resilience of north of the business?

Secondly, coming back to Mark’s question on sort of the investment for returns later. I think it sounds like there is about CHF 6 million to CHF 8 million that went into the Contract Logistics business, but in terms of other areas where there is investment. Could you give us just a sort of feel across the group about how much OpEx went into these new systems and platforms in the quarter. So we could get a feeling for the like the underlying incremental EBIT GP?

And then very finally, with Marcus’s comments on you’ve considerably more volume, clearly, the press is reporting that is a pair up that are looking to IPO sort of three times plus net debt EBITDA. Can you remind us of the kind of levels will you think you would become comfortable in terms of debt or cash position of the balance sheet within your business? Thank you.

[Detlef Trefzger, Chief Executive Officer]

Okay. Hi, Damian, I’m taking the liberty to take the last question first on the – is there a target tax ratio for [indiscernible] no there is not. You know that the quality of our balance sheet has been one of the assets for many decades and for a long, long history. And I think having had that quality in the balance sheet has always led to that long history. So I think there is no such ambitions I foresee in target, we’re going to leverage balance sheet or anything. It’s about when there is the right target there will be the right financing. And that is, I think, how we with our boards, how we work together, it’s the right target that is going to determine the rest.

[Markus Blanka-Graff, Chief Financial Officer]

Okay, then Damian, the other two questions pre-post Chinese New Year. First of all the whole season has shifted by two weeks this year, due to the change in Chinese New Year or the later celebrations. And we have seen in the first quarter that then the volume started to pick up again. So in total I would say, a normal pattern with the effect that we have mentioned before that the imports to China, not to Asia, but to imports to China with regards to recycling materials has been banned so they are gone, this is not existing in the market. That was a very remarkable volume.

As I said also, we were able to compensate, parts of that was other destinations, but in total, the majority of that volume will not come back. There is no local recycling market that has been soaring, and there have been other markets regionally that have been established, but this is not generating any seafreight volume. Our investments into the transformation of our business, the technology transformation of our business has been – is clearly defined and has been according to our plan, we will not disclose those details, but it’s more than just one quarter, where you can expect those investments to happen.

So as a guideline, maybe the effects that you have seen this year in the first quarter are likely to continue two or three more quarters this year so that would be my guideline with regards to those investments. Notwithstanding any positive effects – investments will generate in the respective market of its customers.

[Damian Brewer, Royal Bank of Canada]

Okay. Thank you very much.

[Markus Blanka-Graff, Chief Financial Officer]

Thank you.

[Operator]

The next question comes from Daniel Roska from Bernstein. Please go ahead.

[Daniel Roska, Bernstein]

Hi, Detlef. Hi, Markus. Three questions if I may. One you mentioned – Detlef you mentioned cost control on your last slide. Can you let us – a bit where you’re focusing on in terms of the efforts that even more sales operations, back office, integration of the acquisitions where you think that you see some cost opportunities?

And then maybe to touch upon the whole digitalization topic, one question you sought at Capital Markets Day you’d be ready to give some insight onto where eTouch volume were and how they were progressing, so any thoughts on that? Where are we currently? Are they progressing? Do you think that will be a part of the reporting at some point going forward.

And then maybe a little more on the strategic side, I think the digital capability in the supply chain of course, if you look at the environment, carriers, customs offices, of course is a bit challenging in that progression of digitalizing the supply chain, but you’ve launched some efforts in blockchain, we are seeing customs organization kind of making up with this, do you sense that there is an acceleration of the digitalization in this the supply chain, kind of, in the partners you depend on to make it a fully digital supply chain? Thanks.

[Detlef Trefzger, Chief Executive Officer]

Thank you very much Danny. And let me start with the later question, supply chain digitalization. First of all, we see a different perception in the market, not only with customers but also with other partners, carriers, customs offices, other official authorities. And that will help to change and improve the technology placement in supply chain management. At the moment, I wouldn’t talk about acceleration, maybe six months too early, but the attention and the willingness to try to understand and to collaborate and to partner and to test, for example, blockchain shipments had significantly increased. When we launched three years ago, four years ago, KN FreightNet, we were the first in the market with code book track platform within confirming the shipment within seconds for our customers.

Today, we see more and more customers that have moved to our platform, and we see more and more market players trying to achieve the same. So there is a higher willingness to move into that direction. eTouch, what we have said at the Capital Markets Day, is for sure is still valid, we will come up with the first reporting on eTouch shipments this year, so we deliver as promised is one of our claims and you can count on us. That will happen, you will see this.

Your question on whether you like those figures or not that is a different question. Your question on cost control, we focus on all areas of the supply chain. But most important is the back-office optimization or operations. And also, the manual data keying in manual processes that we still see a lot of that – we see a lot of markets still being state-of-the-art that we can also automate this more and more. So I hope any of this is giving you the insights that you were expecting on those three questions.

[Daniel Roska, Bernstein]

Well. One short follow-up then on kind of the conclusion for that would be on the kind of on the sales fund. You are happy with the setup, and basically kind of use the volume or revenue growth to, kind of, lower the sales profit of revenue? If I get that correctly.

[Markus Blanka-Graff, Chief Financial Officer]

Yes. Exactly.

[Daniel Roska, Bernstein]

Okay, thanks.

[Operator]

The next question comes from Neil Glynn from Credit Suisse. Please go ahead, sir.

[Neil Glynn, Credit Suisse]

Well, good afternoon, everybody. If I could ask two questions please. The first one just following on the efficiency theme. Within contract logistics, can we revisit Capital Markets Day from last year? And can help us understand what has significant and efficiency gains from the new WMS system you expect? How much manual intensity reduced in Contract Logistics as a result? And then the second question, the strong growth in Overland volume. Just interested can you help us with some detail as to what extent you're growing with new customers? Were the Overland expansion versus gaining incremental share of wallet from existing customers, were they use you within Overland or other businesses?

[Detlef Trefzger, Chief Executive Officer]

Sure. Neil, let me answer Overland the Overland related volume question, first. It's both, it is – we win new customer, we retain those customer and we win additional share of the wallet of those customers through our quality and network services that we provide. And that is true in all markets. At the same time, as oil prices are increasing, we see more demand for intermodal in North Americas, for example. So there is a mix of new customers or customers, you know pushing more volumes into our Overland networks, and this is throughout all regions. The Contract Logistics, WMS question, first of all, we have for decades one unified global WMS. And we are building and implementing the new generation of WMS, that are much – that will enhance the easiness of integrating pharma customers and e-commerce fulfillment customers. Especially with e-commerce fulfillment, we see a higher complexity, a higher demand for predictions, a higher demand for day plannings and this system will enable us to do so. It will take another 4 quarters, 3 quarters to have a significant rollout not a full rollout for this WMS, but the solutions already implemented, especially in China, we're extremely well and we have a very good productivity gain on that side. And your question is right, productivity is improving our operations, and making processes unnecessary or manual processes redundant, and this WMS will enable us to do so.

[Neil Glynn, Credit Suisse]

If I could just follow up on that second answer there. You mentioned, for example, predictive analytics and capabilities such as those does that also suggested there should be a potential additional revenue stream with an additional line item in contracts? Or is that simply likely to help you in business better for a similar price for example?

[Detlef Trefzger, Chief Executive Officer]

I think it's the letter first. So we will start optimizing our own solution in before we have independent revenue stream in Contract Logistics established on predictive analytics. But this is different for integrated logistics, where we have supply-chain management activities and take ownership of inventory or working capital optimization. On behalf of our customers, their predictive analytics can generate a great benefit right from the beginning, and that is what we are applying with integrated logistics.

[Neil Glynn, Credit Suisse]

Very helpful. Thank you.

[Detlef Trefzger, Chief Executive Officer]

Okay. Welcome.

[Operator]

The next question comes from Aymeric Poulain from Kepler Cheuvreux. Please go ahead.

[Aymeric Poulain, Kepler Cheuvreux]

Thank you, good afternoon. Four questions if I may, the first is on volumes, you did not refer to calendar effect as some of your competitors highlighted so were there any – and if so, what impact did it have in Q1? On the waste ban and impact on Q1 volumes, is that a one-off effect for Q1 only or should we expect a further impact in the rest of the year? That's for the volume questions.

On that GP per ton, the question I had is also referring to some of your competitor's comments recently, what's your view on the evolution of freight trade this year and the impact it has on your GP per ton? And I understand you don't want to provide yet the data on a booking, but your first experience on that front, would you see more of that volume coming from existing customer or are you actually attracting new customers to these platforms?

[Detlef Trefzger, Chief Executive Officer]

Great. Thanks for your questions. The questions on volume calendar effect, yes, there are calendar effects but we have calendar affects each and every year therefore, we didn't permanently put this into the focus. Easter was earlier so if effect for once. But we have, for example, in May, which shows the highest numbers of public holidays in Europe for the last two or three years. So -- but that's a normal seasonality of our business, and I don't see any effect and you asked for a effect that will last throughout the year, I don't see any effect. Let me answer this question may be with the macroeconomic view, at the moment, we see strong volume growth on all trades, we see high consumer confidence and consumer spending happening in all major markets, a situation we didn't have for the last four, five, six years, because we always had some areas where did this didn't happen. And this should drive volume goals and the opportunity to capture part of that volume growth in the markets for our business units all over the world. GP per ton, yes, and you saw this in our hot cargo business, we saw strong volume growth of 9%, 10% volume only in that market segment so we are able to capture still market share in a market that has may be seen a slightly reduction of demand over the last three, four, five months, but still the market is growing at 5%. If you remember two, three years ago we had negative growth, Q1, Q2 in some of those airfreight-related markets.

At the moment, we see demand growing, and our volume growth is – or we have over proportionately participating in the gross with our volume growth. GP per ton, we would not expect further significantly decrease, but the pressure on the margins in airfreight are continuing. Because the demand on airfreight capacity – on air capacity is not only happening from the airfreight side, but also from the passenger side, as you know, and that further congests some of the airports especially in Europe, and this leads to additional cost in the supply chain for rerouting, for trucking, whatever it needs to be done in order to optimize that setup.

So there will be a continuous pressure on the margin per ton in airfreight. But as you saw in the past, we are able to manage this, because we are optimizing our cost structure or production models accordingly so that in total, the margin and the cost effects are overcompensated by volume effect, and that is, I think, the most important story for airfreight.

And then eTouch, and e-bookings, we see a lot of demand increase I mentioned that earlier in our call, and especially with the solutions we have bid on our platform KN FreightNet, we see that both quotation as well as bookings are, soaring would be an exaggeration, but have a strong double-digit growth in all areas. And you will see some statistics this year, we promised.

[Aymeric Poulain, Kepler Cheuvreux]

Okay, thank you.

[Operator]

The next question comes from Bruce Chan from Stifel. Please go ahead.

[Bruce Chan, Stifel]

Yes, thank you operator, and good afternoon gentlemen. I have a follow-up on the last question a little bit. Talk about maybe some of the gross margin dynamics and the capacity environment, you shared some lights on airfreight already, but in the ocean, I think, is in the beginning of the year there have been some talk about some persistent lingering over capacity and now maybe that’s tightened, can you discuss – how that shipping your expectations for gross margins for the rest of the year? And then, also going back to airfreight, you’ve talked about the tight capacity in both main deck drivers and in passenger, are we getting to the point where we are seeing volume growth starting to get constrained by capacity?

[Detlef Trefzger, Chief Executive Officer]

So let’s start with Bruce, first of all good afternoon. Let’s start with seafreight, there is a overcapacity on certain trade lanes and there is cost capacity on other, so there is no general answer to it. On the main trades and our expectation for this year, are more stable margins, and yes, you have seen this in our Q1 results so the margins slightly increased per TEU. So that – that should be our – was our expectation for this year. All consolidations – carrier consolidation has happened, and I think there is no surprise to be expected this year as we have seen two or three years ago.

Airfreight, it’s main capacity, it’s belly capacity, but most important bottleneck at the moment are some of the European gateways and the hubs that are congested, but not by airfreight, but by the passenger planes getting into those hubs. What we go to an extent that airfreight growth is in that by that development, I don’t think so, because we will see lower margin cargo moving on alternative routings, but at the same time, there is an increasing demand for time critical shipments. And in the aerospace sector, in the former head scale sector, with some of the consumer retail oriented sectors, so the demand for airfreight due to its lead time advantages is increasing. So therefore,, I – we are positive with the overall outlook for this year that the market growth that we have anticipated of approximately 5% will remain throughout the year, that’s a guidance Markus has presented, and our target as we have stated at the Capital Markets Day is to grow twice as fast as the market.

[Bruce Chan, Stifel]

Great. I appreciate that. And then just a quick follow-up on general trade issues, you’ve maybe fortunately been a little bit more insulated over in Europe than we have here in the U.S., but there has obviously been a lot of rhetoric back-and-forth about tariffs and sanctions and what not. And I’m wondering if you have started to see any dividends of these trade discussions manifest themselves in customer volumes?

[Detlef Trefzger, Chief Executive Officer]

Not at all. No effects.

[Bruce Chan, Stifel]

Great. That’s very clear. Thank you.

[Detlef Trefzger, Chief Executive Officer]

Thank you.

[Operator]

The next question comes from Edward Stanford, HSBC. Please go ahead.

[Edward Stanford, HSBC]

Good afternoon, everybody. And just a couple of questions left if I may, I wasn’t quite sure whether you had actually answered the question on the recycling volumes and whether that was just a one-off or whether we might expect volumes to be effective for the rest of the year on a sort of similar basis and secondly, you mentioned I think about some improvements you’re making to the production model in the UK in contract logistics. Because you perhaps just – I think I will miss you in your main comments so just – and touch down a little bit more please.

[Detlef Trefzger, Chief Executive Officer]

Sure. Recycling volumes export to China of raised and recycling materials has been banned. So this will not only affect this year’s volumes they are gone. China is not allowing any imports of recycling material anymore. This volume, 25,000 TEUs first quarter in our network, 25,000 TEU first quarter this year, is gone. We were able to compensate this with other markets that are interested in importing recycling materials somewhere else in Asia, but to China, this volume will be gone for the rest of the year.

So you should factor this effect in whatever model or view analysis you do for seafreight. The production model in the UK, we have a long-lasting customer there, where we have a very good relationship with. Their markets are changing, and we have jointly decided to go into an extension of that partnership for another decade, and as a basis of this partnership to start and invest and grow approach an implementation of a new production system for this customer, and other customers in that niche in the market jointly. This investment for this project will happen this year, and we will not be able to harvest the benefits before, let’s say, somewhere in next year. And that is mainly the story behind the UK, but it’s one thing the customer in a specific niche, it’s not the overall contract logistics business in the UK. Does that answer your question?

[Edward Stanford, HSBC]

Yes. Just one follow-up question, can I – can we assume that probably your recycling volumes were roughly 100,000 TEUs a year then?

[Detlef Trefzger, Chief Executive Officer]

Just one seasonality a bit more than the 100,000.

[Markus Blanka]

It’s a different seasonality.

[Edward Stanford, HSBC]

Okay. Thank you.

[Markus Blanka]

Yeah.

[Operator]

[Operator Instructions] The next question comes from Stuart Todd from Lloyd’s. Please go ahead.

[Stuart Todd, Lloyd’s]

Yes. Good afternoon, gentleman. I’d just kind of like to get your reaction on shipping lines moving more and more into logistics, just a year ago, we had CMA, CGM taking 25% as fees. And before that we had Maersk impacting by getting deeper into the logistics becoming a global integrator of container logistics. And can you make a little bit comment that sort of tie-up with CMA, CGM [indiscernible]

[Detlef Trefzger, Chief Executive Officer]

Stewart, we have a lot of competitors in the market and the company you have mentioned has been a competitor for the last 10 years in some areas and in some areas they are not present. I think shipping lines have always made attempts to expand their value chain as we do with all our customers and I don't see any conflict at the moment in that space.

We are having excellent relationship with all our shipping lines for years, decades as you know, centuries most likely and we work very trustworthy with all of them. We are number one to three shippers with all high volume for all of them. As you also know some of the shipping lines have started those attempts and then stopped them again, or have not got a lot of traction.

At the end of the day, the customer has to decide where does the customer get the most highest-quality end-to-end supply chain service with total visibility, with proactive database supply chain management, and at the moment we're not seeing any conflict here.

And let me add one more aspect, our market share in Seafreight, in Airfreight, and Contract Logistics, Overland on average globally is less than 2.5%. There is enough room for growth, as we are always set with highest pressure, especially with high investment on digitalization and technology is on the smaller forwarder that are almost unable to deal with these investments in the time or as fast as required.

[Stuart Todd, Lloyd’s]

Okay, many thanks.

[Detlef Trefzger, Chief Executive Officer]

You’re welcome.

[Operator]

[Operator Instructions] Gentlemen, there are no more questions at this time.

[Detlef Trefzger, Chief Executive Officer]

Then thank you very much, ladies and gentlemen for joining our Q1 call. Thanks for the interesting dialogue and questions. And as you know, we stay focused on cost control and digitalization of our business model, and how we got traction in quarter two with these topics you will see in three months from now approximately. In the meantime, take care and looking forward to talking to you again soon. Bye-bye.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing chorus call, and thank you for participating in the conference. You may now disconnect your lines. Good bye.