Kuehne und Nagel International AG

SIX:KNIN

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to the Q1 2019 results conference call. I'm Andreas, the Chorus Call operator. The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast.At this time, it's my pleasure to hand over to Dr. Detlef Trefzger, CEO of Kuehne + Nagel. Please go ahead, sir

[Detlef A. Trefzger, Chairman of Management Board & CEO]

Thanks, Andreas. Good morning, good day, good afternoon, and good evening to all of you, and welcome to the Kuehne + Nagel analyst conference on the first quarter 2019 results. Markus Blanka-Graff, our CFO, and I welcome you from beautiful Switzerland. We have published our analyst presentation earlier this morning, and as always, we start on Slide 3.Kuehne + Nagel continues to grow, and we got off to a good start in 2019 with group earnings stable at CHF 181 million in quarter 1; a strong EBIT improvement in Seafreight to CHF 112 million, which amounts to an increase of CHF 15 million above quarter 1 2018; a stable EBIT in Airfreight of CHF 80 million, which is CHF 1 million below the record year 2018; a strong net turnover growth in Overland, which resulted from a strong operational improvement of EBIT; and a net turnover growth in Contract Logistics of 6.3%, whilst consolidating our contract portfolio.Let's continue on Slide 4 with some key figures. Despite the market's weakening, and we mentioned so already during our last analyst call when we commented on the full-year 2018 results, our first quarter this year has been very successful. The consistent implementation of our business strategy in all business units has been decisive for this success. So net turnover improved by 7.7% to CHF 5.2 billion. Gross profit improved by 7.3% to CHF 1.978 billion, almost CHF 2 billion. EBIT improved to CHF 242 million, or by 2.5%, and earnings per share were slightly down to CHF 1.50 [indiscernible] per share, almost on the same high level as in the previous year's quarter 1.I think we hear Andreas making some noises in the background, so maybe you can drop off or go on mute.We have on Slide 5 a short introduction to our two network business units, Seafreight and Airfreight. Seafreight, we are number one globally with the volume transport in our networks, and we saw significant business wins with our new digital platform. We have launched KN ESP already last year, and we have mentioned that a couple of time we have a lot of bookings and the trend is increasing on this platform, but I'm really proud that we also launched a new solution on a platform a week ago called KN Pledge, and I'm sure you have noticed this. This is the first and only full container load quote, book, track solution in the market that offers guaranteed lead times and even a money-back guarantee, and we see a lot of traction with that solution in the Seafreight market. The strong volume growth, and we will detail where the growth comes from in a minute, is paired with operational leverage in Seafreight, resulting into an EBIT improvement of CHF 50 million, as stated before.Airfreight, the very successful integration of our bolt-on acquisition of the Quick group, a high niche market player in a market that is growing fast and offers strong margins, higher margins and margin improvements. And we continue our success with industry solutions that we have deployed and that continue to see highest interest of our customers. I would like to mention KN InteriorChain once more, and KN PharmaChain as well.Let's detail the volume development of Sea and Airfreight on Slide 6 of the slide deck. Let's start with Seafreight. We saw a very robust volume growth in TEU of 6.2%, which resulted into the highest volume ever in a quarter 1. 1,146,000 TEU shipped in our networks in quarter 1 2019, while the market growth was clearly, or has clearly been below 2% or 1% to 2% in quarter 1 this year.Our Asia-Europe volumes expanded double digit, despite a declining market on these trades, and our products, LCL and Reefer performed extremely well. And we also were able to leverage our proximity and our solutioning for small and medium sized enterprises, the customer segment we concentrate on for many years.In Airfreight, markets have been different, and we have stated so already when we commented on quarter 4 or year-end 2018 results on our last call. In a declining market, our volumes declined as well by approximately 3%, which was in line with the market. And we saw a decline already in quarter 4. Remember, we saw a decline of minus 2% in quarter 4 2018 versus quarter 4 of previous year.Europe export to Asia, as well as NAM, North America Export to Asia -- to Asia declined, while the Europe to North America and the Europe exports -- the NAM, the North America exports to Europe, so vice versa, increased. So we had trades that declined, and we saw still volume growth on some key straits throughout our network.Let's talk about the key figures of Seafreight on Slide 7. Seafreight improved yield and benefitted from active cost management. Both led to a record result in quarter 1 2019. At CHF 333 per TEU, the average margin improved sequentially by 7%, which also represents a year-over-year improvement still of 1%. This reflects the improved mix of the segments we are working in. I mentioned already LCL as well as reefer, but also the small and medium size enterprises we are focusing on.The year-over-year expenses per TEU were down by 2%, or CHF 5 per TEU, resulting into a high EBIT per TEU of CHF 97, which is a significant improvement versus previous quarters, so sequentially up almost 20%, and year over year by CHF 7, or almost 8%.As always, I quote the year-to-date variance analysis in million Swiss francs, so the GP effects coming from volume in Seafreight were CHF 23 million in quarter 1. The margin effect in GP coming from the first quarter were CHF 2 million. The cost increase due to the volume was under-proportional. It was only CHF 10 million, resulting into an EBIT improvement in quarter 1 2019 of CHF 50 million.Let's do the same exercise and the details on Airfreight on Slide 8. The trend that we saw already in the last two quarters of underlying yield strength continued and extended into quarter 1 2019. The margin improved by 19% year over year, with more than half of this improvement coming from the organic growth, organic development of Airfreight. And the balance, as you'll see in the slide, is attributable to the acquisitions of Panatlantic and especially Quick. The EBIT per 100 kilo improved by 5%, and sequentially as well as year over year, or CHF 1. The clear contribution of the Quick acquisition can be seen in the figures that we have outlined here, and the EBIT of the Quick acquisition is still suffering from the intangible amortization, as well as the integration costs in the first quarter after the acquisition.Also, here I would like to go through the year to date variance analysis in million Swiss francs. The volume effect on gross profit has been CHF 9 million negative, lower volumes, lower GP. The margin effect in gross profit has been positive with CHF 52 million, clearly to be seen CHF 80 per 100 kilo versus CHF 67 per 100 kilo previous-year quarter 1. The cost effect has been minus CHF 44 million, resulting into an EBIT effect of CHF minus 1 for the first quarter in Airfreight.The impact of the Quick acquisition, as I mentioned already, also in the figures before, you'll see these on Slide 9 again, and I would like to state a couple of messages here, or focus on a couple of messages here. We bought one of the more global market leaders in time-critical shipments, and I have to say, the product Sterling for the aerospace AOG solutions, as well as the QuickSTAT solutions for the healthcare and pharma industry are outstanding. The deeper we look, the more impressed and happy we are.The integration is ongoing as planned, cross-selling, business case confirmed, all those topics. But I think more important for all of us is we see a high fit, a high complementarity of cultures and the way of doing business. So the team, the spirit, and the way the colleagues at Quick do their business match and interface seamless and integrate seamlessly with our business.Quick is a niche solution, as you know, high margin, high grow -- in the high-margin, high-growth segment of time-critical shipments, and a very low volume of the business. So the overall tonnage moved in the first quarter 2019 in the Quick networks with time-critical shipments was less than 3,000 tons. And, as you saw, we have a very positive EBITDA contribution of more than CHF 5 million from Quick, but with a slightly negative EBIT effect due to the intangible amortization and some of the integration costs. So this bolt-on acquisition will show also in the future a lot of impact in our Airfreight P&L.Let's continue with another very successful business unit on Slide 10, Overland. The strong performance of our U.S. intermodal business, as we already stated in our last call, is ongoing, and the strong operational improvements is matching the quarter 1 2018 figures in a nominal way. But the figures last year, as you'll remember, included a material one-off gain of almost CHF 6 million or more than CHF 6 million from the disposal of a business in Brazil. So operationally, the business unit, Overland, improved their contribution by this amount.What contributed to the strong performance? As said, intermodal shipments for our major customers in the U.S., so the U.S. economy is still running well. The European group [indiscernible] and LTL business, FTL business, and the integration of the Overland business in our industry solutions, the pharma solution, KN PharmaChain has also solutions, or part of the solution is rested, or is based on the performance in the Overland network and also, their digital platform sales, especially in Europe.Strong topline growth and GP growth we have seen in quarter 1, and this growth reflects both the volume expansion -- we count the volume in Overland and shipments, but also improved pricing. And as said, the result included this one-off gain -- or compensated the one-off gain that we benefitted from a year ago, and operationally, Overland is in an excellent shape and continues to deliver their growth as well as their EBITDA [ performance ].Let me continue on Page 12, Contract Logistics. Also here we have posted the story in our last call already. This is ongoing and will be ongoing for the whole year. We consolidate, or we focus on the consolidation of the contract portfolio in Contract Logistics, as well as very active cost management. At the same time, we continue to roll out our new WMS-solution worldwide and our picking-enhancement technology investments, our automation investments in the warehouses in order to improve productivity. All this is putting pressure on the P&L or the EBIT in Contract Logistics. And the headline here that we chose is reshaping the business. We reviewed the entire project portfolio in Contract Logistics, and we focus, as we have said already, on scaling high-margin solutions that also benefit across then to the other business units. We invest into technology, picking enhancement and warehousing software, which I mentioned before. And we are very selective, or more selective, with the growth in 2019.So, while we saw an organic growth of 6% in quarter 1, which was in line with the 6% that you saw in quarter 4 2018, we believe that with the typical contract implementation cycle for a Contract Logistics project of 6 to 12 months, in total for the year 2019, you would expect a significantly lower growth, as we plan to consolidate and focus on scale solutions and high-margin businesses. All this has been highlighted during the last call. So, therefore, the EBIT contracted to CHF 26 million compared to the CHF 34 million in quarter 1 last year, which reflects the investment and the cleaning up and reshaping of the business.With this walk through the four business units and the overall group performance, I hand over to Markus, who will lead you through the details of the financial figures.

[Markus Blanka-Graff]

Thank you, Detlef. Hello from my side also to all participants. I'm on Page Number 14, income statement. First quarter, if I may, just three topics I want to address. First, GP growth, we have added CHF 135 million of GP, of which CHF 25 million in Seafreight, CHF 43 million in Airfreight, so the two international network businesses, with CHF 68 million additional GP. You have heard from Detlef's explanation, Seafreight with CHF 25 million more, GP has returned CHF 15 million more EBIT, so conversion rates increase. Airfreight, I think we have explained with the acquisition of Quick, being the first quarter on the consolidation including intangible assets of around CHF 5.5 million.Overland adding CHF 21 million on the GP line, and on the nominal value remaining at the very same level as the first quarter 2018. But please be reminded, in first quarter 2018, we had a positive one-off effect of a disposal of a business in South America amounting to around CHF 7 million. So operationally, as you have heard, a very good performance.Second topic, IFRS 16 impact, you can see that here very clearly on the development on the EBITDA versus the development of EBIT. We have CHF 115 million of depreciation of right-of-use assets that are reclassified below the EBITDA line. So hence, if you compare EBITDA like-for-like, you would see CHF 289 in the first quarter '18 versus CHF 303 in the first quarter 2019. Just for explanation, I'm sure you're all aware of that, just to highlight where you can find the impact easily.Thirdly, the exchange rate impact, negative for us at 1.7% on the EBT line. That translates into roughly CHF 4 million EBT. So on a constant currency situation, we would be very much in line with last year.Balance sheet, moving on to Page Number 15 of the presentation, again, a reiteration of what is the extension of the balance sheet through IFRS 16. We'll see right-of-use leased assets around CHF 1.75 billion versus, on the liability side, split into non-current and current lease liabilities, depending on the maturity of the contract. For easier read and reference, we have added on Page Number 16 a quick summary of all the impact on IFRS 16 on the balance sheet, as I have explained right now, and on the right side on the P&L development of the income statement. You can see here the depreciation value of CHF 115 million, which I pointed out earlier. On EBIT level, we are around CHF 3 million impacting, and the profit before tax has a not-so-significant impact of minus CHF 1 million in the quarter, predominantly in Contract Logistics, as you can imagine, through the so-called frontloading impact of the IFRS 16 methodology. We expect that CHF 1 million on a quarterly basis to continue throughout the year, so a full-year impact will be around CHF 4 million to CHF 5 million negative impact on EBT for the group, of which you can attribute the majority to Contract Logistics. Coming back to balance sheet, equity ratio, the current equity ratio after the extension of the balance sheet is around 25.1% coming from 29.5%. I think everybody needs to adjust their KPIs to relate to reference points. I have added something that I think is interesting in conversations around how stable balance sheet development and how well managed the balance sheet is going within the companies. I have added something that was usually used also in the banking sector as tangible common equity, nothing else than equity minus goodwill, and put that into relation to the value of the entire balance sheet. That would show you a bit where we sit on the tangible equity value, around 13%, even after extension of the balance sheet.Going to cash and cash equivalents, Page Number 17, a summary. I think we have a very healthy Q1 development. Also here you imagine there is an IFRS 16 impact on reclassification, which we have then pointed out on the next page, on the Page Number 18. But let me just walk you through quickly on the individual items. We started in the year with a bit of a lower balance than it had been a year before of CHF 488 million, which is CHF 222 million lower than it was the year before. And quick jump to the conclusion, we end up with the cash and cash equivalents at the end of the first quarter with only CHF 67 million lower than last year. Hence, with all the reclassifications in between and the complications, if you like, we can safely say around CHF 140 million we have had a better cash inflow than it has been the year before.Looking to Page 18, which is the free cash flow development, and on the right side you see the quick restatement on like-for-like comparison for IFRS 16, and you can see quarter 1 has returned very healthy on CHF 140 million free cash flow, which is a very good result, taken that Q1 also historically has a seasonal impact of usually not returning too high free cash flow. So we have worked diligently on receivables/payables, but also have diligently worked on growth in all the business units and how much cash or capital allocation goes into the various business units.Working capital in numbers, Page Number 19, we are staying within our corridor with 4.5%. Clearly, we are not stopping to grow, so hence, a bit of an increase also in working capital, and hence, net working capital. You will see here we have increased CHF 166 million compared to a year ago, with spread between DSO and DPOs that have narrowed from 12.9% to 7.2%. Let's be mindful in this one when we look into the year-end result and also on the last year, we have seen that spread moving between the 12 days, which was the maximum if you like, also down to 5 days. I think 7 to 9 days should be our corridor that we want to work in.Return on capital employed, Page Number 20, a very familiar slide with the spread, or with the separation, into return on capital employed with and without acquisitions. You know acquisitions have, from day one, the full balance sheet and only the build-up of the P&L over the three-month period rolling that we use as a reference. So the upper line, the dark blue line, or the darker line, is the one that is excluding the acquisitions, and you see the first time that we go after the inflection point of 58%, again into the direction of 60%. Anticipating what is on Page Number 21, we have remained with our guidance on a midterm target 2022 that our return on capital employed, excluding acquisitions, is technically possible at 70%, and hence remains our target.Page 21, financial targets, and on the right side a bit our outlook for the market assessment. Financial targets have not changed, conversion rate 60% for the group assuming a constant mix of business units compared to our starting point 2017. Effective tax rate around 23%. I've given ourselves a bit of leeway, 23% to 24%, but I think we will be somewhere around the 23% line. Working capital intensity will remain within the corridor, and also don't change the corridor.Business outlook, if you like, market for Seafreight we currently see around 2%, and I'm trying to be specific here. We have had a bit of feedback on our way how we write down approximately. Plus/minus does not mean between minus and plus 2%. It means around 2% mark, so approximately 2%. For KN, we expect a growth double the market, in this case above 5%.Airfreight we see currently, or our expectation is after the first quarter with a reduction in market volume, so a reduced market. We see still the market for the full year 2019 on the 0 level, hence we imply that for the months to come, for the next three quarters, there is going to be a positive development in Airfreight. For ourselves, the only thing we can say, we want to grow our volumes.Overland, 2% to 3% in the market. We want to grow double the market Contract Logistics with the more selective approach to growth and customer portfolio that already, as Detlef alluded to, we will target to grow in line with markets.This would conclude my brief explanations towards the financials. You will then find obviously in the annex of the presentation our financial calendar, and as usual, the quarter-over-quarter comparison.

[Detlef A. Trefzger, Chairman of Management Board & CEO]

And with these details on the financial figures and the outlook on market and our performance for 2019, we are open for your questions.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] The first question from the phone comes from Daniel Roeska from Sanford C. Bernstein. Please go ahead, sir.

[Daniel Roeska, Research Analyst]

Three questions, if I may. Number one, on the IT rollout in airLOG, could you give us a little bit of a color if that's progressing, how that's progressing, kind of how the speed is going, just an update on that, and whether also the volume weakness in air is attributably kind of fully to the market, or if there is kind of also a slowdown here as you are rolling out the new IT on air.Secondly, I'll come back to eTouch kind of on your task to digitize more of your workflows, and I'm wondering, have you had conversations with customers about this? I bet you do. And then the question becomes, what's the feedback you're getting? What's the progress you're making? How excited are customers about your initiative, and what kind of impact does that have on your plans going forward.And then, you already touched a little bit on Contract Logistics, if I may just ask you kind of to give us a little bit of a plan, so to speak, for the next 4 to 8 quarters, kind of you're rolling out the IT, you're reworking the contracts. What's the sequencing? How do we think about kind of the next 4 to 8 quarters in Contract Logistics? Thanks.

[Detlef A. Trefzger, Chairman of Management Board & CEO]

I will answer your questions in the sequence you have asked them. AirLOG rollout, we are done with the airLOG rollout, as per plan, so all countries are rolled down. Now it's on us to, you know, start using the software and the tool in the most efficient way and to drive productivity. That, for sure, will be a task for this year or the next 18 months, but the effect you will not see before maybe end of the year. The final rollout has been in Germany and the U.S. end of last year, early this year, so that for sure had sort of a productivity or cost issue, but not on the volume on the market side. And that is, from my point of view, the most important message.eTouch, not only our customers are excited, we are all excited about eTouch, and we have a lot of initiatives running, and it's different per business unit. So I mentioned briefly the digital platform business that got a lot of traction in Overland. This is transforming more and more into an eTouch kind of business, as we defined it in our last call. The KN Pledge platform, the solution that we have posted in Seafreight, is a clear eTouch solution. This has been developed together with customers. This has brought a customer and carrier feedback, and we get a real wow effect, a positive wow effect from the market. eTouch has been discussed with customers, and they are excited. That is the conclusion. We will give an update, as we have agreed on our last call, every second call, so every half year. So in summer, when we come back to you with the half-year results, you will get an update on how much traction do we get with eTouch.The Contract Logistics plan for the next couple of quarters is pretty clear, so I think what you should be thinking about is that for the next four quarters, we are in that mood that we have described already in the last call, yeah? So investments into technology, picking enhancement, productivity improvement, reshaping of the contract portfolio, optimization of our organization, all this is running at the same time. It's a holistic reshaping of our business and a more seamless interface of the Contract Business with the rest of the network business. You should see clear benefits in a year from now, the latest. That would be my ambition to say this also pretty clear.I hope that answers your question, Daniel.

[Operator]

The next question from the phone comes from Sathish Sivakumar from Citigroup. Please go ahead.

[Sathish Babu Sivakumar, Analyst]

I have a couple of questions, actually. Firstly, on the cost, is unit cost that I've seen as being the main focus as part of your cost management strategy, because if you could list some of the key measures that you have taken to bring the cost down by about CHF 76 million in Q1 this year.And secondly, on the working capital, what are the main drivers that would result in the improvement in working capital? How do you see the role of reverse factoring or trade factoring impacting the working capital in the next few quarters?

[Detlef A. Trefzger, Chairman of Management Board & CEO]

Let me answer the cost question, if I understood the question right. You were very difficult to understand, but the -- we have an active cost approach and cost management approach which is part of the DNA of Kuehne + Nagel, one could say, in each and every business unit. And for Airfreight, with the implementation of airLOG and now the, you know, the getting to know the system, as we got to know the system we were working on the last 25 years, and this training and so on. Yes, there is a certain cost burden associated with it, but I would not -- there I will not give any details or figures on that. But, for sure, that has an impact on our cost development. Nevertheless, productivity improvement and process optimization, process re-engineering in the operational processes has always been a task for each and every business unit. As we grow the business, we can't, you know, just add volume into the same sort of pipeline, and that is what we are working on.So there will be eventually a certain relief in costs that are associated with the airLOG implementation, or has been associated on the airLOG implementation. To what extent, maybe we can share that when we know all details, end of the year.

[Sathish Babu Sivakumar, Analyst]

So what is actually driving the cost reduction in your selling, general, and administrative expenses? Because the productivity, everything goes under the other operating expenses, right?

[Markus Blanka-Graff]

I think, Sathish, when you look into the quarter-over-quarter comparison, I think on the Seafreight, you see very clearly when you take cost per TEU, that not only we have increased the GP, but that is one thing by CHF 2 per TEU, but also costs came down by CHF 5 per TEU. So that -- our improvement of CHF 7 on EBIT per TEU is mainly coming from the cost side, and that is personnel cost, obviously. That is operating cost, and that includes, obviously, also the usual thing where we develop our IT systems, our IT -- our products for further IT. So the reductions that you see is usually coming out of productivity gains.And when, like in the Airfreight arena, in the first quarter when we have a bit of a reduction of volumes, that obviously we are not building additional resources. We are being very careful in the way we add resources to it. So even in the Airfreight arena, when you were to take out the consolidation impact of Quick, which obviously adds GP and cost, when you take it out and look at the business that is excluding Quick, we would actually have and have made -- you have it also in your presentation -- the comparison like-for-like for Airfreight, and you would see that on the cost per 100 kilo, we would actually have a CHF 2 improvement on EBIT, a bit more additional cost, but the majority coming from the higher-value services that need a bit more cost. So higher GP, a bit higher cost, and in total, a higher EBIT per 100 kilo.Another driving factor, obviously, for Airfreight is we always look at the 100-kilo ratio, but the workload is on order level. And when orders become smaller, then your work actually remains the same because you have the same number of orders [indiscernible], and the effort remains the same, but obviously the chargeable revenue is coming down.So a couple of moving factors, but I think what we do is strict and very tight cost control on operating costs. Working capital is a very straightforward answer to that. I think in the first quarter, we have been working diligently on the receivables and payables, I think more on the payables side than on the receivables side. Going forward, clearly we are not going to suppliers and say, okay, now there is only going to be suppliers that we're going to pay in the 120 days. Now, there is the offer of supply chain finance solutions that we have put in place over the last 2, 3 years already. I think I spoke on the same calls already a couple of times about it. It's a very well-known solution, and it picks up volume very well, which is a win-win situation from a supplier side, as well as from our side.Secondly, I think when we talk about more selective growth going forward, in the next couple of quarters, most likely spilling over into 2020, you should see also a bit of a reduced requirement for CapEx and/or capital allocation in the business units where we don't want to grow exponentially above the market.

[Operator]

The next question comes from the line of Glynn Neil from Credit Suisse. Please go ahead.

[Neil Glynn]

I think the line might be poor, but I'm going to try anyway. Just two questions for me, please. The first one, just on the quarterly progression of GP per TEU, Markus, we obviously talked about it this morning, but is it possible to give any kind of breakdown in terms of how meaningfully helpful reefer versus LCL versus SME benefits were, quarter on quarter? And I'm just interested in those premium aspects of your product portfolio. Would you classify them as more volatile or less volatile to your average product across the portfolio?And then, a second question just on the developments within Contract Logistics. Is it possible to provide some color as to the proportion of customers using both Contract Logistics and either Seafreight and Airfreight? And to what extent is the ongoing work in Contract Logistics likely to bring more alignment between service and customers?

[Detlef A. Trefzger, Chairman of Management Board & CEO]

Let me answer both questions that you have asked, as you spoke to Markus already earlier this morning. GP per TEU, yes, we know the structure, but we don't disclose it. What I can say is that all business solutions and all products contributed to a higher EBIT in quarter 1 this year. This is true for FCL, LCL, reefer, and all the premium solutions that we have placed in the market. So all of them contributed to the overall EBIT improvement and higher margins.The cross-selling effect of Contract Logistics, yes, we know the Contract Logistics cross-selling effect. We assume that -- or we plan that the solutions will be more and more integrated with the networks. That's our target and ambition. But even if they continue to be based on separate contracts, the approach to work for global key accounts with what we call scale solution is ongoing in Contract Logistics. We are still having some of the legacy businesses in our portfolio, and that is what we focus on in cleaning up the business, or reshaping the businesses that are under-proportionally, you know, offering cross-selling possibilities that are standalone, have no synergies even on a country level with other Contract Logistics or network businesses. And that is what we are going to change and to optimize.

[Neil Glynn]

If I could just come back on that first question, just on the subject of volatility or predictability, do you see any distinct difference between those premium products, higher-value products within Seafreight relative to the standard Seafreight product portfolio?

[Detlef A. Trefzger, Chairman of Management Board & CEO]

Yes, it's a premium market, and we see that certain customers tend to use an LTL solution, naturally more likely if the rates are increasing throughout the year, or if they anticipate a rate improvement throughout the year. At the same time, we see a structural change at the moment. We haven't mentioned that for Airfreight, but what is true for Airfreight is also true for Seafreight. The shipment, the number of files is more or less flat in Airfreight and it's improving in Seafreight. But the cargo, you know, on file, the number of TEU or 100 kilos per file is decreasing. So we see smaller lots being shipped, not a high proportion of smaller lots, but we see that there's more shipments necessary to move the same amount of tonnage, or TEU, in the market. And that is a typical trend for -- we are cautious with the outlook, as you saw, for quarter 2. We are very positive and excited about the whole year, but that is a trend when people do not, you know, build up stock too heavy or do not see high increases in their consumption in the markets they work in. And that is reflected in the shipment versus TEU or tonnage figure that I mentioned before.So LTL, we'll see further growth -- LTL, we'll see further growth as the rates for Seafreight, we anticipate, will grow further through the year.

[Operator]

The next question comes from David Kerstens from Jefferies. Please go ahead.

[David Kerstens, Equity Analyst]

Two questions, please. First of all, on the conversion ratio in Airfreight, I understand the first quarter was impacted by the Quick acquisition impact, the amortization and integration cost. Has it now all been completed, and do you anticipate a normal level for the conversion ratio going forward? And can you maybe indicate whether the Quick acquisition is accretive to your group conversion ratio?Then my second question, you highlighted that you expect Airfreight volume growth to recover in coming quarters. What are the drivers, and what's your view on the relative performance of Airfreight versus Seafreight? Why is Airfreight so much weaker at the current point in the cycle, despite secular growth trends such as growing e-commerce? Thank you very much.

[Detlef A. Trefzger, Chairman of Management Board & CEO]

Let me answer the latter question first, David. The Airfreight is an early cycle solution in the market, so we see Airfreight volumes being flat for two reasons. First of all, the anticipation of growth in the market and the overall outlook that I mentioned before, but secondly, we compare the Airfreight market with a massive and all-time high never seen before -- I'm not exaggerating -- growth in the market as well as in our networks last year, quarter 1 and quarter 2, with a more normalized market or more normalized markets in the second semester 2018. So this comparison also helps a lot.But pharma and aerospace, we see continuous growth. We see a lot of stable performances. What we are missing at the moment are the economy-induced ad hoc shipments for the automotive industry, for example, which we saw last year. They tend more, with less time pressure, to ship via Seafreight, so that is one reason. Then the stock build-up in the excitement of whatever trade wars and Brexits that we have discussed with you in the past is gone. The stock levels are still high, or higher, or high enough to, you know, ship with Seafreight rather than with Airfreight.But if you compare the Airfreight performance over a two-year period, just from 2017 to '19, our volume is still significantly higher than 2017. We had 350,000 tons in our network; now we have 409,000 tons. Take the 59,000 tons, we are talking about a year-over-year growth of 6%, 7%, which is extremely high in such a market environment.So all this creates a certain confidence that in the second semester, markets will show a maybe small or lower, but normalized growth again.Your question on conversion rate in Airfreight, yes, there are a couple of impacts. First of all, lower volume, and we did not react with cost to the same extent. First of all, there's always a time lag, and we believe in the scenario that I just -- so I don't need to reiterate that message. And then we had the Quick acquisition, and Quick will have an impact on the group -- sorry, on the Airfreight conversion rate. Low volume, less than 3,000 tons, and this will continue quarter-by-quarter, and a very high GP, but an EBIT that is still loaded with the intangibles, or the write-off of the intangibles, which we will continue to do for the next quarters to come, and maybe Markus can give some more details on that.

[Markus Blanka-Graff]

Because you asked very specifically on the intangibles if that's going to continue, so yes, intangibles will continue over a certain period of time, so that is very clear. You can see that out of the [ divisional ] statement, you should look at the variance of the amortization of intangibles, and you will see there is a CHF 5.5 million, CHF 6 million impact per quarter on this. So, yes, that will continue, but obviously, you will have to disregard that, if you like, from an assessment of quality of the acquisition.Secondly, integration costs, of course it's the first quarter of integrating. Have we finished with that? Have we finished? Well, it depends on what we understand under integration. That is an acquisition that we made not for cost synergies. That is an acquisition that we made for bolt-on know-how, time-critical shipment of a company that is very strong in the North American market, and our task is going to be to develop that, to leverage that know-how throughout the organization. So in that context, integration is only going to be completed when everywhere in the world, we can offer the same service under the same standards that currently we can do on the North American market. But has integration progressed well with people, assistance? And so, yes, they have. Are there extraordinary costs, if you like, towards that integration within the first quarter? Yes, there are. Are they of a magnitude that we would mention them? No.So what I can tell you is the conversion rate without Quick is comparable to 2018. In 2018, we had 20.6%, I think, without Quick. In the first quarter '19, we have 27.7, so a slight decline in conversion rate. That is what also Detlef said. We work on productivity, but obviously, number of orders remain the same, shipment size goes down. It is our primary focus without losing the quality to the customer, because that ultimately counts.Is going to be the conversion rate of Quick accretive? Well, obviously it is. Otherwise -- or it will be. Otherwise, I think our business case would not have worked. Let me just say I'm not going to disclose after the first quarter too many details on that.

[Operator]

The next question comes from the line of Damian Brewer from RBC. Please go ahead.

[Damian Brewer, Analyst]

I've got three, please. First of all, for March alone, given the confidence you've expressed in air ticking up, could you tell us what the March ocean and air volume growth rates were year on year, please, i.e., stepping away from Chinese New Year and some of the inventory stocking/destocking effects of January and February. So March-only volume growth for ocean and air.Secondly, given Contract Logistics has historically been quite a capital-hungry business, can you elaborate a little bit more on what the sort of re-dimensioning of that business and the re-focus of that business does on capital allocation, but also on the CapEx intensity of the group as a whole going forward?And then, very finally, I remember in Q4 you talked about picking up the baton on cost optimization and cost reduction. Rather than sort of the average rate per quarter, could you give us some feeling for what the cost optimization or reduction in run rate was like, exiting Q1, i.e., to give us a feel of what we could expect to see in Q2 going into Q3? Thank you.

[Detlef A. Trefzger, Chairman of Management Board & CEO]

Let me pick up your questions. March growth rates, yes, we know them. We know them even by day or week, but we don't disclose them. I would state there's no specific pattern that would, you know, require us to mention any certain deviation from the normal trends in the quarter 1.CapEx and capital allocation in Contract Logistics, for sure, once we are through all those activities and reshaping initiatives and optimization initiatives, there will be an effect. I think it's too early to state this effect. We need to go down this path another one or two quarters, and then we will be able to disclose more precisely what effect you might -- or what you can expect.Cost optimization, we have a clear plan on how to optimize SGA costs and what to do also from a structural point of view. You would not see any benefits because whatever costs are associated in implementing the cost reductions, this has been part of quarter 1 and will be for sure in quarter 2, but you should see benefits let's say quarter 3, or more likely in quarter 4.

[Damian Brewer, Analyst]

All right, thank you, but if you were to remove the underlying -- or if you were to look at the underlying without the implementation costs, could you give us a feel of the progress you're making, given it was such a critical issue on the Q4 miss?

[Detlef A. Trefzger, Chairman of Management Board & CEO]

I mean, Damian, we are on track with our plan. That is what we can disclose. I will not be in a position or willing to disclose the figure, as such, at the moment. We have set up a plan in quarter 4, or end of quarter 3, early quarter 4, and we are pursuing this plan, and we are on track.

[Damian Brewer, Analyst]

All right, thank you. We'll wait for the Q3 report.

[Operator]

The next question comes from the line of Marco Strittmatter from Zurcher Kantonalbank. Please go ahead.

[Marco Strittmatter, Analyst]

Just a quick and small question remaining for me. In the income statement, you have an other operating income of CHF 8 million. Maybe you can tell us which division it came out and what it is.

[Markus Blanka-Graff]

It's pretty straightforward. As always, we were continuing our real estate streamlining, and at that point in time, that was a smaller portfolio that we have put on the market. You can also see that in the income -- sorry, the cash flow statement and the gross value, if you like. The benefit on the P&L is a bit less than CHF 8 million, actually. On that portfolio, it's about CHF 6.5 million. The rest is the kind of smaller component.

[Marco Strittmatter, Analyst]

So from the -- it's really in the Contract Logistics division then?

[Markus Blanka-Graff]

Yes, that's correct.

[Operator]

The next question comes from the line of Aymeric Poulain from Kepler. Please go ahead.

[Aymeric Poulain, Head of Support Services Research]

Three question, if I may. The first one is on Airfreight. I'm puzzled by the swing in gross profit per ton, and obviously the mix is quite important with the Quick acquisition. And here, obviously, you have a quite sizeable perishable business, so I'm just wondering how this mix effect worked in Q1, and also, as we extrapolate for the rest of the year, how you see the GP per ton evolving throughout the year, given the very high level we had in Q1. That's the first question.Second is on Contract Logistics, given the importance of this division for IFRS 16 forecast, I'm just wondering if I understood correctly that you're planning to have that division effectively flat for the rest of the year, and then gradually re-accelerate or recovering into next year, as you're happy with the productivity measure, and therefore, it should grow as of 2020 more in line with the rest of the group? Or do you plan to keep it flat from now on?And on the third question, looking at the outlook for the market that you reiterated, I'm just wondering, as we enter into the seasons for the bookings for the peak season very soon, what are your clients telling you about the, you know, general economic activity, and is there a hope for a trade deal? You have mentioned the Brexit having led to some restocking, so there's quite a lot of moving parts and questions around the true underlying trend as we move into the second half. So I'm just wondering what's your feeling about this recovery in the second half is at this stage. Thank you.

[Detlef A. Trefzger, Chairman of Management Board & CEO]

Aymeric, let me pick up the first question, Airfreight mix effect. The Quick acquisition, and Quick has above average significantly higher GP per 100 kilo. We talked about 8 to 12 times higher GP per 100 kilo, and that has an influence, obviously, with the low volume that we are -- the low tonnage that we ship in the Quick network.Perishables, ongoing, we are the strongest player globally in the perishable sector. We have made an acquisition last year, Panatlantic, as you'll remember. All this is running well. As the business, or as the overall market is not as bullish at the moment at the demand of capacity, [indiscernible] are also more easier to be accessed this perishable shipment, so that eases up our position in the market as well.The overall outlook for Airfreight, the GP per tonnage will decline slightly, given the fact that volumes will come back, especially in the second semester of this year, and that the demand in the market will show certain smaller growth rates again. And the mix will stay in a normalized or in a balanced structure. If you look on Slide 8, Aymeric, you'll see exactly the Quick acquisition effect on GP per TEU and the [ hard ] cargo mix perishable effect. So the pure Quick effect is a CHF 5 per 100 kilo higher, or offers CHF 5 kilo per 100 kilos higher GP for the entire volume shipped in that period.I will skip the second question, and outlook, peak season [ asset ] market should normalize. Second semester, market growth may be back to 1% to 2%, so that in total, our market outlook, as you saw, has been zero, so we were a bit cautious here. And to come back to our general macroeconomic outlook, we have positive fundamental data in most of the major economies, the low unemployment rate, high tax reduction, high incomes, purchasing power of the households, and so on and so forth. I will not give you a lesson now; you know much better. But there's one thing that is still in the room. The white elephant in the room is trade war, and if we come to conclusions eventually and trade agreements again, U.S. and China, and also a Brexit solution, I would see that confidence comes back to the consumers as well. But if you open a newspaper today, or if you see the news on TV, watch the news on TV, I mean, you can't but become cautious, and that's a bit our approach at the moment. As stated in our last quarter, we hope that those two major white elephants, as I called them, will be resolved.Your second question, Aymeric, I didn't get fully. If the -- you said something IFRS 16 [indiscernible] and then [indiscernible]. We didn't capture that question, so maybe you can --

[Aymeric Poulain, Head of Support Services Research]

Yeah, it's because you mentioned most of the IFRS 16 [indiscernible] effect are effectively driven by the Contract Logistics, or the growth of Contract Logistics, or the lack of growth must affect the forecast IFRS 16 impact for the coming year. So as you -- I think you mentioned that, having restructured the business, you're planning to keep it pretty much flat for the rest of the year. But then, as we move into 2020, should we assume that this business start to grow again, which will obviously impact the IFRS 16 [indiscernible] effect? Or should we assume it flat for the foreseeable future? And, again, it's a technical question on the accounting side, but it's big, because [indiscernible] effect of an accounting impact, it's quite important.

[Detlef A. Trefzger, Chairman of Management Board & CEO]

Aymeric, now I get it. Well, I mentioned that briefly when I presented the Contract Logistics business unit. The typical project cycle is 6 to 12 months, so you would expect the growth in the Contract Logistics business above market -- be careful -- above market this year, maybe on market level, so we [ reduce ] growth, and next year a flat development. That is what you should expect. We didn't say we don't want to grow. Also here, we have to be very careful. We are more selective in the growth that we pursue within the [ group ]. So if we grow in 2020 slightly below market, and on market again in the following years, that would be ideally from our point of view, yeah? But it's more the portfolio of contracts that we grow with than the absolute percentage figures.For this year, you should expect growth that is for sure higher or on market level, or slightly higher than market, given the, you know, order intake and project and implementation. Next year, as I said, slightly on market level or slightly below. Yeah? And that then has an impact on IFRS and orders.

[Operator]

The next question from the phone comes from Sebastian Vogel from UBS. Please go ahead.

[Sebastian Vogel, Director & Sell Side Equity Research Analyst]

I have three questions, and the first one would be on if you can outline the acquisition and [indiscernible] effects on the Airfreight and Seafreight, on the net turnover. And the second one would be on net working capital. You mentioned already early on, your trade finance offering, i.e. reverse factoring. Is it possible to share with us the level of, or the share of your payables that are currently already covered by default or reverse factoring facilities? And speaking of net working capital, speaking of DSO and DPO in that regard, was the Quick -- had the Quick acquisition some effect on these numbers, or was it not sizeable in that regard?And, last but not least, again with IFRS 16, what is the [indiscernible] level of right-of-use additions that we have seen in the first quarter, something that we should see as a sustainable level going forward? That would be my three questions.

[Detlef A. Trefzger, Chairman of Management Board & CEO]

All right, Sebastian, in my count it would be four, but that is probably also agreeable. So for the first question, what is the impact on the turnover, I think for each of the business units after Quick acquisition and other acquisitions, I think we can take that offline. If you contact [indiscernible], we can give you the numbers.

[Sebastian Vogel, Director & Sell Side Equity Research Analyst]

Sure.

[Detlef A. Trefzger, Chairman of Management Board & CEO]

Trade finance, the program that we share with our partners, Tradeshift and Citibank, is currently attracting around 500 million turnover a year. We are expecting a growth rate this year for roughly another 20%, so another 100 million. Major target or major participants at the current stage are midsized suppliers, basically in the European and the U.S. markets.The networking capital, DSO, DPO impact of Quick, the impact of Quick actually is a very -- Quick has a very healthy DSO, and DPO health remains very [ good ]. So DPO development, obviously from a consolidation point of view, yes, we are now in the first quarter recording the first three months of turnover, and at the point in time of takeover, 31st of December, 2018, all the receivable -- so the whole balance sheet went over. So quarters from a seasonality point of view is slightly lower, so you could argue from a pure technical point of view that there's a lower revenue than probably the receivables which we have taken over at that point in time in the balance sheet have been referring to. So, technically, it might have actually a bit of a negative impact. But overall, the DSO, DPO development for that business is better than the average of the KN Quick.IFRS 16, right-of-use asset level of CHF 1.75 billion. I think this is a first-time recognition, so at that point in time, these are all the -- you know how it's [ built up ], all the contracts, all the base contracts being added together and discounted for their lifetime. Yes, there will be variances to that, but I think if there is going to be a reduction to that, it can only come out of two reasons. Either we reduce the overall number of contracts, or we shorten the period. So the sheer number that is here on the balance sheet actually doesn't tell us anything about is there business growth or not. I could exchange 10 short-term contracts for each of them one year with a 10-years' contract, you know what I mean? So that number doesn't necessarily make a big comment or a big analysis of the business growth. So, hence, I would think that number is going to stay pretty much around that level.

[Operator]

The next question comes from Mark McVicar from Barclays. Please go ahead.

[Mark John McVicar, Head of European Transportation Research]

Hopefully, one quick question for each of you. Let's start with you, Detlef. On the KN Pledge product, can you just explain to us how you protect the volume from -- you know, you've got a guaranteed lead time, and you've got a money-back guarantee. So how do you protect the business from the inevitable, the ship is late, the weather is bad, the port's shut, the truck that doesn't turn up, all that kind of stuff. How do you protect or price that product? And, related to that I think, how big do you think this could become as a product?

[Detlef A. Trefzger, Chairman of Management Board & CEO]

Yes, I thank you for that question, because for sure, we have discussed this intensively when we set up this product. Mark, this is based on a platform that allows FCL booking [ per se ]. So a quote, book, track for FCL with an instant quoting, which is unique in our industry as such. But the Pledge effect, the guaranteed effect is based on big data and predictive analytics. We have the data. We have the information. We can design the routing as safe and as predictable as possible. I mean, we can't foresee an explosion or an earthquake most likely, but all other effects, even weather conditions for a certain period, we use, and all this is part of that platform solution.So when you quote -- or, sorry, when you request a quote as a customer, the system behind, you know, offers more secure, less secure, different routings and timelines and so on, and the pricing is associated to that. And I think we have a unique product in the market, too early to say how much of a product will that be. But, for sure, it forms the basis for what we have established already before with LTL shipments on a platform solution, the KN FreightNet solution for LTL, which we posted I think three years ago. Now we have an FCL solution with the Pledge and a CO2-neutral approach, I think you can count that to be a blockbuster for sure in that area.But, Mark, too early to say what contribution will it bring to the Seafreight P&L as such. But I have to say, I'm proud of the Seafreight team and the way they used and leveraged our platform [indiscernible] predictive analytics and big data competence, as well as the classical Seafreight know-how. It was instant quoting and price confirmation, booking slot confirmation from the carrier side.

[Mark John McVicar, Head of European Transportation Research]

Sure. And, you know, depending on how successful or otherwise you are with this product, could you see yourself rolling out more Pledge products? I get that it's based on average delay, average whatever it is, so okay, that's fine. But that looks to be a pretty attractive product. Could you roll it to LCL [indiscernible] other Airfreight products?

[Detlef A. Trefzger, Chairman of Management Board & CEO]

I mean, you're not going to know we have a lot of ideas, but we will not disclose things that we will do. We only disclose what we do and what we do well, and/or where we have room for improvement, whatever it is. Mark, it's not easy to be copied. I mean, it's almost impossible. If you don't, we have a unique system running. We have the platform; we have the automatic interface with carriers and with other suppliers. So all this runs into this -- or is incorporated in that solution, based on the platform and open for our customers only, and for sure not for competitors who try to get into that.But it's part of our -- and I think I mentioned that before -- it's part of our eTouch strategy. This unique solution drives the overall eTouch implementation in Seafreight, or rollout of the eTouch approach in Seafreight, as we have similar approaches in other business units.

[Mark John McVicar, Head of European Transportation Research]

Okay, thank you. And then, just a quick question for Markus on Quick, without trying to go over old ground. Could you just give us a kind of better, I don't know, steer or pointer on your current accounting basis, including all the amortization? When do you expect it to be earnings enhancing? Is it 2020, or do we have to wait until 2021? And perhaps if I ask the question the other way around, what is the amortization period? Is it 5 years or 3?

[Markus Blanka-Graff]

I think we can be very clear on the earnings accretive. I think it's going to start being earnings accretive as soon as in the next quarter. The financial or the economic power of Quick would be higher than the amortization of intangibles, so we would expect the Quick acquisition to be earnings accretive by second, third, and fourth quarter already this year, so we're not talking 2020, 2021.The amortization of intangibles, at the current stage, is around CHF 5.5 million per quarter, as I mentioned before, so call is CHF 20 million in a year. That will continue over a couple of years, and the amount of years or the number of years, it's going to be between 5 and 7.

[Mark John McVicar, Head of European Transportation Research]

Between? I'm sorry, Markus, I didn't hear the last bit.

[Markus Blanka-Graff]

Sorry, the number of years is going to be between 5 and 7.

[Mark John McVicar, Head of European Transportation Research]

Five to 7, okay, that's brilliant. Thank you both very much.

[Operator]

There are no more questions at this time.

[Detlef A. Trefzger, Chairman of Management Board & CEO]

Thank you, Andreas. Ladies and gentlemen, thanks for joining our call on the quarter 1 results of the Kuehne + Nagel International AG. We have started the year pretty good from our point of view, and we continue to grow. With all the outlook we have shared with you, and having said so, we look forward to talking to you again on the semi-annual results on July 23rd, so in three months from now.Bye-bye, and take care.

[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. Goodbye.