Kuehne und Nagel International AG

SIX:KNIN

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, welcome to the Q1 2022 Results Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] And 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 Trefzger, executive]

Thank you, Sandra. Good morning, good day, good afternoon and good evening to all of you and welcome to the Analyst Conference on the First Quarter 2022 Results of Kuehne + Nagel International AG. Our CFO, Markus Blanka-Graff, and I welcome you to our today's call. And as always, let's get started on Slide 3 of the slide deck that we have published early this morning. The strong development of quarter 3 and 4 last year has continued throughout the first quarter this year.

We are roughly in line with the Q4 performance with our quarter 1 performance while net turnover increased by 68% on the previous year and results more than doubled. This is clearly a confirmation of our strategy, which is relevant for our customers and all the trade lanes we are active in. We closed the first quarter with a gross profit close to CHF 3 billion -- exactly CHF 2.942 billion, a growth of 46% or 34% organically excluding any foreign exchange effects.

We posted a strong increase in free cash flow from operations. You will hear more details on that from Markus later. And we have increased our earnings per share versus previous year by CHF 3.88. Please follow me on the next slide with a short overview on the strong performance of the Kuehne + Nagel Group in the first quarter 2022. We closed the first quarter with an EBIT -- group EBIT of CHF 1.12 billion and a group conversion rate of 38%. In Sea Logistics, the chaotic and unpredictable markets continue until today and it's ongoing. At the end of the presentation, we will give some flavor on what we expect for the next couple of weeks or months. And we closed Sea Logistics with an EBIT of CHF 621 million, a continuation and a result of the high service intensity due to the challenging market environment. Air Logistics posted an EBIT of CHF 425 million, a result of a strong volume increase and yield increase.

The acquisition effect to the EBIT is CHF 130 million and we have a strong contribution both to volume and EBIT from acquisitions and also a strong contribution to EBIT from our KN stand-alone business. Road Logistics posted an EBIT of CHF 30 million. Volume growth in all networks: Europe, North America and our platforms. I will come to this later on. And we have seen very sound and growing operations throughout the last 3 months or the first quarter. Contract Logistics posted an EBIT of CHF 44 million, an expansion of the service offering in pharma and e-commerce ongoingly and a high capacity utilization. Also here you will get some details later on. Most importantly, in Contract Logistics, all the new projects were flawlessly implemented. And we have seen an expansion in our core industries in both Road Logistics and Contract Logistics and that is part of the strategy that I alluded to in the beginning.

Some details on the business unit Sea Logistics and Air Logistics volume development, you will find on Slide 6. Sea Logistics, nominal volume decrease of minus 4% in the first quarter 2022 or minus 8% organic. It's in line from our point of view with the market, which is contracting in the mid-single-digit range at the moment, a market that is deteriorating and reflecting a couple of effects that has been discussed earlier. We have seen also the KN SeaExplorer indicator showing the peak of the disruption index in the middle of February so in the middle of the first quarter this year. This has eased up until maybe 2 weeks ago and now it's increasing again, but we can discuss this later on. We also on purpose have a continuation of the low yield erosion as we focus on strong growth in where it matters most in -- on the Trans Pacific.

On the Trans Atlantic, partly on Intra-Asia, reefer and LCL and for all our services, we see our focus is on services that demand a high service degree and have the complexity, which we are able to solve on behalf of our customers. The carrier reliability remains extremely low. You have heard me saying this a couple of times. At the moment, we are on a level of 30% to 35% on-time delivery. I was already blaming a low quality when we were at 65%, 70% prior to the pandemic, but now it's really a very, very low reliability. And our focus, part of our strategy in Sea Logistics is customer service, end-to-end reliability and visibility and managing the cargo mix towards high yielding complex transports mainly. Air Logistics, volume growth of 33% nominal, organic growth 3% to 4%, a market growth that is flattish maybe 1% growth in the first quarter 2022.

We have seen double-digit growth in pharma and aerospace again and clearly automotive lagging in the first quarter 2022, a reflection of the manufacturing bottlenecks in the automotive industry for example with regards to chips. Apex is continuing exceeding expectations. And with that, I would like you to follow me on Slide 8 where we have the KPIs of the Sea Logistics business unit. A strong yield development that we have seen in quarters 3 and 4 is continuing in quarter 1, 2022 reflecting the favorable portfolio mix: blue-chip customers, small and medium-sized enterprises, complex requirements, service orientation, reefer and LCL shipments, high service intensity, a lot of manual work needs to be done, a lot of pressure in our operations in order to make shipments go through the network as seamless as possible.

And we have a focus, as what I mentioned before; Trans Pacific, Trans Atlantic, LCL and reefer and renewable energy where we see a lot of pickup in volume growth throughout the last couple of months. The yield expansion more than compensated for sequential unit cost increase. And as mentioned, there is no relaxation at all in the very intensified workforce and work book that we see in our networks. EBIT for the first quarter was at -- or we closed the first quarter at CHF 621 million. A great performance of our operations and our teams throughout the world. On Slide 10, we see the Air Logistics KPIs -- unit KPIs. Air Logistics, a very strong performance. Organic yields in the first quarter were up 26% sequentially versus 9% in quarter 4 so we have catched up here. All-in yields of CHF 142 per unit per 100 kilo, down by 7% sequentially as the Apex yields and you see this clearly on that slide normalized slightly versus the very exceptional fourth quarter 2022.

Apex, and I mentioned that before, is clearly outperforming our expectations and our targets and that we have seen again in the first quarter. It's fun and pleasure to have Apex as part of our group. Organic unit costs are up 9% sequentially in quarter 1 versus quarter 4 and 15% year-over-year. clear effects of our digitalization and eTouch efforts as the volume has organically been growing much, much faster than the unit cost development. EBIT first quarter in Air Logistics CHF 425 million and an impact from acquisitions within those CHF 425 million of CHF 130 million from -- during the first quarter. On Slide 12, you will see the details of Road Logistics. We have seen very strong volume growth in the core European network, a high demand for our digital solutions. What we have seen in third and fourth quarter was continuing even growing further. The eTrucknow visibility and Software as a Service solution sees a very high demand and we have seen significant increase in volumes in domestic U.S.

Having said that, we have seen a net turnover increase of 13% in the first quarter versus first quarter last year and a clear EBIT improvement of 25% resulting into an EBIT in Road Logistics of CHF 30 million. The Road Logistics business sees continued demand and growth and we will come to outlook later that should not change too soon as from our today's perspective. Contract Logistics, our fourth business unit, where we do a bit of a deep dive during that presentation -- today's presentation on Slide 14. Contract Logistics showed a very strong operational performance with an organic quarter 1 net turnover growth of 8%. Once again centered in pharma and e-commerce, which contributed -- both contributed to 80% of all newly signed contracts. The growth of trade in Asia and North America is 2x that of Europe and that's part of our strategy, the geographic focus and the interlink with our network development.

Over 80% of the lease obligations are backed by customer contracts with nearly 100% expiring beyond 2025. So we have a very long and robust customer relationship here with renewals clearly above 90%, 95%. And the idle space on an extremely low level at the moment of 2.1% versus 2.3% end of last year. So the capacity of 10.2 million square meters end of quarter 1 2022 showed almost no idle space, just some pallet places. All this resulted into an EBIT in the first quarter 2022 for Contract Logistics of CHF 44 million, which is 16% above prior year.

And with that said, I am handing over to my colleague Markus to give you some details on the financial performance.

[Markus Blanka-Graff, executive]

Thank you, Detlef. And ladies and gentlemen, welcome also from my side and thank you for taking the time listening to us. Indeed it was an outstanding quarter certainly in relation to first quarter 2021 so from a year-over-year perspective, but it has also been a solid and strong continuation of our quarter 4 2021 performance. Group conversion rate, as Detlef briefly commented on, 38% when you look on to the profit and loss income statement here on Page 16 of our presentation. When you look at it on an incremental basis, the incremental conversion rate is 75% on a year-over-year basis. Again on a sequential, I think we have been well outperforming and continuing the pace that we have started in the last quarter 2021. So CHF 700 million roughly additional earnings before tax. Also here bit of split into organic and inorganic growth through acquisitions and that is in all business units together is around CHF 175 million organic growth, year-over-year CHF 525 million.

Third item I want to mention here is noncontrolling interest. For many years that never has been a large number, but now it becomes a relevant amount. And I would indicate that going forward, a number around the CHF 50 million should be our run rate also for this income statement line item. What has changed on the balance sheet? Not much and I think that's the good news. Page 17 of our presentation. The 3 topics or the 3 items on the balance sheet I always look at; receivables, payables and cash. You see from the starting point at the beginning of the year until now, trade receivables are remaining relatively stable around CHF 6.3 billion, CHF 6.4 billion. At the same time, trade payables in the same range CHF 2.8 billion CHF 2.9 billion. Cash increased around CHF 800 million from the starting point of the year, which leads me already to the interesting development on the cash and the free cash flow, Page #18.

And you will see I want to highlight that one line here changes in working capital. You see here in Q1 2022 we have the number of CHF 41 million. So what it actually means is we have been able to contain and to limit our working capital that we started with into the year at the same level and operate the business with no further extension of working capital. That translates in our world of our balance sheet and how it works that basically the net profit after tax is pretty much equivalent to the free cash flow generated. So we've generated another CHF 800 million additional profit, another CHF 800 million has been inflowing as free cash flow. That results into the roughly CHF 1 million free cash flow in the first quarter. Again here my expectation would be going forward that our net working capital as it stands today, and you can see that on this Page #19, is around CHF 2 billion, should remain at that level until or unless the business is changing significantly.

Page #19, I refer to it. When you compare the number we have here working capital intensity of 4.6%, arguably that is a notch above our corridor that we have given ourselves until up to 4.5%. I think for Q1 that is still tolerable. We have to see how it's going to develop in future. DSO is 52.6% so around 52% in range where we want to be. DPO of 58%, same here. So basically no news, stable business, stable receivables, payables; it's the way to go. That translates obviously when we run the models and the analysis on Page #20. Return on capital employed, you see here on one page all of the story that I have I told you over the last 3 minutes. You see that on one slide. Return on capital employed increased around 120% to 130% on a reported level and is at that level continuing. It is remarkable and to a large extent a sustainable performance.

With that current high level of performance and our ongoing ambitions obviously to keep it at that level, I hand back to Detlef to give you some perspective on current market performance.

[Detlef Trefzger, executive]

Thank you very much, Markus. Ladies and gentlemen, let me comment on market development. But before I do so, let me also comment what we have read again this morning in some of the papers and media and so on. We are not giving any outlook at the moment because it would be very much speculative whatever outlook you would get from us. We have a view and I can share that view that for the time being, I'm talking this current quarter as we speak, there will be no major changes in consumer behavior nor in the volume trends that we have seen. How this then continues in the second semester 2022 would be very speculative. Our assumption is no major additional disruption. So that's the assumption for our own planning or our own forecasting. But whatever figure or whatever hint we would give you, we have the feeling would be more speculative and we don't want to end up speculating about the future. We are driving our future.

We plan as far as we can and we react in a very agile manner on any changes that we experience. Having said that, let me comment on the market. You know that the global GDP growth consensus has been decreased a couple of times. At the moment, it's expected to grow only by 3.5% globally. We see that inflationary pressures are clearly triggered by the war in Ukraine mainly driven by the energy prices -- the huge increase in energy prices. We have seen a continuation of the inefficient supply chains, which have led to network disruption and congestion mainly an infrastructure topic centered around ports and airports and sometimes also capacity availability not only in vessels, but also in trailers and truck drivers in certain markets or railway engineers. And we see a stabilization not happening at the moment, but no massive deterioration either while the overall stabilization, now I'm talking second semester, depends on the consumption patterns and the infrastructure investments that might kick in.

How are we reacting? How are we addressing those topics? I mentioned that very agile organization. Agility is something that is based on our digital platforms and the talents of our logistics experts all over the world. We focus on high service quality and network reliability in the given circumstances. Our investments are ongoing in sustainable logistics solutions. We forget a bit with pandemic and the war in Ukraine that sustainability is the major topic of societies globally at the moment and we have to address it. We have to be active. We have to reduce carbon footprints. Transport and logistics is good for only 8% of the global transport -- sorry, the global carbon footprint. But we can impact it, we can reduce it. And as you know, Kuehne + Nagel is working on this very actively and has been continuing its work and activities throughout the last couple of quarters.

We focus on profitability and the leverage of our acquired companies. We are very selective with acquisitions. As you know, wherever we conduct an acquisition, this is our focus. And we accelerated and continue accelerating our digital transformation. And we have started already quarter 3 and 4 last year, but also this year specifically with Air Logistics to harvest from our digital platforms and our newest technologies that we have deployed throughout our networks.

With that said, I thank you for listening and I hand back to the operator, Sandra, to open the Q&A session. Thank you.

[Operator]

[Operator Instructions] The first question comes from Clementine Flinois from Bernstein.

[Clementine Flinois, analyst]

I have 3 questions. First, what's your assessment on the loss of airfreight capacity from both the Ukraine war and the Chinese lockdowns? I know you've talked about it, but could you give us some numbers around how that differs per trade lane maybe? Second question, Apex. You mentioned that Q4 was an exceptional quarter and now yields are normalizing. Where does this difference come from and how do you think that looks in the normalized world especially on GP and OpEx per tonne basis? And final question, certain shipping lines have been expanding more and more beyond shipping into air, road, contract logistics. Is this going to increase competition by diluting GP yields and if not, why not? That's it for me.

[Detlef Trefzger, executive]

Clementine, let me answer or let us answer your questions. First of all, airfreight capacity, yes. As the Russian as well as the Ukrainian territories cannot be flown over, there is an implicit reduction of available airfreight capacity because flying to Northeast Asia, especially Korea and others, is affected by a longer travel time of 2 to 4 hours depending on where you go to. In total, approximately 30% of the Asia-Europe trade and vice versa is affected by this blockage of the territories. In addition, Russian aircraft cannot be used in Ukrainian, but all this leads to the 30% that I've just mentioned. Quarter 4 and Apex, I'm not sure I've also understood right. I think the run rate you have seen in quarter 1 this year is the run rate you could expect from Apex moving forward, but don't underestimate the seasonality of the business.

And the seasonality of that business is a Trans Pac focus very much and it's also a Chinese New Year effect, which you see in February usually. So that's the reason why the first quarter and the fourth quarter differ from our point of view. But the run rate and the performance of Apex has not changed at all and I mentioned that I think in the call explicitly. We are extremely happy and proud to have the Apex team as part of the Kuehne + Nagel Group and also that they overperform their budget and their strong and ambitious targets. Competition, I mean this question is as old as forwarding and carriers I would say. It's not a new dimension. Is competition changing? I think you have to look into the details and maybe 2 or 3 levels into those details. The carriers have always had logistics arms, many of them.

By the way, you have railway carriers that have logistics arms as well. They have more or less leading roles in their certain national markets as well and it doesn't harm us. And whatever has happened so far in the carrier market has not changed the competitive situation because we are talking to the same companies and competitors that have been bought and now are owned by a different owner. And we don't see any change because the carrier business as such and the forwarding business is in 2 separate buckets with the carriers, which is stronger. So there is no change in the competitive landscape. I think our focus is less on competition, but more on our customers and how we can serve our customers best in the current circumstances and the transformational needs of our customers in the current market environment. I hope that answers your questions, Clementine.

[Operator]

The next question comes from Robert Joynson from BNP Paribas.

[Robert Joynson, analyst]

Just 3 questions from me, please. First of all on Road Logistics, we've seen a few changes recently that have had a negative impact on European trucking capacity and I'm thinking of the introduction of the mobility package and then some Ukrainian drivers returning home and then a week or so ago we saw Russian Belarusian trucks having to cross back over the border. Could you maybe just talk about the extent to which you estimate those factors are having a negative impact on the overall industry capacity, please? So that's question number one.

And then a couple on Sea Freight. First of all, if we exclude Apex, volumes were down by around 8.5% in Q1 year-on-year. Could you maybe just talk about the drivers behind that change and in particular the extent to which you think that reduction was driven by a softening of underlying demand relative to other issues such as the Chinese lockdowns, Russia effects, et cetera, et cetera? And then the final one, just a quick question on Chinese export specifically. Could you just comment on the extent to which you're seeing Chinese export volumes down in recent weeks impacted by the lockdown restrictions?

[Detlef Trefzger, executive]

Robert, let me start answering. Road and trucking capacity, we read and hear about that as well. At the moment, Kuehne + Nagel is not affected. We have long-term partnerships with our trucking companies and we cope with all the requirements obligations, new legislation and rules and so on, operating routes and we don't see any topic here. But the driver shortage in the market in general is very old. It's something that we had also prepandemic. It was discussed very heavily and it affected the British market very much directly after the Brexit. So from that point of view, at the moment yes, there is certain changes. But for our groupage and full truck and less truckload network in Europe, it has no significant or no impact at the moment. Sea volumes down and what's driving this? I think you have a market that is down. There were some first indications of the market and I think it's 4 weeks too early because the carriers will post their results in the next couple of weeks and we will see their expectation.

But we will see a market that is maybe 7%, 8% to 10% down and we are in line with the market growth organically. You know that with the Apex acquisition effect, we are down 4% only. And the main driver of this is Chinese New Year in the first quarter, don't forget it. We had virtually no Chinese New Year last year from a volume perspective because there was a big demand after the pandemic and the opening up a year-ago. But this year we had a seasonal effect due to the Chinese New Year, which is always a 2 weeks effect on average. And yes, the lockdowns in China have showed their effect. So it's a market impact and that leads to the third question, the Chinese exports. China is still exporting and -- but it's less exports and it's more selective and it depends on the production capacity more than the port capacity and trucking capacity. We would expect at the moment, and it's our guess, that we see an export reduction in China of 15%. So that would be my answers to your question, Robert.

[Operator]

The next question comes from Sathish Sivakumar from Citi.

[Sathish Sivakumar, analyst]

I got 3. Firstly, on the visibility in terms of volumes. Given the -- as you mentioned, the production cut out of China is like down 15% the export. How this has actually impacted your booking visibility across both air and sea today versus say start of Q1? Have you seen like in 4 months -- 4 weeks visibility versus say 8 weeks that were there like at the start of this year? Secondly, on the contract logistics, what is actually driving the high utilization? Do you think this trend to continue for the rest of the year or is there anything very specific that has actually driven this high utilization in Q1? And the third one around free cash flow. Given the strong start to the quarter or to the year, what are the expectations for '22 compared to 2021? Is it fair to say that free cash flow likely to be significantly above 2021 levels?

[Markus Blanka-Graff, executive]

Sathish, let me just answer the third one. I think as I said during our presentation when we can assume that net working capital remains at the level that we currently see, I think your assumption should turn out true that our free cash flow generation will be significantly above last year. Logically last year you may remember already in the first quarter continuous in the second and third quarter, we have put into the expansion of the net working capital quite some cash flow. So that's why if that is not there, it stays the same. So yes, the answer is I do expect a significant higher free cash flow in 2022.

[Detlef Trefzger, executive]

Let me answer then the other 2 -- your other 2 questions. Visibility, Sathish, has not changed. I mean we can forecast demand and volume expectation, of volume demand and so on very much and we are in close contact with all our customers. So that has not changed. I think it's more what is the next wave of decisions the Chinese government will take and how does it affect manufacturing. And as long as we understand manufacturing, we can plan the volume demand and capacity requirements of our customers which we do. It's a daily business, nothing spectacular. Contract Logistics, idle space, clear answer. I would expect the idle space to be staying below 3%; whether that is now 2.1%, 2.3% or 2.6%.; it's not really material. But an idle space of 3% is cool. I have to say I have been in Contract Logistics before many years and 3% is -- or below 3% is a very good figure. And we need a bit of idle space to breathe with the volume demand and spikes and requirements of our customers. And I think we are in a good shape with 2.1% to 2.5%-ish throughout the whole year.

[Operator]

The next question comes from Muneeba Kayani from Bank of America.

[Muneeba Kayani, analyst]

So just going on back to China. So you've seen the decline in Chinese export volumes. Whenever these restrictions ease, do you expect a surge in volumes and could that result in higher rates and yields? Kind of how do you see this coming -- following in the next couple of months, weeks is my first question? Secondly, Markus, I think in the last earnings call you had said that you expected EBIT this year to exceed 2021. Given the strong performance in the first quarter, how should we be thinking about EBIT this year? I know you don't give guidance, but just if you could give some indication on your thoughts. And then I think I heard you say, Detlef, that you haven't seen any changes in customer behavior. I just wanted to follow up on that. Can you draw any differences between what you're seeing in terms of customer demand in Europe versus the U.S. and kind of is any region weaker?

[Detlef Trefzger, executive]

Muneeba, thanks for your questions. And I will answer 1 and 3 and I'm happy you asked Markus for the EBIT outlook, which is great. China declining volumes, we have made experience all of us globally during the pandemic. Lockdown in Wuhan first, then the Hubei province and then all over China and a revamp within weeks. So we shouldn't underestimate the power of China and the reincarnation of the trades in China. It depends on production and manufacturing capacity, raw material imports. But we would see that being or getting back to whatever is normal within weeks and I'm not exaggerating. The impact on yields depends on the availability of vessel and container capacity, trucking capacity; but that's not our topic. It's more do we see the export volumes coming in and we need to see that happening.

We have end of April now. In 3 weeks -- sorry, in 3 months, we will have the winter and Christmas business to start, I'm not kidding, for the Sea Logistics network and for this, we need a production up and running again and I think that will be part of the focus activities of the Chinese government. Therefore, declining volumes at the moment we talked for the second week now. It's from our point of view at the moment not concerning. It depends on how long and how extended the lockdown will continue not only in Shanghai with 25 million people, but maybe also in Beijing or the Greater region of Beijing. And we have a lot of manufacturing sites in the Greater region, but not in Beijing as a city. So it depends. The customer behavior and detail, I think we said or gave some details when we posted our annual results 2021 a couple of weeks ago.

However, the topic is consumer behavior has changed already. While during the pandemic and I called it home, gardening and individual sports at that time; everybody was investing in refurbishing its home, bathroom, living room and so on, garden or terrace or whatever, balcony and individual sports. We have seen so many sport shoes -- pairs of sport shoes being shipped to the U.S. You all must have, I don't know, 10 new pairs bought over the last 2 years. But that consumption has changed with the slight opening up after the pandemic. I'm talking already middle of quarter 3 we have seen a consumption pattern skewed towards service industries again: restaurants, perishable business, high-end restaurants and so on. And this is at the moment continuing.

So therefore, that was my message. At the moment we don't see a big change. The only topic is will the purchasing power of the private households stay as strong worldwide, but especially in the U.S. and in Europe, to continue purchasing and consuming services and goods that are required to provide those services in order to drive a certain level of GDP growth. And we are talking about a GDP growth of 3.5%, ladies and gentlemen. We are not talking about a depression, we are not talking about negative GDP growth. And I think that's a very fair and reasonable assessment of the second semester at the moment unless something more disruptive or more unpredictable happens. I hope that answers your questions.

[Markus Blanka-Graff, executive]

So then let me conclude then with the details that you have just mentioned, Detlef, on customer behavior, on the continuation of challenges in the supply chain and what's going to happen in the next couple of months that we have some limited visibility to. So I think with the good start that we have had in the first quarter and what we know a little bit on the second and one of the scenarios that we work on, of the second half is it seems feasible that the result for the full year is going to be in line or above with what was the previous year.

[Operator]

The next question comes from Sam Bland from JPMorgan.

[Samuel Bland, analyst]

I've got 2, please. First one again is on the China congestion. I guess that's sort of adding to disruption in the market and your disruptions tended to be things, which have pushed up freight rates in recent quarters. But if anything at the moment, this kind of disruption is maybe bringing them down. Can we just talk a little bit about why that difference of effect on freight rates is happening? And the second question, this is again one that's come up from time to time. There's sort of been talk recently around the level of globalization, we've got disruption in China and various geopolitical events. Have you got any more sort of updated thoughts on will the world continue to globalize or could that basically go into reverse and see supply chains become a bit more regional?

[Detlef Trefzger, executive]

Okay. So let me start with the latter question, the grade of globalization. We are living in a globalized world and you can't rewind that. But what we will see and we have given similar answers during the last 12, 18 months, we see that for certain industries and certain customers in these industries not in general, but for specific companies, second sourcing. So not one supplier for Tier 3 supplies in the Wuhan -- in the City of Wuhan only, but a second one may be in Romania or Mexico and increasing a minimum stock level from 2 days to 5 days or so has become an option and has been implemented or is in implementation. But we don't see a general trend of changing globalization not at all, yes. We see some shifts of certain goods moving from China, low margin, low -- high carbon, low margin goods being produced in Vietnam rather than in China as part and a reflection of the Chinese 5 years plan and their focus on high-yielding technology, savvy and sustainable product. We don't see any other trends at the moment.

With regards to congestion, may I be careful -- I'm picky with wording here. There is no China congestion. We have a congestion at the moment in the largest part of the world, which is Shanghai Pudong. We do not have a China congestion. We have trade ongoing and, as said, we have a volume reduction in the -- we assess, we don't know, a volume reduction in the market at the moment of 15% lower exports for the last 2 weeks. So therefore, we will see here maybe a continuation for another week or so and then we will see. Yes, freight rates are slightly down, but we have to remind ourselves they are 5x higher than pre-COVID. And if I may reiterate the message that has been part of my prayer so to say in the last calls, you should and we all have to assume significantly higher average freight rates in this decade than during the previous decades because there's a lot of investments to be taken into port infrastructure, into railway, road, trucking infrastructure, digitalization, connectivity, data connectivity of course, blah, blah, blah, airports and so on.

And this will require investments and costs that have to be covered and they will be covered by the end consumer as always. And sustainability I mentioned that in our call, it's the top topic of society and it will cost money and whatever politicians are telling us, it will not happen for nothing. And we have to face it and we have to address it and we have to tackle it. We do this in our organization, but this will become a trend. So freight rates at the moment might be slightly lower, but freight rates -- you will most likely not see freight rates at the level of 2018 or '19 this peak.

[Operator]

Next question comes from Andy Chu from Deutsche Bank.

[Andy Chu, analyst]

2 questions for me, please. The first one is around the sea freight rates and the jump into the CHF 900 per TEU. Detlef, you kindly gave a sort of a list of sort of reasons for that happening. But I just wondered if you could just break that down a bit to just help us out in terms of the moving component parts on what's actually driven that sequential sort of 20%-plus movement in sea freight rates. And then on minority interest, Markus, really helpful because I'm definitely struggling on that figure. But just wondered in terms of the CHF 50 million run rate, is that sort of -- I mean, I guess that, that figure should be quite seasonal on a quarterly basis, but is that sort of an average sort of figure that we should be using for minority interest on Apex or is there some sort of change potentially there in ownership?

[Markus Blanka-Graff, executive]

Andy, I think on the minority interest, we picked it up first. Yes, there will be small changes going forward on the level of minority interest for sure. That CHF 50 million, that I think it's a roundabout number that you could factor in on a quarterly basis. So I don't expect that to jump to CHF 100 million or to disappear. But that's why I gave some guidance on this because we usually didn't have any of that in the past. So small variances, yes, but I think as a guidance the number of CHF 50 million is a good number. On the sea freight rates, just for me to understand because you talked CHF 900, do you mean margins or rates on this one?

[Andy Chu, analyst]

Sorry, just the GP per TEU.

[Markus Blanka-Graff, executive]

So clearly, I mean that increase has many drivers and the most important driver is the value that we bring to customers by organizing through all what we've talked about the last 45 minutes to actually bring that service level towards the customer and that has a price. And you see that also on the cost per unit. It's not only the GP per unit that goes up. It's also the cost per unit going up because there's so much more effort in it. But you will understand that we are not providing details on what comes out of the service part, what comes out of the purchasing power, what comes out of the trade mix, what comes out of the product mix. But these are the 4 major components that are in there. But as I said, product mix, trade lane mix and the service component is -- are the more relevant parties to that development than what somebody from the outside could actually assume is the freight rates and the freight rates level on absolute terms.

[Detlef Trefzger, executive]

And if I may add, we have disruption in all ports globally. Also in Europe in the meantime, we are seeing our Seaexplorer disruption indicator increasing again after the peak in February or end of February where we had like 17 million container waiting days. We were on a low of maybe 6 million container waiting days couple of weeks ago -- 2, 3 weeks ago and now we are back to 7.5 million. It's increasing day by day. And we are working and living in a very competitive market environment so customers always have a choice. But for them, it's most important that their cargo is shipped on time and full undamaged rather than saving whatever on the cost or alternatively flying goods rather than shipping them with a container vessel. So there are options, alternative options. But obviously our customers given the strong service especially in Sea and Air Logistics, but also in Road Logistics and Contract Logistics, they choose Kuehne + Nagel for good reasons.

[Andy Chu, analyst]

Can I just [Technical Difficulty] congestion of the disruption index and views on the movement, but maybe you could just sort of help us in terms of explanation. So I guess there was a peak and then is the fall just seasonality driven mainly and the pickup is basically end of seasonality pickup. What sort of just maybe this is the shape of the sort of what's happened in your disruption index just in terms of the reasons?

[Detlef Trefzger, executive]

We have to be careful not to give a disruption indicator lesson now, Andy, but we monitor each and every port with disruption globally. We have visibility to compute 250 million, 300 million data points every day to come to that indicator. And we see that the congestion or this disruption is increasing in all ports. While you didn't really wait in front of the port of Antwerp or Hamburg like 3 weeks ago, at the moment you have to wait 7 to 14 days. So there is a certain disruption and this is dependent on a flow in a network that has 2 or 3 bottlenecks and one obviously is the largest port globally, which is the port of Shanghai or the Shanghai area, it's more than one port.

[Andy Chu, analyst]

And previously it was coming down mainly because of seasonality. Is that the big driver do you think just this easing of the congestion from the sort of February peak is -- I mean that's how I would read it, but maybe I'm completely wrong.

[Detlef Trefzger, executive]

Not my message. My message is it's increasing, it's 50% or 45% higher than 3 weeks ago so it's increasing again. And the reduction we have seen previously is that we have additional shifts and more automation especially additional shifts in the West Coast ports and East Coast ports in the U.S. The main bottleneck started with the West coast ports, L.A. and Long Beach, I don't know a year ago, a bit longer than a year ago. So it has a different impact.

[Operator]

The next question comes from Alexia Dogani from Barclays.

[Alexia Dogani, analyst]

I also have 3. Just firstly, when you assess the market over the past 2 years of the pandemic, do you identify any kind of significant market share shifts between, let's say, yourselves, the digital freight forwarders, the smaller freight forwarders and the asset owners that are of note or would you say pretty much the market has been stable and it's been driven by kind of industry wide changes? So that's one. The second question is -- sorry to get back to kind of the China lockdowns. I guess on your comments of 15% reduction in volumes near term, is your expectation then that should those lockdowns be lifted, this volume basically comes back or is there a risk that demand is distracted because basically some of these products are no longer in need the longer these lockdowns are in effect? And then finally, just a question on succession planning. Clearly Stefan Paul will take over in 3 months. Can you just give us an update on how the transition is going and an update on that, please?

[Detlef Trefzger, executive]

Market share changes, I think we have clearly gained market share in Air Logistics and we have mentioned that over the last couple of quarterly calls both through organic growth as well as through acquisition mainly Apex. We have maintained our market share in Sea Logistics and to be honest market share in Sea Logistics is not the topic. The topic is more finding the right customer mix and getting access to capacity. Also your question related to digital forwarders and smaller forwarders, there is no digital forwarder. It's about making physical transports happen. It's important to have goods. And whatever you call digital forwarder might be a nice booking platform.

At the end of the day, it's about executing shipments and here we are clearly a market leader. There is no major shift at the moment although market share is not our focus. At the moment, we focus on different topics. The China volume, I can't judge what sort of goods are in the containers waiting at the Chinese ports or somewhere else in the world. But to be honest, we have seen that during the pandemic and I would assume we see a similar pattern, this volume will come back.

It will spike and the consumption still is robust. It has shifted its structure, that was my message before, more skewed towards services and related goods -- service-related goods. A simple example, scissors for hairstylists, simple things like that. But it has not changed with regards to growing and the growth expectation still is 3.5%. So that's our assumption moving forward. And succession planning, we will have a handover session during the analyst call when we post the semiannual results for the first semester 2022, which will be on I think July 25 if I'm not mistaken, and there I will hand over to Stefan. Stefan has been part of the Management Board for 9 years plus so he is well aware of all the details of our strategy, he's a great asset to the team. It's a superb choice and you will see a seamless continuation. But he will be a new person and he has maybe different ideas -- hopefully, he has different ideas and different focus topics, but he has to speak to you and give him a chance to get into the saddle and most likely he will talk to you then in more detail during the quarter 3 call in October.

[Operator]

The next question comes from Marc Zeck from Stifel.

[Marc Zeck, analyst]

I guess there's 1.5 questions left and I really apologize for feeling like an octogenarian here. But could you just repeat the reduction in export from -- export capacity or export reduction from China? Is it 50 or 15?

[Detlef Trefzger, executive]

15. That was the half question, right?

[Marc Zeck, analyst]

Yes, that was the half question. The other question relates to the U.S. trucking market. There were quite a lot of reports recently that the spot freight rates in U.S. trucking were, let's say, crashing quite hard and some competitors think that this is like first or ultimate sign that the U.S. consumer is sprung back quite materially. Do you -- would you agree with that assessment or do you see something else going on in the U.S. spot trucking market? That's the real question.

[Detlef Trefzger, executive]

So Marc, you have asked that question to Markus. Let me answer it. The U.S. trucking market is very difficult short haul. So all the short truck movements from a port to a terminal which is like 30, 40 miles away, that's a bottleneck and you have to secure capacity and we have proven suppliers and long-lasting relationships and so on. While the long-haul trucking is not affected and truck drivers enjoyed crossing the country -- the continent so to say and be on the road for 1 or 2 days. So that is not the bottleneck. For the long haul, you also have railway solutions and we are strong in intermodal as you know in the U.S. So that is not affected. The opposite, we see intermodal increasing especially given the -- at that time it has eased up a bit the diesel price for -- or the fuel prices in all markets, but especially also in the U.S. So the short haul is a topic and if you didn't secure capacity and have a proven relationship with trucking companies, that might be causing delays or problems for one of the others.

[Operator]

The next question comes from [ Christian Affolter ] from Logifleet.

[Unknown Analyst]

You said that there's no China congestion, that's just in Shanghai. Does it also mean that you can reorganize flows from Shanghai to other ports?

[Detlef Trefzger, executive]

If that is a question, yes we do. And the shipping line do and yes, that's happening.

[Operator]

The next question comes from Michael Foeth from Vontobel.

[Michael Foeth, analyst]

Just 2 questions left for me, both related to the sea freight yield. So basically you mentioned those different factors that influence and drive the yield. Now we have had disruption obviously for several quarters and still we are significantly up in terms of the sea freight yield still. And my question is, is there any reason why the figure that we've seen beyond CHF 900 shouldn't go further up in coming quarters? And conversely, the other question would be is there -- what part of the yields that you're generating is really sustainable and comes from underlying improvement from digitalization from things that will basically stay also after disruptions ease?

[Markus Blanka-Graff, executive]

Michael, it's Markus. So I think I can answer the first question, is there any reason why the margin per TEU should further go up? I would answer I don't see a reason why it should go down again. So it's always hard to predict something that is going to change even upwards in the future. But what I'm more comfortable with is saying that our GP margins per TEU at least for the foreseeable future can remain in the very same level.

The second question is around the productivity efficiency part and is where we of course have continued our digitalization, our eTouch initiatives or around that. Every single element that we can save on the execution of a shipment is 100% sustainable because whatever we are going to automate or abandon in the best case is never going to come back as manual work.

So we hope that once the situation that we're in right now that everybody works a little bit on emergency mode to make shipments happen. If that eases up slightly, then more of the execution pieces will even benefit from the automation. But whatever we do here is going to be sustainable for the rest of the time we are using the same execution patterns and that is a 3% to 5% conversion ratio. So leave the GP per TEU for a moment. The improvement in the conversion rate of 3% to 5% is what we are driving towards.

[Operator]

The last question for today's call comes from Jain Parash from HSBC.

[Parash Jain, analyst]

I have 3 questions, if I may. Firstly, can you share an update on the U.S. West Coast labor union negotiation with the port owners. We have seen a trend of capacity shifting to the East Coast perhaps expecting some sort of chaos in the summer. Do you echo that view this time it could be different? Secondly, just with respect to the global demand and as you rightly pointed out in your presentation that it is grinding lower at this point of time and the world GDP is hovering around 3%, 3.5%.

But I mean whatever is the number that we take off from the global trade growth forecast because of Russia and Ukraine situation, but the fact that first quarter started on a tough note primarily because of the higher base. We entered into the second quarter where China's export is down double digit. Does it pretty much puts us into a situation where this year's peak season artificially even if it may will look stronger even if we are entering into kind of a flattish trade growth in 2022? And lastly, with your cash flow assuming that there is no last ticket M&A around the corner, how should we think about deployment of that capital between growth, balance sheet and shareholder?

[Detlef Trefzger, executive]

Let me answer the first 2 questions and then maybe let's go through how to deploy capital best. The West Coast situation is much calmer than what we experienced 5 years ago. Everybody seems to prepare and tries to get into a good negotiation structure, but that doesn't mean that we will not see shutdowns of the ports or strikes happening eventually. Hopefully not, clearly not, but let's see. We had solutions in place during the big West Coast strike 5 years ago or a bit more than 5 years ago with going through the Panama Canal as well as more calls to the East Coast of the U.S. and a combination of sea and air. So you ship it to Dubai and then you fly so to say the last mile, which is a bit of an exaggeration, into the respective airports in the U.S. We will find a solution.

But if people -- as everybody is aware, there is a need to have efficient ports in very low productive ports at the West Coast. I think there's a good chance that this year we will see a rather moderate environment for the negotiations. Global demand and that's the reason we don't give outlooks. That's speculation. We all don't know. Nobody knows. I would be very surprised if somebody knew, then they have to invest into the respective areas where they see growth in margin. We see this 3.5% GDP growth. We see more demand for service-related goods transport, which is great. It's a different structure of goods in our network, which we believe is healthy and sustainable and we have no indication that, that should not continue in the second semester.

People -- and please we have to abstract from the war in Ukraine, people are desperate to travel, to enjoy a holiday again, to enjoy a big rock concert or whatever it is, to meet other people after 2 years and more of lockdowns and that will drive consumption. And maybe you can't spend $5,000 for your travel because you have to pay the energy bill of 1,000 expats, but then you spend $4,000 and that is the behavior we expect to happen in the second semester. Whether that is the truth or rather accurate forecast of how demand is evolving throughout this year, we don't know. But that's our view and our assumption and therefore, I'm happy to share it.

[Markus Blanka-Graff, executive]

And on the last question, the cash flow. I think my first priority is always to generate the cash flow first. Then of course historically I think we have been very prudent in terms of where we put our money in terms of M&A. But if there is nothing assuming your question relating to that, also historically we have been very clear excess cash on the balance sheet will find its way back to the shareholders. Ultimately that decision, as you know, lies with the AGM and proposals from the Board of Directors.

[Detlef Trefzger, executive]

Then ladies and gentlemen, thanks for joining in. As you heard over the last 1 plus hour, Kuehne + Nagel deployed its strategy and stayed on course not only in 2020, 2021, but also in the last quarter -- the last quarter, first quarter of 2022 and performed strongly in all business units in all geographies. And then it's maybe also worth mentioning, all trade lanes and geographies are doing very well. Thus far in the current year, the business outlook has been favorable while geopolitical tensions and ongoing supply chain disruptions generate a certain uncertainty. I think we have covered that uncertainty in the call. We are not too concerned. We are a company that is agile, has the right network and people and expertise and energy to solve the problems on behalf of our customers. We are here to solve challenges and complexity on behalf of our customers.

And with this said, we are looking forward to talking to you on July 25 in order to give you flavor of the second quarter, the first semester in total in 2022 and a short outlook of the second semester 2022. Thanks for joining. Stay healthy and we talk again in 3 months. 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. Goodbye.