Kuehne und Nagel International AG

SIX:KNIN

Earnings Call Analysis

Kuehne + Nagel Q1 2024 Shows Stable EBIT and Strong Seafreight Performance

During the first quarter of 2024, Kuehne + Nagel reported an EBIT of CHF 375 million, consistent with Q4 results after excluding a CHF 53 million redundancy charge. Seafreight EBIT improved to CHF 197 million, a CHF 36 million increase from Q4, driven by a 17% rise in gross profit per container despite a 9% drop in volume. Anticipated cost savings from organizational streamlining are expected to save CHF 100 million annually. Overall market yield remained subdued, but strategic focus on high-yielding business segments and aggressive cost control measures are positioned to sustain future growth.

Introduction to Kuehne + Nagel's Q1 2024 Performance

In the first quarter of 2024, Kuehne + Nagel closely aligned their earnings with expectations, achieving an EBIT of CHF 375 million, stable compared to the previous quarter once an exclusion for a redundancy charge is considered .

Seafreight Performance

Seafreight operations showed improvement with EBIT rising to CHF 197 million, a CHF 36 million increase from the previous quarter. Effective yield management drove a 17% sequential increase in gross profit per unit despite a 9% downturn in volume. This strategic approach helped maintain stability despite the seasonal cargo volume downtick .

Air Logistics Insights

Air Logistics experienced a decline with EBIT dropping by CHF 14 million to CHF 94 million compared to the last quarter. Despite this, strategic prioritization of yield management showcased stability, supported by a modest 3.4% year-on-year volume growth, primarily fueled by mid-single-digit perishable segment growth .

Road Logistics Overview

The Road Logistics division faced volume pressures, with a 6% year-on-year decline in shipment volumes leading to an EBIT of CHF 30 million for the first quarter. The acquisition of Farrow Group helped mitigate some of these pressures by expanding Kuehne + Nagel's customs footprint in North America .

Contract Logistics Performance

Contract Logistics sustained strong performance with an EBIT of CHF 55 million, maintaining the record levels from Q4 2023. Growth in market share, particularly in the healthcare and e-commerce segments, contributed significantly to these results .

Organizational Streamlining and Cost Management

Kuehne + Nagel’s ongoing organizational streamlining is anticipated to save approximately CHF 100 million per year. These measures, aimed at enhancing cost control and speeding up decision-making, are expected to reveal full savings in the coming quarters .

Cash Flow and Financial Health

Despite historical trends of low or negative free cash flow in Q1, exacerbated this time by an unexpected sharp rise in seafreight rates, Kuehne + Nagel maintains a solid operational conversion rate. Cost control remains a priority, and various measures have been implemented to ensure reduced unit costs moving forward .

Strategic Focus and Future Outlook

The company emphasized its strategic focus on improving customer and employee satisfaction, leveraging recent technological advancements such as cloud migration and AI. For Q2 2024, Kuehne + Nagel expects volume growth between 2% and 5%, indicating a continued positive trajectory .

Conclusion and Forward-Looking Statements

In summary, Kuehne + Nagel navigated a challenging logistics environment with strategic cost management and yield prioritization. While growth expectations have been recalibrated, the continued focus on customer excellence, operational efficiency, and strategic acquisitions supports a robust long-term outlook .

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, welcome to the Q1 2024 Results Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] 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 Mr. Stefan Paul, CEO of Kuehne + Nagel. Please go ahead.

[Stefan Paul, executive]

Thank you very much, Sandra. Good afternoon, and welcome to the presentation of Kuehne + Nagel's first quarter 2024 financial results. I am CEO, Stefan Paul, and I'm joined as always on the call today by our CFO, Markus Blanka-Graff.

Let's go into the first quarter earnings. The Kuehne + Nagel Group achieved a Q1 EBIT result in line with our expectations. This result was stable relative to the reported Q4 result of CHF 375 million, which excluded a redundancy charge of CHF 53 million.

Our ongoing focus on yield management and cost control offset the typical seasonal downtick of cargo volumes from Q4 to Q1. We achieved modest volume growth in our 2 largest business units, building on the somewhat improved volume trend of late 2023.

During our last earnings conference call, you may recall that we undertook redundancy measures in Q4, and said we had additional cost control measures already underway in Q1. This was a direct reference to the recently announced organizational streamlining, which will centralize general management and speed up our decision-making processes.

We anticipate related savings of approximately CHF 100 million per year comparable to the redundancy program announced with year-end results. The associated charge in Q2 should be roughly half this amount, and we expect the full run rate savings to emerge over the coming quarters.

Lastly, historical free cash conversion in Q1 is usually low and sometimes negative. The result in Q1 2024 reflects the unexpectedly sharp rise in seafreight rates at pressure, which is not likely to extend beyond Q1. Markus will have more on this topic to come a bit later.

Let's move into the seafreight business unit, Page 3. As always, left, the volume in toys, GP per toy and EBIT per toy always, of course, in Swiss francs. Sea Logistics achieved EBIT of CHF 197 million in Q1, which was a CHF 36 million improvement on the result of Q4. Relative to last year. this result includes an currency headwind of around 3% or CHF 10 million.

Effective yield management drove a stark sequential increase in GP per toy of plus 17% from Q4 to Q1. This improvement more than compensated for seasonally lower sequential volumes of minus 9%. This also accounted for about 80% of the EBIT improvement, with a balance from an absolute operating cost reduction of 2%.

Headline volume growth in Q1 was 1.5% year-on-year or roughly 5% on an organic basis, excluding the effects of discontinued commodity volumes in Q4. We view our market share as roughly stable, with estimated market volume growth of 2% to 4% year-over-year.

The sharp rise in freight rates triggered by the situation in the Red Sea resulted in a relatively small uplift to yields in March. We expect some additional uplift in early to mid Q2, but no further effects after midyear.

Next is Page 4, Air Logistics, tonnes, GP per 100-kilo and EBIT per 100 kilo in Swiss francs. Air Logistics delivered Q1 EBIT of CHF 94 million or CHF 14 million lower than the operational result for Q4. Our intensified prioritization of yield management resulted in a stable overall outcome in Q1 relative to Q4. This prioritization will persist, and we expect further improvement ahead.

Headline volume growth was at 3.4% year-on-year, revealing modest acceleration. Organic volume growth of 0.8% tipped into positive territory aided by mid-single-digit perishable growth. In the hard cargo segment, excluding e-commerce, we believe our market share is stable. Note that we are serving the growing Chinese e-commerce export volumes, but with less exposure relative to the broader market.

Revisiting the situation in the Red Sea, you may recall that we had not witnessed a material uplift in sea, air at the start of the year. Since then, we have seen some additional demand growth, but off a relatively small base.

Next is Road Logistics on Page 5. Road Logistics EBIT for Q1 was CHF 30 million. Shipment volumes remained under pressure in Q1 at minus 6% year-on-year, but broadly unchanged, excluding day count effects. This is a slight moderation of the Q4 result of minus 9%.

Yield and mix effects mitigated volume pressure once again, resulting in a more modest GP decline of 3% year-on-year, excluding currency effects. The Q1 result also reflects the first-time consolidation of Farrow Group results since February. The acquisition of Farrow addressed the key strategic initiative to expand our customs footprint.

Farrow is a long-established specialist cross-border North America trade; a market where custom solutions are cornerstone of successful sales efforts.

We expect to close the recently announced acquisition of City Zone Express in Q2. As a reminder, this is a Malaysia-based provider of cross-border road services spanning their home market, Vietnam and Thailand.

Next is Contract Logistics on Page 6. Contract Logistics generated another strong EBIT result of CHF 55 million in Q1, matching the record result of Q4 and comparable to the Q1 result of CHF 53 million last year, excluding a real estate gain. Market share expanded once again in key health care and e-commerce segments, categories which continue to dominate the sales pipeline.

Our ongoing focus on efficiency resulted in a modest year-on-year increase in the recurring conversion rate. Please note that the major Adidas distribution facility in Northern Italy, designed and operated by Kuehne + Nagel to serve Southern Europe for this client is now operational.

Let's move on to Page 7, Roadmap 2026 and update for the quarter. And before turning over to Markus, let's review some key developments with respect to this Roadmap 2026 strategy.

With respect to the cornerstone, [ Kinex ], actions are underway to make meaningful improvements guided by the insights from the customer and employee survey conducted in the second half of last year. These actions market important steps to improve our customer service offering and our attractiveness as an employer.

Additionally, as I touched upon earlier, the recently announced streamlining of our organizational structure will bring us closer to our customers and improve the speed of our decision-making process. In terms of market potential, I already referenced key recent acquisitions in Road, addressing geographic coverage ambitions in Asia, as well as expansion of our customs brokerage capabilities.

We also made further advances in key verticals such as health care and renewables. Our shift from on-prem to cloud-based hosting of our in-house business application is on track, while we continue to explore the potential for AI to drive new efficiencies.

Lastly, we expand our service offering in Road to include tangible emission reductions and avoidance solution and also made progress with respect to our social impact initiatives.

With this, I would like to hand over to Markus now to talk more about the financial KPIs.

[Markus Blanka-Graff, executive]

Thank you, Stefan, and good afternoon, everyone. Thank you for your interest in Kuehne + Nagel and taking the time today for our first quarter 2024 results.

Just as a quick recap, as Stefan has outlined, we continue to see an environment of demand for Global Logistics services that remains overall subdued, and we don't expect a material change to this situation. In such periods of a potential volatility, we focus on our highly flexible asset-light business model combined with a entrepreneurial spirit.

Our current priority, hence, is on cost control with several significant actions initiated in the fourth quarter 2023 and intensified in 2024, to ensure a further reduction of unit cost. This reflects both a reduction of absolute cost and per unit cost with stable to increasing sequential volumes in sea and airfreight.

Moving on to the income statement. Whilst the P&L remained below the same quarter in 2023. But we shall recall that the first quarter last year still enjoyed some positive spillover effect from 2022. Looking at the quarters sequentially, we can see a solid operational conversion rate of 18%, supported by active FTE resource management. The combined sea and airfreight conversion rate was 33% in the first quarter. For reference, the full year 2019 sea and airfreight conversion rate was 28%, excluding one-offs.

Not to forget, headwinds coming from currencies increased with an impact of around 4% or CHF 102 million equivalent at gross profit level, and around 3% or CHF 19 million on earnings before tax.

Moving on to working capital. One of the topics that have been on the agenda for the last couple of quarters. It increased due to the unexpected sharp rise of sea freight rates triggered from the situation in the Red Sea, as Stefan has outlined already in his opening. I anticipate stable net working capital for the next quarters to come.

DSO have expanded against the end of last year and also against the same time last year. Days of purchase outstanding, DPO, on the other hand, have increased to a similar extent so that the spread between the DSO and DPO stands now at stable 12 days.

Net working capital intensity increased by the close of March with a result of 4.1% versus 3% for 2023. The absolute level of CHF 990 million is there with almost CHF 100 million greater than it was a year ago. I will come back to this fact in a minute.

Let's continue with cash and free cash flow. The pressure on the net working capital, we just discussed, arising from the sharp rise in seafreight rates is clearly evident in the Q1 free cash flow result. This along with some other factors, amplified seasonal effects, which typically result in a lower free cash flow conversion in the first quarter of the year.

For a better illustration, let me move on to the next slide, which is a new slide, starting some more information on the cash conversion.

The first quarter is usually not marked by the high-end free cash flow conversion as it follows the peak demand season for Sea Logistics, our largest business unit. On that slide, you can actually see the average free cash flow conversion rate over the last -- over the last years between 2010 and 2020, so a 10 years look back on the Q1 cash conversions.

A look back at this decade leading up to the pandemic points to an average first quarter free cash flow conversion of just under 20%. Excluding the effect of the recent sharp rise in seafreight rates and some other factors detailed on this slide, the Red Sea impact the noncore CapEx in the amount of CHF 55 million earlier last collection date that we had in March due to the timing of Easter and initiated in the fourth quarter 2023, but cash effective in the first quarter 2024, some of the redundancy payments.

We experienced also, as mentioned briefly, a curtailed collections due to the timing of Easter and some material cash outflows linked to the redundancy charge, as mentioned in the fourth quarter.

With these few comments, I would like to end our standard presentation with some key takeaways. As Stefan mentioned, there is a silver lining on the horizon, positive volume development to be continued, intensified cost measures on Kuehne + Nagel site, streamlining of the organizational structure, as announced in the first week of April, strengthening of the customer proximity, active yield and customer portfolio management, which all results into a confirmation on our focus on the Roadmap 2026 initiatives.

So in closing, volume trends showed some improvement in the first quarter amid challenging market conditions. Nonetheless, market demand overall and yields remained subdued. In this environment, we remain relentlessly focused on cost management, and this is evidenced most recently by the additional measures that we have taken in the first quarter to further reduce costs. These actions will yield incremental benefits continuing in the second quarter and of course, beyond that point.

With this commentary, I would like to conclude the standard presentation, and I would ask Sandra to open up for Q&A.

[Operator]

[Operator Instructions] Our first question comes from Alex Irving from Bernstein.

[Alexander Irving, analyst]

My first question is on volumes, please. So global data on airfreight and seafreight volumes are suggesting total market growth in around the high single digits year-over-year. Your number is in the low single digits, but you also said that your market share is stable. If you could please help us to understand where the difference lies?

My second question is on the regional management structure. So following that closure, just a little bit more information here. What's the specific role of the managers who have been eliminated? And why are you confident that you're able to eliminate those roles without impairing your ability to control the business, please?

[Markus Blanka-Graff, executive]

Alex, this is Markus. I'll take the first one. Good question on that market data, by the way. Not sure where the high -- the high single-digit market volume. We think we have been growing in line with market. But of course, we are trading off, if you like, high-yielding business for volume increase. So I think or we believe, based on our market data, that we have been in line with market and certainly expanding on the higher-yielding volumes.

[Stefan Paul, executive]

Alex, Stefan speaking, good to have you. I will answer the question on the regional management structure and give you a little bit more insights, basically beyond the press release, which you have seen.

So first of all, we had roughly 700 FTE, 700 people in the regional structure, 5 regions. And reporting into the regional management, we have currently, or we had currently between 55 and 60 national or cluster managers. This 55, 60 cluster managers will now report into the Management Board directly into 5 of us, 4 colleagues in the business units, sea, air, road and contract logistics, and to myself, 4 of them. So that's the new structure.

And what it requires is, of course, that the national managers take even larger and wider responsibility, especially on -- and that's not new on CX and EX. So on the customer front, customer-facing activities and on the employee side. And as I said, repeating myself, they will report now or they already report into the Board members, and that will ensure that in a volatile market, we can execute our decisions much faster than in the past because we have now a direct connection into the country organizations, vice versa. So that's the major change on the structure, which we have put into place beginning of or on April 8.

[Operator]

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

[Muneeba Kayani, analyst]

If I could just go back to your comments on sea GP per TEU. So you mentioned there was a benefit from Red Sea towards the end of the quarter in March. Can you help us understand kind of how much of the performance in the first quarter was your focus on yield versus kind of a benefit from the Red Sea? And as you talk about 2Q, what's your visibility on that? And why do you think that there's no Red Sea benefit beyond 2Q?

And just then on your medium-term targets, where are you in terms of meeting your 2026 EBIT targets? I think in the last conference call, you had said that the volume performance was below your expectations. Has that changed in any way?

[Stefan Paul, executive]

Muneeba, Stefan speaking. Let me tackle the first question, the sea GP per toy. What was the share coming from Red Sea. It's rather limited in March, it's between CHF 5 million and CHF 10 million on EBIT level in March, nothing in January, February. And then why do we believe there is no contribution from Red Sea beyond Q2.

So we believe that the situation from a rate perspective is going to normalize end or at the back end of the second quarter. But of course, we do not have the crystal ball. That is our expectation looking into the market right now.

The only thing that I would like to add here from a volume perspective, what we expect as well in the Q2 is significant -- a remaining positive uptick in terms of the volume is concerned coming in from Q1, we believe that Q2 from a volume is stronger than the first quarter. And year-on-year, there should be expected between 2% and 5% volume growth in the second quarter versus 2023.

[Markus Blanka-Graff, executive]

Then Muneeba, it's Markus. On the midterm 2026, I think I can reiterate what we mentioned recently that we believe the quality of the P&L, so the improvements in conversion rates, the focus on the customer excellence part. The expansion on the markets and also what Stefan alluded to on his Roadmap slide on the digital ecosystem, I think we can deliver all that.

I think where we struggle right now is the market growth that we had assumed at a different level than what it shows, but right now and what we can expect for the next quarter or so to come. But also, let's not forget, we have, if you like, already missed the first year of growth, which was last year, which we had in our plans at a different level.

So is it impossible to achieve the growth rates that we have put out during our Capital Markets Day. I think impossible is a strong word, but it's very unlikely that's going to happen.

So again, the quality of the P&L, the improvement on conversion rate, everything else is going to happen the way we had communicated, just decide the growth -- of that we have been able to gain from the market is not there as we speak.

[Muneeba Kayani, analyst]

If I could clarify your comment on 2Q volumes. The 2% to 5%, is that -- so the 1.5 that you did in Q1, we should think of that year-on-year would be better by 2% to 5% in 2Q?

[Stefan Paul, executive]

Yes, that is the right interpretation. So what I said, let me repeat it. The volume growth year-on-year Q2 is expected to land between 2% and 5% in the second quarter.

[Operator]

The next question comes from Sathish Sivakumar from Citi.

[Sathish Sivakumar, analyst]

I got two questions here. Just on that volume comments. How much of like the visibility you have today in terms of -- from your customers, both across air and sea? And then just moving on to the LCL volume mix. Can you just give us an update like what is the LCL volume mix today and how it has actually progressed in the last 6 months?

[Stefan Paul, executive]

So in terms of the outlook from customers basically, twofold. In seafreight, we have a rather good insight into the bookings for the next 4 to 5 weeks, at least the pre-bookings. Basically for the next 2 weeks, we are absolutely clear on what will be booked. And then as I said, 4 to 6 weeks, we have a rather good indication from the customers.

Airfreight is a little bit different, right? Because there is a lot of spot business, so the visibility into the next 6 or 7 weeks is less pronounced than in seafreight.

[Markus Blanka-Graff, executive]

On the volume mix, Sathish, I think we're continuing to expand our shares on the high-yielding business. I think not every quarter -- is due for an update on the numbers, it's a slow-moving process given the large number of customers that we have.

We are moving into the right direction. Is there anything that I would call out as being a step change in the mix, no, not as of yet. And I think we shall give you further information as we have promised on a yearly basis because then you really see the progress also in meaningful steps rather than in smaller movements.

[Sathish Sivakumar, analyst]

Got it. And can I have a quick follow-up on the demand visibility in seafreight. And how does it actually compare into Europe and into North America like where do you see more longer booking versus by region?

[Markus Blanka-Graff, executive]

You mean the longer or shorter...?

[Sathish Sivakumar, analyst]

Longer -- yes, that you see, like visibility is slightly better. Or is it just consistent across all regions, right? When you say 4 to 6 weeks of visibility in seafreight.

[Markus Blanka-Graff, executive]

Yes, that is -- well, that is pretty much across all the geographies. Let's not forget, still the old truth -- holds up that the vast majority of businesses are concluded in North America and Europe. And from that perspective, the visibility is still there. So it's not depending on the geography. It's really across the globe in a very homogeneous way.

[Operator]

The next question comes from Andy Chu from DB.

[Andy Chu, analyst]

A couple of questions from me, please. The first one is around free cash flow. Obviously, lots of moving parts. Markus, is it possible to give any sort of range of free cash flow outcomes or conversion rate for the full year? I think your company consensus is about --well pre, this morning's results was just under 1.3 billion. So we see quite a big deviation this morning, and you printed 970 million last year. So I know there are things like probably more redundancy payments coming through. So can you help us a little bit in terms of free cash flow?

And then in terms of the charge to be taken, the CHF 50 million, is there any sort of split of that by division, please? And whether all of that will flow into a base of that flow into Q2?

[Markus Blanka-Graff, executive]

Sure, Andy. Thanks for the question. I think free cash flow, very good observation. Yes, there will be cash outflows for redundancies, and I combine the answer for the two questions.

I think the range of around CHF 50 million cost at that point in time is likely everything, whatever we're going to execute and announce and inform everybody is going to be during quarter 2. So similar to the quarter 4, we will also disclose in some level of detail.

From an allocation point of view, I would guess the majority will be in the sea and airfreight arena. And a smaller part will be in Contract Logistics and Road.

For the full year cash flow, I would still believe that because the logic of the business model has not changed, we should run at a free cash flow conversion rate at around 90%. Then when we are discounting some of the redundancy payments that are happening in -- during the year, I would think we should still have 85% to 90% as a -- or 80% to 90% as a target for our free cash flow. And if that -- nothing unforeseen is going to happen, I think I'm comfortable with saying that that's also going to be the reality at the year-end.

[Operator]

The next question comes from the line of Dan Togo Jensen from Carnegie Investment Bank.

[Dan Jensen, analyst]

Maybe if you can give an update on the NEOM project in Saudi Arabia. I know you're involved on the renewables side. How does that business impact you? And how will any potential delays impact you in the future?

[Markus Blanka-Graff, executive]

Dan, I will take that, Stefan. So as I outlined a couple of times last year already, we are not involved directly, and you said it quite rightly. So with NEOM project. So what we execute is shipments based on supplier decision base. So we are currently executing a large wind project from China into NEOM is a turnkey project, and we have a couple of others where we bid on currently. So for us, it's purely supply related.

And I've seen as well that there was an announcement recently on a delay or less basically investments into the line, but that has no impact on us as we are not directly involved into the NEOM activities. We are only focusing on supplier-based turnkey projects, mainly in the seafreight and project area and not directly involved on ground.

[Operator]

The next question comes from Marco Limite from Barclays.

[Marco Limite, analyst]

I've got two. So the first one is on the GP per TEU in seafreight, whether you feel like the 500 for markets, it's, let's say, the new sustainable level? I guess you were mentioning there was a bit of a tailwind in March from Reds Sea. So maybe something coming from that drops off, but you feel like 500 million is a ballpark right number going forward. And whether volume growth or stronger volume growth in the second half of the year, but already in the second quarter, it's somehow dilutes that number. So if volume growth is a tailwind or a headwind basically to your yields?

And the second question is on conversion ratios, which were very strong in seafreight, but in airfreight it sounded to be softer. What is driving that? And whether structurally, you see big differences in your path forward to get to your targets in seafreight versus airfreight?

[Stefan Paul, executive]

Marco, it's Stefan. GP per toy, it's not 500 million. It's CHF 500 per toy. And this is what we have as well...

[Marco Limite, analyst]

[indiscernible] of ocurse.

[Stefan Paul, executive]

Communicated as an ambition as well during the Capital Market Day last year on March 1. So we are happy that we have demonstrated that we have the can-do attitude and that we have reached again the 500 mark. We believe, and this is what we always said, is there will be some quarters above and below.

Second quarter will be in the high 400, close to 500 range. We don't believe that there is a significant negative trend to be expected, but with more volumes and significant more volume coming in, in the second quarter as we see the bookings currently arising, it might be that there is a little bit lower GP per toy to be expected.

But it remains our ambition and we will do everything on the product mix and on the focus with our customers to really demonstrate that we deliver as promised around the 500 range. So no big deviation to be expected.

[Markus Blanka-Graff, executive]

And then maybe on the airfreight side, on the conversion rate, I think seafreight, you have seen yourself very healthy levels. On the airfreight side, I think we should expect further improvements on the yield, but in a moderate pace, and at the same time with some cost benefits with higher volume and most certainly stable or actually declining cost structure.

Having said that, I think the important thing to understand is, how does the market currently look like? And really when you do the 3 components of the market that is currently driving the volume growth and also some of the capacity restraints.

It's hard cargo that is currently missing. It's perishable that is stable. And it's basically [ not ] growing. And you have e-commerce that is really the driver for everything we talk in airfreight. And I think at that point in time, we also have to see what is the profitability around that e-commerce business, and how eager we are to operate that business or rather focus on higher-yielding businesses in the hard cargo.

So I think what you should expect going forward is focus on hard cargo, better yielding, lower cost structure and then I think airfreight is also going to take off into the right direction again. So nothing miracle around it. It's just focused on the right strategy.

[Operator]

Next question comes from Gian-Marco Werro from ZKB.

[Gian Werro, analyst]

I have two questions. First of all is a follow-up question of what Markus just said. In e-commerce as a driver in airfreight, I think we didn't speak enough about this topic today. So can you elaborate also the momentum that you really see there with Chinese e-commerce giants boosting the volumes there?

And can you also give us a bit more, flesh the bone there in relation to the profitability that you achieved in this industry. So -- or in this segment as some market reports are also showing to us is that these big players also potentially even pay more or attractive prices to save the capacities for their big plans to bring volumes to Europe and the U.S.?

And then the second question is more on -- also your measures that you mentioned this morning. For example, the temperature-controlled area in New York, adding in Air Logistics, some more possibilities to you? And besides this, also the inauguration of the new U.S. Contract Logistics facility in New Jersey.

So can you just give us there a bit more maybe granularity about the significance of those measures to your overall volume capacities or volume growth potential? I know there are some details about square meters, but that's not so helpful.

[Stefan Paul, executive]

So I was -- maybe we should have a side discussion on the reports basically because I'm not aware that any of these players are paying any single penny too much or any premium, right? So that is not what we see.

But from a volume perspective, Gian-Marco, they still basically have huge demands and mainly they focus on direct carrier connections. Your question was, as well, what is the utilization? How much do we carry for e-commerce and the 2 giants in particular?

As we said, I think during the Q4 call, we are leveraging our subsidiary, Apex in particular, for that kind legacy is not pretty much involved. And it's less than 20%, below 20% of the capacity offered by Apex into the marketplace, which is focusing on e-commerce. But again, I need to reiterate, the yield coming from e-commerce is significantly lower than for standard hard cargo.

[Markus Blanka-Graff, executive]

And I think on the temperature controlled and also some other locations that we are continuously improving, it's not so much the size that really is of biggest relevance, it is the network and the completion of network positions around the globe with the right certifications in place, with the right accreditations in place. And so temperature control is one of the distinguishing features, I wanted to say for the transportation. So it's the availability of a certified network rather than how big the individual locations are.

And on New Jersey, I think was your question, the New Jersey facility is already up and running, and it's a hub for fashion and luxury brand. And we are using that also for all kind of cross-border movements. So it's interesting that you picked up on these two. But -- yes, these are the -- these are the context around these two.

[Operator]

The next question comes from Michael Foeth from Vontobel.

[Michael Foeth, analyst]

Just two for me also. The cost per unit development in airfreight, can you just explain why it increased so much versus the third quarter and the fourth quarter, and the fourth quarter included some one-offs there? So what are the dynamics in quarter-to-quarter in the OpEx? And how should we look at that going forward? That's the first question.

And then the second question is just maybe a clarification or a follow-up on what was just asked, your right-of-use assets increased quite substantially in the quarter. And I was just wondering, if that relates to those warehouses you just mentioned, or if there are other effects in there?

[Markus Blanka-Graff, executive]

Michael, it's Markus. So right-of-use assets, rather clear impact from one large operation. I think Stefan mentioned that South European distribution center that we opened in Northern Italy in Mantua, and that is a massive site with a very long lease periods that obviously has an impact of the right-of-use assets, at the same time, the contractual liabilities.

So if you look at the balance sheet, this is actually the move that's happening. That site went operational in the first quarter, hence, from an accounting perspective, that is what happened.

[Stefan Paul, executive]

Let me tackle the question on the airfreight unit cost, right? So the airfreight unit cost in the first quarter is 69 per 100 kilo. And if you look at the fourth quarter, fourth quarter was positively influenced by 2 one-offs. One was the Apex one-off and the other one was a negative one, which was the accrual for the redundancies. And this together, we're at roughly 20 million, right?

So the operational -- the operational number, operational number was 20 million higher in overall for airfreight in the fourth quarter. And that's the reason why the comparison needs to be taken into account minus the one-off, and then you have the real number, right, which is then 6% below the fourth quarter if you take these 2 into account. So 6% net reduction of cost per unit between Q4 and Q1.

[Operator]

The next question comes from Sebastian Vogel from UBS.

[Sebastian Vogel, analyst]

I ask my two questions now. The first one is if you can add some color on the exit yields in sea and air by the end of the first quarter? And the second question is staying with sea yields. And if you look a little bit further out, so by the end of the year, most likely there's some additional seafreight volume becoming eventually available. Do you think you can sort of offset the potential pressure that's coming out of that one overall, and then on rates that you can offset that one with yield management measures there? That would be my two questions.

[Stefan Paul, executive]

Yes, Sebastian, I'll tackle the first one. The exits on the first quarter in March. So what I can confirm is that the highest yield per unit in the first quarter in both air and sea was definitely in March. Yield in air was above the 82 and yield as well in sea was above the 502. So the strongest yield came definitely in March months.

[Markus Blanka-Graff, executive]

And of course, the yield seafreight. Until the end of the year, I would wish I would know it precisely. But I think from [indiscernible] perspective, we should -- we should be looking at a sound number between the 450 and the 500 mark. So maybe some quarters looking at the volume development, maybe a bit below the 500 mark, but I think we should be somewhere in that range.

[Sebastian Vogel, analyst]

Got it. And I wonder if I may squeeze one small one in. The noncore CapEx, the CHF 55 million. Can you elaborate a little bit on that one? That was -- what was there behind?

[Markus Blanka-Graff, executive]

There were investments into projects in the area of sustainability. So that's something that creates for us a platform to further invest on the ESG agenda.

[Operator]

The next question comes from Lars Heindorff from Nordea.

[Lars Heindorff, analyst]

Both, two, on the yield side. The first is on the sea yield and the increase in the first quarter. Markus, we've previously have discussions about how you source your capacity, whether you're long, short or completely back to back. I would assume that the strong increase maybe is caused by you being a little bit long on how you source capacity.

If I'm right in that thesis, I mean, how will that affect the yield? I mean, I know you've been giving guidance for Q2. But all else equal, is rates going to decline maybe going forward? I mean how can you keep it then around the 500 levels? That would be my first one.

[Markus Blanka-Graff, executive]

Okay. We take it step by step or you want to ask your second question at the same time?

[Lars Heindorff, analyst]

No, no, step by step, sorry.

[Markus Blanka-Graff, executive]

Okay, Lars. Good to talk to you. So I think I'm going to disappoint you now because on the capacity side, we currently run on a very high-level spot market. So it's really not anything that is -- the CHF 500 GP per toy level is really not driven through the procurement strategy, it's far more driven by -- really our focus on higher-yielding business, versus in the past, running with some of the commodity business.

So yes, there is an impact that impact from a procurement is not significant in the first quarter. So going forward, I think we will see how the market develops. And I think we keep our procurement strategy, certainly for the future, rather close to our [ adjust ]. But the main movements going forward is always move into the -- or develop into the right customer portfolio mix rather than thinking about how we disclose or not disclose our procurement strategy.

[Lars Heindorff, analyst]

That's clear. And I suspect that you will give me an answer, which is probably along those lines. So which brings me to the second point, which is that the long-term guidance around the 500. If we assume that over time, yields has been sort of steadily declining. I think that's more or less evolution in this industry. What kind of change in mix will that require for you to keep that margin sort of stable? And maybe you can indicate how much is SME today and what it will be -- or what would it would take to be in the future to keep it around the 500 level?

[Markus Blanka-Graff, executive]

I think we have disclosed some of the SME shares in our last call on the full year result. Again, I mentioned today, don't expect that mix is shifting on a weekly basis or even monthly basis. This is a long journey. It is connected with our customer experience -- with our customer experience commitment. And it is clearly connected towards also at digitalized and more efficient execution on lower-yielding business. So it's a whole mix of what we want to do.

And we were -- we have been very mindful when we created on the Capital Markets Day that aspiration of CHF 500 GP per toy, and these are the drivers that we think we are mostly under control of those. So we get the customer experience right, we get the customer stickiness in the tenure of customer contracts extended. We create a good portfolio towards high-yielding business, most of that is in our control, most of that is, I think, on the long-term relevant for us.

[Operator]

The last question for today's call comes from Uday Khanapurkar from TD Cowen.

[Uday Khanapurkar, analyst]

This is Uday on for Jason Seidl. I guess just sticking on the sea GP in the second half. So you mentioned no Red Sea impact for mid-year and expecting normalization. I guess, at the same time, some reports had ocean capacity up 9% for the year. Does the 450 to 500 mark for 2H assume the effect of those capacity as like do you have any visibility there, and the impact on GP per toy in the second half?

And I guess just quickly for my follow-up on China, the U.S. transit, did you do -- or are you seeing any shift in shipper demand for moves to the U.S. West Coast versus the U.S. East Coast?

[Markus Blanka-Graff, executive]

Uday, it's Markus. So for -- if I understand you correctly, your question goes into, is there a negative or potential negative impact on GP per toy through the incoming additional capacity in the second half 2024, right?

[Uday Khanapurkar, analyst]

That's right, yes.

[Markus Blanka-Graff, executive]

So I think overall in the market, that might actually still -- that might be true. But I come back also to what I said to Lars, is our market share is still a single-digit market share. And we can clearly choose how we operate within that market. And with our focus on the higher-yielding business, there is enough higher-yielding business to be won out there.

I would say if additional capacity comes in and the rates will come under pressure, that might even open an opportunity for us that we will have a lower buying versus our selling. So we might actually have an opportunity to create more GP.

So I would be rather optimistic, at least in that dimension of the market. Choose the right customers where we can really make additional GP through additional services with the right customer experience, and then the capacity might actually be an opportunity for us.

[Stefan Paul, executive]

I will tackle the China question to the U.S. And the question was, do we see a shift from East to West? Yes, we see double-digit shift from East to West Coast, currently from the inbound from Asia to the U.S., and the reason is labor disruption risks and Red Sea disruption. So there is a clear shift to be seen already.

[Markus Blanka-Graff, executive]

All right. I think from our side, we are at the end of our session today. Thank you very much all for joining the call, and I wish you a good day from Kuehne + Nagel.

[Stefan Paul, executive]

Thank you, very much, and good day.

[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.