Kuehne und Nagel International AG

SIX:KNIN

Earnings Call Transcript 2022-Q2

[Operator]

Ladies and Gentlemen, welcome to the Half Year 2022 Results Conference Call and Live Webcast. I am André, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. [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, Chief Executive Officer]

Thank you, André. Good morning. Good day. Good afternoon and good evening to all of you, and welcome to the analyst conference call on the half year 2022 results of Kuehne + Nagel International AG. Our CFO, Markus Blanka and I welcome you from sunny and beautiful Switzerland. As always, let's get started on Slide 3 of the slide deck that we have published earlier this morning.

Based on the strong operational performance of all business units, we have recorded another record result in the quarter and also for the semiannual result 2022. We ended the quarter -- we ended the half year with a net turnover exceeding CHF20 billion, a gross profit of almost CHF5.9 billion, and a strong free cash flow with a network -- net working capital intensity in the benefits of our guidance range. All this resulted in earnings per share almost doubling with CHF12.90 for the first 6 months 2022.

Please follow me on Slide 4 of the slide deck. The total EBIT of the Group and that was CHF2,195, more than a doubling versus previous year. This is the third consecutive quarter with a result clearly above CHF1 billion in EBIT, clearly above CHF1 billion, and a book conversion rate of 37%.

EBIT in Sea Logistics reached CHF1.2 billion, and we are facing persistent congestion at ports, which require high service intensity. Air Logistics EBIT of CHF826 million in the first 6 months of 2022, route changes due to closed airspace in Russia and in the Ukraine and the acquisition being accretive was an EBIT contribution of CHF174 million.

Road Logistics record half year with an EBIT of CHF80 million. The networks are operating at full capacity, especially in Europe, and the high demand for digital solutions, which is even accelerating. And Contract Logistics was an EBIT of CHF81 million. We are expanding our service offering for pharma and e-commerce logistics, and we have a very high capacity utilization. More details to come when we goes through the business units.

Please follow me on Slide 6 of the slide deck and we start with the volumes in Sea and Air Logistics. Let me start with the Sea Logistics volume. The Q2 volumes in Sea Logistics nominal were 2% below previous year's Q2 or 4% organic versus the market that is assumed to have decreased by 5%, and some trades even by 10%. The disruption of vessels, ports, containers, trucks, railways is ongoing. We don't see a major change.

The sea explorer disruption indicator increased last two days checking this morning to over 10 million container waiting days and the trend is going upwards now for the last couple of days. We have seen a shift from the West to the East Coast in the U.S., Savannah and Houston [ph] ports are now congested. And Europe -- and we see that Kuehne + Nagel performs on market level and shifts for further volume growth depending on capacity availability. So now is the time to start growing again depending on the availability of capacity [indiscernible].

Sea Logistics -- sorry, Air Logistics volumes growth of 3% organic minus 7% versus a market growth of minus 5% and a growth of still plus 2% in Q1. The comparison of this quarter to 2022 -- 2021 are a bit skewed because we have an Apex consolidation effect in there, which leads to a tougher comparison versus previous year. We were clearly hit by the Shanghai lockdowns in Q2 2022. And only in June we faced a volume reduction in the market and was in our networks of minus 19%. This is recovering now, and we see a strong trend towards growing volumes again.

Our organic growth is robust. Kuehne + Nagel legacy business is growing quite well on all trades. And pharma and aerospace is up -- volumes are up with double-digit growth. The global capacity balancing might be interesting for you. At the moment its 65% roughly freighters, so main deck operations was our own chartered freighter network, and 35% [indiscernible] is gradually coming back.

Let's move on to the details on the KPIs on Sea logistics. We have seen an extreme peak. By the way, it's on Slide 8. Please follow me on Slide 8. We have seen an extreme peak of spot rates in the past as you know, and this seems to be behind us, while rate level will balance back on a level much higher than in 2019 and before. We believe that the balance of rate levels will be 2x to 3x pre-pandemic. Yields remain high, especially as S&E customers are constantly looking for solutions. We do not see any changes at the moment in that segment.

KN secured the right capacity on the right rates. So we are safe as our capacity offering. And as mentioned before, we will for sure go for growth again, as soon as we have idle capacity to offer to our customers. Our operational costs are high, relatively high. We have to do a lot of manual interference and booking due to the disruption. Almost everything is manual, while we had on average three files per colleague per day in our network pre-pandemic. At the moment, we are on a level of about one file per day, per colleague, because as I said, all the activities are manually driven.

We believe that we can go back to normal as soon as possible as soon as capacity offering and stability in production allows. And then we continue aiming for five files per day and colleague, which is part of our eTouch initiative in Sea Logistics. The conversion rate -- by the way, the bottleneck at the moment are logistics experts in the market.

We are having a lot of vacant drops, and we see that it's getting better month over month with our recruiting initiative and with our industry becoming more and more attractive for especially young people that want to go into a cool industry. Conversion rate in Sea Logistics at 20 -- 62.2% for the first half year. And I think that's in total a very, very solid performance with EBIT I mentioned that before closing for the first 6 months 2022 at CHF1.2 billion.

Please follow me on Air Logistics, Slide 10. Every key in Air Logistics is stabilizing at around CHF140 per 100 kilo. Our operational unit costs are flattish sequentially especially, and you will hear more about the eTouch effects in Air Logistics later on when Markus goes into the details of the financial figures.

We have a stable unit EBIT of around CHF70, especially in Q2, but we are stabilizing for the last three quarters around CHF70 and we have a conversion rate for the first 6 months of 51% which is 9% higher than in 2021 same 6 months. This shows that the Apex effect and the Apex procurement synergies remain evident. Gross profit was CHF1.6 billion for the first 6 months, 68% higher than previous year. And the EBIT was CHF862 million -- sorry CHF826 million, more than doubled versus previous year.

Please follow me on Slide 12 of the slide deck. Road Logistics is expanding its momentum. High-end utilization of core European network, a high demand for digital solutions. We mentioned this a couple of times but it's still growing and the demand is increasing. Its eTruck now, software as a service solution and your easy custom solution which gets a lot of attraction with our customers and is growing, especially in the last 6 months.

We have a very solid U.S demand and a strong performance in the U.S. And we have a strong operational 14% conversion rate for this business unit. This is a new record and we can only congratulate the entire Road Logistics team. EBIT half year 2022 first half year, closed at CHF80 million, 48% above prior year and asset very strong performance.

Please follow me on Slide 14 of the slide deck with the details on Contract Logistics. We saw a organic net turnover growth that surged to 14 plus, 14% in the first -- in the second quarter, sorry, goes once again centered around pharma and e-commerce we see a very strong and unbroken growth trend in both segments. Our trade in Asia, and North America is growing 2x and more than that of Europe, which is exactly the strategy that is in place in contract logistics, and over 80% of the lease obligations backed by customer contracts and nearly 100% of our obligations expiring beyond 2025. I'm deeply impressed by the agile space in Contract Logistics which is significantly below 2%. So we are running with the optimum of utilization in all warehouses.

Let me Summarize the business unit overview before I hand over for Markus. We have posted another remarket with quarter, Q2 for the entire KN world, the semiannual results more than doubled. And result -- this is a video result of our strong improvements and performance in all business units. Due to the ongoing disruption in the supply chains, we can leverage our automation and digital strengths only very limited, which offers potential once we see more normalization or less disruptive elements in the market.

My heartfelt and I mean it. Heartfelt thank you to all our KN colleagues for providing an excellent customer service versus a market that is full of challenges and disruption. Thank you very much. And now we hand over -- I hand over to Markus, who will lead you through the key financial figures. Markus?

[Markus Blanka-Graff, Chief Financial Officer]

Thank you, Detlef, and also very warm, quite literally a very warm welcome from Switzerland to you all ladies and gentlemen. Before I lead you to the numbers and to figures, I want to take a small special moment here and very personal moment because it's the last Analyst Call that I will sit beside Detlef. And I want to thank him here and for all of you on the call, for all the patience that he had with me. And I can say that, frankly also with some of you. And the questions and topics that he was addressing in an -- in a very, very thorough way, every time. Undoubtedly, I believe his candid and very authentic answers have driven the exceptional shared development over the last years. And I think we should all be very well recognizing that. So thank you Detlef and good luck.

[Detlef Trefzger, Chief Executive Officer]

Thanks Markus.

[Markus Blanka-Graff, Chief Financial Officer]

Back to the numbers. I said in the first quarter call that Q1 was an outstanding quarter and I can say so is also Q2, quarter two. The group conversion rate was 36% in Q2, it was 37 on a year-to-date basis. So looking at that, yes, [indiscernible] 38, 37, 36, but from an overall perspective, the level is on an extremely high platform which we have reached.

Again, looking into incremental development something that is extremely important and I think also gives us a hint for the future when we look incrementing gross profit development over the first and the second quarter, leave alone the absolute number but the conversion rate in each of the quarters, so incremental gross profits towards incremental EBIT is in excess of 70%, 74%, 75%. Something that we should keep in mind when we then potentially talk about future quarters to come.

Last but not least on this page number 16. Let's be mindful about what's happening in currencies and other political, geopolitical environments and the impact on two currencies, we have in Q2 year-to-date and impact negatively of 2.9% on a gross profit level, that translates into CHF124 million. And the same calculation on an EBITDA earnings before tax level. 2% that equals CHF21 million. So there are -- potentially when we look forward into the next couple of quarters, that number will become an item on our P&L that gains on significance.

Page Number 17, balance sheet, and I would title that balance sheet with no news is good news. So extremely stable. The largest balance sheet items are at a high-level and very well [indiscernible]. We have trade receivables around CHF6.5 billion, trade payables around the CHF3 billion. As you certainly have already discovered, our cash and cash equivalent is around CHF2.2 billion, and that after we have paid out dividend at the amount of roughly CHF1.2 billion, all that points into a healthy cash flow development, which on Page number #18, you will also see.

And I think what we have seen on the balance sheet, you can see reflected also in our free cash flow development to trajectory that we started in 2022. Starting with around CHF1 billion in the second quarter, we're now in 1.7. And when you look at the other years, that we're below here in the rather darker shades of blue, then I think there is confidence that that trajectory will be very similar to the previous years.

Changes in working capital, just to highlight one more topic here on that slide. Changes in working capital in the first half year 2022, a reasonable CHF54 million, given the total trade receivables that we have here with CHF6.5 billion. I think one can say it's stable net working capital that we currently utilize for running the business.

Illustrating what I just said Page Number 19, Working Capital, we are around CHF1.9 billion working capital to run the group, and when you compare that again on the DSO GPO level, so, these are sales outstanding and days of payables outstanding. So, you will see that also compared to the first quarter, we are at a similar level. So we are between 52 and 53 days on VSOs, around the 57 on the DP0s. So our gap between these two is between 4 and 5 days.

A level that I think also going forward is a level that I would expect for the next couple of quarters. Return on capital employed, this slide that potentially had most of the changes as you have probably noticed, Page #20, first of all, we have eliminated the second line that was showing the return on capital employed without and with acquisition. So, the elimination of acquisition because the last significant acquisition that we have done is now fully consolidated for more than a year. So hence we are showing a return on capital employed for the entire Group without separating these two effects [indiscernible].

And secondly, before being asked, we have over the last quarters in the segregation of the acquisition, we have made a small mistake. And you will see the numbers of the Q3 and Q4 has changed slightly on the return on capital employed. So we have corrected that. And I'm not -- I'm not shy of saying that that has been slightly miscalculated. And as every 6 months, I would like to show a little bit what's Happening on the e-Touch side. I think, just to remind ourselves, Page number 21. What is the e-Touch all about? And what's the context around that?

I think you have, or most of you are familiar with this slide. And it's just really to understand we talk internal operational gains and efficiency. Automation is one of the main topics. Clearly understood that the more [indiscernible] and foreseeable execution becomes in Sea and Air Freight, the more relevant the gains on automation will become. Nevertheless, even in situations as today, or over the last couple of months, eTouch has already contributed quite significantly to the conversion rate.

Page #22, and, yes, we do the odd thing of counting man hours, but that is something that is the only reliable way that we can actually look into if e-Touch is effective in reducing man hours and gaining productivity. So, yes, we do that. And we can show that we have within our numbers, an improvement of the conversion rates in air freight of nearly 1.8. So it's 1.7% out of the e-Touch initiative only.

So with all the significance that obviously other elements also have on the conversion rate, I think that is for me the most sustainable improvement of conversion rate, and when I said at the beginning the 3% would be our target, I think I feel fairly comfortable today that we are achieving a 5% target within a very short period of time.

Why is that so important for us? Just to reiterate, every improvement we do on the e-Touch side is forever. Because any process that we have eliminated or automated, there is no one on earth who is going to go back and say, please let me do that process manually again. So obviously, that is a game that is going to be there forever. But we want to be prepared for the future.

Clearly, automation and productivity and efficiency is something that we have and market conditions may vary. I know we can all have different opinions about what the future is going to bring in the market. But we will maintain our performance because we are agile, we are very flexible and very variable in what our cost and business structure is.

So with that, I would like to hand over back to Detlef and looking to the current perspective.

[Detlef Trefzger, Chief Executive Officer]

Thank you, Markus. Yes, ladies and gentlemen, the emergence of the pandemic in 2020; the war in Ukraine; the rising in energy prices causing inflationary pressures triggered a high degree of unpredictability and uncertainty. We continue to anticipate strong and robust demand in all markets and business units and rely on our agility and responsiveness. With prevalent uncertainty, we are confident that customers will continue to seek out for strong logistics partners like Kuehne + Nagel also in the second quarter 2022 in order to ensure the best possible solutions for supply chain and freight management that they can get.

While the dynamic might change and Markus has just alluded to it, KN, Kuehne + Nagel with stay successful, leveraging its technology and digital capabilities. And also during the past years, we have proven that we have proven that our technology savviness, our agility and strategy and M&A competence, shows success and is relevant for our customers and for the respective markets.

And with this, I thank you for listening. We are -- I'm heading back now to André. I'm handing back now to André to do the M&A and …

[Markus Blanka-Graff, Chief Financial Officer]

Q&A.

[Detlef Trefzger, Chief Executive Officer]

Q&A, you're right. M&A is something -- yes Q&A. And then we will -- after the Q&A, we will introduce our incoming CEO to the audience. André, the floor is yours.

[Operator]

[Operator Instructions] The first question comes from the line of Alex Irving from Bernstein. Please go ahead.

[Alex Irving, Sanford C. Bernstein]

Hi, good afternoon, gentlemen, and all the best. Three from me, please. So first of all on demand trends, what's your current sense of the upcoming peak season on ocean and the demand the bookings you're seeing from your key customers? Are there any clear points of strength or softness. Second on Air, you call out [ph] ocean disruptions is rising, would expect that to be supportive for earnings, but offset against that, of course, passenger capacity is returning to the market? How are you seeing the air freight balance evolve into the rest of the year please? And then third on the ocean spot rates? You've seen those coming down. Are you currently renegotiating with the shipping lines? Or are you sticking to your contract to secure capacity here? How much of your capacity is contracted for the rest of the year? And are you long or short spot rates when you compare that to your customer contracts, please. Thank you.

[Detlef Trefzger, Chief Executive Officer]

So Alex, let me answer a question one and three together, if you don't mind and then we can go to the air frieght balance. Upcoming peak season, yes, there will be a peak season, how much that will be a peak season to be seen. At the moment we are confident that we have a rather robust structure for the next or during this quarter. Also spot rates very rarely we offer spot rates as a general solution to our customers. Usually we have backed contracts, customer contracts and capacity contracts, and therefore the majority of our capacity.

Spot rates is more for urgent shipments where a customer has not provided enough capacity was a main contract on [indiscernible] contract and where we have to rely them on a spot -- on the spot solution. Air frieght balance at the moment, as I said, 65% freighter capacity, 35% [indiscernible]. I don't see a major change in the next couple of months or quarters, for the reason that now is the peak season for passenger planes, even intercontinental, as the summer vacations are kicking in almost everywhere globally.

But for the winter season, the [indiscernible] capacity will be reduced, that's for sure. And still, some of the major markets are not offering a free entry into the country like China, which also limits the number of [indiscernible] capacity into one of our strongest or most important markets. I hope that answered your questions. Thanks, Alex.

[Alex Irving, Sanford C. Bernstein]

It does Thank you.

[Operator]

The next question comes from the line of Sam Bland from JP Morgan. Please go ahead.

[Sam Bland, JP Morgan]

Hi, thanks. Thanks for taking the question. I have two, please. The first one is, I think in your remarks you said that you thought sea freight rates would level out in the future at 2x to 3x above pre-pandemic levels. I just want to make sure I heard that correctly. And when you say sort of level out, what sort of timeframe are we thinking here? Is this sort of in 6 or 12 months? Or is it kind of level out more long-term? And the second question is where volume was down a little bit in Q2, do you think that's mostly driven by lower end demand? Or was somehow related to, for example, more supply side things like Chinese lockdowns? Thank you.

[Detlef Trefzger, Chief Executive Officer]

Right. Let me -- Sam, let me answer the latter question immediately. We have a supply bottleneck was a problem at the moment. And that is, for example, also calls to the Shanghai lockdowns. And I think that is the characteristic of our market at the moment or has been for the last, I don't know, 12 to 18 months. We do not have the demand not yet. We are rather less responsive to customers or new customers where we do not have a direct capacity that we could offer them -- capacity available that we could offer them.

Sea Freight, yes you partly read that correct. But I said so in also the last calls that pre-pandemic we -- the decade pre-pandemic, our freight rates, especially in Sea Logistics or Sea Freight were rather or historically low. And my scenario or our scenario is that for this decade on average. It doesn't happen tomorrow, it doesn't happen next year. Those contracted rates will be significantly higher than what we experienced in the previous decade. And the factor is 2x to 3x higher. That shows also -- show a reflection of the infrastructure investments that need to be done. The -- into ports, railways, truck, bridges, whatsoever, containers, the connectivity investments into data connectivity, technology interfaces with the Sea Freight business, those Sea Freight business was the other businesses and the shippers all this is reflected in that factor 2x to 3x. But it will take time and it's more an outlook for the next or the current decade, then on average then for the next 2 or 3 years. I hope that answered your question.

[Sam Bland, JP Morgan]

That's great. Thanks very much.

[Operator]

The next question comes from the line of Sathish Sivakumar from Citi. Please go ahead.

[Sathish Sivakumar, Citigroup]

Yes, good morning, everyone. Detlef, again, thanks for the help and all the best. I got three questions here. So firstly, on the labor market, Detlef, you mentioned that you're seeing a very tight on in terms of recruiting logistics specialists. So what is your typical turnover in a normal year and how does it actually compare today? And is the tightness that you're seeing is more specific to any particular region or particular market? Any color on that would be highly helpful.

Secondly, on the Road Network. So given the tight network capacity that we have seen in Q2, how should one think about going into Q3? Because historically it is a seasonally low quarter. Would you expect a similar performance in terms of volumes as you go into Q3, or it will be like a normal seasonality? And the last one is actually on the Air Frieght. If you could actually give some color on how Apex performed versus the Kuehne + Nagel standalone on GP per kilo, that will be helpful. Thank you.

[Detlef Trefzger, Chief Executive Officer]

Hello, Sathish. Let me answer the first two questions, unwanted attrition. Our industry has shown in the last 2, 2.5 years that we are providing essential services to societies, and have come into the spotlight of many other industries for the competency, agility, the expertise of the logistics. And therefore it became attractive to hire more of those capabilities into other industries, which were rather low in the demand before.

At the same time, our industry has become very attractive because a lot of people saw during the last 2.5 years, [indiscernible] fast speed and important industry, transport and logistics is worldwide. And all this leads to a shift. So I don't think numbers or regions will help you to answer that question. We see that we have a new demand becoming attractive for our colleagues in other industries. And we see that we all of a sudden are becoming an attractive industry for industries like the apparel or fashion industry, which was never looking at transport and logistics as a potential employer before. And that's maybe the shift that we go through at the moment. And that leads to this movement or this shift to scarcity of experts, especially as I mentioned before, Sathish, with the productivity of only 1.5 [ph] per colleague per day versus 3.5s [ph] per colleague per day, normally we have a high demand -- much higher demand on people here.

Road, quarter three performance as always, I think that the seasonality, especially in Europe, especially in August, and that will not significantly change at least no signal or sign that this will change. And we believe that this will be a rather normal quarter versus the previous year's -- previous year quarter [indiscernible] performance in both logistics.

[Markus Blanka-Graff, Chief Financial Officer]

So, Sathish, let me take the Apex performance question. I mean, we have segregated the impact on volumes and profitability over the last quarters and in other roles after a year were stopped doing this because -- not because we become more intense [indiscernible], but the business is more and more getting into woven [ph] with our businesses. So it becomes increasingly difficult in order to segregate and point specifically to some profits. But what I can say certainly for the second quarter is that it is pretty much the performance of Apex is pretty much in line on a GP per 100 kilo basis, pretty much in line with what we had shown in the previous quarters, variances on this number are below the 5% range.

[Sathish Sivakumar, Citigroup]

Okay. Yes, thanks, Markus. That's very helpful. Thanks, Detlef, again.

[Detlef Trefzger, Chief Executive Officer]

Thanks, Sathish.

[Markus Blanka-Graff, Chief Financial Officer]

You’re welcome, Sathish.

[Operator]

The next question comes from the line of Robert Joynson from BNP Paribas Exane. Please go ahead.

[Robert Joynson, Exane BNP Paribas]

Good afternoon, Detlef and Markus. I’ve three questions, if I may. So first of all, on the demand outlook, just a follow-up on one of the previous questions. We all know that some of the large U.S retailers have recently reported excess inventories. Could you maybe just comment on whether you're seeing any noticeable difference with respect to the demand outlook from the large retailers versus small or medium sized retailers?

And then second question on the balance sheet. I guess the way things are going, I imagine that the cash and equivalents could be close to maybe CHF4 billion by year-end, which compares with a number in the upper CHF100 millions prior to the pandemic. In that context, how do you think about the cash balance going forward? You don't have any significant debt or pension liabilities to pay down. So could you maybe think about special dividend or potentially share buybacks in that context?

Then the final question just on the [indiscernible]. I know it doesn't make a huge difference to the Group EBIT at the moment, but it really was super strong in Q2. Can you just comment on the extent that was being driven by market wide issues such as driver shortages or other capacity shortages as opposed to Kuehne + Nagel specific issues? Thank you.

[Detlef Trefzger, Chief Executive Officer]

Let me start with the demand outlook. We read what is communicated in many and various presses. We have a different notion here. While the larger retailers became cautious due to the supply chain disruption and have increased their inventory levels, we don't see a major difference because small and medium sized accounts all of a sudden start to build up their inventory as well. So we are -- we see a positive outlook for small and medium sized enterprises. In our outlook in total, as we are not responsive to a lot of the demand, or many of the customers that are in contact with us at the moment given the scarce capacity, I think we are not as alerted or concerned then what is to be seen in the press.

We also see that inventory levels are a security belt for the retailers to be able to provide services and goods obviously to the customer base in autumn and winter, especially as brand owners are gaining market share. So it will be maybe also a shift in the balance of power, especially in the e-commerce market. That is driving this inventory built up in some of the markets. Balance sheet, I think the best person to talk to is Markus.

[Markus Blanka-Graff, Chief Financial Officer]

So I think I share your expectation and your view on to the year-end, it's going to be a high number on the cash balance. I think what it tells us that's the cash generation of the businesses are very healthy one. And that also in the future, we're being mindful of what we do with it on an M&A side. So here again, I think we reiterated that our strategy was clear. It's always a question of the right target to the right price. And I think at least over the last couple of quarters, the price dimension was not really where it should be and you have seen in the overall M&A market there was also now when interest rates have increased, there was a significant slowdown in activity.

So assuming that is going to happen also in the future, and you're right, I think we only have historical evidence. Then when excess cash is building up on our balance sheet we are willing and executing on dividend payments. Share buyback is something that has never been close to our heart and I think I have no indication so far that should be different. Gross EBIT, I don't see any major changes to the performance that we’ve seen so far.

[Robert Joynson, Exane BNP Paribas]

Okay. Well thank you very much guys. And Detlef, thank you from me as well for all your help over the past several years.

[Detlef Trefzger, Chief Executive Officer]

You're welcome. Thank you.

[Operator]

The next question comes from the line of Muneeba Kayani from Bank of America. Please go ahead.

[Muneeba Kayani, Bank of America Global Research]

Detlef, good luck, and thank you for answering all my questions in the many calls. So with that, just wanted to touch on what you're hearing about the ILWU union negotiations on the West Coast. And do you think that could result in disruption over the next couple of months?

And then on your dedicated freighter capacity in a kind of what percent of volumes are on dedicated freighter for you right now? And how do you think about that mix going forward? And then you mentioned -- I think you said on Sea, you use contracted volumes. How does that work in air? And are you exposed more to spot rates on the Air side? Thank you.

[Detlef Trefzger, Chief Executive Officer]

Muneeba, happy to answer your three questions. Although this time, let me start with the latter one. We have a mixture of long, mid-term, short-term spot rates in our portfolios both with Sea logistics and Air logistics, I think in Air Logistics, and that was your question, you have seen that we have our own charter planes now that will come into service in autumn. So, this is a normal procedures for capacity we run our own standard infrastructure, so to say, charter not own. And for the rest, we go to the relevant markets. It's always back to the customer contract now. We do not offer capacity with our customer contracts.

The second question Muneeba -- your first question is unions, at the moment, it's rather quiet. Negotiations are still going on. But our belief is that we come to terms. The situation is totally different to what we experienced, I think it was 6 or 7 years ago. At the moment, it looks like they will come to terms, let's put it this way. And we shouldn't make up a problem that is what we had a problem. And I think that's, for me, the biggest. We have enough disruption and topics to solve. And as I mentioned, I don't know whether you were participating in the call already, then the Sea explorer shows that the bottlenecks in the ports have moved from the West Coast U.S to the East Coast. We have no union activity going on at the moment on the East Coast. Its Houston Savannah, where we have a lot of backlog of vessels waiting to enter the port. So it's something that is we're not -- at the moment, it's not a big concern for us. Thank you.

[Muneeba Kayani, Bank of America Global Research]

Thank you.

[Operator]

The next question comes from the line of Alexia Dogani from Barclays. Please go ahead.

[Alexia Dogani, Barclays]

Yes, thank you for taking my questions and congratulation, Detlef that as well from me. And three questions, please. Just firstly on kind of the quarterly performance, clearly it is a strong performance in the kind of historical context. But should we say does marking the turn of this disruption cycle as it is the first quarter were we seen quarterly decline? And if not, do you think that this because of the disruption index indications, do you think things firm up from here? That's my first question.

My second question, which kind of relates to it is about growth and kind of volume growth or activity. I think in your comments, you talk about growth will resume when capacity becomes available again. When do you think that is? And should we expect volume declines until this disruption kind of clears? And then just finally, on Contract logistics, why wasn't the margin kind of stronger given the revenue growth that you delivered in Q2? Thanks.

[Detlef Trefzger, Chief Executive Officer]

So, Alexia, let me answer the turn off disruption cycle. We don't see a turn at the moment. We don't see an escalation and no worsening, but we don't see turn as well. And all the developments will not happen all of a sudden, they will happen over quarters and maybe years. At the moment, there is no major change. We are where we were almost a quarter ago from with regards to disruption.

Growth, yes, growth will resume as soon as capacity is available again. And we are holding back as you know, and that has been part of our strategy. But the market growth is also negative as you saw in our presentation, and we are still capturing indirectly market share, which is our target but I believe we will not see a major increase in capacity offering for the next most likely 6 or 12 months, nobody knows. And everything would be speculation, but we are ready to grow again. We are changing mind and we are looking for customers, especially in the SME sector again, where we can start offering capacity and solutions.

And Contract Logistics, I'm not sure I got the question because Contract Logistics performed very well in the last quarter. We always have some seasonal effects and especially and that is maybe then the margin effect that you'll see when we ramp up was 14% top line growth. When we ramp up new projects that has in the beginning in the month or quarter where we ramp up new projects and negative impacts on the margin, and we will recover immediately once the projects are up and running. So -- also as you know, that is many -- that's the main effect. I hope that explains or answers your questions. Thank you.

[Alexia Dogani, Barclays]

Absolutely. Thank you.

[Operator]

The next question comes from the line of Andy Chu from Deutsche Bank. Please go ahead.

[Andy Chu, Deutsche Bank]

Thank you. Good afternoon, Detlef and Markus, and all the very best to you Detlef. Three questions from me, please. Just to sort of clarify the comments around sort of the sea freight rates been up 2x to 3x from pre-pandemic levels. Are you talking here about the sort of ocean carrier rates, and therefore I'm just trying to translate that into sort of GP per TU. And if I were to apply that sort of 2x to 3x from pre-pandemic levels, which I believe, I guess, would be about CHF300 per TU. Are you sort of saying here, that sort of flow -- a flow would be around CHF600 per TU going forward? And I wondered if you could give us a view please on Air. Apologies if I missed that. And again, similar what would happen to GP per 100 kilos? Thanks very much.

[Markus Blanka-Graff, Chief Financial Officer]

Hi, Andy. It's Markus. So thank you for the question, I think interesting conversations around connectivity of all connections between rates and gross profit. I think last time we spoke about it in such intensity was when the freight rates were extremely low, because then we also made money. Because we are not -- our gross profit per unit is not a function of the freight rate by itself. So it is the service we offer to the customer. It's the service levels and the intensity that we offer to the customer.

Of course, there's a certain part in it that is connected to freight rates, but that is one part of many. And I think what we can say is whatever the level of freight rates is going to be, I think what Detlef and many in the industry are of one opinion is that is not going to come back to the level with which we have seen right pre-pandemic. What we will see is that service will be will be paid and good service will be paid well. And with our extremely efficient systems and customer orientation in how we solve problems for customers, the flexibility that we deploy on a daily basis with our logistic experts, I think we should look confident into the future with reasonable gross profit level. I cannot tell you if that level is now 450, 500, 550, 600, 700, I don't know. But it's going to be a level where our profitability is going to be reasonable.

[Andy Chu, Deutsche Bank]

Okay, great. Thanks. And just in terms of that, sort of 2x to 3x probably a question been asked several times. And I guess there's probably a bit of sort of art as well, to science to that. How do we -- how do you get to 2x to 3x maybe some sort of thoughts behind that? Because obviously its …

[Markus Blanka-Graff, Chief Financial Officer]

Yes, it's not planned. Sure. Andy, it's not scientific and it's not based on a model. It's more we had in the previous decade, exceptionally low rates. I remember, I will have to say this now. The rate from Shanghai to [indiscernible] 50 bucks, less than a taxi ride in Zurich at that time, which were unbearable for the carriers. So we all experience very low freight costs for many reasons. But with sustainability, ESG investments, infrastructure for investments, technology, investments, all the things that have to happen, our assumption is that minimum twice as high, or maybe 3x as high as last decade, the average freight rate, not individual rates, the average rates will be the market rate, so to say, for this decade. We will see that end of 2029 and I'm not saying this because I'm watching it from somewhere else. But nobody should assume that freight rates of 2017, '18 or '19 will become reality again, especially with regards to the cost of protecting the environment this will be a huge cost driver. I hope that explains our thinking there. Thank you.

[Andy Chu, Deutsche Bank]

Thanks very much, and again all the very best.

[Operator]

The last -- the next question comes from the line of Sebastian Vogel from UBS. Please go ahead.

[Sebastian Vogel, UBS]

Hello, and good afternoon. I've got three questions. The first one would be, can you quickly sort of guide me through the quarter in terms of volume and yields for Air and See. How sort of stable or volatile they had been? That would be quite the first question. The second question, when I was looking through the half year report, I was stumbling over the divestment of the Russian operations. And I guess it was written as a non-material effects that was linked to that. I was wondering what is your sort of threshold in million when you say in non-material effects, or at least sort of ballpark where I can put this one. And the last one would be, if you can just quickly give me an update on the CapEx program compared to the previous guidance, and where will you stand in the mid-term?

[Markus Blanka-Graff, Chief Financial Officer]

Hi, Sebastian, it's Markus. So I have to say for the first question, I think the volumes in details into GP and so I think we have provided a stat if this would help you [indiscernible] available in the afternoon to detail out what do you need. Second half, Russia, yes, well spotted. And I think not only well spotted, I think we have been vocal about it, our operation in Russia because of the aggression and the war that Russia has inflicted. So the financial impact of this is around CHF28 million. I think we have also disclosed that in our stat book for the second quarter 2022. Material or not material in that context, because of the magnitude of the rest of the Group performance.

And the other one I have to say, well spotted is the CapEx, yes, indeed. We are running at lower pace, thankfully on CapEx. around 200 -- maybe CHF220 million. I think that's a good orientation for and a reference point. And I think we can keep the level.

[Sebastian Vogel, UBS]

Got it. Many thanks.

[Operator]

The last question from today comes from the line of Michael Foeth from Vontobel. Please go ahead.

[Michael Foeth, Vontobel]

Yes, thank you. And thank you, Detlef, and good luck. Just two questions. The OpEx [indiscernible] sea freight was quite high in the quarter, and obviously understand there's a lot of manual intervention. But my question is what has really changed in the quarter versus prior quarter that explains that level? And where should we expect it to go? And the second question is, the volumes and road seem very, very strong, and somehow a bit disconnected from the muted volume growth in C&F rate. So maybe you can explain where the disconnect comes from in those markets? And if you have any capacity constraints also enrolled or not? Thank you.

[Markus Blanka-Graff, Chief Financial Officer]

Hi, Michael. Its Markus. So on the OpEx sea freight, I think, for us, the reference point is always the expenses per TU, because that that really shows the operational efficiency and there we have rather marginal development of 336 to 342 per TU cost. I think that for me does not raise any concerns for me, because I know what's happening. We have, of course, inflationary pressure with a lot of manual intervention, as you say. So it's a lot of these things going on. I think what is important is that [indiscernible] into automation becomes even more effective when we have a higher cost base because then also the gain is higher. And I think that's something that we're looking at.

But that's a bit of a mid-term outlook from or mid-term view, not after the mid-term view and the costs. I think right now and most likely also for the quarter to come, we -- as Detlef mentioned already, we struggle with people. We need people and people that are newly hired, yes, they go through an educational program. They are on boarded, they are trained on our systems, but compared of course to somebody who was working in the sea freight arena already for years, the productivity is not the same. So we have to start up inefficiencies that we have with new people. So I'm afraid probably for the next quarter we will not see a lot of change in that number.

[Michael Foeth, Vontobel]

Thank you.

[Markus Blanka-Graff, Chief Financial Officer]

All right. Then I think we are at the end of our …

[Detlef Trefzger, Chief Executive Officer]

We are at the end. Ladies and gentlemen, Kuehne + Nagel has performed strong in the first semester 2022 with earnings more than doubled. This is and this will mark the ninth consecutive year was an all-time high results. Also 2022 remains unpredictable and challenging, and I think we have exchanged a couple of view recently. We Kuehne + Nagel remain committed to our proven strategy of providing reliable, high quality technology supported in data driven supply chain services to all of our customers. And it is all about our logistics experts. Our technology and our agility, complexity and agility our friends.

As Markus said, today also marks a milestone for myself and my family. After nine consecutive years at the helm of the Kuehne + Nagel Group, I will step down at the end of this month, and virtually will hand over to Stefan in a couple of minutes. My successor Stefan Paul will take over as of August 1. And Stefan has been part of the Kuehne + Nagel success for the last 9 years. And he is well familiar with the organization and its strategy.

Thanks to all of you, our colleagues around the globe who are typically also listening in, but also for you in the finance community, analysts and investors for your trust and collaboration and the many great moments that we have created together. I'm handing over this precious diamond of Kuehne + Nagel to Stefan now, and he will sharpen some of new facets of the organization and lead it to another great success. I'm pretty sure he will be the right person to ride the horse further.

Before I say goodbye, I have to give two messages to Stefan. Stefan, that this is a diamond, and it's shining and it's great, but it has a lot of room to improve and become more shining in the future. And as you know, no pressure, no diamonds. And the second saying is, the best is yet to be. And I count on you to make it a great story. Stefan, I'm handing over the floor to you. It's yours. And to all of you, bye, bye. Have a great summer. Bye, bye.

[Stefan Paul, EVP Road Logistics and Sales Management Board]

Yes, ladies and gentlemen, you see me smiling. Detlef, thank you very much for the very warm welcome and thank you in particular for your great leadership the last 9 years. Under your tenure as CEO of Kuehne + Nagel, we have achieved outstanding results. You have been able together with your leadership team to create significant value for our customers, for our people and investors. I now feel excited, honored and responsible to take over this great company with almost 80,000 people into a very bright future.

I started my career for those who don't know me back in 1990 as a sales clerk in Munich and then afterwards as a Department Head for Road Logistics as well at the same location. After 7 years, I decided to join a competitor for almost 16 years where I held various management positions in Sales and Marketing and Integration and Senior Leadership roles managing large P&L.

In February 2013, I decided to come back to Kuehne + Nagel and since then here in Schindellegi I'm responsible for the Road Logistics business unit and since 2020 in addition to that, I've taken over the responsibility for our sales unit. Sales, in particular, key account management focusing on our key accounts in the network businesses, Air, Sea Freight, Road Logistics and as well as the large customers in Contract Logistics. And by the way, I have decided to maintain this role. I will take it over into my new CEO role in order to stay very close and committed towards our customer base.

Ladies and gentlemen, I look pretty much forward interacting with you. I have three main events here in my calendar. The next one is our interaction for the 9 months results, which we are going to release on October 25. In between we are going to start road shows with some of our investors, Markus and Chris are organizing that for me and us. And then last but not least, a very important milestone will be the Capital Markets Day on March 1. Next year 2023 in the morning, we will release our full year figures 2020 and then in the afternoon, we will share the strategy and the roadmap with you moving forward. With that, thank you very much again, Detlef. And Markus, I will hand over back to you.

[Markus Blanka-Graff, Chief Financial Officer]

The best is yet to be. All the best to you. Have a nice summer and bye, bye from Schindellegi.

[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.