Kuehne und Nagel International AG

SIX:KNIN

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, welcome to the 9 months 2021 Results Conference Call and Live Webcast. I am Alice, the Chorus Call operator. [Operator Instructions] And the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast.At this time, it's my pleasure to hand over to Dr. Detlef Trefzger, CEO of Kuehne + Nagel. Please go ahead, sir.

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

Thanks, Alice. Good morning, good day, good afternoon and good evening. Welcome to the analyst conference on the 9 months 2021 results of Kuehne + Nagel International. Our CFO, Markus Blanka, and I welcome you from as always, sunny Switzerland. And also, as always, let's get started on the Slide 3 of the slide deck that we have published this morning. Q3, the third quarter 2021 has been a remarkable quarter. Results more than doubled versus previous year and it is an extension of what we have seen in quarter 1 and 2 already this year. And it is a confirmation as well as an acceleration of our strategy and its deployment. On Slide 3, we have published some of the KPIs. So our net turnover increased to CHF 21.8 billion, which alludes to an increase of 47%. Gross profit increased by 25% to CHF 6.9 billion. Free cash flow missed the CHF 1 billion -- by CHF 1 million, so CHF 999 million, an increase of 23% nominal versus previous year. And the earnings per share were at CHF 10.94, an increase of 128% versus previous year, with an organic EPS growth of 106%. Please follow me on the next slide, which is Slide 4, some highlights of the third quarter and the year-to-date development. The third quarter is another excellent quarter, as we have stated before. And the group 9 months EBIT concluded at CHF 1.825 billion, up 131%. Let me also draw our attention or focus your attention on the conversion rate. Short conversion rate year-to-date 9 months of 26.6%. In quarter 1, we started with 21.3%. Quarter 2 came to a 26.2% conversion rate, and we concluded the third quarter with a conversion rate of 31%. Outstanding performance in Sea Logistics in a very chaotic market environment, which I will explain or give some details later throughout the presentation. A very strong performance. A high service intensity is continuing, and our colleagues, especially in sea freights are all over the place to make the shipments of our customers' work. Air Logistics, a very strong performance with an EBIT of CHF 645 million for the first 9 months. A strong volume and yield performance in that period. And we have fully consolidated Apex. And let me also state, we have an excellent collaboration with the colleagues from Apex. And this is based on an almost identical entrepreneurial spirit, and there's a seamless interaction with the team of Apex, which we all enjoy. Road Logistics, EBIT of CHF 75 million for the first 9 months, a very strong volume growth, especially in the third quarter in Europe and a high demand for digital solutions with a very solid operational performance despite all the headwind that we experienced with driver shortages in the market, equipment shortages and so on. And Contract Logistics continued its growth, especially in pharma and e-commerce very successfully and concluded the first 9 months with an EBIT of CHF 114 million. Please follow me on Slide 6, where we give some details on the volume development in Sea Logistics and Air Logistics. I will start with Sea Logistics. We have a volume progress of minus 2% in the third quarter and Apex adjusted of minus 4%. Our organic development on purpose, I should say, is minus 9% or we lack like 100,000 TEU which is exactly the low yield in cargo, the commodities that we have mentioned and described before, forestry products ex Europe, agricultural products ex USA, which are not running in our networks at the moment as we lack capacity as there's a huge lack of capacity. We focus and we see a strong focus on where it matters most on the transpac. Asia exports to North America, especially U.S. we see a mid-range double-digit volume increase -- significant increase. And Europe to North America and partly South America, we see a solid double-digit volume increase on those trades, especially with cargo or with customer demand that requires solutioning and expertise from our Sea Logistics team. I mentioned that before, we have a chaotic market environment, and that is going to continue. And I know you will come up with this $1 billion question, when does it end? There's no end insight at the moment. We always -- it might last until Chinese or Lunar New Year next year. But we would expect this can continue even longer than 6 or 12 months. There is no sign of relief. And as I mentioned in some of the press interviews recently, this is a bullwhip effect we experience, and it's getting worse at the moment. And we should expect this to become worse or to get worse in the next couple of months. What is the chaotic market situation? We have ports with historically low productivity. And I checked by half an hour ago or 45 minutes ago. On the West Coast, U.S., we have in 100 vessels waiting to enter a port, average waiting time most likely is 14, 15 days. We have rail ramps that are congested, rail terminals that are congested, trucker shortage in the U.S. and U.K. and partly no chassis available to do the [indiscernible] vessel shortfall transports. We focus. We stay focused on our customers. We stay focused on our customers' demand and the cargo mix. And the key to success remains sustained and expanding service intensity. So it's a service industry as we speak and access to capacity wherever possible and shifts on solutions with both modes of transports integrated in order to bypass congested ports. The Air Logistics, volume development totally different and maybe also a reflection of the congested and tight chaotic sea freight markets. The base of organic growth and market share gains is still high, but it's slightly moderated from Q2 to Q3 from 46% growth to 29% growth organically. We have a strong development in all segments, especially pharma, aerospace, general cargo, e-commerce and also perishables. We see this trend also unbroken and do not expect a major change even beyond the next 3, 4 months. And we still have no significant additional capacity in the long-haul tax belly capacity. There are flights, intercontinental floods, but they are homeopathic, so to say, with regards to the demand for belly capacity. So we produce with charters and block space agreement we have mentioned before in our previous calls, and that is expanding. That development is expanding. Please follow me on Slide 8, some details on the Sea Logistics KPI. We have seen a strong yield development, especially in the fourth -- in the third quarter, reflecting both the favorable portfolio mix, which is a very important factor in that yield per unit development. We do not have any commodities, no forestry products, recycling material and so on in our cargo mix at the moment in Sea Logistics or very low volumes. And we concentrate on small- and medium-sized enterprises and blue chip customers, which drive this favorable product mix. And we grow in the year or high-yielding segments with high service incentivity on purpose, as I said, in the mid-range double-digit on the transpac, for example, which is transpac and transatlantic from a geographic point of view, but which is also less container loads, LCL business, very strong, great performance, great projects, renewable energy is in the focus here, and we have stated some of the wins -- customer wins where we were able to do so in the recent press announcement. And this development is also unbroken and ongoing. The yield expansion more than compensate for the sequential unit cost increase, which is also shown here. And at the moment, we see no relaxation of the intense workload our organization as we have to produce a seamless supply chain, more or less menu leave as a lot of personal interference of our Sea Logistics and come later to this Air Logistics experts. This pressure or this development is also unbroken and expected to or to continue throughout the next couple of months. EBIT is -- for the first 9 months was at CHF 990 million, which is 226% above previous year. And Q3 saw a clear acceleration of that trend that we have already posted when we had all Q1 and Q2 calls. Conversion rate year-to-date 9 months 52.3% versus 28 -- yes, 29% previous year. And I think that's also a clear sign that we produce -- continue to produce with a lot of manual interference but also using our automation and platforms wisely in order to make the shipments flow happen on behalf of our customers.Next, details on Air Logistics. You will find on Slide 10 -- sorry, Slide 12. And Air Logistics KPIs. We have delivered a small degree of yield and EBIT normalization in air freight over the last couple of quarters in the figures that we show without Apex, you will see that we have a stable organic yield at CHF 94, CHF 95 per 100 kilo and a stable organic unit cost at around CHF 57 per 100 kilo. Apex, and I mentioned that in the beginning, is continuing to exceed expectations, both in yield and EBIT development, they are outperforming market and also in the volume growth. And the way they do business and the way we do business is really complementary, and it's super cool and pleasant collaboration amongst the 2 organizations. We have closed another small acquisition, a company called Salmosped, have a guess what they do. A Norwegian perishable freight forwarder, we closed at September 1, 2021, annual turnover last year, CHF 118 million. And last year, 2020, we had -- they handled 63,000 tonnes. So we welcome them. Also a very interesting business, and they are supplementing our existing KN perishable network, which has been built on more than 70 stations around the globe. And as you know, we are one of the leaders, if not the leader in perishable in worldwide. Conversion rate for the first 9 months at 41.2% versus 30% in 2020. Please follow me to Road Logistics next slide. Strong volume growth in European network, not only domestic but also cross-border and that volume growth has been accelerating. Typically, the third quarter is due to the summer vacation in Europe, a quarter that shows maybe less growth or less development. We haven't seen that effect at all this summer, especially not in the big markets of U.K., France or Germany, which is very encouraging. And we see a high demand and still growing demand for digital solutions like eTrucknow for your easy custom solution. So Road Logistics does very well, has gained market, a significant momentum in the second and third quarter. And if you have a look on Slide 12, you will see their KPIs in the quarter-over-quarter comparison saw strong volume growth and especially the networks that I mentioned before, first signs of driver capacity shortages, but they can be overcome with our platform solutions. We have the market visibility. We have the partnership agreements with etrucking organizations and we see a high demand for digital solutions for both for visibility reasons, but also access to capacity reasons and we deploy eTrucknow as a software as a service solution, which is more or less a plug and play for our customers and enjoys a lot of new customers or enjoyed a lot of new customers during the last quarter. EBIT for the first 9 months 2021 at CHF 75 million, 97% above prior year, and that is a trend that has been ongoing since the last 2 quarters. Great, great performance, strong organization and the cool spirit in Road Logistics. And then please have a look on Slide 14, Contract Logistics. A strong organic growth in net turnover, especially in the areas of pharma and e-commerce. We posted a 6% excluding foreign exchange effects growth in those 2 sectors, a solid Q3 performance and growth across all geographies. Then may be important for you is that trading in Asia in both Asia and North America is twice as much as in Europe. So we grow much faster outside of Europe, which maybe gives also a signal to market maturity and market developments outside of Europe. The cost management programs that have been initiated 6, 9 months ago, have been completely rolled out to all 700 sites and we start to see benefits from those programs as well. That's the routine optimization of the process flow within warehouses. And Contract Logistics is a key contributor to improve KN group ROCE, which will be explained in detail by Markus. But before I hand over, please allow me to give a short summary of our business performance for the first 9 months of the KN Group. So we posted another remarkable quarter. And that is true for the entire KN group. All countries, all business units, all areas and segments contributed to this successful quarter 3 that all the key figures, key KPIs that we use for steering the business have improved and even volume developments in sea freight happened on purpose because we concentrate on what matters most for our customers, as I stated before. We have still approximately 45% of our white collar staff in working mobile mode. So the pandemic, I've mentioned this a couple of times, the pandemic is ongoing, has gone away. And before it becomes endemic, we will see another quarters to come with which will be difficult to predict and anticipate. And at this stage, I do this cloud and clear I would really state a heartfelt thank you to all our KN colleagues worldwide for their outstanding customer service, their persistence and perseverance. They really drive the needle. And without their spirit, this KN spirit that makes this company unique. Our customers would have seen more problems, that's for sure. And now we come to the key financial figures, and I'm happy to hand over to our CFO, Markus.

[Markus Blanka-Graff]

Thank you, Detlef, and welcome from my side to all ladies and gentlemen, and all participants to this call. Indeed, it was an excellent and as Detlef mentioned, remarkable quarter. I'm starting on Page #16 on the income statement, and I want to highlight a few numbers on that page. Results again accelerated with incremental gross profit over the first 9 months of CHF 1.355 billion, of which CHF 678 million in the third quarter. Looking further down into the income statement on the EBIT line, there was for the first 9 months, CHF 1.43 billion more EBIT earnings before tax of which CHF 422 million in the third quarter. So a further acceleration of result improvement. And conversion rate, something we have mentioned frequently today. Conversion rate incremental in the third quarter was in excess of 60%. And I want to use the opportunity here to clarify also some news or some pieces of information that have been published today in the morning around the conversion rate of the group that I was quoted in some of the papers being between 20% and 25% conversion rate for the group in 2021. That is not correct. I was quoted or correctly, I should have been quoted a sustainable conversion rate is for the group between 20% and 25%. For the fourth quarter 2021 and obviously, also for the full year '21, this number is going to be in excess of 25%. Just to clarify and to use this opportunity because I think it has created a bit of irritation. Let me finish this page with 2 more technical notes. The first one on the foreign exchange column on the very right of the page. I think it has been a long time ago that I can talk about the foreign exchange impact that is neglectable. I think over the last couple of years, we have always seen a negative impact. So I think we have to keep that in mind, exchange rate impact currently on a very, very low level. Secondly, and you see that also in the footnote that we have added to the slide. We have closed the sale of our equity stake of 24.9% in Apex to Partners Group on August 12. And that explains the increase, which you certainly have noticed on the noncontrolling interest line in the third quarter, the so-called NCI, noncontrolling interest to approximately CHF 20 million on a quarterly basis. Given the performance of Apex at the current stage and for your information, I would expect that number to be relatively stable in the fourth quarter. The next page leads us, of course, into balance sheet and also on the balance sheet, we have some impact from the sale of the equity stake and the acquisition of Apex. Before that, Page #17 of the presentation, major deviations or changes in the numbers on, obviously, goodwill, other intangible assets. We have added approximately CHF 1.1 billion goodwill between December 31 and September 30. At the same time, around CHF 160 million on intangible assets. On the right side of the balance sheet, you will see on the non-current liabilities, an increase of around CHF 1.3 billion of which a good part is what you can see down here, the recognition of redemption liabilities for the put option out of the transactions with Apex and Partners Group. Second topic, and let's go back to what I call the most important position on the balance sheet, which is the cash position. Cash position of around CHF 1.6 billion CHF 1.592 billion, exactly as you can see it here, leading me straight into Page 18 and the reconciliation and bridge of the cash and free cash flow generation. And most of our improvement in the cash flow comes out of operational cash flow. We have CHF 996 million more operational cash flow as we have mentioned before, and it's mainly fueled from operations. Where did we put it and then be very transparent here. Changes in working capital have absorbed around CHF 500 million of that additional operational cash flow. Partially, it was, I call it burned in the working capital, but both from organic development as well as from the Apex acquisition. Why? Because on the organic side, as everybody can appreciate, we have high rates, sea freight and air freight rates, we have volume growth. And also we have with Apex, a different business model in terms of greater reliance on charters that usually do not enjoy the same payment terms as we would have for regular air freight capacity. Going back to the overall bridge. Cash flow from investing activities. This is just from an explanatory note. The CHF 1 billion flow that you see here is the majority, the outflow from the acquisition of Apex. At the same time, you see 3 lines further down on the so-called Others, cash flow from financing activities. You see an inflow of more than CHF 290 million, which is the net amount of what the inflow came -- the sale of the equity stake to Partners Group. Again, more on the explanatory side, you will find a full detail explanation on our condensed statements for the first 9 months in the notes, 9 and 10. Right side of the slide is free cash flow trajectory, you see here the CHF 999 million that we have in year-to-date September. And I am very confident that the trajectory for the rest of the year, so fourth quarter will be very similar to the ones over the last couple of years, as you can see here on the slide. We course -- we have seen what I would call the maximal expansion in the working capital. Page #19, the working capital, as mentioned, organically impacted from higher rates and volume growth and from the business model of Apex. We have, and just for reference purposes, the numbers for net working capital in the second quarter was CHF 1.350 billion. So today, we have 1 on the 30th of September, not today. On the 30th of September, we have recorded CHF 1.7 billion. So we have added another CHF 350 million over the third quarter to net working capital, for the reasons that I have mentioned before. DSO, DPOs remained relatively stable compared to the second quarter. And if you some flavor what Apex in the same categories of KPIs would deliver, DSOs for Apex are between 40 and 50 days. DPO are between 10 and 15. That is what I mentioned before. Different business dynamics. The numbers back to the graphs and next page, #20, return on capital employed. And I would like to start with an apology for misleading you on the last quarter conference call that we had because quarter 2 was certainly a quarter at the top end of expectations. Obviously, Q3 was even better than that, but this is how difficult, I think, it is under the current market conditions to actually make a prediction that would hold true. However, with the performance that we have now in the third quarter. And I try it again, it's the quarter at the top end of our expectations. It really shows again the potential of the group's operational and financial strength. But as Detlef said before, the most interesting question for sure, remains what are the current and future perspectives of the market? And with that question, I do hand back to Detlef.

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

Thank you, Markus. Before I answer this question, let me talk about our internal situation at the moment. We have put a claim into the organization as of second quarter last year, which was -- which is still staying on course. And staying on course meant we deployed our strategy. We accelerate where we can, and we stay on course with all our activities, especially customer-facing technology oriented. And our strategy has been clearly confirmed and the implementation continues to accelerate. What are the areas we are focusing on? We are focusing on industry solutions and within the industry solutions on key customers and their transformational needs. We focus on technology, digital platforms and eTouch to drive both customer-facing efficiencies as well as internal efficiencies. And our colleagues and experts because it's a people's industry, it's the service industry, and these are the 3 focus areas. They are part of our strategy, which we have presented in more detail and we never gave up implementing driving this forward. And I think we start to harvest from this situation or from this approach. The question -- the main question is the market and how does the market develop further? We have mentioned that on different occasions. At the moment, we see a continuation of the private consumption and the demand for goods, which remains very strong. This is also what we have stated on Slide 21. And the current market situation and capacity constraints are also expected to persist longer or beyond Lunar New Year 2022. And I said this before, most likely or as from today's perspective, we do not see a major change during the next 6 to 12 months. And whatever is changing will not be a radical change, but a gradual hopefully, normalization. But for the time being, we expect bullwhip effect, I repeat myself, we expect an even worsening of the market situation and capacity. And that is unfortunately what we see at the moment, especially at the West Coast in the U.S. Our strategy approach, we are successfully meeting high-end service level requirements of our customers, and we focus on those. So we are extremely selective with our growth and where do we grow? And I mentioned transpac before, LCL business, less container load business and so on. And we continue providing solutions for different industries, pharma and e-commerce and focusing on deploying our technology because this was clearly a pandemic effect that the buy-in and the onboarding on our technology solutions, our customer platforms, eTrucknow, Sea Explorer, myKN has been exceptionally high, and this trend is ongoing and unbroken. With this statement, I thank you for the attention so far. I'm sure we have some questions in the pipeline. And for this, I hand over to our facilitator, Alice.

[Operator]

[Operator Instructions] The first question comes from the line of Robert Joynson with Exane BNP Paribas.

[Robert John Joynson, Senior Transport Analyst]

Three questions from me, please. First of all, on ocean freight volumes, they were down by 9% in Q3, excluding Apex as you mentioned. When you talk about low-yielding cargo not running in the network at present. Is that primarily because it's just an economic to transport low-yielding cargo with rates as high as they are? Or is it more because you can only obtain a finite amount of capacity from the container shipping lines, and therefore, you understandably allocate that capacity to the high-yielding cargo? So that's the first question. Second question on the gross profit per TEU. It's now obviously more than double the level seen prior to the pandemic. Could you maybe just comment on the extent to which the markup element has risen in recent quarters as a period value-added element? And then the final question on supply chain disruptions. We all know that the U.S. ports have seen severe disruption for several months now, and you just said that you think that will get worse. But could you maybe provide us with an update on what you're seeing at the main European ports? Recent news flow suggests congestion has worsened quite significantly over the past month or two. Is that consistent with what you're seeing?

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

Absolutely. Thanks for your questions. Let me start with the latter question. Ports are congested, I should say, around the -- but the severest congestion is at the U.S. West Coast right now. While East Coast ports are doing marketing with shipping lines to reroute transports or vessels because they still have capacity. We still like a 47-hour 7 days a week service in some of those ports [indiscernible] statements, it's not happening. And we have the high season now in the U.S. with Thanksgiving coming up soon and Christmas season and so on. So it is not only -- not only a U.S. topic, but it's very hot, so to say, in the U.S. At the moment, we have around 740 vessels somewhere waiting in front of ports around the globe, which is like 12%, 13% of the global investment capacity. So this is a topic with this is also -- which is also relevant for European ports and especially those ports that are not automated or only automated to a very low degree. And that would be my answer to your third question. Low-yielding cargo in Sea Logistics networks, yes, I fully agree. It's both. It's uneconomic for the shipper unless you have increased your prices for forestry products or recycling material already, and they -- those prices can bear the high spot rates. This is a cargo typically running on a spot rate basis. And it's a capacity big because not all those goods would be shipped and would be waiting in some of the export ports. And therefore, we are more selective in accepting those cargo -- this cargo. And GP per TEU, I'm not aware of any markup. We have -- if you see our increase in GP per TEU, it's mediocre compared to the spot rate increases by the carriers, and they are a reflection of extra works in order to handle those goods. So it's not -- I'm not aware of any markup that you've alluded to.

[Robert John Joynson, Senior Transport Analyst]

Can I maybe just ask 1 quick follow-up question. Just going back to the first point on the ocean freight volumes. Are you starting to see any signs that the container shipping minds are skewing capacity towards their own controlled volumes as opposed to the forwarders? Is that an issue?

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

This is something that's happening in the market for years back and forth, I don't see any significant trend or shift in trend. And also here, whoever controls the volume, more important is that you control the terminal or the infrastructure on port side, and that's the bottleneck. And then the inbound and outbound flows both on trucks as well as on railways, we have seen a huge disruption also there. So the -- so to say the market share of the carrier controlled versus forwarder control business has not shifted significantly over the last years.

[Operator]

The next question comes from the line of Sathish Sivakumar with Citigroup.

[Sathish Babu Sivakumar, VP & Analyst]

I also have 3 questions here. Firstly, production cut in China. Are you seeing any impact on export out of China and especially as you go into the Chinese New Year, what are your shippers are actually talking about how to offset some of the potential output drop there? Secondly, on the trucking shortage in the Europe and the U.S., how does it actually impacted your ability to buy capacity? Do you have any dedicated charter or a block space agreement similar to the air freight in the trucking market? And when do you expect things to normalize here i.e., is sea freight should see first normalization, then you see a trucking or which 1 should actually as a lead indicator? And then the third one, Obviously, given the surge in the freight rates, it looks like the NIM accounts or the big customers got some priority over SMEs? And what are you actually seeing within your client portfolios, SMEs big NIM accounts?

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

Right. Sathish, let me answer your question. The production shift in China I think it's ongoing for -- is it 5 years or so yes? Maybe we should reflect the last but one 5-year plan of China, which ended last year and then the new one, it was clearly stated that China will concentrate on high-value production, mainly for the domestic market and selectively for exports. And they want to bring imports and exports, GDP related to imports and exports in equilibrium, which would mean that they have to bridge a gap of 2.5% GDP, which is obviously, which reflects them both, less exports and more imports to state this. And we will -- we have seen this. It's not a new trend. Our development in other Asian markets like Vietnam, Indonesia, Myanmar, even partly India or Singapore, Malaysia, reflected that trend over the last years. And I think we are not seeing an ad hoc development here, but a gradual shift and the domestic Chinese market is so huge that this capacity that is freed up, so to say, will be serving the domestic Chinese market. No major change. Trucking shortage is both. We have a trucking or trucker shortage in many markets based on an industry that was never and primarily in the focus. And the container trucker shortage will remain. That's all. We have long-term agreements with our partners, even throughout the pandemic, by the way. And therefore, we don't experience that to a certain extent. But whatever spot causes additional problems. And that is maybe then also referring or leading to the answer to your third question because last decade, to say this, frankly, our customers have shifted from long- or mid-term contracts to short-term contracts and spot. It was normal 2, 3 years or 4 years ago that a logistics -- Head of Logistics of a production or trading company put 40,000 TEU to be shipped next month on the spot market and would have placed them within 48 hours. This is impossible. So we see more long-term contracts, but this is also true for SME customers. So those that are really suffering are those customers that ship goods that have a very low value per good article and that have a very low value per container and then have not provided for a volume or capacity with a long-term or mid-term contract, but try to place those on the spot market, which is, if you ask me, almost impossible. So that would be my answer, but it's not related to named accounts and those mechanisms. It's more what is your sourcing strategy and what is your capacity demand? And have you sourced long term for the capacity? Or are you trying to play the spot market, which obviously brought a lot of surprises to some customers.

[Sathish Babu Sivakumar, VP & Analyst]

Just a quick follow-up actually. So as I made a bit clear. Production cut, so I was also referring to the power cut in Chinese production facilities. So do you see any impact of that power cut?

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

Sathish, I'm not sure I understand the question. I'm not aware of any problems in Chinese production facilities. If that was the question. I'm not -- I think I stated everything regarding China. It's based on the second 5 years plan that has focused on renewable energy, sustainable production and high margin or high-value products as such, mainly serving the domestic market. And that's the trend that we have seen over the last years, and that is driving us in supply chains.

[Operator]

The next question comes from the line of Alex Irving with Bernstein Research.

[Alexander Irving, Analyst]

Three for me, please. First of all, on capital allocation. Your net debt isn't far off turning negative at this point. How would you prefer to use the surplus liquidity, looking M&A, increasing payout, anything else that comes to mind? And then kind of secondly, and related to the topic of M&A, you've mentioned before that you'd like to be doing some more deals. Any thoughts on the type of target that will be most appealing either size, verticals, niches? Is there anything you've learned from Apex deal that would kind of change your approach on M&A deals going forward? And then third and finally, can you please talk a bit about your medium-term plan as markets normalize? Do I have it right that you're hoping to achieve some higher yields in pre pandemic I may be focusing a bit more on the cargo mix? And if so, why is that the right strategy on the -- with eTouch also being rolled out, with eTouch not increase the operating leverage, so it makes sense to pursue for as much volume as possible? You could help me to understand that, please, as well.

[Markus Blanka-Graff]

All right, Alex. It's Markus. I'm going to take the first 2 questions on capital allocation and M&A deals. So capital allocation for me, the first and most focus is always create enough cash. So we need to focus on the cash generation of the business. This is the foremost and utmost importance. Later on, on capital allocation, where you know we don't -- we do not have written down fixed dividend policy. But you know from a historic pattern and also what we communicated over the quarterly calls that we have a certain payout ratio that we are targeting and that also the Supervisory Board usually makes the proposal to the AGM. So cash generation and to remain asset-light as much and as enthusiastic as possible, and uncertainty, Detlef and myself and every leader of the business units, we are very much focused on the asset-light model that we are maintaining at KN. And that for me is first. And of course, M&A plays a role in that. We have always said our M&A strategy is bolt-on acquisitions and I would even use Salmosped as a very small acquisition but very typical for the way how we develop. It's very specialized, very niche at that point in time. But it is extremely valuable know-how that we get with that kind of acquisition. And then we leverage the know-how, the expertise through our larger network. Of course, not every acquisition is of that rather smaller size acquisition. Some of them are larger size acquisitions. But from a type perspective, very similar. And that is one part of our M&A strategy. The other part is Asia. And I think we have been very vocal around it, and we have also been very successful with the Apex acquisition in our footprint development in Asia. And I think we can -- we can expect that we are continuing that part in Asia. Is it going to be another Apex? Most likely not. We are not in -- we are not buying 2x the same thing. But obviously, there is going to be other focus areas that is going to increase and solidify our footprint in Asia.

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

And let me answer then Detlef speaking your third question, Alex, cargo mix. Why would we not take all cargo that contributes a positive EBIT per unit if we can operate them in an efficient way? And that is the strategy of eTouch. eTouch is automation across the whole shipment flow. But it will create it too complex and high end, high-yielding cargo, but also to the commoditized cargo. If you reflect, we believe that a fully eTouch shipment will create a converter rate of 60% or 90% or even 100% incremental. And we will capture these volumes if there is enough space in the market and if the contribution of these shipments is positive. If you look only to the total figure or the average figure, not the total figure, sorry, the average figure, you will not -- you might see a reduction in yield per TEU or per tonne per 100 kilo or EBIT per tonne per 100 kilo or per TEU but the contribution is positive. It will create cash inflow and EBIT inflow, and that is what we will focus on. But as we have seen in the last months or as we have shown in the last months, it's a plug-in and plug out. We can steer it. We can control it, yes. And that's the current. It's a reflection of the current market situation where the goods cannot bear the transport costs at the moment and the capacity is geared more towards the higher yielding or more complex solutions.

[Operator]

The next question comes from the line of Muneeba Kayani with Bank of America Global Research.

[Muneeba Kayani, Director & Head of European Transport]

The first question is around -- you mentioned some of the ports will start working 24/7. They haven't yet. Do you think that once the Port of LA starts working 24/7, will it hub to ease the congestion and will it be meaningful? Then secondly, on the air freight side, now that the U.S. will be opening from November onwards and transatlantic passenger flying should increase. How do you see that impacting the global air freight market? And then if you could please comment on dividends, given the strong cash flows and how we should think about that for this year?

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

Thanks for your questions, Muneeba and let me answer them. So Ports of LA 24/7, yes, is highly needed and we are desperately waiting for it. And it will gradually influence the bottlenecks, but it's not the only story. And it's not the only bottleneck. But it would be highly needed. But that's what I mentioned before. It will be -- might create or might be a starting point for a gradual improvement. But it's not only the port. It's the inbound and outboard flows of the containers. It's the railway terminals, even in Chicago, and in Detroit, which we closed down for a week or so in order to sort the containers in the terminals. So it's more. It's a very complex approach. But with the 24/7 operations, it would signal that gradually this can improve. At the moment, we have some ports that are working 24 hours a day at the West Coast and some aren't. So that's maybe the big difference. Belly on the transatlantic, yes, first of all, I'm flying to the U.S. on early November again. So it's great to see that we see a bit of normalization. But the volume that we expect coming from belly on the transatlantic only will be in high demand, but will not be serving much of the market needs at the moment. So it's not a big change. It's not a big -- it will not have a big impact. And our expectation or the expectation of our colleagues in the Air Logistics community, especially that we will not see a belly capacity of sizable offering of a sizable offering kicking in before 2024. We need regular flights between the continents again, passenger flights, again. And if you remember, we had 50 flights alone from the West Coast U.S. per day to Europe. We see that coming back. It will take some time. By the way, the holiday season is over. So it will be more the relatives and business travelers that we will see in those flights that might be possible as of November 8 from Europe to the U.S. and vice versa. And dividends is the last question, I think I mentioned something before already on the question from Alex. I think I would believe a good reference point would be payout ratio over the last year. As you know, we never give guidance to that, but I think it's a good reference point to.

[Operator]

The next question comes from the line of Sam Bland with JPMorgan.

[Samuel James Bland, Research Analyst]

I've got sort of 2 questions, please, on the same topic. First one is if we look at the sea unit margins, I guess, they've been particularly strong across the group. Can we just kind of unpack that and talk a little bit about what's driving them to such high levels? In particular, how much of it is mix kind of away from lower-margin [indiscernible] commodity volume, whatever else versus sort of other impacts? And the second part of the question is, has there been any sort of time lag benefit between when you bought capacity and when you've sold it? So for example, where you're able to buy capacity 3, 6 months ago at lower rates and you can now sell it at spot market. Is that sort of time, time lag effect having much of a big impact on unit margins at all?

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

Let me start with the latter question. That is not our business model. We buy and sell, so to say, in your wording at the same time. We do not provide capacity and then wait for customers to come and make use of that capacity, clearly not. Whatever we do is in direct conjunction and interaction with the customer, always. The sea unit margin is a reflection of the market situation at the moment. Nothing else, yes? And it's reflected in higher operating costs, which we mentioned before. And maybe here, it takes some time before you see that on a unit basis to really kick in. But we have -- this is the main driver and nothing else.

[Operator]

The next question comes from the line of Michael Foeth with Vontobel.

[Michael Foeth, Head of Swiss Industrial Research]

Two questions from my side. Going back to the GP per unit margins, but not in sea and air. I was wondering what explains really the stability of the unit margins or the yield in air freight versus the sort of chaos we're seeing and see if you could help us understand that. And the second question is, in practice, how do you manage or how do you circumvent the congestion problem in sea freight for your customers? And how do you really manage to get the goods from A to B in a reasonable time with the current chaos going on in the ports?

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

Michael, let me answer your questions. First of all, what is driving the stability in Air Logistics? It's our own flight operation. Yes, we have our own production, our own flight operation that's driving the stability, if you want. And we have not the high demand that we saw in quarter 2, especially last year, where we had all the PPE, you know the personal protection equipment that needed to be shipped to Europe or somewhere in the world like overnight. And the heat is out of the market, although the market is still very hot. It's a market which sees a high demand. We can grow our volumes. We base our own flight operation as -- or this is based -- our solutions are based on the own flight operation, which gives a certain stability. The second question?

[Michael Foeth, Head of Swiss Industrial Research]

The first question was the gross profit per tonne in airfreight and why it is stable? I think that was my answer, just my answer. Okay, the second was the sea freight, how we..

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

How do we manage to get the containers through? A lot of manual interference. A lot of mutual organizations interference with port authorities with railway companies, with trucking companies, a lot of gas work. Unfortunately, I have to say when does the container relief the port or is able to enter a port or a terminal? And that is why we say it's a high demand for the expertise and the skills of our forwarding sea freight forwarding experts at the moment. So you can't automate this process flow at all.

[Michael Foeth, Head of Swiss Industrial Research]

But you still have -- sorry, as a follow-up, you still have a very high visibility on the global goods flow through your systems. Is that correct? Because we want to...

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

Has not changed, and we can anticipate even bottlenecks. But then you have to give you an example. If you see that -- at the moment, we are piling up or the vessels that are waiting to enter the West Coast ports in the U.S. are increasing. It was a record last night of more than 100 vessels waiting to enter the other West Coast port at one night, imagine, 100 vessels. And we can see this. We can anticipate this. And then we can give our customers different signals. We can ask them to unload their cargo in a port prior to the West Coast and then fly cargo so the sea-air combination, we can urge in combination with the carriers, reroute vessels, even, which we did partly during the Suez canal cut when they've ever given was sitting there wrongly anchored in the middle of the Suez canal. And those are the solutions we are trying to initiate and drive for our customers. And the rest is real in individual customized activities to make the container flow as stable is the wrong word as possible as much as possible. Can I just address to the -- we still have a number of people in the queue. Can I please ask you since we are a bit limited on time today that you would focus on 1 question each, please. Thank you.

[Operator]

The next question comes from the line of Marc Zeck with Stifel.

[Marc Zeck, Research Analyst]

Congratulations on the great results. Then just 1 question maybe on Apex. It seems that the volume development quarter-over-quarter towards the second quarter was very weak for Apex and cost per unit were pretty high. Could you elaborate a bit why this could you maybe also extend on what was the co-loading development in Apex?

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

So -- okay. So you're addressing the sequential development of Apex volume, right, Q2 to Q3, is that right?

[Marc Zeck, Research Analyst]

Yes.

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

Okay. Good. Yes. So talking about air freight, I think the growth rates in both had been still quite solid. But obviously, in Q2, Q3, we still have a bit of a misalignment of the first consolidation, which of the volume was in which of the quarters. So there is a bit of an effect that certain risk and then give you more details to that. But I can say that the growth -- the absolute growth in both quarters has been very similar. So it's more of a reporting topic rather than other business topic.

[Operator]

The next question comes from the line of Alexia Dogani with Barclays.

[Alexia Dogani, Research Analyst]

I just wanted to ask you what's your view in terms of kind of medium-term volume growth in relation to your comments around cargo mix and the low-yield goods? I mean do you think there is any reason to believe that this don't ever return because structurally, we go to a higher rate environment mid-term?

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

I would not concur with your statement. I think we will see more of the commodity cargo entering the market again because eventually, the customers of those goods are willing to pay higher rates. It will drive a certain price increase of those goods, not of the transport cost. But we will see this kicking in again. At the moment, as the market is so congested only urgent commoditized cargo will find its way into the network. But we are a company that still is pushing to grow volumes in all areas, all its business units and has clearly stated and that has not changed to outperform market growth rates. But at the moment, in the current Sea Logistics environment, we have put this target on hold for generating higher yields and higher EBIT per TEU, as mentioned before.

[Operator]

The next question comes from Sebastian Vogel with UBS.

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

I have just 1 question on Sea Logistics, it's with regard to the M&A impact there. If I'm calculating correctly, the gross profit margin on the incremental business, was quite pronounced. Is that a specific factor because of the consolidation? Or is that something which we could think of could go on there going forward? Or how should we put that into context?

[Markus Blanka-Graff]

Gross profit margin per incremental TEU is a reflection of the current market situation, which we described throughout the last hour.

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

Yes. But I mean the conversion rate is like 68% on the sort of incremental gross profit versus incremental EBIT? What about -- high number...

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

Current market situation, sorry, Sebastian. It's a reflection of the current market situation because we only onboard cargo where we have a high service demand where we are able to fulfill customer expectation. And that is exactly reflecting -- is reflected in the conversion rate.

[Operator]

Today's last question comes from the line of Carolina Dores with Morgan Stanley.

[Carolina Botacini das Dores, Equity Analyst]

Then 1 question for me. I guess, given that the supply bottlenecks are getting worse and not better, what concerns you in terms of pressure points or point on the cost side that could squeeze the margins and drive profits lower? I do understand the third quarter is a special situation, but I'm just wondering on the cost side, where -- what is your main concern for the next few quarters?

[Markus Blanka-Graff]

On the cost side, our main concern is that our eTouch solutions and automation can be fully deployed because -- this would mean that our human being or the personal interference is decreasing. So the more markets stabilize, and we are anticipating, as I said, a worsening, but we can anticipate it at the moment, maybe better than 3 months ago or 2 months ago, we can drive productivity through technology. We need our experts to interfere with customers and suppliers and to interact with them. So therefore, at the moment, I would say it's more driving our automation to become even more effective in the current market environment.

[Operator]

Thank you. This was today's last question.

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

Thank you, Alice, and thanks, ladies and gentlemen, for joining in for the 9 months analyst call of Kuehne + Nagel International AG and our performance throughout the last 3 quarters. And you saw that we have performed very strongly. But 2021 remains unpredictable and challenging, but we find ways and we find solutions for our customers. We remain committed to our proven strategy, staying on course, I mentioned before. And this strategy includes providing reliable, high-quality technology supported and data-driven services to our customers and a selection of where we want to grow as said mid-double-digit growth on the transpacific with a clear focus on those trade lanes, that really matter for our customers. It is all about our logistics experts. That is also reflecting some of the [indiscernible] that we had our technology platforms and our agility to adapt and find solutions to the market situation. We thank you for joining us. Have a nice year-end. And I'm sure we will talk again in early March next year to see how the year has closed -- the year 2021 has closed. Bye-bye from Kuehne + Nagel.

[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.