Kuehne und Nagel International AG

SIX:KNIN

Earnings Call Analysis

Solid Q3 Results Amid Cost Control and Volume Recovery

In Q3 2023, the company showed resilience with a net turnover of CHF 18.2 billion and a significant EBIT of CHF 1.6 billion, despite market challenges. Cost control measures intensified, resulting in unit costs dropping by 17% year-over-year, and there was a keen focus on yield management. All logistics divisions delivered strong results; Sea Logistics grew modestly, achieving CHF 875 million in EBIT, Air Logistics saw CHF 429 million despite a constrained market, Road Logistics nearly matched its all-time high with CHF 119 million, and Contract Logistics set a record EBIT of CHF 158 million. The gross profit margin outperformed the previous year, signaling early success in targeting higher-yielding business. While Q3 free cash flow of CHF 233 million represented a 73% conversion rate, an improvement to approximately 100% is expected, underscoring management's optimism for continued fiscal discipline and strategic advancements.

Strong Financial Results Amid Subdued Demand

Kuehne+Nagel presented its financial figures for the first nine months of 2023, reporting solid results despite a challenging backdrop. The performance, touted as possibly the strongest in history save for the pandemic years, was attributed to strenuous cost management and effective yield management. Even against subdued logistics demand and a tough comparison to 2022's figures, the group saw an impressive net turnover of CHF 18.2 billion, a gross profit of CHF 6.7 billion, and EBIT nearing CHF 1.6 billion.

Enhanced Yield Management Strategies

Yield management strategies played a starring role in bolstering Kuehne+Nagel's financial results. The company shed light on its success in reducing unit costs across Sea and Air Logistics, with these cost-saving measures being more evident with each succeeding quarter. Additionally, growth in volumes was reported in Sea Logistics for the first time since Q2 2021, showcasing a modest year-on-year expansion which narrowly outstripped the market decline. Their methodical approach was also revealed in their expectation management for Q4, wherein they anticipated a volume growth despite a strategic move to cut some lower yield activities.

Downturn in E-Commerce Volume

The earnings call touched upon e-commerce trends, indicating that despite a decrease in overall volume, Kuehne+Nagel did not lose its market share relative to its peers. Instead, the company remarked that the decline was more reflective of industry-wide volume shifts spurred by major players rather than a loss in their own market position.

Continued Cost Efficiency and Digitalization

Kuehne+Nagel is steering towards a cost-efficient operation model, moving jobs from high-cost to lower-cost countries and employing digitalization to decrease their full-time employee (FTE) count. This strategic decision aimed to reduce overall FTE costs and cater to a more sustainable financial roadmap. The call detailed a reduction in the number of employees in air and sea freight, aligning with the company's intensified focus on permanent staff rather than temporary labor, except in the contract and road logistics sectors where temp labor was more prominent.

Investment in SME Sales Force and Customer Care

The company is investing robustly in sales personnel, particularly in the SME sector, as it sees this as crucial to its North American expansion. Kuehne+Nagel has also been setting up customer care locations to enhance service and solidify its relationship with mid-sized customers, a strategy it believes will yield dividends in the future.

Stable Expectations for Q4 EBIT Amidst Growing Pressure

While the company anticipates more pressure on yields in Q4 due to the ongoing supply and demand imbalance, it expects the EBIT to remain on par with Q3's results. They confirmed that should yields diminish, they would counterbalance this with further cost control measures. Additionally, no material airfreight peak was expected for Q4, underpinning the consistent strategy of cost management in face of yield fluctuations.

Outlook on Dividends and Minority Interests

Kuehne+Nagel expressed that their dividend approach aligns with their performance, particularly highlighting the payout following 2022's success. They also noted a gradual increase in ownership of Apex, which might signify a higher cash outflow in future periods, presumably for 2023 dividends to be declared and paid out in 2024 in accordance with ownership shares. The call conveyed that the payout ratio for minorities would emulate that of 2023.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, welcome to the [ 9 Months ] 2023 Results Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions]. The conference will not be recorded for publication or broadcast.At this time, it's my pleasure to hand over to Mr. Stefan Paul, CEO of Kuehne+Nagel.

[Stefan Paul, executive]

Thank you very much, Sandra. Good afternoon, and welcome to the presentation of Kuehne+Nagel 9 Months 2023 financial results. I'm Group CEO, Stefan Paul, and I'm joined on the call today by our group CFO, Markus Blanka-Graff. Let's go into Page #2, 9 months results. The solid financial results for the first 9 months of 2023 reflect accelerated cost management and continued strong yield management amidst subdued demand for logistics services. They also reflect the extraordinary comparison basis of 2022 results. As was the case in the first half, EBIT for the first 9 months of 2023 would have been the strongest in history, excluding the pandemic years 2021 and 2022. Net turnover was CHF 18.2 billion, gross profit, CHF 6.7 billion and EBIT nearly CHF 1.6 billion. Our focus on cost control has intensified over the course of the year with visible sequential cost reduction in Q2 that we extended in Q3. This exemplifies the flexibility of our business model and long-standing experience of rightsizing our cost base to the market environment. Our strategic focus on yield management also supported our financial results in the first 9 months of the year with particularly strong gains in the first half. Let's move on Page #3, C Logistics. As always, from left to right, volume in TEUs, GP per TEU and EBIT per TEU in Swiss francs. Sea Logistics generated EBIT of CHF 875 million through September. The effect of cost measures became visible in Q2 and even more so in Q3 as unit costs declined by 17% year-over-year and by 13% versus Q2. In Q3, see Logistics also achieved its first quarter of growth since Q2 2021. Our year-on-year increase of 0.3% slightly outperformed the overall market decline of between 1% and 2% year-over-year. As expected, there was no peak season in Q3, but volumes did improve modestly once again on a sequential basis. For Q4, we anticipate volumes to be broadly similar to Q3, excluding the effect of discontinuing some lower yield volumes in line with our yield management strategy. These volumes represent about 130,000 TEU per year. Despite this, we expect volume to grow year-on-year in Q4. Market share gains have not come to the expense of yield or mix development. Year-to-date, SME volumes grew by 6% year-on-year versus minus 10% for commodity volumes. This brought our share of SME volumes to nearly 50% of total versus the mid-40s during the same period last year. In Q3 alone, SME volume growth was plus 1% year-over-year versus minus 1% for commodity volumes. The yield decline from Q2 to Q3 was most visible early in the quarter with some recovery and relative capability in the last 2 months of the quarter. Q4 will bring more sequential yield pressure in light of significant supply and demand imbalance. We will respond by continues to focus on cost measures. Page #4, Air Logistics. Again, from left to right, tons, GP per 100 and EBIT per CHF 100. Air Logistics delivered EBIT of CHF 429 million during the first 9 months of 2023. As with C Logistics, the pace of Air Logistics cost management efforts accelerated in Q3. Unit costs declined 23% year-over-year and by 14% versus Q2. Volumes declined by 9% year-on-year in Q3, broadly in line with the overall market. Volumes in Q3 were once again weighted down by double-digit declines in Transpac. Sequentially, volumes improved once again with a 2% uplift versus Q2. This extends the modest sequential volume recovery of H1. Mix trends in Q3 resembled in H1. Volume in the general cargo segment remained weak, but perishables demonstrated strong absolute and relative year-on-year growth in the low double digits. Volumes from the semicon sector, a strategic growth area continues to grow at multiples of prior year levels, again versus a low base. For Q4, we do not expect an airfreight peak season, typically a peak would entail a volume uplift from Q3 to Q4 in the range of high single-digit percentage. Our expectation for Q4 this year is for volume similar to that for Q3. The yield decline from Q2 to Q3 mirrors the C Logistics development. The weakest result was in July with modest recovery and stability in August and September. The sequential decline reflects an uptick of capacity, weaker yield development at Apex and some dilution from stronger perishable growth. Next is Page #5, Road Logistics. Road Logistics EBIT of CHF 119 million for the first 9 months of the year, nearly exceeded the all-time high achieved last year. Shipment volumes declined by 9% year-on-year in Q3 but slightly outperformed the overall market, which appeared to contract by more than 10%. Strong pricing and effective supplier cost management mitigated the volume pressure so that gross profit declined by only 5% in Q3, excluding currency headwinds. The Q3 conversion rate of 9% showed a year-on-year sequential decline. But it still marked the second best Q3 performance ever. Following last year's result due to a 3% cost reduction versus last year and 6% versus Q2. Sources of savings included fewer FTEs in high-cost countries as well as lower admin costs.Page #6, Contract Logistics. Contract Logistics delivered a record high EBIT result of CHF 158 million for the first 9 months or CHF 149 million, excluding a onetime gain booked in Q1. The EBIT of CHF 48 million in Q3 was lower than last year's result, which was the best ever quarterly result for the business unit. Gross profit grew by 2% year-over-year in Q3 or 5% excluding currency headwinds. We believe our market share expanded during the period, thanks to our strategy to focus on selected verticals and customers less affected by broader market fluctuations. New business wins are up by more than 20% year-on-year in the first 9 months, while our pipeline has expanded by more than 50%, which makes us confident about our prospects in the coming quarters. Now next, Page #7, an update on our road map 2026. We have much to report on the strategic road map progress we achieved in the third quarter. Let's start with the market opportunities. We expanded our capacity and offering the strategic health care vertical. We also commenced deliveries for the NEOM project announced in late August, an early and significant success in our efforts to grow in the renewable arena. Remember, this industry offers high growth opportunities with a limited competitive landscape. On the technology front, we have appointed a new digital transformational officer reporting directly to our CIO. He brings relevant experience to the group as our cloud migration program is in full swing. As a reminder, this project will yield multiple benefits, including faster, more consistent exchange of data. Equally important, it will provide a platform to more effectively leverage all of our data, including applications of artificial intelligence and to create new services for our customers. In terms of sustainability, we have also expanded our offering to include an emission reduction solution for road logistics customers.Let's move to Page #8. You see the picture of the wind blade. This is a picture of our renewable project showing local transportation activities towards the Harbor facility in Shanghai. I traveled to China 2 weeks ago and would like to share some of my key takeaways. On the agenda for this trip where visits with several customers in a number of verticals, including renewables, e-mobility, semiconductors, high-tech and e-commerce. These visits left me with an overall impression of China speed, agility and optimism and technological progress. Following the Covid pandemic, many in the West seem to have the perception that the growth we were used to seeing from China would come to an end. These visits showed me that the potential remains despite the global slowdown in GDP growth. We, as a company, must understand their evolving service requirements and to be ready to take advantage of this dynamic so that we can grow with them, both inside and outside of the country and in particular, to support our end customers in North America and the European marketplace. With this, I would like to hand over to Markus.

[Markus Blanka-Graff, executive]

Thank you, Stefan, and good afternoon, everyone. Thank you for your interest in Kuehne+Nagel and taking the time today for the 9-month result 2023. As Stefan has outlined in the -- as a quick summary, we witnessed an environment of demand for global logistics services that remain subdued. The sea freight peak season did not materialize in Q3 and confidence remains low in material airfreight peak demand emerging in the fourth quarter. Destocking effects may now be fading, but inflation challenges persist and geopolitical tensions are rising further. We have been managing through countless economic cycles and periods of unforeseen volatility, a credit to a high flexible asset-light business model, combined with our entrepreneur spirit. Hence, our current focus is on cost control that intensified during quarter 3 of 2023 and culminated in a much more visible reduction of unit cost. This reflects both a reduction of absolute costs with stable to increasing sequential volumes in sea and airfreight. Country logistics and road continue to further increase their profitability levels in such volatility market dynamics. That has a small summary and layout of how our P&L is coming along. Let's start with the income statement. And as expected, we can see negative developments on nearly every P&L line compared to last year, that was of exceptional at. What matters is the absolute performance with EBIT of CHF 455 million in the third quarter or CHF 1.6 billion in the first 9 months. A result, that could have been a full year result in any year before the pandemic. The gross profit margin continues to outperform 2022, confirming some early successes in our strategy to focus on higher yielding business. We see a solid conversion rate of 23.5%, also supported by diligent FTE resource management. The combined sea and air freight conversion rate was 39.2% in quarter 3. For reference, the full year 2019 result was 28%, excluding offs. Headwinds coming from currency increased with a negative impact of around 4%, which is around CHF 320 million at a gross profit level and around 3% or CHF 80 million on earnings before tax, so quite significant. There were no reported nonrecurring impacts in Q3, just for your reference. Moving on to working capital. One of the topics that has been on the agenda for the last couple of quarters, quickly contracting due to the reduction of receivables and contract assets compared to 1 or 2 years ago, together currently at around CHF 4.2 billion. Receivables have reduced as a function of lower rates, external charges and, of course, lower volumes. Looking forward, I anticipate stable net working capital in absolute terms for the next quarters to come. DSO, as you can see, have expanded against the beginning of the year and against the same time last year. GPO on the other hand, have increased also quite significantly so that the spread between the DSL entity deal has increased to 12.6%. Net working capital intensity is based on a quite narrow selection of working capital items in the cash flow statement.The net working capital intensity deteriorated slightly by the close of Q3 with a result of 3.3% versus 2.8% for Q2 and as a reference, 3% in the first quarter. The absolute level of CHF 795 million is slightly up about 7% versus CHF 740 million at the end of June. In September, DSO and DPO stood at 57.5 and 7.1 days, respectively, both having increased by roughly 2 days relative to the Gen numbers. In absolute terms, this points to a CHF 260 million reduction of receivables, more than being offset by CHF 314 million reduction of payables, driving a net CHF 54 million increase of working capital, as you can see in the schedule above. This leads me to Page #12 and to the cash and free cash flow generation. Q3 free cash flow of CHF 233 million represented a 73% cash conversion, always in relation of net income before minorities. While that has been better than the trough in free cash flow generation in Q2, which was, as we explained at that point in time, weighed by large cash bonus payments and dividend withholding tax impact. The Q3 result was below our long-term average of approximately 100% cash conversion rate and should not be considered indicative of what is to come. A reference made also to our first quarter free cash flow generation, which was at around 91%. Two factors contributed to the relatively weak result in the free cash flow generation, we had a later phasing of tax payments, which obviously now in an environment of positive interest rate is beneficial. And secondly, some working capital pressure that I have explained previously on the DSO progression. As a summary, we anticipate further improvement of the free cash flow conversion in the fourth quarter. And I can't see any reason why we shouldn't return to the 100% around 100% conversion rate when these effects that I mentioned will dissipate. With these comments, I'm already at the end of our presentation with some key takeaways following a solid Q3 2023 result with a continued and intensified cost control, signs of modest volume recovery in the sea freight arena, active yield and portfolio management that continues and a clear early success with our Roadmap 2026 initiatives. With that short presentation, I want to thank all of you already now and would open the line for Q&A. Sandra, please.

[Operator]

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

[Alexander Irving, analyst]

Two from me, please. I'll start with a bigger picture one. If the global inventory correction coming to an end, you steered towards some of the volumes in Q4 as in Q3 across sea and air. But what did current inventory levels imply the volume developments over the subsequent couple of quarters? My second one is on cost behavior when volumes recover. Is it right to think that we will see a further reduction in unit cost as that happens as e-Touch driven productivity impacts supportive reduction in unit costs at the high level of volumes? Or is there a reason why unit costs will either stabilize or grow from here?

[Markus Blanka-Graff, executive]

Can you have the first question? It was hard to hear from the line. You talked inventory development? Or what were you talking about? Sorry, about that.

[Alexander Irving, analyst]

Is the destocking done basically? Can you your Q4 guide just in volumes in Q3. But where inventory levels and should we expect volumes to recover?

[Markus Blanka-Graff, executive]

Got it. Well, I think what we currently witness is that at least the sea freight market that is probably 1% or 2% in the negative in Q3. We are taking market share and are slightly positive, I would call it, our exit certainly in September was a positive rate. We would say that inventory levels are not fully depleted yet. We are still seeing that inventory is being reduced, particularly in Europe and the U.S. Is that going to continue? The logical answer is, eventually, it will stop. But at the current stage, we should not expect a turning point. We should not expect a recovery that is broadly based on the restocking.

[Stefan Paul, executive]

I take the cost question. So, the cost development. Your question was do we foresee an increased cost per TEU or per 100 kilos if the volume bounces back. So, let me take it from a different angle, maybe looking at our road map 2026 and our digital ecosystem. We have now concluded on the 2 partners. One is assured. We have now moved everything into the MS 365 cloud, including -- and that is what I would like to emphasize here, including our customer service activities. So, customer service now is fully leveraging the new CRM system in the cloud supported by Azure. As stated already a couple of months ago, we are connecting now our operational systems with our CRM system in order to carve out cost and to be much more effective in the way how we deal with our customers and manage customer service. So that will bring us more on a long-term basis, a release in terms of our cost is concerned. That will help significantly when the volumes come back. And the second answer to it, we have now as well concluded on the second partner, which is AWS. We will move our operational stack into the cloud from a lift and shift perspective. And this is a mid- and long-term as well lever to ensure that we do not recover from a cost perspective and that we need to add resources as soon as the volume hopefully in 2024, already is bouncing back. So, it's a strategic shift in terms of how do we manage our cost base as well, independent from any volume development in the next years to come.

[Operator]

The next question comes from Robert Joynson from BNP Paribas.

[Robert Joynson, analyst]

Stefan and Markus. Two questions from me, please. So first of all, if we look at our sea and air specifically, SG&A costs came down by about CHF 60 million between Q2 and Q3. And that was pretty similar to the like-for-like sequential reductions of around CHF 60 million seen in Q1 and then CHF 40 million in Q2. So, just over CHF 50 million on average for the last 3 quarters. Should we expect a similar run rate going into Q4 and then maybe into Q1, Q2 of next year? Maybe some color around that would be helpful. And then the second question, if I look at the combined EBIT produced by sea freight and air freight, the peak was in Q4 of '21. It was CHF 1.06 billion. Since then, we've seen that number decline for 7 consecutive quarters now down to CHF 370 million or so in Q3. So, a reduction of around 65% from peak. Obviously, that number is driven by quite a few moving parts, but could you provide some color on when you think that combined sea and air freight EBIT will trough? Do you think the trough may have happened in Q3? Or could that number continue to slide in the coming quarters?

[Stefan Paul, executive]

I'll take the first one on the cost development and the outlook for Q4 and the next quarters to come. So that was not a onetime wonder in terms of how do we manage the cost and how we articulate internally the effectiveness on the cost measures and what you could expect from us or what we will definitely do is we will continue with our cost measures moving forward. It's not only from an operational perspective, we look as well into the admin cost buckets, and we have a clear plan how to execute and to reduce our costs quarter by quarter moving forward. So that is an ongoing effort, which will be accelerated during Q4.

[Markus Blanka-Graff, executive]

And on the second part and your observations are spot on as always. So, I think the answer is twofold. There is the GP per unit, obviously, that we need to manage. And the way how GP per unit is managed, as you well know, there's a lot of -- or a lot of influence comes from the market conditions, from the capacity, from the carriers, from -- some part, we can obviously manage, which is our product mix, so which is the mix of our customers. I think we have been quite vocal around it that we want to actively manage into a higher-yielding business going forward. So, this we can do. At the same time, we manage our costs, as Stefan just alluded to quite openly that we can also manage. So, what we really do is we look at EBIT per unit. And I think from that perspective, when we continue to actively manage our costs and at the same time, be as efficient as possible on the management of the market as well as how we manage our customer portfolio. I would like to believe that we are probably at a point where we should not see any further sliding down. There might be a point where we continue to be at the level that we currently are. But I think I see more upside potential until 2026 than downside potential.

[Operator]

The next question comes from Sam Bland from JPMorgan.

[Samuel Bland, analyst]

Two, please. The first one is on air costs. Those were very good, surprisingly good in Q3. Can you just talk about whether there's anything in there that's nonrecurring in nature? I've had a few questions on whether there’s -- provision reversals involved. Is there anything that might not repeat the strength in Q4? Or is it quite recurring that strong cost performance? And the second question is, with reference to the 2026 targets which you laid out earlier in the year, could you just talk about how things are progressing versus where you might like to have been when you set those targets at the time and whether you can maybe split that into – within the market has been better or worse than you might have hoped for and whether company-specific objectives have gone better or worse than you might have hoped for when you initially set those 2026 targets.

[Markus Blanka-Graff, executive]

Let me take the first question because I know that there's communication out in the market that is based on some numbers in the cash flow statement that, I think, would like to have identified like a CHF 20 million bucket, which was from external labeled as provision reversals, that's not the case. There is indeed nothing that is extraordinary nature or one-off nature within the Q3 on the airfreight cost development. The movements that allegedly have been identified as such are normal movements, and we took a CHF 20 million magnitude in relation to the group accounts, I think, is already obvious. So that is normal movement in provisions and at the same time also in the payable side and on the receivables side, much, much bigger movements being (indiscernible). So I think that is -- it's a bit of a balloon. The reality is we have clear cost control in air freight, nothing extraordinary.

[Stefan Paul, executive]

So, I take the second one in terms of the 2026 target and our road map, which we have communicated the first time, March 1, in London. I think everything what we can influence, if you look at the pool cornerstones, we are rather happy with. And nothing has changed. Let's take Kuehne X for example, first, CX, customer experience and employee experience. We have just concluded on the first Net Promoter Score survey. Results are not yet in, but as promised, we'll communicate later this year or beginning of next. We had a very high engagement ratio on the AX with our people, more than 80%, quite high on both sides on the right and blue color which is promising. And if you look at the market potential, SME growth, pretty happy with what we have seen in particular in sea freight. Cost consciousness and the cost effectiveness, I think we have seen already in the second and the third quarter, and we talked about that quite good development. Renewable energy, semiconductor wins, especially in air freight, now with e-commerce coming in from Asia, we see as well a certain share coming in for Kuehne+Nagel. And then I have to say we are absolutely in plan when it comes to the digital ecosystem. Just said and repeating myself, signed now the 2 contracts, MS 365. The customer side is already in execution, and now we do the lift and shift of our operational stack. And living ESP, we have communicated as well. So, everything what we can influence as Kuehne+Nagel, we are still on track. I think what we have seen now is contrary to our view in the first quarter or when we crafted the strategy, the market has changed significantly. And of course, we need a certain bounce back of volumes in 2024, 2025 to come. And that is the uncertainty when it comes to our target expectation. But I can reiterate everything what we can influence, the product mix, the go-to-market, the cost measures, how we execute, we are still very confident that what we have promised we will be able to deliver.

[Operator]

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

[Muneeba Kayani, analyst]

Stefan, I just wanted to go back to Air unit GP. You talked about a couple of factors that impacted it in 3Q, including the sequential decline, including an uptick of capacity, weaker yield development at Apex and dilution from perishables, how had these trends -- or what's your expectation for these trends developing in 4Q? And so, what's your expectation for air unit GP in the fourth quarter? And then you talked about Neomand we've clearly heard a lot about that from your other competitor. Do you see more opportunity in Saudi Arabia and more projects like this?

[Stefan Paul, executive]

To the first question, what is my expectation or our expectation on Q4 unchanged, similar mix and GP development. I was talking about missing peak season. The only peak season, mini peak season, we see is coming out of South China, Shenzhen and Hong Kong due to the e-commerce boost of 2 or 3 customers requiring a lot of capacity. So here, we might see a little bit of higher yields. But overall, Q4 will unchanged or similar to Q3 GP. Neom, just to ensure, we have decided to focus pretty much on the suppliers, the partners of Neomand Saudi. So, we focus on the supplier side of the NEOM project, and we deal with suppliers in the renewable energy, mainly currently out of China. So, the freight is paid outside of Saudi. We see a lot of demand coming in from large turnkey projects, especially in project logistics, which we execute via our sea freight and project organization. There is more to come over the next couple of years, but I need to reiterate, we basically focus on the supplier side and not on the NEO organization as such.

[Operator]

The next question comes from Andy Chu from Deutsche Bank.

[Andy Chu, analyst]

At Stefan, Markus. Just following up on me to be crystal clear. Obviously, you're focusing on the partner side, but were you interested at one stage with the JV on NEOM? And then just on the GP per TEU, you've given some help on the air side, as maybe just give us some help on what you expect for DP30U for Q4.

[Stefan Paul, executive]

Andy, I'll take the first one. Yes, we have been in discussion with the NEOM organization a couple of months ago, but we then finally have decided not to pursue further because this is outside of our business model, the 3PL asset-light model. And instead of talking further through this investment, we have decided clearly to focus, as I said before, on the supplier side rather than on the ground handling.

[Markus Blanka-Graff, executive]

And from a GP per TEU, I understand, I think the answer is very similar to what we have seen in the on the air freight side. I think the Q4 from where we sit today is going to be rather a continuation of a sideway development compared to Q3. I would not expect any significant movements in the GP per TEU in the fourth quarter.

[Operator]

The next question comes from Michael Foeth from Vontobel.

[Michael Foeth, analyst]

Very interesting comment on your China visit there. I was wondering if you could elaborate a bit more. Do you actually currently see growth in China above the group average? And can you relate maybe that to the performance of Apex as well? That would be the first question. And the second one is coming back on those yields, obviously, very difficult to judge where they go. But are you still comfortable with your longer-term level of 500 to and 500 and 100 further out from here?

[Stefan Paul, executive]

Michael, yes, I will touch the first question, China visit. So, I think what I have seen there is a particular the old economy, so to say, in the new one. And I was really impressed about some of the brands and the speed, how they want to basically execute the products within China but as well outside. And I mentioned a couple of industries is TE-mobility, in particular, is everything around mobile network, high tech. It's the entire renewable energy, whether it's solar, whether it's onshore, offshore wind, it's massive in terms of the technology development I have seen there. And in particular, I was impressed with the e-commerce approach. And there is so much volume to be expected to uplift in Q4 and the next quarters to come. From a couple of new Chinese players, the Chinese giants who are really, really changing the e-commerce market outside of China, in particular as well, when it comes to European end consumers and American end consumers, particular certain age levels basically buying more and more from these new customers. And that will definitely bring new opportunities when it comes to volume development and in particular, for Apex because the demand is growing as we speak. So, we will leverage that pretty much so in the next quarters to come.

[Markus Blanka-Graff, executive]

Yes, Michael. And on the yield, I think we gave indications that are obviously quite broad numbers going forward. I think for the -- let me start on the sea freight side. I think the important number is the EBIT per TEU. So, I cannot exclude and we currently are in a situation where our GP per unit is below 500. And I think that could be even for an extended period of time. However, as you have seen already in the third quarter, and it's going to continue like that in the fourth quarter and next year, our cost base is very well managed towards that. So, the 200 EBIT per TEU we're delivering currently, and we intend to continue to do that. So, I think in 2026 is still some way out. I think we manage actively the EBIT per TEU. We might be below the CHF 500 million, but then we are also below the CHF 300 million cost base. I think that is the message. There's no linear way to get there. I think there's going to be some fluctuations in both of the numbers. On an airfreight side, I think the CHF 100 per 100 kilo, I think that is something that we are still very much aiming towards to but a similar comment around there. It's the EBIT per 100 kilo that we manage. And of course, we are committed to our product mix. That includes, obviously, perishables and some other than dry cargoes and some niches to it. So, in that environment, I think that still holds up as our strategy going forward.

[Operator]

The next question comes from Sebastian Vogel from UBS.

[Sebastian Vogel, analyst]

I have 2 questions. The first one is coming back to the cost-cutting side of things. If we look into and see that, how much easy to pick fruit you see here have already picked and how much is still to go? And the other question is on the capacity in flux on the logistics side, how long do you think you will continue to see an influx there that might have an impact on rates and therefore, as an indirect impact on your business.

[Stefan Paul, executive]

Cost cutting is never but easy question. But at the end of the day, it's twofold. And I said it at the beginning. It's twofold. It's the operational adjustment on our cost position, and it's the admin adjustment of our cost position. And it's the structural adjustment in terms of leveraging new technology. And basically, we see that there is still room to maneuver in terms of how do we operate the business? How do we manage the cost per file in these 3 aspects, operational, admin and structural cost changes by leveraging the new ecosystem? So, 2 is short-sided for the next couple of quarters. And the third one is a long-term gain for the next 3 or 4 years to come in order to manage the way how we execute our business differently by leveraging the latest technology, including artificial intelligence and machine learning.

[Markus Blanka-Graff, executive]

And I think on the capacity side -- sea freight, that was your question, Sebastian, I think we have long-term -- we all know the order books from the carriers, but we are not a carrier. But I can only observe as much as you can that the long-term picture is certainly an overcapacity until 2025. But remember, our market share is quite low. And we focus on the right mix rather than just trying to grow exponentially. It's the right mix, and we will continue to grow in the right area. And with our market share, that should be possible. So, overcapacity will be our environment we work in for an extended period of time. However, when we focus on the right things, the right mix and the right areas to grow, we should be able to do that.

[Sebastian Vogel, analyst]

And if I may come back to the first question, just more follow-up. On the first 2, as you mentioned, the operational adjustment, the admin cost there. How advanced do you think in terms of whatever you on the scale of 1 to 10, how much you have already realized there for AMC?

[Stefan Paul, executive]

We said you have seen the run rate of CHF 60 million, respectively CHF 50 million and that is going to continue for the next quarters. I wouldn't say it's 1% to 10%. Basically, we are in the middle of execution and there is room to maneuver.

[Operator]

The next question comes from Gian-Marco Werro from ZKB.

[Gian Werro, analyst]

On the 2 questions remaining from my side. So first one is on the personnel cost reduction, which is really impressive in the third quarter. Can you give us a bit more details here on which business units and also in the business units, which job profiles where you really could reduce those FTEs and also the costs? And then the second question is more on your volumes in air freight. If I compare it with the market development, this would imply some market share losses here. However, I can imagine this goes hand in hand, of course, also with your focus strategy. So, can you tell us how much is really based on your focusing strategy and how much was really a market share loss that you did not plan for?

[Stefan Paul, executive]

As I have tackled the cost questions already, I will continue with this. So, from a job profile perspective, we have the operator level. So, people who are executing the freight from order to cash. This is one part of our cost measures. And the second part is, and I mentioned it a couple of times already, it's the admin. And admin means HR operations, finance operations, sales support, quality measurement. Everything what you use basically in order outside of running the business to support the business. And these 2 areas are the main focus for our cost measurements currently and in the next quarters to come.

[Markus Blanka-Graff, executive]

Then Gian-Marco, we have on the market share loss in airfreight. I'm not 100% sure if I can follow you there. I think we have the 2 businesses, if you like. We have seen some developments on the e-commerce part. We haven't lost any market share. I think certainly not compared to our peer group. I think there's good development on e-commerce exports. They are boosting currently, the industry airfreight statistics. So, there's a lot of that coming out of 2 major players. And that's more an effect of a larger volume altogether out of these 2 players rather than us losing our market share. So, it's a bit of a technical explanation to what you say.

[Operator]

The next question comes from Sathish Sivakumar from Citi.

[Sathish Sivakumar, analyst]

I've got 2 questions here. Firstly, on the volume development within Transpac, obviously, you said you gained market share. Any color on quarter-on-quarter trends over there? How much volume growth did you have in that particular trade line? And just related to that, if I look at your Americas headcount versus last quarter, it's up around 5.6%. Obviously, you are investing in that region. Do you think that you’re done investing in that particular market? Or do you still have more to go? And then the second one on the cost per FTE, even the outcomes are actually going up, your unit cost per FTEs actually come down. And it looks like that's mainly driven by some of the temporary staff unwind, do you see more room to grow there? And what is actually driving? Is it seasonality? Or are you actually like taken out some of the overtime related cost out of the system?

[Markus Blanka-Graff, executive]

Satish, it's Markus. I think on the first question on the specific development in transpac development on that particular trade line. I would have to ask that you contact Chris on that because honestly, on an individual trade line perspective, we are not ready to give public information here. Cost per FTE, and I think depending on which statistics you looked at, obviously, what I can say is following up on Stefan's comments, number of FTE in air and sea freight have reduced. So that clearly says the number of employees has reduced as well.Secondly, I think, yes, there is a clear move from high-cost countries into lower-cost countries through global services, shared services and alike. So that will lighten the cost per FTE as well. Temp labor is more a topic in the contract logistics and to a certain extent in the road logistics area to a very small extent also in airfreight perishable, but I wouldn't believe that the statistics would have a big impact out of that section. It's really more temp labor in Contract Logistics and particular road. So, I think it's more about the initiatives and how on a specific basis, you have to look at the number of the employees that are working for us.

[Sathish Sivakumar, analyst]

So, the current cost per FTE, would that be more normalized levels that we should be seeing going forward?

[Markus Blanka-Graff, executive]

Which cost of FTE? I have to be picky here, which cost are we looking at?

[Sathish Sivakumar, analyst]

So just taking our total personnel cost and dividing it by a full time equivalent of employees, around 74,000.

[Markus Blanka-Graff, executive]

But that is too many moving parts that I've just explained. There's a lot of mix into temp labors in contract logistics, reduction of white collar, much more expensive people in the air and sea freight arena, shift from expensive to less expensive. So, in that context, I think it becomes very, very difficult. At the same time, we have digitalization that obviously reduces equally a number of FTEs. So, I think at a total group level, that KPI is not very helpful.

[Sathish Sivakumar, analyst]

And just on my first question, do you need to see that are you still investing in North America? Or are we the required sales force there?

[Stefan Paul, executive]

Stefan here. So, we have shared how many FTEs we have invested into our SME sales force, and this is going to continue. And that includes, of course, the very important North American marketplace. So, we invest in customer care locations and sea freight, in particular, SME salespeople globally including the North American market. So, we are not yet there.

[Operator]

The next question comes from Marc Zeck from Stifel.

[Marc Zeck, analyst]

One question from my side, really just a clarification. I believe in the beginning, you said that Q4 yields will be -- you say yields will be under some more pressure. But then in the Q&A, you referred to air yields and yields and said that this will be broadly similar to Q3 and Q4. Could you just clarify what's then the case?

[Stefan Paul, executive]

Good question. We were referring to EBIT. So, our expectation on bottom line is similar to Q3. If the yields if the gross profit per unit is going down, we react with cost measures, and that is what we said. So, we were referring more to the total EBIT rather than on the individual yield position.

[Marc Zeck, analyst]

And then basically, I guess you said that also in the beginning that volumes are broadly flat across MSC and the fourth quarter was the third quarter. And seasonally, the road and contract logistics see a slight uptick in the fourth quarter. I've been saying that do you expect Q4 EBIT to be roughly in line with Q3? Or are there any other movements that are not miss.

[Operator]

The next question comes from Nikolas Mauder from Kepler Cheuvreux.

[Nikolas Mauder, analyst]

Two from my side, please. The first one, yesterday, we heard a lot about a competitor going after larger clients as opposed to SME clients in the past, while you earlier this year published a strategy focusing more on higher profitability business, including a lot of SME there. From your perspective, do you think this is a reaction to your renewed SME focus? Or is this driven by other motors there? The second one. We've also seen a large dividend paid to minorities in the third quarter, probably reflecting the very successful 2022 at Apex. What should we expect here going forward, considering that your share in Apex has also increased over time. Should we think about like 100% of minority attributable profits being paid out going forward? Or is that the wrong assumption?

[Stefan Paul, executive]

I'll take the first one. I will not comment on any competitor or strategy or approach or road maps from competitors whether this is a reaction on us or not. So, we focus pretty much on our customers and our strategy and our road map. And we have deliberately taken the way that or the choice that we go for a very balanced view and more SMEs than in the past, the 50-50, which we have reached already. And we and I'm reiterating a further developing both key accounts and SME. And in order to grow the SME portfolio, we have done 2 things. First of all, we have hired more salespeople hunting sales force. We have changed as well the incentive program for that. And we are moving closer and closer to our midsized customers by opening up these customer care locations. So that's the answer on what we do, but please allow me not to comment on anything from the marketplace.

[Markus Blanka-Graff, executive]

Nikolas, good to talk to you again. On the dividends, on the minorities, I think very clearly, yes, the high cash outflow is related to the extraordinary good performance from 2022 to cash outflow in 2023. And yes, indeed, we step by step increase our ownership in APAC. And obviously, dividends are going to be declared and paid for 2023 in 2024 according to the ownership shares.

[Nikolas Mauder, analyst]

And a payout ratio similar to what we've seen in 2023?

[Markus Blanka-Graff, executive]

In relation to the minorities, yes. Thank you very much. I think that was the last question that we had. And we appreciate your time and interest in Kuehne+Nagel and we would close the call. All the best to all of you, and have a nice day from Stefan and myself.Handing back to Sandra.

[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.