Kuehne und Nagel International AG

SIX:KNIN

Earnings Call Analysis

Kuehne + Nagel sees improved EBIT amid economic challenges.

In Q3 2024, Kuehne + Nagel reported a group EBIT of CHF 455 million, reflecting a sequential improvement and a yearly increase driven by volume growth and effective cost management. Sea Logistics EBIT climbed to CHF 256 million, a 24% sequential rise, while Air Logistics EBIT was stable at CHF 120 million. Looking ahead, the company projects modest single-digit growth in Q4, comparing favorably to previous estimates. Despite inflationary pressures, ongoing strategic initiatives are expected to enhance service levels and productivity, maintaining a conversion rate between 35% and 45% and positioning the firm for growth in a challenging market.

Kuehne + Nagel's Return to Profit Growth

In Q3 2024, Kuehne + Nagel reported a remarkable return to profit growth, achieving a Group EBIT of CHF 455 million, which marks the first year-over-year quarterly increase in two years. This resurgence was primarily driven by volume growth, effective yield management, and market share gains in contract logistics. The company's efforts in cost control led to a sequential reduction in unit costs within Sea Logistics, while Air Logistics saw stable unit costs.

Highlights from Sea and Air Logistics

For Sea Logistics, EBIT grew sequentially to CHF 256 million in Q3, up 24% from the previous quarter, bolstered by a gross profit increase of 7%. The strategic faux pas of deselecting low-yield business resulted in underlying volume growth of just under 2%, below the market's estimated growth of 3-5%. Meanwhile, Air Logistics reported steady performance with EBIT of CHF 120 million, relatively flat compared to the prior quarter.

Costs and Future Expectations

Recurring operating expenses in Sea Logistics declined by 5% quarter-on-quarter, leading to a unit cost reduction of 7%. However, rising costs are anticipated in Q4 as Kuehne + Nagel invests in service quality. The company aims to maintain a conversion rate of 40% and targets CHF 200 EBIT per TEU for Sea Logistics and approximately CHF 35 EBIT per 100 kilograms in Air Logistics.

Challenges and Market Conditions

Despite these achievements, Kuehne + Nagel faces challenges stemming from geopolitical uncertainties and port strikes. These factors have led to front loading of cargo demand and an overall muted peak season for Q4, resulting in modest low-single-digit growth forecasts moving forward. Management has underscored their capacity to navigate these challenges, signaling confidence in leveraging their streamlined operations to tackle emerging market demands.

Strategic Initiatives and Future Growth

Recent strategic initiatives include a significant improvement in customer service and a successful migration of the core transport management system to the cloud. Kuehne + Nagel remains focused on expanding its market share within healthcare and e-commerce over the coming quarters. The recent acquisition of City Zone Express is also anticipated to strengthen cross-border road services in Southeast Asia.

Cash Flow Performance and Dividend Outlook

The company reported stronger free cash flow generation in Q3, improving to about CHF 300 million with an 85% conversion rate to net income. Although the dividend outlook remains uncertain, there is caution regarding the potential reduction aligned with performance and payout ratios. The Board's decision, expected during the upcoming Annual General Meeting, will take into account the broader financial context.

Summation and Forward Guidance

In conclusion, Kuehne + Nagel is positioned for profitable volume growth in a low-growth market environment. The anticipated easing of inflationary pressures in cargo rates, alongside strategic investments, sets a foundation for further competitive advantage. Kuehne + Nagel plans to grow at least in line with market expectations for 2025, aiming for substantial improvements across key logistics segments as market conditions evolve.

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, welcome to the 9 months 2024 Results Conference Call and Live Webcast. I'm Sandra, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Stefan Paul, CEO of Kuehne + Nagel. Please go ahead, sir.

[Stefan Paul, executive]

Thank you very much, Sandra. Good afternoon, and welcome to the presentation of Kuehne + Nagel's 9 months 2024 financial results. I'm CEO, Stefan Paul, and I'm joined by our CFO, Markus Blanka-Graff.

Before I go into the details, please apologize my voice. I catched a little bit of a cold. I will speak a bit slower in order to ensure that everybody will understand what I'm going to say. Let's move to the 9 months results, the overview.

In Q3, Kuehne + Nagel achieved a sequential improvement in group EBIT and the first year-over-year quarterly increase in 2 years. We earned a group EBIT of CHF 455 million with nonrecurring items. Sequential earnings expansion in Q3 was driven by volume growth, effective yield management and contract logistics market share gains. Our ongoing cost control efforts resulted in a further sequential reduction of unit costs in Sea Logistics, while Air Logistics units costs were stable.

With respect to cost-saving measures taken in Q4 last year and Q2 of this year, we continue to see emerging benefits that we expect to realize fully by year end or early in 2025. As we have noted in recent quarters, these savings are mitigated by inflationary pressures and now also by the effect of volume growth and additional investments in service quality.

In terms of free cash conversion, the second half is typically much stronger in our business than the first half, and usually strongest in Q4. Our year-to-date performance in 2024 reflects this trend, but working capital expansion softened the effect on absolute conversion. This was primarily due to growing freight volumes and especially the sharp rise in seafreight rates, which appear to have peaked in Q3 per usual. Markus will expand on this topic in a few minutes.

Lastly, the return to profit growth in Q3 was broadly in line with our expectations, but with diminished prospects for this year peak seasons relative to our views at midyear. This is to due in large part to front loading of cargo demand, which persisted through the middle of Q3, a development with implications for both the seafreight and airfreight markets.

Front loading was a reaction by supply chain disruption sparked by the rerouting away from the Red Sea, potential fallout from port strike actions in the U.S. and geopolitical uncertainties. These uncertainties persist with the U.S. election now in focus and its potential impact on trade policy.

That said, Kuehne + Nagel has a long established track record of successfully navigating challenging market conditions. We remain focused on the execution of our strategy, with progress in Q3 across multiple fronts, including improvement of SME service levels, additional seafreight portfolio management, migration of our core TMS to the cloud and the closing of our bolt-on Road Logistics acquisition in Asia.

Looking back at the 9 months, we have delivered on the rightsizing workforce, streamlining the management structure and refocusing the sales force. This has created a solid platform from which to accelerate growth in the quarters to come.

Let's move to Sea Logistics. As always, volume in TEU, GP and EBIT per TEU in Swiss francs. Sea Logistics EBIT grew sequentially and year-on-year in Q3 to CHF 256 million. This compares to an underlying result of CHF 206 million in Q2 and CHF 236 million in Q3 last year. The sequential EBIT increase of 24% reflected a gross profit increase of 7%, with volumes plus 7 -- plus 2 and yields plus 5%, along with reduction of operating costs.

As I mentioned, we took another step towards improving our volume mix in Q3 with a deselection of additional low-yielding business from a single customer who accounted for about 140,000 TEU of volume in 2023.

Adjusting for this decision and the volume from the 2 other accounts we stopped serving in Q4 last year, our underlying volume growth was just under 2% year-on-year in Q3 versus estimated market growth of 3% to 5%. This change and especially delayed recognition of Red Sea effects contributed to sequential yield expansion in Q3.

Turning to costs. Recurring OpEx declined by 5% quarter-on-quarter to CHF 292 million and declined by 3% year-over-year. This translated into unit cost reduction of 7% sequentially and 1% year-on-year.

We anticipate a small step-up costs into Q4 as we continue to invest in our service offering and pursue higher-yielding volumes, which also entails higher costs. This includes additional customer care locations in second-tier cities. We have now opened 37 since late 2022, with 3 new locations in Q3 alone. This all resulted in an increase of conversion rate to 47% in Q3 from 40% in Q2, which also marks an improvement of 44% in Q3 last year.

Shifting to current trading. It is clear that yields improved over the course of Q3, but that did not top out as high as we expected, given the earlier-than-expected conclusion to the peak season, which also brings lower volumes.

Let's move to Air Logistics. The volume in tonnes on the left-hand side, GP in 100 kilo and then EBIT per 100 kilo, always in Swiss francs.

The Air Logistics EBIT result for Q3 of CHF 120 million is roughly comparable to the underlying Q2 result of CHF 122 million. This compares to CHF 136 million a year ago. Modest sequential gross profit growth of 1% on the back of volume growth and stable yields was more than offset by a 2% increase of OpEx, which translated into flat unit costs.

Apex drove the volume uplift from Q2 to Q3, with all other volumes flat. From a year-over-year perspective, perishables and Apex showed the strongest growth. Spillover from the seafreight market due to Red Sea disruption appeared to be minimal. Air Logistics volume grew 7% year-on-year in Q3 or by 5% on an organic basis.

We view our growth in line with our reference markets. The net effect on yields was neutral, as higher growth in the lower-yielding perishable segment offset stronger yields in other areas of the portfolio.

As for costs, Q3 saw a plus 2% Q-on-Q rise in OpEx to CHF 340 million. On a year-over-year basis, costs were up by 4% relative to the average quarterly OpEx in the second half last year. The sequential rise of overall OpEx reflects the stronger performance from Apex, which is in part seasonal. This all resulted in a conversion rate in Q3 that was stable relative to Q2 at 28%, but lower than last year Q3 result of 33%.

Here as well, looking at current trading, we see a muted peak season this year in Q4, with most likely modest low single-digit percentage volume growth on both a sequential and year-over-year basis.

Again, the contrast with our more bullish expectation at midyear. This partially reflects the extent of front loading earlier in the year, where the reduced potential emergency demand as seafreight disruption has eased, and the actual demand in some key segments, such as the German auto sector, which fell short of expectations. That said, we aim to deliver higher growth in the quarters to come.

Let's move to Road Logistics. Road Logistics EBIT for Q3 was CHF 22 million versus a recurring CHF [ 39 ] million result in Q2. This compares to CHF 26 million last year. Shipment volume grew 8% year-on-year in Q3, up from 6% year-on-year in Q2. On an organic basis, Q3 volumes were closer to flat. Gross profit remained roughly flat year-on-year in Q3, reflecting soft conditions in our core markets, notably Germany and France.

Overall, the net result was a relatively weak EBIT contribution for Q3 during the slowest seasonal quarter for Road Logistics. Please note that the City Zone Express acquisition closed in Q3, consistent with our most recent communication. As a reminder, the City Zone Express will strengthen Kuehne + Nagel cross-border road service in Malaysia, Vietnam and Thailand.

Next is Contract Logistics, a highlight for this quarter. Contract Logistics once again generated solid EBIT growth in Q3, even increased to CHF 57 million versus a recurring result of CHF 52 million in Q2 and CHF 48 million in the year ago quarter.

Gross profit growth, excluding currency effects, accelerated further to plus 10% year-on-year in Q3, up from 8% year-on-year in Q2. This reflects in part the ramp-up of the major Adidas distribution facility in Italy, we spoke about that a month ago, a side which will fully fulfill all of the company's distribution and e-commerce needs for Southern Europe. As previously indicated, the Adidas project is expected to reach the planned full run rate contribution by the first quarter 2025.

Market share expanded once again in key healthcare, e-commerece segments, categories which continue to drive the science pipeline. The conversion rate of 6% in Q3 was stable in both quarter-to-quarter and year-over-year basis.

Before turning it over to Markus, let's review some key developments over the past quarter with respect to our Roadmap 2026 strategy.

In Q3, we addressed the market potential pillar of our strategy, with a further expansion of our Contract Logistics footprint in e-commerce and healthcare. As mentioned a few minutes ago, we also closed our Road Logistics acquisition in Asia.

If we look at our technology efforts in the digital ecosystem, we reached an important milestone in Q3, with a successful first wave of migration of our in-house transport management system, TMS, to the cloud. This is a critical prerequisite to boosting our ability to leverage our data and continue to identify and test Gen AI use cases. Also, our offering to help customers decarbonize their supply chains is gaining further traction in the areas of Air and Road Logistics.

With this, I will 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 2024 results.

As Stefan has outlined and before we turn the page, we can report sequential improvement, improved EBIT and a year-over-year quarterly increase as well. We have achieved this result in a market environment characterized by the ongoing Red Sea situation, short-term disruption from East Coast strikes in the U.S. and some severe weather conditions in Asia at the end of Q3. Hence, we continue to focus on our highly flexible asset-light business model.

Our current priority is on cost control with the elimination of the regional structure in the second quarter 2024, which resulted in a reduction of absolute cost and unit cost.

As always, let's start with the income statement. Q3 has been sequentially stronger than Q2 2024 and Q1 2024, even more so when considering restructuring costs of CHF 17 million in the second quarter. For 2025, we expect a further improvement in our performance on group conversion rate.

Looking at the 3 quarters in 2024 sequentially, we can see solid operational conversion rates of [ 18 to 19 ], now nearly 21%, excluding restructuring costs, supported by active workforce management. The combined sea and airfreight conversion rate was 38% in the third quarter. For reference, the full-year 2019 sea and airfreight conversion rate was 28%.

Headwinds coming from currencies had a negative impact in translation of around 3% or 121 million at gross profit level and around 2% or 36 million on EBIT level.

Working capital increased due to the significant rise of seafreight rates, triggered by the sustained higher rate levels on Far East westbound trade lane and a recent search in airfreight charter activities from [ Apex ] operation in Transpac. Looking forward, I anticipate stable net [ working ] capital for the fourth quarter, with some relief into Q1 2025.

DSO have expanded only slightly against previous periods. DPO, on the other hand, have decreased significantly, mainly due to the increase in airfreight charter activities, which reduced the spread between DSO and DPO to now 4.8 days.

Network -- net working capital intensity increased by the close of September with a result of 4.3% versus 3.3% for 2023. The absolute level in Swiss francs is thus more than 400 million greater than it was a year ago. I will come back to that fact in a minute.

Continuing with cash and free cash flow generation, the pressure on net working capital we just discussed is also evident in the third quarter free cash flow result, but with a better free cash generation than any of the previous quarters in 2024. In absolute terms, we are satisfied with the free cash flow generation improved to about CHF 300 million in the third quarter.

Looking more closely at free cash generation, the third quarter results reflected free cash flow conversion of 85% to net income before minorities. This compares to 38% in the second quarter.

As a reminder and relative to other quarters, the third quarter is historically the second strongest after fourth quarter. The historic annual average is in the range of 90% to 100% free cash flow conversion.

The quarterly performance year-to-date does fit the historic pattern, but with a more muted overall development due to the pressure of net working capital expansion, as I alluded previously. As seafreight rates appear to have peaked in Q3 and assuming further moderation ahead, we anticipate an eventual reversal of these net working capital outflows over the coming quarters.

In summary, our key takeaways, we are positioned for a greater profitable volume growth in a low-growth market environment. We assume that Red Sea effects have peaked in the third quarter 2024. We have rightsized our cost base and progressed further on our key strategic initiatives, customer mix, service mix and technology. We will provide more details around our plans in conjunction with Roadmap 2026 with the publication of the full-year results.

Looking back at the 9 months, we have delivered on the rightsizing workforce, streamlining the management structure and refocusing the sales force. This has created a solid platform from which to accelerate growth in the quarters to come.

With this, I would like to thank you for your attention and hand back to operator Sandra to open the Q&A session.

[Operator]

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

[Alexander Irving, analyst]

Two for me, please. First on volumes, looking at industry data commentary across the sector, Sea appears to be growing about 6%; Air, double digits. Does that match your assessment of the market? And if so, what's behind the share losses? And how do you plan to reverse that?

Second question is around cost reduction actions from earlier in the year. We had some headcount reductions back into Q1, and it seems that your volume performance has been lagging peers. With the benefit of hindsight, were those reductions the right move? And will they be reversed?

[Stefan Paul, executive]

Alex, Stefan speaking. Let me take the first one on the volume. So our take is seafreight volumes are growing between 4% and 5% and airfreight is growing as well around 5%. I think the difference comes overall from the e-commerce share which is, as we all know, outside of our [ remit ] at least in the Kuehne + Nagel legacy.

We only provide service for the e-commerce companies out of China with Apex. So that's the reason why our numbers -- and I talked about addressable market, right, is a little bit different.

So the second part of the question was how do we address that, right? And that is, for me, pretty clear. We have done -- and Markus said that as well, we have done our homework in 2024. So we rightsized our workforce pretty much so in the Q4.

Last year, we did the restructuring with the new governance model. Now all the MDs are reporting directly to the Management Board. We have 3 sales channels. One is the global account. The other one is new, is the national accounts. National accounts are midsized accounts, the hidden champions, reporting directly into [ NMs ], into the managing directors. They are fully accountable for that.

And last but not least, then the very important sales channel, SME, which is in particular for seafreight and Road Logistics.

So what we are going to do now is -- and we have started that journey already, is we will focus more on organic growth, leveraging our new structure and pushing our organization even more into customer-focused setup. And I'm rather confident that we can gain share again in the next quarters to come. So we revitalized our focus on growth after have done our homework in 2024 pretty much so.

[Markus Blanka-Graff, executive]

And Alex, on the cost reduction, I think there's 2 chapters to the cost reduction. The first one is rightsizing the workforce, we have done that. And I think we are exactly where we want to be in the light of also renovating or changing some components in the customer portfolio.

So I think we continue to change customer portfolio, customer mix towards our desired ratios. And for that, that workforce is in the rightsize. Not to forget, we continue to harvest on productivity impact, so continuous automation and digitalization.

The second chapter of the workforce was the structural change in the organization structure. That obviously is an absolute sustainable cost reduction. It's never going to come back, and that is something we will benefit from now on.

[Operator]

The next question comes from Sathish Sivakumar from Citi.

[Sathish Sivakumar, analyst]

Maybe firstly on the SME -- increasing the workforce on the SME side to cater to that mark, that customer segment. If you could just help us understand that are -- do you think you've got the right mix of SMEs spread across the regions that would probably bring volume growth actually going into next year? And -- because that's probably sea -- you're probably going to get better operating leverage with the same headcount as you invested in that segment now.

And just on that operating leverage. So given you optimized your cost and rightsized the workforce, what is the like average volume growth you could still do without seeing an inflation in the cost?

And then the second one, in terms of portfolio rationalization, are we kind of done with the optimizing your, like, say; prices as the volume mix within your customer portfolio? And is it mainly done on the sea? What about in airfreight, do you see a scope there as you go into next year?

[Markus Blanka-Graff, executive]

Sathish, it's Markus. I think you're a little magician, I have to say. It's like eight questions disguised in two. But we're going to try to address those.

So SME, I take the operational leverage in context with the customer mix changes. You're absolutely right, different customer sectors like SME customers require obviously a higher effort, but that was exactly what we wanted to do.

And when you remember back into our roadmap ambitions, the SME numbers are certainly where we wanted to be more present and be able to provide more services to the customer. Hence, we have started our journey by opening what we call customer care centers in the seafreight SME segment. That grows currently -- I don't want to disclose the number, but it's a double-digit growth number that we see on that segment.

It's customer proximity, and not only proximity as understanding the requirements and the needs of the customer, but indeed also a geographic proximity. And it's something that matters. We have opened a total of 37 customer care locations over the last 8 quarters to accommodate that initiative.

So operating leverage goes in combination with what is our service offering towards the customers. I think we focus pure operating leverage far more on the efficiency gains through automation, through streamlining of operation. This is where we put our money, if you like, to become more efficient.

[Stefan Paul, executive]

Okay, Markus. And there is a question around the customer portfolio and the cleaning up of the customer portfolio left over. Let me take this one.

So this is an ongoing effort overall, right? So you are never done with the spot, but -- the big but is, but in seafreight, we have basically handed over 3 major customers, the [ commoditized] customers, towards the market. And it depends always on the rate development and the situation where we are in, right?

If we don't generate a certain yield, then we will have a discussion with the customers, right, whether they are large, medium-sized or small, we always try to optimize our portfolio.

But overall, if I look at it from a current perspective into the commoditized or a normal key account business, I would say, for the time being, we are done. But again, we -- iterating what I said, this is an ongoing effort in all business units, in all network business. Whether you take road, sea or air, we always look into the different portfolios and the different profitability of the customer segments.

[Operator]

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

[Muneeba Kayani, analyst]

Just following up around kind of the growth focus that you've talked about. And what actually -- what steps are you taking at this point to kind of accelerate the growth from what you've been doing over the last kind of year or 2 around cutting costs and kind of ending these -- the portfolio rationalization?

And then secondly, we saw that Amazon has announced a cargo for third parties and has a quote from Apex on its website. Can you explain to us how Apex is working with Amazon Air cargo?

[Stefan Paul, executive]

Yes. Thank you very much. I'll take the second question, the Amazon question first. So what Apex is doing, and I have to say we are absolutely satisfied with the service offered by the Amazon Air because it's the Amazon Air, it's the domestic fleet of Amazon, roughly 60, 70 aircraft in the domestic market.

We inject in [ Honolulu ] our e-commerce business into the Amazon aircraft or air fleet business, and we leverage them for a distribution within the U.S. marketplace. But that is used for e-commerce, but as well used for standard hard cargo from the Apex perspective. So this is a perfect fit.

On the one hand side, we utilize the return flights for Amazon out of [ Honolulu ]. And on the other side, we have a direct connection into the different hubs of Amazon Air in the U.S. marketplace. So overall, I would call it a win-win situation.

[Markus Blanka-Graff, executive]

On the growth focus, what are the steps? So what do we do different, if you like? And I think it's always a bit of a difficult question, what do we do the different? Let me say positively what we focus on, and let me start maybe on some of the highlights of the third quarter as well.

Let's take, for instance, Contract Logistics. Contract Logistics growth is steady over many, many quarters and continues to perform and improve performance also on a profitability basis. So how do they do that?

They have increased their hit rates on the tender, so they win more tenders. The implementation is flawless. And we have a much higher customer proximity, what I said before, understanding the customer business.

And when I talk about it in the Contract Logistics area, it's not much different in the network businesses. Customer proximity is something that has changed our approach, where we clearly focus on our sales channels that start with global accounts, key accounts where they have an entire, I would say, team and dedicated staff that is available to them via the second level then on national accounts, the most important customers on a national level that we address on a very personal level, right, and change our service offering towards them.

And last but not least, of course, there are the specialists in the business units that are addressing specific needs on vast majority of our customer base.

So it's really a focused approach with clear roles and responsibilities around the sales force, including -- and maybe anticipating one of your questions, including changes in the remuneration and incentive or incentivization, if that's an English word, of the sales force. So I think we have really changed the way how that works, and it really made a very sound and [ ground ] package to be successful.

[Operator]

The next question comes from Marc Zeck from Kepler Cheuvreux.

[Marc Zeck, analyst]

Maybe the first one on GP or yields in seafreight. I believe in summer in August, for example, you were so quite enthusiastic about the yield outlook for ocean freight. And then September, not so much anymore. And that implies that probably the exit rate or the September yield in ocean was quite bad. Maybe you can elaborate a bit on what exactly changed or how bad September really was in terms of yield?

And the second question would be on unit cost. I guess, versus last year's third quarter, unit cost in air are kind of up 10% -- worse 10%, so to say, while sea, it's basically flat after all the cost cuts and against inflationary pressure. And maybe you can elaborate on the building blocks why in sea unit cost differ too much or the development differs so much from last year?

[Markus Blanka-Graff, executive]

Sure, Alex -- sure, Marc. Sorry. It's Markus. So from a gross profit perspective, let me just clarify one thing. We have not communicated that September or exit GP per TEU would have been -- would have been bad. So if that is out in the market, I think that is inaccurate information. And as you know, we never disclosed on a monthly basis what are the GP levels.

But coming back to your point, I think we had been optimistic on the GP per TEU development. And I think we were looking for a gross profit, in Swiss franc, north of 500 for the TEU. And we exit on a blended 3 months, so on a quarterly basis, with, I think, 490. And now we can argue if 490 or 500 is a big difference.

I would just tell you also one thing that currency development hasn't really been in our favor. So a lot of that has to do with U.S. dollar headwind.

At the same time, I think we had seen on the back end of the third quarter some irritations, I wouldn't call it disruptions, but irritations from the short-term strike that obviously nobody has known that it was a short-term strike at the beginning and also some of the severe weather conditions -- of the severe weather conditions that we had at the back end of the third quarter.

So I think it's a more academic conversation if 490 or 500 is the right number or was an achievement or not. I think we are happy with where we sit currently. Not to forget, we continue to change our customer portfolio.

Unit cost, I think it's a good observation. Our unit cost reduction on the seafreight side, very much self-driven cost reductions, the measures that I have been talking about before have taken their positive impact.

On the airfreight side, I think we also have to consider that there's a bit of a consolidation effect on the unit cost per se. There is [ Morgen ] cargo that came into the mix compared to last year. And as you know, [ Morgen ] cargo with perishable portfolio would put a bit more pressure on the cost base than what it has contribution on the gross profit base.

But that's a conversation we have on a regular basis. I think we're committed, we are absolutely clear and committed to the perishable business, and that's just one of the mathematical effect of it.

[Operator]

The next question comes from [ Shikha Khurana ] from JPMC.

[Unknown Analyst]

It's [ Alex Budel ] from JPMorgan. Just firstly, could you comment a little bit on how the value-added services share of your GP has evolved during the pandemic and now? And whether you just see more resilient kind of GP fees, if you like, at the value-added services?

And then secondly, you helpfully talked about the 4Q airfreight volume expectations and the fact that you don't expect big season. Can you just also comment on seafreight? And then more broadly for 2025, do you see any headwinds for global trade, should kind of protectionist measures put in place? And just any comment around that, that would be very helpful.

[Stefan Paul, executive]

I take the first question for the volume -- the value-added services. And this is basically almost unchanged. So we said already 2 years ago, 60% is outside of the [ port ]. [ Ports ] coming from, so to say, value-added services.

And as we speak, as more complex the world is becoming, right, with the tariff structures, value-added services are slightly increasing, especially on the customs clearance front on the nonrelated freight customs -- on the freight customs clearance front and on any other activities, whether it's multi-fulfillment last-mile e-commerce activity. So basically, we see that the share of value-added services is slightly increasing rather than decreasing.

[Markus Blanka-Graff, executive]

I think from then the second question on the volume expectations, I think maybe I can answer the 2025 question first. I think your question was broader in context of the macroeconomics, is there an increase in volume based on the macroeconomics?.

I think we have to accept, looking forward, that trade volume growth will be, at best, in line with [ GDP ] growth. I think we have to look into that mechanic in such way that we consider onshoring regionalization to a certain extent, as one of the trend or two of the trends that are -- continue to impact the absolute trade volumes.

So as such, our models, our base cases are usually using a one-to-one advanced relationship in the [ GDP ] growth. That also should give us some indication for 2025, of course. I don't have any indication right now that, that should be different for the year to come.

And for the fourth quarter, I think seafreight was your more specific question around that, I think seasonally, the fourth quarter is not as strong as the third quarter in the seafreight business.

At the same time, we have a couple of rollover cargo that spilled over, if you like, into the fourth quarter. And we might -- we may have an effect because Chinese New Year is quite early next year, I think it's at end of January 2025. So that could lead to a certain compression of orders already in the fourth quarter that would normally happen maybe a bit later.

But this is speculation, I think, and it's going to only marginally change the overall picture. I think the prevailing seasonality, Q4, a little bit lighter than Q3; should be still the case.

[Operator]

The next question comes from Uday Khanapurkar from TD Cowen.

[Uday Khanapurkar, analyst]

This is Uday on for Jason Seidl. So just I guess on the sea starting with -- impressive step-up in the sea conversion rate, obviously, in the third quarter. I think it's like well above your 40% target over here. I'm just trying to understand, I mean, do you think you can hold that conversion rate above target even as these Red Sea tailwinds taper off, coming -- going forward?

And then secondly, you mentioned the refocusing the sales force, shedding of low-yield customers. I guess, how much more runway do you think you have from this point in managing that book of business? Do you think you can accelerate that rationalization as we move out of the peak season? How should we think about that?

[Stefan Paul, executive]

I will talk about the sales force first. And then Markus maybe will cover the first question. So sales force basically, right? As I said, we have 3 pillars, the key accounts, our 380 global accounts; the national accounts, the hidden champion; and the SME customer portfolio, predominantly in seafreight and in Road Logistics.

So what we have done now is for every, basically, customer channel, we have a so-called liaison officer in the business units, and that's new for us as well, right? So we dedicate people in the business units towards the sales organization in order to ensure that we always price ourselves right at the very beginning because normally, you have -- in our business, in our industry, you have sometimes the case that you go into an RFQ and the first round, you do not come up with the appropriate pricing because either tender management or pricing is not aligned with the business unit or vice versa with sales.

And this is something which we have done completely new this year. So we are pretty sure that in terms of the reaction time and the accuracy of how do we position ourselves in front of customers when it comes to pricing and service and product accuracy, we are much better than ever before. And that's the reason why we are rather confident that we can leverage that new setup for the better, and we see better growth in the years to come or in the quarters to come in as well in the years to come.

So the connectivity and the connection between our sales force and the business unit, I would call it a second to none if you compare that to the past decades. And that makes me so confident that we see already the first results, which are encouraging.

So that's what we do different in terms of clearly articulating different sales channels and, in particular, creating a much closer bond from the very beginning between the pricing teams and the business units and the sales force.

[Markus Blanka-Graff, executive]

And Uday, maybe on the conversion rate, yes, indeed, we're above the 40%. It's our clear aim and our clear commitment that we maintain basically, throughout business cycles, between 35% and 45% conversion rate.

We do the right thing. We invest into efficiency, we invest into automation, we improve customer portfolio, we extend our opportunities to generate GP on each single TEU. So I think we do a whole portfolio and as a whole array of actions that will support to maintain that conversion rate.

The fact that we are, on that particular KPI, ahead of our roadmap ambitions is only something that I can say, this is the current market and operational efficiency that we see. And as I said, we do the right thing to prolongate and extend that for a new normal level.

[Operator]

The next question comes from Marco Limite from Barclays.

[Marco Limite, analyst]

My first question is on seafreight. So you also said that in airfreight, you think you are growing broadly in line with your addressable market. But in seafreight, looks -- you are losing market share a little bit. So can you just talk through your expectations for Q4? I think comps become easier. And what are your expectation in terms of volume growth or under or over performance versus market into next year?

The second question, a bit of a follow-up to what has been already asked. But could you discuss a little bit what you expect in terms of normalization of yields in -- if there is any normalization in Q4 and '25 as well, given that [ spot rates ], especially in sea freight, will still keep down -- going down more slightly?

And the third question is a bit of a housekeeping question. How much of cost tailwinds did we have in Q3 from your restructuring program? How much shall we expect in Q4 and Q1?

[Stefan Paul, executive]

So first of all, I will take the question about market share and growth expectation. And you can imagine that we have discussed it intensively within the management team in the last couple of weeks. So what is pretty clear for us is for 2025, the minimum expectation for us as a company is that we grow with the market or even higher.

Piggybacking on what I said before, we have done our homework, we have streamlined the organization, we are ready to tackle now, and the consolidation of the market will help as well in certain areas, not everywhere, but in certain areas. So again, minimum market or even higher. That's our expectation and the message into the organization.

[Markus Blanka-Graff, executive]

And I take the normalization, the housekeeping. The housekeeping maybe is the easiest one, although I think we are -- we have it also in our documentation. In the third quarter, there was zero impact from the restructuring, and we expect also for the fourth quarter, at maximum, a minimal impact. So our restructuring is done, our rightsizing is done. We should not expect any material impact from that in the fourth quarter anymore.

Normalization, that is one of the, one of the difficult words, I think, over the last years. I would like to say that we have now built a leaner, faster reacting and much closer to the customer operating organization that we can much better [indiscernible] or much better play, if you like, on market developments, even on volatility, we are going to be much faster in reacting and I think much better in harvesting out of movement in the markets and opportunities in the market.

So hence, I believe what we have said also in our Capital Markets Day, conversion rate ambitions are maintained and sustained. We want to have a 40% conversion rate in sea and air. And we certainly want to work on our target CHF 200 EBIT per TEU and 35-ish on 100 kilograms on the airfreight. Some of it will be strongly supported by the market. Some of it were not, but I think we have laid a good foundation to achieve.

[Marco Limite, analyst]

And if I can sneak one more very quickly. Given, let's say, EBIT down year-over-year and...

[Stefan Paul, executive]

Marco, my apologies. We said please to ask only two questions, and I think...

[Marco Limite, analyst]

Sorry.

[Operator]

The next question comes from Robert Joynson from BNP Paribas.

[Robert Joynson, analyst]

Yes. Stefan and Markus, two for me, please. So firstly, on seafreight. I know the GP per container in Q3 was below what you expected a few months ago. But nonetheless, it did provide another good example of the quarter during which the GP per container showed a positive correlation with freight rates.

Could you maybe just provide some color on what share of seafreight gross profit you estimated influenced by fluctuation in container shipping freight rates and what share of gross profit doesn't have any exposure? So that's the first question.

Yes. Second question on the dividend. If we look at the ordinary dividend last year and don't include the special, the cost was around CHF 980 million. If we look at free cash flow this year, it's been CHF 330-odd million during the first 9 months. So presumably, the full year, we're not going to get anywhere close to CHF 980 million.

Equally, if I apply a 60%, 70% payout ratio to what appears likely for 2024 net income, we won't be getting anywhere close to CHF 980 million either. So both of those observations suggest a reduction in the ordinary dividend.

But if I look at consensus, the Street is looking for a dividend of about CHF 8, which is basically in line versus the [ CHF 8.2 ] ordinary paid last year. So I appreciate maybe too early to comment in any detail, but could you maybe just provide some color on whether you think that consensus estimate for the dividend looks reasonable?

[Stefan Paul, executive]

So the first question was on the share, basically, and I answered that question, I think, already. It's a 60-40 split. So 60 on value and 40 on the portfolio.

[Markus Blanka-Graff, executive]

Okay. So clear. I think on the dividends, also, Rob, I appreciate your question and that I think there is some consideration in the market as well.

I think your math stacks up approximately, I would say, I would hope that our free cash flow conversion is, at the year-end, somewhere closer to a number where we feel comfortable with financing or having enough liquidity for the dividend payout.

But as you said, it's too early to say really. It's at the discretion of the Supervisory Board and -- to make a proposal to the AGM, to the shareholders, and that will happen, as usual, in May when we have our Annual General Meeting.

I think we should stick to our historic reality payout ratios. As we said and as we mentioned yourself, historically, that is something we should consider. I'm not in a position currently to comment on the estimations or expectations of the financial market on dividends.

[Operator]

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

[Gian Werro, analyst]

Two questions from my side. First one is on your air business. There, according to market observations, we see higher rates now between Middle East and North America, also partially indicating very strong momentum in Sea, Air solutions. And I wanted to ask if this is positively affecting your Air profitability? And if you can also go then, therefore, into the direction of originally targeted CHF 90 per 1 of the kilo for the fourth quarter, is that still achievable in your view?

And the second question is on the cash flow statement. There, on the dividends to minorities, usually -- or last year, you had 173 million dividend to minorities in the third quarter, that hasn't happened now in the third quarter. And I expect it, therefore, in the fourth quarter. Should we consider something similar in the same magnitude or something meaningfully smaller now in this [ year ]?

[Markus Blanka-Graff, executive]

Gian-Marco, I'll take the second one quickly. Yes, it's going to happen, and it's going to be a bit lower. I would say, and I say that with a bit of a bigger note, if you like, because that is also a reflection on the performance of Apex. It's going to be somewhere in that area, but a bit lower.

[Stefan Paul, executive]

Okay. Gian-Marco, Stefan. I'll take the first question on sea and air. Yes, sea and air is picking up, but in relative terms from a size perspective, this is not, honestly, moving the needle for a business unit, right? First answer. The second, even if it's double digit, right, then it's growing significantly. But overall in the big scheme of everything, it's not significant moving the needle.

So the second question was the 90 yield, even if the fourth quarter will be the strongest in terms of volume and rates are concerned, I would not anticipate that we will reach the 90 in the fourth quarter this year because if you look at the profitability currently, the gap is too much, currently.

It will be better, right? It will be raised, but it will not reach the 90 there.

[Operator]

The next question comes from Jain Parash from HSBC.

[Parash Jain, analyst]

My question is more regarding our near-term outlook. With potential U.S. East Coast labor union negotiation with the port operators going in mid-Jan, early Chinese New Year, alliance reshufflement. Do you think that increased volatility will have freight forwarders, with respect to protecting GP TEU or for that matter, with respect to with the [ air cargo ] with increased growth coming from e-commerce? Is there a [ statement ] that some point of time, [indiscernible] we'll look at it and probably chase volume at the expense of yield?

[Markus Blanka-Graff, executive]

Jain, I think it's an interesting question. You can never predict rate, right? It's one of the most difficult things that you can do.

Picking up some of your questions around e-commerce, e-commerce rates will depend very much on what is the demand. At the same time, it will have an impact if de minimus regulations are going to be put in place prior to Chinese New Year or not. That's the first answer to it. And I cannot tell if that's going to happen at all.

Secondly, I think it's going to be a question around is there disruption in seafreight, right? We will never be able to tell the future on the seafreight side. If there is disruption is what Stefan said before, then airfreight becomes the logical alternative for us to mitigate some of these topics.

But again, from a freight forwarding perspective, I think whatever change or volatility is in the market, you can always take as an opportunity for us to keep cargo rolling, to keep actually the good inflow. And that usually requires additional services, additional effort and service intensity that we need to provide, and that comes usually at cost. How exactly it's going to look like? I really don't know.

[Operator]

The last question for today's call comes from Andy Chu from DB.

[Andy Chu, analyst]

Stefan, Markus, a couple of questions, please. The first one is just around the Apex and the put option of -- I think there's a 24.9% stake outstanding. And I just wondered what your latest thoughts are there, please?

And then on the seafreight business, what percentage of your business is now sort of commodity business? And I appreciate, it sounds, Stefan, you are done at the moment in terms of where you are with your customer mix. But from whatever percentage you give us in commodities, what do you think is the sort of the right balance of -- or percentage exposure to commodities?

[Stefan Paul, executive]

Let me answer the first -- let me answer the second question, the commodity. I wouldn't say that we have any commodity anymore in the seafreight business, right? So we only distinguish between the key accounts, the larger accounts and the small- and medium-sized enterprises and then manage business.

But pure commodities, right, which we have carried out maybe 5 or 6 years ago or 10 years ago, whether it was trash, whether it was paper, whether it was [ pulp ], so all these kind of stuff, we don't carry anymore. So it's completely excluded in our portfolio.

[Markus Blanka-Graff, executive]

And on the production...

[Andy Chu, analyst]

But in terms of maybe now in terms of sort of lower-margin business, maybe not quite the commodity paper and packaging, but sort of what I would say, lower-margin business, is there an opportunity there across those 3 segments to kind of realign longer term? I guess there's always an opportunity, but what's the potential there, please?

[Stefan Paul, executive]

Okay. Good. I misunderstood that. Of course, there is always a potential or there's always an opportunity, right? So the lower business -- the lower-yielding business or the lower-margin business, I would say, is maybe overall 20%, 30% of the total portfolio, where we can always improve the situation, depending on the marketplace and where we are.

And I would say this is more on the high side. Most probably, it's more at the 20% range. It's not a big number, but there is still room to maneuver in terms of low yielding versus the blue anchor [ light ] where we have SMEs, midsized customers, where we have a much higher yield. So there is room to maneuver in the area of, I would say, let's say; 20% or so.

[Markus Blanka-Graff, executive]

So let me take that quick, put option. Obviously, we have a very fruitful and very successful cooperation with Partners Group. I think Apex is performing very well.

Also compared against the original business cases, I have no visibility what is in the thinking of Partners Group. But from what I feel and how we cooperate, I would say this is something that pays off for all parts -- for all parties involved.

[Operator]

That was the last question. Back over to the management for any closing remarks.

[Stefan Paul, executive]

Thank you very much for listening, and I apologize again for my voice, now it's completely gone.

[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.