Kuehne und Nagel International AG

SIX:KNIN

Earnings Call Transcript 2017-Q4

[Operator]

Good afternoon, ladies and gentlemen. And welcome to the Kuehne & Nagel FY 2017 Results Analyst Call, hosted by Detlef Trefzger, CEO; and Markus Blanka-Graff, CFO. My name is Andrea, and I will be your coordinator for today's conference. For the duration of the call, you will be on listen-only. However, at the end of the call you will have the opportunity to ask questions. [Operator Instructions]

I am now handing you over to Detlef Trefzger to begin today's conference. Please go ahead.

[Detlef Trefzger, Chief Executive Officer]

Thank you very much. Good morning, good day, good afternoon, and good evening to all of you, and welcome to the analyst conference call on the full year 2017 results of Kuehne & Nagel. Our CFO, Markus Blanka-Graff, and I will lead you through the slide deck which we have distributed earlier today on our internet. And as always we get started on Page 3.

Remember our story line at the Capital Markets Day, September last year. The end consumer is driving growth. The end consumer is driving world trade growth and is also driving the worlds - the freight flows in all freight lines and all markets, driven by middle class, growing middle class in Asia and Europe and in the Americas as well as technology that enables new service model. All this leads to consumers expecting today everything everywhere. This leads to a lot of opportunities from integrated business model.

I'm on Slide 4 now. The integrated solutioning, the industry focus helps a lot to drive answers and solutions towards the industry - towards the market - the end consumer. And this results into a very good result for our group in the year 2017.

I'm on Slide 5 now. The Group earnings for 2017 were CHF 740 million again much higher than last year. We saw a strong volume increase of 7.5% versus previous year. The 7.5% needs to be translated into absolute figures. Our absolute TEU growth has been 302,000 TEU in 2017 that is the size of a middle class Seafrieght forwarder.

Also in Airfreight we saw a very strong volume growth of 20.4% or 266,000 plus. Let me translate this into additional freight capacity referred in our network per day. This led to 12% of working day more in our network. Overland contributed with a very sizeable and strong EBIT of CHF49 million in 2017 and Contract Logistics has seen a very strong EBIT increase of CHF14 million or 9.5%.

On Slide 6 we have summarized the key figures of the 2017performance for you. We have seen strong volume growth and I will detail that during the details of the business units more. Leading conversion rate in all network businesses and the integrated business model showed positive effect and led to another increase in earnings.

So net turnover CHF2.69 billion more versus previous year or 12.5%. Gross profit improvement 7.2% or CHF473 million and EBIT improvement of CHF19 million or 2.1% and the earnings per share increased by CHF0.17 and 2.9%.

On Slide 7, we will start to go into more details with regards to the Sea and Air freight segments. Seafreight, the size and the growth have been extremely high last year as we have mentioned before, 302,000 TEU more for the size of a middle class Seafreight forwarder in addition to the strong and leading volumes that we already operate globally.

Our focus has been very much on cost control, you will see details later and we've seen exceptional growth in LCL and reefer. In LCL we've reached 2 million cubic meters transported in our network last year and in reefer we have seen 25% growth year-over-year last year.

The similar story in Airfreight, with the strong focus on perishable and pharma, we clearly confirmed our number two position worldwide and we were able to grow the volume - the strong volume growth with a high conversion rate and an improvement in EBIT.

Please follow me on Slide 9, where we go into a deep dive of the volume development. As said before strong volume growth in all business units, but have a look here in for 2016. For the third time ever we penetrated more than 1 million TEU shipped in our network in Seafreight. Only five quarters later, we saw already 1,100 more - 1.1 million TEU and more shipped in our network, so strong and continued volume growth in Seafreight.

The same in Airfreight, last quarter, quarter four 2017, we've seen for the first time more than 400,000 tons in our network operated on our networks. This includes already 25,000 tons through acquisitions of Trillvane and CFI are through perishable targets, but we've seen a strong organic growth in our hard cargo and other industry solutions in the Airfreight - in our Airfreight business units.

Let's have a look into the development of margins and EBIT per TEU. Seafreight first, we have seen a margin effect through the consolidation in the Seafreight industry for the last 15 months. We have seen that the consolidation from 18 carriers to eight within a period of 12, 15 months puts a lot of pressure on the margin. Unsustainable rates in the past - unsustainable rates for the carriers led to ongoing losses for many years.

This industry has consolidated for this reason. And with the volume growth that we've seen and the strict cost control you'll see this on the expense for TEU developments, this has led to productivity increases and the stable development of the EBIT per TEU.

The volume effect in 2017 in total has been CHF105 million, you can extract this from the details quarter-over-quarter slide that we have quoted at the end of the presentation. The margin effect has been 105 million per ton, CHF105 million and the cost effect 7.5% more volumes transported has been CHF31 million. So the development of this business given in the chart is very stable result, growing the volume and compensating the margin as well as volume growth.

If we move on Slide 11, you see the same slide details were used for the Airfreight business unit. Also here we see that GP per 100 kilo development over the last four quarters or five quarters and there is a perishable effect in there in quarter four, 2017 for sure has mentioned 25,000 tons perishable business through acquisitions with lower margins and the hard cargo business included in that business.

And a stable cost development around CHF45, CHF46 per 100 kilo, leading to a relative stable EBIT per 100 kilo. Also here the effect in 2017, we have a volume effect, 20.4% volume growth or volume effect of CHF197 million, a margin effect of CHF125 million, a cost effect of operating 20.4% more business in our network of CHF57 million, only 8.3% cost increase or operational expense increase, which led to a positive EBIT development in total of CHF15 million 2017 for the Airfreight business.

Continuing on the next slide, Slide 12, we have shown the development of the conversion rate in both of our network businesses, Seafreight and Airfreight. And you see that we're staying around the 30% conversion rate for both businesses and that is also the guidance that we have given at the Capital Markets Day, our long term ambition is to grow stuff as fast as the market, twice as much as market in both sea and Air freight at a stable conversion rate around 30%.

Slide13 shows the summary of the financial figures for both Seafreight and Airfreight and the main takeaway is through growth we were able to grow gross profit in Airfreight to more than CHF1 billion in 2017. We had a stable gross profit performance in 2017 and Seafreight was CHF1.4 billion compensating the margin pressures through efficiency program partly or through a majority sense and in the Airfreight over compensating the margin effect by volume - strong volume growth with a positive improvement in EBIT of 5%.

Let me summarize the takeaways for Seafreight and Airfreight on Slide 14. An industry - the Seafreight industry, an industry that sought unsustainable losses and rate levels for many years with high losses for the carriers having an effect also on the quality of the product and less investments into the product has consolidated over the last 15 months.

This consolidation led to eight carriers and three alliances and should show now a sustainable margin for those carriers and investment into enhancing the product and the product quality again. This is unprecedented; we haven't seen that in any industry in such a short period before. But we were able to partly compensate the margin pressure and by efficiency gains and cost reduction CHF10 per TEU.

We've used cost over the year 2017 and we have launched and seen strong growth in our product like KN BatteryChain, the reefer business as I mentioned before, the 25% growth and LCL shipments was more than 2 million cubic meters transported in 2017, so our solutions have shown traction with our customers and in [indiscernible].

Airfreight we were able to do clearly outperform market growth, market growth 9% to 10%. We've seen a growth of 20.4%. The acquisitions of Trillvane in Kenya and CFI in the US contributed largely to a smaller portion last quarter, quarter four of around 25,000 tons additional perishable business. We were able to expand our perishable network further in India, Thailand, Sri Lanka and also in the Caribbean and we operate and have seen more than 500,000 tons in 2017 in the perishable sector.

Also here industry solutions got a lot of traction that KN BatteryChain, the solution that we launched for lithium batteries at the IAA, the Frankfurt Motor Show in September last year was well received and we had a lot of customers using this dangerous looking product in the certified - this dangerous looking solution with certification and very optimized quality oriented supply chain for their battery solutions.

And KN PharmaChain, our strong business across all business units we mentioned this year in the Airfreight because we have certified last year 88 locations with the CEIV IATA certification for all those locations in the Airfreight Pharma network IATA has certified and meets the CEIV standards. The first one in our industry, we were the first provider that were able to certify the pharma network in such a way.

So these are the developments in Sea and Air freight in 2017 and I continue now with the performance of our Overland business and as we have already stated over the last year, there's a clear industry specific strategy has been designed usable for the Overland business and the consistent implementation of the strategy for market customers as well as the optimization of the operation has led to a very successful year 2017.

So the Overland business is contributing or had contributed CHF49 million for the overall performance the Kuehne & Nagel group. The leverage growth on those rates is the top line growth and you see it on the next slide, is repeated on the next slide as well as we have gained significant improvements in operations and productivity and also in profitability there.

The next slide shows the key figures of the Overland business, 7.6% net turnover growth, 6.4% turnover gross profit growth converted into a strong EBIT growth. I would like to mention what we have stated in the detailed financial report, in the EBIT improvement we have 7 million gain from a settlement out of the [indiscernible] and find that we have paid, so that the operational performance of Overland 50% or CHF12 improvement year-over-year.

And you see clearly from the graph on the bottom of this slide that quarter-by-quarter the business of Overland - the operational performance, the operational strength of Overland business in a two year span has improved.

Next business unit, Slide 17, Contract Logistics, repeatedly we mention scalable solutions and we mention scalable solutions because we scale solutions for our customers. We have seen strong flow with scalable solution in the e-commerce sector as well as the pharma sector. We have seen a growth in e-commerce of 50%, five zero year-over-year and in pharma 30%, three zero year-over-year through scalable solutions.

This is reflecting what I said initially, consumer demand, everything everywhere and the consumer demand price also our Contract Logistics business our e-fulfillment business. In addition, we acquired two companies in the pharma sector in Italy and in Turkey, have integrated them and thus strengthened our pharma network globally. At the moment we run 80 fulfillment centers for e-commerce and we have a couple of dozens of pharma centers that operate in our KN PharmaChain around the globe.

Next slide shows the development quarter-over-quarter in the Contract Logistics business unit. You see a strong net turnover growth of 7.8%, 10.5% gross profit improvement and you see an EBIT improvement operational of 9.5% or CHF14 million. And the space operated increased by 600,000 square meters from 10.0 to 10.6 million square meters warehousing space operated with a high leverage of our e-commerce solutions in this area and the idle space has been reviewed to 2.7%.

So overall a very successful for our Contract Logistics, but not only for all business units facing different market situations and especially a consolidation in one industry with a full year of activities the Kuehne & Nagel group is pursuing, we were able to show a strong bottom line increase in 2017. And what this means with regards to financial figures will be detailed now by Markus.

[Markus Blanka-Graff, Chief Financial Officer]

Thank you, Detlef. Hello everybody also from my side. As usual first slide here income statement. I think all of you know that one of the slides that I prefer talking about shows the dynamic of the group and I think what is important this year was we also had in our translation I think as a header. We talk about an integrated business model.

I know we're going to talk about - when the line is going to be opened for questions, we're going to talk about GP per TEU and GP per 100 kilo and what is the conversion rate and hope we'll get questions around what is the conversion rate of the Seafreight business in three years from now and all these details that obviously we may or may not be able to answer. However, the group lives off an integrated business model and that's why I like looking at the P&L from a total perspective.

The first thing you'll see, we have a net turnover - as our turnover itself increased of around 2 billion. You'll have to be mindful about it, when we then talk about working capital and then we talk about these in details and where some of the cash goes into.

So 2 billion, that's a size increase of the wheel that you're turning, which is when you look at the quarterly on the right side of the slide, when you look at the quarterly movement year-over-year, you see - I said it at the beginning a couple of times with our one-on-one conversations, we intend to forget that the first two quarters last year were very bad quarters.

The first quarter was a very bad quarter. The second quarter, we caught up with what we been behind in the first one, so whatever the results 2017 impacted in 2016 actually was out of the second half. So that dynamic has improved quite significantly and you see that here. When you look at the EBIT improvement, it goes up to the third and fourth quarter to 9 million and 11 million or on earnings for the year perspective to 7 million and 13 million per quarter.

What is important, in between all of that, we have managed four acquisitions and we're not only started with the acquisitions, we have closed, we have integrated them and by the end of the year all four acquisitions had contributed to their part to the overall result.

Something that - and maybe you hear a bit of anger in that way, but something that seems to be ignored over the last couple of years and it's being increasingly ignored is the balance sheet. I somehow have the feeling that good nobody's looking at the balance sheet anymore and I have the feeling that the balance sheet is an expression of how much risk a company takes in running the business.

And that obviously translates and I admit that you know better than me that translate into risk for investments. How is that done, I obviously I leave that up to you. We're still running and we're proud about that, an entity ratio of about 30%, albeit that our entire balance sheet has been extended through the increase in volume and the increase in rate.

You see on the next page that the increase in the balance sheet on trade receivable, payable is quite significant and that is predominantly the financing of growth. But coming back to the quality of the balance sheet, let me - what I normally don't talk about, but let me talk about the goodwill and other intangibles. The EBIT together is around 950 million. The equity position is 2.3 billion.

So scope for bid or economy for bid that there is going to be a risk coming around the corner. Then if there is a situation where impairments become potential risk, our balance sheet I think is healthy enough to cope with that risk. If that is the case for any other balance sheet, I leave that up to you, but the only thing I'm telling is, this is something that we actively manage and we actively pass an item.

Cash flow, operational cash flow, you can see that is up 86 million. So the business is - continues to be cash generating. We have - where did you put the cash because obviously if you go down the list there is - cash balance at the end of the period is 127 million below last year and you can see the two big variances, the changes in working capital, I have alluded to that, we have to finance the growth and we to do that because help the growth and on the other hand we have increases that we're approximately accounting for 100 million.

Working capital development and I've been sensible about these numbers because this is working capital development and the management of DSOs and DPOs is a sensible topic. Because it means that our business partners, our suppliers, as much as our customers, they are as we are squeezing DSOs, extending DPOs, so everybody has the same interest of it. That is why since, a good two - two and a half, three years, we have thought it to be a bit more, let me call it intelligent about that situation.

And not going to our suppliers sense of saying, the new payment term is going to be 90 days, 120 days, 180 days, but we go to the suppliers and offer them an economic solution with our partners, trade chiefs in Citi bank to actually have supply chain financed, something that increasingly has a take up rate and helps us obviously to manage our DPOs at the same time with a good relationship and maintaining a good relationship through our suppliers.

You see here growth in capital at the current stage where were in December 2017 is 820 million, 200 million more than it has been at the same time last year. Still we are - as it is year-end position, slightly below our core reserve that we have had until the year-end between 3.5% and 4%.

What does that mean to the return on capital employed, current expense is around 64% and I'm adamant that by normalizing, if you like the two impacts that we have listed here, we have quite a large gap as you know from the difference of the average exchange rate that is used for consolidation of the P&L versus the month-end rate that is used for evaluation of the balance sheet, so that gives quite a hit on the return on capital employed.

The second impact we have is, through the consolidation of acquisition that has been relatively late in the year, be able to have the full balance sheet, but only a few months of the P&L results. If I were to eliminate to neutralize these two impacts, I'm comfortable in saying that the underlying business return on capital employed remains at around 70%. So no change to that number and I expect that also going forward to be a number that you'll see on that front.

Talking about going forward, these are our financial targets. As you know that traditionally we don't give very detailed targets and we stick to tradition. So again we're not going to give a lot of details on these targets. However, important and was discussed in the Capital Markets Day, we aim for a group conversion rate by 2022, but it's not '18, '19, '20, '21, 2022, that we have a conversion rate of 16%. I'm repeatedly being asked, so what is the composition of that? So how much improvement you need in Seafreight, in the Airfreight, in Overland, in Contract Logistics, to actually compose that number of 16%.

So my principle is that equally small or big in years, so that is not the message or that was not the message at the Capital Markets Day. The Capital Markets day message was, translate to you guys, we aim to improve the quality of the earnings of this company from the 14% conversion rate that we had at that point in time to 16%. Whatever the composition is going to be, wherever we're going to get them, but the quality of the earnings are going to be improved.

So in clear terms, our target was, if the numbers of 2016 would have been in 2022, we would have liked to make 120 million EBIT more, okay. So don't ask me because I don't have the answer. Don't ask me then what is exactly my predictions - my modeling into 2022, that's not the point. The point is, the quality of the earnings are going to be more than 16% better than it has been at the starting point.

Financial targets for the rest return on capital employed with the structure we have and the mix we have, we can confirm 70% going forward. We have an effective tax rate of 22%, 23%, some uncertainty here or some opportunities, if you like, maybe downward, after the US tax reforms, we're going to see how that's going to play in our P&L, once it is fully effective.

Working capital intensity, I'm pretty sure you've noted, we have expanded the corridor from the upper 4% to 4.5%, why is that, because we want to grow significantly and rapidly. So we have taken this review that for increasing EBITDA or working capital intensity, we want to [indiscernible].

That is 2022 and the conditions for that - you've also seen or the assumptions of that is also seen on that slide as usual relatively stable macroeconomic environment. We have not considered acquisition impact to that and obviously the IFRS 16 and that will have some impact on our balance sheet and some of the KPIs which we have not considered in these numbers.

2018, that's a bit closer. What is our expectation for market? You see here, Sea and Air freight 4% to 5%. You know that our targets grow double the market and we stick to that also for the year 2018. There is going to be a consolidation impact or a base impact, if you like, from the consolidation of the Airfreight, perishable volume that came in late '17, so there will be a rate effecting to '18. And ultimately the two other business units, Overland and Contract Logistics, also target double the market and 3% to 4% estimated market growth for the year '18.

Where - this chart lead us to the top because I'm really talking about the year 2017. And forgive me when I'm - when I'm heard a bit separating. The real business and how much profitability the business can deliver versus evaluation of the evaluation of the share on the financial market that does not necessarily have a one-to-one relationship as you know better than me.

You know the dividend proposal for 2017 paid in May 2018 is CHF5.75 per share. That equates to a dividend payout ratio of 93.3%, which is pretty much in line with our policy and reality that we have executed over the last couple of years. You know with that always between 75% and 100% is our regular payout for dividend based on that profit [ph].

What stick that means and I was brave enough to put shareholder return on that slide because sometimes also interesting to have a small look backward and able to be - to have a bit of a feeling if investors are - might be happy or not. When I look over to the last five years, you can see here our total return has been - in years somewhere between 1% and last year 2% to 3% ratio.

I know today in the morning the share has locked 5%, 6%, I also know why that is and interesting enough. It has nothing to with the underlying business. But we can debate that afterwards because we are in the environment of financial market where we may or may not like it. There might also be day trading taking place, which has impacts on shares like ours, which may have not sufficiently previously in the market place to actually count about that, but you guys are as always better than me gifted to understand that and see through the development on this.

I think 2017 has been a very good year for the simple reason because the result is very difficult in an enormously difficult environment. I think that as had - said very clearly, when you look at again the quarterly development of the P&L, we talk certainly on the very far left foot and we ended up quite solid with an increase of 20 million net profit after tax. For whoever thinks 20 million is a long turnout, I don't know, but 20 million is 20 million more than last year and 740 million is an increase of around 3%.

What's going to be next, I hand over back to Detlef on the KN+NextGen.

[Detlef Trefzger, Chief Executive Officer]

Thank you very much Markus. Another successful year 2017, improvement of profit by 20 million to CHF740 million, again a very high profit that the group has generated. Let me share the mixture and also the perspective for this year.

In London at the Capital Markets Day, September last year, we have launched our strategy, our new strategic program, called KN+NextGen, which will guide our investment process and fulfill topic for the next couple of years and which also has very ambitious growth and profitability target.

Leading the transformation is our ambition and leading the transformation means the transformation of our customers and their customer's business models and also in our industry. KN+NextGen, relates to customer technology and people and I would like to remind you to put focus on those topics that we have presented in more detail at the Capital Markets Day.

We will set a new standard for customer quality, customer excellence in our industry because that has been missing over many years. The customer excellence will be one of the drivers of our activities for the next couple of year. We will also make our business process with eTouch, the commodity part of our business a [indiscernible] implement invoice reconciled that's fully automated will become reality soon.

And we will continue acquisitions in order to accelerate growth or to get into new areas with complimentary services for supply chain and value chain services for our customers. And also our industry despite the whole automation and digitalization or whatever you might call it, our industry just remains a people's business, with feet on the ground to see interface of automation business growth solutions and compliments of full order; we will be able to drive future solutioning and growth.

And some of our collogues or our top managers who listening to this analyst call, I would like to thank all of them and their team for a very successful year 2017, for their passion, commitment and driving force in driving all our businesses closer in developing solutions and providing the best quality for our customers.

So the mid-term perspective is that spaces and Markus has said this, we will not only grow our business, but we will improve the group conversion rate to 16% and we will captured market areas around supply chain management that are complementary like financial services or data driven services.

What is our focus for 2018? Next slide, cost control [indiscernible] that propels to ascertain that our leverages scale effect are generated in all businesses. Digitalization as you will hear and see solutions in the next couple of days with regards to all our ability to use fixed data predictive analytics for new services and new solutions. Digitalization will be the game changer, we will apply this as a game changer for new solutions, customer facing, but also for further productivity in full fledge.

As mentioned before value chain expansion increasing the footprint of services with our customers will stay part of our activity especially in 2018, and we have an active M&A process, we evaluate potential targets and this is to be seen as an accelerator for our strategy implementation.

And with this is outlook for 2018; our focus topic. I would like to close this presentation and hand back to the operator for Q&A, but before we do so for those remotely listening, I would like to open the Q&A session here in the room first. When we do so, please state your name, make sure you speak loud enough so that those listening in the telephone are able to follow-up our discussion. Thank you very much. So who is first?

[Edward Stanford, HSBC]

Hi, Edward Stanford from HSBC. Two questions please, you talk about the difficulty with freight rates in the ocean freight market. We have seen some decline more recently as you see that as some are exercised in the pressure you are feeling. And the second question is, you mentioned the strength in the balance sheet, the limited amount of goodwill in the balance sheet, does that influence your thinking about each acquisition value, limiting your operations to more focus on acquisitions in the future?

[Detlef Trefzger, Chief Executive Officer]

Okay, let me answer the first question. The margin pressure is a result of the industry consolidating and optimizing their capacity structure. As you have seen in the quarter-over-quarter development that we have shown before, it seems to settle that. The pressure that we have seen has been - if you got used over the last three years, two years, or if you get used to rates from Shanghai to Xantosh [ph] of EUR2,500 or $2,500, and now the rates is coming back to a normalized rate. This takes time to be transferred back to our customers and I think this has taken much longer than we expected to happen last year. And, for this year we do not expect major margin increases, but also no margin improvements. So do the good old times come back soon, that is also doubtful.

[Markus Blanka-Graff, Chief Financial Officer]

So, on the balance sheet and obviously connection of acquisitions in goodwill, I think the message is, we're speaking to our strategy and growth and we hope that if we were able to come to market, the goodwill is very often generated through - I've been told overpaying target that is not what you're [indiscernible].

[Detlef Trefzger, Chief Executive Officer]

Okay, other questions. Mike, you will have to speak louder.

[Michael Foeth, Bank Vontobel]

Okay, may be following up on the gross profit for TEU question, basically I think the market is concerned that the decline in the profit of the TEU is at par as your productivity improve, and may be you can say a little bit about, what do you feel in your customer contact, how the pricing of the patterns go, whether there is really a structure of that down in each new contract and through that coming to an end or that is going up sell, so where do you see that standing over the next couple of years really, so that we can get that feel on [indiscernible].

The second one, I don't know how much you can share at this point already, but your Alibaba eTouch automated volume, you could get any idea on the take up and talk how much volume that is already today and also whether in your experience the volume that is basically cannibalizing your own volume, or there is new volume coming from the market there.

And the last one, there were a lot of talk about e-commerce being the main driver of the Airfreight market in 2017 and the transfer sometime - because basically is that a new norm for the supply chain that more and more stuff is slow or it will be just different warehouse infrastructures in a couple of years' time and not from the specific retailer, but more from the e-commerce guys and that will go back to Seafreights which looks like a more rational mode of transport for most things that are being from today. I'm just trying to understand the market dynamics there. Thank you.

[Detlef Trefzger, Chief Executive Officer]

Yes. So, let me start with the first question, structural change in the market has been accepted by customers. As I said before, to the year to show the new market dynamic in Seafreight and Airfreight and explain this to our customer base, at the moment we have no exception in the market. There is a whole market has developed continuously over the last quarter, as I has, this is more and more understood and accepted by customers. That does not mean, that we will not see slight margin decreases or improvements but the erratic changes and the pressure especially the first six months, 2017 we will not expect for this year. So our assumption for this year is rather for the whole year or rather stable margin development.

The Alibaba question we do not disclose details on customers usually, but all I can comment on is improvement solution and that is combined also with the KN FreightNet solution for –Airfreight for example has seen a lot of growth and volume development over the last 12 months. I can say that for e-commerce fulfillment in Contract Logistics, we have seen five zero, 50% growth as mentioned before, and we operate more than 80 fulfillment centers in 25 countries around the globe. I'm saying this because, what you are saying is right, there will be more and more localized replenishment centers on one side, on the other side as the consumers expect instant reaction, instant solutions more and more even in all our industry, this leads continuously to Airfreight solutions in that market. Especially as in Seafreight the supply chain is not showing the required quality with regards to time definite shipments. That's something that speak at the moment still, for the next couple of years for Airfreight solutions, for the consumer related transport.

E-commerce and that goes into the next question more or less as well. E-commerce drives for sure, cap rate that is consolidating online orders, and then flying them into the country of destination and then going into a distribution network, we will see more and more. At the same time, the volume growth can only be hopeless, the replenishment of the fulfillment centers can only be hopeless from volume perspective for Seafreight. But the reliability of the Seafreight product, congestion in airport handling capacity is still a bottleneck in some markets.

[Michael Foeth, Bank Vontobel]

Okay.

[Detlef Trefzger, Chief Executive Officer]

More questions here please?

[Unidentified Analyst]

You mentioned that 2.5% warehouses is quite idle in contract logistics, is this a number that will come through it and do you expect it to get down, given the increasing drive in e-commerce?

[Detlef Trefzger, Chief Executive Officer]

I think I am very comfortable with that figure, between 3% to 4% - has always been our target figure, we are better at the moment. The reason for saying so, because we have seasonally seen those warehouses to cope with and you have to have a certain idle capacity to cope with the seasonality requirement of certain industries, especially e-commerce. In [indiscernible] situation or situation, you have 5times to10 times more through put in those warehouses, and you have to make sure that you have the capacity and the structure in the organization in place to cope with that. So, I feel comfortable with that, long answer to a short question.

[Detlef Trefzger, Chief Executive Officer]

More questions out of the room here? Then I would like to hand back to Andrea, the operator and open the questions for those listening in the telephone call.

[Operator]

[Operator Instructions] The first question comes from the line of Andy Chu from Deutsche Bank. Please go ahead.

[Andy Chu, Deutsche Bank]

Yeah, good afternoon, this is Andy Chu from Deutsche Bank. Just two questions from me please, could you just give us the senses of your business that comes from perishables and also from your pharma business place within Airfreight. And then secondly just in terms of antitrust issues, most of the countries being resolved, but Brazil remains on your contingent lot better say last. Just being that's troubled me for a few years, I thought you've forgotten what that relates to and if there is a solution inside for Brazil place. Thank you.

[Detlef Trefzger, Chief Executive Officer]

Yeah, so Andy, first of all our perishable volume in 2017 in total has been 500,000 tons, through acquisitions. The two acquisitions I've mentioned this before, we have seen already 25,000 tons approximately in Q4 2017. So, from a 266,000 ton improvement less than 10% has been through perishable acquisitions. The rest is organic growth, strong organic growth both in the perishable - in our perishable network as such but also even over proportional for what we call hard cargo or in the non-perishable sector.

[Markus Blanka-Graff, Chief Financial Officer]

Yeah, you have noted well Andy in our little foot note, as you know some of these court cases take a long time. In the European Union it took 7 years, in Brazil I think it will top that equally. Not to say about Brazil, but it will be able to change their way how they work on their court cases. And, that that is the case that is ongoing and I cannot obviously disclose what is the content of the case. I can only tell you the case is ongoing and we wait for the authority to proceed.

[Andy Chu, Deutsche Bank]

I just got one more, just in terms of sort of volume growth as you are saying is obviously without the crystal ball. It feels like the Airfreight environment is still very strong, so maybe you can make a comment to, if it's all possible. How you are seeing Airfreight, I think, I've seen you talking about Airfreight moderating which kind of makes sense. But the shorter term trend into 2018 seems to be still very strong in the market.

[Detlef Trefzger, Chief Executive Officer]

Sure, we see this market started strong this year, and we can't have an outlook for the whole year. I think that has to be shared by Markus with you, 4% to 5% market growth over the whole year. At the moment we see strong growth in all our business, in all our network with regards to our KN PharmaChain solutions or pharma products are going fast. And that should continue in the next six months or four months and also the strong volume growth, also for our KN BatteryChain solutions. You know that we have a certified solution for dangerous goods transportation of lithium batteries, a strong growth market around the world, as electric vehicles are sold more and more and here we see a strong demand growth as well. So in total we are confident for the next six months, will this last throughout the year to be seen, I think we can share this with you in the Q2, end of this quarter.

[Andy Chu, Deutsche Bank]

Yeah, makes sense, thanks very much.

[Detlef Trefzger, Chief Executive Officer]

And, maybe I should add as always you know that you had and hope nobody forgot it, it was Valentine's Day a couple of weeks ago, and this is always the big starting point of the perishable season, with spring coming on, all the things that the consumers are looking for around February to Easter and that is now getting a lot of volume or that shows a lot of volume growth as well.

[Andy Chu, Deutsche Bank]

Okay.

[Operator]

The next question comes from the line of Joel Spungin from Berenberg. Please go ahead.

[Joel Spungin, Berenberg]

Hi, good afternoon everyone. I just got a couple, may be one sort of strategic questions and a couple on the numbers. So strategically, I am just sort of thinking about your comments about Seafreight being stable. I mean if we look at the last few years, obviously you've done a good job in terms of volume development within GP per TEU rates under pressure, conversion rates drifting down. As we go into 2018, obviously we still got a lot of consolidation still to come through, in the container market. We also hear from the likes of Mesa, they are trying to do more sort of end-to-end services themselves. Would it not be more conservative to assume that the margin remains under pressure going forward, that's my first question?

And just on the numbers, I know just in the balance sheet, that there was an increase of about 120 million in terms of unbilled revenues, is that also related to the general trend for working capital in terms of higher volumes and revenues. Is that just, something that trends up with that, or is it something else lying behind that?

[Detlef Trefzger, Chief Executive Officer]

Let me start with Seafreight market, we have a totally different reading of the Seafreight market. First of all the consolidation is over, we have eight carriers and those carriers are luckily making money again. So that helps them to invest into their own business model, which mainly is port-to-port. At the moment nobody is having a strong footprint in an end-to-end supply chain industry oriented approach. And, we partner with those carriers in order to drive eTouch further, the automated booking, the automated capacity management, the automated invoicing, all these are projects that we won with all of the carriers in order to improve efficiency here. The market from all our point of view will show growth again and that should be taken from the martin perspective. I am not talking about how the percentage margin up or down.

And also, conversion rates, we are celebrating the past maybe not - or we don't look into the past long enough. I remember the time where we had discussions internally to set a target of a conversion rate for Seafreight of 25%, this is four years ago. Four years ago, we all got used to 30% and more, but we had windfall profits obviously. At the moment from a structure point of view and you asked this question before, from a structure point of view Seafreight margins should stabilize, there is increasing demand for Seafreight shipments and we are confident that the quality of the Seafreight production for solutions shall increase and improve further and will meet more and more customer requirements again.

[Markus Blanka-Graff, Chief Financial Officer]

And then the unbilled revenue, that work in progress, that date is pending in the same line as working capital growth, obviously that is the like function of it and there is nothing to figure out.

[Joel Spungin, Berenberg]

Okay. So, that number is again really just sort of being considered as part of the general trade receivables in the same trend?

[Markus Blanka-Graff, Chief Financial Officer]

Yeah.

[Joel Spungin, Berenberg]

Okay, thank you.

[Markus Blanka-Graff, Chief Financial Officer]

Okay.

[Operator]

The next question comes from the line of Bruce Chan from Stifel. Please go ahead.

[Bruce Chan, Stifel]

Yes, thank you operator and good morning gentlemen. If memory serves, I think you've talked in the past about roughly half of your area in sea business being more of a traditional port-to-port portly move, excuse me that's your sea business, and has been more of a higher tier value added services. In terms of the new business that you are on boarding can you talk about the breakdown there, is that in line with the existing mix or are you seeing more value added services penetration?

[Detlef Trefzger, Chief Executive Officer]

That's different business, let me start with the Airfreight, we see a strong growth in complex solutions. KN PharmaChain, KN BatteryChain, all those - KN SecureChain, all those solutions that we've developed in the past show strong volume growth. So, that is what we are seeing in the Airfreight market, so more complex end-to-end control column in its specific - industry specific solutions. In Seafreight I suppose, it's a commodity port-to-port high volume, but with high truck and trades requirement here our KN Lockwin [ph] and our solutioning with regards to monitoring and tracking the cargos throughout the supply chain is a very important sector for winning business and solutioning. All business units especially Seafreight has become part of a pharma chain or a battery chain solutioning that we have launched years ago. And that also creates volume increases or volume improvements with Seafreight.

[Bruce Chan, Stifel]

Great and then one final question, given your comments about the consolidating and stabilizing Seafreight market, do you anticipate any improvement in service that may start to peel back some of the growth from Airfreight that may have switched over due to I guess poor service?

[Detlef Trefzger, Chief Executive Officer]

Yeah, and we had a similar question here in the room before. I think this will - we will see this eventually if we have reliable and stable services, in the Seafreight sector. At the moment 78% and only 78% of all Seafreight services that we see are on time. And on time means plus, minus one day, for e-commerce fulfillment for certain customers in the pharma sector, in the hi-tech sector, in automotives supply chain line feeding services, these services are not reliable enough. And, if I say 78% you have 22% that are not meeting this time window and then you have to work around. So, there are at the moment - there is a high demand or requirement in improving the Seafreight supply chain and that is known to all participants in the market. And, I think you see - this will see improvement over the next couple of years as carriers are making money again and can invest into enhancing their products.

[Bruce Chan, Stifel]

Excellent. Thank you.

[Detlef Trefzger, Chief Executive Officer]

Thanks.

[Operator]

The next question comes from the line of Robert Johnson from Exane. Please go ahead.

[Robert Johnson, Exane]

Good morning everybody. Just two questions from me please. So, first of all on consign of freight rights, one of the large consign shipping lines recently said that it has been successful in raising the contract rights that it has agreed to trust maturity in 2018 so far, even after adjusting to the higher fuel cost. Could you just maybe comment on whether that is consistent with working or not rising in the market as a whole?

And the second question on the 2022 outlook, sorry to ask more questions on unit profitability, but could you possibly provide some color on how you would expect the gross profit per TEU and the gross profit per 100 kilos to develop over the next five years just holding the currency constant? Thank you.

[Detlef Trefzger, Chief Executive Officer]

First of all thanks for your question. We have a lot of glass balls, unfortunately this sort of glass ball combination we have not found yet. And, the reason I am saying this, we are not looking at the margin per TEU or ton anymore. And we have said so very detailed at the Capital Markets Day. It's about the EBIT quality per ton and TEU that is what we will look at and optimize, because it grows are our own production or our own productivity gains and our own digitalization of the operation of Seafreight and Airfreight. And that is our key focus, so even - and we have made this example, even with commodity shipments with a very low margin, because it's commodity, per say gross profit TEU, we can have the very high conversion rate of 70%, 80%, 90% through an automated eTouch solution and having said so, also a very high EBIT per ton or per TEU. And that is our strategy so independent of the solutions for to high volume part of the market, we can't predict how margins develop, we concentrate on driving productivity and automation of our own value generation.

The other question related to container freight rates, yes, the market has changed and through the consolidation of the carrier - through the carrier consolidation we have seen increasing market rates month-by-month, quarter-over-quarter last year. The volatility of the rate development, and we have mentioned short chain patterns before, I'm sure you remember that, this is gone. So, we believe that the high market rates will stay rather stable for 2018 with seasonal developments as always, but we have the erratic rate development and short chain patterns, we don't expect to see this year again.

[Robert Johnson, Exane]

Thank you. May be just going back on my first question, may be just re-phrase the question, given that you guys are focusing more on the EBIT per unit going forward, could you provide some color therefore on the EBIT per TEU and the EBIT per 100 kilo outlook for 2022?

[Detlef Trefzger, Chief Executive Officer]

Yeah, I would love to and I know you are looking for data and information for your mother. But we don't disclose details of the business. The guidance we gave is the in the midst of all activity we confirm the target we have set for 2022 is 16,16% conversion rate for the whole group in the year 2022. That is our ambition and that is the financial guidance we give.

[Robert Johnson, Exane]

Thank you very much and have a good afternoon.

[Operator]

The next question comes from the line of [indiscernible] from SEB. Please go ahead.

[Unidentified Analyst]

Good afternoon, thank you also, couple of questions from my side. So, first is regarding Seafreights, rates have been relatively stable as you mentioned and you're also expecting to remain fairly stable at these high - relatively high levels throughout 2018. I would have thought in such a scenario that you would be able to improve your yield or your gross profits per bucks a little bit more than actually have been in the case here. So, that's the first question if you can elaborate a little bit on that.

And then secondly regarding your conversion rate of targets for '22, is there anything cost resulted in sort of increasing of cost or investment in some of that journey that you are about to embark on, that is holding back the conversion ratios, since it's actually declining on a group level last couple of quarters?

[Detlef Trefzger, Chief Executive Officer]

Okay, let me start with the latter question, you know that we invest into the new generation operating systems, sea and air lock at the moment. We expense all those investments in the year up definitely, so there's no work improvement and that's for sure is causing additional costs as we run through systems at the moment in parallel. We expect also that this will be ongoing for the next couple of years because we are on time in plan and for example Airfreight will close the full deployment of air lock end of this year. Whether that is causing a significant change in the cost structure to be seen, I wouldn't give any guidance or comments here. This is stable rates in the market, there will be seasonal rate development, I didn't say we have a fixed rate for 12 months and it depends on how are improvements in operations that we have a decent margin or EBIT per TEU generated. So, I am confident that our Seafreight team will drive everything in order to meet their targets for 2018.

[Unidentified Analyst]

Okay and maybe a follow-up on the mix you mentioned, you've been talking about that previously regarding the pharma increase to shares of volumes in the pharma space. Is that mix does that chains your visibility and the share of constant volumes that is more responsive?

[Detlef Trefzger, Chief Executive Officer]

I'm not sure I got that question, can you repeat.

[Unidentified Analyst]

The question is regarding the visibility in your business, I mean some of the chains that you have done in terms of the volume mix, it's a bit more for example you mentioned pharma, volumes that you have been getting in, has that changed your visibility or do you have more contract volumes now compared to what you had previously?

[Detlef Trefzger, Chief Executive Officer]

Yes, for sure, and especially for Airfreight, we have much more contracted volume especially in Airfreight.

[Unidentified Analyst]

And the visibility, can you give us any sort of indication about visibility?

[Detlef Trefzger, Chief Executive Officer]

No, unfortunately not.

[Unidentified Analyst]

Alright thank you.

[Operator]

We currently have no further questions in the queue, so please be reminded. [Operator Instructions]

[Detlef Trefzger, Chief Executive Officer]

Any additional question here from the room, oh yeah there's one question.

[Unidentified Analyst]

There maybe two and a follow up, one is when you look at sort of in the rare view mirror, there's no longer just the old trend DHL tanker kind of [indiscernible] very tough going. Does that change, your approach about how you look at the market, and how you want to grow? Do you think that you need to accelerate growth because of these guidance closing in and being very acquisitive? That's one and the other one on land price. Maybe two, in fact I understand that it's more or less a bit difficult in Q4 in the US, can you elaborate on what's been driving that and whether you think that's temporary or would go away. And then there's also a [indiscernible] and deal with that rather less opportunity or with the margin going forward. Thank you.

[Detlef Trefzger, Chief Executive Officer]

Yeah, we usually look rarely in the rare mirror but more ahead and we drive fast as you know and with our data company we're not able to predict the future with a high predicament. At the moment I think our strategy that we have launched and the focus on driving productivity, automating our business, establishing eTouch with the target of [indiscernible] in the year 2022 in Airfreight and 20% in Seafreight, this will be clearly improving or will be the ingredients that help us to meet the conversion rate target of 16%.

We always respect our competitors, but the more competitors are in the market that act rationally and read the markets like we do, the better is to go into a competitive situation because I've said this many times in the past, we're not driving the price war, we will not drive the price war. We have a high quality customer excellence with our customer promise high quality and this deserves a certain compensation and that you will never see from us in the years to come.

US intermodal we've seen a bent market situation over the last 18 months and I have to say, it's starting to accelerate again with oil prices higher, high consumption, driver scarcity also in the US, not only in Europe, regulations for drivers also in the US, we should see a more positive outlook for the US intermodal business in 2018. At least that's what we see for the next six months, whether that lasts throughout the year, it depends on whether consumption in the US and the consumer confidence continues to grow and develop as it did in the past. Yeah, does that answer question? Any other questions?

[Operator]

There are no further questions on the phone lines. Thank you.

[Detlef Trefzger, Chief Executive Officer]

Then thank you very ladies and gentlemen for listening to our analyst call on the year end 2017 results, leading the transformation is our ambition and whether we got traction in implementing our strategy in quarter one 2018, we will share with you on April 24 in the next analyst call. In the meantime, all the best and talk to you again soon. Bye, bye.

[Operator]

Thank you for joining today's conference call. You may now replace your handsets.