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Kuehne und Nagel International AG
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Ladies and gentlemen, welcome to the Full Year 2018 Results Conference Call. I'm Alice, the conference call operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Dr. Detlef Trefzger, CEO of Kuehne & Nagel. Please go ahead, sir.
Sure, good morning, good day, good afternoon, and good evening to all of you, and welcome to the Kuehne & Nagel Analyst Conference on the full year 2018 results. Our CFO, Markus Blanka-Graff, and I welcome you from sunny Switzerland.
In 2018, Kuehne & Nagel increased annual results again. This is the fifth year in a row where we outperformed previous year's results and we want to thank – I want to thank, we want to thank all the team members of the Kuehne & Nagel Group and all our colleagues around the globe for an outstanding performance last year.
The group earnings went up to CHF 772 million in 2018. We've seen a strong volume increase in seafreight of 7.7% or 335,000 TEUs. A strong volume increase also in airfreight of 11% or 173,000 tons. A substantial net turnover improvement in overland of 13.1% and also a strong net turnover growth in contract logistics of 9%.
And as always, we go through the presentation that we uploaded this morning, and we continue on Page 4 of the slide deck. Despite the markets weakening end of last year, 2018 has been another successful year. The consistent implementation of our overall strategy, the business strategy, the business programs of the business units showed the respected effect.
Net turnover increased by CHF 2.2 billion almost or 11.7%., gross profit by CHF 686 million, EBIT by CHF 50 million and the earnings per share improved by 4.4%. The year 2018 weakened though in the fourth quarter. From a market perspective, we saw a changing environment. Therefore, we want to lead you through or let me lead you through Page 5 of the slide deck in order to show the very specific development quarter-by-quarter last year reflecting the macroeconomic and consumer dynamics.
Let's have a deeper look into the first quarter. We had a lot of tailwind from quarter four 2017, with strong volume growth continuing in – quarter one 2018, strong macroeconomic momentum and a lot of consumer dynamics in the market. The Kuehne & Nagel organization started to rollout the road map 2022, strategic program and launched already in quarter one, two digit platforms in seafreight only.
The second quarter, we start to face some southwind maybe, tailwind continued but some first southwind came up and the trade war and trade disputes started to become a topic in the market. Signs of trade conflict is what we saw, but we didn't see it in our networks at that time. Strong airfreight growth continued. And especially, with our Kuehne & Nagel chain solutions, the solutions that we deploy in certain – for certain industries showed a lot of volume growth in Tradeshift.
Quarter three, a very solid quarter, with GP up 10% and EBIT improvement of 5% versus previous year's quarter three, reflecting the macroeconomic heated up disputes on trade settlements or trade relations not leading to settlements or conclusions. Trade tariffs were imposed in quarter three. And the positive momentum from our customers, the feedback we got from our markets, from our volume customers, from our shippers were still very positive. Our focus in quarter three has clearly been on driving volume, improving – growing volume.
Quarter three – quarter four started with that momentum from quarter three, but changed throughout the quarter. We saw some first headwind in December. Macroeconomic still stock bid up in some markets, struggling to find some political solutions and conclusions and the trade disputes continuing even heating up with further tariffs being imposed. In December, we saw surprisingly low volumes in our networks, both sea and airfreight and this started second week of December. And for the first time in 2018, our customers started to become insecure about their own outlook and their own developments.
Kuehne & Nagel – it's Kuehne & Nagel because we can react fast, we are agile, we see those developments and we have initiated immediately safeguarding measures. And I would like to lead you to what we saw in December last year and how we reacted on the following page, Slide 6. Especially the automotive but also the high tech industry and the retail industry started to struggle. And we had some profit warnings out in the market from those industries in quarter four and especially in December. Also, the European export trade weakened throughout December. And especially, Asia and North America related trades saw a significant declines.
Our measures immediately initiated in December. We adapt our – adapted our transport capacity. We go more on spot markets because rates are more favorable at the moment on most of the trade lanes. We initiated cost reductions programs in markets where we see that volume forecasts are sluggish or questionable, and we accelerated our already existing efficiency improvements throughout the organization. Also we started to be more selective in our growth with higher-margin customers, especially in contract logistics in order to prepare for 2019.
These [indiscernible] will take time to be visible for you on the call because they need to be implemented and they usually address investment into the measures as such. So the year 2018 started extremely well, quarter one throughout quarter three. And just in December, we saw headwinds and less volumes in our networks that we had to react on.
Let's continue going through the different business units. Slide 4, a short overview sea and airfreight and then we go as usual through the volume development as well as the unit GP cost and EBIT development.
Seafreight. We launched the KN ESP platform in March 2018, so last year, just a year ago. And we got a lot of interesting and new business with our digital supplier management platform. This was extremely well accepted, and we even upgraded the solutions throughout the year. But we also saw continued gross profit pressure, marginal pressure on gross profit margin, which particularly or partially has been offset by cost measures in our operational leverage but not fully.
The airfreight business unit has been seeing acquisitions being implemented and integrated into our organization and the enhanced performance and the delivery of growth, but not only auto, operational organical growth has been very strong. The success of our industry solutions and you know that we have launched KN BatteryChain and KN InteriorChain last year was extremely positive.
So the take up of those solutions by our customers and the volume put through our networks based on this integrated solutions was extremely well perceived and positive. Let's go through the details of the seafreight and airfreight volume development on Slide 8.
In seafreight, we saw a market that was very different by trade and throughout the year. We saw Asia-Europe Eest bond trades with slight growth, 1% to 2%. We've seen the Trans-Pacific East Bound with a strong U.S. economy driving imports being very strong which has accelerated until early quarter four but not fully to quarter four.
We've seen Asia imports with negative growth in the market, flat to negative, especially reflecting the China waste ban. We have reported that earlier this year in quarter one and quarter two calls as well as China imports from the U.S. reflecting the restrictions on agri-products being imported to China.
Intra-Asia continue to be a strong market and the performance of Kuehne & Nagel was relatively strong in each of those trades. Asia-Europe, very strong growth. Intra-Asia with a very strong growth and U.S. imports from both Europe and Asia, we were seeing strong growth but rate pressure, obviously, because capacity, especially on the Transpac has been tight at a certain time of last year.
In total, we were able to improve our container volume by 335,000 TEU, plus 7.7%, ending the year – transporting almost 4.7 million TEU in our networks last year.
The airfreight market, different dynamics, different developments, we saw strong European exports especially through North America or through the Americas, also South America, while exports to Asia declined. And the market of intra-Asia reflecting orders set already with regards to seafreight very strong growth both markets as well as ourselves.
And North America exports showed growth on transatlantic as well as partly transpacific, and we were able to outperform and grow over proportionally, especially with our perishable exports from North America and South America.
Airfreight showed 173,000 tons more in our network or plus 11% last year and a strong dynamic outperforming market not only on the basis of recently conducted acquisitions but also organic.
Let's move on to Slide 9, seafreight. In seafreight, we pursue a strong growth strategy based on our platform business and managed business which is affecting the overall yield per TEU due to the mix effect.
The normal network volumes, the containers, the TEU shipped in our normal volume standard networks show a rather stable margin per FCL. So the yield decline in 2018 is due to the mix and for sure was also impacted in quarter four through less volumes than anticipated and a certain time to react and to see the cost measures showing traction.
For the whole year, we show a yield per TEU of CHF 316 and an EBIT per TEU of CHF 89. And the year-to-date variance analysis which we usually report in those calls, we had a volume effect in our networks of CHF 108 million, a margin effect of CHF 14 million and the cost effect of CHF 88 million, reflecting also our investments into technology and all the transformational programs that we have set up.
Let's continue on Page 10 with airfreight. Obviously, we have more perishables in our network. And usually, you would expect that the perishables in the network generate a much lower yield, which was the case, but here the strong yield effects or the strong yield in our hard cargo – classical hard cargo business clearly offset the mix effect that we generated through increasing the volume – the perishable volumes in our network.
For the whole year, we showed very strong gross profit per 100 kilos of CHF 69, a very strong or stable EBIT per 100 kilo of CHF 20. Also here, the year-to-date variance analysis in million Swiss francs, CHF 114 million volume effect and margin effect of positive CHF 52 million and then a cost effect, including for sure the effects from acquisitions, and so on, of CHF 124 million, leading to a very result improvement in airfreight last year.
And as we have always stated and also been quoted in different forums, and newsrooms, and so on, we pursue an active M&A strategy. And one example of that M&A strategy is the acquisition of Quick International Courier, a global market leader in time-critical shipments. And I would like you to follow me on Page 12 to give you some details on Quick International Courier, a business by the way, which we closed effective December 31, 2018. Quick International or Quick as we call them is active, very successfully in high-growth verticals, especially in the aerospace sector, AOG Aircraft on Ground with the brand Sterling and also in the healthcare and pharma arena with the brand Quick STAT.
The time-critical shipment market, airfreight market is a premium, high-growth, high-yield segment, and we have always been active on single opportunities on contract basis. Here we have now a player or an organization that is set up with four control towers in the U.S., six – two control towers in Europe and 11 support centers around the globe driving and running time-critical shipments for their customer base.
We see immediate synergies with Quick from a customer, from a carrier, from a process point of view, enhancing and enlarging, widening our service and solutions scope in our solutions that we have already set up, KN PharmaChain, KN InteriorChain, AOG desk and so on and so forth.
Some financial details, the revenue annually of Quick is USD 230 million with approximately 500,000 shipments per year in their network, more than 500 employees. And as said already, their setup is based on control towers complementary to our control tower activities, for example, that we pursue for AOG desk.
Purchase price CHF 508 million but including a contingent consideration of USD 202 million depending on – Swiss francs sorry, depending on the financial performance until 2021.
And with that short overview on Quick, I would also like to heartily welcome our new colleagues from Quick Dominique, the COO and her team. Welcome, we look forward to jointly conquer the markets we are active in and create the synergies that we have discussed in the previous months prior to signing this agreement.
Let me continue on Slide 14, Overland, we have presented Overland over the last couple of years which many assets but for the last three years or four years even with a statement that I would like to reiterate and strengthen and stress, Overland has performed outstandingly last year and generated a huge success, not only in growing their top line, but also their bottom line. The strong performance was especially seen in U.S. intermodal business. Markets are back. We performed very closely, very successfully in those markets and also leveraging the top line growth with significant profitability improvements through our productivity programs and the focused markets approach that has been set up in Overland.
What contributed to the strong performance of Overland, clearly, European groupage and LCL business, intermodal, as said already and the transport management business were major customers in the U.S. and also industry-specific solutions which go across all our business units and Overland being an inherent part of those solutions, especially KN PharmaChain for patients and healthcare customers or pharma healthcare customers in Europe and North America.
The next slide shows the business unit contract logistics, Slide 16. And as we have stated over the course of the last calls, we are reshaping our business in contract logistics. We started 2018, we will continue this year. We not only review the entire product portfolio, but also focus on the industries and solutions that generate higher margins and show growth.
One solution is for sure e-commerce fulfillment. One area where we are very active in and we see a lot of new contracts in that sector. The same is true for KN PharmaChain in our pharma solutions that we pursue. And this leads to a strong top line growth, net turnover growth and also GP growth. Overland also reshapes its operating model, and we continue to invest into technology, picking enhancement, new warehouse software – warehouse management software and that is especially reflecting the specific demand and needs of e-commerce fulfillment but not only also other solutions.
And I'm on slide 17. This has for sure impacted our EBIT development last year. So EBIT declined by 14%. And as said before, we are at the moment very selective with new projects and further growth moving into Q1 and Q2 2019, while we continue transforming the contract logistics business and the investments into technology and all the transformational and enhancement reshaping activities that I've mentioned before.
And with this overview, I would have like to hand over to Markus, who will lead you through the details of the 2018 financials.
Thank you, Detlef, and welcome ladies and gentlemen. And I start on Page number 18, income statement and obviously everything that Detlef has explained from the business perspective at the end of today finds its way through the income statement into the numbers.
And you can see, follow me quickly through the quarters. We started probably in – on a very high end in the year 2017 on the fourth quarter, probably one of the best quarters ever recorded in the history. And we started with a lot of enthusiasm from a macro perspective, but also from a company perspective into the year 2018.
And as you can see on the page where you look at the variances quarter-over-quarter on an EBIT line, we were in the first quarter's CHF 50 million ahead of last year. Then through various macros that had – where they worked against entire industry, but also worked against the global economy, we also felt that there was a slowdown over the quarters, first signs in the third quarter where we were still CHF 11 million above the third quarter 2017 in terms of EBIT but our state of being better than the year before was slowing down.
Ultimately, at the end of the third quarter, we were CHF 60 million ahead of the year 2017. And in the fourth quarter for all the reasons that Detlef had alluded to, we were going backwards by CHF 10 million, ending the year still with CHF 50 million more EBIT than 2017.
What are we doing about it? And I think that at the end it's the most important topic that we needed to talk when we talk about cost. And I'm going to guide you through the Page number 19 and following 3 pages that are main topic around eTouch.
eTouch was a terminology that we have introduced at our Capital Markets Day in September 2017 as an opportunity to execute shipments in the fully automated way.
Since that time, we have been working internally on the preparation of the technology and the automation opportunities to do that. We have been very covered up with information. We have not given a lot of information outside to the market just to make sure that we get also our act together right and can present a viable situation and a viable solution going forward.
Page number 19, why do we do that? So why do we actually do eTouch? Well, the simple answer is to increase profit, but there is a bit of a more sophisticated way. So for us, it is a response to something that we expect in the future, which is an ongoing structural margin pressure for shipments that are on the less complex, lower service side of the business.
We all recognize and you all know that, that not every shipment that we are handling in our organization is a super high value service shipment. There is a couple of shipments that only cover a short part of the supply chain but also shipment where we do very little additional value added too.
Shipments that we will identify as being addressable with a fully automated execution. We will call eTouch shipment and we expect a conversion rate that will be around 60% to 80%, only through technology and automation at a shipment level.
What is addressable for volume for us? I think we had been in various conversations, we try to convey the message what is the addressable volume. I think what we come today is around 20% of the seafreight business as it stands today and around 45% of our entire airfreight shipment would be addressable through the eTouch automated solution.
Out of that addressable volume, our aim is depending on the business unit, seafreight a bit less, airfreight a bit more to convert around 20% to 40% of this addressable volume into executed eTouch shipment. That will clearly drive conversion rate up.
So to anticipate a question of being asked yet is that going to be our driver for conversion rate of 16% for a group? Yes, it will drive us towards the conversion rate target of 16% but that will not be the only thing that we need to do to arrive at that conversion rate. And – let's leave that aside for a moment, let's get a bit more into the details of eTouch.
Page number 20, what is it? And when you look at the page, we have tried to use a couple of symbols – commonly used symbols around supply chain to demonstrate in which areas of supply chain we are active. And for each of the business units that we have seen in the sea and in the airfreight area, we have put a couple of numbers together which are for illustrative purposes based on today's volume.
So when we say the addressable volume in seafreight is around 20%, so we will then be able to convert, let's say, 10% to 20% of the addressable volume into fully automated. So out of the total volume we talk today, let's say, around 250,000 TEUs, that will be executed with a 60% to 80% conversion rate.
Same calculation on the airfreight side, we will talk around 400,000 tons today that would be operated under full eTouch 60% to 80% conversion rate. In relation to our today's volume for airfreight, while 400,000 tons out of 1.7 million that is like 25%, right.
It's like 20%. So this is the magnitude of what we aim for by the year 2022. Is that going to be a linear way to get to that point? Most likely not. Automation and technology will be put in place side-to-side on a process, process journey. That means only when processes are linked up together then we will be able to cover various steps within the shipment execution in an automated way.
So most likely what we will see is that our impact on the numbers will be very much loaded into the years 2021 and 2022. This is the volume conversation we have, but we also need to look at what are the values and what are the financial framework, which of the shipment we are addressing.
Page number 21, basically, gives the answer on what is today's commercials around the addressable volume. And unsurprisingly, I'm giving you the explanation for the left side of the slide where we look at the unit per – at the gross profit per unit. Today, in our entire business mix, seafreight, we generate around CHF 300, CHF 310, CHF 320 gross profit per TEU. That is a whole range as you can imagine from very little to CHF 400, CHF 500. The average is at CHF 300 to CHF 320.
The addressable volume, so the shipments that where we do less value added, where we do on a shorter piece of the supply chain, of course, we are not making CHF 300, CHF 400 GP, we do less. Currently, we have identified the addressable shipments with a gross profit per toy that is somewhere between CHF 60 and CHF 70.
So today, and I'm being very simplistic on this, today when we operate these shipments with that kind of gross profit in our existing operational model, we will generate 30% conversion rate. So 30% 60% we will make CHF 20 EBIT. Yes, we know that. All of us view that the industry does not own delays out of high-value added services. But these are the shipments where we are going to target instead of making CHF 20 per shipment, we want to do CHF 50. And that is where our whole work is going to go to that we have an incremental EBIT per TEU of CHF 33 in my model or doubling the conversion rate versus the average today.
Same conversion of airfreight, and I know that there's already some questions out there, why is it in airfreight the gross profit per 100-kilo in the average the same as in the addressable volume? Very simple because the addressable volume in airfreight is far more around the mix of not specific meaning. Perishables, PharmaChain solutions as Detlef has alluded to. It's far more in the general mix cargo included where we see the addressable volume. Hence there our leverage will be, again, from 30-ish percentage conversion rate to date into 60% to 80%.
So now it should be relatively straightforward when we look into the volume section and the financials around it to figure out what is the ambition and what is the impact on the financial model on the sea and airfreight. I'm pretty sure there's going to be a couple of questions around that, but that is kind of the information that I would like to share at the moment and move from the P&L impact and the business model impact towards balance sheet.
Balance sheet and I'm back on the 31 of December 2018, Page number 22. Not much movement. Still today, we have a very good equity ratio. Our balance sheet total around CHF 7.5 billion with an equity of CHF 2.3 billion. So that translates into an equity ratio of around 29%.
Anticipating, next Page number 23, the impacts of IFRS 16, all the operating leasing put onto the balance sheet which leads to an extension of the balance sheet, we will still have an equity ratio under the new balance sheet reporting standards of around 24%.
What is the impact? Specifically of IFRS 16, Page number 23, on the balance sheet items, we will add, as I just said, around CHF 1.7 billion, CHF 1.8 billion towards the extension of the balance sheet. On the income statement, you can see that here over 3 basis shift from SG&A expenses into depreciation and interest expenses. We would see EBITDA increasing approximately between CHF 420 million and CHF 460 million. Depreciation increase of CHF 400 million to CHF 450 million and EBIT impact of around CHF 10 million to CHF 20 million and the profit before tax impact close to zero, I would estimate it today of negative CHF 5 million to CHF 6 million due to the front loading of the IFRS 16 calculation.
Thirdly, but not to be forgotten, on a cash flow statement, we see from a pure cash flow that should be cash neutral but there is obviously a reclassification in the reporting from the operating to financing activities.
Talking about money, Page number 24, cash and cash equivalents. You see at the current stage on the 31 December 2018, we have roughly CHF 500 million cash position available. What are the main variances between 2017 and 2018? We have listed them briefly. We started a bit lower working capital. We have put CHF 130 million into the working capital, which is putting the growth or growth needs to be financed through that. We will just talk on the Page 25 then what is the movements on the DSOs and DPOs. Then we have, obviously, have higher CapEx. Also there, there is growth in the country logistics area that was driving that and acquisitions plus a little bit higher dividends than 2017, have led overall to the position that we are in by the end of 2018.
Talking about working capital, Page number 25. I think that we are still within the corridor that we have given ourselves for working capital intensity between 3.5% and 4.5%. We are at 4.1%. You can see there is an increase compared to a year before.
Where that increase come from? DSOs, I think, we have been able to defend, if you like, to work very well with the customers to have different solutions in place not to have much longer extended payment terms. But on the DPO side, very clearly, two components that were driving a higher – or sorry, a shorter DPOs by around 7.5 days. One is the overproportion of growth compared to sea and airfreight of contract logistics, which leads to receivables but no payable other than if you consider payroll as a payable.
So payroll doesn't have payment terms unfortunately. It needs to be paid on a monthly basis. That is one driver of this. And the other driver we have to be clear on that as well with seafreight carriers getting far more into an allied – or allied and aligned situation on the market. Also here we have come under pressure.
Page 26, return on capital employed. I would like you to look at the top line of these two on the graph, which is 58% in the fourth quarter or at the end of the fourth quarter 2018, because as you have heard by December 31, 2018, we have consolidated the balance sheet of the Quick acquisition which obviously the balance sheet came over immediately, but there was no EBIT at that point in time. So you see a little bit of the impact of the acquisition on the lower line. Going forward or looking forward IFRS 16, we would expect and estimate roughly an impact of around 1% on the original capital employed.
Coming to Page number 27, financial targets. Unsurprisingly, I guess, nothing new on the left side. We stick to our target in 2022 to have a 16% conversion rate from GP into EBIT for the group. And please never forget, this is assuming the same mix between the business unit as it has been 2017. So when – obviously when there was over proportional growth in some of the business units, that might distort that number either favorably or unfavorably, but we want to measure ourselves against the mix remaining equal.
Return on capital employed, excluding acquisitions, we want to stay at 70%. Simple answer to that we just have to make more EBIT and we’re going to get there. So I think that is a simple target to do that, and eTouch is going to be part of that journey. Tax rate working capital, no change today.
Expectation from volume perspective for 2019, I’m not going to read this slide to you, but I think it tells we want to grow at least double the market growth. About the market growth, I think we can all have an opinion. We see currently – or our expectation at the current stage is what is written here, seafreight, 2% to 3%; airfreight flattish to plus 1; and overland contributed pretty much in line with GDP for the market. Our ambition, double the market in the business units.
Page 28, last but not least, also relevant. At the current stage, we are prepositioned towards the supervisor report – excuse me, towards the Annual General Meeting for a dividend of CHF 6, which would translate into a dividend yield of, again, roughly 4.5%, 4.6%, with a payout ratio of 93.3%, also that very stable.
That would conclude the financial overview. And I would hand over back to Detlef for the outlook 2019.
Outlook 2019, we have looked into our crystal balls and have spoken to our customers. We expect 2019 in total to be another good year, but very challenging. Especially, in quarter one and quarter two, the insecurities in the markets will have the impact. We need resolutions for trade disputes. We need clear conditions for future trade. And eventually, we need less noise in the news on what’s going on or is going to be postponed. And we concentrate on our sales and our customers cost control stays in our focus, as mentioned before.
Technology as a game changer, is a prerequisite also for eTouch. As Markus has shown, we will continue with our technology driven or enable transformational path and we confirm our organic growth targets was growing double as fast as the relative markets of the business units. And with that, we clearly aim for improving our results in 2019 further. But as said, quarter one and quarter two, very much depends on resolutions in the trade environment, the trade regimes and that can’t be discussed.
And with this message, I think we can hand over back to Alice in order to open the Q&A for all of you.
The first question comes from the line of Daniel Roeska, Bernstein Research. Please go ahead sir.
Good morning, gentlemen. Not surprisingly three on eTouch, if I may. The guidance you’ve given on eTouch today, it seems to be just a little less ambitious than your previous plans from the CMD in 2017. Lower boundary of conversion rates down 10% from 70% penetration aspiration little bit lower. Why is that the case? And kind of what are the key drivers for this a little bit more cautious June.
And secondly, if we take your guidance, it seems though that you’re expecting eTouch OpEx for unit could be more than 50% lower almost than a traditional shipment. Could you elaborate what the tangible example kind of what it is your employees don’t do any more in that moment? And whether the biggest benefit is in booking, execution or fulfillment invoicing and kind of which processes kind of are you looking at and targeting the most?
And last year, you shared your ambition in terms of addressable and penetrated volumes for eTouch. Could you comment on today’s starting point kind of where are you right now in sea and air in terms of those volumes and penetration? And explain a little bit how the seafreight is different from the airfreight since you’re seeing a lower penetration? Markus, you commented a little bit, but maybe a little bit more color, which processes in ocean – what makes it more difficult to have more addressable volume in ocean? Thanks.
Hi Dan, it’s Markus. And I think, I just take a random sequence, because I’m going to explain this. So I’m not going to do one, two, three, four, but I’ll start with a difference between sea and airfreight, because that helps me also to explain what people are going to do and not going to do. I think the biggest difference between sea and airfreight shipments is just the duration of how long in time actually a supply chain is.
And as a matter of fact, you may agree with me that things – that more things can happen, meaning unplanned happen within seven weeks than within 72 hours and – point number one. Point number two, the – I try to be as careful as possible. The quality of the airfreight products in terms of accuracy, punctuality and the way how much room for error is there, is much lower than what we see in the seafreight arena.
And that, obviously helps and supports a larger number of shipments in potentially – coming back now to one of the previous questions, potentially fully automated execution of the shipment. What does that mean? That means that customers’ orders will be received in an automated way. That could be as benign as somebody actually putting information into an Internet interface or it could be as sophisticated as customers applications or IT applications interfacing into our applications.
So either way, no matter how that front-end looks like, but it’s an automated order receipt. And from that point on, like order planning, that is something that we can do already today kind of what is the design of the shipment, what is the available space on which of the routine and what is – do we have space booking on the planes or not.
So we can all do that today, but then comes the tricky part, it’s the communication part with the suppliers. It’s as crazy, if you like, as when we get and order to pick up a shipment at a certain place, you need to employee then obviously somebody a trucker or somebody like that who actually goes in and picks up the cargo. That service must be capable to give us a confirmation of that service has been done in a way that our systems can further progress with that.
So it doesn’t – it’s just not enough to pick up the phone and – or to come then back into a depot and actually clocking in. That is today when people manage that. So human intelligence can deal with that. Machines cannot deal with that. So you have to get like a standard response to these things. And you see there is a lot of interaction with the execution part of a shipment that needs to be – or readable and workable with from a machine.
That answers what an operator is not going to do anymore. An operator may actually not – as a standard routine, if everything goes fine, may actually not manage anymore if the trucker is stuck on the entrance door of the manufacturing site and say, I need to pick up something from door number eight, and he doesn’t know where the door is. And he is going to call and say, can somebody tell me where the door – these things operators will not do, or doing the standard documentation process or doing the data transformation from one system into the next, meaning on the left screen, he has that information; on the right screen, he is entering the other information.
So all these things, operators will not do anymore. Ideally – the cautiousness is more on the conversion rate of 60% to 80%. Ideally, no operator will do anything different than monitoring exceptions. So arguably, you could put me in a hot seat here and say, well, then, actually, the conversion rate should be 100%.
And yes, arguably, intellectually, I agree with you, but I think reality will be a bit more where we think it’s going to be between 60% and 80%. Last but not least, more cautious, I think we have been pretty consistent in our messaging around eTouch also back in September 2017. I think that slide that has been copied, I don’t know how many times in how many presentations with that little sliding lever where we were showing like higher value and lower value, that has always been neglected the fact that not every shipment that we had on this lever is represented as an eTouch addressable volume.
And I think that was something that we might have been not precise enough, but there was never a notion that 100% of the volume is eTouch addressable. So hence, that is a specification that – and I take that on our shoulders that we might have been even a bit late in the process, but I think the reality is what we have presented.
Is there something you can do or think of in terms of technological developments in the next five, six years that would enable you to either increase the addressable or the convertible, so to speak? So I mean, if those are the two levers you think about, I mean, what are the discussions you’re having internally to accelerate or to put in place new initiatives to kind of improve or enhance that?
I think it comes back to my first point in the answer. I think we need also other players in the industry on the execution side to actually get that accuracy to – or the quality of the service to the point that it is workable for a machine. That is one of the things. And what we – I think from a general perspective, what we will – I don’t want to say never, but it’s going to be a huge challenge to make a larger addressable volume. When we talk about cargo, that means manual handling or that means special care handling.
And a lot of our cargo needs some additional special handling to it. I think that’s going to be still difficult to automate entirely. You’re talking about a time frame, maybe five or ten years. And I don’t want to open here the miracles, but maybe at a point in time, there is also for care centers, which today are obviously mainly operated by people, that these care centers might actually work, in 10 years from now, with a bit – or with the support of, call it, artificial intelligence and they’re really intelligent, and they would only be working eventually on the real exceptions with human. But that is, I think, less relevant for our current strategy, which expands into 2022.
Thanks.
Thank you, Daniel.
The next question comes from the line of Mark McVicar with Barclays. Please go ahead.
Hi, Detlef. Hi, Markus.
Hi, Mark.
So two-part question on Quick. First of all, could you just – and I get the principle of mission-critical transport, but could you give us just maybe a couple of examples of things that it can do for customers that you can’t currently do or you couldn’t have developed yourself over the course of a couple of years? What makes it so different in terms of its service offerings, is the first part of the question. And the second part is, what guidance can you give us around synergy benefits and margins? When is it going to start contributing to the bottom line of Kuehne & Nagel?
Sure. Quick has two areas which they have focused on and where they were very successful. I’ve mentioned that before. Let’s start with Sterling, the part that addresses the aerospace aviation industry with spare parts. So their setup is similar to our AOG Desk but with a different customer base. And they have a higher focus on purely time-critical shipments where we solve solutions – or have solutions for all spare parts requirements of the aerospace and aviation customer base.
So for that, it’s a complementary service and partly overlapping in the area or arena of AOG Desk, but with different customers, so we have a complementary customer base for that business.
The more interesting part – similar, interesting, Mark, different – interesting for different reasons as well of that area is the pharma area or industry. You know that we have set up the KN PharmaChain solution. And especially, with regards to clinical trials, hyper care and organs, they have a very robust and a sound solution. And this is what we didn't offer. So whenever we talk to our strong pharma and health care customer base, this was a service that even subcontractors would have taken years to develop for us.
So therefore, in this area, we can create immediate synergies and benefits for existing customers for both of us with a more enhanced value proposition or service scope than what we operated today in the KN PharmaChain. Quick has a proven track record and a strong brand established over almost 40 years, four decades. They are a market leader in this time-critical arena, focusing just on time-critical. So we had time-critical solutions subcontracted, operated in different ways in our organization. Now we have a very robust, high-quality, high-reputed solution within the Kuehne & Nagel network offering for KN PharmaChain and KN InteriorChain or AOG Desk to start with but for other time-critical segments of the industry as well.
And as you say, it would have taken a very long time to develop that stuff in-house.
Yes, very long time and very often – I mean, as the pharma customers do not just give it a try and test someone, it's for us the opportunity with our strong reputation in the pharma and health care industry to up-sell, to widen our service scope for existing customers and win new customers in our classical PharmaChain business, which is clearly higher-margin business and a very strong growth segment in the entire pharma – or transport logistics segment of the pharma industry.
Okay. And synergies and contribution something?
Yes, I mean, synergies – immediate synergy is top line growth. Immediate synergy is cross-selling between the different networks, so to say. So our customer base, we will offer now the full scope of services that Quick has been offering over decades and vice versa.
And we have synergies, for example, in sourcing area capacity, procurement so to say was the different – in the different markets. Also, from a footprint point of view, I mentioned that four controlled – Quick-controlled towers in the U.S., two in Europe and 11 supporting stations around the globe. But with our global networks, we can enlarge the Quick solution to other high-growth markets very quickly.
Okay. And I'm sorry, the last, my question was, when do you expect it to start contributing to the bottom line?
Yesterday. It was closed, as Markus said, 31st of December last year. So it's part of the balance sheet, but it's part of the group as of 1st of January this year on, and it contributes immediately.
Okay. So will be earnings enhancing this year?
Sure. Earnings, gross profit and so on. EBIT.
Good. Okay. My second question was within contract logistics, you've been restructuring, repositioning, reshaping for quite some time now. Do you see a point where that process is complete and then the new growth show itself through more strongly? Or are we still going to have a couple of years to go? What sort of time line do you have?
Years to go – first of all, restructuring for quite some time, Mark, is a very interesting statement. We started to reshaping the business second quarter last year. We announced the technology investments, but we were already fully ready in starting this exercise second quarter last year. And contract logistics is based on contracts, so longer-lasting contracts. Contract logistics is based on three to five years contracts. And we will address also the reshaping of our portfolio in this time frame.
But you can expect to see effects much earlier, obviously. So I'm not expecting you to wait another couple of years, as you just have alluded to. I would expect second semester this year, so Q3 or maybe Q4 more, to see the first effect fully in contract logistics, with all the measures, productivity measures, technology, picking enhancement, new warehouse management system and the focus on the portfolio, will show traction this year, end of this year.
Okay, that's great. Thank you very much.
Sure.
The next question comes from the line of Aymeric Poulain with Kepler Cheuvreux. Please go ahead.
Yes. Good afternoon. The two main questions, if I may. The first one is on the capital gains that you reported in 2018. Could you help us look at this capital gain by divisions? I understand there's CHF 120 million in the contract logistics in Q4, but for the rest, if you could remind us where this affects the profit of each division, that would be helpful. And also, in terms of the pro forma clean EBIT that we need to use, I mean, I calculated the capital gain at CHF 47 million in 2018, so that produced CHF 940 million, but it could be that these are not exactly the numbers. So it would be helpful to have a clean EBIT number if possible. That's the first question.
The second is on the acquisition of Quick. Given the price you paid on the EBIT-to-sales ratio and the synergies in terms of growth and so forth, but could you give us an idea of the underlying EBIT margin of this business and – or why you pay such a high price? I think I understand the value, but it seems like a high price. And more generally, on the acquisition rationale, you obviously made some comment in the price back in December on the possible interest in Panalpina, and then one of your key shareholders is saying that, that would have been the case. So just to understand how you are prioritizing your acquisition and your – the rationale behind the choice you make on that – from that would be very helpful. Thank you.
Sure. Aymeric, let me answer this question, Detlef here, with regards to M&A. Our M&A strategy has not changed throughout the last 12, 18 months. We have always said that we look for transformational acquisitions, especially with regards to technology, for an enlargement, widening of our solution competence, and Quick is a very good example for that. And we always said we look on domestic markets in Asia in order to increase our footprint because as our global networks, we’re active there. But in some of the markets, we could – we’ll be able to do more with this different solution specific for the market.
My interviews in the press, rightly represented by the news and by the press from my point of view, but I never said I would buy any target. I never mentioned the name of any company. And I even gave an interview on the 3rd of January in the German business newspaper called Handelsblatt stating that we would never buy a target unfriendly, and we would never buy a target that is clearly having a price tag that is based on speculations or rumors in whatever direction.
We – and I stated and we clearly stated, we look at targets. We evaluate the business case. We evaluate synergies. And on that basis, we then decide whether to pursue or not to pursue certain targets. And then we pitch, as you saw in the case of Quick, which brings me to the purchase price. We pay a very normal, I would say, multiple on the EBITDA or EBIT for the Quick acquisition. You saw – or you’ve seen that we have certain consideration put into the purchase price that we announced in our analyst presentation and our annual results, and that’s based on an earnout basis.
Quick is one out of only three global players in the time-critical market segment. And it’s extremely unlikely that you can build a very robust and network covering time-critical solution yourself. So from that point of view, Quick is a clear part of our strategy and road map 2020 through an airfreight that we posted and announced at the Capital Markets Day and we iterated throughout the last couple of analyst calls. I hope that answers your questions.
On acquisition – yes, I mean – but, obviously, you mentioned technology. We saw the private value of e-booking platform like Flexport going through the roof. So I mean, the trade-off between buy and deals and, obviously, the appetite for top line growth versus cost synergies, I mean, that you did not necessarily answer, given – especially given the price-to-sales ratio of Quick, which is like 3x and seems to me get to top line growth mostly.
Yes. That’s a pure financial look at it. And also, those examples that you mentioned are based on speculations. And we gave – Markus gave some details on eTouch and our process here. And it takes a certain understanding of the global forwarding market and network infrastructure as well as the technology competence to establish these solutions. I don’t think that we can expect this from other players at that space at the moment. I’ll give you an example for seafreight. We have launched two platforms early March last year, Sea Explorer and KN ESP, for supplier – a digital platform for supplier management. I will not go into details of those platforms anymore because we have mentioned that a couple of times.
But we have a lot of transactions and business won on that basis. We even enhanced those platforms, and you can be sure, we will not stop there. You will hear news on our technology in all business units driving top line but also bottom line growth. That’s our transformational journey that we have started 1.5 or 2 years ago. And this is paired up with solutions. We mentioned that before, airfreight, for example, KN EngineChain in aerospace, KN InteriorChain in aerospace, and also then the KN BatteryChain is not only a solution that facilitates customer requirements within airfreight answering, but it’s an end-to-end solution operated by all our business units in an integrated way and has very high margin per shipment.
So the beauty of Kuehne & Nagel is that we can pursue two strategies at the same time out of one organization. One is high-volume shipments transferred into an eTouch environment as much as we can, but we will always say a people’s business because we need forwarding non-expertise to address customer needs and to interface with customers. But from a process point of view, we can ease up the process, as Markus has described, much more. And the solutions business, we understand industries, we understand the – our customers’ needs because we understand their customer needs and have answers to help and support them transforming their business. And that’s our strategy. Thanks, Aymeric.
The next question comes from the line of Neil Glynn with Crédit Suisse. Please go ahead.
Good afternoon, everybody. If I could ask three quick ones, please. The first one, with respect to the dividend, it’s the first time in living memory, maybe ever, I’m not sure, that the dividend amount proposed is actually bigger than the cash on the balance sheet. And before thinking about IFRS 16, it looks like you’re going to a net debt position in the first half of next year. Just interested in your thinking on that, not that a small net debt position is in any way an issue, but just thinking about how you manage that going forward.
Second question, Markus you mentioned pressure from the consolidation on the seafreight side having ramifications for working capital. And I’m just interested to what extent liners are starting to request payment upfront and how you manage that. I think Maersk is doing that, I’m not sure. Are you experiencing others following? Is it an issue for you? Or is that more for the smaller freight forwarders to worry about?
And then a final technical question, just on ROCE. Within IFRS 16, you’ve obviously highlighted CHF 1.7 billion to CHF 1.8 billion of an uptick to your asset base. Just interested in terms of why that doesn’t have a bigger impact on your ROCE calculation given that it doesn’t seem to have much of an impact on the EBIT per the accounting change. I would’ve expected ROCE to have a considerably greater impact on the 1 percentage point you referenced in the slide. Thank you.
So maybe let me take quickly the third question on the return on capital employed. There's obviously an extension of both sides of the balance sheet. So the 1% impact only comes up that small interest differential between these two.
So your calculation of capital employed, that is based on net debt?
So it includes both the asset and liability side of it. So that's, I think, the more easier one. On the liners...
Yes, I can answer. The liners – and it's not only the liners, you have this in all industry. We do not pay carriers upfront. We pay on the agreed payment terms, which are different per carrier, per industry and per trade. And we honor those payment terms. And that is – from our point of view, has not significantly changed.
And then there was the – and I think on the dividend side, well, it's an interesting question because we finance the acquisition, not necessarily the dividend on it. And also, we were, obviously, having – for the Quick acquisition, we were going – we were picking up some debt that you can see, obviously, in the balance sheet, and hence, that is the situation. So legitimately, I think, and we have always been quite transparent on this one, that on an acquisition side, we would accept a temporary net debt position.
Understood. I guess part of the substance of the question is I'm just trying to understand, is you're thinking developing in terms of finding more justification to use that balance sheet in – for accretive reasons? Or would your mission be to build up a net cash position again as soon as you can?
Well, I think it has never been driven and – it has never been driven by a balance sheet policy. It's about what is the right target? What fits to us? What is also, as you say, accretive? It's getting more and more difficult to actually find a quick target in that context. So we are more thinking about that part of the decision-making rather than anything else.
Understood. Thanks for that.
Welcome.
The next question comes from David Kerstens, Jefferies. Please go ahead.
Good afternoon, gentlemen. Two questions, please. First of all, on the yield development and seafreight. Could you please explain what the mix effects are that lead to the ongoing pressure on yields in your seafreight business? And with regards to the outlook for 2019, how have your recent rate discussions on Asia-Europe developed with your carriers as well as your customers, and particularly, ahead of IMO 2020 likely coming into the freight rates in the fourth quarter of the year? Then the second question is regarding the 16% conversion ratio. You mentioned, Markus, in the presentation, you also meet order factors besides the expansion of eTouch. How much do you expect will be driven by the eTouch expansion to get to the 16%? And how much should come from order factors? And what are the order factors that you are having in mind to improve the conversion from here?
Hi, David. Let me take the mix question first. We have clearly over-proportionally grown our managed business, the platform business based on, for example, KN ESP that we mentioned before. So with this platform, with this supplier management – digital supplier management tool, we got a lot of correction in the market, and that is reflected also in our volume development. And that had an impact on the yield mix. But also, here, as you saw, we were able to counterbalance this leverage effect on the cost side.
The carrier question that you mentioned, we have agreed rates for trades and volume agreements with our carriers. And IMO 2020 is part of that agreement. So that is embedded already in the rate discussions. But it's not an issue. It's something the whole market is experiencing and will become effective then in 2020 and not today or yesterday. So therefore, that's not a major concern for us. You might see the first effects of IMO 2020 maybe in Q4 or end of Q4 given the lead time of seafreight shipments, as you know, in the supply chain. So that is – that will be my answer. And there was...
I think on the conversion rate, yes, you're right. eTouch is – as I mentioned, is not the only thing that we need to do. Now there is – eTouch is one component on conversion improvement, if you like. There is – and it goes back to the traditional thing as cost control. It goes into automation. Not every automation falls into eTouch. It goes into improvement of productivity and efficiency. So the – let's say, I want to say the normal, but the efforts to become a more efficient way of working is not only driven through the eTouch-ing.
And when you think about how many files are being handled on a daily basis, we will not have as an only initiative that now we are doing everything on eTouch, no. There is also be automation and technology driving productivity. So the same at three files a day, you may have heard over the many years – over many years in seafreight. If that becomes 3.5 or 4, then that is contributing to that.
If I may add, David, we have always mentioned that we implement our new generation of operating systems in seafreight and airfreight. Airlock is completely rolled out around the globe. Now we have to work with the new system and need to use those leverages it offers, not only to drive eTouch forward because these systems are prerequisite for becoming eTouch-able in some parts of our supply chain activity but also to drive productivity and the operating models forward in order to enhance EBIT
And I would like to add solutions business that we mentioned before. Our KN chain solution, as we call them, has a much higher margin per shipment because they reflect specific needs of our customers in certain industries. They are auditable. They are licensed, and they are generating a value proposition that cannot be fast copied by some other marketplace.
Would it be possible to put a number on the conversion ratio improvement? How much should come from eTouch, roughly speaking?
Well, I think when you have a model on hand and you would put these numbers in terms of volume and the profitability, the GP and the conversion rate into it, I think it should be very clear to visible to you. I will not give a specific number from our side.
All right. Fair enough. Thank you very much, gentlemen.
You’re welcome.
The next question comes from the line of Bruce Chan with Stifel. Please go ahead.
Yes, thank you, and good afternoon gentlemen. Just one question for me on the contract logistics side here. Competitor of yours talked about a significant increase in the use of factoring in their business, especially, again, on that contract logistics side. And they mentioned that this is something that was very common in managing working capital. I want to know, is receivables factoring something that you do? And if not, is there an opportunity there?
Very simple answer, Bruce. I think, currently, we’re not doing it. It’s an opportunity. Yes, it is an opportunity. Are we looking into it? Yes, but there is nothing specific right now in terms of – that I can give you a time line or a volume to that. But yes, I agree, it is the industry commonly used a way of doing.
Okay. Very good. Thank you.
The next question comes from Damian Brewer, RBC. Please go ahead.
Good afternoon everybody. I’ve got two questions, please. First of all, just on the outlook for 2019. Clearly, the volume in the GPP unit is open for debate, but one thing you do have control over is the costs. And just looking at Q4, you did about CHF 1.7 billion of SG&A costs. And you’ve already alluded in the presentation to accelerated operating efficiency measures. Could you tell us a little bit more about how you think that will trend over 2019? And in particular, if it takes a while to get those measures in, would Q1 be similar to Q4 and then we could see progress or what the phasing looks like to be different?
And then my second question, and sorry for laboring costs and cash flow, but if I look at your operating profit to EBIT conversion through 2000 to 2010, you were at 110% through – 2011 through to 2015, dropped to sort of 90%, 95%. And then we slowly come down to 80% last year and – sorry, 80% in 2017 and 67% in 2018. So is what we’ve seen in the last two years in operation? Or is there a sort of new normal of lower operating profit to EBIT conversion? Thank you.
So the outlook 2019, we – for sure, can influence us both sides, the cost – our cost side as well as the new business that is won and implemented in our networks or in contract logistics. The phasing, I would expect the majority of the effects to phase in Q2 and then from there, second semester 2019. We – if we reduce G&A costs, and we do this in some areas, very conceptually driven, that will take time to show the effects in the P&L as we may have to pay redundancy payments or have to – have a cost of change here to take into account. So that’s our expectation. The macroeconomic environment, we can only assess and see how volumes will kick in. But here, we are extremely cautious for Q1 and also Q2.
And as I said before, we need clarity in the trade agreements and not postponement of negotiations or discussions or Brexit, we need clarity. And it’s not us that need clarity, it’s the end consumer because all the noise in the press create a certain insecurity. And we have low unemployment rates around the globe drive a scarcity and so on and so forth. We have higher purchasing powers through tax release and so on and so forth, but if the news state certain unsecurity, people will hold back and will not continue to consume and invest. And that drives our business.
So therefore, yes, cost effects will be seen. The majority will full swing as of Q2 this year. And more interesting for us is whether consumption continues to grow and improve again after Chinese New Year, but not only – and what the future scenarios in some of the trades look like given this unsecurity that I mentioned before. Operating profit to EBIT conversion?
Damian, I think we talk also cash conversion in that context. And I think it is a very correct observation that the capital intensity has increased over the years in – especially, over the last couple of years. Is that a new normal? Well, there was very good growth pattern over the last couple of years. Growth is connected with some investments, if you like. If these investments are then expensed as costs into the P&L or real investments in terms of – into fixed assets, that might have back much. But every significant growth is requesting some capital to it.
And at the end of the day, I think what we are all collectively working on is getting more out of the capital allocated. And if that comes eventually with some trade-offs on growth, meaning do we need to take over-proportional growth in the capital-intensive businesses, I think that it’s going to be a management task for us to manage it right. I think I would not be happy in seeing that as the new normal.
Okay. And can I just ask a follow-up from that, then really just coming back to the outlook where you just said, Markus, is that the explanation of why the aspirational – the goal or whatever you want to call it for 2019 in the contract logistics business is only around about that 2% as you seek to optimize the balance between profitability, return and growth?
I think there is truly a hint to it as well that we are – we have been very vocal around this – the headlines for the contract logistics, as what we called reshaping. I think there is some of that in it.
Okay, great. Thank you very much.
The next question comes from the line of Frans Hoyer, Handelsbanken. Please go ahead.
Thanks very much. Question about sea rates negotiations, how they have developed on Asia-Europe. And are you looking to cover more or less than you usually do with these contracts, please?
So, sea rates and volume, I think it’s two different things. We see Asia-Europe that we agree on long-term rates, and we have no significant change in our rate negotiations for sea carriers, I think I mentioned that before, which usually happen early in the year – this year. So, no change. The question is the rates are stable Asia-Europe. The rates will stay stable. And we are usually covered – that’s different in other business units or in airfreight, but we are covered long-term with regards to our sea freight rates. We are expecting a normal volume development, so nothing specific on Asia-Europe. We had a different market dynamics vice versa. So, Europe to Asia, as I mentioned before, we saw a declining environment, but this was also driven by less scrapping and waste material in the market. So, a different market dynamic.
Okay. Thanks very much.
You’re welcome.
The next question comes from Todd Stewart [ph] from Lloyds. Please go ahead
Yes. Good afternoon, gentlemen. I just want to get some reaction from you to the – this $1 billion investment – capital investment in Flexport. This is a company that in the space of five years has a turnover of $500,000 – $500 million now. I mean obviously, they’re taking business from somebody. Are you starting to feel the heat from some of the disruptors? You said in the past that – you’ve played down the impact in the past. Is that something that’s going to change, do you think?
First of all, you need to go into another analyst call, the one of the company you mentioned. But we mentioned that the market – before we mentioned many times, the market is consolidating from the bottom, and we are consolidator ourselves. We don’t see any heat at the moment. We see market opportunities, and we are even selective with our growth already today over last year. So from that perspective, market consolidation is something that is ongoing in our industry for decades through acquisitions in the early 2000, but also through organic growth over-proportionally of some of the players like us. And the market share of the top 10 or top 15 players in the market is below 20% significantly. Therefore no – nothing has changed from our point of view.
My question – so then the fact that they’re going to change scale of this capital investment of $1 billion, obviously, they’re going to change geography scope and scope – range of services to you. You don’t see any difference in the landscape now as far as the – as a disruptor like Flexport is concerned?
Disruption is a word we never use, because disruption means you are not prepared. And we are a transformation player in the market ourselves. We don’t – we are not concerned and we don’t see any changes in the market dynamics right now. We have more than 0.25 million full borders around the globe, named full borders that are identifiable. You might have even more agents or people being active in that market. And as said, the market share of the top players is not changing significantly over the last year; because the market is growing itself as well as you know. And Frans, we can’t help you – Todd, sorry, I can’t help you, I – nothing changed.
Okay. Thank you.
You’re welcome.
The next question comes from Sebastian Vogel with UBS. Please go ahead.
Hi, good afternoon. I have a couple of questions. First one would be on DPO. During the presentation, you quickly alluded to a couple of points that was provided in DPO in 2018. From my point of view, we see these reasons were somewhat or should be somewhat ongoing. So how should we think of DPO going forward? That would be my first question. The other one would be on air and sea with regard to top-line growth. Can you provide me or remind me on the split between organic FX and M&A? And the last one would be on the short-term bank loan that you alluded to earlier also a bit. When was that actually drawn, so when they need to be paid back again? That would be my last question. Thanks.
Sebastian, hi. So DPO, while – yes, there is ongoing pressure and especially because I talked about carriers, I think that will be an ongoing situation and how do we mitigate that I think it’s going to be on us to do two things. And the first thing is – and I’m not referring to the carriers at that point in time. I’m more referring on to many other suppliers that supplier selection is going to play a bigger role to it, but also focusing and the consolidation on the supplier side. And with the same context, I think the offering of supply chain finance solutions that we are having out there is a good opportunity.
Having said that, do we expect these numbers go back up to the, I don't know, 70s or 80s or whatever it was some time ago? I would doubt that. So we would have to see probably – certainly for the next 12 to 18 months, you would see certain – or we would see a level like that.
And on the short-term loan, well, as you can imagine, it was drawn when the deal has closed, so that point in time. That was the short-term loan for the acquisition of Quick. And as you see, it is within short-term – without giving too much way, it is payable within a short timeline.
So organic versus M&A growth, first of all, we focus on organic growth, as you know, in sea and airfreight to see if it is organic growth, only driven by deploying our technology, our platforms that I mentioned before. Airfreight has an M&A effect embedded in the overall development, one-third of the business is organic – of the growth is organic, and two-thirds roughly are through acquisitions that we concluded previous year, so 2017. The full effect in 2018 – or faced effects in 2018, mainly in the perishable side.
And FX?
No Quick effect. FX is different per business unit. The highest FX effect has been in the euro environment. I would say air and sea was very small FX effect, especially on EBIT level because that's most likely what is of interest. And there's no major effects in EBIT. We just checked figures here. We have a negative...
What level are you talking about, Sebastian? You want to have the revenue or – you want to have the impacts on revenue or in GP or what you want to...
On revenue, sorry, yes.
Okay. So as you can imagine, on airfreight, it's – FX impact is nearly zero. And on the revenue side, I would think it's around 4% on acquisition impact. The rest is organic growth. On the seafreight, very much the same, there is very little ForEx impact and...
No acquisitions?
No acquisitions.
Great, Many thanks.
Alright, thank you.
The last question for today comes from the line of Mr. Dan Togo Jensen with Carnegie. Please go ahead.
Thanks, good afternoon. Two questions, if I may. How should we think of yields in 2019 as you -- quite muted growth here? Is it too optimistic to expect a slightly positive impact from the muted growth into yields, especially air, I'm thinking of air? Then a question on eTouch. What does this require from the plant? Any investments in education, et cetera? And the interface, is it just plug-and-play here? That's the two questions. Thanks.
Ideally, it's plug-and-play based on data standards, to start with that answer right away. But it's not only clients. It's not only customers. We are integrated in many of the production or order management processes, supplier management processes of our customers already to date. It's across all touch points of the supply chain. So it includes different carriers, not only seafreight but also port handling agents. It includes the pre and on-carrier trucking activities and so on and so forth. I don't want to go into that detail again. I think Markus mentioned that before. And we need data standards for this. So it will be a plug-and-play. We will have service offerings, platforms that you can connect with, but you have to be able to connect. And that is, by the way, a prerequisite for many activities already today in the market.
The market is softer at the moment. To come back to yield development, market is softer today. And the volume that we have in the market generates a positive effect, obviously, and desired by the carriers, also the perishable volume. Alright?
Okay. Thank you.
I would like to take the opportunity to thank all of you for joining the analyst call on the year-end result 2018. We are proud of what we have achieved last year, first year in our transformational journey that we have explained to you in detail during the Capital Markets Day and by investor[ph] meetings following – during the following 1.5 years. We are looking forward to a challenging year 2019. As said, there's certain insecurity in markets given the political instability or unclear situation with regards to trade barriers, trade wars or trade agreements, especially in quarter one and quarter two.
But for 2019, we expect this year to close again with another – as another successful year with higher volumes, growth double as fast -- double as strong as market growth and an improvement – significant improvement again in our bottom line. Thank you very much and we will talk to you soon again on quarter one, I think, in two months. Pretty much on the spot, we will talk again. Thanks, and bye-bye from Switzerland.
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