Kuehne + Nagel International AG (KNIN) has announced an encouraging financial performance for the first half of 2024, with a notable second-quarter EBIT of CHF402 million, an increase from the first quarter's CHF376 million. The company attributes the positive results to a seasonal volume increase, effective yield management, and improved cost efficiencies.
Looking ahead, Kuehne + Nagel anticipates stronger group profits in the latter half of the year, bolstered by robust seafreight yields, an anticipated airfreight peak season in the fourth quarter, and ongoing efforts in yield and cost management.
Additionally, the company is progressing with its roadmap 2026 strategy, including new customer care locations and e-commerce fulfillment centers. The acquisition of Malaysia's city zone express is expected to be finalized in the third quarter.
Key Takeaways
- Kuehne + Nagel's Q2 EBIT rose to CHF402 million from Q1's CHF376 million.
- Seasonal volume uplift, yield management, and cost improvements drove positive results.
- Stronger group profits expected in H2 due to higher seafreight yields and airfreight peak season.
- Sea (NYSE:SE) Logistics and Air Logistics EBIT stood at CHF200 million and CHF116 million, respectively.
- Road Logistics and Contract Logistics EBIT were at CHF36 million and CHF50 million, respectively.
- The company's roadmap 2026 strategy is on track, with new initiatives underway.
- Free cash flow conversion in Q2 was approximately 38%, impacted by sea freight rate increases.
- Net working capital intensity grew to 4% in June 2024, with net working capital CHF300 million higher than the previous year.
Company Outlook
- Anticipation of stronger group profits in H2 2024.
- Expectation of a significant improvement in gross profit per TEU in Q3.
- Airfreight peak season expected to drive higher volumes and yields in Q4.
- Sea freight volumes projected to rise in the lower single digits in Q3.
- Further improvements in contract logistics conversion rates with new facility ramp-ups.
Bearish Highlights
- Net working capital expansion due to increased sea freight rates.
- Q2 free cash flow conversion lower than the decade's average before the pandemic.
- Decreased interest income due to shareholder payouts and increased lease costs.
Bullish Highlights
- Positive yield management and cost efficiencies across business units.
- Growth in air freight volumes in line with market trends.
- Apex's strong performance, driven by Asian e-commerce strength.
Misses
- Free cash flow conversion and net working capital intensity did not meet historic averages.
Q&A Highlights
- The company clarified customer order behavior as securitization, not restocking, due to rate hikes and supply chain uncertainties.
- Airfreight yields increased in Q2, instilling confidence for the subsequent quarters.
- Anticipated improvements in seafreight and airfreight yields, with 70% of Apex's Q3 and Q4 capacity already sold.
In conclusion, Kuehne + Nagel's financial results for the first half of 2024 show resilience and optimism, with strategic measures in place to enhance profitability and efficiency. The company remains focused on leveraging its strengths in seafreight and airfreight, while expanding its digital capabilities and global footprint.
With the expected closure of the acquisition of city zone express and the successful implementation of its roadmap 2026 strategy, Kuehne + Nagel is poised to capitalize on market opportunities and deliver continued growth.
Full transcript - None (KHNGF) Q2 2024:
Operator: Ladies and gentlemen, welcome to the Half Year 2024 Results Conference Call and Live Webcast. I'm Sandra, the Chorus call operator. I would like to remind you that all participants have been in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions]. At this time, it's my pleasure to hand over to Mr. Stefan Paul, CEO of Kuehne + Nagel. Please go ahead, sir.
Stefan Paul: Thank you very much, Sandra and good afternoon and welcome to the presentation of Kuehne + Nagel's half year 2024 financial results. I'm CEO, Stefan Paul and I'm once again joined by our CFO, Markus Blanka-Graff sitting next to me. Let's go into the half year 2024 figures. Page Number 2. Focusing on the most recent quarter, the Kuehne + Nagel Group achieved a Q2 EBIT result of CHF402 million, which fulfilled our expectations to improve on the Q1 result of CHF376 million. The Q EBIT result was CHF419 million, excluding non-recurring costs associated with the streamlining of our organizational structure, which we announced in early April and concluded in the quarter. Driving this positive result was a meaningful seasonal volume uplift in Q2 versus Q1, combined with our ongoing focus on yield management. Unit cost improvement in core Sea Logistics and Air Logistics operations also contributed to the stronger result. Underlying operation costs were relatively stable with accumulating cost saving from the measures taken in Q4 offset by inflationary effects. With respect to cost saving and inflation, we currently estimate a net positive annualized EBIT effect of up to CHF100 million. Once cost savings are fully realized by the end of this year, early 2025. Free cash conversion in our business is seasonally lower in the first half than in the second with Q2 typically stronger than Q1. This was also the pattern in the first half 2024. However, we experienced expanded net working capital over the entire period from the sharp rise of Seafreight rates and stronger trade volumes from Q1 to Q2. Markus will expand upon these points in a few minutes. Lastly, we expect stronger group profits in the second half relative to the first. Several factors give us this confidence. First, our visibility into stronger Seafreight yields at least through the end of Q3 alongside modest volume development. And second, an expectation for an airfreight peak season in Q4 and finally, our ongoing yield and cost management efforts. Let's do a deep dive into Seafreight, Page number 3. On the left, as always, volume and TEU, GP per TEU in Swiss francs and EBIT per TEU. Sea Logistics achieved EBIT of CHF200 million in Q2 or CHF206 million excluding restructuring costs. This compares to CHF295 million last year and CHF107 million in Q1 2024. The sequential EBIT development reflected a gross profit increase of 2% with volumes plus 9% and yields minus 7% along with roughly flat underlying operating costs. The volume uplift from Q1 to Q2 reflects normal seasonality as well as the pull forward of some peak season demand. However, this strength is not reflected in our year-on-year volume development of minus 1% in Q2 or underlying plus 2%, which excludes the low yielding commodity volumes we stopped serving only in Q4 of last year against an estimated market growth of 3% to 5%. Turning to costs. Recurring OpEx was roughly flat year-on-year at CHF308 million or 6% lower than a year ago. This translated into unit cost reduction of 8% quarter-on-quarter and 5% year-on-year. Lastly, gross profit and EBIT in Q2 did not include any material effects of Red Sea disruption compared to the roughly CHF10 million recorded in Q1. However, we do expect the ongoing disruption in the East West trades to drive a sizable yield increase in Q3, which may extend further into Q4. This is one of the factors underpinning our expectation of stronger group profitability in the second half of this year. Next is Air Logistics on Page 4, tones GP per 100 and then EBIT per 100 always in Swiss francs. Our Air Logistics delivered EBIT of CHF116 million in Q2 or CHF122 million excluding restructuring costs. This compares to CHF139 million last year and CHF94 million in Q1, 2024. The sequential EBIT development reflected a solid plus 10% gross profit increase with volumes plus 5% and yields plus 4%, partially offset by an increase of underlying operational costs. The volume uplift from Q1 to Q2 was centered in Apex, fully participating in the e-commerce market boom. There was no apparent spillover from the sea freight market due to Red Sea disruption. Air Logistics volume grew 7% year and year in Q2, with organic volume growth of 5% year and year and in line with our market growth estimate. Recurring operating expenses ticked up 3% in Q2 versus Q1 due to inflationary pressure as the bulk of annual wage increases takes effect every April. This speaks to a modestly slower accumulation of cost measures savings relative to what we have seen in sea logistics. Underlying costs were at CHF308 and slightly lower than last year. Even so volume growth resulted in unit cost reduction of 2% Q and Q and 6% year on year. Looking ahead we are well positioned to capitalize on any further market recovery and are cautiously optimistic that the second half will include a noticeable air freight peak season. Next is Road Logistics, Page Number 5, of the presentation. Our Road Logistics business unit had an EBIT in Q4 of CHF36 million or CHF39 million excluding restructuring cost. This compares to CHF41 million last year and CHF30 million in Q1, 2024. Shipman volumes returned to growth in Q2 up to 6% year and year versus favorable comps. This compares to flat growth in Q1 on a day count adjusted basis. We believe our volume growth broadly mirrored the market in Q2. However, GP growth excluding currency effects of 4% year and year, did not match this pace, implying some price mixed pressure. This speaks to soft demand in our core European and North American markets. Looking ahead, please keep in mind that Q3 is the seasonally weakest quarter for road because of the phasing of summer holidays in Europe. Lastly, please note that our already announced acquisition of Malaysia-based city zone express is now expected to close in Q3 slightly later than originally anticipated due to delay in regulatory approval. City Zone Express with strength from Kuehne + Nagel cross border road services in Malaysia, Vietnam and Thailand. Contract Logistics page 6. Contract Logistics generated another solid EBIT result of CHF50 million in Q2 or CHF52 million excluding restructuring costs. This compares to CHF48 million a year ago and CHF55 million in Q1. Cross profit growth excluding currency effects accelerated to 8% year and year in Q2. This reflects in part the ramp up of the major Adidas (OTC:ADDYY) distribution facility in Italy which serves exclusively the distribution and e-commerce need of Southern Europe. Please note that this Adidas project is expected to reach the planned full run rate contribution by Q1, 2025. Market share expanded once again in key healthcare and e-commerce segments as mentioned a couple of times already, categories which continue to dominate our sales pipeline. Lastly, the conversion rate of 6% in Q2 was stable on a year-over-year basis. Before turning it over to Markus, Page number 7, let's review some key developments over the past quarter with respect to our roadmap 2026 strategy. In Q2, we made further progress in establishing a key pillar of our Sea logistics SME strategy with the additional rollout of new customer care locations. These sites play a key role in enhancing service quality with the aim of reducing our churn rate in this key customer segment. Turning to market potential. The quarter saw the launch of three major e-commerce fulfillment centers across three continents, including the Adidas facility in Novo, Italy that I just mentioned. We also initiated a new offering facilitating the faster turnaround of temperature-controlled sea-freight containers for health care customers. On the technology front, we improved our ability to exploit our data and continue to identify a test Gen AI use case or use cases. Lastly, I'd like to emphasize the importance of our recent organizational streamlining and the relevance of this move to our roadmap efforts. We now have a direct line from management board to our country organizations with positive implications for the service quality, responsiveness as well as efficiency. With this, I hand over to Markus.
Markus Blanka-Graff: Thank you, Stefan, and good afternoon, everyone. Thank you for your interest in Kuehne + Nagel and taking the time today for the half year 2024 results. As Stefan has outlined, we continue to see an environment of demand for global logistics services that is slowly improving. In such periods of continuous potential volatility, we usually focus on our highly flexible, asset light business model. Our current priority is on cost control with the termination of the regional structure in the second quarter 2024 to ensure a further reduction of cost. This reflects both a reduction of absolute costs and per unit costs with expected stable to increasing sequential volumes in sea and airframe. Let's start with the income statement. Q2 has been sequentially stronger than Q1, 2024, even more so when considering restructuring costs of CHF17 million in the second quarter. We expect a further improvement on our performance on conversion rate based on the EBIT level of CHF402 million and the underlying business performance of EBIT CHF419 million. Whilst the P&L remained below the same period of the first 6 months in 2023, we recall that the first half year 2023 still enjoyed some positive effects from 2022. Looking at the quarter sequentially, again, we can see a solid operational conversion rate improving of 18% or 19%, excluding the restructuring cost. Supported by active resource management, the combined sea and air freight conversion rate was 34% in the second quarter. For reference, the full year 2019 sea and air freight conversion rate was 28%. Headwinds from currency had a negative impact of around 3%, which translates into CHF121 million at gross profit level and around 2% negatively or CHF24 million on earnings before tax. Working capital, Page Number 10, was on the top and remains on the top of our agenda is increased due to significant rise of sea freight rates triggered from the ongoing disruption in Red Sea. From here on, I anticipate stable net working capital for the next quarters to come. DSO have expanded against the end of the last year and also slightly against the same period last year. DPO, on the other hand have decreased, which reduced the spread between DSO and DPO to now nine days. Net working capital intensity increased, but a close of June with a result of 4% versus a record low of 2.8% for 2023, but improved marginally from March 2024. The absolute level is thus almost CHF300 million greater than it was a year ago. I will come back to that fact in a minute. Continuing with cash and free cash flow generation as mentioned, the pressure on net working capital arising from the continuous rise in sea freight rates during the second quarter is also evident in the Q2 free cash flow result. In absolute terms, we are satisfied with the net working capital as it has increased only a little over the value from the first quarter 2024. Expanding on the free cash flow generation, the Q2 result reflected free cash flow conversion of approximately 38% relative always to net income before minorities. This compares to an average of nearly 70% for second quarters in the decade prior to the pandemic. Relative to other quarters, just for your own reference, Q2 is historically the second weakest quarter after Q1. Q3 is the strongest, followed by Q4 with average historical conversion rates of about 140%. While the Q2 performance marks an improvement on Q1, the largest single driver of the gap versus the historic average is the expansion of our core net working capital, accounting for about 40% of the difference. That is directly linked to the further escalation of sea freight rates in the second quarter due to the ongoing Red Sea disruption, as I mentioned before. Let's focus on efficiency. In air freight, on the eTouch update we see the positive conversion rate of 340 base points, which represents a value of approximately 3%, whereas on the sea freight side we see an improvement of 120 base points on the June -- on the end of June 2024. Just to remind ourselves how we derive these numbers, obviously, we look at man hour savings. They do continue to accelerate as you can compare probably to our last disclosures for the full year 2023. So Seafreight has improved from 100 basis points at the year end to 120 basis points and, as mentioned before, on the Airfreight side, from 300 basis points to 340 basis points. In closing, key takeaways, volume trends showed some improvement in Q2 amid challenging market conditions in Seafreight, growth in line with the market in Airfreight and margin improvement for both network businesses. In this environment, we remain focused on cost management, and this is evidenced most recently by additional measures taken in the second quarter to further reduce cost. All of these actions will yield incremental benefits. Thank you, everyone. And I will now hand over to Sandra for the Q&A session.
Operator: We will now begin the question and answer session. [Operator Instruction] The first question comes from Alex Irving from Bernstein. Please go ahead.
Alex Irving: Hi, good afternoon, gentlemen. Hope you're well. Two from me please. First of all, how are you thinking about the third quarter for gross profit per TEU between pork and gas strike threats and equipment shortages? I understand your logic on yields being sequentially higher, but how significant could that uplift be please? Second is on your impressive cost performance across both sea and air. Unit cost in both is below your implied medium-term target levels. What drives that from here? Where do they go? And should we be thinking about possible upside to your medium-term conversion ratio targets as a result? thank you.
Stefan Paul: Hi Alex, Stefan speaking. Yes, we are well. Summer is now in town here as well. So, the first question on the margin development for the third quarter, right, the silver bullet question. So, what we see and what we believe is, it will be significantly above the 500 range. Where exactly is too early to judge because you know we only invoice after incoming containers in Europe and in the U.S. We have achieved a pretty good utilization with our customers, especially the large one’s despite of the SME customer base on agreement a couple of weeks ago already on the new rate. So, to sum it up, it will be significant above the 500 range, but where exactly it's too early to judge.
Markus Blanka: Yes, Alex, hi, it's Markus. And on the other side, yes, we are happy that unit cost developed into the right direction. I think unit cost go hand in hand with efficiency gains on the one side. On the other side, we are changing our customer portfolio towards more small medium enterprise business that usually requires a bit of higher service intensity. So, by continuing doing that, I think we will see that unit costs will further improve. But at the same time, there is a clear focus on managing CHF200 EBIT per TEU rather than merrily bringing down the cost per TEU on one side. So, it's really a hand-to-hand with the change of the customer portfolio to higher yielding business and focusing on CHF206 EBIT per TEU.
Alex Irving: Excellent.
Stefan Paul: Thank you.
Operator: The next question comes from Muneeba Kayani from Bank of America (NYSE:BAC). Please go ahead.
Muneeba Kayani: Thank you. So, I just wanted to ask a little bit more about your second half outlook and specifically on the air freight to peak season that you talked about. Can you just give a bit more color on how you're thinking about the volume and yields developing and whether that 83 that we saw in 2Q can be maintained or even higher into the second half? And then just on the sea side. I think you said in your prepared remarks that there was some element of demand pull forward, kind of how much of the volume benefit was the element of our earlier peak season and how does that then impact your thinking into the second half of the year? Thank you.
Stefan Paul: Hi, Muneeba, I’m Stefan. Take the first question, the peak season in air. So, the planning is we have ended the quarter with 83 per 100 and we believe the margin, the GP gross profit margin will go up slightly in Q3 and again even more in Q4. Volumes, that was the other question, are currently in the second quarter, 7% up. This is going to continue into the third quarter and most probably even higher into the fourth quarter. So, it's a combination of improvements in yield paired with more volumes anticipated for the third and even more in the fourth quarter. So that is the answer. On air freight, sea freight, you have seen we have been flattish organically, slightly growing with our customers. Flattish in the second quarter. Looking at the current bookings, we believe that the third quarter not yet true on the fourth, but the third quarter we'll see a lower single digit increase in volume. So, the pull forward effect has no impact on our Q3 volume development in sea freight.
Muneeba Kayani: Thank you.
Operator: The next question comes from Cedar Ekblom from Morgan Stanley (NYSE:MS). Please go ahead.
Cedar Ekblom: Thanks very much. Can you talk a little bit about why the restructuring costs came in lower than what was originally guided? Are there more costs to come or should we assume that your cost saving program is actually smaller? I remember the original number being more like CHF200 with your two programs combined. And I believe that the guidance you gave now is 100. So why have potential cost savings come down? And then can you also just talk a little bit about how we think about the ramp up in the contracts, logistics business and where margins settle with your new facilities being opened and ramped up? Thank you.
Markus Blanka: Hi, there, it's Markus. Quickly to the restructuring cost. I think it's -- when we have to distinguish the two different elements that we have deployed. The first one was in the Q4 2023, which was really a rightsizing of the operational workforce. And then the second action was in the Q2, 2024, which was related to the operational setup to the regional management structure and also operational excellence structure in the organization. And when we made the decisions to deploy these two waves, you may call them, I think we were still in a situation where we were uncertain around the business development going into the second half of 2024. And we realized that and I think that is also what Stefan mentioned before, there's an improving situation or an improving expectation for volume going forward into the second half 2024. Hence, we held back slightly on the sales management, specifically on the sales force piece, from the second quarter 2024 initiatives to go back to our growth mode, I would call it, from the company to benefit from the upswing in the second half 2024. So well observed, I think our original thinking was really cost reduction in a declining market environment. We have changed our view on that expectation, hence smaller cost reduction costs, so restructuring costs had also been lower and the expectation is now to post inflation. Let's not forget that we had mentioned the CHF200 million pre-inflation. So now we're at the CHF100 million post-inflation target for 2025 full year number. That's the background to your first question.
Stefan Paul: I'll take the second one. That was the question on the ramp up of our Mantua facility, the Adidas, the South Campus. Just to remember a little bit on the size, basically, right, 130,000 square meters, 700 robots, 700 people working on-site. We have started a couple of weeks ago with the inbound, the utilization currently, and I've been there last week, together with my contract logistics colleague, Gianfranco, and my management board members, the current utilization of the warehouse facility is roughly at 15%. We will finalize the implementation of the entire site by the first quarter 2025. Just a number, right? Currently, our throughput on a daily basis out of our contract logistics facility globally when it comes to the parcel volume on a daily basis is 800,000. This facility will add another 500,000 on a daily basis, so a significant operation. We will, of course, not share any financials on a single customer. But what you could expect is further improvements in the conversion rate in contract logistics overall in 2025.
Operator: The next question comes from Marco Limite from Barclays (LON:BARC). Please go ahead.
Marco Limite: Hi, good afternoon. Thanks for taking the question. The first question is a follow-up on what you have said on the outlook for Airfreight, where we can expect, let's say, a slightly improvement in Q3 and Q4 in yields. Just wondering, yeah, if there is any specific factor driving that other than, let's say seasonality? That's the first question. And the second question, which is a bit more qualitative. I'm wondering whether you are able to talk about, let's say some of the benefits you have been already seeing, you have already seen from the new reporting structures. And. Yes, so some say practical example will be very helpful. Thank you.
Stefan Paul: Yes. Then, I take the first, sorry, Stefan. I take the first, the outlook on air freight. So, in the third quarter the yield development will be maybe in the area of CHF0.01 to CHF0.03 but we believe we will come closer to the 90 %or even slightly above in the fourth quarter. And that has to do with two factors. First of all, the seasonality, the peak which expected and secondly, what we see already now kicking in. And that started in mid and end of June. We see significant increase in terms of demand on our sea, air products. But this has been expected based on the Red Sea crisis and the sea freight situation which is ongoing. So, air freight will benefit from that. E-commerce is still booming right where Apex plays a certain role. So overall a couple of cents in the third quarter but then a much higher expectation on the yield coming to the 90s, close to the 90s or even slightly above in the fourth quarter. And the second question was a benefit on the new reporting structure. I give you one example. We have now roughly 370 and 380 key accounts, global accounts and we had to renegotiate all the rates within short in the second quarter. And that was executed extremely well between the business unit and the country organizations. And that has given us already a proof point that this new reporting structure is working extremely well on the customer side. So ready to execute, be fast and executing. What we are discussing here vice versa in the countries is working pretty well, I would say.
Marco Limite: Thank you.
Operator: The next question comes from Sathish Sivakumar from Citi. Please go ahead.
Sathish Sivakumar: Thanks again for taking my questions. I got two questions here. So, first is actually around the slide 13 and slide 14. Thanks again for sharing the data on those eTouch. Just for understanding here why if Air Logistics actually seen in better productivity gains versus sea and what is actually driving that? And where do you see further potentially in terms of unit like this contribution in sea? Would you get back that same Red Sea normalized there? And the second one is around the Apex performance given the strength of Asian e-commerce, what is the level of visibility that you have for Apex? Because obviously, Apex operates more on contract spaces agreement rather than the given KN Legacy which is more on the spot market. Any clarification on that would be helpful. Thank you.
Markus Blanka: Hi, Satish. It's Markus. So, to your first question, why is eTouch in airfreight currently leading, if you like, from a positive impact perspective. Simple answer is we started with airfreight much earlier than we did in seafreight. So, they had a much earlier start point. So hence, the accumulated savings is greater. Which of the two has the higher potential, I think, versus the second part of your question. Clearly, seafreight is a larger operation. There is still more to come. So that also in future, we have a sustainable positive impact from the eTouch initiatives. You may remember when we started eTouch, we have been talking about the potential upswing of around 300 basis points, so 3% at that point in time, from 25 percentage maximum, let's say, starting point of conversion rate. I think we can safely say that on the airfreight side, we will continue to improve through digitalization and streamlining of operation. And I think we should expand that to a 300-basis point to 500 basis point range. The same for seafreight. But as I said, it will come at a later stage, but it will have a bigger lever because the operational organization is bigger on the seafreight.
Stefan Paul: Yes. Thank you, Markus. Let me take the second question on the Apex performance. So yes, indeed, Apex is more involved in the e-commerce channel, particularly into the two new giants. Basically, what I can tell you is two things. First of all, the Apex capacity for the third and fourth quarter is already sold to a high level of 70%. We will keep a little bit of a gap in terms of giving us the opportunity on a weekly basis to adjust the selling rate for the remainder. But 2/3 of our volume, which we have secured is already sold, presold to the three -- third and the fourth quarter, which is a very good indicator. And as tighter the market gets as more successful, the Apex model becomes, and you have seen it as well during the pandemic. So that's good news for us because we expect, as I said, and I'm repeating myself, we see a good peak coming towards us from a sea and airfreight perspective during the fourth quarter this year.
Sathish Sivakumar: Stefan, just a quick follow-up on that, actually. So, 70% is sold. Where does that compare on the e advise? Would you say that what you have seen in quarter 2, it has come in slightly better than that? Just like any clarity on how much of those 70% is sold at what levels?
Stefan Paul: You mean on the EBIT, you said what does that mean for the EBIT, right?
Sathish Sivakumar: No, on the GP per ton, GP per...
Stefan Paul: Yes. So, it will be -- it will -- as I said before, right, it will be higher than the second quarter. We know already, it will be higher based on the pressure we have seen from the marketplace. Just to let you know, of the 20% of the Apex volume is e-commerce. It's not more, right? So that gives you a little bit as well room to maneuver on the price level. So, it will be higher in the second.
Operator: The next question comes from Elliot Alper from TD (TSX:TD) Cowen. Please go ahead.
Elliot Alper: Great. This is Elliot on for Jason Seidl. So, two questions. Maybe -- you discussed some of the soft demand in core geographies within Road Logistics, hoping you could expand on that, maybe any end markets in particular that you're seeing weakness? And then within Contract Logistics, can you discuss the current customer pipeline you have? I'm not sure if I missed this earlier, but maybe how we should think about margins in the back half of the year? And if there are any upcoming start for us to think about?
Stefan Paul: I take the road one, where we see, in particular, a little bit of a softer demand from a domestic and international perspective or the large markets in Europe. Whether you take France, whether you take Germany, U.K. as well, we see less volume than anticipated. And we know that -- and we all know that the domestic market in the U.S., FTL brokerage as well the total logistics management is soft. So, we see that in the U.S., we see that in the large markets in Europe. And in Europe, in particular, we have to feed a certain network, a certain cost needs to be managed, right? We cannot reduce the cost as fast in a network business than in the brokerage business. So, the only answer to it, how to overcome the challenge in terms of lower volumes is to activate as much as you can in your field sales and your corporate global sales management and your people in order to bring profitable volumes in, but that is the challenge currently are the main markets in Europe are soft.
Markus Blanka: And Elliot, it's Markus. For the Contract Logistics question, I think we have slightly touched on it from the project with Adidas that we have there. I think we expect, certainly for 2025, to show improvement over the conversion rate, not just because of that one single project, which is large, but not in [indiscernible] of that, but also the mix enhancement overall. We're still working on more health care and obviously complex solutions going forward, right? The size of the pipeline is, of course, very considerable. We are talking in excess of 1 billion. But you're also aware that the selling process or the sales process plus then the implementation and so on, it's a much longer process than what it is, obviously, for a transactional business. Health care, as I mentioned, as one of the focus areas are obviously above average conversion rate. And we are looking for that segment only into a pipeline, there's probably 500-plus million potential. So again, we took pipeline and potential in the areas of our main interest. Don't expect that to happen within a quarter, but I think we are very well positioned to structurally change our customer portfolio towards, again, higher-yielding business with better conversion rate also in Contract Logistics.
Operator: The next question comes from Sebastian Vogel from UBS. Please go ahead.
Sebastian Vogel: Good afternoon. My first question relates to the Sea Logistics side. When I look there on the gross profit per unit side, it's down quite a fair bit, while your revenue on a per unit basis was going down also a bit but not so much. Can you share your thoughts on the drivers of that? And how you see that for the rest of the year? And the second question would be about the financial results and how should we think that one for the rest of the year?
Stefan Paul: Sebastian, I'm Stefan. Yes. So, when the rates go up, and this is what happened in the second quarter, basically, you have a little bit of a gap between your contracts with the customers, especially the larger ones and the carriers basically, and that is what you have seen in the second. Now, as I mentioned before, starting with the third quarter, we will benefit from the new contracts and the new rates we have agreed with our customers, and that's the reason why we are so confident on the new GP level moving into the third and into the fourth quarter. Overall, we do not give and share exact figures, of course, as always, but what you can definitely anticipate is that the second half will be stronger than the first half. And maybe Markus want to lose something -- no, fine. So significantly stronger in the second half than in the first and the indicators and the reasons and the rationale behind we have just shared.
Markus Blanka: And Sebastian, markets. On the finance result, I could give a very -- I mean it's twofold the answer, right? We paid CHF1.2 billion to shareholders. So, the cash box that has been very well filled last year also from 2022 results and so on, I think, has reduced slightly. So, interest income has -- is lower than it was, obviously, last year at that point in time. And secondly, we started quite a significant lease contracts also connected to the contract logistics ramp-up for Adidas. So, there is inherent interest cost in the lease rates for that activity, which also has a negative impact. But these are the two main drivers, less money. And on the other side, there is more interest cost for the right-of-use assets lease contract.
Operator: The next question comes from Gian-Marco Werro from ZKB. Please go ahead.
Gian-Marco Werro: Markus and Stefan good afternoon. I have two questions that relate to the scenario and your base case for the international freight rate development in the second half of the year. So, I got it from the seafreight profitability that you mentioned you see now in the second half, a significant higher profitability than in the first half, that makes sense. But you also mentioned in the beginning of your presentation that you see a significant improvement in the third quarter. And then did I get it right? And you even said further expansion than in the fourth quarter. I know it's very early to say, but I would really wonder how you see the base case of this international freight rates and affecting your profitability also in the fourth quarter. Then in relation to that also net working capital, that's my second question. Markus will speak about net working capital remaining stable for the rest of the year. But also, here, if we expect at least some bottoming out of international freight rates and maybe some slight decline, shouldn't that significantly reduce then your net working capital again? Thank you.
Stefan Paul: I take the first one, Gian-Marco. Thank you very much, and good that I can clarify that, right? So, what we see and what we expect is an uplift in GP per TEU margin development moving into the third quarter, and that will continue into the fourth quarter as it looks right now, right? So, I do not expect that a major change to be expected from a seafreight rate development, especially on the power lanes, Asia to Europe and Asia to the U.S. So, it's more a continuation of the rate development in the fourth quarter coming from the third and -- but there is no further uptick most probably to be expected in the fourth. So, it will be higher, but flattish coming in from the third moving into the fourth.
Markus Blanka: Well-sponsored, yes. I agree with you, that's the mechanic that we are looking at. If freight rates were to come down significantly, which is not our base case, again, with Stefan says, the base case for us is that the Red Sea stays closed for the next 2 quarters to persist, which most likely will also solidify some of the rates. And at the same time, I'm saying we should have a volume increase. So, my base case for the net working capital is, I allow for a certain reduction of the freight rates, but that's going to be offset by additional volume that we will gain from the market. Of course, when the freight rates would, for whatever reason, come down very quickly. Then of course, you're right, the receivables will be immediately transferred into cash and then obviously, cash flows back, very clear.
Operator: The next question comes from Andy Chu from Deutsche Bank (ETR:DBKGn). Please go ahead.
Andy Chu: Stefan and Markus, a couple from me please. Just in terms of the GP per TEU, is it possible to current sort of run rate for what you're seeing in July? And is it possible to get a little bit more help in terms of what's significantly above CHF500 per TEU means is it possible maybe to give a range? And then secondly, in terms of seafreight again staying with seafreight, is it fair to conclude basically that you're not seeing really a recovery in seafreight volumes? You alluded to sort of Q3 volumes being sort of low single digit. I just wonder that actually whether you might slip into a slight negative growth year-on-year in Q4 with a slightly tougher comp.
Stefan Paul: I'll take the first one. As we don't give any guidance, Andy, on -- during the year on the exact figures. But what we can see is trading is doing well and invoicing is doing well as well. So, if I would need to give you a range, it's definitely not 5 or 5 or 5 tenets. It's definitely higher. If it's above 550, I cannot tell, but it's not on the lower level of the 500. It will be higher, and this is what we see already in the invoicing process now in July. More I should not share because it's too early.
Markus Blanka: And I think on the seafreight volume side, clearly, we are looking at expanding our volumes. I think there is a fair assumption in our base case that we will gain volumes single-digit, yes. But if the question was if there would be additional volumes, I don't know, in excess of double digit or so, the answer is no. We would be in a moderate single-digit volume increase, yes.
Operator: Next question comes from Lars Heindorff from Nordea. Please go ahead.
Lars Heindorff: On the volume side, particularly on the seafreight maybe also to some extent on air. So, the increase in the volume and the front-loading that everybody talks about, I just wanted to pick your brain a little bit on whether this is purely front loading, whether there is an element of restocking? And what's -- I mean, kind of the feedback that you can provide from your customers, which is the reason for this volume increase? That's the first one. And then the second one, most of the question has been around the yields, still a little bit. You want to sort of get some clarification in previous quarters. And so, during the pandemic, we've seen yields spiking up. And to some extent, following the rate development. That has not been the case here in the second quarter. So, what is the reason for the sequential development into the second quarter? And then again, your expectations are fairly significant increase into the third quarter, which appears a little bit weird compared to the sort of the development we've seen in previous quarters, also June pandemic. Thanks.
Markus Blanka: Lars, it's Markus. Let me talk first about this early peak or you call it front loading, but I think we talk about the same thing. Well, I think -- and I don't have any hard evidence on hand, to be frank. But I think the reason why customers have actually decided to do that is on the brink of rates going up very quickly at the same time, seeing that the Red Sea is a bottleneck and creates uncertainty on the supply chain. I think it was more a behavioral desire to make sure that there is there is cargo available or there is merchandise available for the year-end business. I don't think there is a particular, let's say, drive into restocking or anything like that. It's really more of a securitization topic. Let's not forget, we came out of a period still in May, June, where we had a rollover cargo that where shippers have seen that cargo has not been taking on the saving, where they where they expected it to. So that creates uncertainty. And I think that was really the driver for that early peak season and the front-loading, as you mentioned. From that perspective, I think also the question of the -- you said rate development, right? Your second question was about the rate development, why we haven't seen the higher gross profit already in the second quarter. Clearly, there is a delay. And you know it from an accounting perspective, when rates are being communicated and contracts are being signed with current rates, they really only take effect a couple of weeks after. And I think there is a difference when we look at the correlation and our correlation because knowing you, I think and rightfully from an analytical perspective, if you look at the correlation between freight rates and gross profit, I think we -- during the pandemic, we had looked into a crisis, let's say, that is -- that was fueled from a demand side, and it was a global one. Currently, we look into a situation that is driven from a supply side, and it really is only a few trade lines that we are talking. It's Asia, Europe predominantly. So, I think there is a significant difference in the two drivers. For us, clearly, the higher rate profit or the higher rates gross profit will come third quarter going forward.
Stefan Paul: And maybe to add one sentence on airfreight, the difference to the previous years is that the yield has increased in the second quarter versus the first, which has not happened in the previous years, and that gives us additional confidence on better yield in Q3 and Q4.
Operator: Ladies and gentlemen, that was the last question. Back over to you, gentlemen, for any closing remarks.
Stefan Paul: Thank you very much. Enjoy your summer break, your vacation and speak to you the latest in October again.
Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
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