Kuehne + Nagel International AG

Ladies and gentlemen, welcome to CUNY Nagel's half-year 2020 results conference call. I am Sandra, the chorus call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. For operator assistance, please press star and 0. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Dr. Detlef Tretzker, CEO of Kühne & Nagel. Please go ahead, sir.

Thank you, Sandra. Good morning, good day, good afternoon, and good evening to all of you, and welcome to the analyst conference on the semi-annual half-year 2020 results of Kühne & Nagel International AG. Our CFO, Markus Blanka, And I welcome you from sunny Switzerland. We published our half-year results and the respective slide deck earlier today. And as always, let's get started on slide three. Over the first half of the year, the Kühne & Nagel Group successfully managed to deliver excellent service for customers in the face of unprecedented challenges posed by the COVID-19 pandemic. This started with the very abrupt halt to Chinese exports in February, followed by lockdowns in March and a deliberate pace of day-to-day recovery. Thanks to our dedicated colleagues and a seamless transition of approximately 45,000 staff to home office in a matter of days, our customers faced no degradation of service quality despite extraordinary volatility and demand for essential goods. This culminated in substantial market share gains across all transactional business units. From a financial perspective, the group's performance in quarter two is a testament to our flexible asset-light business model and our efforts to optimally variabilize a meaningful portion of our short-term fixed costs. And looking at those four key figures that are in front of you, you will see that the net turnover decreased by 7.5% heavily impacted by an FX effect of 5.9% versus previous year. Gross profit went down by 9.1% and the EBIT by 18% down to 419 million Swiss francs in the first half of 2020. Earnings per share landed at 2.58 Swiss francs per share. Please follow me on the next slide. slide four with a couple of details on the group and the business units. Group earnings for the period of the first six months were at 309 million Swiss francs. And we generated a strong free cash flow of 383 million Swiss francs. Looking at the four business units, let's start with sea logistics. We have seen an EBIT of 167 million Swiss francs, which were 28% below previous year, as a result of a shift in cargo mix, less SME volumes, and a positive reefer and farmer development. Also, the demand for rail solution, especially at China, started to pick up strongly as of June last quarter. Air logistics, an EBIT of 181 million Swiss francs has been achieved, which is 4% higher than previous year, based on a high demand for crisis goods, but also a demand for special solutions, such as sea and air volumes, which more than tripled in quarter two 2020. Road logistics ended the first semester with an EBIT of 26 million Swiss francs. All networks were maintained. and Europe now is slowly recovering while the Americas are still suffering from the effects of the pandemic. And contract logistics ended the first semester with an EBIT of 45 million Swiss francs, 21% below previous year, seeing a high demand of essential goods and answering the gross profit decline with strict cost management, almost matching the gross profit development. On slide six, we will discuss briefly the volume development in sea logistics and air logistics. Please let me start with sea logistics first. We have a pronounced effort in sea logistics, especially on maintaining our own networks in sea logistics, especially on maintaining our own network capacity, which yielded in significant market share gains across all segments. but especially in pharma and reefer and the e-commerce segment. The cargo mix, I mentioned that before, showed a significantly lower SME volume, and this is higher yielding as we have mentioned in some of our previous calls. The market demand is continuously recovering over the course of quarter two, but it's still below previous year. Let me give you some hints on how market, sorry, how our volume developed months by months in quarter two. We saw April was a 15%, 1.5% volume decrease, but gaining market share ended our volumes in May by only minus 12%. And the June volumes already showed a minus 8% volume decrease. So gradually we see volumes picking up again, but still lower than previous year. In total, we shipped 217,000 TEU less in our networks, which resulted into an 11.7% reduction in quarter two and a 9.1% reduction in volumes for the first semester 2020 for sea logistics. Air logistics saw a significantly lower demand for dry cargo and perishables, and both are lower yielding, as you know. a strong demand for essential goods, which were higher yielding, and mainly produced or operated in a charter, via charter business, because the recovery of belly is not expected to see or show significant effects before quarter four this year. a soaring demand for sea and air solutions, and also a monthly development that was rather stable by minus 23 to minus 20% April to June. In total, the first semester, a reduction in volume of minus 15.5%. How does this translate now into the unit performance of the business units? And please follow me on slide seven first. See logistics. Mentioned this already two times. Now for the third time, cargo mixes lower SME volumes, volume gains in pharma, e-commerce, and revert, and a stable margin development per unit in constant currency. On the next slide, slide eight, you see the details of the development. The gross profit mix is the driver of the unit profitability. with an FX effect, a currency effect of 6%, minus 6%. On the unit basis, you see a constant development or a constant margin per TOI, per TEU in quarter two this year. All cost measures were intact, and including the tailwind from FX or from currency, we saw a reduction in the cost level per unit as well. The EBIT per TU is well below our normal EBIT per TU, but this includes also headwind form currency of 6%. So, in total, we are at the lower end of the range that we usually pursue, the 80 to 100 Swiss francs TU EBIT per TU. But it's recovering, and we also see some seasonal effects kicking in. We are focusing, especially in sea logistics, on excellent customer service. And we have one significant business which already related or resulted in less volume reductions than one might have expected from the market development. And quarter two has been stronger and improving month by month. with regards to both volume, margin, and unit profitability. Slide nine, air logistics. The general cargo volume declined significantly. I will comment on this on the next slide. And the demand for higher yielding crisis goods has soared. The market demand has been much weaker in quarter two, as anticipated. We have to say the regular dry cargo, so the general cargo, the normal cargo that we transport, especially in the belly capacity, has been down by minus 40 to minus 50 percent. And this has been offset by crisis volumes, essential goods, but not only crisis volumes, essential goods, but not only PPE, but also packaged food, as well as e-commerce volumes went into that segment. Perishables were down in April and May, but the recovery started already in June, and we also see hard cargo or general cargo coming back step by step as of June this year. We had a spike in charter business while belly was not existing, which led to unit figures that are skewed by a different way of producing air logistics. And our unit yield, as you can see, is clearly above our normal range of 70 to 85 Swiss francs per 100 kilo, per ton, sorry, no, per 100 kilo for the normal volumes transported in our networks. The unit EBIT is also above normal despite higher currency headwinds. And this marks a 50% increase in quarter two versus previous quarter due to the beneficial volume mix. The cost consciousness also in this business unit, as well as the first airlock efficiencies that we have seen kicking in into that segment. Slide 11, a short overview on road logistics. Europe is slowly recovering. while the volumes in America stay at a low and very low level at the moment. This is true for both intermodal as well as truck brokerage. We have seen, slide 12 now, we have seen a fast and massive deterioration of volumes in Europe at the start of quarter two. And I think we mentioned that when we had our quarter one analyst call with you. And the order of magnitude has been higher than 50% volume reductions. But that was true for two, three weeks only. And we see a steady volume recovery step by step, especially in domestic transports in Europe at the moment. U.S. followed with a sharp volume decline end of April. and especially intermodal more or less collapsed. And we see a steady recovery in June, since June in Europe, and a stabilization on a low level in the U.S. at the moment. International and cross-border, which is the higher yielding business, those transports are still lagging, but also here we see volumes coming back. All our networks have been maintained and we are ready to deal with the cargo kicking in. And in some markets, I will not say the geography, we have even had to reject certain volumes because our networks were filled again in June. That's true for domestic transports. We saw a very strong growth in bookings on our digital roads. platform called eTruckNow. And we have been able to roll this out even in a virtual environment over the last couple of months in many Asian countries. And we see the volume soaring on that platform at the moment. While EBIT was 42% below previous year, we generated a positive EBIT of 26 million Swiss francs. And in our best case scenario, we would not have expected a positive quarter two in road logistics, given the character of our networks. So we are very proud of what has been achieved here, countering volume reductions with cost measures. Slide 13, contract logistics. And I have to say, contract logistics showed high resilience And it showed two faces. The ugly face, if I may say so, was industries that clearly were down trading, automotive and industrial to name two. And we had complete shutdowns by customers and sometimes by governments in those industries for two, three, four, six, up to eight weeks. and some of the volumes have not recovered even to a sizable level again than prior to the crisis. And there was a couple of nice faces that we saw, or up-trading industries, the pharma and healthcare industry, up-trading industries, the pharma and healthcare industry, the industry for essential goods, which is packaged food and consumables, and also e-commerce. And here the volumes were well above seasonal peaks, and we had extra shifts that we had to introduce, especially on the weekends, to cope with the soaring and spiking demand. 90% or up to 85% to 90% of our sites remained open throughout the whole crisis. And currently, we only have 12 sites that are still closed out of more than 600 sites globally. So we see a clear confirmation that 50% of our solution portfolio is related to essential goods. And this demand has never stopped or has never been reduced. Some details on the contract logistics business unit on slide 14. The implementation of the COVID-19 SOPs or operating procedures across all operations were introduced, but they also added a lot of cost and a lot of efficiencies. While we were doing everything to protect our staff, we lost clearly efficiencies. Cleaning, disinfection between shifts, no overlap of shifts anymore, segregation of workflow between shifts led to a lower productivity. and higher costs, obviously. But the excellent cost management that contract logistics introduced immediately with the crisis becoming one, so as of February, clearly showed progress and we were excluding the pressure from the exchange rate. We were able to counter the top line revenue pressure with cost measures almost entirely. And that is for such a huge business unit employing so many people, that's a huge effort and a great result. So the high portion in our solution portfolio of essential goods showed high resilience. And the lease debt largely backed by contracts with customers back to back. So we have more than 50% of our sites are so-called dedicated sites. So we were not exposed to an overproportional lease without any activity in too many sites. Nevertheless, we saw a development end of quarter one and early quarter two. But if you look into the figures, the overall performance, including the FX effects, is only 11.3% lower net turnover and in EBIT almost on the level of previous year, quarter two. And having said so, I am happy to hand over to my colleague, Markus, to lead you through the key financial figures.

Thank you very much, Douglas. Welcome to all participants, also from my side. A very special second quarter indeed. A time that was characterized by unusual business pattern. I think we had quite some Opposite focus on business management focus in the business units. Air freight can be described by just make it happen. Times where customers as much as on the carrier side, I think a lot of creativity was being required to make things happen. On the other side, as Ned Lev mentioned in contract logistics, clear focus on on cost containment and cost management. So a lot of times we have been confronted with the fact that traditional KPIs, key performance indicators, have been not extremely helpful. We needed to look differently at the business because it was a very special situation. But, and I want to lead you on to page number 16, I think the result ultimately was a quite good one. And when you look at the magnitude of impact, what such an unusual business can happen is, when you look at the gross profit development from the first and the second quarter compared to last year, we have actually lost in the second quarter 265 million gross profit compared to last year. That is two and a half times more than in the first quarter. However, on an EBITDA level, we actually have been at the same, even better level than compared to the first quarter. So we only, if you like, still a big number, but this quarter. So we only, if you like, still a big number, but only had a reduction in FHDA of 30 million out of a cross-profit reduction of 265. So there's quite a lot of the cost contained and the cost management in between That I think you can appreciate was quite a piece of hard work to get that done. Going further down in the P&L, of course, on an EBT level, yes, we are around 18% behind last year on a half-year basis, so 90,000,000. of which, and that's not an excuse, just a fact, of around 20 million are coming out of foreign currency exchange. So 70 million from an operational perspective reduction versus last year. So in relative terms, I believe the second quarter, and that's also very apparent, was even better than the first quarter. Page number 17, let's talk about air and sea freight in that context, the eTouch project and the automation initiatives behind that. We have presented the potential of the eTouch initiatives in commercial terms at our full year 2019 presentation. So, what you see here is merely an update where we stand. It's not a new assessment of values. It's just an update on progress. And I think you can appreciate we have set the baseline in many areas in air freight. Our operating system airlock is fully rolled out in 2019, which is prerequisite for many of the eTouch initiatives. Not all of them, but many of those. Despite the fact that Q2 had been a challenging environment to put through a project, but we have continued to drive eTouch initiatives and we made pretty good progress, at least in one of the five core areas, the one that is customer booking and order entry. I think the message here is, yes, do not expect any miracles right now in the current situation with still over a good three months, people working partially from home, partially just what I said, trying to keep up service in an excellent manner. But some of these projects have a slight delay. The message that I want to give you here is eTouch is on track. Page number 18, balance sheet. I'm only going to talk about three, four components, of course, some of them housekeeping. First one, trade receivables, biggest item on the balance sheet, 3.2, 3.3 billion by the end of June 2020, compared to 3.6 billion. Not surprisingly, again, here we see a position where business volume has reduced slightly. And you know, it's a function basically of rates and volume. And of course, a currency impact also on that position that is reducing the overall amount. Secondly, and arguably more important, cash and cash equivalent. I think our balance sheet is strong with a gross cash position here of nearly 1.2 billion, translated into net cash of around 760 million. which compares to roughly 900 million, respectively 480 million by the end of the first quarter 2020. So simple terms, a very good development in cash generation. In light, I think, of the decision, and you have read it in the news today, in light of the decision to propose the distribution of a dividend to the shareholders of four Swiss francs, We have calculated a pro forma net cash position at that point in time, and that would still be positive with 280 million. Just as a housekeeping topic here, you're aware that we have a revolving credit facility available to us, which is entirely undrawn, so nothing has been used so far in the extent or at the frame of 750 million. Coming back to the next item on the balance sheet, asset held for sale. Also here, information purposes. This is the value that we have or that is the scope of the business that we have signed a contract of divestment with XPO. You can see here very transparent asset held for sale. You can see here very transparent asset held for sale, $400 million. Liabilities associated with these assets held for sale, 300. So the net asset value of that business to be carved out is around 100 million. Equity ratio, I'm sure you have already calculated that yourself. From December, 23.6%, an increase to 25.9%. So I think the solidity of the balance sheet is also in these rough times and unusual times a benefit. Nevertheless, balance sheet is one thing, cash is king. So main topic, cash, going swiftly to page number 19. Operational cash flow, you can see that here in the first half 2020 at around 804 million. Similar level than last year with around 872 million. However, when we go down a little bit and look at the total cash and cash equivalent situation, we have an increase on the cash balance of around $666 million. Be reminded at that point in time that included last year a dividend payment to the amount of $720 million. So comparably at similar level, free cash flow generation, really what we are looking at. Very resilient free cash flow generation also in the second quarter. So I'm talking second quarter, not half year. In the second quarter of 227 million, which compares to 223 million. So let's talk about crisis or non-crisis. Free cash flow generation has been at the very same level as last year. Excluding some of the disposals, and this gives you a bit of an idea on how much extraordinary components are in there, excluding the disposals, the underlying free cash flow for the second quarter was still 221. So, the swing that we talked due to disposals is a very neglectable, I think, 6 million out of the free cash flow. For everybody who runs some of the models, I think you can see here from the investing activities, the gross CapEx, the run rates or the CapEx that we spend into the business is currently aiming at around 200 million on an annual basis, which is significantly lower than we had it seen over the last couple of years. Some of the drivers, of course, is the contract logistics disposal of part of the UK business. At the same time, we're also very diligently working on the usage of long-term leases, according to IFRS 16, rather than outright purchases. Looking at the pattern in time, so the trajectory of the free cash flow, I think when you look at the curves on the page 19 on the right side, there is no reason to believe that that should look differently, at least in the third quarter than it was last year. Again, be reminded in the fourth quarter, we had some extraordinary impact in 2019. So we should expect a more even development into the fourth quarter also for 2020. Going to page number 20, and I only touched the accounts receivable quickly on the balance sheet. When I talked about the balance sheet, here you see trade receivables have decreased over year over year by around 400 million. The reasons that I mentioned already. trade payables by around 260 million. So our networking capital is down around 146 million. What's more important, our KPIs on DSOs and DPOs, we were able to keep, especially on the DSO side, days of sales outstanding, a number around 54, 55. So we have a deviation of 0.4 days. many questions coming along our way, obviously. Is there pressure from customers on extended payment terms? Yes, there is. Very clear, yes, there is. I think we will see more pressure coming in the third and fourth quarter. We are holding up quite well. I think service is one of the important arguments to maintain the DSOs. At the same time, I think our focus moves towards the risk profile behind the counterparties. I do expect going forward for the next two to three quarters an increase in the risk two to three quarters, an increase in the risk profile on counterparty risks. So nothing bad happened so far. I want to underline that. It's a no big defaults or anything like that, but I would expect that the pressure is also here getting higher until the end of the year and maybe into the first half year 2021. Regenerate capital employed, page number 21. You see that Little infliction point that we had here from 60% up to 66, 67, and I think that was a good sign. So now we see a little bit the COVID-19 effect that pushes down to 62% again. Very clear, and I just wrote it for clarity just beside it, the sudden decrease of the profitability that we have seen also on the P&L on a very similar asset base. is obviously mathematically leading to a bit of a compression on this one. However, from a target perspective, we maintain our financial targets with around 70% return on capital employed. That should be possible. The good news, and at the same time, I think the expected also from some of you news, is on the next page, page number 22. Dividend proposal, just to put also some clarity around conversations we had over the last years, you know that we never had a formal written dividend policy. As it is, all decision-making power remains with the Board of Directors and the General Assembly. That having said, the actual payout ratio in the recent years was always consistent with also our verbal communication to a distribution of around 75% of the net profit after tax. Clearly, now the BOD's proposal is based on the assessment of the market conditions and also the groups, performance, and likely ongoing performance. And as you can see here, the proposal to the extraordinary general meeting on September 2nd will be to pay out a dividend of four Swiss francs. Financial targets, and last slide from my presentation. I think you see on the left side, uh, the group financial targets, conversion rate, 11 to 16%. I think everybody's clear. One of the main drivers, e-touch, uh, return on capital employed. I just, uh, spoke about it. I think when we come back to, uh, regular profitability based on our asset base, 70% is, uh, is in reach working capital intensity. I want to talk about that first working capital intensity, uh, currently at 3.9%. And, uh, you might have noticed, I have, uh, Intentionally widened a little bit the corridor from top end 4.5% to 5% for a simple reason, because I believe that is anticipating a reflection of pressure on counterparty risk and potential DSOs for the next four quarters. Tax rate. Tax rate, I think, very important to look at this one. It's a housekeeping topic for you also to update on your models. We expect a group effective tax rate of around 24 to 26 percent, up from around 24 to 25 as per our latest communication. This is just reflecting the current shifts in the business and geographic mix. So just that you're not surprised on your models. Right side, the four business units, you see the first line, our actual performance in volumes, but underneath the part that everybody was really waiting for, that is the update on the market expectations for 2020 and the outlook. And as you can imagine, I think we're in line with many of our peers. We are not giving any. You know, I think the performance that the group has shown so far gives us a certain confidence in our ability also to manage through what we believe is going to still be a volatile and highly uncertain believe is going to still be volatile and highly uncertain market also for the rest of the year. And as the market outlook remains extremely uncertain to us as well, we offer, again, no explicit financial guidance for the group, nor volume guidance until the end of the year. Very sorry for that, but at the current stage, we will all have to live with guessworking and a bit of color of what we said on our past performance. With that little... Lack of outlook. I will hand over to Dentleff.

Thank you, Markus.

And the lack of outlook maybe marks the whole year because in the pandemic, we have to fly on site. That is the saying we have. As far as we can look ahead, we initiate measures and activities and the rest is agility, adaptivity to a situation that you can't really predict. On slide 24, I want to make a couple of remarks. Logistics is and will stay people's business, even in a more and more digital environment. And we have embarked on this route. Our roadmap 2022, which started in 2018, and we are in the middle of that roadmap deployment, blends customer technology and people. And we believe that the COVID-19 pandemic and the last six months have clearly shown that we have embarked on the right strategy. We stayed fully operational throughout the crisis and continue serving our customers with our high quality services throughout the world. And I would heartily like to thank our colleagues for their commitment and passion and to our customers for their trust and loyalty. Thank you. Without you, the first semester would have looked differently. And that's the energy and passion of the best logistics team in our industry. And having said so, I would like to hand over back to Sandra to open Q&A.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touch-tone telephone. You will hear a tone to confirm that you have entered a queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question comes from Daniel Ryszka from Sanford Burnton. Please go ahead.

Gents, good afternoon. Thanks for taking the questions. Could you elaborate what is enabling the market share gain, especially during a crisis like this one, in your view, and kind of who's losing it? And then how much of that market share gain will you be able to retain kind of as things move more back to normal? You also talked a little bit about your cost reduction efforts. And in today's report, you showed about 87,000 employees down from about 98 last year at the same point. Now, how much of that decrease, let's call it a rough 10,000 employees, is driven by the temporary furlough programs? and how much due to actual sustainable reductions that then will benefit you kind of as you ramp back up. And tying this also to eTouch, back at the financial year results, you talked about $20 million annualized savings so far. Any indication on how this has progressed in the past six months and future? Do you expect that the automation will enable you to keep staff numbers lower as volumes go back up, or how are you thinking about really driving eTouch through the business? Thanks.

Thanks, Daniel. Let me answer those questions. Let me start with the latter one, because we have alluded to that a couple of times. It's not about staff reduction. eTouch is enabling us to do more business and to drive business segments or growth in business segments with a traditionally lower margin, but with the high conversion rate still very attractive to us. That is eTouch. Market share gains. We have mentioned that. We were able to gain market share because We changed the whole organization into addressing actively customers after Easter. So we were engaged with all existing customers and potential customers, target customers, as we call them. And we had interaction virtually with all of them a couple of times throughout the week and months. And we won business. We won business without having met the customer physically. And we were winning business because we were operational. And many of our mid-sized and smaller competitors were not operational. Many of our mid-sized and smaller competitors were not operational. They struggled to keep operations up and running. So that also would allude to answering your question, who lost? The lower part of the pyramid is the one that is under highest pressure. Technology, connectivity, and also functionality of operating systems is a big challenge for many of them, and especially in an unprecedented situation that we all went through worldwide over the last three, four, or five months, that proved to be a big risk and a big problem because you couldn't overcome any of those deficiencies by just calling someone or going somewhere. You had to prove your systems and technology are working. How much can we retain? I would say we convince our customers by quality. We don't convince by price. We are a quality supplier. And the customers that have made the experience over the last six months or in the past in general, they stay with us. We have a lot of customers that we retain because of our high-quality service, and that's part of our roadmap 2022 strategy. Customer excellence is at the center of all the topics we do. We don't want to win transactional business just for the sake of winning it and operating it for one, two, or three months. We want customers to stay with us and see how much of our solution portfolio can generate benefits for them. Cost reduction efforts. I think we have made a lot of efforts with all the programs that are in place, but not only. We have optimized our workforce. We have reduced capacity where required, but we shifted capacity to those operations, sometimes in the same city or even the same warehouse, where demand spiked. So there is no rule. We have only a few temporary labor. I think it's 2,000, a bit more than 2,000 temp labor, less than we had a year ago. And this is driven by the effect that we see much higher demand still in some of the essential goods segments, especially pharma, healthcare, and e-commerce. And this, from our point of view, sustainable volume. This will stay. So in different words, Daniel, I would say we made an organic growth experience compressed in – five months maybe or four months that we usually would have gone through in our customers in a period of 18 months. And I would say that is to a large extent sticky and stays and will not be reversed. Right. Thanks.

The next question comes from Satish Sivakumar from Citigroup. Please go ahead.

Yeah, thank you. Good afternoon, Dr. Marcus. Thanks for taking my questions. I have three questions. Firstly, could you please elaborate on volume trends through the quarter from SMEs, which markets are actually seeing weakness versus the relative strength? Secondly, in 2019, your SG&A expense was around 445 million Swiss francs. So could you please update on the current trend rate on SG&A? Finally, what has been your workforce return rate from remote working across key markets?

Can you repeat the last question, please?

I didn't hear you. In terms of workforce returning back to office, what has been your return rate so far across key markets?

Okay. So volume trends. which markets. So as you know, the whole pandemic started mid of January already in Asia. And usually this is not an SME market, or we have a much higher portion of blue chip customers there. But in Europe, it's mainly the SME customers that dropped out of business very fast. And the recovery is or has started now in June, I would say. So the first sign of a recovery of SME customers has been seen in June in Europe and partly in other markets, but mainly in Europe. And this will take time. It will not come overnight. At the moment, the pandemic is hitting the Americas and we see that we have still volumes that are down and not recovering. But here, I would say it has bottomed out. So we are more positive today than we were three months ago when we discussed the quarter one results. I would say despite regional and local setbacks, despite regional and local setbacks, the pandemic is not over, but we have all managed and understood how to handle it. And governments have initiated enough protective health measures in order to secure the people and make them continue consuming. The SGE run rate has a lot of components, and it starts with travel, for example. I do not expect travel to come back this year, to say this clearly. Intercontinental travel, I would not expect to see any of the flights intercontinental with Grüner Nagel stuff on it, before September, if at all. And then we have made such a positive experience on winning new customers and such a positive experience with winning customers and so on, online and virtual only, that you could say every second trip can be spared in general moving forward. And then we have a currency effect here as well. There's a currency effect in SGE because we translate everything into into the hard currency Swiss franc, and that has an effect in itself as well.

I hope that answers your questions.

The next question comes from David Kersen from Jefferies. Please go ahead.

Thank you. Good afternoon, gentlemen. Three questions, please, from my side. First on sea logistics. It turns out that the volume development is better than expected as the quarter progressed. I was wondering, did you see a noticeable impact from a shift from air to sea freight due to the lack of capacity in air freight? Then secondly, in air logistics, you benefited from, I think in constant currency, 34% higher yield. And now with the air freight market starting to normalize again, Would you expect that that air freight yield also normalizes back to the range that you indicated in your presentation of 70 to 85 Swiss francs per 100 kilogram? Or do you expect to be able to continue to do better than that range? And then finally, on road logistics, I think the organic revenue was down 20% in the second quarter. But that's a mix of Europe and North America. Can you provide some color on how weak North America really was? And with a decrease of 20%, does it still imply that you gained market share in the second quarter? Because I think some of your peers refer to the market down only 15% in the second quarter. Thanks very much.

Sure, David. So let me answer your questions. Sea logistics, yes, we had a better volume development than expected, but any shift from air to sea is insignificant for C. Sorry for saying so. One freighter has 100 kilos and 100 tons, and we are talking about, I don't know, six, eight containers. So it's a different business model. You can't compare it. But what we saw is, and that is a good combination, and I mentioned that, is the air-sea combination. So you go into Dubai via sea, and then you go into final distribution even to South America via air. And this combination, this solution, in light of the lacking supply side of freighter capacity, especially in China, got a lot of tailwind. And I mentioned that our volumes here spiked more than three times the normal volume that we see. So this combination showed a certain progress. Air logistics, I think I mentioned that during the presentation. We expect, especially in the second semester, that the higher yield was a very special or was a result of a very significant supply and demand situation in quarter two and that the normalized yield of 70 to 85 Swiss francs per 100 kilo will come in or will kick in again gradually, not overnight and not on a fingertip, but gradually. Road logistics, I think our comps are – we have so many different figures in the market, and not being able to predict even what has happened or describe really what has happened is, I think, what we have to – all of us have to be very careful with. Let me describe a situation that we experienced in Europe, and then I come to the USA. Europe, we have volume reductions of 50, 60% within weeks. This happened in the first one, two, three weeks in April. But then this bottom out and the recovery gradually started already as of May. So the figure you see is an average figure as of May. So the figure you see is an average figure of a volume development that had a lot of slumps and spikes and a lot of shifts over the last weeks. At the moment, we all believe that the volumes are gradually coming back and they stay. It's not a one-time shot. And in the U.S., I think we are still on a very low level. But as I mentioned, it has bottomed out. So long story short, it was a disaster and it's recovering. Okay, great. Thank you very much.

You're welcome.

The next question comes from Sam Bland from J.P. Morgan. Please go ahead.

Afternoon. Could I ask, I think, three questions, please? First one is on the sea freight conversion rate. That's held up pretty well, but I guess there wasn't very much, you know, there wasn't any benefit from e-touch in that segment. So just be interested in, you know, did you do any specific cost savings programs in sea freight or what helped the conversion rate in the quarter? Second question is on, I think there was... 57 million of employee government support in the quarter. Could you just talk about roughly which divisions that came in? Was it mostly in contract logistics? And could you see that support be withdrawn before the market recovers back up to normal rates so there's basically a lag and your profitability is impacted by that? And the last question would just be an update on M&A plans. Obviously, you paid the dividend. Should we read into that that... Any M&A ambitions are a bit less in the short run, or you've still got plenty of five dollars to look at that?

Thank you. Okay, Sam. By the way, guys, you can also ask less than three questions. It's not a standard routine that you have to ask three questions, only as a short hint to you. So, see, we have cost savings in place, and there's no e-touch yet. Because as mentioned many times, the prerequisite is the fully deployed new transport management system called CLOC as a basis for running eTouch activities in sea logistics. The government programs that you allude to, 80-85% is related to contract logistics, but people were out of work. So as volumes are coming back, also in the normal operation, people are in employment and we pay them. So that's not the point. We avoided to lay off people, which is beneficial for our staff and also for the government related to this. So the business... the operational run rate of contract logistics has been extremely strong. All the restructuring measures showed the desired effect. And we will see in the second semester when things are cleaning up more and more, especially in the quarter four figures, how strong contract logistics will Phoenix-like come back out of all the restructuring activities. And your question related to M&A ambition, I'm a bit surprised because our... proposal, dividend proposal has not changed to the one that we made prior to COVID-19. So when we posted our annual results 2019, there was a dividend proposal of false risk francs per share. And cautious as we are, we postponed a decision on this. and did not decide on a dividend given the unsecurity, unpredictability of the pandemic. And now as we see that cash flow is strong and we weathered the situation strongly, we are in a situation that the board of directors decided to propose for the general, to propose the same dividend again for the general assembly. Our M&A ambition, our M&A strategy has not changed at all. But physical beatings, in Asia are restricted at the moment. So whatever we do is based on video calls.

Okay, understood. Thank you. You're welcome.

The next question is come from Mark from Barclays. Please go ahead.

Hello, Mark.

Mark. Hello. Hello. You were shocked why I said less than three questions, Mark.

Yeah, no, I'm only going to ask two questions. You'll be pleased to hear. Okay, very good. Just for variety, really. So just to come back on the air freight and capacity question, could you give us a sense for how much of your air freight in Q2 went in freighters rather than belly hold? And do you see that changing significantly in certainly Q3 and maybe even into Q4? Because my sense is that the airlines are bringing back into Q4, because my sense is that the airlines are bringing back capacity, but much more of it is short and medium haul rather than the long haul stuff, which is typically what you use.

Exactly. So whatever... belly comes back at the moment, uh, it's short and medium haul. And that doesn't help us. I mean, uh, usually that is not where we, where we, uh, transact the majority of our business. Yeah. So I would expect in the second semester, uh, 60 to 70% of our volume to be transported with freighters main deck capacity. Yeah. And, uh, belly will not recover too soon. I would say it will take maybe two years that we see a significant network activity which allows for belly, using belly capacity again. Yeah, go ahead.

The 60 to 70% that you think is going to go in phrases in the second half would compare to what 90, 95% in Q2 because there was so little belly capacity around?

Yeah, I'm not sure. So this is... No, no, Mark, I'm not sure. End of this year, we will have 60% to 70% of the belly capacity that should be back. But we will still rely on freighter capacity to a major extent. And that will gradually transform or change throughout quarter three and quarter four. So we are talking end of the year, whereas at the moment, I think it's 90%, if I'm not mistaken, or quarter, early quarter two, middle of quarter two, the majority, almost all, is freighter capacity. So we have a lot of belly still in North America or the Americas, which can be used. And we use partially belly capacity for perishables out of African countries.

Yeah. So when you talk about the GP normalizing or coming back towards the longer term range, that's much more the mix, because I guess the like-for-like GP from using a freighter isn't going to be different in August than it was in April particularly, no?

Absolutely. Yeah, it's the mix, clearly.

Yeah. Okay. And the second question, a straightforward one, could you just remind us where you stand on sort of credit insurance on debtors, how much you use it?

Thanks, Mark. I also got a question once. Hey! Credit insurance is a very interesting topic right now. And without disclosing too much details, you know that we work with the two main credit insurers on a global basis. A lot of conversations going on right now. I don't want to say that insurers have all similar patterns. Obviously, when business goes well, there's a lot of insurance coverage available. When business goes not so well, it goes down very quickly. But we are having a good partnership with them, and we try to manage as much coverage as possible. As I said in my presentation, until now, no significant defaults or fallouts or bankruptcies or anything like that. However, there is, you know, the horizon is a bit darker than what it usually looks like. So there's a lot of caution is going forward. How much we pay, you can see that of the annual report, we pay every year around three and a half to four million on insurance premium. I think that is given our sales ledger of more than 3 billion, a reasonable number, when you assume that around 70% of that is being covered.

Yeah, but broadly, as you go into the second half, your level of cover is unchanged, yeah?

Our level of cover is, on a total number, probably unchanged. When you look into some of the industries, it may vary. Like aerospace industry might actually be reduced a little bit. Some industries will be increased. But overall, the risk profile is shifting within the industries, but overall remains very stable.

Okay, lovely. Thank you both very much.

You're welcome.

The next question comes from Neil from Credit Suisse. Please go ahead.

Oh, hello. Neil from Credit Suisse. If I could ask firstly another question of Marcus, if that works, to give you another opportunity. Marcus, if that works, to give you another opportunity.

Thanks, Neil.

Much appreciated. My pleasure. And then I'll have one for Detlef too, if I may. Keep it to two. So the first one, Marcus, you obviously spent some time talking about working capital and increasing risk to some of your SME customers. Just wondering, as it pertains to sea freight and the negative mix effect on GP per toy, as you plan beyond 2020, do you plan for a smaller proportion of SMEs relative to normal, or how do you think about that as it relates to GP per toy over the medium term? And then the second question, and I guess it could be for either of you, Just following on from the Airlog comments on how it's evolving and obviously C-Log is to come, how relevant is this to your M&A ambitions that you obviously outlined to an extent at the full year? I guess on one hand, optimization of those two TMSs might be ideal before any major transaction, but is that the way you think about it or is that something that will ultimately take care of itself if you find the right deal in advance?

Okay. Maybe, Neil, I take the latter question, if you don't mind. First of all, we concentrate on our own business and optimizing our own business based on Airlock and followed by C-Lock and the e-touchability of that business, make e-touch happen. And we make progress here in Airlock logistics, as we have pronounced. M&A is independent of this. This needs cultural fit. We are looking for access to certain Asian customers, a solutioning that is not yet part of our own solutioning maybe. So there are a lot of other criteria. And yes, it would be much easier to transfer a acquisition directly on CLOC, to name this, than on our current legacy system. But if that would be needed, we can do so as well. I mean, we have proven that this is not a big exercise for us. So that is not a criteria that would influence our M&A approach or delay any M&A. It's more getting acquainted to those targets and also building up a basis of trust. And that needs physical, personal meetings. And you can't do this via via video calls. We also, we always said when we announced this, because there were rumors in the market, we always said, it's a two years exercise. It doesn't happen overnight, but we make progress. We never stopped. We didn't change approach. So from that point of view, I'm quite confident that eventually we will be able to announce the right or the right acquisitions.

So Neil, then on the first question, I think it's interesting angle that you come from when they're working capital and the risk profile to the SMA. I think we see now the SMEs volumes coming down in the second quarter just for a simple reason, because most of the businesses have been, due to the curfews, have been just shut. That doesn't mean they reopen again. So I think what we are looking at in CFRED is that temporarily there is going to be a shift in mix away from the SME, but I think ultimately it's even going to be a bigger portion, you know, We have an extremely, when you look at the market share, it's a very small market share we cover right now. So it's an absolute attractive and we're totally committed, as you know, in our customer base to the SME customer. This is our backbone of our operation, right? There is still a massive potential to grow in a very profitable market in the SME. So How the margin is going to look like, I think also here there is a time that we need to look at for the normalization, but there is no systemic structural reason why the margin for SME should be lower than it has been in the past. So I think rightfully so, our backbone SME customer base we will even get a bigger portion of that and the profitability is going to be run exactly, if not above the level that we had until now.

Understood. Many thanks both of you.

The next question comes from Franz Hoyer from Handelsbanken. Go ahead.

Thank you very much. Good afternoon. Also a question regarding the mix shift in CE towards SME. Could you try and describe how much of a shift in the mix you saw and what was the effect on the yield that you saw in the sea business?

I think those details we will not disclose, but the majority of the SME business has not been able to sustain their operations, their business models throughout the pandemic, at least for four, six weeks. And that has caused the reduction. But we see them gradually coming back. But as Marcus said before, some of them do not come back at all because their basis, their their financial severance is not given. And SME is everything, be careful. It's also very niche products that has not seen an increase in demand at the moment. Whether you have hand-painted tiles that are produced in northern Italy and the demand is coming back now in Denmark, for example, is a rather questionable front. And that is maybe how you should think about it. But eventually that will come back. And our business is, and we are strong in SME business, our business is stood towards SME. So that gives you a bit of a flavor. It's a result of the pandemic and not of a conscious mixed decision.

No, I understand. Okay, and the second question, final question, is around the M&A market and whether the Trump... I mean, you mentioned that you're winning markets, gaining market shares, and those that are losing it are typically the smaller, mid-sized competitors that are having difficulties on the technology front, connectivity and so on. And you also talk about... credit risks escalating. So there might be an uptick in the M&A opportunities that you see. Maybe you can talk about that.

Yeah, we monitor the market for many years and we are active in the market as you know but not everything that looks shiny is of interest for us and and that may be we we to fulfill our strategic targets and to continue our growth paths that we have embarked on many years ago we don't need mna what we we have defined targets what we want to achieve with an mna approach and if we find targets that are fulfilling those requirements, we will become active. And if not, we don't. And for us, the market has not significantly changed at the moment. And we never looked at, we always looked at targets also in the past that were successful with their business model in their geography or in their solutioning. We are not looking for a restructuring case. That's not our business model.

Understood. Thank you very much. Thank you.

The next question comes from Christian Obst from Baader Bank. Please go ahead.

Yes, hello. I have some more technical questions. One is concerning the decision concerning capex or long-term leases. So we have seen an increase in depreciation of right of used assets from 237 to 254. a million in the second quarter this year. And so what is the trigger for a decision going for CapEx or for long-term leases? And how is the current market for long-term leases developing? Also, what is the main trigger for any decision in either way? Second one is you are talking, and of course, there is DSO pressure. Are you currently supporting some of your customers for longer payment terms or something like that to keep them into your network? And the last one is, can you give us a guidance for any kind of income from disposals in the second half? Thank you.

So, Christian, rather than use assets, I think your question has two answers. The first one is, what is the decision-making reasons to it? And the second one is, what is the increase in the second quarter? There are two different reasons for that. The maybe the more technical first, you know, that we have the asset held for sale related to the disposal of the business in the UK, which also includes right of use assets. And as per the IFRS standards, you have to stop depreciations at the point of signing. and then keep that frozen, if you like, until the point of closing. That is the simple reason why you have the variances in the second quarter and continue to have until closing has been executed. So that is the technical part. Then the question around what makes us deciding into one or the other pace, what makes us deciding into one or the other pace, Main and most important piece to it is that, because we talk most of it of locations, of country logistics facilities. So what is the perspective of that country logistics facility? Is that a facility that is an operational optimal position? then obviously we want to keep our flexibility most of the time back-to-back with customers where we say we have a five or, I don't know, 10 years customer contract, you know, I'm just making an example, and we match that with our lease commitment. It's flexibility that is driving our asset-light business model, right? So if you ask us, you know, then each answer is going to be the more flexible, the better. We only make investment decisions where locations do not provide the required quality of facility. I give you one example. A few years back, we were investing into a pharma hub in Singapore because there was no such pharma space available, right? So with a couple of ups and downs, you know, right now, it became a very good decision, you know, in the current circumstances to have that space available. This is really the exception where there is a good reason why to invest our own money. In all the other cases, a lease agreement back-to-back with the customer will be preferable. DSO, second question, DSO, we never sell on payment terms. We don't. This is irrespectively of any pressure, demand, or anything like that. We sell because we have a very good service. We are fully operational. We are competitive in the market. We are not selling on terms.

Okay, that's clear. And the last one?

I didn't write down the last one. Income from disposals. Oh, income from disposals in the first half? No, in the second half. Oh, in the second half. We have a second real estate portfolio is out for sale. I do not expect material impact on the P&L out of that. So it's going to be less than 10 million.

Okay. Thank you very much.

Thank you.

The next question comes from Moniba Kayani from Bank of America. Please go ahead.

Hi. Is it possible for you to quantify the benefit from lower perishables in air GP in 2Q as well as the impact on volume from lower perishables as that normalizes how we should be thinking about it in 3Q and the second half of the year? And then secondly, What have you seen from the digital forwarders during the COVID crisis? And have you seen a higher or more presence from them during the crisis?

Okay, let me answer your question. The latter question, I don't know what digital forwarders are, but I would believe our digital solutions got a lot of pickup during the crisis. We have not seen many of our competitors in general being active or aggressive in the market. I would say a handful have been. The rest somehow disappeared. And I'm not exaggerating. So I will not name any and I will not give any comments on single forwarders. The quantification of the benefits from perishables, first of all, perishables is a low-margin business, and we had less perishables, one-third less approximately volume, one-third less perishables in the first semester. That led to the cargo mix to a higher yield independent on whether charter was available or required or the rate spiked or not. we believe that this perishable volume comes back gradually in the second semester. And thus the mix would reinstate with a lower yield. So the 70 to 85 Swiss francs per 100 kilo will become a reality also because of the cargo mix with one third of our total volume being perishable. I hope that helps.

I hope that helps. Thank you. You're welcome.

The last question comes from Sebastian Vogel from UBS. Please go ahead.

Hello. I got two questions. The first one will be on contract logistics. You mentioned there your expenses came down quite a fair bit. I was wondering if you can add more granularity how the different cost items, i.e. personal costs and the other one, SG&A, have contributed to this development in the second quarter. And the other question I have, if I calculated correctly, your conversion ratio in particular in Asia was quite high in the second quarter. Is that mainly a function of the transport mode exposure of that region?

So, Sebastian, first of all, we don't look at conversion rates per region because... It depends on the terms our customers apply on where to, you know, invoice and pay transport bills. So it's skewed. Be careful. We have a profit sharing model. So that is within or internally between regions. So that will not really help. Conversion rate for sure is influenced by the performance of the different business units. And yes, in quarter two, air freight or air logistics has been extremely successful. So the question on contract logistics and cost development, the majority of the cost is people, colleagues, and the second cost factor is lease. I gave an answer on the lease already because 50% or a bit more of our contracts are all back-to-back, dedicated with single customers. So the fixed cost coverage is usually part of our contract. So that is not an exposure. And the rest is capacity, and we breezed with the volume very well. Yes, we did not have a mass layoff, and we stated so many times it's not necessary, because from the beginning of the pandemic, we said this would be in a situation that would – that is – limited by time. It would not end up in a permanent situation. And that is exactly what we see. Many of the operations are back. I mentioned that only 12 operations out of more than 600 contract logistics sites are still locked down, and 11 out of them are in one country because some infrastructures have not opened yet. and the rest is fully operational or has started to become operational again. Maybe not a three shift operation or weekend shift, but if you look into China and China is maybe a, we can learn from China or Asia because they went through this pandemic very early and gradually. We have full employment in our operations in China. We have additional shifts introduced in our line feeding, automotive production line, services, spare part services, and we see increasing and strong demand for a lot of goods out of China. And therefore, we see that a lot of our customers start picking up in volume again. Is this VTWO or whatever? Let's forget it. But it's not as fast as we thought, but the slump was not as severe as we anticipated before. So I hope that helps to answer your question. It's personal cost is the main factor. And we are almost in full employment again in contract logistics. That means we have a gross profit related to that activity. And the rest is lease cost. And our idle capacity has not changed significantly. We are below 3% in idle capacity. That's a leading indicator in our industry. Thank you, Sebastian.

Gentlemen, that was the last question.

Thank you, Sandra. Ladies and gentlemen, logistics is people business, and we are proud of our people. They have managed this crisis extremely well, and we are honored by our customers, their loyalty, and their business that they awarded to us during the last, especially last quarter. We will see how we progress over the next quarter, quarter three. And we are looking forward to talking to you again, middle of October. And in the meantime, stay healthy. Don't travel too much. Don't forget to use masks because we need you as end consumers like millions and billions of others because end consumers drive our business model. And we want to see a strong quarter three when we talk next. Thank you very much and talk to you again soon. Have a nice summer. Bye-bye. And talk to you again soon. Have a nice summer. Bye-bye.

Ladies and gentlemen, the conference is now over. Thank you for choosing Coral School and thank you for participating in the conference. You may now disconnect your lines. Goodbye.