Kuehne + Nagel International AG

Ladies and gentlemen, welcome to the Half Year 2024 Results Conference Call and Live Webcast. I am Sandra, the Chorus Call Operator. I would like to remind you that all participants have been listened only mode and the conference has been 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. In the interest of time, please limit yourself to two questions only. 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 Mr. Stefan Paul, CEO of Kühne Nagel. Please go ahead, sir.

Thank you very much, Sandra, and good afternoon and welcome to the presentation of Kühne Nagel's half-year 2024 financial results. I'm CEO Stefan Paul, and I'm once again joined by our CFO, Markus Blanka Graf, sitting next to me. Let's go into the half year 2020. For figures, page number two. Focusing on the most recent quarter, the Kühne-Nagel Group achieved a Q2 EBIT result of Swiss francs 402 million, which fulfilled our expectations to improve on the Q1 result of Swiss francs 376 million. The Q EBIT result was This ranks 419 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 C logistics, and air logistics operations also contributed to the stronger result. Underlying operation costs were relatively stable, with accumulating cost savings 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 $100 million once cost savings are fully realized by the end of this year, early 2025. Pre-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 networking capital over the entire period from the sharp rise of sea freight 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 sea freight yields at least to the end of Q3 alongside modest volume development. And second, an expectation for an air freight peak season in Q4. And finally, our ongoing yield and cost management efforts. Let's do a deep dive into Seafreight page number three. On the left, as always, volume in TU, GP per TU in Swiss francs and EBIT per TU. Sealogistics achieved EBIT of Swiss francs 200 million in Q2 or 206 million, excluding restructuring costs. This compares to Swiss francs 295 million last year and 107 in Q1 2024. The sequential EBIT development reflected a cross-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 $308 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, cross-profit and EBIT in Q2 did not include any material effects of Red Sea disruption compared to the roughly 10 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. tons GP per 100 and then EBIT per 100, always in Swiss francs. Our air logistics delivered EBIT of Swiss francs 160 million in Q2 or 122 million, excluding restructuring costs. This compares to 139 million last year and 94 in Q1 2024. The sequential EBIT development reflected a solid plus 10% cross-profit increase with volumes plus 5 and yields plus 4, partially offside 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-on-year in Q2 with organic volume growth of 5% year-on-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 Swiss Tranks 308 and slightly lower than last year. Even so, volume growth resulted in unit cost reduction of 2% Q&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 five of the presentation. Our road logistics business unit had an EBIT in Q4 of 36 million. or 39 million excluding restructuring costs. This compares to 41 million last year and 30 million in Q1 2024. Shipment volumes returned to growth in Q2 up to 6% year-on-year versus favorable comms. 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-on-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 Roth 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 will strengthen Kununagel's cross-border road services in Malaysia, Vietnam and Thailand. Contract Logistics, page 67. Contract logistics generated another solid EBIT result of SWIFT's 50 million in Q2 or SWIFT's 52 million excluding restructuring costs. This compares to 48 million a year ago and 55 million in Q1. Cross-profit growth excluding currency effects accelerated to 8% year-on-year in Q2. This reflects in part the ramp-up of the major Adidas 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 C-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 Northern Italy that I just mentioned. We also initiated a new offering facilitating the faster turnaround of temperature control sea freight containers for healthcare customers. On the technology front, we improved our ability to exploit our data and continue to identify a test genii 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. Thank you, Stefan, and good afternoon, everyone. Thank you for your interest in Kuna and Margot 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 determination 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 C and F. Let's start with the income statement. Q2 has been sequentially stronger than Q1 2024, even more so when considering restructuring costs of 17 million in the second quarter. We expect a further improvement on our performance on conversion rates based on the EBIT level of 402 million and the underlying business performance of EBIT 419 million. Whilst the P&L remained below the same period of the first six 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 121 million at gross profit level and around 2% negatively or 24 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 networking capital for the next quarters to come. DSL 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. Networking capital intensity increased by the 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 300 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 network and capital arising from the continuous rise in sea freight rates during the second quarter is also evident in the Q2 free cash flow results. 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 results reflected free cash flow conversion of approximately 38% relative always to net income before minority. 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 networking 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 sea disruption, as I mentioned before. Let's focus on efficiency. In air freight, on the eTouch update, we see a 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 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, sea freight has improved from 100 base points at the year end to 120, and as mentioned before, on the air freight side, from 300 to 340. In closing, Key takeaways, volume trends showed some improvement in Q2 amid challenging market conditions in seaframe, growth in line with the market in airframe, and margin improvements 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 costs. All of these actions will yield incremental benefits. Thank you, everyone. And I will now hand over to Sandra for the Q&A session.

We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment may press star and 1 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 2. Participants are requested to use only handsets while asking a question. In the interest of time, please limit yourself to two questions only. The first question comes from Alex Irving from Bernstein. Please go ahead.

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, right, between poor congestion, 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 you be thinking about possible upside to your medium-term conversion ratio targets as a result? Thank you.

Hi, Alex. Stefan speaking. Yeah, 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 ones, despite of the S&E 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 is too early to judge.

Yeah, I'm excited, Marcus. And on the other side, yes, we are happy that unit costs develop into the right direction. I think unit costs 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. 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 203 CHF EBIT per TU, rather than merrily bringing down the cost per TU 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 200-string EBIT per TU. Excellent. Thank you.

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

Thank you. So I just wanted to ask a little bit more about your second half outlook and specifically on the air freight peak season that you talked about. Can you just give a bit more color on how you're thinking about the volume and yield 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 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.

Hi Muniba, 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 cross-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. Seafred, 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 Seafred.

Thank you. The next question comes from Morgan Stanley. Please go ahead.

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 200 Swiss francs 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 contract logistics business and where margins settle with your new facilities being opened and ramped up? Thank you.

Hi there, it's Marcus. 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 fourth quarter 2023. which was really a right-sizing of the operational workforce. And then the second action was in the second quarter 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 uh 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 uh 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 quarter. in the second half of 2024. So, well observed. I think our original thinking was really a 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 200 million pre-inflation. So now we're at the 100 million post-inflation target for 2025 full year number. That's the background to your first question.

I take the second one. That was the question on the ramp up of our month of our 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 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%. um we will uh finalize the implementation of the entire site by the first quarter 2025 um just a number right currently our throughput on a daily basis out of our contract logistics facility globally when it comes to the password 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.

That's helpful. Thank you so much.

The next question comes from Marco Limite from Barclays. Please go ahead.

Hi, good afternoon. Thanks for taking the question. The first question is a follow-up on what you have said on the outlook for air freight, where we can expect, let's say, a sliding improvement in Q3 and Q4 in EOS. 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 structure. And, yeah, so some, let's say, practical example would be very helpful. Thank you.

Yeah, then I take the first, sorry, Stefan, I take the first, the outlook on air freight. So, I don't know, In the third quarter, the yield development will be maybe in the area of one to three cents. 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 CER 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, 380 key accounts, global accounts, and we had to renegotiate all the rates within short, right? In the, in the second quarter. And that was executed extremely well between the business unit and the country organization that, 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 in executing what we are discussing here, vice versa in the countries, is working pretty well, I would say. Thank you.

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

Thanks again for taking my questions. I've got two questions here. So first is actually around the slide 13 and slide 14. Thanks again for sharing the data around those e-touch. Just for understanding here, why are logistics actually seen in better productivity gains versus C, and what is actually driving that? And where do you see further potential in terms of units like C? for TU contribution, and see if we get back that same R&C normalized there. And the second one is around the APEX performance, given the strength of APEX in 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 KM legacy, which is more on the spot market. Any clarification on that would be helpful. Thank you.

Hi, Satish. It's Marcus. So to your first question, why is e-charge in air freight currently leading, if you like, from a positive impact perspective? Simple answer is we started with air freight much earlier than we did on sea freight. So they had a much earlier start point. So hence the accumulated saving is greater. Which of the two has the higher potential? I think was 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 had been talking about the potential upswing of around 300 base 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 air freight side, we will continue to improve through digitalization and streamlining of operation. And I think we should expand that to 300 to 500 base point range. The same for sea freight, 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 sea freight side.

Yeah, thank you, Markus. Let me tackle 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 rates for the remainder, but two-thirds of our volume which we have uh secured is already sold pre-sold to the three third and the fourth quarter which is a very good indicator um and you know as tighter the market gets as more successful the apex apex model becomes and you have seen it as well during the pandemic so that's um good news for us um because we expect as i said and i'm repeating myself we we see a uh a good peak coming towards us from an air freight perspective during the fourth quarter this year.

Stefan, just a quick follow-up on that, actually. So 70% is sold. Where does that compare on the elite-wise? Would you say that what you have seen in quarter two, it has come in slightly better than that? just like any clarity on how much of those 70% is sold at what levels?

You mean on the EBITs? You said what does that mean for the EBIT, right? No, on the GDP per ton. Yeah, exactly. So it will be, 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, 20% of the EPEX 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 than the second quarter. Okay. Thank you.

Thanks, Marcus.

The next question comes from Elliot Alter from TV Cohen. Please go ahead.

Great. Thank you. This is Elliot for Jason Seidel. So two questions. Maybe you discussed some of the soft-demanding core geographies within red 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 startup costs to think about.

I take the road one, where we see in particular a little bit of a softer demand from a domestic and international perspective on the large markets in Europe. whether you take France, whether you take Germany, UK as well, we see less volume than anticipated. And we know that and we all know that the domestic market in the US, FTL brokerage as well, the total logistics management is soft. So we see that in the US, 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 a 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 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. The main markets in Europe are soft.

And, Marcus, for the country 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. And not just because of that one single project, which is large, but not single because of that, but also the NICS enhancement overall. We're still working on more healthcare and obviously complex solutions going forward. The size of the pipeline is, of course, very considerable. We're talking... in excess of a 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 transactional business. Healthcare, as I mentioned, is one of the focus areas. Our or with the above average conversion rates. 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 and 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. Thank you both.

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

Hello and good afternoon. My first question relates to the sea logistics side. When I looked there on the cross-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 result and how should we think that one for the rest of the year?

Hi Sebastian and Stefan. Yeah. 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 significant stronger in the second half than in the first and the indicators and the reasons and the rationale behind we have just shared.

And Sebastian and Markus from the finance result. I could give a very, I mean, it's twofold the answer, right? We paid 1.2 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 is lower than it was last year at that point in time. And secondly, we started quite 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 slash lease contracts.

Got it. Many thanks.

The next question comes from Gianmarco Vera from ZKB. Please go ahead.

Good morning, Marco. 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 steep rate profitability that you mentioned. We 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 Did you see a significant improvement now in the third quarter? And then did I get it right that you even said further expansion then 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 rate then affecting profitability also in the fourth quarter. Then in relation to that also, network and capital, that's my second question. Mark is going to speak about network and 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 the new network and capital again? Thank you.

I take the first one, Gianmarco. Thank you very much. And good that I can clarify that, right? So what we see and what we expect is, is an uplift in gp per to 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 sea freight 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. 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.

And Gianmarco, well spotted. Yes, I agree with you. That's the mechanic that we're looking at. If freight rates were to come down significantly, which is not our base case, again, what Stefan says, the base case for us is that the Red Sea stays closed for the next two quarters to persist, which most likely will. 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 networking capital is I allow for a certain reduction of the freight rates, but that's going to be offset by additional volume that we'll gain from the markets. Of course, when the freight rates would, for whatever reason, come down very quickly, then, of course, you're right, then receivables will be immediately transferred into cash, and then, obviously, cash flows back. Very clear.

That's all the right here. Thank you, Stefan and Mark, all the best. Thank you. Thank you.

The next question comes from Andy Chu from Deutsche Bank. Please go ahead.

Just in terms of the GP per TU, is it possible to have a 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 significantly above 500 Swiss francs per TU means? Is it possible maybe to give a range? And then secondly, in terms of sea freight, again, staying with sea freight, is it fair to conclude basically that you're not seeing really a recovery in sea freight volumes, you alluded to sort of Q3 volumes being sort of low single digit. I just wondered actually whether you might slip into slight negative growth year on year in Q4 with a slightly tougher comp.

Thank you. I take the first one. As we don't give any guidance, Andy, during the year on the 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 505 or 510. It's definitely higher. If it's above 550, I cannot tell, but it's not higher. 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.

And I think on the CFRED 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... I don't know, double-digit or so, the answer is no. We would be in a moderate single-digit volume increase, yeah.

Thank you very much.

Thank you.

The next question comes from Lars Heindorfer from Nordea. Please go ahead.

Good afternoon. Thank you for taking my questions. On the volume side, particularly on the sea freight, maybe also to some extent on air, So the increase in the volume and the front-loading that everybody talks about, I just want to pick your brain a little bit on whether this is purely front-loading, whether there is an element of restocking, and what kind of 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 questions have been around the yields still a little bit. You want to sort of get some clarification. In previous quarters and also during the pandemic, we've seen your 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 of a fairly significant increase into the third quarter, which appears a little bit weird compared to the development we've seen in previous quarters also during the pandemic.

Thanks. Hello, Marcus. So 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 cargo available or there is merchandise available for the year-end businesses. I don't think there is a particular, let's say, drive into restocking or anything like that. It's really more of a secularization topic. Let's not forget we came out of a period still in May, June, where we had rollover cargo that where shippers have seen that cargo has not been taken on the sailing 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 it. from from that perspective i think also the question of the of the of the you said rates development right your second question was about the rates development uh uh why and we haven't seen the higher cross profit already in the in the second quarter uh clearly there is a delay and and you know it from an accounting perspective when when when rates are being communicated and contracts are being signed with current rates they really only take effect a couple of 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 and rightfully from an analytical perspective if you look at correlation between freight rates and cross-profit i think During the pandemic, we had looked into a crisis, let's say, 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 lanes that we're talking. It's Asia, Europe predominantly. So I think there is a significant difference in the two drivers. For us, clearly, the higher rates profit or the higher rates gross profit will come third quarter going forward.

And maybe to add one sentence on air freight, the difference to the previous years is that the yield has increased in the second quarter versus the first, which has not happened the previous years. And that gives us additional confidence on better yield in Q3 and Q4.

Okay, thank you.

Thank you. Ladies and gentlemen, that was the last question. Back over to you, gentlemen, for any closing remarks.

Thank you very much. Enjoy your summer break, your vacation, and speak to you the latest in October again.

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