Kuehne + Nagel International AG

Ladies and gentlemen, welcome to the nine months 2024 results conference call and live webcast. I'm Sandra, the chorus call operator. I would like to remind you that all participants have been listened on in mood 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 one on your telephone. In the interest of time, please limit yourself to two questions only. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Stefan Pohl, CEO of Kühnenhagen. Please go ahead, sir.

Thank you very much, Sandra. Good afternoon and welcome to the presentation of Kühnenhagen's nine months 2024 financial results. I'm CEO Stefan Paul and I'm joined by our CFO Markus Blanka Graf. Before I go into the details, please apologize. My voice, I catched a little bit of a cold. I will speak a bit slower in order to ensure that everybody will understand what I'm going to say. Let's move to the nine months results, the overview. In Q3, Kühnenhagel achieved a sequential improvement in Group EBIT and the first year over year quarterly increase in two years. We earned a group EBIT of Swiss francs 455 million with non-recurring items. Sequential earnings expansion in Q3 was driven by volume growth, effective yield management, and contract logistics market share gains. Our ongoing cost control efforts resulted in a further sequential reduction of unit costs in sea logistics, while air logistics units cost were stable. With respect to cost-saving measures taken in Q4 last year and Q2 this year, we continue to see emerging benefits that we expect to realize fully by year-end or early in 2025. As we have noted in recent quarters, these savings are mitigated by inflationary pressures and now also by the effect of volume growth and additional investments in service quality. In terms of free cash conversion, the second half is typically much stronger in our business than the first half and usually strongest in Q4. Our year-to-date performance in 2024 reflects this trend, but working capital expansion softened the effect on absolute conversion. This was primarily due to growing trade volumes and especially the sharp rise in sea freight rates which appeared to have peaked in Q3. Per usual, Markus will expand on this topic in a few minutes. Lastly, the return to profit growth in Q3 was broadly in line with our expectations, but with diminished prospects for this year peak seasons relative to our views at mid-year. This is due in large part to front-loading of cargo demand which persisted through the middle of Q3, a development with implications for both the sea freight and air freight markets. Front loading was a reaction by supply chain disruption sparked by the rerouting away from the Red Sea. Potential fallout from port strike actions in the US and geopolitical uncertainties. These uncertainties persist with the US election now in focus and its potential impact on trade policy. That said, Kühne-Nagel has a long established track record of successfully navigating challenging market conditions. We remain focused on the execution of our strategy with progress in Q3 across multiple fronts, including improvement of SME service levels, additional sea freight portfolio management migration of our core TMS to the cloud and the closing of our board on road logistics acquisition in Asia. Looking back at the nine months we have delivered on the right sizing workforce, streamlining the management structure and refocusing the sales force. This has created a solid platform from which to accelerate growth in the quarters to come. Let's move to C-Logistics, as always, volume in TU, GP, and EBIT per TU in Swiss francs. C-Logistics EBIT grows sequentially and year on year in Q3 to Swiss francs 256 million. This compares to an underlying result of Swiss francs 206 million in Q2 and Swiss francs 236 in Q3 last year. The sequential EBIT increase of 24% reflected a cross-profit increase of 7% with volumes plus two and yields plus five, along with reduction of operating costs. As I mentioned, we took another step towards improving our volume mix in Q3 with a de-selection of additional low yielding business from a single customer who accounted for about 140,000 TU of volume in 2023. Adjusting for this decision and the volume from the two other accounts we stopped serving in Q4 last year, our underlying volume growth was just under 2% year-on-year in Q3 versus estimated market growth of 3% to 5%. This change and especially the delayed recognition of Red Sea FX contributed to sequential yield expansion in Q3. Turning to cost, Recurral OPEX declined by 5% quarter-on-quarter to 292 million Swiss francs and declined by 3% year-over-year. This translated into unit cost reduction of 7% sequentially and 1% year-to-year. We anticipate a small step up costs into Q4 as we continue to invest in our service offering and pursue higher yielding volumes, which also entails higher costs. This includes additional customer care locations in second tier cities. We have now opened 37 since late 2022 with three new locations in Q3 alone. This all resulted in an increase of conversion rate to 47% in Q3 from 40% in Q2, which also marks an improvement of 44% in Q3 last year. Shifting to current trading, it is clear that yields improved over the course of Q3, but they did not top out as high as we expected. Given the earlier than expected conclusion to the peak Let's move to air logistics. The volume in tons on the left hand side GP in 100 kilo and then EBIT per 100 kilo always in Swiss francs. The air logistics EBIT result for Q3 of 120 million is roughly comparable to the underlining Q2 result of 122 million. This compares to 136 million a year ago. Modest sequential cross-profit growth of 1% on the back of volume growth and stable yields was more than offset by a 2% increase of OPEX, which translated into flat unit costs. APEX drove the volume uplift from Q2 to Q3 with all other volumes flat. From a year-over-year perspective, perishables and APEX showed the strongest growth. Spillover from the sea freight market due to Red Sea disruption appeared to be minimal. Air logistics volume grew 7% year-in-year in Q3, or by 5% on an organic basis. We view our growth in line with our reference markets. The net effect on yields was neutral, as higher growth in the lower yielding perishable segment offset stronger yields in other areas of the portfolio. As for costs, Q3 saw a plus 2% Q&Q rise in OPEX to Swiss francs 314 million. On a year-over-year basis, costs were up by 4% relative to the average quarterly OPEX in the second half last year. The sequential rise of overall OPEX reflects the stronger performance from APEX, which is in part seasonal. This all resulted in a conversion rating Q3 that was stable relative to Q2 at 28%, but lower than last year Q3, result of 33%. Here as well, looking at current trading, we see a muted peak season this year in Q4, with most likely modest low single-digit percentage volume growth on both sequential and year-over-year basis. Again, the contrasts with our more bullish expectation at mid-year. This partially reflects the extent of front-loading earlier in the year, the reduced potential emergency demand as sea freight disruption has eased, and the actual demand in some key segments such as the German auto sector, which fell short of expectations. That said, we aim to deliver higher growth in the quarters to come. Let's move to road logistics. Road logistics EBIT for Q3 was CHF 22 million versus a recurring CHF 39 million result in Q2. This compares to 26 million last year. Shipment volume grew 80% year-on-year in Q3, up from 6% year-on-year in Q2. On an organic basis, Q3 volumes were closer to flat. Cross-profit remained roughly flat year-on-year in Q3, reflecting soft conditions in our core markets, notably Germany and France. Overall, the net result was relatively weak. EBIT contribution for Q3 during the slowest seasonal quarter for road logistics. Please note that the CitySolExpress exposition closed in Q3 consistent with our most recent communication. As a reminder, CitySolExpress was Franks & Coulinard's cross-border road service in Malaysia, Vietnam and Thailand. Next is contract logistics, a highlight for this quarter. Contract logistics once again generated solid EBIT growth in Q3. EBIT increased to Swiss francs 57 million versus a recurring result of 52 in Q2 and 48 in the year-ago quarter. Cross-profit growth excluding currency effects accelerated further to plus 10% year-in-year in Q3, up from 8% year-in-year in Q2. This reflects in part the ramp up of the major Adidas distribution facility in Italy, we spoke about that in Mantua, a site which will fully fulfill all of the company's distribution and e-commerce needs for Southern Europe. As previously indicated, the Adidas project is expected to reach the planned full run rate contribution by the first quarter 2025. Market share expanded once again in key healthcare e-commerce segments, categories which continue to drive the science pipeline. The conversion rate of 6% in Q3 was stable in both quarter-to-quarter and year-over-year basis. Before turning it over to Markus, let's review some key developments over the past quarter with respect to our roadmap 2026 strategy. In Q3, we addressed the market potential pillar of our strategy with the further expansion of our contract logistics footprint in e-commerce and healthcare. As mentioned a few minutes ago, we also closed our road logistics acquisition in Asia. If we look at our technology efforts in the digital equity system, we reached an important milestone in Q3 with a successful first wave migration of our in-house transport management system TMS to the cloud. This is a critical prerequisite to boosting our ability to leverage our data and continue to identify and test GenAI use cases. Also our offering to help customers decarbonize their supply chains is gaining further traction in the areas of air and road logistics. With this, I will hand over to Markus.

Thank you, Stefan, and good afternoon, everyone. Thank you for your interest in Cuninago and taking the time today for the nine-month 2024 results. As Stefan has outlined, and before we turn the page, we can record sequential improvement in group EBIT and a year-over-year quarterly increase as well. We have achieved this result in a market environment characterized by the ongoing Red Sea situation, short-term disruption from East Coast strikes in the US and some severe weather conditions in Asia at the end of Q3. Hence, we continue to focus on our highly flexible asset light business model. Our current priority is on cost control with the elimination of the regional structure in the second quarter of 2024. which resulted in a reduction of absolute cost and unit cost. As always, let's start with the income statement. Q3 has been sequentially stronger than Q2 2024 and Q1 2024, even more so when considering restructuring costs of 17 million CHF in the second quarter. For 2025, we expect a further improvement in our performance on group conversion rate. Looking at the three quarters in 2024 sequentially, we can see solid operational conversion rates of 18 and 19, now nearly 21%, excluding restructuring costs, supported by active workforce management. The combined sea and air freight conversion rate was 38% in the third quarter. For reference, the full year 2019 sea and air freight conversion rate was 28%. Headwinds coming from currencies had a negative impact in translation of around 3%, or 121 million at gross profit level, and around 2% or 36 million on EBIT level. Working capital increased due to the significant rise of sea freight rates triggered by the sustained higher rate levels on Far East-Westbound trade lane and a recent surge in air freight charter activities from a Pax operation in Transpac. Looking forward, I anticipate stable network capital for the fourth quarter with some relief into Q1 2025. DSO have expanded only slightly against previous periods. DPO, on the other hand, have decreased significantly, mainly due to the increase in air freight charter activities, which reduced the spread between DSO and DPO to now 4.8 days. Networking capital intensity increased by the close of September with a result of 4.3% versus 3.3% for 2023. The absolute level in Smith's friend is thus more than 400 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. The pressure on networking capital we just discussed is also evident in the third quarter free cash flow result, but with a better free cash generation than in any of the previous quarters in 2024. In absolute terms, we are satisfied that the free cash flow generation improved to about 300 million Swiss francs in the third quarter. Looking more closely at free cash generation, the third quarter result reflected free cash flow conversion of 85% to net income before minorities. This compares to 38% in the second quarter. As a reminder, and relative to other quarters, the third quarter is historically the second strongest after fourth quarter. The historic annual average is in the range of 90 to 100% free cash flow conversion rate. The quarterly performance here to date does feed the historic pattern, but with a more muted overall development due to the pressure of network and capital expansion, as I alluded previously. As sea freight rates appear to have peaked in Q3 and assuming further moderation ahead, We anticipate an eventual reversal of these network and capital outflows over the coming quarters. In summary, our key takeaways. We are positioned for a greater profitable volume growth in a low growth market environment. We assume that Red Sea effects have peaked in the third quarter 2024. We have right-sized our cost base and progress further on our key strategic initiatives, customer mix, service mix and technology. We will provide more details around our plans in conjunction with Roadmap 2026 with the publication of the full year results. Looking back at the nine months, we have delivered on the right-sizing workforce, streamlining the management structure, and refocusing the sales force. This has created a solid platform from which to accelerate growth in the quarters to come. With this, I would like to thank you for your attention and hand back to operators Sandra to open the Q&A session.

We will now begin the question and answer session. Anyone who wants to ask a question or make a comment may press star and one on the touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use any handsets while asking a question. In the interest of time, please limit yourself to two questions only. Anyone who has a question may press star and one at this time. Our first question comes from Alex Irving from Bernstein. Please go ahead.

Hi, good afternoon, gentlemen. Two from me, please. First on volumes, looking at industry data, looking at commentary across the sector, SEA appears to be growing about 6% air double digits. Does that match your assessment of the markets? And if so, what's behind the share losses and how do you plan to reverse that? Second question is around cost reduction actions from earlier in the year. We had some headcount reductions back in Q1, and since then, your volume performance has been lagging in tiers. With the benefit of hindsight, were those reductions the right move, and will they be reversed? Thank you.

Hi, Alex. Stefan speaking. Let me take the first one, the volume. So our take is sea freight volumes are growing between 4% and 5%, and air freight is growing as well around 5%. I think the difference comes overall from the e-commerce share. which is, as we all know, outside of our remit, at least in the Coup de Nagel legacy, we only provide service for the e-commerce companies out of China with APEX. So that's the reason why our numbers, and I talked about addressable market, right, is a little bit different. So the second part of the question was, how do we address that, right? And that is, for me, pretty clear. We have done, and Markus said that as well, we have done our homework in 2024. So we right-sized our workforce, pretty much so in the Q4. Last year, we did the restructuring with the new governance model. Now all the MDs are reporting directly to the management board. We have three sales channels. One is the global account. The other one is new, is the national accounts. So national accounts are the mid-sized accounts, the hidden champions. reporting directly into the NMs, into the managing directors. They are fully accountable for that. And last but not least, then the very important sales channel SME, which is in particular for Seafred and Royal Logistics. So what we are going to do now is, and we have started that journey already, is we will focus more on organic growth, leveraging our new structure and pushing our organization even more to customer focus set up. And I'm rather confident that we can share again in the next quarters to come. So we revitalize our focus on growth after having done our homework in 2024, pretty much so.

And Alex, on the cost reduction, I think there's two chapters to the cost reduction. The first one is vitalizing the workforce. We have done that. And I think we are exactly where we want to be in the light of also renovating or changing some components in the customer portfolio. So I think we continue to change customer portfolio, customer mix towards our desired ratios. And for that, that workforce is in the right size. And not to forget, we continue to harvest on productivity impact. So continuous automation and digitalization. The second chapter on the workforce was the structural change in the organization structure. That obviously is an absolute sustainable cost reduction. It's never going to come back. And that is something we will benefit from from now on.

Thank you very much.

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

Yeah, thanks for taking my questions. I got maybe firstly on the SME, increasing the workforce on the SME side to cater to that mark, that customer segment. If you could just help us understand where we are, do you think you've got the right mix of SMEs spread across the regions that would probably bring volume growth as we go into next year? And because that's what I probably see, you're probably going to get better operating leverage for the same headcount as you invested in that segment now. And just on that operating leverage, so given you optimized your cost and right-sized workforce, what is the average volume growth you could still do without seeing an inflation in the cost? And then the second one, in terms of portfolio rationalization, Are we kind of done with the optimizing your, let's say, prices as the volume mix within your customer portfolio? And is it mainly done on the sea? What about an air freight? Do you see a scope there as you go into next year? Thank you.

Hello, Satish and Marcus. I think you're a little magician, I have to say. It's like eight questions disguised in two, but we're here. We're going to try to address those. So SME, I take the operational leverage in context with the customer exchanges. You're absolutely right, different customer sectors like SME customers require obviously a higher effort, but that was exactly what we wanted to do. And when you remember back into our roadmap ambitions, the SME numbers are certainly where we want to be more present and be able to provide more services to the customer. Hence, we have started our journey by opening what we call customer care centers in the Seafred SME segment that grows currently I want to disclose the number, but it's a double digit growth number that we see on that segment. It's customer proximity and not only proximity as understanding the requirements and the needs of the customer, but indeed also a geographic proximity. It's something that matters. We have opened a total of 37 customer care locations over the last headquarters to accommodate that initiative. So operating leverage goes in combination with what is our service offering towards the customers. I think we focus pure operating leverage far more on the efficiency gains through automation, through streamlining of operation. This is where we put our money, if you like, to become more efficient.

Okay, Markus, thank you very much. Then there is the question around the customer portfolio and the cleaning up of the customer portfolio left over. Let me take this one. So this is an ongoing effort overall, right? So you are never done with this part, but the big part is in Seafreight, we have basically handed over three major customers, Commodore X customers, towards the market. And it depends always on the rate development of the situation where we are in, right? If we don't generate a certain yield, then we will have a discussion with the customers, right? Whether they are large, medium sized or small, we always try to optimize our portfolio. But overall, if I look at it from a current perspective into the commoditized or normal key account business, I would say for the time being, we are done. But again, reiterating what I said, This is an ongoing effort in all business units, in all network business units, whether you take road, sea or air, we always look into the different portfolios and the different profitability of the customer segments.

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

Thank you for taking my questions. Just following up around the growth focus that you've talked about, what steps are you taking at this point to accelerate the growth from what you've been doing over the last year or two around cutting costs and ending the portfolio rationalization? And then secondly, we saw that Amazon has announced air cargo for third parties and has a code from Apex on its website. Can you explain to us how Apex is working with Amazon air cargo?

Yeah, thank you very much. I take the second question, the Amazon question first. So what Apex is doing, and I have to say we are absolutely satisfied with the service offered by the amazon air because it's the amazon air it's the domestic fleet of amazon roughly 60 70 aircrafts in the domestic market we inject in honolulu our e-commerce business into the amazon aircraft or air fleet business and we leverage them for a um distribution within the US marketplace, but that is used for e-commerce, but that is as well used for standard hard cargo from the APEX perspective. So this is a perfect fit. On one hand side, we utilize the return flights for Amazon out of Honolulu, and on the other side, we have a direct connection into the different hubs of Amazon Air in the US marketplace. So overall, I would call it a win-win situation.

on the growth focus what are the steps so what do we do different if you like and and i think it's always a bit of a difficult question what do we do different let me say positively what we what we uh what we focus on and um let me start maybe on uh some of the Some of the highlights of the third quarter as well, let's say, for instance, country logistics. Country logistics growth is steady over many, many quarters and continues to perform and improve performance also on the profitability basis. So how do they do that? They have increased their hit rates on the tenders, so they win more tenders. The implementation is flawless and we have a much higher customer proximity, what I said before, understanding the customer business. And when I talk about it in the contract logistics area, it's not much different in the network business. Customer proximity is something that has changed our approach, where we clearly focus on our sales channels that start with global accounts, key accounts, where they have an entire I would say team and dedicated staff that is available to them via the second level, then on national accounts, the most important customers on the national level that we address on a very personal level, right? And change our service offering towards them. And last but not least, of course, there are the specialists business units that are addressing specific needs on the vast majority of our customer base. So it's really a focused approach with clear roles and responsibilities around the sales force, including, and maybe anticipating one of your questions, including changes in the remuneration and incentive or incentivization, if that's an English word, of the sales force. So I think we have really changed the way how that works and really made a very sound and round package to be successful.

Thanks. The next question comes from Mark Zeck from Kepler Chevreux. Please, go ahead.

Thank you for taking my question. Maybe the first one on GP or yields in seafreight. I believe in summer, in August, for example, you were still quite enthusiastic about the yield outlook for ocean freight. And then September, not so much anymore. And that implies that probably the exit rate or the September yield in the ocean was quite bad. Maybe you can elaborate a bit on what exactly changed or how bad September really was in terms of yields. And the second question would be on unit costs. I guess this was last year, third quarter. Unit costs in air are kind of up 10%, worth 10%, so to say. While in sea, it's basically flat after all the cost cuts and against inflationary pressure. Maybe you can elaborate on the building blocks, why air and sea unit costs differ so much or the development differ so much from last year. Thank you.

Sure, Mark, sorry. It's Marcus. So from a cross-profit perspective, let me just clarify one thing. We have not communicated that September or exit GP per TU would have been bad. So if that is out in the market, I think that is inaccurate information. And as you know, we never disclose on a monthly basis what our What are the GP levels? But coming back to your point, I think we have been optimistic on the GP per TU development. And I think we were looking for a cross profit in Swiss franc north of 500 for the TU. And we exit on a blended three month, so on a quarterly basis with I think 490. Now we can argue if 490 or 500 is a big difference. I would just tell you also one thing, that currency development hasn't really been in our favor, so a lot of that has to do with US dollar headwinds. At the same time, I think we had seen on the back end of the third quarter some irritations, I wouldn't call them disruptions, but irritations from the short-term strike that obviously nobody has known that it was a short-term strike at the beginning, and also some of the severe weather conditions that we have at the back end of the third quarter. So I think it's a more academic conversation. 490 or 500 is the right number, or was an achievement or not. I think we are happy with where we sit currently. Not to forget, we continue to change our customer portfolio. Unit cost, I think, is a good observation. Our unit cost reduction on the Seafred side is very much self-driven cost reductions the measures that i have been talking about before um have have taken their positive impact on the air freight side i think we also have to consider that there's a bit of a consolidation effect on the unit cost per se there is a morgan cargo that that came into the mix uh compared to to last year and as you know morgan cargo with a with a with the perishable portfolio would put a bit more pressure on the cost base than what it has contribution on the gross profit base. But that's a conversation we have on a regular basis. I think we're committed. We are absolutely clear and committed to the perishable business. And that's just one of the mathematical effects of it.

Thank you.

The next question comes from Shika Kurana from JPMC. Please go ahead.

Oh, good afternoon, actually. It's Alexis from JPMorgan. Thanks for taking my question. Just firstly, could you comment a little bit on how the value-added services share of your GP has evolved during the pandemic and now, and whether you just see more resilient kind of GP fees, if you like, at the value-added services end. And then secondly, you helpfully talked about the 4Q, you know, air freight volume expectations and the fact that you don't expect peak season. Can you just also comment on sea freight? And then more broadly for 2025, do you see any headwinds for global trade should kind of protectionist measures put in place and just any comment around that, that would be very helpful. Thank you.

I take the first question, the volume of the value added services. And this is basically almost unchanged. So we said already two years ago, 60% is outside of the port. Port is coming from, so to say, value added services. And as we speak, as more complex the world is becoming, right, with the terrorist structures, value-added services are slightly increasing, especially on the customs clearance front, on the non-related freight customs, on the freight customs clearance front, and on any other activities, whether it's multi-fulfillment, last mile, e-commerce activities. So basically, we see that the share of value-added services is slightly increasing rather than decreasing.

I think from the second question of the volume expectations, I think maybe I can answer the 2025 question first. I think your question was broader in context of the macroeconomics. Is there an increase in volume based on the macroeconomics? I think we have to accept also looking forward that trade volume growth will be at best in line with GDP growth. I think we have to look into that mechanic in such a way that we consider onshoring, regionalization to a certain extent as one of the trends or as two of the trends that are continue to impact the absolute trade volumes. So as such, our models, our base cases are usually using a one-to-one at best relationship in the GDP grid. That also should give us some indication for 2025, of course. I don't have any indication right now that that should be different for the year to come. For the fourth quarter, I think sea freight was your more specific question around that. I think seasonally the fourth quarter is not as strong as the third quarter in the sea freight business. At the same time, we have a couple of rollover cargo that spilled over, if you like, into the fourth quarter. And we may have an effect because Chinese New Year is quite early next year. I think it's at the end of January, 2025. So that could lead to a certain compression of orders already in the fourth quarter that wouldn't normally happen maybe a bit later. But this is speculation, I think, and it's going to only marginally marginally change the overall picture, I think the prevailing seasonality, Q4, a little bit lighted, and Q3 should be still the case.

Thank you.

The next question comes from Uday Kanapukar from TD Cohen. Please, go ahead.

Hi, thanks. This is Uday for Jason Seidel. So just, I guess, on the C, starting with impressive step up in the C conversion rate, obviously, in the third quarter. I think it's like well above your 40% target over here. I'm just trying to understand, I mean, do you think you can hold that conversion rate above target even as these red C tailwinds taper off going forward? And then secondly, you mentioned the refocusing the sales force, you know, shedding of low-yield customers. I guess, how much more runway do you think you have from this point in managing that book of business? Do you think you can accelerate that rationalization as we move out of the peak season? How should we think about that? Thank you.

I will talk about the Salesforce first, and then, Marcus, maybe we'll cover the first question. So Salesforce, basically, right? As I said, we have three pillars. The key accounts, our 380 global accounts, the national accounts, the Hayden Champion, and the S&E customer portfolio. predominantly in sea freight and in road logistics. So what we have done now is for every basically customer channel, we have a so-called liaison officer in the business units and that's new for us as well, right? So we dedicate people in the business units towards the sales organization in order to ensure that we always price ourselves right at the very beginning. Because normally you have in our business, in our industry, you have sometimes the case that you go into the RFQ and then in the first round you do not come up with the appropriate pricing because either tender management or pricing is not aligned with the business unit or vice versa. And this is something which we have done completely new this year. So we are pretty sure that in terms of the reaction time and the accuracy of how do we position ourselves in front of customers when it comes to pricing and service and product accuracy, we are much better than ever before. And that's the reason why we are rather confident that we can leverage that new setup for the better. And we see better growth in the years to come or in the quarters to come and as well in the years to come. So the connectivity and the connection between our sales force and the business unit, I would call it a second to none if you compare that to the past decades. And that makes me so confident that we see already the first results, which are encouraging. So that's what we do different in terms of clearly articulating different sales channels and, in particular, creating a much closer bond from the very beginning between the pricing teams and the business units and the sales force.

And Uday, maybe on the conversion rate, yes, indeed, we're above the 40%. And it's our clear aim and our clear commitment that We maintain basically throughout business cycles between 35 and 45% conversion rate. We do the right things. We invest into efficiency. We invest into automation. We improve customer portfolio. We extend our opportunities to generate GP on each single TU. I think we do a whole portfolio and a whole array of actions that will support to maintain that conversion rate. The fact that we are on that particular KPI ahead of our roadmap ambitions is only something that I can say this is the current market and operational efficiency that we see. And as I said, we do the right thing to prolongate and extend that for a new normal level.

Great. Thank you for the time. Thank you.

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

Hi, good afternoon. Thanks for taking my question. My first question is on sea freight. So you have said that in air freight, you think you are growing broadly in line with your addressable market, but in sea freight, you are losing market share a little bit. So can you just talk through your expectations for Q4? I think comps become easier. And what are your expectations in terms of volume growth or under or over performance versus market into next year? The second question, a bit of a follow-up to what has been already asked, but could you discuss a little bit what you expect in terms of normalization of yields if there is any normalization in Q4 and 2025 as well, given that spoil rates, especially in sea freight, will still keep going down, sorry, most likely. And the third question is a bit of a housekeeping question. How much of cost tailwinds? did we have in Q3 from your restructuring program? How much should we expect in Q4 and Q1? Thank you.

So first of all, I will tackle the question about market share and growth expectation. And you can imagine that we have discussed it intensively within the management team in the last couple of weeks. So what is pretty clear for us is for 2025, the minimum expectation for us as a company is that we grow with the market or even higher. Picking on what I said before, we've done our homework, we have streamlined the organization, we are ready to tackle now, and the consolidation of the market will help as well in certain areas, not everywhere, but in certain areas. So again, minimum market or even higher. That's our expectation and the message into the organization.

And I take the normalization of the housekeeping. The housekeeping maybe is the easiest one although I think we have it also in our documentation. In the third quarter there was zero impact from the restructuring and we expect also for the fourth quarter at maximum and minimal impact. So our restructuring is done, our right sizing is done. We should not expect any material impact from that in the fourth quarter anymore. Normalization, that is one of the difficult words, I think, over the last years. I would like to say that we have now build a leaner faster reacting and much closer to the customer operating organization that we can much better benefit or much better play if you like on market developments even on volatility we are going to be much faster in reacting and i think much better in harvesting out of movements in the markets and opportunities in the markets. So, hence, I believe what we have said also in our Capital Markets Day, conversion rate ambitions are maintained and sustained. We want to have a 40% conversion rate seen here, and we certainly want to work on our targets, 200 Swiss Franc EBIT per TU, and 35 ish on 100 kilogram on the airframe some of it will be stronger supported by the market some of it will not but i think we have laid a good foundation to to achieve thank you and if i can stick one more very quickly uh given the tb down here over here and uh Marco, my apologies. We said please to ask only two questions, and I think... Okay, sorry.

Okay.

Thank you. All right.

Thank you. The next question comes from Robert Johnson from BNP Paribas. Please go ahead.

Good afternoon, Stephan and Marcus. Two from me, please. So, firstly, on sea freight, I know the GP per container in Q3 was below what you expected a few months ago. But nonetheless, it did provide another good example of a quarter during which the GP per container showed a positive correlation with freight rates. Could you maybe just provide some cover on what share of sea freight gross profit you estimate is influenced by fluctuation in container shipping freight rates and what share of gross profit doesn't have any exposure? So that's the first question. That's what DSV said, isn't it? Yeah, same question on the dividend. If we look at the ordinary dividend last year and don't include the special, the cost was around 980 million Swiss francs. If we look at free cash flow this year, it's been 330 odd million during the first nine months. So presumably for the full year, we're not going to get anywhere close to 980 million. Equally, if I apply a 60-70% payout ratio to what appears likely for 2024 net income, we won't be getting anywhere close to 982 either. So both of those observations suggest a reduction in the ordinary dividend. But if I look at consensus, the street is looking for a dividend of about eight Swiss francs, which is basically in line versus the 8.2 ordinary paid last year. I appreciate it maybe too early to comment in any detail, but could you maybe just provide some color on whether you think the consensus estimate for the dividend looks reasonable? Thank you.

So the first question was on the share, basically, and I answered the question, I think, already. It's a 60-40 split. So 60 on value and 40 on the port port.

Okay, so clear. I think all the dividends also, Rob, appreciate your question and I think there is some consideration in the market as well. I think your math stacks up approximately, I would say. I would hope that our free cash flow conversion is at the year end somewhere closer to a number where we feel comfortable with uh with financing obviously or having enough liquidity for the for the dividend payout uh but as you said it's too early to say really it's uh in the discretion of the supervisory board and to make a proposal to the to the agent to the uh to the shareholders and uh that will happen as usual uh in uh in may when we have been our our annual general meeting um I think we should stick to our historic reality, payout ratios, as we said, and as you mentioned yourself, historically, that is something we should consider. I'm not in a position currently to comment on the estimations or expectations of the financial market on dividends.

Okay, all clear. Thank you.

The next question comes from Gianmarco Vero from ZKB. Please, go ahead.

Good afternoon, everyone. Two questions from my side. First one is on your air business. There, according to market observations, we see higher rates now between Middle East and North America, also partially indicating a very strong momentum in sea air solutions. And I wanted to ask if this is positively affecting your air profitability and if you can also go then therefore into the direction of the originally targeted 90 Swiss franc per 100 kilo for the fourth quarter is that still achievable in your view? And the second question is on the cash flow statement there on the dividend to minorities usually or last year you had the 100 73 million dividend to minorities in the third quarter. That didn't happen now in the third quarter and I expect it therefore in the fourth quarter. Should we consider something similar in this same magnitude or something meaningfully smaller now? Thank you.

Hi Gianmarco, I'll take the second one quickly. Yes, it's gonna happen and it's gonna be A bit lower, I would say, and I say that with a bit of a bitter note, if you like, because that is also a reflection on the performance of APEX. It's going to be somewhere in that area, but a bit lower.

Okay, and Gianmarco, Stefan, I take the first question on CNR. Yes, CNR is picking up, but in relative terms from a size perspective. This is not, in all honesty, moving the needle for a business unit, right? First answer. The second, even if it's double-digit, right, and it's growing significantly, but overall, in the big scheme of everything, it's not significant moving. So the second question was the 90 yield, even if the fourth quarter will be the strongest in terms of volume, and rates are concerned i would not anticipate that we will reach the 90 um in in the fourth quarter this year uh cause uh if you look at the profitability currently the cap is too too large currently thank you it will be better right it will be raised but it will not reach the 99

The next question comes from Jane Parish from HSBC. Please go ahead.

Hi. My question is more regarding a near-term outlook with potential U.S. East Coast labor union negotiation with the port operators going in mid-Jan, early Chinese New Year, alliance reshufflement. Do you think that increased volatility would have freight forwarders with respect to protecting GPTU or for that matter, with respect to air travel with the increased growth coming from cheese e-commerce. Is there a segment at some point of time where we will look at it and probably cheese volume at the expense of yield? Thank you.

Hey, Jane. I think it's an interesting question. You can never predict rates, right? It's one of the most difficult things that you can do. Picking up some of your questions around e-commerce, e-commerce rates will depend very much on what is the demand. At the same time, it will have an impact if the minimum regulations are going to be put in place prior to Chinese New Year or not. That's the first answer to it, and I cannot tell if that's going to happen or not. Secondly, I think it's going to be a question around, is there disruptions in Z-frame? We will never be able to tell the future on the Z-frame side. If there is disruption, as what also Stefan said before, then air freight becomes the logical alternative, obviously, to mitigate some of these topics. But again, from a freight forwarding perspective, I think whatever change or volatility is in the market, you can always take as an opportunity for us to keep cargo rolling, to keep actually the goods in flow, and that usually requires additional services, additional effort and service intensity that we need to provide and that comes usually at cost. How exactly it's going to look like, I really don't know.

I love it. Thank you so much and have a good day.

The last question for today's call comes from Andy Chu from DB. Please go ahead.

Good afternoon, Stefan. Marcus, a couple of questions, please. The first one is just around Apex and the put option. I think there's a 24.9% stake outstanding. Just wondered what your latest thoughts are there, please. And then on the sea freight business, what percentage of your business is now sort of commodity business? And I appreciate you saying to Stefan as though you're done at the moment in terms of where you are with your customer mix. But from whatever percentage you give us in commodities, what do you think is the sort of the right balance of percentage exposure to commodities? Thank you.

Let me answer the first. Let me answer the second question, the commodity. I wouldn't say that we have any commodity anymore in the sea freight business, right? So we only distinguish between the key accounts, the larger accounts and the small and medium sized enterprises and then manage business. But pure commodities, right, which we have carried out maybe five or six years ago or 10 years ago, whether it was trash, whether it was paper, whether it was pop. So all these kind of stuff we don't carry anymore. So it's completely excluded in our portfolio.

And on the production.

But in terms of maybe In terms of sort of lower margin business, maybe not quite the commodity paper and packaging, but sort of what I would say lower margin business, is there an opportunity there across those three segments to kind of realign longer term? I guess there's always an opportunity, but what's the potential there, please?

Okay, good. I misunderstood that. Of course, there's always a potential or there's always an opportunity, right? So the lower business, the lower yielding business or the lower margin business, I would say is maybe overall 20, 30% of the total portfolio where we can always improve the situation depending on the marketplace and where we are. And I would say this is more on the high side. Most probably it's more at the 20% range. It's not a big number. But there is still room to maneuver in terms of low yielding versus the blue anchor line where we have SMEs, mid-sized customers, where we have a much higher yield. So there is room to maneuver in the area of, I would say, let's say 20%.

So let me take a quick put option. Obviously, we have a very fruitful and very successful cooperation with Perkins Group. I think APEX is performing very well also compared against the original business cases. I have no visibility what is in the thinking of our partners group, but from what I feel and how we cooperate, I would say this is something that pays off for all parties involved.

Thank you very much. Thank you.

Okay, thank you very much. Ladies and gentlemen, that was the last question. Back over to the manager for any closing remarks.

Thank you very much for listening. And I apologize again for my voice. Now it's completely cut.

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.