Kuehne + Nagel International AG (KNIN) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Kuehne + Nagel Half Year 2025 Results Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Stefan Paul, CEO of Kuehne + Nagel. Please go ahead, sir.

Thank you, Sandra, and good afternoon. Welcome to the presentation of Kuehne + Nagel's Half Year 2025 financial results. I'm CEO, Stefan Paul. And once again, I'm joined today by our CFO, Markus Blanka-Graff. Let's go into Page #2, half year 2025 results, gaining market share in sea and air logistics. In the second quarter of 2025, we accelerated our progress towards our strategic goal of profitable market share expansion. In a challenging market environment, the share gains drove gross profit growth for the group, a stable underlying EBIT, excluding negative currency effects. Sea & Air Logistics contributed stable EBIT with volume gains as IMC's performance offset yield pressure and currency effects. Excluding nonrecurring items, the combined Sea and Air conversion rate was 30% over the first half and 29% in Q2 alone. This compares to 35% in Q2 last year and 32% in Q1 2025. The consolidation of IMC has reduced the combined conversion rate by about 100 basis points since January. EPS saw a modest contraction over the period, especially in Q2, mostly as a result of currency effects. Looking at cash, free cash conversion continued to improve over the course of the first half relative to last year. And lastly, we successfully launched 2 bonds of CHF 200 million each in the first half on very competitive terms. Let's go to Sea Logistics, Page #3, continuous market share gains. As always, from left to right, volume GP per container unit and EBIT per container unit always in Swiss francs. In Sea Logistics, we gained market share once again in the second quarter. Underlying volume grew by 4% year-over-year versus estimated market growth of 1%. We more than offset the sharp decline in Chinese exports to the U.S. following Liberation Day by expanding volumes and gaining share in other trades globally. In terms of EBIT, Sea Logistics generated CHF 158 million in the second quarter. Two factors explain these outcomes. First, the challenging market environment after Liberation Day resulted in a 5% year-over-year organic yield decline, excluding currency effects. And second, we had additional OpEx associated with our investment in stronger growth and with annual compensation increases. IMC, which we acquired in January, continued to perform well in the second quarter. While Liberation Day volatility resulted in some pressure, we mitigated it through the ongoing migration of Cayenne trade clearance from other providers to IMC. As a reminder, IMC strengthens or differentiates the Sea Logistics value proposition. It also reduces the proportion of our gross profit, that is correlated with sea freight rates. This all resulted in Sea Logistics conversion rate of 31% in the second quarter or 33% on an organic basis. This compares to 36% and 38%, respectively, in Q1. Looking back at the entire 6 months, underlying volume growth was 5% or more than twice the estimated market growth rate of 2%. This is early evidence that the growth strategy we presented at our Capital Markets Day is working. Page #4, Air Logistics, accelerated and focused market share growth from left to right, again, volumes and tonnes, GP per 100-kilo and EBIT per 100 kilo in Swiss francs. Air Logistics also delivered another quarter of market share gains. Volume grew by 9% year-over-year versus estimated market growth of 4% to 5%. Similar to our success in Sea Logistics, we offset the sharp decline in Chinese exports to the U.S. following Liberation Day by serving rising demand and gaining market share in other trade lanes globally. This outcome is even more impressive, considering the decline of low-yielding Chinese e-commerce exports to the U.S. after the de minimis exemption ended in May. We successfully addressed this volume headwind centered at Apex by intensifying our focus on attractive high-growth customers in the semicon and cloud infrastructure sectors. Turning to profitability. Air Logistics EBIT in Q2 was CHF 114 million or up by 5% year-over-year, excluding negative currency effects. It was flat year-over-year, excluding the nonrecurring costs of CHF 6 million booked last year in Q2. This EBIT outcome in the second quarter reflects a combination of factors. First, the result reflects a challenging period mid-quarter due to market volatility with recovery by June. Second, we grew gross profit by 8%, broadly in line with volume growth as yield, excluding currency effects, were stable year-over-year. This was offset by OpEx development similar to what we saw in Sea Logistics. Air Logistics conversion rate of 26% in Q2 was unchanged from the level of Q1. This compares to 27% in Q2 last year. Here as well, looking back at the entire 6 months, Air Logistics volume expanded by 7% year-over-year or nearly twice the estimated market growth of about 4%. Again, this is an encouraging early indication that we are successfully implementing our growth strategy. Page #5, Road Logistics successfully mitigating market headwinds. Road Logistics EBIT for Q2 came to CHF 28 million. This was down by 17% on the prior year result, excluding currency effects or by 23%, adjusting the prior year results for disclosed one-off costs. Management team continues to effectively mitigate very challenging market conditions with a focus on pricing, capacity management and cost control. We achieved net turnover growth of plus 1% year-over-year in Q2, excluding currency effects. This performance compares to a market where estimated year-over-year turnover growth was flat at best. On an order volume basis, Q2 saw a decline of 2% year-over-year or minus 3% on an organic basis. This compares to flat and minus 3%, respectively, in Q1. Cost pressures remained in -- issue in Q2, contributing to 8% conversion rate. This was an improvement of 6% in Q1, but still well below the underlying rate of 11% last year in Q2. And lastly, our acquisition of Spanish provider, TDN, significantly expands our service offering in Iberia. This acquisition closed at the end of the quarter and, therefore, made no contribution to the first half financial results. Let's turn to Page #6, Contract Logistics. Record EBIT from operations. Contract Logistics generated an EBIT of CHF 42 million in Q2 or CHF 58 million, excluding an extraordinary provision. On this basis, this was the strongest Q2 EBIT result ever recorded for contract logistics. Adjusting for reported one-off in the prior year, Q2 EBIT grew by 12% year-over-year and by 17%, excluding currency effects. Net turnover grew by 5% year-over-year in the second quarter on a constant currency basis, unchanged versus the pace in the first quarter. This represents ongoing market share expansion with share gains still centered in healthcare and e-commerce. We can also confirm that our large Adidas fulfillment hub in Northern Italy is now ramped up. The solid underlying conversion rate of between 6% and 7% was comparable to Q1 and marked an improvement on the prior year Q2 results. Process reengineering and automation remains our focus. This concludes my comments on the performance of the business units. I will now turn to a brief strategic update, revisiting some of the key themes from our Capital Markets Day in late March. To do that, I will recall the image, which shows a strategic focus on market potential. You see that on Page #7, the 4 cornerstones. We are emphasizing profitable growth that exceeds GDP, which is a proxy for market growth. The other 3 cornerstones you see on this page are enablers of this ambition, similar to what we have disclosed and discussed in March. We are pleased with the early success of our efforts. As I noted a few moments ago, both Sea and Air Logistics have delivered market share gains since the start of the year. We grew our core forwarding volumes over the course of the first half at between 2 and 2.5x GDP, assuming estimated global GDP growth of 2.5% to 3%. These allow me to briefly revisit the key drivers of our success so far. First, our sales-related efforts are succeeding in attractive target markets. These efforts include organization around key sales channels, incentive structures and adding the right talent. Second, we are expanding our networks. In Sea Logistics, we continue to improve our physical proximity to high yield ending SME customer. In Air Logistics, we are achieving substantial growth in the geographic breadth and frequency of services. Third, we are focused on selling differentiated value-added services across all business units, examples are the technology-centric support to semicon and hyperscaler customers. Our patient-centered healthcare offerings, our expanded inland capabilities for Sea Logistics customers, and our upgraded customs capacity and know-how. We are confident that this approach will continue to drive market share expansions for many quarters to come. With that update, I would now like to hand over to Markus for a closer look at the financials.

Thank you, Stefan. Good afternoon, everyone. Thank you for your interest once again in Kuehne + Nagel and taking the time today to review our latest financial results. As Stefan mentioned, we are encouraged to see our strategy delivering targeted market share gains. And this is against the current business environment. That continues to be impacted by high levels of uncertainty and volatility, and I will shortly update you on our outlook. But first, let me start with a quick review on second quarter 2025. On the income statement, I would like to draw your attention to one of the most significant developments in the second quarter, which is the impact of currency headwinds. Since Liberation Day at the start of Q2, we have seen the devaluation of our key functional currency like the U.S. dollar and the euro. Relative to our reporting currency, the Swiss franc, the average exchange rate for these currencies declined by 8% and 4% year-over-year, respectively. This resulted in a 6% EBIT headwind in the second quarter alone or 3% on a half year basis as depicted in the table. I will come back to this topic when reviewing our updated outlook and guidance in a few moments. But before that, let's take a quick look at working capital. We can see a modest improvement on the net working capital intensity to 4.8% at the close of the second quarter versus 5.1% at the end of the first quarter. DSOs and DPOs improved and deteriorated, respectively, in equal measure, but resulting in a rather stable spread of just over 3 days. I will elaborate a bit on working capital development with a review of free cash flow generation. My expectation is for a rather stable level of net working capital intensity over the near term. Continuing with cash and free cash flow in second quarter, we generated CHF 122 million of free cash flow or a cash conversion rate of 47% versus 37% in the same period last year. The year-on-year improvement reflects reduced expansion of working capital. For a better illustration, let me just move on to the next slide. Overall, net working capital expansion was CHF 67 million less in the second quarter. As core net working capital swung from an outflow of CHF 68 million last year to an inflow of CHF 86 million this year. All of the network businesses delivered net inflows, offset only by outflows in Contract Logistics and customs. Taking a longer-term perspective, due to cash conversion was below the historical average of 68% for the second quarter in the decade leading after the pandemic. From a year-to-date perspective, the cash conversion of 52% in the first half is above the historical average of 45% as to the relatively strong conversion in Q1. Looking ahead, note that the second half typically delivers more robust cash conversion well in excess of 100% with the peak in the fourth quarter. Let me now turn to our 2025 earnings guidance. Based on our year-to-date financial performance, and our current perspective on the factors which are likely to dictate performance in the second half of the year. Our underlying expectations for recurring full year EBIT are broadly unchanged. The one exception is accounting for the sizable currency headwinds due to the weakening of our key currencies relative to the Swiss franc, notably the U.S. dollar since Liberation Day in early April. The result, as mentioned, was a 6% drag on our group EBIT in the second quarter, in contrast to a neutral effect from currency translation still in the first quarter. Based upon year-to-date currency developments and assuming current spot rates through year-end, we project a drag of around 5% on our full year 2025 group EBIT from currency translation alone. This informs our updated full year recurring EBIT guidance range of CHF 1.45 billion to CHF 1.65 billion. The midpoint therewith is 5% lower than the midpoint of our previous guidance range and is comparable to current consensus expectations. We have also narrowed the width of the guidance range by around 20% to CHF 200 million, which shouldn't be surprising as half of the year is behind us. For the remaining half year, our current base case assumption is that we entered the second half at a relatively stable level of profitability with the fourth quarter likely to deliver a greater contribution than the third. Lastly, given the material impact from currency development and still heightened uncertainty as to how they may develop over the coming months, we are also now providing a sensitivity table to approximate the impact of currency translation effect on full year group gross profit and EBIT. With this more technical part, I would now like to close our presentation with a summary of our key takeaways. In the second quarter 2025, we gained market share, accelerating the trend from the first quarter. At the same time, Sea and Air yields were broadly stable relative to the prior year with some sequential pressure. Our market share gains reflected an intensified focus on attractive factors whereby the volatile market environment has also demanded increased agility and diligence so that we can reach these ambitions. And lastly, our expectations for recurring full year EBIT are unchanged, but we have adjusted our guidance range to reflect the material devaluation of key functional currencies. With this, I want to thank you for your attention and hand back to the operator to open the Q&A session.

[Operator Instructions] The first question comes from Uday Khanapurkar from TD Cowen.

This is Uday on for Jason Seidl. Maybe just to start on Sea. We've had some positive developments on trade in the past week. It's still very early, but is there any sense of the degree to which uncertainty is kind of being alleviated for customers? Is it enough to put some volumes near term? Is it U.S. China the main thing to look for like where do we stand? And then maybe what are your expectations for Sea volume and yield into the third quarter kind of and beyond to that context?

So Uday, this is Markus. Let me just repeat if I got the question right, because your connection was a bit broken. So we talk about trade volumes in Transpacific predominantly, if we see any impact already from changes in terms of volatility for trade deals or not. Is that right?

Yes. Any progress on the uncertainty in the near term here?

So on the uncertainty, I think we're still at the same level as always. Our customers are depending very much on what is the flavor of the day. And now Transpacific specifically, we are looking into -- we are looking into a certain transit time that leaves that high level of uncertainty, very much unchanged. I think there is currently no comfort level with our customers in a stabilization and, let's say, further comfort in the outlook for transporting volumes on a steady pace. I don't think that it's still the uncertainty that dominate. That also answers, I think, your second part of the question, what is the outlook on yields and volume. And I think we will see what's coming. It's really too difficult to give any outlook at the current stage. What we currently certainly be sure about is that we continue taking market share in a volatile environment. That is what we have started to see in the quarter and we accelerated in the second quarter. I think our capabilities, that was the word I was looking for, our capabilities in responding in an agile and swift way to these changes in the market environment and customer requirements. I think that's something that positions us well in taking the market share.

All right. Got that. And maybe just as my follow-up, you mentioned share gains, say, it's encouraging to see those share gains here. Maybe just on SMEs, SMEs have been a focus of yours from a yield management standpoint for a while. These tariff disruptions presumably kind of hurt this customer base, the most -- just wondering, are you seeing any pressure in your book of business from kind of being overindexed on those guys? And maybe that reverses quickly once the uncertainty subsides? Is that how you're thinking of it?

Stefan speaking, let me answer that question. So the SME share overall in sea freight is rather stable. It's about 50%. That was the target years ago. We have now reached a 50% since a couple of quarters is sometimes 1% more, sometimes 1% less. We see the same pattern for SME customers as for the global accounts or for the national accounts, all are in the same boat, basically, right? But there is no particular pressure on the yields neither through the transpac coming from the SME customers. And you know we have 3 channels, the global accounts, the national accounts and the SME, our field sales and the growth into the transpac as well will be supported by the SME customer games and not only from the big ones, right? And from a performance perspective yield, we all know, and this is unchanged if you compare the SME with the global, the margin per container unit is still much better.

The next question comes from James Hollins from BNP Paribas.

Two for me. Just following up on now on the reported Sea yields obviously flat in Q2, down 7% on a reported basis. Is there anything to suggest that both of those would not be quite similar if we were to mark-to-market on FX for Q3. I know you've given a bit of broad guidance on Q3, Q4 profit to be useful to get a wider view there. And then I was wondering if you could just give a bit more detail on any expected contribution from TDN in H2. I'm not sure if you quantify it, if you have, I apologize.

So James, this is Markus. Sea yields, I think your read was quite accurate. I think especially when it goes into Q3 and Q4, stable going forward, I think, is our base case, again, with a level of uncertainty based on the developments that we see. And I think what I want to point out is clearly that the currency impact at a GP level is quite material. When we look at -- into gross profit per TEU, certainly for the second quarter, and you can do the calculus yourself where and verify, we are talking a good CHF 30 to CHF 35 impact per TEU are just purely based on the -- just purely based on the exchange rate. So it's quite a significant number that's moving there. But against that background, I think you're right with your expectations for the rest of the year.

Stefan speaking, the second question was, what is the contribution from the Spanish acquisition? It's roughly CHF 1 million per quarter to be expected impact on the Road results.

The next question comes from Muneeba Kayani from Bank of America.

So just in terms of what you just said on yields. Like, on Ocean, I wanted to understand what's your expectation for the ocean peak season this year, like how much of this demand that we've seen is really just -- has been front loading? And what are you hearing from your customers on that front? And then secondly, just on your guidance, what scenarios would you say are at the low and high end of your guidance range? And if I heard you correctly, you said you expect a bigger contribution from 4Q than 3Q. Why is that?

Stefan speaking. Muneeba, thanks for the question. So looking at the second half of 2025, we expect a little bit of a muted peak season for sea freight, particular for the U.S. And Markus said it quite clearly, we will continue with market share gains and a solid contribution in the third and the fourth quarter from IMC. And your question on the yield is we do not expect a major shift over the near term in light of our market demand outlook and the capacity situation. So overall, not a lot of change to be expected. Not a clear peak season. Front loading, I would say, was not a big topic in the second quarter. So that is how I would summarize the situation in sea freight. Air freight is a little bit different, but that most probably a little bit later.

The next question comes from Alexia Dogani from JPMorgan.

Just my first question is on Sea Logistics conversion rate. Obviously, you talked positively about market share gains. But in fact, EBIT didn't grow adjusted for FX, as you said in your comments, that's despite the addition of IMC. Can you talk to us what's happening on the cost base? And why this annual salary increase you had to give? And are you now in a situation where you have a higher increase in place where we should see some benefit on the cost base from natural filtration. If you can just comment on those things, that would be very helpful. And then secondly, my question is on the outlook, just to kind of square the circle, I guess. So we've talked about you expect GP yields to remain stable. And based on your comments that you don't expect any difference in demand dynamics. Should we therefore expect similar volume growth rates for Air & Sea in the coming quarters. If you can just confirm that. And then what really gives you confidence on that volume outlook? Because obviously, we're seeing a pause situation with the tariffs and the reporting season has started, and a lot of large sectors are warning on weakness in demand. So I guess, why do you think your demand environment will be insulated from those drivers?

Alexia, it's Markus. I'll take your first question on conversion rate and the cost situation. So most prominently, I'd say, is the impact of IMC that -- as we have disclosed, has a very good contribution on the GP level, but is slightly diluting on a conversion rate level. We talked around 2% roughly. And also IMC, let's not forget, with a lower number of activity going into the U.S. market on a year-to-date basis, have not shown yet the synergies or was not able to show the synergies that we were expecting. We're seeing that now ramping up. And it's clear, we expect an uptick as we improve the IMC contribution for the full synergy case than taking effect over the rest of the year. General cost statement, I think, clearly, we are adapting the workforce according to the workload, but that obviously is focused and targeted around the markets and the countries where needed. Now there is no general stop of anything. We need to be very focused and target the individual workforces directly because there is many trade lanes that are increasing volumes versus other few trade lanes that are decreasing. So there is no one-fits-all answer to that.

And let me, Alexia, tackle the volume question. We are, of course, not immune against any big market drivers. But on the other side, let's talk about sea freight. We have gained in the RFQ season during the first half a significant amount of new businesses. I was already alluding to that back in March. As we speak, we are implementing these businesses. That's the reason why we are rather confident that we see the same pattern in the third and the fourth quarter. IMC will contribute not from a volume, but from a U.S. perspective, and I was alluding that we had a little bit of a weaker IMC quarter, the second quarter this year. And on airfreight, we mentioned a couple of times now that we have started to invest into the hyperscaler cloud high-tech environment. We have taken quite a few people from the marketplace, which we will -- which started already in the last couple of weeks or will start during the third quarter, and we get some new significant businesses from large hyperscalers, and that makes us confident, especially in this vertical, which is still growing significantly, where we have been underrepresented that we see nice high single-digit growth for the airfreight business moving into the fourth quarter. And that makes us confident. So the investments we have taken, the additional resources we have been able to get from the markets and now as well as signals, especially in air from customers in this hyperscaler environment to give us more business than anticipated originally earlier this year.

The next question comes from Alex Irving from Bernstein.

Two from me, please. First of all, are you seeing any meaningful changes following the merger between 2 of your larger peers in the second quarter? And if so, what actions are you taking to capitalize on opportunities here? Second, could you please remind us what's happening, what you expect to happen with the Apex minority? Is there anything happening near term?

Alex, Stefan here. So what is happening, and that is not a surprise, is what is happening that 2 things. First of all, there are a lot of people on the marketplace in the meanwhile. And as I said, I'm reiterating myself, we are pretty much focused on commercial, on commercial colleagues and commercial management, which we take into the organization. I mentioned the hyperscaler, the cloud marketplace, where we have already taken advantage out of the merger, right? And we expect a fair share of this business coming in, dominated by 2 players, one was Schenker or is Schenker still in the marketplace when it comes to the service to the recs and to this cloud environment. So here, we clearly take benefit out of it, but we are pretty much selected, right? And secondly, as well, not a big surprise and normally in these kind of environments that customers balance their share of wallet, and they do not put all the eggs to one basket, especially where we have customers where the amount of business they have allocated to the 2 players together is too high from a procurement perspective. We see good chance, and we already have secured significant business in the high tech. Same is now coming in since a couple of weeks in the healthcare sector, where we gain more and more. So that is, in summary, we want to take a fair share out of that, and we look carefully into people and customers, and we see the evidence already.

And on the second question on Partners Group minority in the Apex. I think collaboration is -- continues to be excellent, very fruitful, and I think there is much more value to gain in the future than what is currently there. So both parties, I think, are currently clearly on a path to create value and not necessarily to pull out of any gain.

The next question comes from Marco Limite from Barclays.

The first question is on the FX exposure. So you have quite hopefully provide some color on the translation FX effect. But if you could actually explain a bit better to us what is the real exposure to the currency. So if I'm not wrong, close to 100% of your gross profit in airfreight and sea freight is actually in USD as a functional currency. So I understand what you're saying about the translation effect. But just if you can give a bit more color on what is, let's say, the real effect starting from the functional currency up to your reported currency is the first question. And then the second question is on -- more in your strategy where you're saying that you're growing market share in a profitable way. But I just wanted to understand a bit better whether you think that this growth above market is basically driving -- or you think if that is driving some yield dilution, for example? Or you -- some of the OpEx and lower conversion ratio we've seen this quarter is maybe driven by more cost and for how long you will keep investing. So yes, just a bit of color on how you are basically investing or what is the offset to the higher volume growth versus the market?

Marco, it's Markus. Let me take the question on the exchange rate. So maybe just to sort a little bit the buckets first. So sea freight, you're 100% right, sea freight business generally is a U.S. dollar-denominated business, at least for anything that comes on a carrier invoice, certainly there is also local charges and additional services that are more on the local currency. In airfreight, there is a certain exposure on the U.S. dollar, but it's not globally in the same degree denominated U.S. dollar basis. So it's far more also on local currency invoicing. And we have to distinguish 2 things, obviously. When we talk about U.S. dollar-denominated sea freight, clearly, there is the section, which is the port section that is priced in U.S. dollar and that is the section where we have an overall exposure. So there's a lower number of U.S. dollars, if you like, or same number of U.S. dollars, I should say, the same number of U.S. dollars staying in the P&L, in the local P&L, which translates obviously into a lower number of Swiss franc. Again, that's why we focus on the translation impact. Intrinsically, I would agree with you, there is an additional effect, right, an additional effect out of the pricing of the U.S. dollar, but it's very hard to identify that one. Additionally, clearly, and that's why we take a larger part of the U.S. dollar into our consideration. You also have landside services, et cetera, in the U.S. that also benefits and that is the flip side to it on our cost base from also lower currency. So from that perspective, I think that is what I can disclose a bit more details on it. Again, and I want to reiterate that, in any case, we talk translation topics, we are not talking about exposure out of transaction. There we are still exactly holding very firm our guidance that we always say there must be a hedge, natural hedge with invoicing from customers as our invoicing from carriers and invoicing to customers. So from that perspective, nothing has changed. But it's really the transaction impact that we took.

The second question was on the growth aspect strategy and growth. And is that -- is there any risk that we dilute our yield by looking for growth? So first of all, the answer is, we are very selective. If you look into the airfreight piece, we are not growing per se. We focus pretty much on certain trade lanes. We focus, in particular, on certain verticals. I mentioned quite a few, and I want to reiterate that it's healthcare, it's high tech, it's the hyperscalers, so much the e-commerce. We are not growing in the intra-Asia market, that is particularly important for the sea freight organization that we do not fall into the trap that we focus on low-yielding business in the intra-Asia. We focus pretty much on the higher yields on the power lanes and on the trade lanes where we can really move the needle. So we do not go for growth and all means, and we stay focused, we stay selective, and we look into any possible RFQ with preselected criterias in order to avoid that the organization only looks for volume growth rather than having a combination in terms of their focus on yield plus volume. So that is pretty much the case and we correct every time when we see that we are not on the right path. So I would say that is not a fundamental risk to be expected moving into the next couple of quarters.

And what about the OpEx side, like higher volume growth, does that mean higher OpEx and therefore conversion ratio is still under pressure?

We said that quite clearly, we can add another roughly a 10% volume with almost the same amount of people. So we have room to maneuver still before we need to add significant. But what we have done in the last couple of quarters is we have invested heavily into commercial resources in sea freight, in particular into the SME and as well in national and global accounts when it comes to sea and airfreight. So that is a little bit a lever which we have in order to breathe with additional volume. So we don't need to add significant more operators while we grow.

So there has been an investment this year. And for example, next year, if volumes keep growing, you won't need to keep...

That's the plan.

The next question comes from Andy Chu from Deutsche Bank.

Stefan, Markus. A couple of questions for me, please. You're mentioning a muted peak season in Sea. Does that mean that you're confident that Q2 is the kind of low point of quarterly profits or EBIT for the year? Or could Q3 mark the sort of the low point? My second question is around sort of exit rates for Air and Sea. Could you just give us an indication of the exit rates Air and Sea versus the quarterly average?

Andy, it's Markus. I think when we talked about the new big season in sea freight and if the second quarter was the trough, I think the second quarter was highly volatile in terms of the volume development. Some months and weeks, really large swings from volumes transported, right? And I would say that if that -- if these swings will calm down a little bit. And at the same time, we continue to take the market shares based on the initiatives that we have started and that have been very successful already throughout the second quarter. I would say that we continue to grow very safely into the third and the fourth quarter. Is that guarantee that the Q2 was the trough? No. But is it likely? I would very much think so, right? Exit rates, I think that is the more difficult one. I think the middle of the quarter was especially on the airfreight side. The middle of the quarter was difficult, and I think we should look into a relatively stable, as I said already in our presentation. We should look into a relatively stable situation going forward. On the sea freight side, again, with that high level of uncertainty on the tariffs, for us, really market share gains is our top priority, and that should take care of anything else there.

The next question comes from Cedar Ekblom from Morgan Stanley.

I just wanted to dig a little bit more into this concept of market share gains. From the outside, it's quite difficult to understand how you define what your addressable market is and how that's growing because we obviously don't have the granularity by product segment and by trade lane at a very granular level. And if I look at your volumes, at least on a reported basis, in the first half of this year, they're down 11% relative to where they were pre-COVID. And clearly, the market has grown since then overall, maybe not your addressable market, but the broader market. And if I look over the last sort of 3 years, your year-on-year volume growth has been extremely muted, if anything. So from the outside, I think it's hard, at least for me, to be able to underwrite this comment on market share gains based on the sort of market data that I can observe. So I'd like to just dig a little bit more into how you see your markets and where you actually think you're taking those numbers or those volumes from. And then just also on sort of stepping into the verticals that you are favoring this point on sort of deselecting volumes, I feel like we've been talking about that for quite a long time. And I just wonder -- when do we get to the point where you feel like your portfolio is where it needs to be and the sort of deselect the volumes doesn't become a topic anymore, and we can actually say, okay, now we can see observed volume growth on a total basis because I'm not seeing this volume growth coming through or this market share coming through, and I just -- I don't really know how to think about that going forward. So that's question one. A bit of a long-winded question, but a little bit of visibility on that, I think, would be helpful considering we've had a huge correction in volumes over the last couple of years. And then just the other one is, how do we get back to more than a 35% conversion margin in sea and air? It doesn't sound like you're particularly optimistic on yield improvement. You are talking about sort of maintaining costs or working on efficiency. So that's helpful. But we're a long way away from 35%. So sort of a pathway to get there would be helpful to understand that.

Yes. Stefan -- let me take the first question. I think we have to distinguish quite clearly on the market share gains and how do we define our market between sea and air, right? So in sea freight, you are right, we have deliberately given up certain volumes, low-yielding volumes towards the marketplace. And we started that already 2 years ago. In terms of when have we finished everything, this is the fourth quarter this year, then we have a clean sheet of paper. On the other side, we have seen already net growth in sea freight this year with roughly 2%. So we are growing [ up with ] volume again in sea freight. But deliberately we have decided 2 years ago to give up on certain commodities. The situation for airfreight is different. We have grown our business over the last couple of years in sea freight, and we are now expecting somehow 2.2 million tonnes this year, and this is significantly more than 5, 6 years ago. So in airfreight, I think if you look at the figures, you can see quite clearly already since years that continuously, we are growing our volume. And with the 9% in the second quarter, I think we have underpinned.

Sorry, the question wasn't on airfreight, it was on sea freight, specifically. I appreciate you are growing your volumes on airfreight. I don't think we can argue that. It's more the sea freight volumes, they're basically going nowhere, and we've been deselecting volumes in that business. I feel like it's been for quite a long time. And so basically, I just want to know is, when do we have the new base? And when should I'd be thinking about volume growth in the model? It sounds like from next year, you think we can get there. So -- but yes, I mean it's more sea freight question than anything else.

Okay, then it was answered already in the first part of my response. And the clean sheet is achieved in Q4 2025.

Okay. Cedar, conversion rate, I think that was the question on the 35% and also again from -- we took the combined conversion rate in airfreight. Just from a reference, we talk current first half year at 30%, and 29% in the second quarter, which we all know is a difficult one. And I appreciate, I think 35% is a long way as you put it, from 30%. However, I think we also were transparent in mentioning IMC being a very profitable business and expansion to our value chain exactly what we strategically want. From a numbers perspective, it bears around 100 basis points on the conversion rate. So that has a small dilutive effect. And what are we doing to improve conversion rate? Clear. We continue to have a very strict cost control. We continue to operate in a more automated way in a more digital way, reducing cost per unit, clearly. On the other side, the second quarter, I think, shouldn't be our reference point for our journey towards the 35%. When I look just 1 year back in the second quarter '24, we were at, I think, 33% or 34% that we have to look quickly into it. But it's a reachable number. I think that is what I would like to say in an environment that is maybe less volatile or less difficult maneuver as it is at the current stage. But the activities and the actions are being put in place, and I think it's still a fairly reachable number.

The next question comes from Sebastian Vogel from UBS.

One quick follow-up with regard to the exit side of things compared to the yield question before. I was wondering on the volume side, if you can share a little bit of the volume growth in the end of the quarter, how that compares with the quarter average that you have shown? And the second question is on the legal provision in contract logistics, the CHF 16 million over there that you were alluding to in the slide deck. If you can add a couple of details on that one, that would be appreciated as well.

Yes. For airfreight, the end of the quarter was higher than the beginning. Basically, we saw a steady uptick in the airfreight volume during the Q2, and we expect the same now during the next couple of weeks. And sea freight was rather flattish with the lowest at the beginning of the quarter.

Good. And Sebastian, it's Markus. On the legal case, so I have to respect, obviously it's an ongoing legal investigation, so not too much I can say about it. But it's all centered around well-known and quite often already documented in the newspapers, in the Italian newspapers over the last 5 or 6 years, where an industry-wide topic has been targeted from the Italian officials around temporary labor. I think that is as far as I can currently go.

The next question comes from Michael Foeth from Vontobel.

I have a question regarding trade complexity. You've managed many times in the past that increasing complexity and trade is benefiting your business. And it's not really translating, I think, at least not in the yield, it's maybe translating into volume as far as I can see now. But many companies in the past months have shifted their supply chain and shifted their production and somehow it doesn't seem to be of any benefit for you. So can you maybe comment on whether actually the current environment is more complex? Or is it not? And why are we not seeing it in your yields?

I think the environment is very complex, but it's, at the same time, extremely volatile, right? And we still have a very -- from a demand perspective, a different situation than a couple of quarters ago, with the tariff situation, we have a bit of a softer market environment to the U.S. Transpac is still down by 10%, 15%. Thankfully, for the volume, basically, we have been able to compensate it with other tradings. And I said it already, Europe is extremely strong, [ Northport, Metport ], Latin America is extremely strong. But if one particular market like U.S. is softening from a demand perspective with a lot of capacity into the marketplace, then the complexity is helping you, but the stronger headwind than was basically the reduction in volumes into one power line. So that explains a little bit why the overall complexity didn't help us in the last couple of weeks so much on the yield based on the uncertainty and the volatility of the different markets, especially into the U.S.

Okay. And maybe just a follow-up on clarification. When you talk about your expectation about stable yields in Q3 and Q4, is that versus the second quarter or versus the first half of the year?

Versus the second quarter, Michael.

The next question comes from Lars Heindorff from Nordea.

The first one on the yield side. If I go back and try to correlate the sea yield development that you have with the sea freight rates, on a like-for-like basis, i.e., excluding FX, there tends to be a fairly close relationship that when sea rates go down, then so does your yield? Now I'm just curious in that light, just you've come across being quite confident on the yield developments being stable into the second half. But at the same time you also mentioned that you expect a unit peak season would suggest a further decline maybe in sea freight rates. So I mean, just a clarification on that why you can be that confident? That's the first part. And the second part is on the air volume side. Can you give us any kind of granularity in terms of the 9% growth that you have in terms of the verticals? Which verticals are contributing and by how much?

Lars, it's Markus. So on yield, I agree with you. And especially on the sea freight side, I think it is our base assumption, what we have spoken about earlier, stable yields, volume growth, getting the market share and having a muted peak season. Is that a guarantee? No. It is our base case. We have to keep ourselves a certain framework to work into. But clearly, and I think we have reiterated it several times, the level of uncertainty is high.

So then I take the airfreight volume question. So we have seen now in the second quarter growth in all verticals apart from one, which is automotive, where, in particular, we have seen growth. I underpin already and maybe I have to repeat it now, is the high-tech hyperscaler market is the perishable business, in particular fish, and is the hard cargo environment outside of automotive. So almost all verticals are growing a part of this particular one. Second, I said, cloud and aerospace, everything starts to -- or has started to have a positive impact on the volume.

The next question comes from Gian-Marco Werro from ZKB.

Just one question specifically on the free cash flow generation and also the net working capital intensity that Markus mentioned should remain stable. However, if we look now on the expectation for the second half, most commonly, the consensus is that the international freight rates in sea might come under pressure during the second half year. And therefore, shouldn't be it by nature that also your DSO are reducing and therefore that should help you to gain back those hundreds of millions that you -- so far over the last 1.5 years had like a drag on net working capital, shouldn't that really materialize in more net working capital tailwind on your free cash flow going forward?

I would love to give you a clear straight yes answer to that. But on the other side, I'm mindful that, yes, rates may come down. We don't forecast that, but it is a possibility. On the same token, we are aiming for an exponential growth, we're aiming for getting market shares for any market. So volume goes up even when rates go down, that has obviously an opposite effect. So I think a stable situation is the most likely also taken into consideration that tariffs are equally being a little bit on our working capital. We try to avoid as much impact as possible. But as you can imagine, there is always a certain level of impact on the net working capital as well. So I follow you on your argumentation, but I think our ambitions on growth will rather go into where my mindset sits with a stable environment.

The next question comes from Arthur Truslove from Citi.

A couple for me, if I may. I guess the first question, if I strip out the foreign exchange in the second quarter on an underlying basis, your EBIT is down not far off 10%. I know it's been through some of the drivers of that, but obviously, you bought IMC. And I just wondered if you could just kind of explain why it's down so much at constant currency despite having done acquisition? The second question I had was sort of around the cost base, especially on the sea side and kind of alluding to some of the questions we've had before on conversion ratio. If I listen to some of the commentary I've heard, it does sound like shippers are thinking a bit more about what routes to send their goods on, whether it's to order shipments and the like. Are you seeing more work per shipment for your people? And can you give us any idea about, I don't know, for example, shipments to that shipment per day processed by your staff and how that's evolved over time?

So maybe I answer the first question on IMC and then as well the effort we have to put into the execution. So first of all, no, we don't see more workloads on the single order, that is not happening. So from a profitability, rates have dropped sustainable during the last couple of weeks, and that is mainly causing the EBIT pressure. On IMC, that is particularly clear because IMC is not only they have 2.2 million containers a year, and they are not only executing on Kuehne + Nagel. So we have acquired them in order to offer our customers a better inroad into the drayage market in the U.S., but in particular, in the second quarter, the arrivals to the U.S. have been heavily impacted by the tariff structure and by the shift in the marketplace. And that's the reason why you don't see that so much as expected.

The next question comes from Marc Zeck from Kepler Cheuvreux.

Just a quick one on the peak season. You said it will be most likely a muted peak season. Does this described like only transpacific or are you seeing also, let's say, a more muted peak season than expected on the European trade as well, Far East trade as well. And the second question is on Europe more generally. To me, it seems like that European Ocean born imports were kind of flattish for almost a decade or so, but pick up then after the freight recession 2023, quite a bit. I would be interested in your view on the European import side, if you believe this uptick in European imports is more like a shovel of recovery from a freight recession? Or do you see something more fundamentally changed and trade into Europe that puts the continent on a more sustainable growth path going forward?

Let me answer the muted peak season. And I think we have to be a little bit careful that we do not put the wrong assumption into it. We talk about a little bit of a muted peak season into the U.S., so transpac. We are not talking about Westbound into Europe. I think Europe will still see a significant growth, and that is as well addressing to your second question, right? There will be quite a peak season to be expected in airfreight. And I think we will see a peak season in airfreight. We were only talking about muted peak season in sea freight. It could be even more articulated in airfreight based on the low inventories we see currently having moved into the U.S. So I think we have to be a little bit careful. There is no massive peak to be expected in the transpac. I think the rest of the marketplace especially Asia is -- Asia to Europe is very resilient and the market will see a good growth as well into the peak season. It's particularly on the transpac but not at all for airfreight. This is only one significant [ freight rate ] in sea freight and not at all in air, just to clarify that.

The last question for today's call comes from Rajpal Kulwinder from AlphaValue.

So just a quick 2-part question on capital allocation. One, how should shareholders think about dividend payout this year? And secondly, what do you see in the market in terms of M&A opportunities? Should we expect more bolt-on deals in the second half of the year?

Kulwinder, it's Markus. On the dividend, I think we have articulated on the Capital Markets Day clearly, our policy and the expected payout ratio in a normal year going forward, which we hopefully will be able to finish the year 2025 as a normal year, but we will find out. But this clearly still holds up as a dividend policy. Secondly, on the M&A part. From what I have seen and heard over the last 6 months, the market is not very strong right now. It's a couple of transactions that have been gone through, but I don't see a lot of things being in the market of interest for us, and that should probably also guide us in the second half of the year. Our strategy has not changed small well-run businesses that are complementing our service suites, no large volume opportunities, we don't do that. We go into knowledge and, as I say, complementing our services and then scaling through our own networks. Typical example, perfectly done, I think, on the IMC side. And with a distinctive extension of our value proposition to the customers by controlling the drayage on the U.S. continent as well. So it's absolutely no change in our strategy going forward.

Gentlemen, so far there are no further questions. Back over to you for any closing remarks.

Thank you very much for listening and for the good questions. Wish you a remaining good day, and talk to you soon. Thank you again.

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