In the first quarter of 2024, Kuehne + Nagel International AG (KNIN) reported a stable financial performance with an EBIT result that met expectations. The company saw modest volume growth in its primary business units and is implementing cost control measures, including an organizational restructuring expected to save around CHF100 million annually.
Despite a sharp increase in sea freight rates in Q1, the company does not anticipate this trend to continue beyond the current period. With strategic acquisitions, Kuehne + Nagel expanded its customs services and Asian geographic presence.
The company also highlighted a strong performance in contract logistics and shared updates on its roadmap 2026 strategy, emphasizing cost control and unit cost reduction. Challenges included curtailed collections and cash outflows due to redundancy payments and holiday timing. Kuehne + Nagel remains committed to its long-term goals, though it acknowledges that the growth rates initially planned for 2026 may be difficult to achieve.
Key Takeaways
- Kuehne + Nagel's EBIT results for Q1 2024 were in line with expectations.
- The company achieved modest volume growth in its largest business units and is focused on cost control.
- Organizational restructuring is expected to save CHF100 million per year.
- Sea freight rates rose sharply in Q1 but are not expected to continue rising.
- Kuehne + Nagel expanded its customs footprint and Asian presence through acquisitions.
- The company reported strong EBIT in contract logistics and remains focused on cost management.
- A 2-5% volume growth is expected in Q2 2024 compared to the previous year.
Company Outlook
- Kuehne + Nagel aims for a free cash flow conversion rate of around 90% for the full year.
- The company is working towards achieving a GP of CHF500 per TEU.
- They expect volume growth of 2-5% in Q2 2024 compared to the previous year.
Bearish Highlights
- Redundancy payments and the timing of Easter led to curtailed collections and cash outflows.
- The company sees achieving the growth rates planned for 2026 as unlikely.
Bullish Highlights
- Kuehne + Nagel has strengthened its contract logistics business unit.
- They have achieved their goal of CHF500 million per TEU in sea freight.
- The company sees additional market capacity as an opportunity to generate more GP.
Misses
- Cash outflows were impacted by redundancy payments.
- Growth rates initially planned for 2026 may not be met.
Q&A Highlights
- The company's focus will remain on sea-air freight, with smaller segments in contract logistics and road.
- They clarified their limited involvement in the NEOM project in Saudi Arabia, focusing instead on supplier-based turnkey projects.
- Kuehne + Nagel aims to maintain a sea freight yield between CHF450 and CHF500 per unit.
During the call, Kuehne + Nagel also emphasized their dedication to improving customer experience and advancing digital transformation within their operations. The company's procurement strategy had a minimal impact on yield in the first quarter, which was driven by targeting higher-yielding business. They are confident in their ability to control the drivers necessary to achieve their GP targets, such as customer loyalty and high-yielding business. Despite a shift in shipping demand from China to the US, from the East to the West Coast due to labor and Red Sea disruptions, Kuehne + Nagel sees this as an opportunity to enhance their GP. The company concluded the call with an expression of gratitude and farewell.
Full transcript - None (KHNGF) Q1 2024:
Operator: Ladies and gentlemen, welcome to the Q1 2024 Results Conference Call and Live Webcast. I am Sandra, the Chorus call operator. I would like to remind you that all participants have been listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] At this time, it's my pleasure to hand over to Mr. Stefan Paul, CEO of Kuehne + Nagel. Please go ahead.
Stefan Paul: Thank you very much, Sandra. Good afternoon and welcome to the presentation of Kuehne + Nagel's first quarter 2024 financial results. I'm CEO Stefan Paul and I'm joined as always on the call today by our CFO, Markus Blanka-Graff. Let's go into the first quarter earnings. The Kuehne + Nagel Group achieved a Q1 EBIT result in line with our expectations. This result was stable relative to the reported Q4 result of CHF375 million, which excluded a redundancy charge of CHF53 million. Our ongoing focus on yield management and cost control offset the typical seasonal downtick of cargo volumes from Q4 to Q1. We achieved modest volume growth in our two largest business units, building on the somewhat-improved volume trend of late 2023. During our last earnings conference call, you may recall that we undertook redundancy measures in Q4 and said, we had additional cost control measures already underway in Q1. This was a direct reference to the recently announced organizational streamlining, which will centralize general management and speed up our decision making processes. We anticipate related savings of approximately CHF100 million per year, comparable to the redundancy program announced with year-end results. The associated charge in Q2 should be roughly half this amount and we expect the full run rate savings to emerge over the coming quarters. Lastly, historical free cash conversion in Q1 is usually low and sometimes negative. The result in Q1 2024 reflects the unexpectedly sharp rise in sea freight rates, a pressure which is not likely to extend beyond Q1. Markus will have more on this topic to come a bit later. Let's move into the sea freight Business Unit page number 3. As always, left the volume in TEU GP/TEU and EBIT/TEU always of course in always, of course, in Swiss ranks. Sea Logistics achieved EBIT of CHF197 million in Q1, which was a CHF36 million improvement on the result of Q4. Relative to last year, this result includes a currency headwind of around 3% or CHF10 million. Effective yield management drove a start sequential increase in GP per TEU of plus 17% from Q4 to Q1. This improvement more than compensated for seasonally lower sequential volumes of minus 9%. This also accounted for about 80% of the EBIT improvement with a balance from an absolute operating cost reduction of 2%. Headline volume growth in Q1 was 1.5% year-on-year or roughly 5% on an organic basis, excluding the effects of discontinued commodity volumes in Q4. We view our market share as roughly stable with estimated market volume growth of 2% to 4% year-over-year. The sharp rise in freight rates triggered by the situation in the Red Sea resulted in a relatively small uplift to yields in March. We expect some additional uplift in early to mid Q2, but no further effects after mid-year. Next is page number 4, air logistics tons GP per 100 kilo and EBIT per 100 kilo in Swiss francs. Air logistics delivered Q1 EBIT of CHF94 million or CHF14 million lower than the operational result for Q4. Our intensified prioritization of yield management resulted in a stable overall outcome in Q1 relative to Q4, this prioritization will persist and we expect further improvement ahead. Headline volume growth was at 3.4% year-on-year revealing modest acceleration, organic volume growth of 0.8% tipped into positive territory aided by mid-single digit perishable growth. In the hard cargo segment, excluding e-commerce, we believe our market share is stable. Note that we are serving the growing Chinese e-commerce export volumes, but with less exposure relative to the broader market. Revisiting the situation in the Red Sea, you may recall that we had not witnessed a material uplift in sea air at the start of the year. Since then, we have seen some additional demand growth but of a relatively small base. Next is road logistics on page 5. Road logistics EBIT for Q1 was CHF30 million. Shipment volumes remained under pressure in Q1 at minus 6% year-on-year, but broadly unchanged, excluding day count effects. This is a slight moderation of the Q4 result of minus 9%. Yield and mix effects mitigated volume pressure once again, resulting in a more modest GP decline of 3% year-on-year, excluding currency effects. The Q1 result also reflects the first-time consolidation of Farrow Group results since February, the acquisition of Farrow addressed the key strategic initiative to expand our customs footprint. Farrow is a long established specialist cross-border North America trade, a market where custom solutions are cornerstone of successful sales efforts. We expect to close the recently announced acquisition of City Zone Express in Q2. As a reminder, this is a Malaysia based provider of cross-border road services spanning their home market, Vietnam and Thailand. Next is contract logistics on page number 6. Contract logistics generated another strong EBIT result of CHF55 million in Q1, matching the record result of Q4 and comparable to the Q1 result of CHF53 million last year, excluding a real estate game. Market share expanded once again in key healthcare and e-commerce segments, categories which continue to dominate the sales pipeline. Our ongoing focus on efficiency resulted in a modest year-on-year increase in the recurring conversion rate. Please note that major Adidas (OTC:ADDYY) distribution facility in Northern Italy designed and operated by Kuehne + Nagel to serve Southern Europe for this client is now operational. Let's move onto page number 7, roadmap 2026 and update for the quarter. And before turning over to Markus, let's review some key developments with respect to this roadmap 2026 strategy. With respect to the cornerstone [kynix] actions are underway to make meaningful improvements guided by the insights from the customer and employee survey conducted in the second half of last year. These actions mark an important step to improve our customer service offering and our attractiveness as an employer. Additionally, as I touched up on earlier, the recently announced streamlining of our organizational structure will bring us closer to our customers and improve the speed of our decision making process. In terms of market potential, I already referenced key recent acquisitions in road addressing geographic coverage ambitions in Asia, as well as expansion of our customs brokerage capabilities. We also made further advances in key verticals such as healthcare and renewables. Our shift from on-prem to cloud-based hosting of our in-house business application is on track, while we continue to explore the potential for AI to drive new efficiencies. Lastly, we expand our service offering in road to include tangible emission reductions and avoid a solution and also made progress with respect to our social impact initiatives. With this, I would like to hand over to Marcus now to talk more about the financial KPIs.
Markus Blanka-Graff: Thank you Stefan and good afternoon everyone. Thank you for your interest in Kuehne + Nagel and taking the time today for our first quarter 2024 results. Just as a quick recap, as Stefan has outlined, we continue to see an environment of demand for global logistics services that remains overall subdued and we don't expect a material change to this situation. In such periods of a potential volatility, we focus on our highly flexible asset light business model combined with an entrepreneurial spirit. Our current priority hence is on cost control with several significant actions initiated in the fourth quarter 2023 and intensified in 2024 to ensure a further reduction of unit cost. This reflects both a reduction of absolute cost and per unit cost with stable to increasing sequential volumes in sea and air freight. Moving on to the income statement. While the P&L remained below the same quarter in 2023, but we shall recall that the first quarter last year still enjoyed some positive spillover effects from 2022. Looking at the quarters sequentially, we can see a solid operational conversion rate of 18%, supported by active FTE resource management. The combined sea and air freight conversion rate was 33% in the first quarter. For reference, the full year 2019, sea and air freight conversion rate was 28%, excluding one-offs. Not to forget, headwinds coming from currencies increased with an impact of around 4% or CHF102 million equivalent at gross profit level and around 3% or CHF19 million on earnings before tax. Moving on to working capital. One of the topics that has been on the agenda for the last couple of quarters, it increased due to the unexpected sharp rise of sea freight rates triggered from the situation in the Red Sea, as Stefan has outlined already in his opening. I anticipate stable net working capital for the next quarters to come. DSO have expanded against the end of last year and also against the same time last year. Days of purchase outstandings, DPO on the other hand have increased to a similar extent, so that the spread between the DSO and DPO stands now at stable 12 days. Net working capital intensity increased by the close of March with a result of 4.1% versus 3% for 2023. The absolute level of CHF990 million is there with almost CHF100 million greater than it was a year ago. I will come back to these facts in a minute. Let's continue with cash and free cash flow. The pressure on the net working capital we just discussed arising from the sharp rise in sea freight rates is clearly evident in the Q1 free cash flow result. This along with some other factors, amplified seasonal effects, which typically result in a lower free cash flow conversion in the first quarter of the year. For a better illustration, let me move on to the next slide, which is a new slide, starting some more information on the cash conversion. The first quarter is usually not marked by the high end free cash flow conversion, as it follows the peak demand season for sea logistics, our largest business unit. On that slide, you can actually see the average free cash flow conversion rate over the last quarter -- the last years between 2010 and 2020, so a 10 years look back on the Q1 cash conversions. A look back at this decade leading up to the pandemic points to an average first quarter free cash flow conversion of just under 20%, excluding the effect of the recent sharp rise in sea freight rates and some other factors detailed on this slide, the Red Sea impact, the non-core CapEx in the amount of CHF55 million earlier last collection date that we had in March due to the timing of Easter and initiated in the fourth quarter 2023, but cash effective in the first quarter 2024 some of the redundancy payments. We experienced also, as mentioned briefly curtailed collections due to the timing of Easter and some material cash outflows linked to the redundancy charge as mentioned in the fourth quarter. With these few comments, I would like to end our standard presentation with some key takeaways. As Stefan mentioned, there is a silver lining on the horizon, positive volume development to be continued. Intensifies cost measures on Kuehne + Nagel side, streamlining of the organizational structure as announced in the first week of April, strengthening of the customer proximity, active yield and customer portfolio management, which all results into a confirmation on our focus on the roadmap 2026 initiatives. In closing, volume trends showed some improvement in the first quarter amid challenging market conditions. Nonetheless, market demand overalls and yields remained subdued. In this environment, we remain relentlessly focused on cost management and this is evidenced most recently by the additional measures that we have taken in the first quarter to further reduce cost. These actions will yield incremental benefits continuing in the second quarter and of course, beyond that point. With this commentary, I would like to conclude the standard presentation and I would ask Sandra to open up for Q&A.
Operator: [Operator Instructions] Our first question comes from Alex Irving from Bernstein.
Alex Irving: My first question is on volumes please. So global data on air freight and sea freight volumes are suggesting total market growth in around the highest single digits year-over-year. Your numbers in the lowest single digits, but you also said that your market share is stable. If you could please help us to understand where the difference lies. My second question is on the regional management structures. So following that closure, just a little bit more information here, what a specific role the managers who are being eliminated and why are you confident that you are able to eliminate those roles without empowering your ability to control the business, please.
Markus Blanka-Graff: I take the first one. Good question on that market data, by the way. Not sure where the high single digit market volume. We think we have been growing in line with market. But of course, we are trading off, if you like, high yielding business for volume increase. So I think or we believe based on our market data that we have been in line with market and certainly expanding on the high yielding volumes.
Stefan Paul: I will answer the question on the regional management structure and give you a little bit more insights basically beyond the press release, which you have seen. First of all, we had roughly 700 -- FDE 700 people in the regional structure, five regions and reporting into the regional management, we have -- had currently between 55 and 60 national or cluster managers. These 55-60 cluster managers will now report into the management board directly into five of us, four colleagues in the business units, sea-air road and contract logistics, and to myself, four of them. That's the new structure. And what it requires is, of course, that the national managers take an even larger and wider responsibility, especially on -- and that's not new on CX and EX. So on the customer front, customer facing activities and on the employee side, and as I said, repeating myself, they will report now or they already report into the board members. And that will ensure that in a volatile market we can execute our decisions much faster than in the past, because we have now a direct connection into the country organizations vice versa. So that's the major change on the structure, which we have put into place beginning on April 8.
Operator: The next question comes from Muneeba Kayani from Bank of America.
Muneeba Kayani: If I could just go back to your comments on CGP per TEU. You mentioned there was a benefit from Red Sea towards the end of the quarter in March. Can you help us understand kind of how much of the performance in the first quarter was your focus on yield versus kind of benefit from the Red Sea? And as you talked about 2Q, what's your visibility on that and why do you think that there's no Red Sea benefit beyond 2Q? And just then on your medium-term targets, where are you in terms of meeting your 2026 EBIT targets? I think in the last conference call you had said that the volume performance was below your expectations. Has that changed in any way?
Stefan Paul: Let me tackle the first question. The CGP per TEU what was the share coming from Red Sea? It's rather limited in March. It's between CHF5 million and CHF10 million on EBIT level in March, nothing in general February. And then why do we believe there is no contribution from Red Sea beyond Q2. We believe that the situation from a rate perspective is going to normalize end or at the back end of second quarter. But, of course, we do not have the crystal ball. That is our expectation looking into the market right now. The only thing I would like to add here from a volume perspective, what we expect as well in the Q2 is a significant no -- a remaining positive uptick in terms of the volume is concerned coming in from Q1. We believe that Q2 from a volume is stronger than the first quarter and year-on-year, there should be expected a between 2% and 5% volume growth in the second quarter versus 2023.
Markus Blanka-Graff: On the mid-term 2026, I think I can reiterate what we mentioned recently that we believe the quality of the P&L, so the improvement in conversion rate, the focus on the customer excellence part, the expansion on the markets and also what Stefan alluded to on his roadmap slide on the digital ecosystem. I think we can deliver all that. I think where we struggle right now is the market growth that we had assumed at a different level than what it shows right now and what we can expect for the next quarter or so to come. But also, let's not forget, we have, if you like, already missed the first year of growth, which was last year, which we had in our plans at a different level. So is it impossible to achieve the growth rates that we have put out during our Capital Markets Day? I think impossible is a strong word, but it's very unlikely that's going to happen. Again, the quality of the P&L, the improvements on conversion rate, everything else is going to happen the way we had communicated. Just the size and the growth that we have been able to gain from the market is not there, as we speak.
Muneeba Kayani: If I could clarify your comment on 2Q volumes, the 2% to 5%, is that -- so the 1.5% that you did in Q1, we should think of that year-on-year would be better by 2% to 5% in 2Q?
Markus Blanka-Graff: That is the right interpretation. What I said let me repeat it. The volume growth year-on-year Q2 is expected to land between 2% and 5% in the second quarter.
Operator: The next question comes from Satish Sivakumar from Citi. Please go ahead.
Satish Sivakumar: I got two questions here, just on that volume comments. How much of like the visibility you have today in terms of from your customers both across air and sea? And then just moving on to the LCL volume mix, can you just give us an update like what is the LCL volume mix today and how it has actually progressed in the last six months?
Stefan Paul: In terms of the outlook from customers, basically, it's two-fold. In sea freight, we have a rather good insight into the bookings for the next four to five weeks at least the pre-bookings basically for the next the pre bookings basically for the next two weeks we are absolutely clear on what will be booked. Then as I said, four to six weeks we have a rather good indication from the customers. Air freight is a little bit different, right, because there is a lot of spot business. So the visibility into the next six or seven weeks is less pronounced than in sea freight.
Markus Blanka-Graff: On the volume mix, Satish. I think, we're continuing to expand our shares on the higher yielding business. I think, not every quarter is due for an update on the numbers. It's a slow moving process giving the large number of customers that we have. We are moving into the right direction. Is there anything that I would call out as being a step change in the mix? Not as of yet. And I think, we shall give you further information as we have promised on a yearly basis because then you really see the progress also in meaningful stacks rather than in smaller movements.
Satish Sivakumar: Can I have a quick follow-up on the demand visibility in sea freight and how does that actually compare into Europe and into North America like, where do you see more longer booking versus a region?
Markus Blanka-Graff: You mean the longer or shorter contract?
Satish Sivakumar: Yes. Where do you see like, visibility slightly better or is it just consistent across all regions, when you say four to six weeks of visibility in sea freight?
Markus Blanka-Graff: Yes, that is pretty much across all the geographies. Let's not forget still the old truth holds up that the vast majority of businesses are concluded in North America and Europe. And from that perspective, the visibility is still there. So it's not depending on the geography, it's really across the globe in a very homogeneous way.
Operator: The next question comes from Andy Chu from DB.
Andy Chu: Couple of questions for me, please. The first one is around free cash flow. Obviously, lots of moving parts. Markus, is it possible to give any sort of range on free cash flow outcomes or conversion rate for the full year? I think your company consensus is about, well, pretty. This morning's results was just under CHF1.3 billion. So I've seen quite a big deviation this morning and you printed CHF970 million last year. So I know there are things like probably more redundancy payments coming through. So can you help us a little bit in terms of free cash flow? And then on in terms of the charge to be taken, the CHF50 million, is there any sort of split of that by division please? And whether all of that will flow into or most of that flow into Q2.
Markus Blanka-Graff: Sure. Andy. I think free cash flow, very good observation, yes, there will be cash outflows for redundancies. And I combine the answer for the two questions. I think the range of around CHF50 million cost at that point in time is likely and everything whatever we are going to execute and announce and inform everybody is going to be during quarter two. Similar to the quarter four, we'll also disclose in some level of details. From an allocation point of view, I would guess the majority will be in the sea-air freight arena and a smaller part will be in contract logistics and road. For the full year cash flow, I would still believe that because the logic of the business model has not changed, we should run at a free cash flow conversion rate at around 90%. Then when we are discounting some of the redundancy payments that are happening in -- during the year, I would think we should still have 85% to 90% or 80% to 90% as a target for our free cash flow. And if nothing unforeseen is going to happen, I think I'm comfortable with saying that's also going to be the reality at the year end.
Operator: The next question comes from Dan Togo Jensen from Carnegie Investment Bank.
Dan Togo Jensen: Maybe if you can give an update on the near project in Saudi Arabia. I know you are involved on the renewable side. How does that business impact you and how will any potential delays impact you in the future?
Stefan Paul: As I outlined a couple of times last year already, we are not involved directly and you said that quite rightly with NEOM project, so what we execute is shipments based on supplier decision base. So we are currently executing a large wind project from China into NEOM is a turnkey project and we have a couple of others where we bid on currently. For us, it's purely supplier related and I've seen as well that there was an announcement recently on a delay or less basically investments into the line but that has no impact on us. As we are not directly involved into the NEOM activities, we are only focusing on supplier based turnkey projects, mainly in the sea freight and project area and not directly involved on ground.
Operator: The next question comes from Marco Limite from Barclays.
Marco Limite: I've got two. So the first one is on the GP per TEU in sea freight, whether you feel like the 500 markets, let's say the new sustainable level. I guess you were mentioning there was a bit of tailwind in March from Red Sea. So maybe something coming from that drops off, but you feel like CHF500 million is a ballpark right number going forward and whether volume growth or stronger volume growth in the second half of the year, but already in the second quarter, it's somehow dilutes that number. So if you know, volume growth is a tailwind or a headwind, basically to your yields. And the second question is on conversion ratios, which were very strong in sea freight but in air freight it sounded to be softer. What is driving that? And whether structurally, you see big differences in your path forward to get to your targets in sea freight versus air freight?
Stefan Paul: GP per TEU, it's not CHF500 million. It's CHF500 million per TEU. And this is what we have as well communicated as an ambition as well during the Capital Market Day last year on March 1. So we are happy that we have demonstrated that we have the can-do attitude and that we have reached again the CHF500 million mark. We believe, and this is what we always said, is there will be some quarters above and below. Second quarter will be in the high CHF400 million, close to CHF500 million range. We don't believe that there is a significant negative trend to be expected but with more volumes and significant more volume coming in, in the second quarter as we see the bookings currently arising, it might be that there is a little bit lower GP per TEU to be expected. But it remains our ambition and we will do everything on the product mix and on the focus with our customers to really demonstrate that we deliver as promised around the CHF500 million range. So no big deviation to be expected.
Markus Blanka-Graff: And then maybe on the air freight side, on the conversion rate, I think sea freight, you have seen yourself very healthy levels. On the air freight side, I think we should expect further improvements on the yield but in a moderate pace and at the same time with some cost benefits with higher volume and most certainly stable or actually declining cost structure. Having said that, I think the important thing to understand is, how does the market currently look like? And really when you do the three components of the market that is currently driving the volume growth and also some of the capacity restraints, it's hard cargo that is currently missing. It's perishable that is stable. And it's basically and growing. And you have e-commerce that is really the driver for everything we talk in air freight. And I think at that point in time, we also have to see what is the profitability around that e-commerce business, and how eager we are to operate that business or rather focus on higher-yielding businesses in the hard cargo. So I think what you should expect going forward is focus on hard cargo, better yielding, lower cost structure and then I think air freight is also going to take off into the right direction again. So, nothing miracle around it, it's just focused on the right strategy.
Operator: Next question comes from Gian-Marco Werro from ZKB.
Gian-Marco Werro: I have two questions. First of all is a follow-up question of what Markus just said. In e-commerce as a driver in air freight, I think we didn't speak enough about this topic today. So can you elaborate also the momentum that you really see there with Chinese e-commerce giants boosting the volumes there? And can you also give us a bit more flesh to the bone there in relation to the profitability that you achieved in this industry or in this segment, as some market reports are also showing to us is that these big players also potentially even pay more or attractive prices to save the capacities for their big plans to bring volumes to Europe and the U.S? And then the second question is more on also your measures that you mentioned this morning. For example, the temperature controlled area in New York, adding in air logistics, some more possibilities to you. And besides this, also the inauguration of the new U.S. contract logistics facility in New Jersey. So can you just give us there a bit more maybe granularity about the significance of those measures to your overall volume capacities or volume growth potential? I know there are some details about square meters, but that's not so helpful.
Stefan Paul: So I was -- maybe we should have a side discussion on the reports basically because I'm not aware that any of these players are paying any single penny too much or any premium, right? So that is not what we see. But from a volume perspective, Gian-Marco, they still basically have huge demands and mainly they focus on direct carrier connections. Your question was, as well, what is the utilization? How much do we carry for e-commerce and the two giants in particular? As we said, I think during the Q4 call, we are leveraging our subsidiary, Apex in particular for that kind legacy is not pretty much involved. And it's less than 20%, below 20% of the capacity offered by Apex into the marketplace, which is focusing on e-commerce. But again, I need to reiterate the yield coming from e-commerce is significantly lower than for standard hard cargo.
Markus Blanka-Graff: And I think on the temperature controlled and also some other locations that we are continuously improving, it's not so much the size that really is of biggest relevance, it is the network and the completion of network positions around the globe with the right certifications in place, with the right accreditations in place. And so temperature control is one of the distinguishing features I wanted to say for the transportation. So it's the availability of a certified network rather than how big the individual locations are. On New Jersey, I think was your question, the New Jersey facility is already up and running and it's a hub for fashion and luxury brand. And we are using that also for all kind of cross-border movements. So it's interesting that you picked up on these two. But yes, these are the -- these are the context around these two.
Operator: The next question comes from Michael Foeth from Vontobel.
Michael Foeth Vontobel: Just two for me. Also, the cost per unit development in air freight, can you just explain why it increased so much versus the third quarter and the fourth quarter, and the fourth quarter included some one-offs there? So what are the dynamics in quarter-to-quarter in the OpEx? And how should we look at that going forward? That's the first question. And then the second question is just maybe a clarification or a follow-up on what was just asked, your right-of-use assets increased quite substantially in the quarter. And I was just wondering if that relates to those warehouses you just mentioned or if there are other effects in there?
Markus Blanka-Graff: So right-of-use assets rather clear impact from one large operation. I think Stefan mentioned that South European distribution center that we opened in Northern Italy in Mantua, and that is a massive site with a very long lease periods that obviously has an impact of the right of use assets, at the same time, the contractual liabilities. So if you look at the balance sheet, this is actually the move that's happening. That site went operational in the first quarter, hence from an accounting perspective that is what happened.
Stefan Paul: Let me tackle the question on the air freight unit cost, right? So the air freight unit cost in the first quarter is 69 per 100 kilo. And if you look at the fourth quarter, fourth quarter was positively influenced by two one-offs. One was the Apex, one-off and the other one was a negative one, which was the accrual for the redundancies. And this together, we're at roughly CHF20 million, right? So the operational -- the operational number, operational number was CHF20 million higher in overall for air freight in the fourth quarter. And that's the reason why the comparison needs to be taken into account minus the one-off, and then you have the real number, right, which is which is then 6% below the fourth quarter if you take these two into account. So 6% net reduction of cost per unit between Q4 and Q1.
Operator: The next question comes from Sebastian Vogel from UBS.
Sebastian Vogel: I ask my two questions now. The first one is if you can add some color on the exit yields in sea and air by the end of the first quarter. And the second question is still with sea yields. And if you look a little bit further out, so by the end of the year, most likely there's some additional sea freight volume becoming eventually available. Do you think you can sort of offset the potential pressure that's coming out of that one overall, and then on rates that you can offset that one with yield management measures there? That would be my two questions.
Stefan Paul: I'll tackle the first one. The exits on the first quarter in March. So what I can confirm is that the highest yield per unit in the first quarter in both air and sea was definitely in March. Yield in air was above the 82 and yield as well in sea was above the 502. So the strongest yield came definitely in March months.
Markus Blanka-Graff: So of course, the yield sea freight until the end of the year, I would wish I would know it precisely. But I think from a perspective, we should -- we should be looking at a sound number between the CHF450 and the CHF500 mark. So maybe some quarters looking at the volume development, maybe a bit below the CHF500 mark, but I think we should be somewhere in that range.
Sebastian Vogel: And if I may squeeze one small one in. The non-core CapEx, the CHF55 million. Can you elaborate a little bit on that one? That was -- what was there behind?
Markus Blanka-Graff: There were investments into projects in the area of sustainability. So that's something that creates for us a platform to further invest on the ESG agenda.
Operator: The next question comes from Lars Heindorff from Nordea.
Lars Heindorff: Both two on the yield side. The first is on the sea yield and the increase in the first quarter. Markus, we've previously have discussions about how you source your capacity, whether you're long, short or completely back to back. I would assume that the strong increase maybe is caused by you being a little bit long on how you source capacity? If I'm right in that thesis, I mean, how will that affect the yield? I mean, I know you've been giving guidance for Q2. But all else equal, is rates going to decline going forward? I mean how can you keep it then around the CHF500 levels? That would be my first one.
Markus Blanka-Graff: Okay. We take it step by step or you want to ask your second question at the same time?
Lars Heindorff: No. Step by step, sir.
Markus Blanka-Graff: Okay, Lars. So I think I'm going to disappoint you now because on the capacity side, we currently run on a very high-level spot market. So it's really not anything that is the CHF500 GP per TEU level is really not driven through the procurement strategy, it's far more driven by really our focus on higher-yielding business versus in the past, running with some of the commodity business. So yes, there is an impact but that impact from a procurement is not significant in the first quarter. So going forward, I think we will see how the market develops. And I think we keep our procurement strategy, certainly for the future, rather close to our chest. But the main movements going forward is always move into the -- or develop into the right customer portfolio mix rather than thinking about how we disclose or not disclose our procurement strategy.
Lars Heindorff: That's clear. And I suspect that you will give me an answer, which is probably along those lines. So which brings me to the second point, which is that the long-term guidance around the CHF500. If we assume that over time, yields have been sort of steadily declining. I think that's more or less evolution in this industry. What kind of change in mix will that require for you to keep that margin sort of stable? And maybe you can indicate how much is SME today and what it will be -- or what it would take to be in the future to keep it around the CHF500 level?
Markus Blanka-Graff: I think we have disclosed some of the SME shares in our last call on the full year result. Again, I mentioned today, don't expect that mix is shifting on a weekly basis or even monthly basis. This is a long journey. It is connected with our customer experience -- with our customer experience commitment. And it is clearly connected towards also digitalized and more efficient execution on lower-yielding business. So it's a whole mix of what we want to do. And we were -- we have been very mindful when we created on the Capital Markets Day that aspiration of CHF500 GP per TEU, and these are the drivers that we think we are mostly under control of those. So we get the customer experience right, we get the customer stickiness in the tenure of customer contracts extended. We create a good portfolio towards high-yielding business, most of that is in our control, most of that is, I think, on the long-term relevant for us.
Operator: The last question for today's call comes from Uday Kanakupar from TD Cowen.
UdayKanakupar: This is Uday on for Jason Seidl. I guess just sticking on the sea GP in the second half. So you mentioned no Red Sea impact for mid-year and expecting normalization. I guess, at the same time, some reports had ocean capacity up 9% for the year. Does the CHF450 to CHF500 mark for 2H assume the effect of those capacity as like do you have any visibility there and the impact on GP per TEU in the second half? And I guess just quickly for my follow-up on China, the U.S. transit, did you do -- or are you seeing any shift in shipper demand for moves to the U.S. West Coast versus the U.S. East Coast?
Markus Blanka-Graff: So for -- if I understand you correctly, your question goes into, is there a negative or potential negative impact on GP per TEU through the incoming additional capacity in the second half 2024, right?
UdayKanakupar: That's right, yes.
Markus Blanka-Graff: So I think overall in the market that might actually still -- that might be true. But I come back also to what I said to Lars is our market share is still a single-digit market share. And we can clearly choose how we operate within that market. And with our focus on the higher-yielding business, there is enough higher-yielding business to be won out there. I would say if additional capacity comes in and rates will come under pressure that might even open an opportunity for us that we will have a lower buying versus our selling. So we might actually have an opportunity to create more GP. So I would be rather optimistic, at least in that dimension of the market. Choose the right customers where we can really make additional GP through additional services with the right customer experience and then the capacity might actually be an opportunity for us.
Stefan Paul: I will tackle the China question to the U.S. And the question was, do we see a shift from East to West? Yes, we see double-digit shift from East to West Coast, currently from the inbound from Asia to the U.S., and the reason is labor disruption risks and Red Sea disruption. So there is a clear shift to be seen already.
Markus Blanka-Graff: All right. I think from our side, we are at the end of our session today. Thank you very much all for joining the call, and I wish you a good day from Kuehne + Nagel.
Stefan Paul: Thank you very much, and good day.
Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
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