Agility Global Integrated Logistics (DSV) Earnings Call Transcript & Summary

Welcome to the DSV conference call. [Operator Instructions] Today, I am pleased to present CEO, Jens Andersen; and CFO, Jens Lund. Speakers, please begin.

Thank you, and good morning, everybody, and welcome to this conference call here from Hillhouse in Denmark. We are here this morning to communicate about the information about the closing of the deal with the Agility GIL that we have announced this morning. We are exceptionally happy that we can already at this stage close the deal and get going with the integration. So we have, after the forward-looking statements, which are more thorough than maybe than normal, which I would kindly ask you to read on Page 2. Then we have prepared a small agenda for this morning on Page #3 where we will give a few facts about the combined company, some facts about the completion of the transaction. And then something about the financial impact, and then we have also upgraded the financial guidance this morning. And then we'll conclude with the next steps and also Q&A. And if I may, this time, please ask you to limit your questions to 2. So I'm sorry for all of those of you who have prepared more than that. If you have a lot more questions, you're always welcome to contact us directly. So we will go directly to Page #4. I think, first of all, I'd like to extend a big thank you to the teams from both Agility GIL and DSV. They have worked -- structured hard and efficiently since the announcement of the deal back in April I think it is a testament to the strength in administration on both sides that we can already now here sit on the 16th of August, having closed such a large and very complex transaction also. It has been exceptionally important for us to make the time from signing to closing as short as possible. It's in everybody's interest. So we are super pleased about that. And we are exceptionally eager also now to meet our new colleagues and to get going with the integration. We actually do believe that we will generate an industry-leading leader in logistics now by combining the 2 companies. We will be a top 3 player in freight forwarding. We are, as such, not obsessed with the league tables, but it goes without saying that the larger you get, the more value you can create for all stakeholders. This is what we have seen in the past. We will also see a significant strengthening of our very successful and profitable Air & Sea operations. A lot of things attracted us to Agility GIL. And the problem when you focus on a few geographical areas, you don't talk about the others, but it is a fact that Agility GLI has a very strong presence in APAC and the Middle East, which is a strong complement to our own existing network. That does not mean that we are not excited with the operations outside of these areas, I actually do believe that we get a lot of new strength also in North and South America and also in Europe and a lot of the value in a company like DSV lies in the network. And I'm happy to say that now we will be operational with our own flag on identity in more than 90 countries in the world. It's also about generating value for shareholders, and I think we are actually in a better position to continue to do that now. We have already industry-leading margins in DSV. And we have the clear aspiration to continue with that. We also do believe that we have a certain track record we have experience in combining companies, and we will use all the good input that we have had an experience from previous transactions, most recently, UTIW and Panalpina. We will be more than 75,000 employees, which will be able to service our customers supported by a very strong and very scalable IT system, which is also very important to mention. You can see on the left-hand side of the chart, how the network will look and I think it is a very, very good picture. So with that said, we'll go on Page #5. It's a little bit self-explanatory. You can see the number of employees, DSV Panalpina on the left-hand side and Agility GIL on the right-hand side. combination will be 75,000 revenue in Danish kroner. This is the last 12 months numbers, which accounts to DKK 160 billion. So with a positive trajectory, we do actually believe that it would be possible to get to a higher number than this on an annual basis. But as you know, it's not necessarily the turnover that matters, but more the Air freight numbers, you can clearly see the contribution also to the existing operations that we have very healthy 300,000 tonnes and 600,000 TEUs in sea freight, which is really good. Of that, we estimate that approximately 20% is freight management carries a slightly lower yield than what we have already. Road freight, not to forget, we'll also benefit from this. We see that Agility doing road freight business also in areas where we are not present today. And also have a decent and strong operation in some of the European countries. And I think we'll see a lot of benefits of combining the volumes into one network. The same goes for contract logistics. We call it solutions. You can see the numbers. There are different ways you can calculate the size. We have used a number of square meters where we have 6 million and Agility GIL about 1.4 million square meters. And also here, there will be a lot of benefits of combining the operations into one. So with that said, I'll hand over to you, Jens.

Thank you, Jens Bjørn. And good morning, everybody as well. I just want to skip quickly to Slide 6 and talk a little bit about the transaction and transaction details as well. We have issued shares in order to pay for the activities we have acquired. And agility have received 19.3 million DSV shares. For those of you who are technically very interested, we've actually issued 16 million new shares and used 3.3 million of our own shares to pay for the transaction. This gives us a total number of shares of 240 million. And we could have crossed the things up and headed in 2 steps on the extraordinary general meeting, but we decided to do it in this way, which is a structure that will end out with the same result. If we look at Agility, there will be a new large shareholder in DSV. They will approximately have 8. -- or 8% of our share capital. So very nice to welcome them in as well. And if you look at it, they have also, as part of the transaction, been welcome to join our Board in DSV. On the upcoming AGM, we will also ask for renewal of authorization to increase our share capital up to 20%, and we count on your support for that. And then we will change the name of the holding company. It's been called DSV Panalpina for a couple of years, but I think with combination with GIL, we can -- in order to streamline our presence or branding, we changed the name so that the operational entities and the holding companies are called the same. So we will call it DSV or propose that this is amended. And then as a final note, we will amend our ESG policy on the upcoming extraordinary general meeting as well. so that we are fully compliant with all the corporate governance recommendations also in the ESG area. The transaction itself, it's an enterprise value of DKK 30 billion and basically, we've paid 21.5x the last 12 months EBIT or an EV sales multiple of approximately 1. And these are, as I mentioned, calculated LTM multiples. If we skip to Slide# 7 we can see what the contribution to DSV will be. Here, you can see that we expect that the GIL structure will add another DKK 2.8 billion to the earnings that we have, and we will do a normal integration process, and we expect that to be completed before the end of '22. And this means that we will consolidate a state operations, logistics, facilities, administration and IT infrastructure so that we run it as 1 company and there will be an overdone structures. If we look at basically the last details on the transaction, the costs and also the confirmation of the numbers that we have stated here. This will outcome in the Q3 announcement, so we expect that we've done our diligence that we should basically be on track with the things that we have reported. And I think the one thing that we will highlight is the number of TEUs where we've had some discussions on the Panalpina transaction recently and where we would like to confirm these numbers so that there's no confusion surrounding that and also the volumes in the other business areas as well. So a little bit on the transaction, and we will quickly move on to Slide #8 and just talk about what it's all about. I think we can all see that in '15, we made approximately DKK 3 billion, and now we expect to make, if we are in the middle of a range, more than DKK 14 billion this year. So that's a growth of SEK 7 billion. This growth is basically made of an organic growth part but also the acquisitions that we have made. And here, you can see that a little bit more than DKK 4 billion of 40% of the growth, it stems from M&A. And the remaining DKK 7 billion, they actually come from the development that has happened within the joint companies. So it is tremendously value-creating when we are doing this, and you can also see that the overall operating margin of the company has increased significantly. This is because we've gotten better within the divisions, but also because the mix is different, and we now have a much higher proportion of ANC volume that we had prior to the transactions that we've mentioned here on the slide. If we move on to the next slide, we've upgraded our guidance today. We've had many conversations about that also on the last quarterly call. The reason behind this is that we have seen stronger growth, which is a very important factor. But of course, also that the yields, in particular in sea freight continue to be higher than we had anticipated when we gave our last guidance. These are our changes, the major changes. And then, of course, we have added the GIL income as well to the numbers. And that's how we arrive at a range between DKK 13.750 billion and DKK 14.5 billion in EBIT.. The next steps on Slide #10. We've now closed the transaction. Actually, when you read the announcement, you can see that there's a couple of jurisdictions, outstanding minor jurisdictions where there's a little bit of a longer process and where we have handled this from a legal point of view, so that we could actually continue with the integration. This is normal, at least for one of the jurisdictions that this happens like this. So the next step coming up is the extraordinary general meeting. And then, of course, our normal Q3 announcement where we will once again confirm all the details that we have given today. And with that said, I think we are ready for the Q&A session and the details on that, you can find on the last slide.

[Operator Instructions] Our first question comes from the line of Daniel Roeska of Bernstein Research.

Congrats closing the deal. First question, if I may, on your DKK 2.8 billion contribution to the business from GIL. Could you split that into the underlying performance and a range of synergies you're expecting to realize in the acquisition target? And then secondly, churn has been, as you said, a concern in the past. But could you give us some broad overview of what you're thinking currently in terms of churn? I noted that you mentioned there's about 20% managed freight in the sea freight business. Anything to call out on air freight. Any color kind of on how you're thinking about the business mix of the acquisition would be helpful.

I think what is important to note right here is -- and this is a very deliberate communication from our side is that we will have a contribution of DKK 2.8 billion. We are still -- it's -- I don't even know if it's day 1, it's day 0. We need to quantify exactly what the split will be. We have a fairly good idea. And we -- you need to, at this moment in time to see this as one. I think that is the most important thing that we can say that we will have a positive impact from the acquisition of DKK 2.8 billion. It is -- we think it's a more positive way of communicating the transaction. When it comes to churn, we don't expect any material churn. We have very thoroughly been looking at the business. And it's very similar to what we do in DSV. Again, we enter the company today. And of course, if we see something that changes this, we will do the right thing. But I don't -- we have prepared ourselves really, really well. It is correct that 20% of the number of TEUs do carry a lower profitability like what we normally see with managed freight contracts. But we are fine with that. And I think we can say as normal, the business can still cope or the business case can still cope with an up to 5% loss in GP. We will, of course, try to make sure that it will be less than this. But we always need to leave room for something also unexpected to happen when we do a case like this. So overall, I would say it is our expectation that we will see less churn actually in this transaction compared to what we saw with Panalpina, for instance.

Great. If I could follow up on the first one because it is different from the past acquisitions you did where you kind of went out with a synergy target. Is it just difficult at this point in time given the market environment to separate kind of the extraordinary performance this year, the headwinds and the synergies?

We have an exact number in-house. I just hope you will appreciate the fact that when you are standing in front of integrating a big company and you also need to motivate the people, it can have a little bit of negative flavor if you talk too much about cost synergies also saying that this is the most important thing. We want to show together a more positive story towards the new colleagues that we get in. And maybe also think into the fact that things have changed, so the mix of the positive contribution could be slightly different. Agility, we have had a good development in the GP. They've also -- we could actually commend them for doing a great cost control in the last period. so these things offset each other a little bit but I think the most important thing is contribution and you should not put too much emphasis in the slight change in our communication.

Next question comes from Christian Nedelcu of UBS.

The first one, could you remind us, what is the updated target for the second half in GP per unit in ocean and maybe in volume growth. And secondly, you're saying that the [ Far East air ] freight rate in China is starting to move up, with these recent lockdowns there. Could you remind us what proportion of your air volumes are touching today?

It's about the 1/3 of the volumes that originates from China -- from the Far East on air freight. And the GP per unit, you are right in saying that we've seen very very recent development. We talked about last week only some disruption out of Shanghai Airport. We still need to see how that materializes going forward, but it just tells us that these markets are super volatile and unprecedented in nature. We do actually believe that airfreight volumes can grow between 10% and 15% in the second half of this year and sea freight maybe on a good day up to 5%. And without going into too many details, air freight we assume is around DKK 8,000 and for ocean sea freight, somewhere between DKK 3,600 and DKK 3,700 per TEU.

And our next question comes from the line of Michael Rasmussen from Danske Bank.

Congrats from my side. First question is on Slide #5 where you compare the revenues of DSV and GIL. I noticed that when you initially reported the acquisition, then comparing those numbers with what we see today, then I see that the total revenue is up by 11% on a 12-month rolling basis, which I guess is no surprise given both the results that we've seen from DSV and also the year rates picture right now. However, what seems to be a bit of a surprise to me is the fact that road freight revenues have actually gone down from DKK 2.6 billion in the 12 -- past 12 months to now DKK 2 billion. So can you please tell us what is going on here in terms of road volumes? My second question is if you could add up little more flavor on the integration costs, I do know that you've said you'd give us this number at Q3. But just in terms of kind of the timing of it. And also, I think at Panalpina, you said that look for 1 year's synergies and that is roughly the talked number. Is this also the same on GIL, please?

Perhaps I should answer that. If you look at the 12 months, the 2020 number, we had the 2020 number at that time. That was also impacted by COVID last year. Then you're quite right that now we had the LTM numbers and obviously the second quarter is where it was most impacted last year numbers. And now you have a very basic quarter, so that means quite a bit for these LTM numbers. When it comes to road, at that time, we had estimated 2.6. Now we have rounded down to whole figures. And I think we are currently at 2.2 to 2.3 on road. Numbers when we've got them updated. And when we have been in and had as much clarity on it as we can have because you have to remember, it's outside and in, we've come to a little bit of a lower number. And given the size of the company, we thought we don't want to have comments on this slide, but perhaps we should have anyway. So this is a little bit on that. Then in general, when we integrate a company, you're quite right, that synergies are typically in the cost in relation to the synergies. They're typically in the same vicinity as the synergies that we expect to realize. And the timing of it, I think the integration will basically run with a similar process to the integration of Panalpina. So we will kick off quickly. And then it will run into '22 and probably be finished in Q4 '22. So a very similar process. And in our diligence, we have basically gotten that confirmed that, that should be possible.

Okay. Great. Yes, I do obviously understand that you do a bit of rounding, but I was just still surprised with road revenue has gone down from even if it's DKK 2.6 billion to DKK 2.2 billion in kind of environment that we've had in the past...

It's an estimate. You have to remember, it's an estimate. When you get -- they account and have their divisions and their structure in a certain way. When we then come in and do our diligence then we say, you put it in this bucket, we put it in another bucket. So I don't think you should expect that their volumes in general have declined, but we might have labeled it a little bit in a different way. So I think that's more the way you should look at it. This is always what happens. They don't have -- companies, they have different definitions of things and the way they account for things. So don't worry too much about it. Nothing has gone. I think everybody are busy these days.

Next question comes from the line of Sathish Sivakumar from Citi Group.

I got actually a few questions. So firstly, on the GP part, you said about DKK 8,000 in the airfreight and around DKK 3,500, DKK 3,600 in the sea freight. What is your implicit assumptions for Agility actually, your -- the DKK 750 million upgrade that is coming from GIL. Or what is your rate assumptions there? And then the second one is around the customer consultation and what has been your dialogue so far? So for Agility, who is the top 2 customers for Agility. And is there any significant contract that is actually coming up for renewal or negotiation in the next 3 months?

If we take the Agility assumptions, Agility have realized a little bit lower yields than we've had in DSV, it's not dramatically much, but they are slightly lower. But of course, estimations, they include those numbers as well for the year. so that you don't have to sit and split them up. That's also the reason why we have given the range so that we see exactly how that pans out. And as you say, it's probably in the DKK 3,600 area we talk about for sea freight for the global company. and then a little bit perhaps in the lower end of the DKK 8,000 per tonne. So if that was that part, then the other part was the large accounts. And if we look at the large accounts, some of them overlap. But in general, we also get new, what can I say, account, for such a large account, it's not like, what can i say, 1 contract. You'd typically have a master agreement and then you'll have a lot of sub agreements for different services that are provided throughout the group. And of course, it's normal that you have rate negotiations up till year-end. This was also, for example, the case on Panalpina. And then you will have other types of contracts that have a longer duration. But typically, what matters is that you meet the customer and that you introduce the new and combined entity and the capabilities that we have, and that we get a good report into what can I say, their structure so that they get confident and basically see themselves with us as a new vendor. And we've typically been very successful at that in the past and have managed to keep the volume within.

Okay. So just to clarify. So you did have a conversation with all of GIL's customers, and that goes into your assumption now...

You cannot do that until you have closed the transaction. That is prohibited by the competition authorities. But I don't know if the mail has gotten out now, but I think we've already communicated to them and we are reaching out to all of them. This is really extremely important that we do this immediately.

We have an overview of all the customers, the clients of Agility GIL but with no names. So we don't know the exact brands that lie behind but we know more or less the relationship and which verticals they lie within. But as Jens Lund said, this is 1 of the things that we are not allowed to discuss also another reason for this period to be as short as possible and it has been this time. I don't think you see a lot of transactions with the magnitude of this 1 being closed a little over 100 days after it was announced to the market.

Next question comes from the line of Lars Heindorff of SEB.