DSV A/S (DSV) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the DSV Full Year 2020 Report. [Operator Instructions] Today, I'm pleased to present CEO, Jens Bjørn Andersen; and CFO, Jens Lund. Please go ahead with your meeting.

Thank you very much. And thank you, everybody, for taking the time to listen in to the full year 2020 results here from Hedehusene, Denmark. Jens Lund and myself have been looking forward to this day for some time to get a very surreal year over with, a year which also turned out to be a fairly good year for DSV, as you will see. We have prepared a presentation. I'm sure you know where to find it. And if you look at the presentation, on Page #2, we have provided you with some forward-looking statements that I would please ask you to read. When you have done that, we can go on to Page #3, where we have the agenda for this afternoon here Danish time. We'll start with a few highlights of 2020, talk about the business segments. And after that, Jens Lund will take over and give a financial review, talk about the outlook for the current year, and also talk about something we are excited about this afternoon, the new mid- to long-term financial targets, which we have also announced this morning. And as always, we will leave time for Q&A. And we can see that a lot of you have dialed in. So if you could maybe restrict yourself to a couple of questions, we would appreciate that. If you have further questions, you know you're always more than welcome to contact us after the session, ask for a meeting or discussion with Flemming Ole Nielsen and the IR team. So Page #4. Before we go to the highlights, we put in a small surprise for you guys. We, in a way, came to the end of the last strategy session or strategy period in DSV. Since we have launched new financial targets, long-term financial targets, we felt it appropriate just to go through the value creation of our company, the strategy execution. After all, when you boil all the KPIs down, one is more important, we feel, than others, and that is the earnings per share, the EPS growth. And you can see how that has developed going back from 2011, we have been able to demonstrate a pretty strong performance, we feel, with a CAGR development of 15% going up '19 to '20 with 20%. And looking at the guidance we have given this morning, both for the EBIT result and the share buybacks, it's -- you could easily come to a similar figure of 20% going from '20 to '21. And after all, we do believe that this is what you get as a shareholder, it is the earnings per share development. And this is something we have been tracking for a long time and that we are fairly pleased with. So on Page #5, we have the highlights of 2020. If we have ever talked about a rollercoaster ride, it was what we saw in 2020. We came into the year full of optimism, having just finalized the acquisition of Panalpina, but we soon got hit with the COVID situation in Asia and since it rolled in over the rest of the world. The bottom of the rollercoaster ride was probably in March-April when we sat and had not a lot of visibility into the future. We did cease the share buyback and also the guidance for the stock market. But since, we must say that things have improved a lot. And the fact that we now report an EBIT result of 9 -- just over DKK 9.5 billion demonstrates once again that the business model can withstand most outside coming effects. And if you remember, the guidance of DSV was DKK 8.2 billion to DKK 8.7 billion before we had even heard the word COVID-19 back at the beginning of 2020. We have also seen successful Panalpina integration. We are particularly pleased about that in a very difficult year. We have managed to conclude the integration at the end of December. And from now on, we will not communicate anymore about the Panalpina integration, apart from the fact that we are proud about the new capabilities, the strength that we have in the company due to the fact that we managed to buy Panalpina. So I think we can put a checkmark behind that. We need now to demonstrate the full year impact of the synergies in 2021, which are also baked into the guidance we have given. I think, and Jens Lund will come back to that, but we can also be extremely pleased with the very strong cash flow generation throughout 2020, and that has led to us increasing the current share buyback program this morning with an additional DKK 2 billion, and you should see that as a sign of encouragement or strength that we are comfortable with the cash flow also going into 2021. We have also given, as we normally do, a hard guidance. We feel you should expect that from a company of between DKK 10.5 billion and DKK 11.5 billion. And as I said, we will also come back to some of the long-term financial targets. So just to remind you, we have been able to grow the earnings close to 50% from '19 to '20, and we are in truly new earnings territory now going from DKK 6.6 billion to now DKK 9.5 billion with the ambition of taking that even further in the current year. And I think it might be appropriate just also for me to extend all my gratitude to all the hard-working employees of DSV. I know you and your teams are sitting listening to this also. It has been -- we are just full of awe here at the head office of how you have conducted the business, helped the supply chain of our customers in extremely difficult times and in many cases, done from your home working stations, in some cases in a small cupboard or in your kitchens or bedrooms. We really, really appreciate the hard work of all the great, great staff of DSV. So thank you to you. We will now go to Page #6, talk about the very strong performance of our Air & Sea division. Absolutely unbelievable performance over the year. When you take the growth in EBIT, it's gone up from DKK 4.5 billion in '19 to DKK 7 billion and excess of DKK 7 billion, growth of 61%, about the same number also in the quarter. We did reach a full year conversion ratio also of 41.6% for the full year even though it has been slightly diluted due to the impact of Panalpina. So very, very strong performance. And we are extremely happy with the development of the division, I would say, in every single country. There's nobody who has let us down in 2020, all regions, all countries have done really, really fantastic. If you look at the operating margin, we've had a few questions about that. It has come down, and I cannot really say down, but it is at 9.0%, I know it's down from 11%. It's a normal seasonality. So there should be no worries about that. Things are under control, and we are super confident that we can take this division also to new heights going into the new year. You need to also, as we have put on the right-hand side, be aware of the negative currency impact that we have also seen. It's not totally insignificant. The U.S. dollar is weaker than it was a year ago. But kudos to the whole division, a job extremely well done under very, very different -- difficult circumstances. A little bit more flavor, as I know, you guys like on the division. First, air freight. We are still in a situation, which is fully as expected, where our volumes were impacted by discontinued Panalpina activities and also by COVID-19. On a like-for-like basis, volumes have declined approximately 20% in Q4, and the market is down to -- down between 8% to 10%. We know if we just take 1 customer into account, we terminated the business, that particular customer alone accounts for between 5% and 6% of the volume. So we are getting close to a situation where we will be able to demonstrate market share gains again. We have said before that we probably will not make that in Q1, but during Q2, we are optimistic that we will be able to grow faster than the market. You can also see the yields come down from record highs now to slightly below 8,000. We are very happy about that number. For instance, we can disclose that to get to our mid-range of our target, we need yields at about DKK 7,500 per tonne. And I think we can also say this morning that we've had a fairly good start to the year that the decline has stopped and that we -- even though it is early days, that yields for Q1 '21 could lie somewhere between the levels we have seen in Q3 '20 and Q4 '20. So an upwards tick compared to what we saw in Q4. So if we turn to the next page, we have the same slide for sea freights, more or less the same. Also a slight underperformance on the volume side. We are also adamant that things are stabilizing. It takes some time, unfortunately, before the business that we have ceased doing will get out of the comparison numbers, but also here we believe that we will get back to market share gains during Q2 this year. It's mainly some noncontrolled business that has been terminated, and there were also a few customers where we had overlapping business, both from Panalpina and DSV. And also, as we saw in air freight, some of you will probably say it's an excuse, I don't necessarily subscribe to that view, but the trade lane exposure of DSV is skewed a little bit against us, where we have the highest growth is not where we are the strongest. Some of the trade lanes that has performed the best on sea freight in the recent quarter is Trans-Pacific and also intra-Asia. And this is not really the lanes where we are the biggest. So that goes a little bit against us when we measure up against the development on the overall markets. On the yield side, I can say the same as I said for air freight. We are also based on the current developments at the beginning of this year. We are also optimistic about reaching a yield which is higher in Q1 than what we have achieved in Q4. So fairly okay start to the year also in sea freight. So that is good. So with that said, we will move on from very, very strong performance in air and sea to now Page #9, road freight. Really, once again, I can only reiterate what we said the last quarter, very, very strong results. It's been many years since we've seen self-confidence the way we see it now with the road management team and the whole division. I'm personally extremely happy with this development. Seems like the ketchup is out of the bottle now. We have been waiting a little bit for it to happen, but it seems like it's happening now, and it's really nice. The division have worked stone hard on both growing the business and increasing the productivity, closing some problematic losses they've had or improving those losses, and they have all materialized during 2020. So you can see also a very strong -- and this is mainly organic growth of 12%, only little impact from the acquisitions. So it is actually only organic. So very, very strong result and the gross margin down to about now 20%. We are happy about that. It's normally normal seasonality. So we would be happy if we could retain a gross margin in the neighborhood we have seen in Q4 going forward. Also, as you can see, strong developments on both conversion ratio and the EBIT margin. The Brexit was a situation. Actually, it was a small net positive for us in Q4. There was some stockpiling going on. It's been a little negative in January, but nothing too much to write home about. We did see some of our very large competitors suspending their services in and out of the U.K., that was never on the agenda in DSV. We continue supporting our customers. We've employed approximately 200 new colleagues with customs expertise, and we are helping our customers, even though it's a very, very difficult task. But as we get more and more on our customers, not the least, get more and more experience day by day, we are beginning to see kind of a new normality on the trade lanes from Europe in and out of the U.K. So it's under control. So once again, also, congratulations to the whole road team of a job really, really well done also here under extremely, extremely difficult circumstances. Thank you very much. Last, but not least, Solutions. And again, I don't know what to say. They keep on surprising us in a positive way. They've had a very, very good run EBIT-wise over the years. We don't have to go that many years back to see an annual result equivalent to what we have now made in a quarter in Q4, for instance. So they have really benefited from also all the business plans that they have produced in the division. Seen a great, great, what you say, result of long-term initiatives when it comes to automation. I think you've heard us talking about better infrastructure and consolidation of infrastructure for the last many, many years, this is something we just don't say, there's a reason behind us saying it, and that is that we want to see it transpiring into a better EBIT result, and this is really what we have seen. And this work can continue for way, way -- many, many years into the future. Also goes without saying that the gross margin has been impacted in a positive way by very high activity on e-commerce and with several also industrial customers remaining slightly below what we saw in 2019. But the e-commerce solution we have in DSV attracts a lot of new customers. And together with a continued focus on consolidation and physical infrastructure and also big investments, maybe you can come back to the end on that in terms of automation, with more or less full automatic solution for certain customers in e-commerce. We do believe that the division can continue to grow the earnings and to also be able to achieve their also very ambitious long-term financial targets. So before I forget it, I think it's also in place to extend a great big thank you also to the whole Solutions team as with Road. A very large proportion of the team consists of hard work and blue-collar workers who, for natural reasons, have not been able to work from home. You guys have come to the office every -- or not to the office, but to the warehouse every single day, conducted a fantastic job, moving cargo on behalf of our customers. We really appreciate your efforts on that also. So thank you for that. And with that said, I think now, Jens, it's time to go through some of the financial numbers. On Page 11, you will see the P&L for 2020. So over to you, Jens.

Thank you very much, Jens Bjørn, and I'll jump right into it. I think if we look at the numbers, I would go down to the GP and, of course, have a look at that, it's grown 6.6% in Q4. And that's actually compared to DSV Panalpina figures for 2019, it's a one-to-one comparison. So we have been able to create more value even in these difficult times. I think that's a quite important number to look at. Then also another number I would look at is the annual impact. And here, you can see that, of course, we'd only included Panalpina from the 19th of August in 2019. So you will see that here, we've grown 23.5%. If we look at our EBIT, of course, there's much more growth and that's 54% in Q4 compared to last year, and that's because we now have harvested most of the synergies and reached, what can I say, the state where we've done most of the integration work. Year-to-date, on the synergies, 47.3% up. There's still something coming, we can show that in the guidance as well. But it surely shows that there's economies of scale and that we can handle the volumes with less capacity. If we look at the cost base, you can also have a look at that, it's declined DKK 700 million in the quarter compared to last year, and that's basically in line with the plans that we have for this. So in the special items, obviously, the last quarter where we will see these that should be 0 going forward unless, of course, we are so fortunate that we will be able to buy another company. But otherwise, we've done all the work. We've completed all the actions. And I think it shows how efficient we are capable of doing the integration. If we take the FX adjustments, unfortunately, the translation risk, the dollar seems to decline all the time, and that's impacting us quite a bit. There's also a little bit on Swiss franc, but we will soon be out of that risk. It's a noncash item, this line. So in the good old days, it would actually have been under the equity instead that we had to post this. Anyway, one more number, we could have a look at is the conversion ratio on this slide. And we can see that for the group, it's 36.3 in Q4, and it's increased quite significantly from last year where it was 25.2. So also here we see that the benefit of the integration is clearly there. We are 56,600 employees. And as a matter of fact, we are more or less the same number of blue-collar employees as we were when we acquired Panalpina. The number of blue-collar employees for those of you that have interest in, is that we have 27,000 blue-collar employees approximately in the group today. So here was also just that number. If we skip to the next slide, it's more, I guess, for the bean counters, that we can say, we'd laid out a plan, DKK 3.7 billion in cost savings. And when do we achieve it? We actually did it a little bit faster than anticipated. We've had to say that a couple of times, but I guess that's okay that we execute on the plans faster than we had communicated at an earlier stage. And we've already talked about the one-off items, so I will not dwell too much on Slide 12 here, but just say that we consider that we've delivered on the business case that we put forward originally and also on the COVID-19 savings as well. If we move to Slide #13, we can say that -- I mean the cash flow statement shows the adjusted free cash flow, and you can see the cash conversion is, as always, very high. We don't need to invest a lot in the growth. So the money we make, they are actually available to be invested or to be used to pay off debt or also allocate to the shareholders, which we're doing right now. There's probably going to be a lot of questions about our gearing ratio because it's low. It's 1.3x. We have an unchanged target for the leverage. It's below 2x. But in reality, in practice, it means that we will probably be steering this round to 1.75x. And if you use that in your model, you can calculate what's going to be allocated to the shareholders as we go along during the year. We will come to the allocations a little bit later. So -- and that's actually here on Slide 14.

Maybe you should mention, Jens, because I know we can be proud of this. The last bullet point on Page 13.

We can say that we've also been assigned based on what can I say, our current policies, we've been assigned an A3 rating from Moody's. If you compare that to Standard & Poor's, that would be an A minus rating. So we're very proud about that. It's actually very unusual that a company with our characteristics has such a strong rating. So we take this as an acknowledgment of the business model that we have and basically also of the performance of our teams. So that's certainly something that we're proud of. If we take Slide #14, here you see the allocations to the shareholders, and that's something that we normally disclose fairly clearly to you. And you can see that we plan to have a little bit higher dividend next year. We have also increased the share buyback program so that it's DKK 8 billion all-in-all. When you look at the chart, you have to remember that of the 8 billion, we had already repurchased 2 billion in 2020. So 6 billion remains and you could get a little bit confused by the numbers. But in reality, that's the remaining part of the program. And as we speak today, actually, there's another coincidence on the numbers because we have repurchased 2 billion now, so there's 4 billion outstanding or DKK 4.083 billion, actually, if you look at the slide down there. So -- and that will have to be repurchased before the 30th of April. So they're going to be busy doing that. And that is basically in line with plans that we've put forward as well. And I think it's fairly predictable. We will then continue to steer based on the leverage target that we have. So we should be able to have significant allocations also in the coming quarters, perhaps not as fast as we've seen here in the beginning of the year, but we will monitor that and decide on it every quarter going forward. If we move to Slide #15, the outlook. I think we've come up with guidance now, DKK 10.5 billion to DKK 11.5 billion. There's a lot of moving parts in that. And I think if we just have a look at some of it, there's a negative FX impact of a couple of hundred million. There's also 100 -- DKK 1.2 billion in sort of Panalpina full year and COVID's full year impact. And then, of course, there are some adjustments around the COVID-19 situation in general because we have been able to save some temporary cost, but we've also, of course, seen some benefits due to us being able to move cargo in the air freight market last year, where we also produce some extra income. And -- so all in all, if we look at these impacts, they more or less square out. But the FX's certainly something that is a bit of headwind. And then the remaining part will be organic growth if we should then look at it. Then we will also stress that conditions may change. Nobody can foresee what happens with COVID-19, but it's based on our best assumptions right now, and we really try to stick our neck forward. We know that many of our colleagues there are hesitant to guide, but we do it anyway. And of course, we hope that things they develop in a stable way so that we can live up to our guidance. Then I think the next slide is probably also something that you have sort of been looking forward to as an investor -- or analyst in DSV. We had announced that we will come up with new financial targets. And I think to have a conversion ratio in 2025 of more than 40% is certainly an ambitious target, and that we're going to get the return on invested capital up to above 20%, which we have had in the past as well. But it's clearly something we have to work hard to achieve. When you look at the baseline, for example, the ROIC, you also have to remember that it's calculated on the 2020 numbers where we've not seen the impact of all the synergies. So we still believe that's realistic that we can get that up. Then we also have the divisional conversion ratios of Air & Sea, 47.5% and both Road and Solution above 30%. Here, again, as baseline, we have a little bit of a problem. That's also what we have written in the bottom that we don't really have a proper baseline because we've not seen an annual result where the synergies are phased in whereas the COVID savings are phased 100% in. So the baseline is probably somewhere between the FY 2020 and the H2. Because in H2, we have a little bit higher income than normally. But anyway, we have plans, and I'll just come to that on the next slide on how to get there. It's a little bit the same situation as when we announced the former 2020 targets. People also thought it was quite ambitious what we set out to do. But we managed to deliver on them before the Panalpina acquisition. So I think with the plans we have in place, it seems as if we're going into a similar journey where we will have to work hard, produce a lot of change. And then I'm confident that we will be able to make the numbers as well. The tax rate, gearing ratio and all these things, I don't really come too much into because it's basically unchanged. But there's one thing that we perhaps should mention. And that is the fact that we don't guide on EBIT anymore because with all the volatile freight rates, an EBIT margin doesn't necessarily make so much sense. So we would urge you to look at the conversion ratio and then depending on how the market looks. We will, of course, also disclose EBIT and then discuss that. If we move to Slide 17. And here, Jens Bjørn has asked me to restrict myself because otherwise the call -- you would all fall asleep, and I would just be talking. So in reality, we have road maps for all areas. We've highlighted some of the stuff that we are going to do. But of course, digitalization is a key thing for us in driving the company forward, the productivity up and also providing a better service to our customers. So this is, of course, very outspoken for Air & Sea, but certainly also for Road and solutions. But of course, on the physical side for Road and Solution and working with the network, for example, for Road and how that is produced or volumes we introduce new technologies for that. And on Solutions, as Jens Bjørn said, both on the consolidation side, we consolidate a lot. But we also implement a lot of solutions, goods-to-man, [indiscernible] of cargo, automated -- autonomous vehicles, et cetera, in the Solutions warehouses. So -- and I would say that the divisions, they are really embracing the initiatives and look forward to be part of making sure that we deliver on the targets. So this is going to be an interesting journey that we have ahead of us for the next 5 years. Then, we have another thing that I know Flemming is very keen on, and that's the 26th of May. He's already starting to get concerned now how it's going to pan out. But I can remember the last time we had a Capital Market Day, it went really well. We think it would be good to come and present our plans. And you can have a look at that. And then, of course, through rest of the reporting data there as well. So make a small note in your calendar. And hopefully, we can meet up physically. But if not, we will have an online event. And we will stick to that date. So I think that was it. We now have come to the stage where you can ask questions, and we look forward to answering them.

[Operator Instructions] Our first question comes from Daniel Roeska from Bernstein.

Talking about the volume slippage in Q4 first. Did I understand you correctly that the majority of the difference to the market is kind of discontinued contracts out of Panalpina? And if this is kind of 15% to 20% above market, does that mean you're churning 30% to 40% of the Panalpina volumes that feels really high? And then on your long-term targets and the 40-plus conversion rate you just mentioned, could you give some color if this is more driven by product mix and GP kind of working with your customers to deliver higher-value products or more through efficiency and cost? And could you pinpoint some initiatives or investments that give you already confidence that this is feasible to achieve within the next 5 years?

Okay. If we look at the volumes, I think what we have said under volumes, if we look at air freight, there's 1 particular customer that is 5 to 6 percentage points of the decline. And then there's been also the perishables, as you probably also are aware that we've sort of reduced our exposure. There was 1 specific activity that we divested out of the Panalpina, which was virtually not impacting the GP at all. And we've also, in general, had some down-trading on the perishables. Apart from that, if you adjust that in the numbers, I think we come to that you have to adjust something like 10%. That is then of the total. So in reality, what you're saying is that out of the Panalpina volumes, it's a larger percentage. Whether you then come to 30%, I'm not sure how to get there. But you could argue that it's a higher number. Panalpina was a little bit larger on air freight than DSV was. So all in all, it's probably less than 20%. But it's these type of activities where you don't necessarily produce a lot of GP. I think that's also what shows if you have a look at our GP and how we've managed to drive the GP forward. We would like to produce volume, where we can make a difference to a customer and where we're not just a billing engine that receives an invoice from a supply and then we forward it to the customer probably even with longer payment terms. If we then look at the value-added side, the productivity side, I think there you have a very good argument because that's sort of related to the extra GP that we produce. We simply produce more services for customers that require our more complicated solutions. So I think you are spot on with that analysis. If I should mention some of the services we're talking about, we're probably deeper in order management. But I think also due to the volatile markets, I think we've also done more of what can I say rerouting of cargo, replanning of cargo and provided a lot of additional services in order for us, when the supply chains are so uncertain and we can't really rely on the carriers, the [indiscernible] has an extra job in order to keep the factories running. And of course, some of these services, they cost money, and we are paid for them. So I think that should answer your question.

Okay. Maybe one follow-up, which goes then into the volume growth you're also targeting, where you're saying you're growing more than kind of market growth in the medium term. In the past and some of your competitors have commented that kind of providing these high-value services to customers, as you get larger and larger, goes hand-in-hand also with providing some of the managed freight's low-value services to those same customers. Kind of they'll give you the juicy stuff only if you take the kind of mundane as well. Is that something you're encountering? Or do you think that it's not true?

We see that maybe in a few cases it's a fair point, but not to a very large degree. It's not like they shove something down our throat that we don't like. I mean, you could probably come up with a few cases. But just to make that very clear, when we talk about market share growth, it's market share growth without significantly, at least, diluting our yields because that's the easiest thing to do just to show market share growth. It's just to go out and win some business with very low rates. So that's not what we do for a living in DSV. So you're partly right, but it's not something that we have experienced to a large degree.

Our next question comes from Cristian Nedelcu from USB (sic) UBS.

This is Cristian Nedelcu from UBS. Two questions, if I may. Firstly, if I look at the last couple of quarters, Q3, Q4 and what you're saying on Q1 on air GP per unit, there seems to be a decoupling with the air freight rate. Air freight rates are growing in Q4, now are coming down in Q1. So could you elaborate a little bit what is driving the GP per unit movement? And in that regard, could you provide a bit more details in terms of the duration of the contract with the asset owners, with the airlines, what is happening there? If we're still having very short term contracts? Or are we moving a bit back towards normal? And secondly, looking at the midterm target, could you provide a bit of color directionally in terms of GP per unit in air and in sea over the next years going into 2025? So how do you see that moving? Or how do you see that evolving from here?

Maybe I'll just start with the first question. You can say that we started off in Q2 with a very totally unprecedented situation. It was chaos. It was mayhem, people fighting for volume, and you can see that reflected also in our GP per unit. I think we clearly indicated at the time that it was not a normalized level. We have, together with our customers, found a way, kind of a level, which everybody accepts in a way. It's been a more normalized situation. Customers have more time also to go to the market. So the competition maybe is a little bit harder than what it was before. So that is one of the reasons that we have seen this decline over the quarters, even though the rates have picked up. So it's not a totally alignment between the rate development and our yields 100% like-for-like comparison on that. On the terms, it's of course a commercial kind of secret how we deal with our suppliers, but it's still pretty short. We cannot speculate too long. If we do have a commitment from some of our large customers, we can take longer contracts with the airlines. We're also still very, very happy with the air charter network of Panalpina. We have access to more capacities still than what we had fixed capacity, great support from some of the large customers guaranteeing us volume on these lanes. It's a high-quality product, which we will probably continue to develop also going forward. I don't know exactly what -- we cannot quantify exactly what yield levels we would expect to reach the 2025 targets. That will be an almost impossible task. But it's important to say, we don't meet the yields as we have right now to get there. As I said, to -- the way we have modeled our own 2021 guidance is that, for instance, on air freight, if we are around DKK 7,500, then we would be well within at least the mid part of the range that we have given. So -- and if yields were to come down, you would normally see volumes going up. So we would more look at the development of the gross profit in absolute terms.

Just one small clarification. What is driving the higher GP per unit in air in first -- in the first quarter versus Q4?

I don't know. It's just better utilization. I mean, we've good track with some new customers coming in, continuation of better utilization on some of our own capacity. We've also been able to procure maybe some air freight at more favorable terms than what we did. We have also improved our capabilities, so to say, in front of the airlines. Been more innovative also. And there's probably also been some move away from sea freight, more emergency type of shipments we have handled for customers that felt let down by the ocean carriers, so asking us to move more freight on air, more air freight than normal. So it's a combination of many things.

Our next question comes from Marcus Bellander from Nordea.

Two questions, please. First question, and you've touched upon this already, regarding air freights. I believe you said that your -- the midpoint of your guidance includes an assumption of a DKK 7,500 per tonne yield in air freight. And that's -- I mean that's basically the -- if we adjust for the weakening of the dollar, that's basically the level we saw in Q4. I guess, I'm just surprised that you assume such a high level for the entire year. If you could elaborate a little bit on that maybe?

Yes. We don't -- yes, maybe you are surprised. We are -- this is what we believe could be the case. And as I said, there are different moving parts. Of course, if you take that into account, you also take a certain volume development into the equation. We have seen the normal mechanisms being that if volumes increase, yields go down and vice versa. So this is not extreme in any shape or form. We still believe that there will be lack of capacity. Going forward, we don't believe that belly space will return in the foreseeable future. So we think that we will enjoy a pretty healthy situation in air freight throughout 2021 where volumes will slowly come back into the system, but where capacity will still be constrained. And then we will also see the effect of some of the new agreements we have done on our -- the charter network, which we've done throughout 2020. Of course, that will also have a full year effect going into this year.

Okay. Understood. And second question regarding your long-term guidance. I mean, I understand why you don't provide an EBIT margin target, but it also makes it a little more difficult to see exactly what the moving parts are. And I'm just wondering if you could elaborate a little bit on how much of the rate improvement will come from an improvement in earnings? And how much there is to do on the -- when it comes to optimization on the -- of the balance sheet?

Are you talking about return on invested capital calculation there? Because it must be, I guess, the...

Yes. Yes.

If we should then look at it, you'll already see that here before year-end, we've actually managed to reduce our balance sheet or invested capital a little bit. I'm not sure that there's going to be a lot more we can do. But of course, on the leased assets, we can probably increase, what can I say, the productivity somewhat. And that's also -- we have very low CapEx guided. I think on the IT side, we will have the same level of investments. And on net working capital, given how this company is organized today and [ looks, ] I think, if we are below 3%, we are also good. And this also means that most of the sort of the improvement -- now the baseline is not 14.3%, it's probably closer to 16.5%, 17% depending on how you calculate it and whether you put this number of synergies in or the other, but let's not spend too much time on that. But the remaining improvement has to come from higher productivity that will lead to higher earnings. And this is also then what you see in the conversion ratio that these are driven up. And that should then at least in our own calculations be able to get us where we need to go in 2025. We also are allowed to go higher. We've put a small note on it that says higher than. So if we can overachieve, we would be happy to do so.

Our next question comes from Sathish Kumar from Citigroup.

Three questions, actually, if I can? So firstly, on the gross margin. If you could give some color around the margin difference between e-commerce vertical versus the industrial customer? That will be helpful. And what is your exposure to the e-commerce vertical at the group level as of today? And then the second one, more on your long-term targets. If you could share some details around your assumptions in revenue and gross profit growth? And is it all going to be organic? Or do you have some inorganic bolt-on type acquisitions factored in that? And thirdly, if I can, could you please touch upon the CargoLink Way Forward rollout in the Road segment. Where are we in terms of milestones? And obviously, this project has seen some delays. And I just wanted to get an understanding on that.

Thanks very much for these questions. On -- I'll take 1 or 2, and then Jens, you can come back, especially, to CargoLink, which we now call Road Way Forward because it's more than just an IT project. But on the long-term financial targets, we have -- we don't have any M&A baked into those. They are going to be made purely by ourselves, so to say, organically. That does not necessarily at all mean that we will not do M&A. I'll be extremely disappointed if we were not able to do at least 1 recent -- or decent-sized acquisition before that period of time and maybe more than that. So -- and in that particular case, we'd have to kind of sit down and say what impact that would have on the targets. But then they are based on organic development. On the GP margin for e-com, I don't know, Jens, do we have good intelligence on that?

No. But if we look at the warehouse, of course, you will have a GP problem on e-com if you don't get automation in. So I would rather split it up. And that if you have automation and you have fantastic margin on the e-commerce, but then also you have to look at the fact that you then also have some capital deployed. So you need a higher margin in order to pay the return on the goods-to-man solution as you would typically have in a situation like that. So it depends a lot. And we -- of course, we used to work a lot with mezzanines and voice-pick and put walls and stuff like that. Now we've gone to more goods-to-man solutions, and that means that we deploy more capital. So you would probably have margins in the area on the GP side, around 30% because you need to have that in order to pay for the depreciation and the staff involved also on the white-collar side. If we then look at how much is e-commerce of what are we talking about. I would say that on the Air & Sea side, of course, we would not see a lot of e-commerce because it's a lot of B2C volume that you would typically move in such situation. So it's definitely less than 5%, it's probably even less than 2%. If you look at Road, you would probably find 2% to 4% of the volume is B2C, not more than that. And if you go at Solutions, you'll probably be between 5% and 10% of the volumes that we produce is e-commerce these days. And it's growing rapidly, in particular in Road with, what can I say, more direct deliveries. And then, of course, in Solutions, it's really booming. But you also have to remember in Solutions, I mean, let's say we have a tire distribution, you can't go to e-commerce for that. There will be a lot of services that we produce that can't go to e-commerce. But all the fashion retail, you see that for that vertical, you see a dramatic change. So this is in reality what is happening. And that's sort of what is going to be a larger and larger proportion of our business. So some of these FMCG, that type of business, where we also have a lot of services, there will be more direct business than we've ever seen before.

Road Way Forward?

Yes, the Road Way Forward. Yes, that's a good project. It's actually good that you asked. We have a major milestone coming up here now where we get [indiscernible] that actually should allow us to have what we call an enterprise solution for Road going forward. So we look very much forward to receiving that, and we should get that at the end of March. And then we would be able to finalize the last POCs, proof of concepts, and then we should be able to do the rollout, then we would have the infrastructure that is required. So fingers crossed that this will work. We know the architecture in itself is correct. But now it's changed the name from CargoLink Way Forward. So it's not only a production system, but it's a whole revamping of the way we produce in Road that we get out of it. Because this new technology allows us, what can I say, to produce in a much more efficient way and a much more automated way, and we are already using some of the advances we've made in the production and implementing them right now. So I would say that we are fairly optimistic. And it's probably one of the areas that if we are fully successful, then we will probably have to come and excuse because then the targets are incorrect, then we would be able to deliver more. But let's see how it pans out. Now it's a very interesting year for Road Way Forward.

Yes. And just a quick follow-up actually on the CargoLink Way Forward. So obviously, the Road has had a good year in terms of performance and margins in 2020, that is excluding the rollout of this IT platform, right? So once this platform gets fully integrated into your systems and processes, what is the initial impact on conversion ratio or operating margin that you'd likely to realize?

Actually, when you do change, it's not only 1 computer program, it's a stack of components. So for example, the quote tool is live, the mobility platform is live, some of our online capabilities are live. So they are part of driving it forward. It's not fully implemented. It's not fully embraced. There's much more value in it than we've seen now. But it's led to productivity increases in Road, no doubt about it. And we will continue to push some of these areas. Of course, the big part is the TMS, the transport management system, and that's then what we are talking about. But in reality, and I'm a little bit concerned about saying this on this call because I know your spreadsheets, they can't handle it. But in reality, we would be able to get an enterprise solution that would work just as efficiently as it does for Air & Sea. It will then take us many years to get us there, but that is in reality the limit. We would get very automated, probably even more than we are in Air & Sea, but there's more volume, so you would need some manual interaction still, but that is in reality, what we're talking about. Now that is not in the targets, and that's also where I said we will then have to come up with new targets, but don't put it in at 2025 anyway when you do your modeling. But we should be able to drive much more value out of it. And to my knowledge, there may be 1 competitor in Europe, maybe 2, that has an enterprise solution on a legacy platform. Otherwise, there are none. So it will be unproven -- untested territory we will go into. So it will be interesting.

And just -- sorry, again, when we'll be able to start to see the -- actually the impact of those platforms in terms of margins or in the numbers? Is it like -- more like Q3, Q4 this year?