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

Welcome to the DSV Interim Financial Report Half Year 2021 Results. [Operator Instructions] Today, I am pleased to present CEO, Jens Bjørn Andersen; and CFO, Jens Lund. Speakers, please begin.

Thank you very much, and welcome, everybody. Good morning to all of you. Welcome to this conference call about our half year 2021 results. It's a good day today. So we have been looking forward to sharing the results with you. It is business as usual. We have prepared a presentation, which I'm sure you know where to find. And if we start with the page #2, I kindly ask you to read the forward-looking statements, which is just above the beautiful DSV Truck that you will find on page #2. On Page #3, we have the agenda for this morning. You can read it yourself. This is what you normally get. And then, I know Jens will just spend a little time talking also about the forthcoming closing of the transaction that we have done with Agility GIL. So let's dig straight into the numbers on page #4, the highlights of the first 6 months. I must say, the company goes from strength to strength. We saw a fantastic Q1, and we have seen a continuation of the very, very strong performance also into Q2. The results are stronger than what we expected, only a little over a month ago, at least in the middle of June when we did the last guidance upgrade. But very, very strong results, I'm extremely proud of all the individuals in DSV who have worked under very, very difficult market conditions to achieve the results in all -- which is important in all of the 3 divisions and also in all the many, many support functions that we should never forget that supports the divisions. Based on a better than expected into the quarter and also based on more positive view on the market conditions for the remainder of the year, we have, this morning, upgraded our guidance, so that we now have a guidance -- EBIT guideance of between DKK 12.5 billion to DKK 13 billion, which is more than what we had initially. You can see that on the slide. The regulatory approvals in relation to the closing of the Agility GIL transaction is going really, really well, I must say. It's progressing according to the plan. We still expect the closing to happen during Q3. And it is not unlikely that it will actually be sometime during the month of August. We have recently received the approval of this -- is probably days -- yesterday, we received the approval from the European competition authorities, and we have also gotten the approval in China and the U.S.. So we are positive about that, and I know Jens will come back to that. Cash flow is still strong. We are still committed to our capital allocation policy. So we have also announced a new share buyback program this morning of DKK 4 billion. I think consistency in the way that you deal with these things are paramount, and we will continue to do buybacks. You can see the numbers yourself on the graph. Maybe one point, which we find a little bit interesting in DSV, the EBIT result of the first 6 months actually surpasses the full year EBIT results of 2019, where we made DKK 6.6 billion also. So I think that is proof that we can generate value and the results by consolidating this very fragmented industry part of the improvement, of course, comes from the acquisition of Panalpina, but also work that we have done, so to say, in the company ourselves. Page #5 talks about the performance in Air & Sea, still rock solid, an extraordinary strong performance, double-digit growth in Q2 and very strong results in some unprecedented and exceptionally difficult market conditions, characterized by still a tremendous lack of capacity, primarily now in sea freight. As such, there's still a lot of lack of capacity on air freight, but in a way, you can say we have gotten used to managing that. It is associated with more problems, helping our customers and their supply chain needs when it comes to sea freight. You can see, actually, a small deterioration in the gross profit in air freight. It stems from a very, very strong Q2 last year, where we did numerous air charters with PPE. So as such, it's not a big surprise. On the other hand, a very, very strong performance in sea freight on the GP side. The fact that we have managed to keep the cost base absolutely flat in the Air & Sea division, also you can see that reflected in the EBIT result and also ultimately in the conversion ratio. Had somebody told us some years ago that we would achieve a 55% conversion ratio, we would probably have said, "I'll challenge you on that." But we are very happy about it and we will work hard to retain the high margins as long as we can, even though we do expect yields to come down somewhat in the future. So very, very strong results, very, very fantastic work done by the Air & Sea division once again. Next Slide 6. Some more information about air freight. It actually did quite nice in a way to see that all the 5 quarters, you can see, are characterized by COVID. So we are comparing now from the beginning of the COVID period. You can see yields a year ago went through the roof, more than DKK 10,400 per tonne, which was not sustainable. I think that we also mentioned that at the time, but we have seen a good development throughout the quarter in the air freight market. It's maybe one of the important points to also address is the fact that we have if not beaten the market then we've had a volume development in line with the market. We can say that we have grown the tonnage by 26% in the quarter, and we estimate the market to have grown between 25% and 30%. And this is also what we indicated some time ago, and you can also see that we have had a satisfactory performance during the last quarters, and this is in line with what we have indicated also to the stock markets. So we do not expect that the air freight markets will return to the levels in the foreseeable future. We have started to see a pick up in air travel, but it is the whole short air travel. In Europe, we might take a plane down to Spain or France. But we are not going on intercontinental flights. And before they come back into the loops, consequently, we will see high rates and consequently also, hopefully, at least, higher yields for DSV. So next page 7. Sea freight, you can see, it has been a little bit more volatile in the upward direction, at least in Q2 yields of more than DKK 3,000 It's what we would expect also in this very, very difficult market. It has been associated with great difficulties at certain trade lanes to secure capacity for our customers. We're working stone hard to help them in a period characterized by the port congestion emergency events happening in the Swiss channel, lack of equipment and capacity. That has generated great problems. This is where a good freight forward and we characterize ourselves as that have to step up to the plate and help our customers. And I think we can say that we have managed to do that. But we also have to remember that we do spend more time handling the shipments and the bookings from our customers than we normally do. And it could be now we will see the impact now coming from the Agility transaction. But we could probably not have sustained the work with the existing cost base much longer had we -- if the market conditions were not to improve, but we're happy about the performance. Also growth-wise, we see the same picture as we saw on air freight. We have grown the number of TEUs with approximately -- with 12%, and we estimate that the market has grown somewhere between 10% and 15%. So we can also tick the box on market share gains or at least the growth according to the market for sea freight, which is nice because now once again, when we get into Q3, we will somehow see some sort of pollution or impact in our volume numbers by the inclusion of the good volumes that we expect to get from Agility GIL. Road freight on Page #8. Also they go from strength to strength. Very, very strong results. we do not measure the market share gains as accurately as we can do in air freight and sea freight. There are no really market statistics, but it is our clear view that we have taken market share gains in the quarter. Actually, also in previous quarters also being reflected, rates are not as volatile in Road as they are in Air & Sea, even though we have seen an increase in haulage rates. The increase in revenue is also a reflection of the result of market share gains. We're very happy about that. Maybe, Jens, you will come back to and elaborate on the new initiatives where we have also seen the results in South Africa. We are very pleased about that with new facilities and new operational set ups, which is also impacted the performance in a very, very positive way in the Road division. So the fact that we can grow EBIT by 82% is great. And we actually do expect also that the gross margin can continue around the 20% level, which is quite healthy. So it's a very, very strong set of numbers and we're very pleased about the performance in the Road division. So really well done to everybody working in DSV Road. A large space, before we hand over to Jens Lund. This is number 9, our Solutions division. We've had a few questions about the gross profit not growing maybe as much as people had expected and the margin deteriorating a little bit. You have to remember, I know it's probably a bad excuse, but you have to measure maybe solutions over a whole year, not only by each quarter. We do have more -- both positive and sometimes negative impacts by single events. And in this quarter, we did see that the gross margin was negatively impacted by some costs related to some customer implementations. This. Is, of course, something we expect to be also having a positive effect in the future. When you come and have a look at the GP, and ultimately, at the EBIT also. EBIT is up 16%. And generally, we are happy about the developments. We've seen doubling almost of the e-commerce activities compared to the period before COVID, and it seems like that has stabilized now. But it's something, which is still outperforming the normal B2B business. So also do indicate today that we don't expect the GP margin to stay at the current level. It is not unlikely that it will increase again in the coming quarters. Qs both 3 and 4 are normally very, very strong in Solutions. And nobody should be sad about achieving operating margin of 7%. It is still amongst the highest in our industry. So well done also to Solutions. And I think with these words, I will hand over to you, Jens.

Thank you very much, Jens Bjørn. And I will quickly go through the P&L on Page 10. Obviously, revenue impacted both from growth, but certainly also from the yields. So DKK 37.8 billion for the quarter and then DKK 71.5 billion for the half year, it's big numbers we're talking about. GP up 15% to DKK 8.3 billion and of course, EBIT up to almost DKK 3.6 billion for the quarter and up 40%. That means that the cost base has been stable as well we have promised you that we will drive the productivity up, and we've managed to do so. Our staff have worked very efficiently extra volume and also the more, what can I say, complex service due to all these disruptions in the supply chain that we are talking about right now. So fantastic achievement when it comes to that and nice to see no special items because we're out of, what can I say -- the integration phase on Panalpina. So everything falls to the bottom line and I think one had mentioned this morning that we've now made more [indiscernible] in H1 '21 than we did for the whole year '20 on the bottom line, and we are quite pleased with that. I think if we look at a few other items, some might pay attention to the number of employees. It's come up quite a bit. I think half of them are blue collar employees. So it's people that do the physical handling force. We've added 1,000 employees with the acquisition of Globeflight in South Africa. So that contributes to our distribution activities, as Jens Bjørn just alluded to. In South Africa, we've really made significant change in relation to our distribution capabilities. We've moved into new facilities. And the organization has embraced this change, no doubt about it. I think we will harvest the benefit of that in the future. On top of that, we've also seen the acquisition of a very large automotive client in South Africa that has also added another 1,000 employees. So Globeflight 1000 and this very large automotive client, 1,000 as well. So alone of the 2,000 blue collars of the 5,500 blue collars, 2,000 come from South Africa. As you know, we've also acquired Prime Cargo, so another 500 employees coming in on the blue collar side here. So that explains a little bit that we've done some M&A transaction and acquired some businesses as well that have driven the number of blue collars up partially. The remaining part is just the organic development. And then as always, I think what is important and what we have on the bottom of the page is the diluted adjusted earnings per share, up 78% since last year. So we are now at DKK 37.1 billion and that's going to continue to develop in this positive direction. And after all, that is what you shareholders look for how much income do we generate per share. If we move to slide #11, the cash flow statement. We can see that we have invested more in working capital that, of course, is partially due to the increased revenue that we are having. But it's also partly due to the fact that we've had a facility constructed that is on the working capital that we are currently divesting and that explains DKK 900 million. If you adjust for that, the cash flow should be in line for H1 and the facility should be taken over by the new owner at the latest in Q4. So we run now the company with a leverage of approximately 1.5x EBITDA. We have issued a new bond in the beginning of July, very solid financing with 3 different euro bonds with a total value of DKK 1.6 billion, where the shortest tenor is approximately 6 years. And the latest one we issued here was actually 12. So we have very solid financial situation when it comes to that. If we skip to the next slide and go to #12. It's our guidance asn Bjørn already mentioned it that we have changed our guidance a little bit because we look a little bit ahead as well now. We've been very cautious to the yield levels that we are seeing, but it looks like it's going to continue for the remaining part of the year with a high yield and probably also into '22. So our outlook is now upgraded to between DKK 12.5 billion and DKK 13 billion on the EBIT level, and tax rate is unchanged. We also write here that the currency exchange rates will remain at the current level. If you look at the numbers, we have actually reported a little bit of headwind on that as well this year. So that's also something that should be taken into consideration. If we go to slide #13, we've bought back 7.2 million shares this year so far at an average price just shy of DKK 1,200. So it's certainly been a good deal for the shareholder that we are reducing the number of shares in circulation. And we currently have a new share buyback program that has gone live today of DKK 4 billion. And if you look in the right-hand corner in the bottom, you can see that the total share buybacks that we have committed this year and have executed amounts to approximately DKK 15 billion. And if we do another one, which is likely after Q3, then we will probably add a DKK 2 billion to this number as well. So we are basically delivering on our capital allocation as promised. And as Jens Bjørn said, this is crucial for us that we have a capital predictable capital allocation model. The final thing, GIL. What is it that we expect on that? Well, we announced a transaction on the 27th of April. We've worked hard in relation to the regulatory approvals. And we've actually obtained of them. There are a couple of jurisdictions still outstanding. Here we are in a controlled process where there are certain deadlines that have to be met. And it's not unlikely that we will be able to close the transaction sometime in August. If you look at the time line here, we will then, once we close the transaction, give you a little bit more guidance on what we expect to be able to deliver on the combination of the two companies. And actually, I have one important note more that is a little out bit of the ordinary. And that is that we have our extraordinary general meeting coming up shortly after, we have, as part of the transaction, promised to include member from Agility in the DSV Board. So we will have an Extraordinary General Meeting in relation to that. There will also be another important topic on the agenda, and that is basically that we would like to have our authorization to each new share renewed. We go for a 20% basically of extension our current number of shares. And it's important that we get this through so that we can facilitate our M&A strategy going forward. So that's an important topic that will come up on the extraordinary general meeting. Yes, I think that was it. And if we move to the next slide, you can see that if you want to ask questions, you get the directions here. And then I think we should move on to the questions-and-answer session.

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

Three If I may then. You talked about your expectations for air rates a little bit given the global development of passenger travel. Could you expand your view on ocean rates a little bit? Is there a risk of declining rates at some point? And maybe looking a little longer out, are you expecting any drivers for higher profitability in the Ocean business this cycle as in the next couple of years? You talked about the M&A. I suppose you spend some more time looking at GIL and preparing for the integration. Any additional findings or insights you'd like to call out at this point in time that you kind of discovered over the past couple of months? The business mix, how that business will fit into DSV? And lastly, could you give us an update on your IP strategy in the [indiscernible] line? And How happy are you with [indiscernible] going forward? Is there a more internal development going on? And which barriers are you trying to address currently when you're thinking about GIL roadmap?

I'll kick off with maybe the first 2 ones, and then Jens can come back on the IT side. In Ocean, it's exceptionally difficult predicting when this market will have actually stopped using the term normalized because I don't think we will get back to what levels we were at prior to COVID, but to improve or to deteriorate. we have assumed a deterioration in our yields from current levels that is held in the guidance we have given. It's not like we need to sustain the current levels to meet the guidance that we have given this morning. We actually believe that we will go south of 3,500 maybe or something like that for some period in H2 per TEU. But we have actually extended the time frame from when we do believe that the market gets back to where it was, where previously, we thought it was going to happen in -- during this year, we don't expect really that to happen. We think that this volatile and difficult market will continue a little bit into next year. and then we have to see what happens. On the M&A front, the good part, the good thing about doing a share deal when you acquire company is that seller becomes a new shareholder in DSV. So we share the same interest, and that has been reflected in the preparation work. Very, very forthcoming. I'd like to extend a great thank you to everybody at Agility and GIL. They have been very forthcoming. Within the regulatory frameworks, of course, there are certain limits to us how much information we can exchange. But we feel that we are well prepared we have found exactly what we hope to find a high-quality company, and we look very much forward to welcoming everybody into DSV once it is possible. So business mix, geographical mix is more or less as expected. We also did spend a great deal of time looking into this in the negotiation phase. And maybe Jens IT?

I think our IT strategy, we continue to develop basically our integration capabilities, the way we exchange data with our customers. And we've consolidated our platform, as you know. And if you look at the production platforms that run for the division to specifically had mentioned CargoWise. CargoWise One is part of our stack for air and ocean. We use other components as well. But of course, it's the one where we do the quoting and the order management and produce the freight documentation, et cetera. So it's an important part of it, and we continue to work towards further digitalization of the flows, the workflows that we have so that we increase the productivity of our employees. We need to ensure that we have the right tools so that we can deliver the right service to the customer. And there's really no sort of change in that plan. Of course, we will go to more modern infrastructure and we continue to modernize our platform. That is in reality what we're doing. So more open source, more cloud-based, more -- what can I say, a much more powerful computing power available, that is probably some of the things that go into the direction that we are taking.

Right. And maybe if I could circle back to the first section on ocean. If you think beyond kind of the current and the next year, is there anything you think that has changed throughout the pandemic that meaningfully changes the profitability levels in ocean freight for you, for ocean line? Kind of any hopes of improvement there?

I cannot speak on behalf of the ocean carriers, you have to contact them yourself. But I actually do believe that the truth lies somewhere between rate levels, at least what we saw prior to COVID and what we see now. I don't necessarily believe that we will get back to the low levels we saw. I think, ocean carriers will do everything they can to sustain a higher rate environment, which is also not bad for us. And we don't need to see more Hanjin-like situations either. So we want ocean carriers to be healthy, so they can invest in new capacity also. So we estimate that rate levels will stabilize somewhere between maybe what we saw before and what we see now.

And our next question comes from the line of Sathish Sivakumar of Citi.

Yes, Jens, I've got three, actually. Firstly, on the Air & Sea freight [indiscernible], how the quarter has actually progressed in terms of Q2? So is it like gotten better as we came into June? And just on that, how is the yield performance across regions? So where do you see strength versus weakness within your portfolio or network? Secondly, on GIL, obviously, we are approaching the completion now. What are your thoughts on the integration plan? Has this changed since your Q1 results, i.e., are we looking still towards like [indiscernible] integration window? Finally, on the Road, in terms of your IT platform, any update on the CargoLink Way Forward? Are we set to mid '22 Road going live?

We have some very, very positive news, so thanks for asking that. So we will always keep the very exciting news to the end. So I will ask Jens to elaborate on that later on. But I'll just -- on the Air & Sea yields, it's been fairly stable actually on a high level throughout the quarter, and it's not like they have deteriorated at the end of the quarter. So a good performance has carried into the end of the quarter. It's not like they have spiked tremendously either at the end, but it's been high throughout the whole quarter, and we're very happy about that. And now of course, the big question is how long can we sustain these high yields. But I can tell you one thing. As always, we will try to keep them as high as we can. On Agility GIL, I think you can -- you will have to read a lot into -- you can take a lot of inspiration from the Panalpina deal. This is a smaller transaction. We are more experienced. So I don't think it will take any longer than Panalpina. We are well prepared, but we will not preempt anything. It's not our company yet. So we will have to have a little more patience, and then we will address -- put more flavor to everything once the transaction has been completed, hopefully here during the month of August. And maybe, Jens, on the -- what we used to call CargoLink Way Forward, but we have a new name now. Maybe you can elaborate.

It's actually -- it's called Road Way Forward now, it's not called CargoLink because the project or the magnitude of the project means that we have, what can I say, to rethink the processes and our service offering, what can I say, more generally. But we've gotten live on the platform. We've had some goals at going live with different POCs. Now we have a POC that we actually believe and we are live. And we will -- we're live in a country called Lithuania, and we will do more -- 2 more countries before Christmas, so Latvia and Estonia will go on. The go-live has been good, has been, what can I say, fewer unforeseen issues, certainly positive because that means we can focus on the next couple of countries. The POC will extend into next year, where we will then do Poland afterwards. And if this is done before the summer holidays, then we know that the POC has been successful. If it is successful, and we expect when it is completed, then we will continue the rollout in the remaining part of the division. And we will, in reality, have an enterprise-ready solution that can scale. It's based on Blue Jay, obviously, but it's also done in combination with a whole software stack that was needed. And then, we will have high focus and spend significant resources on the rollout. Having such a tool in place means that in reality, it should be possible to do the same in Road as we do in Air & Sea. So it's, of course, something that is very high on the agenda within our company.

So the Poland -- rolling out Poland next year is the key milestone?

The key mix -- the first one was to get it up and running and then make sure that the flows, they worked. Then we go cross-border. We do that with controlled volume, that's the next important milestone. And then we need to go to a country where there's a higher volume. Poland is a market that we operate in that where we have significant volume. So we will now have then 4 countries on to cross-border, but also then with significant domestic volume. There should be nothing -- we actually -- we used the platform, the Blue Jay, in South Africa for distribution, while it handles much higher volume than the volume we're talking about here. But we need the cross-border functionality to work in combination with that. So when that is done, we are ready to do a mass rollout, and we will then do that as quickly as we possibly can.

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

Also three questions from my side. First on the ocean side, could you just comment a little bit on your recent rate negotiations with the carriers? I mean, did you -- were you shocked or did it work out or right considering the spot rates that we have right now? And also, have you got some partnerships, which you have expanded or the opposite on some various carriers out there? My second question is on the Roads business. When we speak to some of the smaller freight forwarders out there, they seem to be indicating that the volume peak is just behind us, but rates really continue to be possibly even higher? Is this something that you see as well in your business? And then finally, just on volumes in Air and Ocean, really happy to see volume growth coming back versus the market. just to realign expectations a little bit, how should we expect this to play out as we move into the second half, obviously, getting GIL on board? Do you expect to get kind of into a new period of you growing below the market? Or is the ambition to grow in line with the market despite you getting GIL on board?

On the ocean negotiations, if you ask if we were shocked, we have been shocked throughout the last many months. It's an unprecedented level, we see when it comes to rates. We have seen rates we have never ever dreamed about in the past. So -- but we have handled that. As I said, we are one of the largest procurers of ocean freight in the world. So we do have certain buying power, which hopefully is also reflected in the terms that we can achieve by the carriers. Contract rates have gone up, we have seen that. It is something that we pass on naturally to customers. And -- but the tendency is also that customers are asking for more spot-related or more spot-driven market, where you actually do not gamble on -- and you don't really want to log in the rates. So it depends from customer to customer, but we've actually managed to do some good deals. We always change volume from carriers to carriers depending on what terms we can achieve. I wouldn't say that the last negotiations here has caused any big changes in the suppliers that we use. We use most of the world's large ocean carriers and we have good relationships with them. On Road, it's also correct that we are seeing slowly now some sort of lack of also capacity, which has driven up rates or haulage prices as we call them. It's not something we could not handle. We've also managed that on. We have implemented a capacity surcharge in certain countries to secure the necessary capacity for our customers. We have actually, as a part of what Jens just elaborated on in the Road Way Forward project, also changed some of the material that we are using, which has also benefited both our customers and also our own profitability. I will not go into the more details. But a big truck is not just a truck many different models and ways you can operate this. Volumes, yes, we have to already apologize for the fact that transparency will not be as good as it has been. It's -- in the future, once we include the Agility GIL numbers, of course, we will put a little bit of a smokescreen over the numbers, but we will try to be as transparent as possible. But we do actually expect that the performance will continue in terms of market share gains. We see no reason for that not to happen. The only thing I would say is for Ocean, the time might not be ideal to go out and take big chunks of new business right now when you have difficulties sometimes just supplying your own good, loyal customers with capacity. We need to look after our own customers before we get tempted to take big chunks, but they are out there if we wanted to. We have seen volumes and customer names who are also ocean carrier customers. Normally ocean shipping line customers normally that we have never been able to do business with. All of a sudden, they come to us also, now seeking for or looking for alternatives. So of course, we try to take a little bit to establish some connections with these customers. But we have to look after our own customers first.

Great. That sounds very interesting, Jens. And yes, keep up the good work guys.

Our next question comes from the line of Dan Togo of Carnegie.

First, a question on the guidance. When I multiply, so to say, EBIT first half by 2, I get about DKK 13 billion. Could you help me understand why second half should be weaker than first half? I mean, you have the solutions that you stated clearly will improve in second half. And maybe you should also think that when and if container rates start to soften, let's say, not maybe in Q3, but maybe through Q4 when we exit the peak season, it should support your yields in GP, in the sea part business. So can you help me, so to say, tie these things together? Where is do you exactly you see the softness in second half? That will be the first question. And second question, can you be a bit more elaborate on which verticals you see are particularly strong? Is it still the consumer-driven verticals, electronics, apparels, et cetera, or are there other verticals coming back on? I know you are particularly strong in automotive. That was quite weak last year. Is that part of the reason why growth is also coming back, so you have easy cuts in automotive?

Yes. I think there's probably one place then where we have a little bit of a conservative approach. We don't necessarily anticipate that the yield, let's say, will stay on the same level as they have done. We don't know where they will go to where they have compared to last year, and in air freight come down. I know that they are a little bit higher now in our Air & Sea freight per TEU. So of course, you can have various assumptions on that. We don't want to be overly aggressive. The rest of all your argumentation, we understand very well. We are then in the fortunate situation that we will come out with numbers and adjust our guidance as we go along. We've already now tried to extrapolate a little bit on current levels and come up with the guidance. And then, if you do your math the way you do it, it can be that earnings, they are going to be even stronger in Q2. Let's hope that you're right when it comes to that. If we look at the commodities that we move, of course, I mean, retailing, I guess, all over is a place where people spend money right now because can't spend money on things that they normally did, at least not to the same extent. So that certainly led to serious demand when it comes to that. High-tech and other area, I guess, we all invest in new equipment at home or wherever it is that we're doing it, also in the company is actually to support, what can I say, the more digital way of interacting and working with each other, new equipment is needed. It can be many different things, everything from camera to a new computer or whatever that is taking. And then actually, automotive is probably also a vertical where we have seen an increase in demand. So some of the very big volume areas, they are certainly growing these days. I think that's a little bit on the verticals.

And our next question comes from the line of Lars Heindorff of SEB.

A couple of questions from my side as well. First, mainly regarding Sea and Air. And what I'm looking for is a little bit of help about the productivity in the division. I assume that the disruption to global supply chains had cost to not only customers, but also you guys. And problems and maybe I don't know if you have to hand carry orders through the system on how you do it? So I'm trying to get sort of a feel for how -- what do you think about the productivity? I don't know if you can give us any numbers on it, how much productivity is down if anything at all. That's the first part.

Actually, last productivity is actually up because volume is up and cost is flat. Headcount has been flat in the recent quarters. But if you start to measure it on working hours, then you have a point. Then productivity is probably down because of the fact that you say -- you're absolutely right in saying that need we to hand carry shipments in a much greater deal way than what we used to when we could just give an instruction, pick up 50 containers, please, on that day and deliver them at this location on that day, and then you would just assume that it would happen. This is definitely not the case this time around, but blank sailings and you always have to be alert and first ensure that you can get the capacity. And then once the booking has gone through a shipping line, also ensuring that the freight is actually being moved. And in all the cases, multiple, multiple cases where that is not happening, then find solutions alternatives for your customers, that being air freight, trucking to Europe, train or alternative carriers, this is what a freight forwarder can do. He can use another carrier. You cannot do that if you are a customer directly with the carrier. So -- and as I alluded to, also certain limits as to how long we can sustain this. It's -- we are asking a lot to our staff and they have really stepped up, as I said, to the plate. Now we will combine ourselves with the Agility GIL, and we can look at the productivity as one. So I don't expect that we will see a deterioration, but it's definitely a KPI that we have our eyes very fixed upon.

Okay. And then -- but then, in an environment with less volume growth, would it then be challenging to continue to improve that productivity?

No. You know it's like -- we will -- it's not static. I mean, we all talk about this environment. Of course, that's also the truth. But we don't talk about all the other things which are happening in DSV. We invent new ways of working, new technologies being taken into consideration. I'm sure even in the U.S. , we get fewer tailored faxes now than what we used to. We get more electronic bookings. We communicate internally in more sophisticated ways that we did. That kind of offset a little bit the negative impact that we see from the market conditions also. So I think we are in good shape. And now, when we get together with Agility GIL, as I said, I'm sure that we can see a continued improvement in the productivity.

Okay. Then the second part is on solutions. You alluded to this yourself to in the presentation. And I think Jens touched a bit upon it about some of the blue collar and extra staff in South Africa as well. But I'm trying to get a better feel and understanding because unlike as we have in Sea and Air, we have some data points that we can track in terms of rates and volume, et cetera. We don't have the same possibility of tracking the development in solutions. And if you go back maybe 2 or 3 years, on a quarterly basis, actually has been fairly lumpy both growth, but also earnings in general. I know it's been going up very significantly, but still, I would say, relatively dumpy. Is this caused by -- solely by start-up new customers, or are there anything in terms of the execution? What does, I mean, the deterioration on a sequential basis in the gross margin? And what is that caused by?

No. I think, if you look at it, Lars, it's -- if you said we grew 16% on a quarter, then it's correct that once we have gotten , for example, Panalpina's volumes in at that point in time, UTi's volumes in, there were, what can I say, quite a few bleeders in some of these volumes that we acquired. Then when we fix them, of course, then you have some fluctuations in it. On top of that, it's always been a little bit cumbersome when we have to implement very complex workflows on large accounts that we take over. And that then leads to fluctuations in the earnings. And then, it's not unusual that you lose on a very big account, DKK 2 million, or in a start-up phase. But it's typically then a customer you will have for 10 years, or even more sometimes. So of course, you have to invest in the ramp-up and taking things over. And I guess, from the outside, it might look a little bit -- I don't know, you call it lumpy, I would call it bumpy as such. But it's not many years ago that we made, let's say, DKK 300 million in Solutions. And I think this year, we can comfortably say that that's not the case.

Practical example, Lars, you take on a new customer, you and your calculations, you estimate you need 400 blue collar workers. You put in 400, you might put 420 in. Then service levels are not up to snuff. The customer is not very happy. Before you know it, you have 500 blue collar workers to get a satisfactory level. Then the month after, you might be 485, then you might be 475. And maybe 12 months down the line, you are back to what you actually expected. We are constantly trying to improve on this. But it's just -- a matter of fact that this is a problem, but on, like as Jens said, a 10-year period, it's still the right thing to take on these customers. But it is larger and super, super sophisticated solutions we are also doing for our customers.

And if you said and look at it, I think the seasonality, I mean, we will definitely make a higher margin in Q3 and Q4 like last year. And I think that's also been the case historically. And I actually think that we've made significant progress on Solutions. There's still some ground to cover. We put in more and more automation startups. They are going to be more and more complex. We will start now the largest automation that we've ever done here in October. So that's probably also going to be challenging n the first phase. But we drive it forward and I think that our capabilities, they are much stronger than they have ever been before.

Yes. No, I'm not in doubt about that. Sorry, just I should point out on the outside, maybe not lumpy, but then maybe at least in terms of growth, a bit bumpy.

Bumpy it is, Lars.

All right. And then...

But just make a line over time, then I think it looks okay.

Yes. Yes. Then last one, short on the Roads. Given the congestion in Sea and maybe, also to some extent there and the ripple effects and there's still ongoing strong volume growth that we see also in Europe, any signs of any tightness in the capacity or any risk, which, I mean, historically, there's been a few quarters where you can experience in difficulties getting drivers that has caused maybe at least short term a little bit of pressure on the gross margin? Any signs of that?

No, not to in a large degree. Of course, in a few markets, we might see a lack of capacity, rates temporarily spike up without us being able to pass them on. But on a division led, as I said, we expect GP margins to retain or remain at the current level. We have a strong momentum now in Road. And they have not finalized. We have not seen all the effects of the work, which has been conducted in Road. So there's still be more to come and that normally high-rate environment is a better environment also for DSV than a low-rate environment. So we are comfortable with the development in the Road division.

Our next question comes from the line of Frans Hoyer of Handelsbanken.

First thing, I have to come back to these [indiscernible] in your guidance for the second half. It sounds like you are anticipating a decline in yields, suppose, in Sea and in Air compared to the [indiscernible] reported in Q2. Maybe, you could be a little more specific about the sale of the [indiscernible] that you are showing being off in the top and bottom of the [indiscernible]. Same question is around the -- I mean, it's very good to see the organic market share [indiscernible] see how it behaves in the neutral versus the market. but hopefully, the idea is to leverage the increased competitiveness of your service offerings, even after the integration of the management and achieve gained market share organically. Is that still the page and has it worked? Do you see the competitiveness of these sort of top volume having improved to certain extent that they gave up organic market share growth in Air & Sea?

100%, Frans, committed to taking market share. You can clearly expect that from a company like DSV. We sound maybe arrogant and we are humble, but we are one of the world's largest freight forwarders, logistics companies. If we should not take market share, we have not done a good job. I mean, it is still profit over growth. The easiest -- we talked about this a million times, the easiest thing is to outgrow the market. But of course, profitability needs to follow. But we have so many to ways to outcompete the small mom and pops right now. So we would clearly expect that we should take market share. This is also what we have seen in the aftermaths of other transactions. Then we have been able to outgrow the market. And, back to the yields. Of course, if you're a dart player, you know you throw 100 darts against the board and you expect to hit bullseye 100 times, then you are right then. The guidance could probably be higher. But you also need to kind of assume that something can actually also go in the other direction. And to answer your questions more specifically, we have included around in the guidance yields around DKK 8,000 for air freight and around DKK 3,200 to DKK 3,300 for Sea freight yields. And if yields will continue to stay above that and if growth continues at the same pace, then you could have a point that we are conservative. But we think that assuming to hit 100 bullseyes is also a little bit too optimistic and you could also rightfully criticize us for that.

I wouldn't criticize you.

Our next question comes from the line of Sam Bland at JPMorgan.

I have two questions, please. First one is just following on from that point. Obviously, we're watching Sea freight rates keep on going higher and higher. Obviously, freight rates aren't exactly the same as unit margins. So is there a reason why the unit margins couldn't come down even if the freight rates be higher? I don't know whether that's sort of level yielding, pipes of products coming back into the mix or something else. And the second question is on this Extraordinary General Meeting, the 20% share reauthorization. Is that -- is there something different about that to what you've done before, whether it's just the size or whether you'd need, I don't know, fewer subsequent authorization to this and M&A transaction came up in the future?

Quickly, on the Sea freight, it's -- actually, you would normally say, the higher the rate, the higher the yields. So it's not like the high-rate environment would be against DSV in terms of duration in the yields. It's just to be a little bit on the safe side that when we get to maybe the end of the half year that rates could start to drop and consequently also yields, and that the whole system settles somehow and that we could come into a situation where maybe some of our competitors -- you never know what happens, they start to become more aggressive. So it's just to be a little bit on the safe side that we have assumed that yields come down. When you have the highest yields you've ever had, it's very tempting to say, this will continue forever and ever and ever. But don't think that's the way you should run a company. Either, you need to be a little bit cautious also with the assumption that things can actually change. We had the highest rates or highest yields in the industry before this spike and now, we're even higher. So it's -- but I can tell you one thing, we will try our best to keep the yields as high as possible for as long as possible. And maybe, Jens, on the 20%?

We've had the authorization sometimes that have been higher than 20% as well. 20% is that basically what you can do in line with the EU regulation without issuing a prospectus these days. And the reason why I call it out, there's a couple of reasons for that. One is, of course, that we saw on the Agility transaction and also on the Panalpina transaction that the vendors, they want DSV shares. So in order to have the right mandate, it's just important that we have this authorization so that we don't have -- strategy is, in reality, of course, that you have something you would like to do, but it's also that you eliminate the dependencies so that when you negotiate, you can deal in confidence and when you sit at the table and do the negotiations. One of the proxy advisers that is there, they don't hold any shares, but they advise many shareholders on how to vote, they have gotten out with a 10%, what can I say, limitation for a new issuance. And that's -- the problem is, of course, then that it is a little bit against our strategy that we have less mandate because it makes it harder for us to execute. If we find other shareholders, we don't know what the next transaction will be and how that should be bankrolled. So, of course, we want to work as much as we can for our existing shareholders. But for example, we think also that even if we acquired Panalpina or GIL through shares to the new -- or to the vendor, we still think we have created value for our existing shareholders. So it's to have that mandate and to have that power that we're just mentioning it here because we know that in certain cases, these, what can I say, authorizations, when people they vote for the Extraordinary or Ordinary General Meeting, it goes to the Compliance department, and it doesn't necessarily reach the investor. So that's the reason why I'm just calling it out here, so that we close that loop now that we have so many on the call.

Our next question comes from the line of Cristian Nedelcu of UBS.

Could I please ask you, in Ocean and Air, when we look at your purchasing of capacity, could you remind us how much you're buying spot versus how much you're buying on longer-term contracts? And if there is any reason why these should change going forward, considering the current market conditions and so on? Secondly, your Q2 conversion ratio in Air & Sea, 55%, could you give us a bit more color? What was the range of the conversion ratios among different regions, sort of the best performing or least performing out there? And thirdly, maybe a long-term question on GP per unit in Air & Sea. Leaving aside the normalization of the rate, can we talk a little bit about the other drivers that are impacting the GP per unit? And how you see that playing out in the long term? Either it's competition, either it's mix, increase in purchasing scale or maybe automation of some value-add services?

There's a lot of questions. When it comes to spot and contract, to give some guidance, it's close to 50-50, I would say. We have seen, though, with the new scale we have after acquiring Panalpina, mainly on Air, but also more and more on Sea, we are doing BSAs or block space agreements. We have more charters ourselves. We have the legacy Panalpina charter network where we do get in and actually gain access to a fixed capacity. We are not as such speculating massively into filling capacity. So we have run the risks of having vacant capacity. But this is maybe something which will change. It's an evolution where we need to maybe change the procurement strategy in DSV just a little bit going forward where we do take larger block space agreements with both air freight and sea freight carriers. I know Jens will talk a little bit about the regions. But on the GP per unit, there's a lot of levers we can use going forward for the GP to increase. I think the size, the buying power of DSV is one. I don't think such the competition will change dramatically. There will be some consolidation in our industry, but there will still be a fragmented industry, so competition will still be very hard. Of course, automation, the productivity will increase. You will more probably see that, maybe not as such on the yields, but on the conversion ratio, we will be able to handle more shipments per employee going forward as we digitalize the workflows that we have. So for a long, long period of time going forward, there will be ways for us to improve the margins in respect of how we operate. I don't know, Jens, if you have any numbers on the regions?

But if you look at the conversion ratio, it's clear that it's higher in the Asia Pacific area and in the U.S. as well. And then, of course, in what we call Europe and Middle East and Africa, it's a little bit lower, the productivity. So if you look at that, and it's been like that for years, actually. So I think that, that is what we can say about that. I think actually all areas have improved over time, and they are at an extraordinary high level here in Q2. We will now have to see how it pans out the next quarters. If you look at our long-term guidance, we have set higher than 47.5% for the Air and Ocean part. So they are allowed to go higher. It's not a legal company that they have a higher productivity than that. And we're actually very pleased with the way that they operate.

And the final question comes from the line of Alexia Dogani of Barclays.

Just I'll keep it short. Just firstly, on the GIL performance to date, I mean, should we expect that they're benefiting from similar trends to DSV? And so most likely kind of the view in April has strengthened over the past couple of months. Then secondly, on conversion ratio, I mean, from the comments you just made, should we therefore expect to see maybe the mix changing a little bit of how the conversion ratio is driven, but that levels shouldn't necessarily retrench too much post normalization? And then finally, I just wonder if you had any comments on the air cargo market once passenger barely holds capacity comes back. Do you think the provision of capacity has structurally changed? I mean, do you expect freighters to be a bigger part in the future than it was in the past?

Yes. Again, three very good questions. On the GIL performance, we cannot comment too much on that. It's -- we have the information, but we are not in a position to share that with you. You have to take maybe inspiration from what is happening in the industry, and then you make your own assumptions what is happening. We will, as Jens said, come back with more solid information once the closing has been done. It is -- we think it's a little bit inappropriate to comment on a company, which is not ours yet. It will be soon. And so a little more patience and then we will get back to this. Air freight is -- it's, again, a little bit speculative, but you're right in saying that some structural change could happen. We have grown very happy with the freighter systems that we have, at least in DSV, and we expect to continue to develop that. So in the future, I actually believe that if you compare it to the period, a lot of things have also happened in DSV, not least the acquisition of Panalpina. But if you look back to the period before Panalpina and then 2, 3 years out in the future, I would expect that we would use more freighters than what we did in the past. We have more volume. We are better at utilizing this equipment. And actually, the service that customers are getting on the freighter service, it is a premium, deluxe, what do you say, service, which is very, very good. It's something we are proud about. Conversion ratio, Jens, anything to...

No. I think -- I don't think that -- of course, now, we have produced extra high GP. We have very high yields. Our staff have worked really hard in order to do so. Normally, what will happen is then that it gets less complicated. So the yield will come a little bit down, but hopefully, we will produce more shipments than. So where the GP balances out, right now, we have a little bit more than 20% in GP and we've had that for a long time. So we will have to see. What you can count on is that we drive the productivity. As [indiscernible] talked to before, we talked about digitalization and that we will continue this. And I think the regions or the areas where we operate are very similar to deals. This is typical for a company like this. The only thing that is different about GIL is that they have a larger footprint on road and solutions in the Middle East and us. But apart from that, it's very similar to us. So I think we will continue this development. And I don't think -- we've never really had a long track record of going back from productivity levels to lower levels, at least, not in the 20 years I've been in the company. I mean, Jens has been there longer. I don't -- he's shaking his head, so he can't remember it either.

I can't even remember how long I've been employed.

So if you look at that, I think we will continue to drive it forward. That is actually the reason why when we did the financial guidance that we set higher than -- then when we buy a company, it will come down initially. And then we will merge the companies and then typically, we will end up with a higher productivity than we've ever seen before. And we plan to do the same also with GIL. And then when that materializes, we will see what then happens.

Thank you. As there are no further questions on the queue at this time, I'll hand back to our speakers for the closing comments.

Thank you very much, everybody. Thanks for all your very good questions. If we have not -- be a little bit to my surprise, but if we have not been able to answer all your questions, then you know how to find us. Find the contact details of Flemming and the IR team on our web page. If you have any investors who wants to speak to us, please reach out as well. Once again, we are extremely happy and proud and satisfied with the performance of our company. I think the future looks good. We are excited about welcoming a lot of new good skilled, talented colleagues into our company from Agility GIL. We will become a stronger company together than what we are as two individual companies. So we will get back to you before you know it with more information when we get to the closing of the deal of Agility GIL. And until then, we will wish you, those of you who have not finalized your some holidays, a continued good summer, and we will speak to you later. Thank you, and goodbye.