Ladies and gentlemen, welcome to the DSV conference call. For the first part of this call, all participants will be in listen only mode, and afterwards there will be a question and answer session. Today, I'm pleased to present CEO, Jens Bjørn Andersen, and CFO, Jens Lund. Speakers, please begin.
Good morning, and welcome everybody to the conference call, where Jens Lund and myself will go through the recently announced acquisition of Panalpina, where we, this morning, have announced the deal that we will put the two companies together. We have made a small presentation for you, and I will point your attention to page number two. We have a little bit more thorough disclaimer than normal. I don't expect you guys want me to read it up or read it all, but please read it and take that into consideration. The agenda on page number three, we'll try to do it as smooth as possible, so we allow for questions afterwards. We'll talk a little bit about the strategic rationale of the combination, transaction overview, a little bit about Panalpina at a glance, and then what the combination will look like, and next steps, and Q&A.
We are, this morning, extremely excited. We are happy, we are proud. We are very humble that we have managed to strike a deal with the board of Panalpina. It's a high-quality company with unique customers and employees and skills. A strong company culture that we have been looking at for many, many years. It is a very good day here at the head office in Denmark today. Both Jens Lund and myself, we also look very much forward to meeting all the employees of Panalpina when we travel to their head office in Basel a little bit later today. On page number four, we have tried to put four or five points down on some of the strategic rationales behind the deal.
We are creating now one of the world's largest transport and logistics companies, and as we have talked about many times, size matters in our fragmented industry. We truly believe that to be the case here also. It is the best of two worlds. We are two very strong companies individually, but together we will be an even stronger company. There's no doubt about that. We have analyzed Panalpina, and we have seen that they have some unique customer relationships and also some vertical expertise that we probably don't have in DSV. There will be a lot of cross-selling opportunities and, of course, higher growth potential also by creating a new global top four player in freight forwarding. We will strengthen significantly our position within Air & Sea. There'll be a lot of commercial synergies from stronger network and the services that we will offer to our customers.
Of course, there will be some cost structure optimization. We will consolidate operations, administrations, warehouses, and logistics facilities. We believe that the company can continue, as we have seen in DSV, to exercise some sort of cost leadership, which will be crucial to stay competitive and to grow the market share in our freight forwarding industry. We will also continue together to consolidate the infrastructure, and we will leverage on the lessons that we learned from what we consider successful integration of UTi. Of course, this is also very, very important to bear in mind. We have what we consider a very, very strong and very, very attractive financial business case that always underpins all M&A that we do in DSV. We target for the transaction to be EPS accretive, diluted, and adjusted in year two after the settlement.
We have a clear aspiration to lift the margins, the operating margins of the combined entity towards the margins of DSV's existing level. Maybe, Jens, you will go through some of the transaction overview now on page number five.
Sure. Thank you very much. If we start with the purchase price, it's a little bit unconventional because we offer shares. We normally pay in cash. We have offered 2.375 DSV share per Panalpina share. This gives us an enterprise value of approximately 4.6 billion CHF. Here we have not taken IFRS 16 into account because I think all the comparable transaction multiples that we all sit with are pre-IFRS 16, so we still use them in our communication. We certainly pay a high EBITDA multiple of 28x. I think that should be attractive to all the Panalpina shareholders. We're talking about an implied offer price of almost 196 CHF per share. Of course it depends on the exchange ratio, as well as the DSV share price.
The value will be sort of moving a little bit as we go along. We will issue approximately 56 million new shares. That's equivalent to 23% of the DSV share capital today. On the offer, we can say that we have received support from the three major shareholders in Panalpina, which we're very grateful for. It means that 69.9%, I think in daily speak, we would say 70% of the shareholders, they support us on the transaction. Actually, we already have the capital in place that is required to secure the transaction. We would want more acceptance from the shareholders, because it would make the integration even more smooth. That's what we are targeting for, that we get the remaining shareholders on board.
When we print new shares, we have to issue a prospectus in the EU, in Denmark, and also a prospectus in the U.S., taking care of the U.S. shareholders. Of course, for the compliance filings we need to make when it comes to competition law, et cetera, we expect that it will take 6 months before we will be able to close the transaction. It's a lot of hard work, but the way we've evaluated is that there should be no road blockers in this. That's a little bit on the prospectus and the settlement. We've made some other agreements also to respect the Panalpina brand, the Panalpina team. We've decided that the listed company should be rebranded to DSV Panalpina A/S, and that will be done within a short period in time after closing.
We will set up an integration committee, taking care that we get a fair integration of the two entities, so that we evaluate our staff on a transparent basis for the future set up where we have overlaps. We will see which functions can we keep in the Panalpina headquarter. We've already made some concessions in relation to the local operation, but there's also an evaluation that is going to take place about the other functions that are in the headquarter. We have also agreed that due to the fact that the Ernst Göhner Stiftung will become the largest shareholder in DSV, they will have a representative on the DSV board, and we look forward to that. On the dividend policy, we have also accepted to raise our payout ratio from 10% to 15%.
Basically, our capital allocation model and our capital structure thinking should remain the same, and I guess some of you guys would say that we've taken in too much equity bankrolling this transaction. We will come back to you shortly on how we will realign this so that we continue to have the capital allocation and the capital structure policy that we have run for years in DSV, and which we think that our shareholders have appreciated a lot. We will make sure that we realign this, and then we should be good to go on that point. I think now we move to the next slide.
I can talk a little bit about that on page number six. I guess most of you guys, you have a fairly good knowledge about Panalpina. CHF 6 billion in revenue. Panalpina is present in more than 70 countries, so I think combination, we will be in about 90 countries. Of course, extremely strong capabilities in both air freight and sea freight, with air freight just crossing 1 million tons in 2018. If you do some modeling on the yield management, you have to take into account that approximately 20% of the volume is perishables, which carries a somewhat lower GP per unit, and 5% is controlled directly by customers. Also, the combination will create strength in contract logistics and energy solutions, where we will add approximately 10% to our Solutions footprint today. Of course, we're extremely excited about the strong customer relationships that Panalpina have.
They are a well-known brand in the industry amongst the most well-known companies and the highest quality companies, blue-chip companies in the world. We are excited about the opportunity to come out and offer also the DSV services to these customers. Panalpina have a special competence and know-how in air freight with some freighter systems. We have thoroughly analyzed them in the process, and we are excited also to see how that will work in a combined way. On sea freight, we are more or less the same size, Panalpina and DSV. We handle approximately 1.5 million TEUs. What you also here have to bear in mind, that is approximately 35% of that volume is related to freight management services, which is non-NVOCC, that could also carry a slightly lower GP per unit. All in all, the combination is extremely good.
On page number seven, you can see we have said that to you guys many times, we are not obsessed in any shape or form about league tables, we have always said big is beautiful. We still believe in that very much. We will now move in as a clear number four as the world's largest asset-light freight forwarders. More importantly, you should note that we will have a very strong position in air freight, where we will be the world's second-largest measured in volume, and number four in both sea freight and road freight in Europe. It gives us some strength that we will utilize, hopefully, for the benefit of our shareholders. Page number eight, you can read it yourself. I'm not going to spend too much time on that.
You can see how the service offering is split between DSV and Panalpina, I think it is pretty self-explanatory, I have touched upon some of the points before. The same goes for page number nine. You can see that we are diversifying the business mix and geography even more. We are pleased about that in DSV, that we are now becoming stronger, in particularly in APAC, where the growth rates are much higher than what we see in EMEA. Also our very successful operations in Americas will be enlarged, this is exactly what we have been trying to do for many years, we are pleased about that also. On a pro forma basis, you can see on page number 10 some numbers. The revenues, we will get just below DKK 120 billion in turnover.
There will be, of course, an uplift in EBIT, this is just the pro forma before synergies. Bear that in mind, EBIT. You can see also the FTEs, how we will be approximately a little over 60,000 employees. Speed is of essence now on page number 11. You can see a timeline. We have done the pre-announcement of the public exchange offer today. We will work hard to do the filings for all relevant authorities. We will have to call into an EGM where we will ask the shareholders to approve the capital increase. We will work towards getting the regulatory approvals, as you can see. We expect the settlement and the closing during Q4, we will work our socks off to make this sooner rather than later. Before we go over to Q&A, just some key takeaways.
We are very, very happy today, proud and honored that we have managed to make a deal with the board of Panalpina. We are also very excited about the fact that we have close to 70% of the shareholders of the company supporting our offer. We think it makes a lot of sense. It has the characteristics of a potential very, very high value creation for our own shareholders. Of course, the shareholders of Panalpina will also benefit from this. We put five points down here that kind of sums up why we think it is a good operation and a good transaction for us. I have talked about it before, but I would probably touch upon the fact that we see some unique customer relationships, vertical expertise, and then operational excellence in the company.
There's no doubt that there's a lot of skillful employees that has a lot of knowledge, and it is no secret that every time we join forces with another company, we take a lot of new skills, a lot of new ways of working on board. When I travel around the world to see DSV today, I can see clear footprints or markings of previous acquisitions that we have done. We are all coming from acquisitions, and we strongly believe that to be the case going forward. There will be a lot of commercial synergies and cross-selling opportunities also from the stronger network. Of course, there will also be some financial synergies in terms of consolidation of operations and administration and logistics facilities. We will also have to establish the joint IT infrastructure and leverage on the future digital investments.
We believe this is maybe important for all our shareholders listening in, that the target is to be EPS accretive in year number two after closing. Our aspiration is very clearly to lift the operating margins towards DSV's existing levels. We have done that in the past, and We very much aspire also to do that. You need to respect that we cannot talk too much about the business case. It will be inappropriate at this early stage and hard synergy numbers, but we of course look forward to coming back to you on that when we do the closing of the deal. I think that was it for now. On page number 13, you will see the instructions as how to dial in. Would be pleased to take your calls from now on. Thank you very much.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad now. Our first question comes from the line of David Kerstens from Jefferies. Please go ahead. Your line is now open.
Good morning, gentlemen. Congratulations with the takeover of Panalpina. Two questions, please. First of all, why did you change the offer structure from all cash to all shares? I appreciate the comments around the capital allocation, but does it mean that you will resume your share buyback program now as well? Maybe related to this, what is the correct number of shares to work with? Is that the DKK 188 million before the DKK 10 million treasury shares, or will the DKK 10 million in treasury shares be used in the takeover? Secondly, regarding the synergy potential, how much do you anticipate will be from yield improvement and how much from conversion ratio improvement? Is there any measures you can take to improve the yields for Panalpina? I saw your comments regarding the share of perishables in the business and what is the share of value-added services.
Can you bring that up to a level in line with DSV? Thank you very much.
Maybe I can talk a little bit about, of course, a transaction like this is very complex. We need to establish an agreement with all stakeholders. We had a good, what you say, a very open and transparent dialogue with the company. As we progressed in the dialogue, it became clear to us that it would be beneficial if the deal should be done, so to say, to offer all shares. As Jens alluded to before, this is a little bit different to what we normally do. Taking everything into consideration, we felt that this was the right way to do it. When it comes to the synergies and then maybe Jens can talk about the capital allocation. There will be great synergies coming from a conversion ratio improvement. You're right on that. We have seen that many times in previous transactions.
Our industry logic also tells us that there will be a certain room for improving the yields also, the combination to oversee the volumes in one system instead of two, to use the buying power we have towards the airline and shipping lines, and to operate and to utilize the capacity much better than we do as two individual companies will for sure also mean that we will have synergies and potential to uplift the GP margin. Unfortunately, we cannot quantify that at this early stage, but maybe Jens a little bit on the share count and buybacks.
You're right, you know that currently we have 188 million shares registered. We have had an AGM, and we are currently canceling 2 million shares. The right number going forward will be 186 million, plus the number of new shares that we issue, potentially when the deal closes. I think that is a little bit on the share count. On the buyback, we will now evaluate how do we adjust the capital structure in the most efficient way. We will do it just via the classic way we're doing it with safe harbor buybacks. Or should we use a model where we can take a larger step at a certain period in time? We will come back with some information about that so you get more clarity on that.
I trust that you understand that apart from stating that we keep our policy as is, we need to do a thorough investigation before we give guidance on a final roadmap. You can rest assure that nothing has changed when it comes to buybacks and the target capital structure we have in the company.
I think maybe that is the most important statement. We will not change our capital allocation policy. We will not de-lever. We will continue to redistribute the earnings and the cash flow back to shareholders. In a bigger way now, you can say, when we don't take on new debt.
Great. Thank you very much, gentlemen. Good luck.
The next question comes from the line of Eric Plour from Kepler Cheuvreux. Please go ahead.
Yes. Good morning, and thank you for taking my question. The first is on the concession you alluded to and the cost extraction opportunity. First of all, is that a fair guess that if we use a template of UTi and we take on board your target of raising Panalpina's conversion ratio to your conversion ratios, DKK 350 million, DKK 400 million of restructuring charge would be necessary to combine the two entities. That would be the first question. Second, I was wondering if you had the chance to discuss the current trading situation with Panalpina, and whether that meant that you are comfortable with the consensus estimate that the market currently has for this year, especially given the weaker air freight market environment that we saw at the back end of last year. The third question is regarding the listing.
Is there any plan to satisfy obviously some Swiss shareholders of Panalpina to retain some Swiss depository receipt or something of that nature that would allow them to remain shareholder of Swiss entity? That are my question. Thank you.
I think if we start with the last one, then I think on the listing, we will evaluate this carefully. We have a bit of time before we close the transaction. We've had a few inputs on it, and we will see how many shares we are actually talking about, because, of course, it comes with complexity and cost. I think, let's say it's only 1% or 2% of our shares that it's relevant for, then we'll probably not do it. If it's a higher proportion where it's of relevance, we will carefully consider it. That's basically it. On the current trading of Panalpina, I think that you appreciate that we can't disclose anything about this.
I think you are well aware from what I hear about the market movements. I think that I can say that it's typically so that all players in the industry, they are sort of impacted by if the volumes go up or down.
Maybe I can just chip in. If the question was also if we had discussions with the board, of course, we have had discussions. We have been giving access to due diligence. I think we have a fairly good idea about what is the current trading right now.
We can't disclose anything on it. I think on the integration cost, I think I'll not say anything about a specific number because now we need to detail the plans. In historical transactions, the integration cost has been similar to the level of synergies, typically. At least I think from what we have seen so far, this will probably also be the case in this transaction. Then when we go a little bit further, we will come with a more precise information about this. At this stage in the transaction, apart from saying that we expect to get to the DSV level on the relevant ratios, we can't say more now.
Okay. Thank you.
The next question comes from the line of Casper Blom from ABG. Please go ahead.
Thanks a lot and also congratulations from my side. I know this has been high on the wish list for many years. If I may just follow up on the buyback, and sorry for digging into this, as I know you can't comment too much, but on the capital structure, maybe this is for Jens Lund, but would you be comfortable going all the way up to the maximum 2x net debt to EBITDA in a period where you are integrating a company like Panalpina? Would you be more comfortable in maybe being a little bit lower? That's my first question. My second question, Jens Bjorn, you mentioned the opportunities for cross-selling more.
Even though DSV has been highly successful the last many years, it's still been my impression that maybe one of the areas where you could improve a bit was cross-selling between the different business segments in DSV. Is it your impression that this is something that Panalpina has been better at doing than DSV? Is there some learnings that can be taken from Panalpina here? Those are my two questions, please.
Maybe I'll just answer the last one before. You're right, we have grown a lot. We've outgrown the market now after UTi. We're very pleased about that. We have grown a lot with our existing customers who apparently like what we give them, which is nice. We are pleased about that. We could improve when it comes to cross-selling between the divisions. When we say cross-selling, it is more offering now a Road capabilities to the Panalpina's customers, which is highly beneficial. We can also offer last-mile distribution of the existing customers, where Panalpina probably today will use external suppliers. Also, as the product becomes much more sophisticated now with Panalpina, I'm sure also our own Air & Sea customers will like what they see when we can come out with a much more competitive offer. We see a very clear strength in Panalpina on the commercial side.
They have a lot of vertical competence also that we don't have in DSV, and we're very pleased about that, and I think we can use that to our joint advantage going forward. Jens, maybe on the buybacks, you
I think if we sit there and look at it, as you say, we will definitely level the company up, and it will be in the level that we are talking about today ourself or looking at. I don't think it's a problem in integration to go close to that level that you're mentioning there. When we create the value as we go along, we will increase our earnings, and I think that's something we have seen before. We are asset light, so we generate a lot of cash all the time, and we simply have to redistribute this to the shareholders in order to make sure that we stay lean. I think you can hear we are committed.
That is very clear. Thanks a lot.
The next question comes from the line of Andy Chu from Deutsche Bank. Please go ahead.
Sorry. Good morning. Three questions if I could. Firstly, in your outlook for EPS accretion two years out, I guess that's 2021. What sort of macro assumptions are you baking in? Nobody has a crystal ball, but it feels though we're in a quite late cycle at the moment. What sort of phasing in terms of GDP growth do you have out for the next couple of years? Secondly, in terms of the deal. Obviously, you're keeping the Panalpina name, which is quite unusual for DSV. They would normally just rebrand everything to DSV. Clearly this deal is slightly different to some previous large deals. Can you just outline maybe sort of big picture? Do you have to do anything big picture differently in terms of the deal and extracting synergies?
Do you have to tiptoe a little bit around headcount a little bit more than for other deals? Just coming back on the third point in terms of cross-selling. The industry, I guess, has a pretty opaque ability to demonstrate cross-selling. How will you do that? Will you give some hard targets in terms of cross-selling over and above the odd example here and there of cross-selling? My view, for what it's worth, is that cross-selling in the industry is pretty hard to achieve, and secondly, it's difficult to see from the outside visible progress on that front. Thanks very much.
I think on the EPS accretion, basically the assumptions we're using is we use the OECD assumptions. Typically when we make our forecasting we do not claim that we are more knowledgeable in this area. That's basically what we're looking at. If you, for example, in the bank you are working, have another macro scenario, which we see in certain banks, then of course you have to adjust for this. I think that's at least how we approach it. I think when we talk about the brand or the name or concessions so that we cannot extrapolate synergies, I think what we've been very adamant about is that, of course, when we make a transaction of this nature, we can make sure that the acquired company can see themself in the structure.
I think actually Panalpina has a particularly strong brand, so it's very good for us to get that brand on board. On top of this, of course, at the end of the day, we have to be able to extrapolate the synergies, otherwise we can't come back to our shareholders. We have the power we need to do the things that we typically do when we make an integration, and we haven't conceded anything about this. It sounds a little bit negative when you use the words concessions. We don't necessarily see it as a concession that we had to concede on anything. This is something we have done willingly. We are excited about the name, the brand is, as Jens said. You have to distinguish a little bit maybe from your industry and then from the supply chain and logistics industry.
Out in the markets, it has a very high quality, so we are very proud to now associate ourselves with this brand also. I think on cross-selling, I think we measure it internally these things. I think what we have experienced on cross-selling is that, as you say, it's always hard work to do the cross-selling. After UTi, we can see that the proportion of business that operate with two or more divisions has grown. I think the complexity that comes with these large clients and the account planning, the whole executive sponsor plan that you have with these, makes it possible for us to get access and to go in, quote, and bid for these things. We do have internal reporting statistics where we follow up on it.
As you say, it could be higher, but it's definitely an area where we are improving. I think that's what you can say about this. It's always something, we don't put too much in a business case on this, but we have put a little bit of emphasis in there as well.
Right. Thanks very much.
The next question comes from the line of Marcus Walenda from Nordea. Please go ahead.
Thank you. Two questions, if I may. First question regarding synergies. You say that you're going to lift the margin of the combined entity towards the current margin of DSV, which essentially means you're going to lift the Panalpina margin to the same level as DSV. Since Panalpina is 90% RNC, wouldn't it be more reasonable to assume that you could lift it towards your RNC division's margin? That would be my first question.
It's clear that's also our aspiration for the business that is comparable to the business that we operate.
You have also to respect that we have said that out of courtesy, out of respect for the whole transaction, it's to preempt the discussions to talk too much about the hard synergy numbers. We will be delighted to come back to you with that later on, you have to trust us. We think that we have a very strong case to present to the market.
Okay, understood. Second question. I'm getting this transaction, since you're paying all shares and kind of a lot of money, it's going to be highly dilutive for your ROIC target. Will you also come back and revise your targets at some point when you present the synergies?
If we sit and look this, I think we said that we will readjust the way we capitalize the company. I think if you define invested capital as a description of the asset, I think you will see that we have now sort of exceeded our ROIC target. I think this will mean that we get a slightly lower return on the invested capital, and then when we have evaluated the whole thing, make sure that we still are in line with the targets we've given. We will probably even have to re-address all our targets because, as you know, we have 2020 targets out there right now. I think that, as you say, they all have to be reassessed.
All right. Thank you.
The next question comes from the line of Edward Stanford from HSBC. Please go ahead.
Good morning, congratulations on the deal. Two questions, please. First, in one of your slides, you talk about a joint IT infrastructure. Can you just perhaps go into a little bit more detail? Does that mean you'll be running parallel systems, or are you intending to migrate Panalpina to your own IT system in due course? Secondly, you talk about a joint integration committee. Is that different from the way you've dealt with, say, UTi, and does that limit your room for maneuver or is that consistent with previous deals? Thank you.
I think basically on the IT infrastructure, we will have one of each systems going forward. But of course, we see that Panalpina have significant investments in IT platforms. We have significant investments in IT platforms as well. Then we will evaluate carefully which platform is best suited for the different services that we produce. It's not only one IT system, it's a software stack, you call it. There, we will have to get more knowledge, but we will not run overlapping systems. That doesn't make sense in a global network business that you have systems that run in parallel. I think that's a little bit on the IT side. When we talk about the integration committee, we have a governance model that is very similar to the model that we have today.
We have, in order to give security of equal treatment at top board, that doesn't participate in day-to-day business, but sort of oversees the transaction so that there's transparency on how we do it. I think that's something that is a little bit special for this transaction. We also did it on Frans Maas, I can remember. It's something we've done before, but I think this will work well. We have a good set up for that, and it shouldn't hinder us to do the day-to-day work.
Please bear in mind also now that we will get also existing Panalpina shareholders on board now. Of course, we have made sure that we have aligned, so to say, the future strategy. You should not see them in any shape or form as in opposition to the way that we normally conduct business in DSV.
Thanks.
The next question comes from line of Lars Heindorff from SEB. Please go ahead.
Morning. Thank you. Two questions from my side as well. The first to Jens Lund maybe, is regarding the debt level. I recall that previously you mentioned that there are some limits to how high a debt level you want, or partly on some tax shield and tax reasons. Is there anything going forward that would prevent you from lever up above a certain level?
Yeah. We've tried to set out a target gearing, including the IFRS 16 adjustments of approximately two times. That'll be below two times EBITDA. Of course, you also have to bear in mind that the EBITDA can be somewhat higher. Given that the interest is so low, the interest rate, I think it's still beneficial for the shareholder, if you look at it from a return perspective, that we don't use debt in the way we bankroll the company. We will try to stick to what we have guided in the past, and then we might end up in a situation once we've evaluated the whole situation. We can't say that now, where we say, okay, the tax rate might be 1% higher on a group level if this is how we want to go about it.
There will be a discussion, of course, internally, what's the cost of capital, and what's the tax rate, really? That sort of, do you get a tax shield or not on the debt side? I don't think, given the interest rates that we see right now, it shouldn't really make too big a difference. It's really cheap to bankroll the company with debt. Hopefully that answers your question.
Yeah. Also just a short one regarding on the buyback. Will you conduct buyback in the second half of this year as you normally do, or will you stop these things now given the situation?
We will try to put them into motion as soon as we can. Here we have to speak to a lot of lawyers. We have spoken to many lawyers right now, then we will see how fast can we actually put them into motion. Then we will also, this time, as I spoke about, try to evaluate if we are allowed to put them into motion. Should we readjust the model a little bit so that we perhaps make sure that when we issue all these shares, that there's some demand at that point in time? We could perhaps structure a model that makes sure that there might be some shareholders that are not long-term DSV shareholders. They were longtime Panalpina shareholders. We will probably have to think a little bit about how we can make sure that there's some demand at that point in time.
We've been so focused on the deal, we will surely come back to all you guys on the other stuff. We see that this is something that could potentially cause a bit of disturbance at that point in time.
Okay. Lastly, regarding a little bit IT systems. I know you've been in the process of implementing the IT system and the road to it. Is that going to be put on hold or can you share any thoughts on that now, given the situation here?
No. We will continue with that. There's no real sort of integration going on in Road, luckily. They can focus on the things that they're doing. Of course, there will be some customers they need to meet, and the cross-selling, as we just spoke about earlier. Apart from that, they will continue to do the work. They will have, of course, a bit of debate internally about resources and we now have enough time to try to calibrate this so that we are ready when we are ready to close.
All right. Thank you and congratulations.
The next question comes from the line of Damian Brewer from RBC. Please go ahead.
Good morning. Congratulations again. Two questions, please. First of all, in the presentation, you talk about maintaining relevant functions and competencies in Switzerland. Could you expand a little bit more on what you mean by that? Is that effectively a sub-head office in Switzerland, or what is the anticipated outcome of what that would effectively do? Secondly, given the IT issue's been covered as much as you can you talk a little bit about customers, whether you've had any initial reactions or, in particular, when you look at DSV and Panalpina, how much of the customer base overlaps and how much attrition therefore you'd expect to come out of this combination?
When it comes to the HQ functions, it's too early to say exactly how it's going to be made up. Of course, we will analyze very in depth the knowledge that we have around the globe, not only at the HQ. I'm sure that Panalpina, they have some competencies that we don't have in DSV. If they sit in Basel, we would be more than happy to retain those, as we have always done. When we look at previous transactions, we have retained a very large proportion of the skills. When we bought ABX, we have still a very large, what you say, operations at their old head office in Brussels, and also certain places of UTi are still very much intact also. When it comes to customers, there's a lot of antitrust regulation that we need to adhere to, we think there's a good mix.
We have not had any reactions from any customers at this moment in time.
Okay. Maybe if I could ask that slightly differently. Given where we are post-UTi, when you envisaged UTi at the time versus where you are now, how much attrition did you see where there was customer overlap in UTi, on outcome rather than anticipation?
I think basically, if we look at those numbers, we typically do use 5% in our business case. On UTi, actually, we saw less. Also it's hard to measure because we had a few of their customers that initially left because they've experienced service issues. I think now there was a transaction, then they said, "Now we've had it." I don't think you will find the same service issues in Panalpina. They run a very stable and powerful operation. The customers, they will come with a different mindset here. What is interesting on the UTi thing is that most of these customers, they've actually come back afterwards now that we got our house in order. We had good relations with them, and then we managed to get in again.
I'll say if I look at our customer reporting in general and on the major accounts, many of them, they actually come from UTi, and we see that we grow quite a bit with them. They're happy about our services. Of course, they get a broader offering, and that's something that we typically don't put too much of in the business case. I think if you look at our growth figures and stuff like that we have reported to the market, it clearly shows that there is some benefit there. We hope that we can do the same with Panalpina, and their customers as well. I think we're on the conservative side if we put 5% in there for the business case.
Okay, got it. Thank you. Sorry, can I just ask one other, which is just on working capital. Clearly, if you look at Panalpina's Q4, there are some sort of working capital issues as they implemented their own IT system changes. At this stage, does your business case or assumptions about the way you combine, make any assumptions on working capital? Obviously, that was one of the big surprises with UTi. You were able to make significant inroads into the working capital in UTi. Is there any assumption for that at this stage in Panalpina, or is it just an assumption that stays as it is, and that's an additional windfall if you get it?
I think we've put really big changes in the working capital, they have a fairly high proportion of larger customers. We also see that with our larger customers that they ask for certain terms and conditions. I actually tend to believe that when you implement new IT, it's always something you can see in the working capital. I think it's actually quite a relevant explanation that they have come up with at the end. How much can be recovered or how much is due to the IT and the commercial pressure? It's always hard to tell, and it also depends on the date, because you get maybe the payments one day later, one day earlier, and it means a great deal.
Still, Damian, I guess we can say when the integration is over, two, three years from now, we expect that the combined network capital is better than it would have been as two individual companies. Of course, there is something. It's difficult to quantify, and we've not put it into the business case, it would be some potential extra uplift, you could say.
Okay. Got it. Thank you very much. Thank you for your quick answers.
You're welcome.
Thank you. The next question comes from Neil Glynn from Credit Suisse. Please go ahead. Your line is open.
Good morning. If I could ask three questions, please. The first one, just a quick one. I presume that the Panalpina dividend that's been proposed, there is no change to that planned payout, assuming it is approved. Just wanted to clarify that that is the case, per your understanding. Then two on the commercial opportunities, hopefully open to you, but also the incremental homework required to take advantage of them. Just interested, for one, do you know where Panalpina customers currently procure road freight solutions? Any color on your understanding there would be very useful. The second on that, Asia-Pacific is the greatest disparity in terms of size or the proportion of each network, and Panalpina is bigger than you in Asia in terms of revenue. How different is Panalpina's approach to Asia, per your understanding?
Is it likely that its Asian business, its Asian sales effort will be folded into DSV's approach, or is there a scope for a more combined approach in Asia going forward?
I'll just take the two last questions. It's far too early to say anything about it. We are very pleased about the size and the operations in APAC. I think a combination would be great. Like everything in a transaction, it would be the best of two worlds. We will carefully analyze the systems, and then we will, going forward, be a combination. I think basically that's what we could say.
They have, especially within air freight, Panalpina is organized, or they operate a little bit different from what we do with some fixed capacity, and we are also excited to learn more about that. I think there's a great potential in this combination. When it comes to road freight, it's just simply not information I have access to. I don't know where they procure road freight. Some of them probably procured by DSV. Others could do it with both smaller local companies and some of the big guys. If we can combine the services, I think we have a value proposition for the clients. I think it's important that when you do due diligence, you get no names information on customer and vendor data, otherwise you would violate competition regulation.
That's certainly something that we don't want, because then we get the Danish commissioner after us, and that's not good, because he writes big fines. We've been very diligent when it comes to that. On the dividend side, it's a Panalpina decision. If they will pull through the dividend, it will be a pre-implementation if we sort of ask them to do something else. There's a mechanism in the contract that if they take out capital, it will be adjusted at closing on the exchange ratio. I think that's basically, they'll be paid what is equivalent at closing to 2.375 DSV shares. If they want to take a little bit of the return upfront, then they are allowed to do so. In the long run, it should be the same.
Understood. Just to be doubly clear on that, given that that's already effectively a sunk decision or a sunk proposal, that still would be reflected in the mechanism?
I don't know.
Yeah.
You didn't hear it, as we had some problems with the technique.
Sorry, just to repeat that. Panalpina's obviously proposed a dividend already. That predates this transaction and the agreement. It still would be captured in any adjustment, or are you just talking about any decisions that are made from here on out?
No. If that was not the case, we would have written CHF 2.375 plus the dividend.
Yeah. Okay. Thank you.
The next question comes from the line of Tobias Sittig from MidFirst Bank. Please go ahead.
Yes. Thank you. Just two smaller for me remaining. Firstly, following up on Edward's question on the integration committee, could you just elaborate what the mandate of that committee is? Does it have any formal say in the integration process, or is it just an advisory committee? Secondly, Jens, you said you were allowed to do a due diligence. Could you just expand a little bit on how deep you have been allowed to look into Panalpina's books over the past two months? Thank you.
I think if we take the integration committee, what it will do is it will secure that there's framework in place so that we get a fair and equal treatment of all our employees. That's the one thing that it will do. The other thing is that it will receive reporting on how we are progressing when it comes to that. I think that's the role of the committee, so that we ensure that also our new colleagues, they have the same sort of chance in an integration, and it's not biased unfairly towards DSV. I think that's basically the role of the committee. When it comes to the due diligence, I think we've had a customary due diligence for this type of process.
We've had a chance to ensure that we can give comfort to our own board that this is a solid company that we're buying, that it's a house that is well kept and well in order. We were happy to confirm that.
Thank you. Very clear.
The next question comes from the line of Robert Joynson from Exane BNP. Please go ahead.
Good morning, everybody, and congratulations from my side as well. Just first question on the margin targets. You've obviously said that the aspiration is to lift the operating margin towards the DSV level. Clearly, you did better than that with UTi, with the DSV margin now standing materially above where it was before that deal. I appreciate it's too early to talk about synergies in any detail, is that a possibility in this case as well? Are there any factors that would make that more difficult in this instance?
Yes, I think that's always a possibility. We've said it many times that the larger we got, the more productivity we could get out of it. To use this as an assumption in a business case, it's quite a bold statement. We typically go with what we know. If there's some extra uplift or whatever on the productivity side from what we know today, then that will be a nice surprise.
Great. Thank you. Just second question on the cash returns. Historically, DSV has made progressive share buybacks in addition to the dividend. I guess the nature of this deal would suggest that a larger one-off return is possible. Is that something which is being considered or is it just too early to say?
I said we would like to readjust this capital structure situation that we have, and we would also take into consideration when the deal closes so that there's no overflow at that point in time. That's sort of two things that we're looking into, how to structure that in, what can I say, in the most constructive way.
Yeah. If the question was, if it could be like you said, a special dividend, you should probably assume that it's more in the form of buybacks than special dividends.
Got it. Okay. Thank you. Just a final question, a bit of a housekeeping one really. You said that 20% of Panalpina's air freight volume is perishables and 5% customer-controlled, then in ocean that 35% of their volume is freight management services on non-NVOCC. Could you just tell us what the corresponding figures are for DSV on a standalone basis?
I think I can do that. I think we have sort of virtually no perishables business, and we have no customer-controlled business on the air freight side.
Okay.
When it comes to the sea freight, I would say it's less than 5% freight management. I don't know if we do it somewhere, but it might be that we do it here or there, so just to be on the safe side, we will say less than 5%. It's probably closer to nil.
That's great. Very clear and congratulations once again.
Thank you.
Thank you.
The next question comes from the line of Finn-Bjarke Petersen from Danske Bank. Please go ahead.
Yes, good morning and congratulations from my side as well. It seems like a little bit different structure than the normal deal you do, I just have two questions as most of my questions already answered, I would say. In particular, what is that you're most happy about with the deal? Secondly, where do you see the biggest risk in this integration, which seems more like an integration among equals than so to speak?
Which is some good questions, Finn. We are pleased about the fact that we have managed to join forces with one of the strongest players within our space. It's a combination we have been looking at for many years. I think you yourself, you have even made some kind of reports, what should happen if we were successful. It's also something that we see that there has been some speculation about. I think what excites us about it is, of course, that we think it can generate value for our shareholders and for our customers. This is, of course, extremely important, and that is basically why we go to work. Of course, we can also create a fantastic work environment for our staff. We have grown the number of people with 3,000 since we bought UTi, we will also generate jobs going forward.
Of course, there's a whole risk catalog we go through when we do an acquisition like this. Of course, it is important to maintain the value in the company by informing the employees and the customers, and we have a plan to safeguard that. Of course, we need to have a firm hand on the integration of IT also on a Pathway. Unless that happens, of course, that also represents a risk. We have certain expertise when it comes to that, and I'm sure that we will follow our plans, and we will do what is necessary on the IT side also.
If you have to summarize it, the final question, what is different from previous acquisitions?
I would say not a lot. Compared to our size now, it's not more complex than what we have seen. It's a crystal clear, Air & Sea business, by most, at least Panalpina, we are happy about that. I don't think you should consider it as very different from what we have done in the past. You might sense that it is different. It's just a sign that we do show the deepest respect for the value of the company. Of course, we want to illustrate also to the shareholders of DSV and also Panalpina that we take this extremely serious, and that we will take good care of the money and the investments of the shareholders. Also, believe me, we have a solid business case behind it.
Thank you.
The last question comes from the line of Daniel Roeska from Bernstein Research. Please go ahead.
Thanks very much. Gentlemen, congratulations from me as well. Two questions, if I may. I'd like to come back to a question Ed asked earlier in respect to the systems landscape. Given the different customer and product structures between DSV and Panalpina, and looking at CargoWise and SAP respectively, do you see both systems capable of handling the combined business on sea and air today already? Or is there more work? If there is more work, what are the respective areas you would most likely do some more work on to kind of see which of the systems will stay around? Because you said earlier you were striving for a combined system stack in the end. Secondly, one of DSV's core USPs has definitely been a high degree of standardization throughout its business, driving a better conversion rate.
Also, given Panalpina a slightly different mix in customers and in products, do you envision that to change, kind of going back to the UTi deal, where you took some cuts to the revenue portfolio? Or how do you think about that going forward in the combined entity, kind of the change of, let's say, product and customer strategy? Thanks.
I think we have to discuss first the assumption for the conversation. I think actually that there's been a perception in the market that Panalpina has larger customers than we have. This is not the case. I think that changes the whole debate about this. It means that we already have the capabilities that is required in order to produce the volumes on our platform. That doesn't mean that it necessarily should be our platform. It could easily also be their platform that we will use. We have to evaluate this carefully. Of course, as you briefly touched upon, we do have a high productivity, so we need to understand there are many things that lead to productivity. It's not only that you buy a computer program, but it's also how you are organized and stuff like that.
We will have to go in and evaluate this. I think if you look at customer reporting, customer interaction in general, booking platforms, whatever, I think everybody's looking at consolidated infrastructure, consolidated data, and that's what you call standardization. It's probably fair to say that we've been working hard, at least in DSV, on this. I know that there's been a lot of hard work in Panalpina as well. To measure that going forward, I don't think from a service point of view, we don't have issues with the customers. I think, of course, we have to figure out how we do it in the right way together with the customers. I think it's important that we eliminate this conception that there's been in the market that we have some small customers, and we don't serve customers with a certain size.
I think that's probably something we've not been too clear about either. I think now we can clear away at least this sort of misconception.
Okay. Maybe if I could kind of rephrase that maybe. Does that mean that the kind of % of revenues in the combined entity by large, medium, small customers, however you would want to look at this, would largely stay unchanged from DSV's position today?
Yeah, I don't think it will be a very big difference from what we see today, actually. I think that would be the same. I think also if you look at the numbers, of course, on the air freight side where you would expect. On the sea freight, we've had the same volumes as Panalpina had. Of course, on the control side, on the air freight, excluding the perishables, I think we have a similar type of operation. I think it cannot surprise that we also have a customer mix that is fairly similar. Also remember that our customers, they also come from UTi, ABX. I think if you go way back with DSV, we probably had smaller customers at that point in time.
Cool. Okay. Very clear. Thank you.
As there are no further questions, I'll hand back to the speakers.
Okay, thank you very much for your interest and extensive questions. We were pleased that we could answer them. We will stay close to the investor community. If you have follow-up questions, you know how to reach us. We will now go to Switzerland. We look forward to seeing our new colleagues in Basel in some hours. It's a day of joy at DSV today. We are pleased about this achievement. We know that we have some hard work ahead of us. We are sure it will be a great and successful combination. I'd like to thank all the employees of DSV for also making this happen. Also, I'd like to use this opportunity to welcome all our new colleagues at Panalpina. If you're listening in, I think you will like what you see, and together we will be much stronger than we were as two individual companies.
Thanks for listening in. We will get back to you when we have the Q1 numbers coming out, and in the meantime, we will stay in touch. Thank you, and bye-bye.