Ladies and gentlemen, welcome to the DSV Annual Report 2018. For the first part of this call, participants will be in listen-only mode, and afterwards, there will be a question and answer session. Today, I am pleased to present CEO Jens Bjørn Andersen and CFO Jens Lund. Speakers, please begin.
Yes, good morning and welcome to this conference call where we will go through the full year results 2018 of DSV. We have a presentation available for you. I'm sure you can find it online. As we normally do, Jens Lund and myself will go through the presentation, and we will try to leave plenty of room for Q&A afterwards. On page number two, please take a moment to study the forward-looking statements. After you have studied those, I'll direct your attention to the agenda, which you will find on page number three. We will start off with some highlights about the year and Q4, go through the three divisions, then I will ask Jens Lund to go through the financial review, the outlook for 2019, and also to go through some revised financial targets that we have published this morning.
On page number four, you will see what I will describe as a GOAT result, and those of you who know the term will know that it means greatest of all times, because this is the way we consider the result. We have significantly improved the earnings compared to previous years. Overall, we've managed to grow the earnings before special items with 15%, taking the EBIT result now to DKK 5,450,000,000. We consider the numbers quite strong. We have seen a good development on gross profit in all the three divisions, and in the last quarter, we have seen EBIT growth also significantly in both the Solutions and Air & Sea divisions. The adjusted free cash flow was totally as expected, but we did an extraordinary contribution to a pension plan in Sweden of about DKK 250 million at the end of the year.
We did not know if we would manage to do that in 2018 or 2019, but we managed to do that in 2018. As you are pretty well aware, you have seen our company announcement also from the 16th of January, where we informed you about a private proposal we have made to acquire Panalpina. This is a substantial step for us. In case we succeed, it will be the by far biggest acquisition. We take it extremely serious. We spend a lot of time on that. At this moment in time, we have no further comments on the offer, and I will repeat, we have no further comments to the offer.
I think we will go, of course, staying on page number four. I think it's also quite okay for us to be able to say that the return on the invested capital before tax amounts to 26.7% for the full year 2018. I think that's something we can be pleased about. Page number five, Air & Sea. I can repeat myself from previous conversations we've had. Another rock-solid result. Very strong performance. We have seen a slight decrease in the volumes on the markets in which we operate, especially in air freight. If we start and look at the commentary, we say that we have 5% growth in air freight, which is much better than the market. We talk about Q4. The market grew 2%, and for the full year, we've grown the number of tons 8%, which is twice as high as the market growth.
It's mainly driven by growth in export from Europe and from the Americas. When it comes to sea freight, we've seen a growth of 4% in Q4, and also here we've seen stable yields. We've seen also, which we're happy about, improved market growth on the trade lanes from Asia to Europe, which earlier in the year had a slightly negative growth rate, actually. All this means that we can see a significant growth in GP of more than 10.4%, which we are extremely happy about. You can also see that it has a positive effect on the conversion ratio, which for the quarter lies around 39% and for the full year, 40% compared to 37% one year ago. Page number six is the yields. Also fairly stable.
We are pleased about the yields, and if you are to do some forward-looking calculations or modeling, we would advise you maybe a good way would be to use the average for both air freight and sea freight. We see no risks of any imminent material deterioration of our yields. Our expectation is that the yields going into 2019 will stay more or less at the level they were in 2018 if you use the average for the full year. We go to Road. We have underlying full-year growth of 4.5% in gross profit and 8.2% in EBIT, and that is when you adjust. This is the last time, we're happy about that we're going to talk about it. When you adjust for the one-off gain of DKK 125 million we had two years ago in Q1 2017.
We saw a volume growth of 2% in the quarter and 3% in the full year. It's more or less in line with the estimated market growth in the quarter and for the year. The division is focused on absolute GP rather than volume, and we have said goodbye to a few not so very profitable customers. We're happy about the conversion ratio. It's at 21.6% for the full year. We have noted that some of the analysts had had slightly higher expectations for the Road division. We have flagged this morning that one of the reasons that we fell maybe slightly below some of your expectation is the fact that we had to book approximately DKK 15 million as a cost in the other external costs line related to some dilapidation cost that we had on some property we vacated in Ireland.
Normally, this should never come as a surprise to us and this is not what we expect also going forward. We have very strict procedures, but they had slipped through the very tight controlling system this time, and we, of course, are not super happy about that. It amounts to approximately DKK 15 million in Q4. Last slide before I hand over to Jens Lund is the Solutions division on page number four. I think, again, very strong result. Top line has grown tremendously, both by retail and also by e-commerce. Actually, also, we are doing fairly well when it comes to automotive. We have 6% new warehouse capacity added and also a 9% increase in the headcount simply due to higher activity. The earnings growth for the full year is formidable.
We have seen a 44% growth in EBIT for the full year and 20% for the quarter. We did see already a pickup in the EBIT at the last part of 2017, hence we don't see the same growth rates in Q4 as we see for the full year, which is absolutely no surprise for us. We're happy to see this strong development in the Solutions division, and we believe that they can also continue to be a very important contributor to EBIT on a standalone basis in DSV. With these words, Jens Lund will start on page number nine. Jens.
Over to you. Thank you.
If we look at the overall numbers, DKK 79 billion in revenue for the full year and DKK 21 billion in Q4, so definitely 10% growth in constant currencies. On group level, the GP also up to DKK 4.44 billion, which is a growth of 10% on a group level as well. The EBIT came to DKK 1.3 billion with a growth of 12%, so the marginal conversion ratio also up. I think some of you have rightfully pointed out that we have seen some extra high cost in Q4, and perhaps also some cost shifting from one line to another.
I think it is worthwhile mentioning that we have insourced certain IT jobs that we had outsourced before, so they have moved from other external expense to staff cost. It is, on DSV level, perhaps not such a big deal, but it is some money, anyway, that we are talking about.
We have also had significant cost in relation to the IFRS 16 implementation, where we have spent a lot of resources to get this right. We have evaluated more than 20,000 contracts and taken more than 8,000, I think 8,000 or 9,000 into our system, and it has been quite a cumbersome exercise that has cost us significant resources. I would also say on the staff cost line that because the share price has come up, the value of our share-based incentive programs in general adds some extra cost on the salary line. Not all the salary increase is necessarily due to more headcount or increased wage pressure, but also due to the fact that we allocate a larger value in stock options than previous years. I just want to point this out to you as well, but still marginal conversion ratio up.
We are still keeping tight control over the cost. When we come to the financial expenses, there has been an FX loss in Q4. We have seen quite a few gains throughout the year, but in particular, the dollar has weakened a little bit, and that sort of led to this situation. Tax for the period, not much to say about this. Approximately 23%, and we have guided also 23%. I think we are good on this. We will skip to the next slide, which is the cash flow. I think as Jens Bjørn said, we made an extraordinary pension contribution. This could be considered, I guess, if you take the pension deficit and calculate it as debt, as a repayment of debt, but it is booked in another way in the cash flow statement, namely as a change of provision.
That is the reason why it is sort of impacting our free cash flow. Adjusting for this, we are more or less spot on the guidance. Some of you have said, "Did you know this beforehand?" There has been quite a few questions surrounding this, and it has to go through an approval process with the authorities, before we can do such a thing and establish a fund like this in Sweden. We were good to go, and then we had to execute on it. That is not necessarily something that is entirely in our hands. I would like to point your attention on slide number 10 just to the average duration on our debt, which is 3.2 y ears. We have actually refinanced our sort of normal revolving credit facilities this year.
They come in a typical three plus one plus one structure, so it means that we can keep the duration around the three-year mark, which is very comfortable given our leverage situation. I would also point just to one thing more, which you will have to take into consideration, and that is, of course, that the target gearing ratio, going forward will be less than 2x EBITDA. The reason for this is, of course, the implementation of IFRS 16, where we will take our off-balance, basically, debt position, and book it in our balance sheet. Going forward, less than 2x EBITDA, and I think we are in good shape when it comes to this number. If we shift to the next slide, number 11, we have realized DKK 5.45 billion in operational result.
If we then look at our guidance, we have guided between 2% and 9% growth. We think it's a situation where you cannot predict what is going to happen in 2019. There's quite a bit of uncertainty. I think we can all agree that the full range can become relevant. The adjusted free cash flow for DKK 4.3 billion, of course, it can be a little bit higher or lower because it always depends on your collection up till year-end. DKK 4.3 billion, that's what the number we go out with. Tax rate, basically 23%. I think that's a little bit, there are some assumptions below, but I'll not come into them. I will, however, go to slide number 12, where we can see the IFRS 16 calculation in a little bit more detail.
Actually, we have also added another slide, I think it is in the appendix where you can get it a little bit more granular per division as well, so that you know what to work with. Overall, should perhaps say that we will of course, increase our EBITDA, quite a bit. Because we will have to move some of the costs that we have incurred to other lines. Normally, we take the property cost as cost of operation, but now it moves into amortization depreciation, at least the bulk of it, and the financial cost will go to the financial items line. Definitely more EBITDA, but we will also see an increase in our liabilities. That's the other factor. You'll then have to get used to.
We still consider ourself asset-light, and the way we steer the company should be more or less the same. Of course, the balance sheet will look a little bit different. The financial targets on slide 13 have been adjusted accordingly. We've tried to keep the 2020 targets and revised them a little bit for IFRS 16 impact. I think the only debate that we really had is, the Road seems to have been revised down, but we would like to have a joint target for Road and Solutions on the conversion ratio. We've found this compromise. Before we get into the nitty-gritty, that's sort of the argumentation behind this. I think, apart from that, we continue to work towards these targets. If we move to slide 14, you can see that we've actually taken the 2008 number and calculated our compounded annual growth rates on.
It's probably the worst assumption you can use, you should have used the 2009, the team said then it's more than 20%, and we can't have that. It seems as if it would also be wrong perhaps to use this year, as the calculation. 14% growth in EPS is still something that we're very satisfied with. After all, this is what you are looking for as a shareholder, more income per share. With that I think we will go to slide 15 and open for questions. Please dial in and ask your questions.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad, and if you wish to withdraw your question, you may do so by pressing zero two to cancel. There'll be a brief pause while questions are being registered. Our first question comes from the line of Damian Brewer from RBC. Please go ahead. Your line is now open.
Hello. Good morning. Two questions from me, please. First of all, both focused on the Road business. On the Road business, could you elaborate a little bit more on where the regional variations are, and in particular, whether deviation from the median conversion ratio has expanded or contracted across the business in Q4 when you look year-over-year? Secondly, looking sort of into 2020 and 2021, can you talk a little bit more and update on the Road transport management system, how the pilot's going, where do you see full rollout, and when does it have the sort of critical mass effect that one would expect?
I think I'll take that. If we take the conversion ratio, it's clear that we've had a few disappointments. Jens Bjørn did already mention one of them. There are some markets where there's a little bit of concern/unrest. If you go, for example, to an area like Turkey, could be an area where we've also had a few challenges. I would say that there are certain economies in Europe that have shown a bit of weakness as well. This is also visible in our figures. Could be more in larger economies such as Sweden, Germany as well, where there's a lot of capital goods being produced. You do see small impacts, of the things, I guess that you see in the media as well when it comes to this.
I think on the IT system, we've done the second pilot in 2019 or 2018 on the IT platform, and we now have what we call the business blueprint in such a format that it's actually more or less completed. This means that we can now go into a phase where we can do the final configuration and pilot this as well. If this works out fine, we can start the rollout. It's been a cumbersome exercise where you do the quote, the booking modules, and you would do the mobility track and trace solution as well as reporting and other stuff as well. I think that it's cumbersome, but we take small steps all the time, and it's surely moving in the right direction.
Road needs a new IT platform in order to be able to scale to the extent that we need in order really to make a big step in the results. I think we are on a good way forward, but there's still some ground to cover.
Thank you very much.
Thank you. Our next question comes from the line of Andy Chu from Deutsche Bank. Please go ahead. Your line is now open.
Good morning. Two questions, please. Firstly, on just following on from Road and just to sort of drill down a little bit why you feel comfortable with that 2020 guidance. You obviously mentioned some sort of economic impacts. I think the world feels a little bit of a softer place from a European perspective in terms of the macro. Why are you keeping that 5% margin target, and why do you feel comfortable around that? Secondly, around the sort of working capital debtors, I think there's a new table in your annual report around sort of aged debtors. Just wondered if you can just clarify in terms of sort of overdue debtors, sort of more than 120 days. It feels like you've got a carrying amount of DKK 312 million and a loss allowance of DKK 120 million for this year.
It feels like quite a large number versus last year. We had slightly different reporting of DKK 12 million. Just wondered if you could just thresh out whether there might be any risk or some sort of aged debtors as you look forward into next year. Thank you.
I think the Road target is, it's Jens again that will answer this one. Actually it is perhaps revised a little bit down if you really look deep into it, because we have a target of 5%. We get some help from the new IFRS 16 impact. Now it's still 5%. I think you could read into this that we have lowered it a little bit. At least that's what we would like you to read into it. If we look at the trade debtors, I think that we are well covered when it comes to provisions. We've seen slightly higher losses, I think, in certain areas. I think in many of these uncertain places, you do face a bit of risk, but I don't think you should expect any sort of big deviations when it comes to losses on trade debtors, not right now at least.
I think that's what I can say to that.
Just on the Road, just reading into sort of the IFRS 16 impact, obviously nothing in terms of the IFRS 16 impact. If you've got some impact from Air & Sea, the same impact for Road, you're saying we shouldn't read anything into that in terms of the revised targets for 2020, which would make sense. Just in terms of Road, reading the sort of 0%-0.5% , you're saying that reading into it, the nitty-gritty, sort of 5% becomes 4.5%. Is that right? Or maybe 4%. Is that-
No
The right reading on what Road?
No. It's probably-
Yeah
If you stick to the 5% and you take the middle of the range, you'll probably downgrade it with 0.25% or something like this. It could also be 0.3% or 0.2% or whatever, that's the way that I think you should read it.
Do you think it'd be fairly linear to get I mean, it's pretty difficult to tell, but do you think it'll be a linear improvement in margins from your sort of 3.7% to your 4.7%-4.75%? Is that?
What you have to look at is, it's a target, it's an aspiration that we work towards. Depending on how much progress we make on the IT, it's not necessarily that we will become suicidal if we make 4.5%, and we have to ask for a couple of years to get to the 5% target. We know we will get there once we have the IT. There's no doubt about it. We have a lot of focus points, I guess, as you can imagine, and a lot of things that we work on. We do allocate a certain resource to Road, but they don't necessarily get all the attention that we have. We try to balance this, and then we will also, of course, stand accountable at the end of the day.
Right. Thanks very much.
Thank you. Our next question comes from the line of David Kerstens from Jefferies. Please go ahead. Your line is now open.
Thank you. Good morning, gentlemen. Two questions, please. First on Solutions. If you look at your automotive customers, they sound increasingly bearish with regards to the outlook for 2019, you still call out automotive as one of the key growth drivers in Solutions. To what extent do you expect to continue to be able to grow with your existing customers this year? Secondly, regarding Solutions, do you see any potential impacts ahead of Brexit from record stockpiling in the U.K.? Do your warehouses have sufficient capacity available to benefit from this trend? The second question regarding your yields in air and sea freight. You highlighted that you are very confident that they will remain at current levels, you highlighted the increase in Q4. I understand that is reflecting a tight capacity situation in the prior year quarter.
To what extent is the gap with your peers structural, or is that something that eventually will close over time? Some more comments on that would be very useful. Thank you very much.
Yeah, you're right. I'll take this. Solutions, we're big in automotive. It's a big, what you say, vertical for us. When we are optimistic about automotive, it's got to do with the fact that we are taking market share. We're growing with new customers, we're growing with existing customers, and that clearly offsets any negative, if we should see a negative development on the current trading that we are doing with a particular customer. I personally went down to see an unnamed automotive customer not very long ago. They told me that their total turnover, their total spend on transport and logistics was EUR 8 billion. It's a very, very large customer for us, but we're a very, very small supplier to them. If we could just grow a little bit with a customer like that, we are safe.
We have capabilities, we have an interesting product for these type of customers, and we are growing with them, even though the customer in itself might not see the world as very positive right now. That's some of the reasons that are behind the fact that we are optimistic. Also remember that even though the sale of ready-made cars might not be super positive, the supply chains are still becoming more and more complex, and that drives volume growth for us. Even if there's no growth in the number of cars which are being sold because of the complexity or the parts that goes into production, we could actually see a positive development. When it comes to Brexit, I think we have the necessary warehouse capacity.
Depending on the outcome, of course, we are not in a position where we can guarantee a full and seamless operation. If it becomes a no-deal scenario, of course, this is also what we've said to customers, they should expect some sort of disruption in their supply chain. That is the case. We have been very close to our customers. Customers, they have separate issues with this. Some customers don't really have any problems with it. Some customers, they might have chosen the U.K. as a European distribution center. Of course, we are helping them to move, what you say, their products outside of the U.K. right now and service Europe from maybe the Benelux or Germany. Others have the reverse problem.
It is a complex situation, but I think we have a fairly good grip on the situation. When we say that the yields in Air & Sea are stable, it's based on the knowledge we have about the market right now. I don't think there's any structural changes to the yields. We can come back to this again and again, but please do bear in mind that a large proportion of the GP that comes from what we call, or some of you guys call added value services. We do the non-freight-related services, and they are really stable. This is what makes us comfortable that the yields can be stable. They cannot be rock solid stable. If you take the average for the full year, that probably fits well into what we expect for the year 2019 also.
All right. Great. Thank you very much.
Thank you. Our next question comes from the line of Marcus Bellander from Nordea. Please go ahead. Your line is now open.
Thank you. One question regarding your acquisition strategy. In the past, you've mainly made friendly takeovers, but lately you've launched two hostile bids during a pretty short time period. What's the reason for this change in how you go about making acquisitions?
We don't consider, I would say, the last two. If you allude to the CEVA case and the Panalpina case, we don't necessarily consider them a hostile approach. A true hostile approach would have been very different from what we have done. You shouldn't read too much into this. Each transaction has its own characteristics. Of course, the way we approach the target is, of course, based on a conclusion from very thorough, what you say, analysis on each target. We don't consider them really hostile as such.
Okay. Thank you.
Thank you. Our next question comes from the line of Neil Glynn from Credit Suisse. Please go ahead. Your line's now open.
Good morning, everybody. If I could ask three questions, please. The first one, Jens Bjørn, you touched on value-added services a few minutes ago. Just interested, as global trade becomes more complicated, obviously, there's volume questions, but is this also providing more opportunities for you to secure more value-added services for customers needing more solutions? The second question, I think it's the first year-on-year growth in headcount in Air & Sea since the UTi deal. Just interested in the outlook for 2019, particularly if the market growth is slowing. How many people do you expect to add within Air & Sea based on your current view of the market in 2019? Finally, again, talking towards a deteriorating market or potential weakness. You've obviously newly expanded the business, and I'm just interested in your approach to managing the top line with a bigger business.
How does that influence how you act in a potentially soft market? Added to that, you've integrated businesses in tough markets before, but is there an argument that big M&A in a deteriorating environment may actually heighten the risk to the underlying business? Just interested in your thoughts on that. Thank you.
About the value-added services, some of them are really what we also internally call VAS or value-added services, mainly in our Solutions division. There's a big need for this from our customers. It goes from very simple operations to put a label on a particular product in another language, if the goods are going to be sent to another country, to very sophisticated services. There's no doubt about the fact that if you compare an invoice that you receive from DSV today compared to five or 10 years ago, it holds more lines now. We do offer more services to our customers. They are outsourcing more and more of their operations to us, and they ask us to do more and more. A lot of customers don't see transport and logistics as their core competence, and if they can ask us to do it, they will do that.
That is also something that we expect to be able to continue going forward. I think, Jens, you had a point on the headcount. Maybe you can talk about that. Maybe I could just allude a little bit to the last question. Managing the top line and integrating a potential is hypothetical, of course, a company in a difficult market environment. First of all, I don't think that we will get into a similar difficult market environment as we saw in 2008,2009 when we integrated ABX. It will not make it more difficult for us to integrate the company. I don't see that as a problem. When the top line, of course, we will continue to expect growth above market rates also going forward.
As you have seen in the past, we can reiterate that statement many times again. At DSV, we favor profit over growth, not growth for the sake of growth. We need profitable growth. This is also why you will probably see slightly lower growth rates than what others can show to. You will see that we have managed to protect the yields, and hence, we can grow the absolute GP and also the EBIT consequently. Jens, maybe you wanted to talk about the-
I think if we look at the-
Look at the numbers
The headcount, I think, in 2016 we were 12,900 in NC. Still taking cost out in relation to the UTi transaction. What then happens is that there's a trough. I think we reached that at the bottom of 2017 with just a whisker over 12,000 headcount, and now we're 12,100 at the end of 2018. I think the way you have to look at this is we grow our GP quite significantly. I think we are up almost 10% in constant currencies, a little bit in absolute figures. Of course you would need, at the end of the day, more hands. You have right-sized the business, now you'll come into the growth. The marginal conversion ratio on such growth has historically always been high, and higher than our target. I think that's the way you look at it.
If we manage to drive the company forward, we will need more hands, but it will still be at a very efficient pace. We've now right-sized. We can grow. We will increase the headcount in line with our growth, perhaps at a little bit more efficient sort of per FTE than what we have in our numbers right now. I think that's very important going forward.
Did that make-
Yeah. If I could just follow up on that, I just wanted to be clear. Is there any difference in terms of how you're planning headcount this year? I notice you haven't given me, I guess, a number in terms of what potential growth you might see in headcount in 2019. Are you taking a more fluid approach because of uncertainty, or is that just because you don't want to give any number at this point?
It's not the way it works. I don't have a number. Each country, each small business unit has a target for 2019 in terms of growing its earnings in absolute terms. That is the EBIT. He will strive, go through whatever he can to achieve those numbers. That would also mean that if volumes are not picking up significantly, he will not add headcount to the organization. If we go into a modest growth rate, I would be very surprised if we see a growth in the headcount. If we were to see that, I'm sure Jens and myself, we would do what we could to guide the organization in the right direction. It is not our expectations that headcount will grow. We will still see a good impact from the incremental conversion ratio that we hopefully will see in 2019.
Depending on where we are in our guidance, there can be different numbers. It's not so that we say hire 200 people to the division and then see what you can do with them. It's the other way around. If there's more work, of course they will need more hands, and I think that's the way you look at it.
Absolutely. Thank you.
Thank you. Our next question comes from the line of Lars Heindorff from SEB. Please go ahead. Your line is now open.
Morning. Two questions from my side, please. Firstly, regarding Road. I don't know if you can give us an indication of what kind of improvement in gross margin you expect from the rollout of the IT system, if any, over the next couple of years. That's the first one, and the second one is regarding the net working capital. If you go back some years, it was close to zero. I know you've been doing acquisitions as the market has changed, but I can see some of your key assumptions on page 13 in the presentation, that you have assumed net working capital around 2%. Is that something which has been changed, or you no longer have any ambition of reaching a net working capital below that level? Thanks.
I think we take the net working capital first. I think it's also a question of business mix, if you look at it. NC, they don't consume a lot of investments in fixed assets and some stuff like that, but they consume more working capital. Now that NC is a larger proportion of our business, I think that's the main driver behind this development. As a consequence of this, the target is 2%. We used to have a target of 1%, which you rightly point out. Depending on how a year ends out, of course it can be a little bit more or a little bit less. That's very hard to predict given the volumes that flow through our system.
When it comes to the Road division, I think there's both a business case for being able to plan better, this should increase the GP. It's very dangerous always to have too big aspirations on the GP, because it means quite a bit on the numbers. There's a productivity point to it as well. If I were sitting there with your calculation, I think you would expect us to get something out of our planning tools and capabilities so that we can utilize the capacity better. That could perhaps be half of the change we need in order to reach our financial target. The other one would be on the productivity side, where we simply need to increase the productivity now that we got better tools or will get better tools in some countries.
We already have some of the tools implemented, for example, quote tool and mobility, here we already see it's starting to take off. We launched MyDSV as well, a new booking platform that also helps us on the booking quality. We are slowly phasing some of the tools in, they should help on the number of people that have to sit and do manual work today because the quality of the data is too low. I don't know if that helps you, but that's the plan that we have.
Very helpful. Thank you.
Thank you. Our next question comes from the line of Casper Blom from ABG. Please go ahead. Your line is now open.
Thanks a lot. Two questions from my side as well. First goes to Solutions, where you can say that, my impression at least is that the growth you are achieving here seems a bit disconnected from underlying trade growth. Can you give any sort of guidance to what level of growth would satisfy you, both in 2019 and maybe also in the years to come? Secondly, within Air & Sea, I think if we think back a year, and back to performance in 2017, when you guided for 2018, you sort of hinted that you had a couple of new contracts already signed that would start helping you in 2018. Have you got any of those hidden tricks up the sleeve, looking into 2019? Thanks.
Thanks for reminding us. I don't really seem to recollect that we had any aces up our sleeves one year ago, but I'm sure you are right. I cannot say that we have anything material which will impact us. We expect that the Air & Sea will continue to show strong performance. They are a strong organization. They have good margins. We have excellent service. The customers like the mix between our entrepreneurial more hands-on approach and then our new renewed size also. I think the table is set for another good year for 2019. It doesn't come by itself. There's a lot of hard work that needs to be done from the guys and girls out in the organization. They are up to it, they are up for it, and I'm sure that they will set new records also. When it comes to Solutions, you are right.
Of course, we need to be realistic and say that we cannot continue to see the growth rates that we have seen for the full year. Of course, 2018, we've grown the earnings, as you saw, from DKK 500 million to DKK 700 million. It's 44%. We are likely to see more modest growth rates. I still believe that we will see a certain momentum, and I also actually believe this is a positive notion, some sort of disconnect between the earnings and the growth in the economy around the Solutions in a way where we will see more EBIT growth than what you actually could expect when you look at the economy in Europe and in the U.S., where we mainly do the contract logistics. Actually also now in Asia. I should not forget those guys.
Okay. Just to get a little bit of flavor here, would it be fair to say that you would also be expecting double-digit EBIT growth in Solutions in 2019?
I guess we can sneak us up to something close to double-digit. That should be possible for the Solutions division, yes.
Okay, thanks a lot.
Thank you. Our next question comes from the line of Edward Stanford from HSBC. Please go ahead. Your line is now open.
Good morning, everybody. Can I come back to net working capital? Clearly, you mentioned in the statement that it was higher than expected, and it's grown quite considerably in the Air & Sea division. Can you just give us a flavor of what the pressures are you're seeing? Are there any actions by competitors that are causing difficulties in provision of working capital? Do you see any end to that, or should we expect it to rise further as a percentage of sales in Air & Sea in 2019? Secondly, just coming back to the value-added services side, is there anything strategically that you would like to add in terms of capability to what you already have? Thank you.
I think if we look at the net working capital, I don't think it's a big theme for some of the customers that they get a certain number of days in credit. I think it's also become more outspoken that even if we have agreed something, then we don't stick to it. That's sort of, I think, the trend. I think us forwarders then have to look at the return on invested capital, and make sure that when we allocate the capital, then we have to carefully evaluate if it makes sense to work for a customer or not. That's some hard choices we have to make from time to time. That's ultimately capital allocation at the lowest level.
That you say to a customer, "We can't create a return, so our investors, they don't accept that we use capital for these things." We do this on a continuous basis. We have incentive schemes internally with net working capital charges for customers that consume high level of net working capital, so that we make sure that the capital allocation is right. I think that's what it's all about. At the end of the day, let's say a customer would want a very high level of credit. As long as they pay for it, then I think we're all okay if there's no credit risk. It seems as if there is a trend where.
This is something that some customers strive for. I can't really see the point, but it's the market we operate in.
I wouldn't say, if that was part of your question, that we see any irrational behavior amongst any of our competitors. It's not like we see a clear trend with longer payment terms. It's just this, if slightly smaller customers might now ask for slightly longer payment terms, and as Jens says, the behavior is not improving. You can say the outsourcing to payment agencies in different time zones can be also problematic, at least in the beginning, where things need to settle a little bit in with our customers. We try not to make that our problem, but if we like it or not, that becomes our problem sometimes, if you know what I mean. It has the highest focus in every Danish Krone we can improve. Net working capital can be used for something else in DSV, and everybody is aware of that.
When it comes to the value-added services, I think it's more a matter of using the best practices that we have in DSV. I don't really necessarily see that we have lack of knowledge, or if there's a product out there that we don't have at DSV. It's more like using more of the good stuff that we have some places in the organization elsewhere as well, and use the capabilities that we have. We have some best practices that we're rolling out, and also some systems that we are more systematically now offering to the customers, compared to maybe what we did some years ago.
Thanks very much.
Thank you. Our next question comes from the line of Bruce Chan from Stifel. Please go ahead. Your line is now open.
Yes, good morning, gentlemen, and congrats on the good result this year. A few questions from me, maybe one in each division. I guess, first in Air & Sea, Jens Bjørn, you mentioned that the slowdown on the core Asia-to-Europe lane had improved in Q4. I'm wondering, outside of demand-related factors, we talked about the possibility of some structural changes, like with nearshoring as contributors to that pressure. Do you have any more color commentary as you look back on 2018 as to what had driven that slowdown? Second question on Road, you mentioned some of the slowdown in 4Q shipments related to shedding some underpaying accounts. Do we have any more of that pricing action to work through in 2019? Third question on the Solutions side. E-commerce has been growing quite nicely over the last several quarters.
Is there anything inherent in that business that maybe makes it more challenging from a yield or margin perspective as far as the headcount or square footage requirements? Maybe one last one on the M&A. Any changes in the competitiveness of the M&A market over the last quarter or so? Happy to take those questions offline. Appreciate it.
Yeah, that's a lot of questions. First, Air & Sea, it's been a very volatile, very strange year in terms of volumes. Of course, we understand the reasons behind the strong transpacific volumes at the end of the last year. I think it's got more to do with some maybe destocking activities, which has happened. We have really not seen the nearshoring, apart from some high-profiled, maybe cases. It's not a trend that we see. We do more see movements from within the regions, if you know what I mean. Some production have been moved out of China, maybe to some neighboring countries, which do not represent a problem for us. I do agree with you.
It's been a very volatile year in terms of volume. If you start to analyze each trade lane, we've also seen a lot of volatility on those. Overall, the year has been okay. We've seen growth, and we are optimistic that we will see growth for 2019. Road, I have not heard of any larger customers that we are shedding. It sounds so dramatic when we say shedding. It's not like we will go out and just terminate the contracts. It will always be on the basis of some negotiation where we try to increase the rates. Sometimes customers say, "Listen, we cannot accept that increase," together we will then agree that the customer should go somewhere else. I think it is behind us. We have a good customer base now, and we need to work on that in 2019. Solutions, you're right.
E-commerce, it's a product that probably carries a slightly lower GP percentage. It's a lot of volume going through. It's probably also slightly more labor-intensive. It's still very attractive because it grows so much, and it's not a standalone business as such. You often do both retail, high street deliveries, and e-commerce for customers, so it's something that you need to add to what you're already doing. It could over time, it's a good point. It could over time change a little bit the structure of some of the margins, dilute them maybe a little bit in the Solutions division. As long as the absolute earnings continue to grow, then we are happy with that.
M&A landscape, I don't think it has changed a lot. It's a topic you could talk about for a long period of time. People talk about vertical integration. We've seen some shipping lines going in during 2018. Overall, we still believe that the overall theme is consolidation in a fragmented industry. It will continue. We would like to take part in this, I guess it's no big changes in the M&A landscape.
Hello, Bruce, are you still there?
I am, thanks, [Moller]. Appreciate the color.
Thanks.
Okay, thank you. Our next question comes from the line of Maurice Poulard from Kepler Cheuvreux. Please go ahead. Your line is now open.
Yes, good morning. Thanks for taking my questions. The main question I have is actually a follow-up of the previous ones on working capital movement. Your guidance for EBIT is DKK 400 million range, and your free cash flow guidance is obviously one number only. That is despite your comment about stable gross profit per unit, and an indication of the type of volume gross you would anticipate above GDP. I'm just curious, why is there a DKK 400 million range in your guidance if you have some idea of the free cash flow? What is the key swing factor here? Is it the volume you would expect from the first half to second half? Is it cost growth? Some plans you have on that would be helpful to better understand the guidance. That's pretty much it for me.
Okay. I think the working capital, you can have many assumptions into that. There can be a little bit extra investment as well, that sort of fluctuates. There can also be some movements on the provisions as well. It doesn't necessarily only have to be, if you look at the free cash flow guidance, the working capital. In general, I also think you have to look at the number, not like DKK 4.3 billion, and then .00. There can be a little bit below or a little bit above. It's also very dangerous to guide a range when you look at the working capital, because this includes all movements, both the operational and all the movements in the balance sheet. We try to guide a number, and then we could write ± as well. We like just to guide this number.
This year, we were, apart from the pension, spot on. Some years we've been a little bit above, like last year. I don't think you should read more into it. You have to make your own assumptions when you make the spreadsheet, and I'm quite sure with the comments I give you'll be able to do so and make sure that it all adds up. At the end of the day, let's say we make DKK 4.3 billion, we will then allocate them in accordance with our capital allocation policy. I think this will give a very high conversion ratio, which is also what you would expect from a service company, that we do convert the earnings we create into cash.
Is it correct to assume that the main sensitivity in your guidance has to do with volume growth at this stage? If so, what would be your best guess of the pattern between first half volume versus second half volume?
I think, of course, it's the volume that is a swing factor in our numbers. We keep all the other assumptions then equal. There can be changes in the labor market that we don't know right now. Labor is, of course, an important component for us as well. We take the assumption that nothing really material happens there when we make the budget. You're right, it's the volume number. Right now we take it basically month by month. We have seen that it seems as if there was a bit of a sort of slowing down at the latter part of 2018. We hope that this slowdown will not be too long. Then we might see that it picks a little bit up later on. It could also do the other thing, that's the reason why we've guided the range.
Thank you.
Thank you. Our next question comes from the line of Joel Spungin from Berenberg. Please go ahead. Your line is now open.
Good morning. I've just got three questions, actually. Maybe if I can just start off by asking just back again on the working capital, and something I think we've discussed in the past, which is the potential impact of tariffs on Transpacific volumes. I realize Transpacific is not a huge trade lane for you and your sea freight business, but has there been any impact in terms of tariffs, and specifically in terms of cash and working capital at all as a result of that? Maybe give us around that'd be helpful. Second question, just in terms of your disposal of PP&E and the cash flow. Obviously, the number for 2018, I think, was the highest it's ever been. One assumes you sort of can't continue to do this forever. How should we think about that number going forward? What contribution it makes to cash generation.
Finally, just a relatively dull one, the D&A charge in the fourth quarter, I think, was down by about DKK 14 million or DKK 15 million compared to last year. I was just wondering if there's any specific reason behind that.
I can say for sure that these are very good questions, and they are for Jens Lund.
I think the net working capital, no, we are small on the Transpacific. I know that there might have been some fluctuations for some of our colleagues that have a different exposure on that lane. It's still important for us, but there are some players that are much larger than us. Nothing really specific on that one. If we take the PP&E, I think, if you see, we grow a lot in Solutions. We put a lot of racking into the warehouses. This is what we put onto the books right now. We've then, as you point out, we also take out some different facilities, stuff like that, so that the fixed assets, we try to reduce them all the time.
I think you can also see that in the notes that it gets less and less that we hold on the balance sheet of land and buildings. I think that drives it a little bit down, and I think if you look at the intangibles, we do invest a lot in IT and IT infrastructure as well. Just want to cover that as well and say that this is, of course, part of having a high productivity going forward. Try to stay as low on the tangible fixed assets and, of course, continue to invest in the intangible assets because this is basically something that increases our productivity.
Can I just follow up quickly? Just in terms of thinking about the going forward, the disposal of PP&E, there's no reason to think that number is going to substantively change going forward, or does the fact that you can't under IFRS 16, obviously everything has to be on balance sheet, change the equation in terms of thinking about what you do there going forward?
Yeah. I think we will split that out so you can see what the IFRS 16 numbers are specifically. Of course, over time, when we get rid of all our old-school fixed assets, if we can call it that, then we cannot continue to under-invest on that side. It will take some years before we reach that stage, meanwhile, we continue to slim down our balance sheet as much as we can. Then we will isolate the consequences of the IFRS 16. It's typically trailer lease on the equipment side, forklifts on the equipment side, and then on the land and buildings, it's of course our terminals, our warehouses, and our offices that will be booked under these. Historically, we have had some warehouses and some offices on our books, and we are on the direction where we slowly reduce this.
I think it's easy to see if you go back also historically in the numbers, you'll be able to find this.
Okay. Sorry, just to check very quickly, the reduction in depreciation amortization in the fourth quarter is explained by what?
It's explained by that we have less of these fixed assets on our balance sheet.
Okay. Thank you.
Thank you. Our next question comes from the line of Dominic Edridge from UBS Group. Please go ahead. Your line is now open.
Hi there. Hopefully a quick one from myself. I just noticed the fact that obviously in Solutions you've now more than 60% through the rollout of the warehouse management system, your new warehouse management system. Can you just say whether that fed into the, obviously, the profitability growth that you've seen? Secondly, just looking forward, how do you see that rollout being? What's the optimal level you can reach? B, is there further to come on the profitability side from that rollout? Thanks so much.
Yes. I think we've now rolled out 60%, as you say, onto our platform. It's quite a long journey to complete that rollout. I think it will take another three, four years, before we have done the rest of the volume. You have to remember that we are deeply embedded into our customers' ERP platforms when we do this, so changes are very cumbersome. Right now, we have 60 people in the teams working on this year in and year out, changing the volumes. It gives us better productivity because we can invest on our joint platform in better equipment, better tools for our staff so that they can have a higher productivity and also a better service offering for our customers. We simply can do more value-added services for them.
I think that's also part of the success that we have in Solutions, that we have this platform, basically IT infrastructure we roll out that help our teams to become more successful. There's definitely something to come out of that. Otherwise, we shouldn't invest.
Yeah, of course. Thanks so much.
Thank you. Our next question comes from the line of Jürg Meier from NZZ. Please go ahead. Your line is now open.
Hi, just a quick one from Zurich. Listening to all your great results and talk of growth and everything, I'm just wondering, what is really the rationale behind acquiring another company now? There's a lot of work that you have to do, the economy is slowing. Now you want to burden yourself with possibly another big acquisition. What is really the thinking behind that?
Yeah, it's a good question. We don't go to work not to burden ourselves. We like challenges. It's part of running a big company also. We are of the very clear understanding or opinion that in this extremely fragmented industry, where the biggest players have only a fraction of the market, consolidation makes a lot of sense. We have created value for all stakeholders every time we have built a bigger company. Every time we have acquired one of our competitors, we've created value for shareholders, for the employees long-term, and also for customers. We simply build a better product offering to the market than what we had. The way we see it is, at least from analyzing our own situation, today, we are much stronger than we were had we not done the acquisition.
We would be stronger today as two individual companies would have been. That is some of the rationale that lies behind. The biggest players in the industry, they have a market share of 2%-3%. The 20 largest, they have a market share of between 30%-35%. In other industries, you will see one market leader having a similar market share. These are some of the reasons that lies behind. You're right, you could debate about the timing of it. I think there's nothing wrong with any timing. Right now is as good as any moment. We have previously done acquisitions in times of uncertainty and also of times with high volume growth and economic growth, and both have actually contributed to a successful development in DSV.
Okay. That's very good. Thanks so much.
Thank you. That is the last question that we have in the queue, so I will hand the call back to you, speakers, for your closing comment.
Okay. Thank you, everybody. We really appreciate the interest and all your questions. They are, as always, razor sharp. We are happy about the interest that you have in DSV and in our industry. We thank you for the questions. I just want to send a small thank you note also to all the employees of DSV. Once again, you've set new records. We're proud of you. It's been a fantastic year. You can be proud of yourselves as well, so thank you very much for that. We hope that we will continue the good growth also in 2019. In the meantime, we will cut this conference call and then speak to you also bilaterally in the times to come. Thank you very much and thanks for listening in. Bye-bye.