Ladies and gentlemen, welcome to the DSV Interim Financial Report H1 2018. For the first part of this call, all participants will be in listen-only mode, and afterwards, there'll be a question and answer session. Today, I am pleased to present CEO Jens Bjørn Andersen and CFO Jens Lund. Speakers, please begin your meeting.
Yes. Hello and welcome everybody. Welcome to the conference call covering our half year 2018 results. The concept will be as it has been for many quarters. We will go through the presentation, which should be available online. We will do it as quickly as we can in order to leave as much time as possible for your questions. If we go straight into the presentation after you have carefully studied the forward-looking statements on page number three. We will go directly to page number two, I'm sorry. We will go straight to page number three, which is the highlights of Q2 and the first six months of 2018. On that, you can see that we have had what we consider a very strong quarter. We have just put that behind us, where we did see a satisfactory growth in gross profit.
The growth was 9% for the quarter, and we now have 6% growth for the full year. Maybe more importantly, we did see a very strong growth in EBIT in the quarter of 21%, meaning that now year to date, we have seen a 15% growth in earnings. Combined with the fact that we see no big risks ahead of us, we felt it appropriate also to upgrade the full-year outlook for the full year. That is now between DKK 5.3 billion and DKK 5.6 billion when it comes to the EBIT for the full year. Consequently, that is an uplift of DKK 200 million. We have, as a consequence, also lifted the guidance for the free cash flow with DKK 200 million so that now is DKK 4.2 billion. As we've said many times, we think that the money best belongs in the pockets of the shareholders.
We have also initiated a new share buyback program starting as of tomorrow of DKK 1.2 billion. Please bear in mind that the numbers I just mentioned, the growth rates, they are in constant currencies. Going to page number four, you can see what we consider another rock-solid, very strong results from the Air & Sea division. We're very pleased about the development. We've seen a continuation of the strong performance in particularly air freight. We will see the growth rates later on. It's mainly driven by exports from the EMEA region and from Americas. Sea freight growth was more in line with the underlying market, and we are happy about that since we have seen a weak development on the market, on the trade lane from Asia to Europe, which has probably only grown about 1%.
Since that is the biggest trade lane of DSV, the fact that we have managed to grow at the same pace as the market, we consider that pretty good. The fact that we have had a very strong positive yield development is satisfactory, and that has, of course, led to a significant growth in the EBIT, which came to DKK 988 million for the quarter, which is a growth rate in constant currencies of a little over 20%. I think also the margins speak for themselves, more than 10% operating margin and a conversion ratio of more than 41%. I think the division can be extremely pleased about that. So going to page number five, you can see how the yield has developed.
First air freight, as you might have seen on the previous slide, we managed to grow the number of tons we moved in the quarter by 11%. Under normal circumstances, when you outgrow the market in such a way, you will see a negative effect in the yields. We have not seen that in constant currencies. We have actually managed to grow the GP per unit with approximately 4.0% to be accurate. This is something that is very good, and it underpins what we have always said in DSV. Growth should always be profitable. We are not growing for the sake of growth. Any growth should be profitable growth, and I think we have demonstrated that in the quarter. When it comes to sea freight, we've grown in line with the market.
The volumes, number of TEUs have grown approximately 4%, which is what the global markets have also grown. What is extremely good to see is that we have grown the yields also, the GP per TEU with 6.7%, which has also helped tremendously on the growth in absolute numbers on the GP. I think we can extend a very big thank you to the guys in Air & Sea. They have put behind them another very strong quarter. I think we can be extremely pleased with the developments of the division. We go to page number six. It's the Road division. I think we can also be very pleased with the results of the Road division.
They made DKK 322 million in the quarter, and when you make DKK 322 million in a quarter, I think it gives reason for celebration, so they should be happy and proud of what they have achieved. We did do one adjustment that you guys have to be aware of, and that is the fact that we have put a renewed or an extra focus on our 4PL activities, which we are seeing potential growth coming from. If you want to be a true 4PL operator, you need to operate the 4PL activities in a kind of independent activity in your company. We have moved those activities out of Road to a unit in the DSV Group entity. The gross profit for the quarter was negatively affected with approximately DKK 22 million.
That is the reason that the growth rates in the GP seems not so exciting at first glance. Overall, good development. We've also grown volumes 5%, which is strong. The market has only grown 2%-3%. We believe that we will manage to stabilize the gross margin around 17%. With that said, we believe that the gross profit and consequently the EBIT will also continue to grow in the coming quarters. Last of the divisions, the Solutions. We've seen a very strong continuation of the trend, which actually started in Q4 2017, where we did see very strong results. Good top-line growth driven by a lot of verticals, but primarily, I would say by retail, including e-commerce, and also the automotive industry have grown fairly well with us.
We've seen a stable gross margin, and we also see a nice development of EBIT coming from high productivity and an increase in profitability in several locations. Some of you have this morning asked if this is a supernatural EBIT margin we have of 5.6%. We think it is high. We recognize that, but please do remember that in earlier days, so to say, for instance, back when we bought Frans Maas some years ago and also after buying ABX, the EBIT margin of the Solutions division were significantly higher than what we have seen in recent years. We actually do believe that we can get it up and also work towards achieving our long-term financial targets of the division. It's great to see also a strong set of numbers from the Solutions division. They have also surprised us, I can say, in a positive way.
Overall, we are pleased about the developments of our company. We're tracking our plans. We are ahead of the plans, which is also the reason that we have lifted the guidance for the full year. I'm sure some of you will ask about trade wars and impacts in the global economy, but I think we can take that when we come to the Q&A. With that said, I will now leave the floor to Jens. Please, Jens.
Well, thank you very much, Jens Bjørn. I would like to say to the investors, it's actually a special day today because it's Jens Bjørn's 10 years anniversary as CEO. Quite good to note that the share price when you started was 100.
That's correct.
Now it's 560. Personally, I'd hoped for more, but I guess we are okay with that.
I'll do my best for the next 10 years. I'm sorry.
Okay. Congratulations, at least from me.
Yeah, thanks
On behalf of the whole team. We're proud to work together with you. We will now come to the numbers. I will not dwell too much about it. Many of them quite speak for themselves. We can see that we have managed to grow our GP with 9%. Actually, our EBIT has grown with more than 20% if we calculate it in constant currencies. Of course, this is because we see that there's still a marginal conversion of the incremental volume that we produce that is significantly higher than what we see for existing volume. On top of this, of course, it's still the benefit from sort of the full year impact of the UTi synergies that we have achieved as well. Good to see that it filters through into the numbers.
When it comes to financial items, we've on several occasions discussed these internal loans that we have that we have to adjust over our P&L. The dollar has increased vis-à-vis some of our currencies up till quarter end, and this actually gives us an inflow in Q2 that eliminates our financial cost and actually produces an income. Glad to see this, but in reality, it's internal paper money, and overall, our financial costs follows what we have guided so far. We are in line with that. On the tax side, we still aim for 23% on a yearly basis. We are a bit higher right now. We see that we should be able to achieve approximately 23% when the year is final. On the EPS, of course, you will see that quarter shows a dramatic development because of these FX movements.
On a yearly basis, or year-to-date basis, we are down at 23%. It's probably more correct to say that it's somewhere around the 20% mark if we adjust for the FX movements. Still glad to see that we have significant growth in the income we generate per share, because after all, that is what the investors pay for. If we move to the next slide, the cash flow, I would say the cash flow statement is pretty much as expected. On the half-year results, we do normally see an outflow because we have optimized the cash flow situation at year-end. Normally, this is where we have the best position due to seasonality. That's pretty normal. We're very confident with the cash flow and with our debt level, which is currently below one times EBITDA.
This is also the reason why that we've launched this share buyback program of DKK 1.2 billion, which is quite high if you consider it's for a quarter. The right calculations, I know that some of you sometimes speak about this, if you calculate our ROIC, it's 24.3%, also very close to the financial target we use. It's very much for capital allocation internally. If you want to compare to some of our peers that have grown organically, I know that they sometimes like to disclose their ROIC. You should probably eliminate the impact of acquisitions in our numbers, and this would mean that we would have a ROIC of 94%. I guess that's also a number that we can be satisfied with. Allocation to the shareholders on slide 10, just basically for the accounting or accountability of what we do.
You can see how we allocate the capital that we produce, we expect now a total distribution this year of almost DKK 3.4 billion. I think that's in line with the cash we have produced for this period. Really nothing to say to that. On the guidance, it's on slide 11. We have upgraded the guidance here with DKK a couple of hundred million top and bottom of the range. As Jens Bjørn mentioned, basically cash flow adjusted as a product of this and also just the tax rate, which I talked about a little bit earlier. Nothing material to say about this. It's all as could be expected. I think we will very soon skip to the Q&A part, please ask your questions and we will answer them as good as we possibly can.
Thank you. Ladies and gentlemen, if you do have a question for the speakers, please press zero and then one on your telephone keypad now. Please hold until we have the first question. The first question is from the line of Damian Brewer from RBC. Please go ahead, your line is now open.
Good morning, everybody. Two questions from me. First of all, within the presentation and elsewhere, you talk about further workflow digitization in the Air & Sea business, also clearly the Road TMS pilot now should be started. Can you talk a little bit more about what you mean by further digitization there and seeing what sort of productivity that could generate? Indeed, any findings from the Road TMS pilot so far? Then just secondly, noticed that your average debt maturity is coming down slightly. It looks like it's around about three years. Do you intend to let that drop further, or are you going to look at new or diversified sources of debt? Thank you.
Yes. I think if we look at the productivity, for example, for A&S, we have a roadmap for this, where we continue to digitize the way we do. Right now, of course, there's quite a bit of focus on both tracking and booking capabilities. We also have some tools like a driver app so that we can get the IOD, the information of delivery. We'll probably also get the POD, the proof of delivery, with a signature when our driver app is mature enough for that. We will drive productivity with some of these initiatives. There's a lot of things going on when it comes to customer report, and we use a lot of software robots. Some of that will probably change over time to machine learning when we get better at it. Right now, we use software robots for this.
We consolidate many of our activities in shared service centers. Each of these things are based on business cases. As you can see, basically, we trend towards the long-term guidance for our financial targets 2020. We need to continue these kind of initiatives in order to get there. We are, of course, glad to see that when we add volume to the platform, the margin or the incremental part can be produced very efficiently in our structure. I think that's the whole point of all the work that we do, that we increase our productivity all the time. That's really, at the end of the day, what DSV is all about, productivity. If we take the road system, yes, we are making progress on the TMS platform. We are live. We have almost now produced the blueprint that we need for the system going forward.
It's quite a piece of hard work, but we've put all our resources in there. It's still a long journey. We need to have a pilot this year, and we need one more next year before we are 100% certain that we can roll it out. We make progress when it comes to that. On the debt side, it's right that we have now a duration on our debt portfolio of approximately three years. I think we have less debt on our balance sheet that we have seen, so we don't necessarily need the same duration. We issued a bond a year ago or something like this. We will look into it, how to bankroll the company in the most efficient way.
We may take out some facilities with banks, with a certain duration on, or perhaps a little bit later, evaluate whether we should do another bond. We're monitoring it, and I think with the current debt levels, I think we're okay.
Okay, very clear. Thank you.
Next question is from the line of Mark McVicar from Barclays. Please go ahead, your line is now open.
Good morning, everybody. Two sort of groups of questions from me. You've obviously reported and talked about a bit of a slowdown in market growth in the second quarter, particularly on the sea side. The first question is, do you see that slower growth continuing in the second half, or are you working on the basis that this has been a bit seasonal or a bit transient and it should come back again? Could you give us some sense as to what you're telling your people to work towards as market growth for the second half?
I can answer that. We've told our people to go out and beat the markets and take market share and grow faster than the market. You're right, it seems like the markets have come down just slightly. We have said that for Q2, the market for sea freight was 3% and air freight 4%, maybe coming down a little bit, but from at least air freight's perspective, a very high level. It's extremely difficult for us to get good intelligence about what's going to happen in the extremely volatile world also that we will see in the next couple of quarters. I think we should assume that we will see 3%-4% growth rates within Air & Sea, both air freight and sea freight.
We just have to go out and, without jeopardizing the yields, of course, go out and see if we can beat that and take markets. It's come down a little bit from the beginning of the year. It's correct to assume that, yeah.
Your working assumption is that it remains relatively stable-
Exactly
roughly where we are at the moment for the second half.
There is-
My second question was, obviously, no mention this morning of M&A. Do you still have an active pipeline? Is it quieter than it was six months ago or fuller? What's the sort of sense out there on M&A?
Nothing has changed, Mark. We are still extremely eager to do M&A. We think about it every day. We talk about it every day. The company's getting more and more ready. We just don't want to raise expectations too high. It's a fine balance. If we talk a lot about it, people think we're going to do something tomorrow. If we don't talk about it, people think we've forgotten about it. That's not the case. It is extremely important for us. It is priority number 1 for the usage of the free cash flow. It's to do value creating M&A. We've said it many times. There's been some speculation this morning also about the fact that valuations are too high now. That is the limiting factor for us. I don't necessarily see that as correct.
I think the limiting factor is more kind of a willingness from the seller side. We have some extremely attractive propositions I think we can show to particular companies, if they don't want to sell themselves to us, we can want to buy them as much as we want. If they don't want to sell for reasons we sometimes don't understand, there will be no transaction. We have to be patient and stay in contact with these companies we have on the pipeline. One day maybe things will change or other opportunities will arise, I think we are ready. Both from a financial point of view, of course, with the deleverage we have done, but also from an operational point of view. It's not off the table, let me put it that way.
Sure. Sounds sensible. Although obviously the more your share price goes up, the higher the value is on the investment bankers' comp sheets when they run around trying to persuade people to sell. Okay, thank you.
Investment bankers.
Question is from the line of Andy Chu from Deutsche Bank. Please go ahead, your line is open.
Good morning. Three questions from me, please. Maybe just to thresh out your thoughts on trade wars, global economy. Obviously, you're the fourth out of four in terms of reporting, so just wondered if you're saying anything different to your three quoted European peers, please, on the trade tariff side. Secondly, could you just give us a little bit more information as to the low growth in Asia, Europe, and what you've seen there on the sea side? Again, another interrelated question. In terms of industry exposure, I think you pull out in Solutions some pretty good growth driven by autos, but obviously, that's one of the segments that is under, if you like, some scrutiny around trade tariffs. Is this a bit of a ramp up before the storm? Maybe some comments there, please, on autos on the freight management and Solutions side. Thanks very much.
On the trade wars, it's extremely difficult for us to find something positive in restrictions and tariffs being imposed. We have to say that. Having said that, it seems at least at this present moment in time, that the case or the issue has been encapsulated to the China-U.S. trade lanes. That represents approximately 10% of what we do in Air & Sea, not of all of DSV, but in Air & Sea. It's relatively isolated. That's why we are not too concerned. We were extremely happy when we saw that there was an ease-off in the tensions between the EU and the U.S. That's a more important trade lane for us. Still, the most important trade lane is Asia to Europe, and I don't expect anything to happen on that. I have to remember that the global supply chains have developed tremendously.
They are extremely sophisticated now. As an American company, if you have vendors in China doing sophisticated materials for you for your production, you just don't change supplier overnight. It's not going to happen. I think we could potentially be exposed and affected, but we don't expect it to be very dramatic. The last thing I wanted to say about this is also some of the items which will be hit are more bulky items that we are not into. We are not doing steel and soybeans and whatever. It's not an activity that we are in. As I said, of course, we could be impacted, but I think it would be to a limited degree. It's correct that there's been some weakness recently on Asia to Europe. The recent developments or statistics, we can see they do stem from May, so it's not super updated.
It seems like the volumes have grown between 0 and 1% only. Of course, that has had a negative effect on us on the total growth in sea freight when that is our, by far, strongest trade lane. It's too early to say if that's going to continue or not. It's not like it's falling off a cliff. When it comes to Solutions, you are right. We're strong in auto in general. That has driven good growth for us. Also some retail business have really picked up e-commerce. Maybe we should have put FMCG in. We have been extremely successful in getting a lot of fast-moving consumer good clients into the Solutions division recently also.
One of the things we can also see, maybe not so much in terms of growth, but in terms of profit improvement, is that we see less failures in implementations. We have improved our skills, I would say, on implementing larger customers and some of the not so very profitable activities that we did in the past. We've actually managed to turn them into something which is quite good now. It's a combination of those things.
Right. Just in terms of the China-U.S. trade lanes, is that 10% Air & Sea exposure by volume, or is there any difference in terms of profitability? Just to clarify, the 10% is by volume, is it?
It's by volume, yes. That's correct, yes.
Right. Super. Thanks very much. Thank you.
Next question is from the line of David Kerstens from Jefferies. Please go ahead. Your line is now open.
Yes. Good morning, gentlemen. I've got three questions, please. First of all, a follow-up on the weakness on Asia to Europe with growth of around 1%. I think it's even more striking if you compare that to growth of 6% on the Transpacific. I was wondering if you have any insight into the differential between Asia, Europe, and Transpacific sea freight growth. Secondly, on road freight, could you quantify the working day impact of the timing of Easter? I notice you also lowered some of your gross margin target to 17%. Is that related to an increasingly tight capacity situation in road freight, or is there also a mix effect from the transfer of the 4PL activities to the group? Finally, regarding the tariffs and the increased protectionism, do you also see opportunities with increased complexity, potentially leading to improved profitability on some activities?
Thank you very much.
That's a lot of questions. In terms of the complexity, you're right. You could speculate that some supply chains will move out of China to Bangladesh, to Vietnam, to other places, and Malaysia. It's places where we have a strong foothold. We can move quickly. We are agile. We can help our customers to set up new systems. I think we're in a good position if supply chains, they are changing, definitely. When it comes to the mix or the GP margin in Road, you're right. It's a combination of a lot of things. The 4PL that we're moving out, it has a consequence of approximately 0.2 percentage points as far as I remember. That plays a little role.
It's also, to be realistic, we have been around the 17% mark for a very long time, and it just seems to be extremely difficult for us to move that upwards. That does not mean that we cannot grow the GP in absolute terms and consequently, the EBIT also. We're still relatively optimistic about that. When it comes to the impact of working days, we believe it's about DKK 15 million on EBIT and it's something we said we would see, and I think that is also included in the numbers. I think maybe Jens will elaborate maybe later on. The first question you asked, we don't have a lot of insights as to the volumes. You're right. Transpacific has been strong.
You can also speculate, is that some kind of last-minute express activity going on because of you want to get the products home before tariffs are being imposed? We simply don't know. Did you want to put some more flavor on it?
The only thing I can say on the first one is, U.S. has shown quite a high growth rate as well. At least with the last set of numbers we've seen from the U.S. The GDP has grown somewhat faster than Europe. I guess that's sort of. Sometimes you then see that the trade, there's a small multiplier on it when there's a lot of growth. That can be the case. We are just speculating here, but I think that that's probably what we see. It's not that major for us anyway. Yep.
Okay. Thank you very much, gentlemen.
Next question is from the line of Casper Blom from ABG. Please go ahead, your line is now open.
Yeah. Thanks a lot. First of all, congrats on another strong quarter. Well done, everyone. First question is regarding the balance sheet. Jens Lund, you mentioned the target of a net debt to EBITDA of between one and a 1.5, and you're actually a little bit below that right now. How should we really expect you to target this going forward? Do you really want to be around one, or is it the midpoint of the range that should be the target? That's my first question. Then secondly, regarding the very strong volume growth in air freight. Is it a bit of a catching up on the market growth that you didn't see last year? Should we then expect it to start slowing down now? Or has there been any particular new initiatives implemented in order to capture more market growth here? That's my question. Thanks.
Okay. The balance sheet, you're right, we are 0.93 if you take the two digits on it, and we do DKK 1.2 billion now. We would like to just to be above one, if we can do that. Right now, we may, once the new leasing rules, they come in, have just a single number instead of a range. We will discuss that once this becomes relevant. We've launched another share buyback of DKK 1.2 billion in a quarter, so we should lever the company a little bit up. That's how you should think about it. I think on the air freight side. Last year, you saw the impact of the integration, so we had less focus on sales. Now we have focus on sales, and we have gained a lot of new customers, and we can then cross-sell to these customers our services.
I think that's also what you've seen after other transactions, that then we get quite a high growth and we develop fairly well. Once we can focus 100% on our operation, I think that's basically the explanation. I think that you can expect us to deliver solid performance vis-à-vis the market also going forward.
That's great, Jens. Just coming back on the balance sheet here. It's more when we have to try and extrapolate how much could you potentially buy back in Q4 and next year. Is it really the more one-time EBITDA we should use as the guiding tool?
Think one, then you're okay.
That is clear. Thanks a lot.
Next question is from the line of Robert Joynson from Exane BNP Paribas. Please go ahead, your line is now open.
Good morning, everybody. A few questions from me, if I may. First of all, on the Road division. The OpEx declined by around about DKK 150 million during the first half of the year versus the first half of last year. Could you maybe just provide some color on how much of that was provided by synergies as opposed to underlying cost reductions, please? Then a couple of questions on the Air & Sea division. The OpEx was around about DKK 1.4 billion.
During Q2, would it be reasonable to assume that run rate continues during Q3 and Q4, or is that a little bit optimistic? Then the second question on Air & Sea, just a slightly broader one, really. I appreciate that you only provide an EBIT figure for the division overall. Would it be possible to provide some color on the percentage of EBIT that comes from Air nowadays versus the percentage that comes from Sea? Thank you.
Maybe I can take the last question. Then it was some quite detailed questions you had about the OpEx. Jens can just prepare a little bit on that. When you analyze or when you look at the presentation, you can see that the GP for air and sea is pretty evenly split. I think you can say the same for EBIT. It is not possible. We want to be as transparent as possible. Simply, it would be too much work going into making an EBIT for each. You would have to do a lot of assumptions. When you get out in some of the smaller countries, you don't have these two, what you say, activity levels totally isolated. You will have people doing both. Then it will simply be too much for us to split it out.
You can assume that the cost base, which goes into operating and handling this GP, is more or less the same. It's two good, strong legs that we stand on. Even though we do see a stronger development on the volumes recently in air freight, we're still fairly okay also in Sea. Now, Jens, I don't know if you want-
On the Road side, the Concentric, I guess you have understood, that we move this part of the volume out. It doesn't really produce an EBIT. It has a GP and a cost attached to it. This, of course, has an impact on the figures that you see. Then I think there's been, if you look at the numbers and have some quarter-on-quarter, you will see that we have quite high cost in Q1. A little bit lower in Q2. I think this relates to some accrual issues where if you have to look at basically on a half-year basis, when we run the company on a size like this, to get all the IT costs, I think we have approximately 25 plus cost drivers on the IT side in order to make a true activity-based costing.
To have models that are in sync all the time, it requires quite a bit of resources. If you look at it, I would say that take the two quarters, add them up. Adjust for the Concentric where we have already given the numbers. Two years, a little bit more than DKK 20 million. I think you will be okay when it comes to the Road side. I don't necessarily think that you will see what was your calculated decline in cost of DKK 150 million. That must be an extrapolation of Q2 that you have. I wouldn't expect that to continue. Take the average of Q1 and two. Adjust for Concentric. Then you're okay for your model. Was there another question as well?
Can you see your OpEx then?
Yes.
Yeah, it was just on the Air & Sea division. I'm trying to get a feel for kind of operational gearing going into the second half of the year, really. Just trying to get a feel of how much additional volumes could be handled with the current cost base.
I would look at it in another way if I should model it. I would probably model a marginal conversion ratio of plus two-thirds, so +66% I would model, because we do see that we can add volume at a higher conversion ratio, significantly higher than what we already achieved today. There's still some synergy impact in the Q2 numbers when you look at the Air & Sea. I think we will see a lot of impact from very efficient systems. In Denmark, we have a saying, the trees, they don't grow into heaven. There's only so much that we can do. I think if you model, let's say, two-thirds in marginal conversion ratio, then you're okay.
That sounds pretty good to me. Thank you.
You're welcome.
Next question is from the line of Ben Togo from Carnegie. Please go ahead, your line is now open.
Yes, thank you, and good morning, and congrats from us as well. The DKK 200 million upgrade you make in your guidance, I would like some color on that. What drives it? Which divisions, business segments, has surprised you in particular compared to when you guided, let's say, from the full year?
It's obvious when you look at it. I think we can say that Road is tracking. They're actually a little bit ahead of the original plans that we had, and that we still have old-fashioned budgets in our company, and you might laugh at that, but it's what we have. They are a bit ahead of that. Of course, you will say the same to a slightly larger degree for Solutions. They are also doing better than what we expected three months ago. The division that really swings the needle is the Air & Sea. Three months ago, we had not expected to see the volume developments we have seen in air freight, and we had not expected also the very strong yield developments that we have seen. It is the Air & Sea.
It is the engine right now in our company, that is the main reason that we are lifting the guidance now.
Then, just to follow up here, are you seeing some benefits also from, at least in the Asia-Europe part, from the more soft rate environment here?
Definitely. You can see that on the yields. It's been okay for us. There's been some volatility. There's been a lot of additional surcharges which are being put into the market also. At least it seems like we've managed to push that forward to the users of the transport systems. I think that is also the way it is. I think it's been a good quarter for us. We've always said that we don't have a big opinion about the rates, if they are high or low or whatever. Volatility is always good. We've had that. It's been fairly okay. Congratulations on the new job, by the way.
Thank you. Then just another question relating to air and sea . You're tying up more cash or more working capital in that part of the business. Is that just a function of the high activity we are seeing, particularly in Air, and will that change throughout the second half, improve throughout the second half?
Maybe Jens, you will take this one.
I think what you see is that we get more so-called Fortune 500 customers. Very large customers. They demand longer payment terms, I guess the work is still okay if we do that business. We have to invest a little bit in working capital in order to get that growth in the air and sea division, we are happy to do so.
Thank you very much.
Next question is from the line of Lars Heindorff from SEB. Please go ahead. Your line is now open.
Thank you. A couple of questions from my side as well. Firstly, back to the cost issues, and I have a question regarding Air & Sea. Other external expenses are going up. Jens, you talked earlier about still a bit of synergies kicking in here this year. Despite that, we can see that the other external costs are up, both quarter-over-quarter and also year-over-year. I just wonder if you have any sort of good explanation for that.
Yes. You will probably see that as we invest more and more in automation, of course, there is a little bit of extra cost for some of these IT initiatives. I would say this is like a general trend, Lars, that you will see that, of course, we try to replace staff cost with this kind of thing. Apart from this, I would say that, as I said, I think you should look at it on a half-yearly basis for the A&S and even it out. We're working quite a lot with our activity-based costing right now in order to make sure that the allocations are correct. That might have impacted with a little bit too much cost here in Q2, if you look at it. That's how I would see it.
Okay. Regarding the volumes, I understand that your geographical exposure may be a little bit different compared to some of your key competitors, which may explain the growth rates, particularly in sea freight. Is it your impression that even with the strong focus on and exposure to Asia-Europe, have you been growing in line with the market, or have you actually been gaining market share on those trade lanes?
I think, if you look at it and you see that we have grown at the same level as the world growth has happened on sea freight, and we are more exposed to weaker trade lanes, then the consequence of that will be, or the logic reasoning will be, that we have taken market share. We are happy about that. When we are at markets which are only growing, maybe not growing or growing 1%, and we still have a 4% growth overall, then we are pleased about that. It's also important for us to say that we're only pleased about 4% growth in sea freight when we see a growth in yields of 6.7%. Had we seen a negative yield, then of course we could not be happy about a growth rate of 4%.
We've said it many times, and we'll say it again, it needs to be profitable growth. We don't believe in the fact that we can go out and secure business at a loss or break even now and turn that into a wonderful, profitable business in the future. That is not the business model of DSV. It has never been, and it will never be the business model of us.
Okay. Lastly, cash conversion. I know you already touched a little bit upon the net working capital. You need to invest a bit more. You're now guiding for mid-range, which is DKK 5.45 and a free cash flow of DKK 4.2. If you look at it historically, the cash conversion has been close to 100%. Is there any chance that you're going to get back there?
Yeah, if you look at it depends on cash conversion of what. Last year, of course, we converted-
Free cash flow to EBIT.
Yeah. You need to adjust for tax and interest costs, I would say that I would come very close to a cash conversion of 100, wouldn't I? If I add all that up. I have to pay 300 in interest, and then I have to pay tax as well, Lars. If you take that, I think we are okay when it comes to.
I guess, Jens, we can say no structural changes from previous years. There's nothing really that has impacted us. Nothing new.
No. Not at all. I think we will end up around the 2% level on net working capital at year-end, perhaps a little bit lower like we have expected or did last year. It shouldn't be a big change on the working capital. We don't make significant investments. We'll make the normal investments that we typically do and sort of reinvest the depreciation/amortization. I think that's what you can expect.
Okay. All right. Thank you very much, guys.
The next question is from the line of Edward Stanford from HSBC. Please go ahead. Your line is now open.
Good morning, everybody. Two questions please, if I may. The first is on looking at some of the staff numbers. In the Air & Sea division, they've been going down for some time, presumably as a result of synergy benefits. How sustainable is that in the future? Conversely, it looks like staff numbers have been going up quite significantly in Solutions. Is that contract-related? If perhaps you could help me understand that a little bit. Secondly, on the 4PL business, you've taken that out into the group, as you explained. Could you perhaps just provide a little bit more flavor of the potential for that business and the relative size it is at the moment? Thank you.
Maybe I'll kick off with the 4PL, then Jens can answer the two first of your questions. We do see a significant interest from major, big clients when it comes to 4PL services. We have to admit that we might not have had a tier one product when it comes to 4PL. Before we bought UTi, we did see that there were some capabilities in UTi, in a U.S.-based company called Concentric. We have seen that to be a credible 4PL player, you cannot have that activity inside a division, then you will not be considered a neutral 4PL operator with the customer. We've extracted that now and taken it out, put it into group, given it a new name, and we will push that forward.
This will not drive, what you say, EBIT significantly in the short term. I think we have some opportunities going forward. If we could both build this organically, but maybe also through acquisitions in the future, it would be quite attractive for us. It is something which is pretty attractive right now. It is a good position to be in. Jens, maybe on the staff numbers for Air & Sea and Solutions.
I think if you look at Air & Sea, you've seen that the numbers have come down for quite a while due to the last impact of the integration. I think also there's been perhaps a few changes in Air & Sea, where we have outsourced some of the different activities that we have. It could be that we've had some blue-collar staff in certain areas that did some stuffing of containers or stuff like that, and we typically outsource that. You'll see that both white-collar and blue-collar that we've had in Air & Sea have come down. If you look at Solutions, you will see that our activities, for example, in a country like India, has grown quite a bit. You don't automate a lot in India because staff is getting quite a low salary, so you will have a lot of headcount.
Also here in Europe and in the U.S., we've grown quite a bit, and that's the reason why there's been quite a sort of activity-based development in headcount in Solutions. Mainly blue-collar employees that do pick and pack activities. Yep. I think that should answer your questions.
Okay. Yeah. Thanks very much.
Next question is from the line of Bruce Chan from Stifel. Please go ahead. Your line is now open.
Yes, good morning, gentlemen. Most of my questions have been addressed. Maybe just stepping back and looking at something a little more strategic. Post UTi, you're a bigger company now, and you talked about higher penetration of Fortune 500 customers in the fold. You also mentioned that payment terms or discussions around payment terms can be a little more challenging when you're dealing with these larger counterparties.
Yeah.
Is there a reason to believe that the margin situation is similar or that maybe you have fewer opportunities for the value-added business than with some of the traditional smaller SME customers? Then just a quick housekeeping question. Can you maybe remind us of what you expect for CapEx this year and how much of that is devoted to technology? Thank you.
Maybe I can talk a little bit about the first couple of things. I think as I've said that a couple of times over the last six months or many times more maybe, I think we're in a sweet spot right now in DSV. We have both the two worlds, the best of two worlds. We are still a little bit the new kid on the block amongst the bigger players. We are not the biggest, and we don't necessarily want to be the biggest. I think so far we have managed to keep our, what we call entrepreneurial culture. We empower our people. We believe very much in local decision-making, giving the good staff that we have on the ground the options to take the decisions which they feel is right for the customer. We are flexible. We have a flat organization.
At the same time, we have more stronger capabilities now in terms of buying power. We can also live up to the expectations when it comes to pricing from our customers. They like that combination, and that is why we have grown. When you look at the margins, the margins now already includes the addition of these customers that Jens talked about. We don't see a particular reason, or we're not concerned that margins will be diluted. The gross margins of these very large customers might not be the highest, but they're more professional. You can automate the processes much more. The EBIT margin can actually be quite satisfactory on these large customers.
When it comes to the investment side, we've typically said that perhaps you invest out of 0.5%, 0.6% of the turnover. I think that would be evenly distributed between intangibles and tangible assets. It's mainly IT development that we invest in, and then, of course racking for warehouses is typically also something that we spend some resources on. We lease all our facilities. We don't invest a lot in that.
Okay. Thank you.
I think you had one more on the margin, whether there would be a structural lower margin. I think Jens sort of addressed that. I think you see some forwarders, they seem to be what we would like to call IATA kings, so they would be on the top of the IATA list. We would like to be EBIT kings. That's something else. We would like to make some money off profitable growth. I think it doesn't go in line with DSV culture to go out and deploy capacity to service customers where we can't make a difference, add some value, whatever, because then there's no room for a margin. I don't think that you should expect us to do that. Diluted.
The next question is from the line of Henryk Paule from Kepler Cheuvreux. Please go ahead, your line is now open.
Yes. Thank you very much. Just a quick follow-up. Most of the questions have been answered, I suppose. Regarding air freight, you managed to grow at a significant rate currently. You said you're really focused on the yield as well as at the volume. However, there may be some capacity constraints during the peak season given the type of growth you and some of your competitors are displaying at the moment. What's your best guess of the evolution of GP per TEU, given the type of volume you're able to show and the capacity constraint you may face? That would be it for me.
We don't model in a big change. We believe it will stay pretty, what you say, stable. You could, of course, anticipate maybe when you get into the hottest weeks in the peak in Q4, that you could see a slightly weak development for a couple of weeks. Overall, on the long run for the rest of the year, we believe that yields will be fairly stable as compared to what they are right now.
The volume you think you can maintain from?
Volume, yeah. Of course, we love double-digit in anything. I mean, double-digit growth is fantastic. I think as Jens said before, we also need to be somehow realistic. So I think we also said that after Q1, and we were wrong because we did see double-digit also in Q2. But we would be happy if we could see a high single-digit growth rates in air freight. It is extremely difficult to quantify. We also have to remember, comparisons do become more difficult also going forward. But we have a good momentum. We are still gaining customers. We are also losing some customers. We have to remember that. But overall, we have a fairly good situation, and we are optimistic.
Perfect. Thank you.
The next question is from the line of Dominic Edridge from UBS. Please go ahead. Your line is now open.
Thanks very much. Just a couple from myself. Just firstly, going back to staff costs. Obviously, we have seen the staff numbers start to rise, but staff costs sequentially have been fairly flat. Could you just sort of discuss maybe the staff situation? Are you successfully offsetting any kind of inflation there, or what the situation is, particularly in Europe? And then the second question was just looking at myDSV and obviously particularly Road freight side, you have obviously added on an online quotation service and tracking service. Can you just talk about that maybe in terms of how you see, is that sort of addressing a new part of the market, or is it just adding on something for existing customers? And then the second question is, do you see adding similar functionality to, particularly the Air & Sea business? Thanks so much.
I think if we look at the staff cost, I think one of the things you have to take into account is the FX impact. That sort of means something when you look at the numbers. Actually, there has been some inflationary pressure. In general, I think what we try to do is we try to take in a lot of young people as well into the organization and train them and use them and, for various positions, which they do really well and grow within the company. I think this sort of helps you to be in control of staff costs so that you don't end up in a situation where you don't have capacity. That's certainly something that helps as well. I think we've been investing in myDSV for quite a while, and we add more capabilities on this platform.
It's not isolated only to Road, it's important to say.
It's also for the other division, predominantly A&S, but as well
You will see that we add. This is the portal, this is the solution that we have vis-a-vis our customers. Our customers know it, they use it, they are trained in how to use it. Perhaps we could learn a little bit from some of our peers to send a tweet out every day that we have this solution. It's not our culture to do like this, but we might market it a little bit harder, because this whole customer interaction and that you can do it in a very efficient way is, of course, important.
I'm sorry, just a follow-up to that. Is that something that existing customers are just expecting more of from yourself in terms of the sort of visibility? Or is it something also to attract maybe, as you said, some of these other customers who maybe want to deal with you on a different basis to maybe how you've dealt with customers historically?
You can look at it in different ways. If you speak to a customer who's already a customer, a client of one of our large competitors, they would expect this clearly is something you need to have on the shelf. We also gain customers from mom-and-pop shops, from smaller operations. They do not have these skills that we have. They don't have the power to invest. It's been something which is also, there's a cost associated with building up a large operation or portal like myDSV. This is something where you can actually go in and have another value proposition to certain customers than what the really small customers are having. I just looked at the numbers when Jens was talking, and I saw that in Q2, we handled approximately 9 million shipments, and more than 80% of those bookings were received digitally.
The notion that we sit with pen and paper, it's wrong. We have 56 million order lines in our warehouse in the Solutions division. I can tell you one thing, they all come in electronically. We are highly digital, and it's something that we will continue to pursue, and it's something where You are right, some customers will just expect it. They don't get too overly excited about it because it's what they would expect. Other types of customers, they actually are very excited about it, and it's one of the reasons that we can actually also outgrow the market, I think.
Okay. Thank you very much.
That was our final question for today. I'll now hand the call back to the speakers for any closing comments. Please go ahead.
Thank you to all participants for putting all the interesting questions to us. We were very pleased with the high interest that you have shown in DSV. I must say, on behalf of the whole management and the board, we are extremely proud of what the employees of DSV have produced in the last three months. It's amazing. We have continued a good trend. You have done fantastic. Thank you to all of the employees, if I can just take this opportunity also for your hard work and dedications. You've done amazing, and we're proud of you guys. Thank you very much for that. We will go on road shows now to all kinds of places in the world to try to elaborate on the results to the investors.
Then we will also continue working, and we're looking forward to speaking to a lot of you in the coming months, and if not before, at least when we come out with the Q3 numbers. On behalf of Jens H. Lund and myself and all the good employees of DSV, thank you and goodbye here from Copenhagen in Denmark.