Welcome to the interim financial report H1 2022. 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'm pleased to present CEO Jens Bjørn Andersen, COO Jens Lund, and CFO Michael Ebbe. Please, speakers, please begin.
Thank you very much, and welcome everybody to the half year 2022 results from DSV here at Hedehusene in Denmark. We will take you through the presentation, and we'll go straight into it. After you have looked at the forward-looking statements on page two, and the agenda, which is similar to what it is normally on page three, we will go straight into page four, showing some of the highlights of what we believe in DSV to be an absolutely amazing and fantastic result for Q2. I have to start by thanking everybody in our company. I know a lot of you are listening in. You are rock stars.
You've done absolutely fantastic, and we are all proud of the achievements that you have done in the quarter. We are still a people's business, and it is the employees of DSV that makes the big difference. It is a really good performance, and it is across the whole organization, despite a somewhat soft demand during the quarter. We'll come back to that. We are also saying that congestion still remains an issue, and rates and yields are still satisfactory. We're very happy about the fact that the GIL integration is very, very close to being complete.
Less than a year ago, we acquired the company, and now we have managed to integrate more than 17,000 employees in over 50 countries onto our platform, also an achievement which is not done by itself. Also, thanks to everybody for that. We should not underestimate, and I know Michael will touch upon that later on, that also something, that makes us happy also this morning is that we are able to show a very strong cash flow also for the quarter. It's always a good sign when the money follows the EBIT results. The cash flow is very, very strong, and that has led us to announce a new share buyback program.
I think it must be the program with the highest value ever in DSV of DKK 7 billion, that we have initiated this morning. We have also upgraded the earnings guidance for the full year to between DKK 23 billion and DKK 25 billion, so DKK 2 billion up at both the lower and the higher end. The EBIT speak for itself. It's very similar, the performance, to what we have seen in Q1. We have a 60% increase in GP, and a 100% increase in earnings. It's maybe interesting to note that we have not seen any deterioration in any KPIs during the quarter. Q2 carried a very strong momentum to the end of the month of June.
So far so good. No signs in terms of yields and profits that things are deteriorating. We think that is very strong. On page number five, absolutely amazing results from the Air & Sea operations and division. They've done once again a remarkable job. The growth patterns are similar EBIT-wise at least to what we saw on the previous page. Here also EBIT yeah is 100% up, but also GP in the quarter growing by a healthy 75%. That is despite also, that the organization have been through a very hard and complex integration. We have also now started to see the results of this.
We have good contributions from the GIL operations also. Of course, I think that 64.4% conversion ratio, and a 13% EBIT margin speaks for themselves. Page six, air freight. We are happy to be able to say that we have actually gained market share in Q2. We have seen an organic development of -4% for DSV, but we do estimate that the market is worse than that, being in reverse, so to say, with between 7% and 10%. We have actually been able to grow faster than the market, and a little bit earlier than we had actually estimated and what we had indicated also to shareholders in the past.
What pleases us also is the fact that we have, continued to see a very good development in the yields going from 11,400 now to 12,500 in the quarter, so no deterioration in yields. This is something which, of course, have underpinned also the EBIT development of the quarter. When it comes to the market, it has been negatively impacted in the quarter by the lockdown, the COVID-19 lockdowns in China. It is unfortunately not possible for us to quantify exactly what that has meant. It is something which has been negative, there's no doubt about that.
Freight rates have declined a little bit, but they remain very elevated as a result of still the disruption, supply chain disruptions, but also as a result of very high fuel prices as we see right now. We go then to page seven at Sea Freight. More or less similar developments. We cannot say that we have taken market share. We estimate that the market in the quarter is down up to 5%. We are down organic 5% in DSV. We're not losing share. We still see a little bit negative impact from some GIL business that, have left the organization since a year ago. We are content with that development.
Here we have seen the continuation in the upward trend in the yields, from DKK 5,900-DKK 6,500. We are happy about that. Of course, if we are, as we expect, and I'm sure you will ask those questions later, to see a deterioration in the yields, I guess it's better to see a deterioration from a high level than from a medium level. That should also mean that, the future impact of the absolute earnings will not be as severe.
Also here we have seen, and I'm sure you're all aware of it, the congestion has been a topic during the quarter. It has eased on the U.S. West Coast, but it has actually worsened on the East Coast. Also now we see some disruptions breaking out or has been part of the picture in Q2 in Europe also. Also here, of course, volumes have been negatively impacted by the lockdown during the quarter that we saw in China.
We also see the weakened demand, also a change in consumer behavior, going a little bit away, from goods to maybe also spending money on things that people that we all have not been able to spend money on during the COVID situation. All in all, rock solid and record-breaking results from the Air & Sea operations. They continue to surprise us in positive ways. Really fantastic results. Road also very strong results, we think. We have growth in GP. We are busy. We are taking market share also in Road.
It's our clear understanding. Jens can elaborate on it later on, but we do see really a lot of demand for our, so to say, new or more structured services in Road, which is an effect of the Road Way Forward project also. I think we have a better product to offer our customers now than what we had some years ago. That is really satisfactory to be able to establish. That has also been reflected in the numbers. With a few exceptions, I cannot even think of one. All countries are actually living up to our expectations. Actually in some of the very large countries in Europe, we see very strong results in Road.
We are happy about that. There's still tight capacity and we have seen increasing rates, also partly due to the EU Mobility Package and fuel prices, of course, also going up. To be able on a almost organic, background to grow the earnings by 18%, is simply impressive. Road now have an EBIT of DKK 1 billion for the first six months. I can remember not that long ago sitting in strategy meetings with Road, where they had some sort of a dream of achieving DKK 1 billion, not in six months, but in 12 months. Those days are long gone. Strong operations, strong performance also from Road.
The last slide before I hand over to Michael is Solutions. Also here, I guess, numbers speak for themselves. We have seen a very strong impact also here from the successful integration and acquisition of Agility GIL. They have our new colleagues some impressive figures that we really appreciate. We can see it.
But also, organically, the old, so to say, DSV operations have continued to the strong performance that we saw in the past. Some of you ask us what are the reasons behind that, but we can point to the continued consolidation of our IT infrastructure, and the more campus strategy that we have on the physical infrastructure in terms of warehouses and large multi-client facilities. It is simply more beneficial, and we can see a higher productivity when we move together. Very strong growth in earnings, both for the quarter and also DKK 1.5 billion for the first six months is very, very strong. Congratulations also to everybody in the Solutions division. You have also done really well.
With that said, Michael, over to you.
Thank you very much. We will jump to page number 10 for the P&L. I think Jens Bjørn has already concluded on the impressive results on EBIT level, which is more than doubled, so I'll only comment on a few other highlights from the P&L here. The profit for the period is not quite doubled, as with the EBIT level, and that's due to the development on our special items, which is due to our GIL integration cost, as well as our financial items, which is impacted by some intergroup exchange rate adjustments. There are no cash impact, and we see that every time we do these integrations until we get the entire structure of our group companies in place according to the DSV model.
That's why it's not quite doubled. Another thing that is worth mentioning is obviously our EPS growth, which is more than 90% growth. It is clear it's mainly driven by the increase in our earnings, but also our capital allocation policy. That is an impressive result there as well. If I jump to page 11, a few things worth noting is our cash flow. I'm really pleased to see the cash flow from the quarter and for the first half of the year. I have sat here for a couple of quarters mentioning the issues or the challenges we have had with our network and capital.
It's good to see that it now has stabilized and remained. Obviously it remains at a high level due to the rates and also our GIL activity coming in. If you look at it in percentages of our revenue, it actually has declined compared to last year. That's really nice to see. It's an impressive number, DKK 10.7 billion in adjusted free cash flow. It's also clear that we pay more taxes when we have higher results, as you can see that as one of the negative developments, and then also we have a little bit of special items, but again, that's due to the integration of GIL.
Another KPI that is worth mentioning is our gearing ratio. It's 1.0, so it's a really low number, and I will touch upon that on next slide, number page number 12. Giving our strong cash flow for the quarter and for the first half year, our strong balance sheet and our capital allocation policy, and our gearing ratio as just mentioned, we have this morning initiated a new share buyback of DKK 7 billion for the next three months. Yesterday we finalized the old share buyback, and as written here, we have in first half of 2022 acquired 7.2 million shares of roughly DKK 1,137.57 per share.
If we look at how much we then have allocated, which is announced today, that is nearly DKK 18 billion that we will return to the shareholders for 2022. Obviously when we have seen how the development is in Q3, we will reconsider for the remaining part of the year. It's an impressive share buyback we have launched. For. Jump to the next page number 13. This morning we also upgraded our outlook for 2022, as Jens Bjørn briefly mentioned. It's clear it's a mixed picture. Obviously, we have had a tremendous and strong first half of the year, which we're very pleased with, as Jens Bjørn mentioned.
When we look into the second half of the year, we have seen some soft development in the volumes. We also read the analysis and news coming from all over the globe that has led us, to guide for an updated outlook for between DKK 23 billion-DKK 25 billion. A little bit not as strong as first half of the year, a little bit softened, taking the uncertainties and the expected development into consideration. That, that's why we have guided like we have. There is, of course, visibility, it's difficult to see that further ahead, but we are relatively comfortable with the guidance that we have given so far.
Yeah. I think that was it from my side, so we'll go to the Q&A session.
Thank you. If you wish to ask a question, please dial zero one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask your question. If you find your question has been answered before it's your turn to speak, you can dial zero two to cancel. Once again, that's zero one to ask a question, or zero two if you need to cancel. There'll be a brief pause now while we register your questions. Our first question comes from the line of Alex Irving of Bernstein. Please go ahead, your line is open.
Hi. Good morning, gentlemen. Two from me please. First on air freight. We're seeing belly space returning, we're seeing chargeable weight down market-wide, but a sequential increase in GP yields. Maybe how do you reconcile that seasonally? What do you think it would take to gross profit yields lower? My second question's on ocean. We're seeing spot rates coming down. I'm thinking about how you're interacting with your carriers and how your customers are acting with you. Are you or your customers renegotiating contracts with the shipping lines or with yourselves, or are you kind of sticking to contracts to keep the, to continue to secure capacity as we get into the second half of the year? And how does that affect your ocean gross profit yields into the second half, please? Thank you.
Yeah. For air freight, it's correct that we'll probably, as we have indicated, we will see yields coming down as rates come down. I think it's a natural consequence. We are in DSV, and that goes for both air and sea. We have always been, maybe compared to others pretty short in the way that we contract. We are maybe a little bit more conservative, risk averse. You can have long debates about what the right strategy is. We have some capacity at hand, but at good terms. We have always felt the right thing for us to do is to be short in the market.
This is probably also why we've been able to see the conversion or the yields increasing in the quarter. When it comes to sea freight, there's not one uniform behavior from our customers. They also have different strategies of how to position themselves. It's also a natural consequence of what we have said this morning, that we will somewhat or somehow during the quarter see deterioration in yields. I still like to point out that we have not seen it during Q2. It ended really good.
With the anticipated developments in the markets when it comes to rates continuing probably to go down and a soft market, maybe more capacity coming in, we do also expect yields to come down. Again, not to nowhere near where they used to be prior to COVID.
Thank you.
Thank you. Our next question comes from the line of Christian Nedelcu of UBS. Please go ahead, your line is open.
Hi. Thank you very much. Three questions if I may. In Air & Sea, could you help us a bit frame your full year guidance? What does it mean for GP per units and for volumes in the second half? Secondly, in air, you've outperformed in the first half the market in terms of volumes. Could you elaborate what is driving the outperformance, and if you think this can persist going forward? The last one on Air & Sea conversion, you know, it's been running north of 60%, you know, with help from excess yields and, but also some higher complexity costing there. But could you give us a rough indication if it weren't for this, you know, congestion complexity and excess yields, what sort of conversion ratio, what's the normalized conversion ratio, there?
Thank you.
Yes. I'll try to answer that. If we look at the GP per unit that we're talking about or expecting in the second part of the year, we are trending somewhat downwards obviously. I think we will go below the 10,000 DKK per ton on the air freight, and we will probably also trend towards the 5,000 DKK per TU. It will trend a little bit downwards from where we at. I actually think on the air development, Jens Bjørn already explained a little bit about that on the previous question, where we are probably a little bit shorter. We've also certain lanes where we've committed some capacity and locked that in.
We have the charter network, as you know, and that we, you know, acquired through Panalpina, and here we have, you know, structured setups that operate very efficient and where we also have good margins on operating them. Then, of course, you ask, of course, a very important question as well, the conversion ratio, where is it gonna be? We'd sort of, you know, set some more ambitions in relation to that. Of course, the 60% mark is also driven by, yields that we are above that. We think actually that when we come out of this extra complexity and all that, you know, we have some long-term financial targets. We should be able to live up to them and perhaps do a little bit more.
The targets, as we've often said, it's like, it's not a limit, it's not the ceiling. We are actually allowed to be higher. Then of course, if we are systematically higher, we will update them every, on a yearly basis when we update our strategy and stuff like that. I think you should expect higher productivity now that we have, a sort of integrated GIL. Also with the investments that we make on the infrastructure as well, that makes us more efficient.
Thank you. On the air volume outperformance, what drove it and what can if it can persist going forward?
We have said all the time that we aim for market share growth. This is still the ambition of DSV. It can vary a little bit from one quarter to the other, so we cannot sit here and guarantee that we will outgrow the market. We hope at least that to be the case, going forward once the integration is over. I said it was a little bit earlier than we had estimated because we haven't seen the full effect, of the volumes that we said goodbye to deliberately at the beginning of the acquisition. We still have an ambition to grow faster than the market, both for air freight and sea freight.
We could mention a few verticals.
Exactly.
I would say that high tech, we've done very well on that. Also probably pharmaceuticals would be an area where we also see.
Yeah
Some growth as well. Across the board, we've also done fairly well. High tech is probably the most notable development.
Thank you very much.
Thank you. Our next question comes from the line of Dan Tökeberg of Carnegie. Please go ahead, your line is open.
Yes, hello. A couple from my side as well. Let's start with the guidance. I understand that part of your guidance includes, a more muted scenario for how volumes will develop in second half. Can you share some color or give some color on that? Is the lower expectation for volume developments here in 2022 explained purely, by lower demand? Or are some of the reasons also due to the more constrained market? Are you seeing more congestions, et cetera, impacting your second half? That's the first question.
Second question on a worst case, I mean, if we sort of suddenly sort of say hit a wall and growth declines further than the 1%-3% that you imply here, and we need to knock off, let's say another 3%-5% of your volumes, how will that impact your guidance or shall we say your EBIT? What is at risk here in such a scenario? Finally, sequentially, how should we look at your expectations for volumes? Not the market but more sequentially here in the second half. You normally can see at least, we do see a pickup in volumes in quarter two to three, and maybe later on for air.
Are we currently looking at what is a normal pattern for volumes in during second half? That's three questions. Thanks.
For the guidance, you know, it's of course we have had a lot of calculations made internally. We've had discussions about it. I think it would be irresponsible at this moment in time, with all the anticipation of what could happen in the second half of this year, to go with a normal split of earnings between the first half and the second half of the year, where normally the second half is slightly better than the first. I mean, we're simply not in a position to be able to substantiate that. What we have put into the spreadsheet a little bit then is that volumes will develop more or less like what we have seen here in Q2.
The big deciding factor is of course the yields. That implies also, as you could point out, that you can calculate yourself, that we expect yields to come down. We don't know what the yields will be in Q3 and Q4. It's also important to say our employees, they work hard every day to keep them as high as possible, but it is likely that they will drop. Volumes, we are not modeling in that volumes will drop from where we are at Q2. You might have a point that Q3 is normally stronger, but I guess that was also the case last year. Worst case scenario, I don't know.
What we can say is, for sure that, as I said, this is the flexible business model of a freight forwarder, not only DSV. That at least for our company, I can say we don't have a lot of fixed capacity that we need to fill. We can adjust the cost base almost on a daily basis. Actually, we can also adjust very fast on the blue collar is more or less flexible also. We have a lot of temporary staff on blue collar, and we can also adjust on the white collar side. Should we hit a wall, as you point out, we will do what we can to protect the EBIT as we have normally done in the past also.
I think we have built in, at the lower part of our range, some kind of not worst-case scenario, but a not so optimistic scenario.
Any flavor on constraints and congestion at the moment? Is it getting worse? Is it sustained?
I don't know.
I think it's more or less the same than. It has changed a little bit from the U.S., and then we have some congestions in northern part of Europe and then also in Asia. I think in total it's more or less the same, but it's not centered around the U.S. West Coast anymore, the way we see it.
Thank you.
Thank you. Our next question comes from the line of Sathish Sivakumar of Citigroup. Please go ahead, your line is open.
Thanks. Thank you. I've got three questions.
Sathish, you sound very quiet. I don't know if your headset's off or your mouth's away from the phone.
Can you hear me now?
No, you sound very quiet and muffled. Like, I can hear you, but you're very, very distant, and I can't make out everything you're saying.
Sorry about that. One minute.
Okay then. Sorry about that. Thank you.
Hello, can you hear me now?
Very pale. Yeah. You fade away.
I'll try to speak up more. I got three questions here. Firstly, on air freight. Just a follow-up on the market share growth. Can you give some color on how you actually performed by key regions like Asia to Europe and Transpacific? Just follow up to that, how much of your charter network and block space agreement is actually contracted out to, say, high-yielding sector like high-tech and pharma? The second question is around your exposure to industrial type vertical versus retail segment, where you have seen increased fluidity despite the increasing conditions, i.e., which verticals have actually started to see more volumes come through, even though the conditions have gone up? The third one is actually around the Solutions.
In terms of the utilization ratio, any color on the utilization ratio of, within your footprint and warehouses? Have you started to get some color from your customers on how they want to think about inventory levels, going into and for potentially a continuous slowdown? Those are my three questions. Apologies for the technicality here. Thank you.
Yeah. Thanks, Sathish. We are not sure we heard all of your questions, so we'll try to answer them as much as we can. On air, it seems like the split, if we should come, we don't have it exactly at hand. It would be like the trade lane growth would be Asia to Europe maybe -10%, and Transpacific minus five would be a guess. So Transpac still doing fairly well. I mean, retail, I guess a lot of what we move will eventually end up as retail, so it's also a definition question. It's for sure less than 20%, in the way that we segregate it between the verticals that we have.
On Solutions, the utilization of our warehouses is very high, which is consistent also with the, inventory levels that we all read about and what we hear about. We have a good utilization of the warehouses. We still have access to new capacity. Maybe Jens can talk about that too, on some of the new, newly erected facilities. In the more traditional ones that we've had and we've operated for many years, the utilization is probably the highest it has ever been. I don't know, Jens, if you wanna elaborate on that.
No, I think I saw one basically, property company that sort of we lease properties with. They sent out a note, they said, "We are sold out." So you know that it's from the likes of Prologis, Panattoni, these type of companies. There's no capacity available in the market. Of course all our facilities there are also full and the inventory levels are high. I think they are high due to two things. First of all because I think, people have stocked up or increased the stock levels, but also because of business continuity plans.
We see that customers, they wanna hold more inventory, in order to be, confident that they can operate also with these, what can we say, bottlenecks that we see in the supply chain in general. A little bit of color on that.
Thank you. That's quite helpful. Are you actually starting to see some pressure as you're going to get toward the next year on the contracts that are coming up for renewal within Solutions wherein your customers are trying to get the volumes down?
I think the problems we have with our customers on Solutions is that we find it hard, you know, to find excess space for them. Of course that leads to a situation where, if we can solve these types of problems, that we can also, you know, make sure that the cost base that we have is covered, and that we get into a contracting structure that also works well for us.
Thank you. That's quite helpful. Apologies again for the line. Bye-bye. Thank you.
Thank you. Our next question comes from the line of Robert Joynson of BNP Paribas. Please go ahead, your line is open.
Good morning, everybody. Hopefully you can hear me okay. Three from me, please. First of all, on the share buyback, you announced a new program today of DKK 7 billion to run for three months, which compares with just over DKK 8 billion during H1. Obviously, you're posting doubling the monthly run rate on what is quite a similar share price. What's the rationale for that? Is that simply that the run rate of free cash flow generation has improved, or are there any other factors at play there? Second question on congestion, which is worsening at the North European ports, as you mentioned. What do you see as the main reasons for that? Is it labor shortages, trucking capacity issues? What are you seeing?
Also, do you sense congestion may deteriorate further during the remainder of this year? The third and final question on the outlook for container shipping rates. One of your peers mentioned yesterday they think rates could stabilize at two to three times the pre-pandemic level. What is the DSV thinking in that respect? Thank you.
Yeah. Should I take the share buyback? It's correct that you can say for the first quarter, the share buyback that we had back then was one of the lowest. Now we have rightfully noticed that we have increased the share buyback to maybe the highest level on a monthly basis that we have had. It is due to the fact that we have had this strong cash flow, our strong balance sheet, and then we would like to adhere to our capital allocation policy. And we also need to consider what is possible to buy back given the safe harbor regulation and so forth. That is the reasoning behind the amount of the share buyback. Jesper, would you talk about the congestion part?
Yeah, the congestion is correct. It's a different situation than what it has been in Europe than what we've seen in the U.S. There's been some labor action in Germany, which was probably the main reason, for the congestion that we have seen. The infrastructure in general, without offending anybody in the U.S., is maybe a little bit more modern than Europe, so we do expect that congestion that will ease also going into Q3 when we talk about Europe. We are not commenting. We don't unfortunately have a crystal ball. I wish I knew what rates would stabilize at. It's also, I guess a big difference if it's two or three times.
To be honest, we simply don't know. We don't have any kind of specific view on that.
For the rates.
Okay, all clear.
Thank you. Our next question comes from the line of Sam Bland of JP Morgan. Please go ahead, your line is open.
Okay, thanks. Thanks for taking the question. I have two, please. The first one is back on the guidance. You said on the comments earlier that there'd been some sort of, windfall profit from being short in the market while spot rates are falling. I think part of what the guidance talks about is the gradual easing of supply chains, to reduce gross profit yields. Wouldn't it have the opposite effect if you're short in the market, and if there was an easing of supply chains, actually you'd keep on having a bit of a tailwind from this short position in the market? The second question is sort of linked to that question just asked on the two to three times rate question. It's more, you know, what's your assessment of sort of, yeah, infrastructure?
I guess it's easy to add ships, but it's difficult to add things like ports. Where do you think infrastructure is? How much of the current congestion is driven by infrastructure and that might then be more difficult to do something about? Thank you.
I don't know whether my two colleagues can think about the second question, but the first question, it's not an unfair kind of view or statement that you are having, you're coming with. It's normally the trend is, as you correctly point out, that if you are short in the market and if rates drop, we've talked about this with analysts and investors all our life, then there is a temporary gain, and it is the opposite when rates go up. There's this famous delay effect. It's probably a little bit shorter now than what it is. Customers are more aware. We are also more aware about this ourselves.
It could hypothetically, you're right, mean that Q3 is not gonna be so difficult, and that we will have to get into Q4 before we start to see a deterioration. Again, it's unknown. There's a lot of factors that play into this as well. We are a little bit cautious promising too much. As I said, with those assumptions, you could come to other calculations. We think that it would, with a great degree of uncertainty and the limited transparency we have also, be irresponsible to guide too high a figure today. I don't know about the rates, maybe Jens can.
I can say a little bit about that. The thing is you're absolutely spot on.
You have, what can I say, at origin you have the, what can I say, pre-carriage and how is the capacity and how is the capacity at the port at origin. I think many, have seen that in China and Asia-Pacific region, there's been significant investments in that. That should, what can I say, over time be able to handle the volumes that are needed. There's been constraints on the equipment, the containers. I think there's been investment in that. That's probably also easing. There's normal capital allocation behind that, so that will basically normalize over time. There's the vessel situation. I would say that it seems like there's capacity coming in as well. All these things, they should help. What doesn't really work is at destination, the ports.
There's been underinvestment across the board in Western Europe. If you look at the capacity also on haulage, on rail and all that, there's no investment in infrastructure in that. We also have, of course, difficulties on the labor side. There's a shortage of staff. I think that is gonna continue. It's gonna be fragile, certain parts of it, and certain parts of it is gonna, I think, work out well. I think that's sort of how you could have a look at it. At destination, we will still face some issues. Of course, having seen the spikes in demand like you've seen under Covid, in particular in the U.S., then it simply overheats.
That's sort of where you get these rate situations where they basically increase very much. There's no help for that because there's no, at least that I'm aware of, significant investments committed, that should basically resolve these issues.
Understood. Thank you very much.
Thank you. Our next question comes from the line of Lars Heindorff at Nordea. Please go ahead. Your line is open.
Yes. Morning. Thank you for taking my questions. The first one is on the yield development as well. We had previously, both during the capital market and also I think in connection with the Q1 report, you talked about the share of LCL, volumes and how that was affecting your yields. Obviously carries a higher, contribution compared to some of the full loads. So I just want to get an indication or a feeling for how that has developed and whether you believe that the recent development is that something which is more sustainable? That's the third one.
Michael will answer that. I just saw he raised his hand in here.
Yeah. I think what we have seen in H1 is you could say it's roughly 6% of the volume corresponding to 20% of the gross profit for the LCL part.
Lars, there's been a focus on developing this.
Yeah. We keep our focus on developing, like Jens mentioned.
Because it's a value add. We are probably number one on groupage globally. We have significant volumes, and we have more direct connections, we think, than most of our peers. Many of our peers, they actually work with co-loaders to a high extent. We also have many co-loaders that we work with, but we try to build our own boxes where possible.
If I understand it correctly, then the 6% is up compared to what's been historically. The question is basically, I mean, is this something which has been caused by change in demand from customers? Is it how you've been operating? Is this actually sustainable, this?
As we push-
Probably central on trying to get at this.
If you know, if there's money there and if there's somewhere we can add value, of course, we push it. If it's 6% of our volume and 20% of our GP, I can tell you that it is something that gives increased focus within the division. There's a big push for developing our groupage, our LCL product, within the MC division. Actually also to try to see if we could develop, what can I say, some additional capabilities in combination with, in particular Road. That's definitely a focus area for us.
And of course, then if you meet the market, if you have a good service and you live up to the customer's requirements, I mean, you can sell the product with confidence and, I think that's exactly what we're doing right now.
Okay. The second question is a follow-up on one of the previous one on Solutions. Still very strong growth, and you talked about high utilization there. I don't know what the organic growth is around 20, maybe 30% in Solutions. Is that really sustainable or is this just mainly driven by the high utilization? How do you see that develop going forward?
Of course, we see, you know, that there is a significant demand right now, and we've been performing very well. We've also seen that we've acquired, what can I say, GIL, and they've also been doing exceptionally well. I think, you know, sometimes you see in Solutions that it needs to plateau at a certain level, and then you sort of get the thing consolidated, and then we can continue the development. I can still remember when we made DKK 300 million in a year in Solutions. Now it's almost like, you know, we make that in one and a half months.
We have managed to, develop and drive it forward with this enterprise thinking that Jens Bjørn was talking about, where we consolidate the IT, where we run the campus strategy, and basically where we continue to drive the division in this direction. From what we can see, it really works well with what the customers are looking for. Right now, we are fairly confident that we can continue the development. Whether we can have, the same high increase also in a market that stagnates or perhaps declines our contracts, time will tell. In general, the strategy and the plan, it works.
Okay. The last one is on the cost side and your ability to safeguard and protect your earnings in case, I think, you talked about earlier, if we hit the wall. When COVID started, you initiated a cost-cutting program where I think you took out close to 10% of your cost base in, I think, less than 12 months, maybe closer to nine. This is only now 2.5 years ago. In case we hit the wall, I mean, will you be able to carry through such a program once again?
Lars, take comfort in the past. Look at the history. See what we have done in DSV over the years. I cannot remember one single time where we have just sat with our hands in our laps, just waiting for things to clear, for the rain and the storm to disappear and for the sun to come up again. We normally do everything we can to safeguard the company. It's not that dramatic. It's just about retaining more or less the productivity level. It's not like we will ask a lot from the organization to dramatically increase. If volumes are down, we need less resources.
That can be done also in an easy manner, as I said, because a lot of the staff, they are temporary, and we also have a turnover rate of employees, which is double-digit that either retires or changes job voluntarily. It can be done fairly easy. I'm sure that in the top drawer of a lot of our country managers' desks, there are already plans should we kind of get to that situation that makes it necessary for us.
All right. Thank you.
Thank you. Our next question comes from the line of Michael Rasmussen of Danske Bank. Please go ahead, your line is open.
Yes, thank you very much. Three questions from my side. First of all, on the ocean side, when you lose business to some of the carriers, can you just talk a little bit about, you know, what is actually driving your customers to change over to some of the carriers? Is it price levels, reliability, service levels in general or what's driving them? That's the first question. My second question is on the staff turnover. I noticed that you've reduced the number of staff by around 1,300, mainly in Road by 500, and also the unallocated is down by 250.
Is this just natural from the GIL integration, or is this actually that you've started to prepare a little bit for a slowdown in the business? My final question is for Michael. At the CMD, you talked about you didn't see EBIT below DKK 20 billion, I think you said any time in the strategy period. Obviously with you now guiding 2023-2025, obviously 2022 is very, very safe, but I've just if you could reiterate that you also see this as safe going forward still. Thank you.
We'll give Michael some time to think about that last question, and then Jens will talk about what drives the customer behavior on sea freight.
Yeah. If you sit and look at it's clear that the carriers, they sometimes invest a little bit in some of these customers in order to, what can I say, get some of the large accounts on board. I've to date not heard that they've changed, what can I say, provider, service provider, due to the service levels. On the contrary, I think we've sometimes, and that might be also that we like to hear that, but they actually accept a lower service level, because they can only use them, what can I say, one shipping line or perhaps sometimes they don't run CFSs and stuff like that have the same volume or structure as ours, some of the forwarders they have.
The price difference sometimes is significant and that then persuades them, what can I say, to move in that direction. Of course, as long as the rates are what they are, I think there's some
You know, competition that can invest in that. That's the market. I mean, we shouldn't really moan about it. We've been competing with all kinds of companies during many years. You know, things they move back and forth so.
The low rates also come with some sort of commitment in terms of the length of the contract.
Oh, yes.
So-
They're gonna have a fun time if the rates they drop off. Because of course, then we will phone and say, "Listen, we have a better rate for you know." And that's of course gonna happen. Now the pendulum it's swinging in the direction of the asset owners. They are happy and all that. It will swing back again. That's how it works. Now, I think Michael has thought about it, he's actually, as you say, better off now because the results are higher. Let's hear what he has to say.
Yeah.
Maybe I will start with the easier one. For the staff turnover you asked too. The development is mainly driven by the GIL integration. Then also bear in mind that we do have a normal focus on the cost base and the efficiencies. That is mainly the impact that you see. As for my statement for the Capital Markets Day, it's clear that, and also if you look at the homepage where you can see the screen in the background, the DKK 20 billion mark. It's clear that we need to have some kind of development.
If we run into a hard recession almost dropping like a stone, then it is clear it will be more than difficult to maintain the DKK 20 billion. In a normal environment, and also coming back to what Jens Bjørn said about our cost base and our adaptability to that, then we still believe that we can have the DKK 20 billion as a mark. Again, it is very important for me to say that it is clear that there need to be some volume that we can work with. If the volume all of a sudden disappear or fall off like a cliff, then we will not be able to reach the DKK 20 billion mark. I think that that is clear for most of you guys.
Great. That's a good and a confident message. Thank you.
Thank you. Our next question comes from the line of Muneeba Kayani from Bank of America. Please go ahead. Your line is open.
Good morning, and thank you. I just wanted to go back to your comment on sea volumes being impacted by, some discontinuation of the low margin business. Were these DSV or GIL volumes? Can you talk about what sort of products these were, and is this kind of done at this point, or do you think you need to do more of that? Then secondly, on cash flows, which were very strong in the second quarter, given your EBIT guidance, how should we think about free cash flow in the second half, and could it be similar to the first half? Thank you.
When it comes to sea volumes, I can say that what needs to be done has been done. You know, when you compare with the performance a year ago, it takes some quarters before you actually see, that the comparisons stack up, so to say. It will probably take one or two quarters more before we get a like for like situation. It's not big numbers compared to what we saw with Panalpina, where we had some issues with some of the. There was some larger degree of unattractive business in Panalpina. Some of the perishables business we did not like so much. With high volumes, we have not seen the same degree in GIL.
We are talking about a very low one or two percentage points or something, not more than that. We cannot hide, so to say, behind that, going forward, and it will soon be out of the comparison numbers also. I guess Michael can talk to the cash flow. I hope he will say now that he's confident that the cash will follow the performance of the company, so.
Yes. I think it will. Right now we have a cash conversion of nearly one to one, and I don't see why that should not continue for the remaining part of the year. We of course still need to have very tight focus, on the net working capital management and then also in general for the operations. I expect that it will continue the way I see it right now.
Thank you.
Thank you. Our next question comes from the line of Parash Jain of HSBC. Please go ahead. Your line is open.
Thank you, if I may ask two questions. First, if you comment on near-term development with respect to demand, particularly with lot of noise about U.S. demand capitulation in the summer, whereas hard data on the contrary reveals that, demand for now remains resilient. Can you comment on what sort of visibility do we have coming into third quarter? And is it fair to say that if the midpoint of your guidance needs to be hit, the half will be of two different quarters, where we see probably a sharp deceleration in fourth quarter, as probably third quarter is unlikely to be very different from second quarter? Is that understanding fair? My second question is, with now GIL integration done and dusted, how do you see your next acquisition?
Is it around the corner? Any color that you can share with respect to your pipeline? Thank you.
Good. You are caller number 10, and it's not that often that we have to wait 10 questions to get a question about M&A, so I can take that. We are in no hurry in DSV. The future success of our company do not rely on us doing an imminent acquisition. Our strategy remains the same. We would like to take part in the consolidation of our industry. We have become a large company, probably number three among the global players. Our market share is still below 5%, so we think all stakeholders have benefited from us doing acquisitions in the past. We've succeeded in another successful integration with GIL, confirming that apparently we have some sort of template, in the company that we can use.
We are optimistic about future M&A also. As I said, we are in no hurry and we both have to be opportunistic in the nature of if something appears. Of course, we have our own plans that we have always had, with targets that we are analyzing all the time, and we'll see when something happens. I don't know about the near-term demand visibility. Maybe Michael?
I think if I can say a little bit like we have already touched upon a few times. As Bjørn said that correctly, of course, that we have seen a good momentum also in Q2, and that seems to, from what we can see so far, to have continued in July. We have not received any numbers yet, but it seems like it has continued. It's also clear that the longer we see out in the future, the less is the visibility. It's a correct assumption like you mentioned that in Q3 we will most likely see better off than in Q4.
Okay. Thank you so much.
Thank you. There are currently no further questions on the line at this time, so I'll hand the floor back to our speakers for the closing comment.
Thank you, everybody, for your good questions. We cherish those. Please reach out if you have any additional things you want us to elaborate on. If you have any investors who would like to speak to us, direct them toward us. We will start the roadshow activities now. For us, the summer holidays are over, so now it's hard work until the Q3 message. We are eager to continue the journey. We think that we have a stronger foundation in the company right now than we've ever had before to meet whatever challenges lie ahead. With that said, thank you very much here from Hedehusene, and have a good day, and goodbye.