DSV A/S

CSE:DSV

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, welcome to the DSV Interim Financial Report for the First Quarter 2018. Today, I am pleased to present the CEO, Jens Bjørn Andersen; and the CFO, Jens Lund. [Operator Instructions]Speakers, please begin.

[Jens Bjørn Andersen, CEO & Member of the Executive Board]

Thank you very much, and welcome to this presentation of the Q1 2018 numbers. As you just heard, I'm joined here today by Jens Lund here in our head office in Hedehusene. And we have, for a long period of time, been looking forward to sharing these numbers with you here this morning.And I just suggest that we will go straight into the results. And after the forward-looking statements, that I would kindly ask you to read on Page #2, you can see the agenda for this morning on Page #3. It looks pretty much like it has been for many quarters now, where we will go through some of the highlights of the previous quarter, talk about the 3 business units, the divisions, how they have done. And Jens Lund will conclude the session with a financial review, whereafter we will leave the floor open for questions and answers. And I'm sure you know how to put your answers in on the conference call.So Page #4 is the highlights of what we consider a very, very good quarter in DSV. We are tracking our plans in many areas. We are actually slightly ahead of where we expected to be after Q1. So I think we can say that the very strong and good momentum that we saw at the very end of 2017 has continued into '18, which is, of course, something we are very pleased about.The gross profit of the period grew 3%, driven by a very solid growth in volumes, and I will come back to that later on. And it is sometimes frustrating, but we still have to draw your attention to the fact that we did have fewer working days in Q1 because of the way that the Easter was. And we -- in the European part of our business, it's about 2 working days fewer, which does have a negative impact.What has our biggest interest is, of course, the EBIT in constant currency. So the EBIT grew 9%, which is something we can be pleased about. The growth was driven by a very strong performance in both Solutions and Air & Sea. And of course, our -- as I said, I will come back to that later on.We have, as one of the few players in the market, a very solid outlook we give every year before the year starts, and we have now found it correct just to adjust the range a little bit. So now the EBIT, the hot guidance we give for EBIT is now a range between DKK 5.1 billion and DKK 5.4 billion.And because of the fact that cash flow has been strong as expected, we have also announced a new share buyback program this morning of DKK 1.1 billion, which will be launched, actually, as we speak, or it has been launched this morning, and Jens Lund will come back to that later on. If you want to see how the growth in gross profit and the EBIT has been put together, you can see it on the illustrations at the bottom of the page.So digging in to the divisions. I have to say that, once again, we have been extremely pleased with the performance, very, very strong performance of the Air & Sea Division. They've done once again fantastic strong performance, especially in air freight, driven by export from the EMEA region and the Americas. You can see that the bottom of the page, that we've grown air freight 10.3% number of tonnes, and it has to be mentioned here that this is a pure organic growth. This is excluding any M&A or any -- it's a clear organic rate in comparison with the same period last year. And we've moved 162,000 tonnes of air freight, which is nice. And it is about twice as high a growth rate than the market that we estimate, which has grown about 5% to 6%.What does please us very much is that we have seen this growth without diluting the GP per tonne. In constant currencies, it's up almost 1%, which is, of course, something which is extremely important that we -- always, as we talk about, the growth should be a profitable growth, and this is also what we have seen. So super, super performance on air freight, and we expect that the growth will continue. If it's going to be double-digit, remains to be seen, but we have a very, very good pipeline of new customers coming in with significant air freight volumes to DSV.Sea freight has grown slightly ahead of the underlying market. You can see that also on the sea freight section of the chart. We've grown the number of TEUs with 4.2%, which is slightly ahead of the estimated market growth of 3% to 4%.Here, we have seen a slightly -- or a more positive development on the unit, on the yields. In constant currencies, we've actually grown the GP per TEU with approximately 3%, which is very good to see.So overall, this has led to an EBIT growth of almost 25%. And once again, we demonstrate a set of margins which, I have to say, are, if not industry-leading, then very close to industry-leading. And as we are still not where we should be in terms of the long-term financial targets of DSV, we still expect these margins to go up even though they are very, very high. So good momentum in the division. It's a true pleasure to be able to see this development.Next page is Page 6. It's the Road Division, where we say that the gross profit has grown almost 3%. You have to, in the Road Division, adjust for a property gain we had in Q1 of '17 of DKK 125 million. And when you take that into account, we also believe that the Road Division has done well.The underlying EBIT is on par with Q1 '17, in spite of fewer working days. And if you actually take the fewer working days, which has a higher effect in Road than in Air & Sea because we are bigger in the Nordics in Road as a proportion to Air & Sea, I think it's fair to say that the underlying EBIT growth of Road is about DKK 15 million to DKK 20 million. And of course, we have put something in the bank for Q2. We know this will be something that we expect and we expect to see in the coming quarters.We've also seen this as something we are very happy about, a sequential improvement in the gross margin. After we did see the gross margin dipping below 17% in Q4, we are now back on the 17% mark. And we hope very much that we will see the gross margin of the Road Division stabilizing at a level between 17% and 18% for the whole year 2018. You can also see, at the very low end, that the number of shipments have grown 3%, which is slightly above or in line with the markets. So everything taken into consideration, a good result for Road that also gives hope for future EBIT growth.So the last slide before I hand over to Jens is the Solutions Division. It's strong operational performance that has led to this EBIT growth. Of course, when you compare with the low number last year, the growth seems very high. So we have to remember that the DKK 66 million that we made in '17, I think we also said it at the time, was not satisfactory. And when things are going in the right direction, of course, we see a big impact. We do see a big contributor being growth in e-commerce, which is growing faster than the normal business. But we've also seen growth in the more traditional 3PL business with large retail brands and also within the automotive industry.What also helps on the profitability is that we have managed to -- we have seen a positive impact from the focus we've had on consolidation to fewer sites. And I think it's also fair to say that what we internally call the so-called bleeder list of unprofitable sites, countries and customers have significantly shrunk during the quarter, which has also meant that the result has been good. And last but not least, we have -- also have to mention that we do see some impact of also synergies on the cost base.So overall, strong performance of Solutions. There's a lot of demand out in the real world so say, from our customers to buy in these extreme sophisticated solutions that the division is capable of producing. And I think the division will continue to report fairly strong numbers.So with that said, I will now ask Lund Jens to -- on Page #8 to go through some of the financial numbers.

[Jens H. Lund, CFO & Member of the Executive Board]

Thank you very much. And I'll just have a quick rundown of the numbers.I think the first thing that we've noticed in the conversations we've had this morning is that there has been a little bit of confusion as to our revenue growth. Actually, in constant currencies, we have grown 5.6%. And I think the confusion relates a little bit to the fact that we also operate solutions and some road activities overseas, so they've also been impacted by the weak U.S. dollar.On the GP level, I think everybody has, sort of, followed that translation risk or exposure, and we see that we have growth of 3%. So that's fairly okay.On the cost side, we can see that we've taken costs out, and the conversion ratio has increased. Compared to last year, we are now at 28.1% on a group level. So that's pretty good. This leaves us with an EBIT margin of almost 9% -- an EBIT growth of almost 9% and a margin of 6.3%. So all in all, very solid income generation out of our activities.One item that has caught your attention is, of course, the effects on the financial items where we see that we've had a loss of more than DKK 80 million in the first quarter.Now the dollar has actually swung from DKK 6.20 on the 1st of January to approximately DKK 6 on the end of March. I would expect at DKK 6.19, so we expect to recover this in the second quarter if the dollar exchange rate continues to stabilize. This is internal loans that we have in U.S. dollar that we do not hedge, and this is the way you account for these loans that leads to these rather technical adjustments.If we take the tax rate, it's at 23.2%. We still working a little bit on the structure that we need to have in place for the U.S. tax reform. But so far, we are going to stick with the current tax rate and level.If we look at the EPS growth, we can see that we've now grown the EPS almost 24% over the last 12 month. And some of you have also asked about FTE or headcount. We can say that the swing mainly relates to higher activity, as Jens Bjørn just mentioned.On Solutions, we can see that we have higher activity. We also have higher activity on Road, and this leads to a higher consumption of blue-collar. We're actually a little bit down on the number of white-collar employees.If we move to Slide #9, look at the cash flow. I think net working capital at 2.5% of revenue at the end of Q1, that is satisfactory. We think that Easter has impacted collection a little bit because many people have been on vacation at quarter end. So apart from this, I think the cash flow statement is pretty straightforward.And our net interest-bearing debt, it's at DKK 6.1 billion, so it's 1.1x EBITDA. And we have a commitment on our loan portfolio of 3 years, so we are also in a solid position there, I should say.I think if we look at the return on invested capital and exclude goodwill and customer relations, we are at a fairly high percentage. We almost reached 100%. So we did draw very little capital apart from the intangibles in our company.If we move to the next slide, Slide #10, just a quick overview of the allocation to shareholders. We normally have this overview as part of our presentation, and you can see what we've done in Q1. That's the actual figures. And of course, the newly established share buyback program is just evenly distributed over the period. So we expect to allocate another DKK 1.1 billion before we speak to you the next time.If we take the outlook on Page #11. I think Jens Bjørn already mentioned that we've just narrowed the range for operational profit to DKK 5.1 billion to DKK 5.4 billion. Some of you have then said, "Why should we not adjust the cash flow?" Well, it's a single figure, and we think that having guided this figure, it's still the relevant figure to show, given the other assumptions that we have there.I think that was what we had on the outlook that is worth paying attention to because I already spoke about the tax rate as we expect to keep that to 23%.And if we move to Slide #12. We can then go to the Q&A session, and Jens Bjørn and I will be ready to take your questions. Thank you.

[Operator]

[Operator Instructions] Our first question comes from the line of Casper Blom of ABG.

[Casper Blom, Lead Analyst]

Two questions from my side, please. First of all, I suppose it's maybe not that easy to separate anymore, but do you have any sort of feeling as to how much the UTi synergies are helping you here in Q1? More to get a feeling of, sort of, what to expect from that side in the remaining 3 quarters of the year to, sort of, really bridge our way through. That's my first question, please.

[Jens H. Lund, CFO & Member of the Executive Board]

That if we look at -- it's Jens speaking, that we will have approximately -- we have guided DKK 200 million of impact in 2018, and we will receive this impact, basically, in Q1 and Q2. So if you calculate, we're approximately DKK 100 million or something like this. I think you are not too far off. It's very hard to say for us exactly which month that we actually see the impact of all the initiatives we took last year, but we get the full year impact this year of the things we did last year.

[Casper Blom, Lead Analyst]

Okay. But basically, you get it in the first half of the year?

[Jens H. Lund, CFO & Member of the Executive Board]

Yes.

[Casper Blom, Lead Analyst]

Perfect. That's very straightforward. Then secondly, coming back to the Road business. As you point to your conversion rate -- or sorry, your margin is back on track after the dip in Q4. Can you speak a little bit about the dynamics in pushing through these higher prices with regards to having higher costs for the lack of drivers that you saw in Q4? What is sort of the dynamic now? And is it still a little bit too hopeful to sort of, yes, hope that you would be getting some pricing power back for real here?

[Jens Bjørn Andersen, CEO & Member of the Executive Board]

It seems like the market has improved. We had also expected that Q1 is normally a soft quarter in terms of supply and demand, except for just the periods straight -- right up to -- not to Christmas, but to Easter. So it seems like we have been able to get the high increases from customers in Road than what we have normally seen. Some of them have not been, kind of, having a full effect of the whole quarter. And it seems like we have gotten some of the pricing power back when it comes to dealing with the suppliers. We've also strengthened the central procurement team of capacity, so we source a larger part central in our trucks than what we did in the past. It's also important for me to say that, of course, we are happy that we are 17% now, but it's not the end game, hopefully. I think it's still our ambition to grow that to see if we can get that slightly up. As I said, between 17% and 18% would be really good. But it's, unfortunately, not possible for us to account for exactly when did we get the increases overall because it also happens in different phases in the different countries. So -- but overall, it seemed like we have had a higher penetration when it comes to increases than we've had for some time at least.

[Casper Blom, Lead Analyst]

You -- I mean, Jens, you've been talking about this 17% to 18% range for a while now. What would it take for you to, sort of, become a bit more bullish and say, "Okay, now we want to get above 18%?"

[Jens Bjørn Andersen, CEO & Member of the Executive Board]

Of course, it's tempting, but I mean, we -- you also know we think that it's extremely important that the investors indeed feel they can kind of rely on what we say, so we would like to say something that we can deliver on. So we have to take this in a couple of steps. Now we've said, let's stabilize this above 17%, between 17% and 18%, and if we get to closer to 18%, you can rest assure we will not be satisfied with that. Then we will see if we can take it higher. But it would kind of take that we would see, probably, a more supply coming in, so we would kind of stop the increase that we have seen that, that would kind of not happen or that the rates that we pay through the whole years would not go up any further from where they are today. It's still very competitive, and it's not so easy, I can tell you that, just to go out to the market and increase the rates. But it is the first step. We are happy about this, and then what we can promise is that we will work hard to get more, what you say, out of the new GP in terms of conversion ratio. I think we still have a good potential to grow the EBIT because of productivity improvements and the new technology that we take into use in DSV.

[Operator]

Our next question comes from the line of Mark McVicar of Barclays.

[Mark John McVicar, Head of European Transportation Research]

I have 2 questions. First one is there's kind of a lot of talk around at the moment about a slight slowdown in the global economy or that there being a soft patch out there. When you look at your order books and you talk to your customers about their intentions for second quarter and then later in the year, do you detect any sign of that? Or is this just, sort of, economists running around?

[Jens Bjørn Andersen, CEO & Member of the Executive Board]

It's tempting to say it's the latter, economists just running around. I don't know if I would quote that phrase. But we actually seen no slowdown. We spend a lot of time, the senior management of DSV, speaking to customers for natural reasons. It seems like they are still optimistic. You could argue that comparisons are becoming tougher. But when you look at the volumes, I think they are still looking pretty decent. So in our forecasts, we have not taken into account that we will see a slowdown in the economy. And I've -- with the knowledge that we have, I don't see that as very likely, either.

[Mark John McVicar, Head of European Transportation Research]

Okay. And then my other question was really linked to that and to do with capacity. Obviously, particularly, on the air freight side, the market is pretty tight. And then, obviously, you're working hard to manage that. Do you see from here the air freight and the sea freight markets tightening as we go through the year? Or is some of the softness or softer conditions that we've seen on -- particularly on the ocean side, likely to persist? And therefore, directionally, where do you think your GP is likely to move over the balance of the year?

[Jens Bjørn Andersen, CEO & Member of the Executive Board]

I think that the ocean market will continue to be soft. There will still be a lot of new capacity coming into the market. The growth is okay but is lower than what we see in air. We get all the capacity that we need. Of course, as you know very well, it's a super volatile market where the ocean carriers constantly try to get the rates up. So we have to be super aware and be close to both our customers and the suppliers. So we are not concerned at all to get the necessary capacity on ocean. Air is a little bit different. We have to fight more in certain weeks of the year to get the capacity that we need. It helps us tremendously that we are one of the larger players now in the market. It clearly benefits us. We do get some, what should you call it, kind of preferential treatment in terms of space allocation from the airlines, which we would also expect when we are a larger customer. So I think that we will -- we could probably see for the rest of the year also a continuation of what we saw in Q1, meaning that ocean yields could improve, maybe slightly more than what we have seen in air but being offset by a higher growth in air. So the absolute earnings can still grow pretty nice also for air freight.

[Operator]

Our next question comes from the line of Damian Brewer of RBC.

[Damian Brewer, Analyst]

Also 2 questions for me, please. First of all, can I just turn to the Road Division? And in particular, we've got some capacity issues, fuel is up again. Could you give us just a business overview or elaboration on what you think happens to the market? Is that likely to trigger any further -- either passive or active consolidation? And given you've announced now the share buyback, it sounds like at least you're not going to be participating in that in the next 3 months. But just your general views, that would be very helpful. And then, secondly, on the Solutions business, you've grown the business. You've grown the EBIT. But then net working capital has been stable but still is relatively high. Can you give us some feeling for how far you are through working out the working capital issues in the Solutions business, particularly with the capital charge now being implied -- or applied internally within the business?

[Jens Bjørn Andersen, CEO & Member of the Executive Board]

Yes, I'll just start off with the first. If I understood you correct, Damian, it was about a consolidation within Road. I think we are, we can say, unfortunately not in a position where we can participate greatly in a consolidation and do large acquisitions for Road. We need to finalize the implementation of our new TMS, Transport Management System, for Road. We are -- it's still early days. It would be too risky, so to say, to do a large acquisition in Road for the time being. So it's not very likely that, that would happen. That does not exclude that we can do small local initiatives, buying these players in certain markets that could give us an advantage. But you should not expect a larger acquisitions when it comes to Road. So that's probably what I can say. And then, Jens, maybe a little bit on the net work caps in Solutions.

[Jens H. Lund, CFO & Member of the Executive Board]

Yes. What we're doing in Solutions, and actually, it's throughout the group, is that we've applied some net working capital charge. And that's, of course, created a lot of attention. We can see that this has led to changed behavior and that we tried to collect our money faster. But it's also clear that many of the arrangement we have on Solutions is like 3-year deals and sometimes even 5-year deals. So it can be a slow process to improve it. But I think we see things trending in the right direction. And I've just had a number of board meetings internally, sort of, for the last weeks, and I can tell you that it's something that is very high on the agenda, both from my side but certainly also from the countries trying to improve it because it has an impact on the results they are able to report. So I think that's what we can say at this moment in time.

[Damian Brewer, Analyst]

Okay. And just to be clear, the movement from the 2.5% to the 2% full year ambition on the net working capital intensity, is that purely Easter timing collection? Or is there some fundamental structural changes you'd expect within the Solutions business within the 2018 year?

[Jens H. Lund, CFO & Member of the Executive Board]

No. There's -- If we sit and look at the Q1, I think it's, of course, impacted by Easter, but it's also normal that we have our best situation on the net working capital at year-end. So having 2.5% here at the end of Q1 is actually within, sort of, the acceptable range. Of course, we like to do better, and we have a lot of focus on it. But I think we are satisfied.

[Operator]

Our next question comes from the line of Neil Glynn of Crédit Suisse.

[Neil Glynn]

If I could ask, firstly, on air freight. Obviously, an impressive volume performance, which you haven't had to concede on pricing. Just interested, would you characterize the business as that you won as driven by your expanded footprint solely? Or are you providing new solutions to the industry? Just a bit of color on that would be useful. And then a couple on Solutions. First of all, Jens, you mentioned dealing with the bleeders, and working capital was, obviously, just touched on in the last question. But just interested, can you provide some more detail on what you've actually done to deal with the bleeders? Has it been a question of terminating contracts early? Or has there been a labor solution, for example or an automated solution? And then, finally, on the Solutions broader competitive landscape. It's obviously a localized market and fewer larger players that -- in Air & Sea. But there does seem to be some sense that the market is changing with new players looking to position themselves for the future. So just interested in terms of whether you're seeing any change in competitive forces and what this may ultimately mean for pricing and contract structures within the market.

[Jens Bjørn Andersen, CEO & Member of the Executive Board]

Yes. It's correct that -- if we start off with your first question about air freight is what pleased us the most when we saw the numbers coming out was, of course, the fact that we managed to grow as much as we did without sacrificing the yields. This is an underlying, what you say, logic that we always apply in DSV is when we talk about growth, it needs to be profitable growth and not just growth for the sake of growth. Our growth, with the hope that you will somehow turn new loss-making customers into profits in the future, we simply don't believe in that in DSV. I think it has to do with something -- the reason that we are growing, it has to do with something which sounds very simple, but it's good service. We deliver on the promises that we keep to our customers. They like that. Somehow, we have managed to keep our, what you say, culture intact from when we were a smaller company than what we are today. So it's a combination of the strength of a big player acting still like a local player. Customers can contact us 24/7. And it's something as simple as that. So we've grown a lot with both brand-new customers but also existing customers, just allocating more business to us. So we are very pleased about that. And as I said, the pipeline for new customers, which are on their way into DSV now is looking really, really good on air freight.Solutions, it's correct. It's maybe a dramatic term to use bleeders, but we call things what they are. When we talk about bleeders, it's simply a list, a top 10 list. And I can tell you, it's a top 10 list you don't want to be on because it's the least profitable countries, it's the least profitable branches, it's the least profitable customers that we're dealing with. And of course, when you have multiple locations which are maybe not -- they are actually loss-making, it represents a big uplift if you can stop that. So that was the focus. We've had that for many years, and it seems like we've been successful. We have terminated some contracts. We have said to customers, "These are the terms, if you don't like them, we will have to cease operations." We've also managed to improve operations [ on ] other places by improving the efficiency, productivity. We take a new technology into use. And of course, just as using new technology can also improve the productivity tremendously and also, hence, the profitability. When it comes to new players, it's a gigantic market. We have recognized the fact that new players are coming in, but so far, it's not something that we have really seen impacting our operations. I think that's what I can say.

[Operator]

Our next question comes from the line of Edward Stanford at HSBC.

[Edward John Rodney Stanford, Analyst]

Two questions, please. First of all, perhaps following off from Solutions, I mean, obviously, very strong performance that was produced. Are you able to say and differentiate between whether the growth is coming just from existing customers, or have you had an unusual addition -- a number of new contracts coming on stream in Solutions in Q1 and how might that look perhaps for the next periods coming? And secondly, in the air freight market, some of your competitors have talked about anticipating quite significant increases in rates over the next few months. Is that your experience, too? And to what extent are you now, given the capacity constraints have been an issue for you sometimes, already looking ahead and preplanning for the peak season? How important is that for you to do as well?

[Jens Bjørn Andersen, CEO & Member of the Executive Board]

When it comes to Solutions, you have to -- as I said initially, you have to take into account, at first glance, it looks excessive, the improvement that we have, 92% growth in EBIT or whatever it is. So you have to take into account that Q1 last year was a -- it was a weak quarter. We were not happy with the performance. It's -- we cannot point to one fact that has led to this improvement in EBIT. It is a combination of, as you correctly point out, new activity, both with existing customers that has grown with DSV, new customers coming in, also, and then, as we just touched upon previously, an improvement of loss-making customers or activities. We've stopped the loss-making contracts. Of course, that has also been helpful for the profit in the Solutions. Air freight, it's correct that, with the high demand, we could look into a period where rates would go slightly up. It's not like we expect rates to skyrocket in the future. But with the new size we have in air freight, it also means that we have to look at the planning in a little bit, maybe more sophisticated way than what we did in the past. We have strengthened the central procurement of air freight. It sits now in New York in the U.S. And I think it's fair to say that we have secured more capacity long term than we would have done maybe a couple of years ago before we bought UTi. But it's also fair to say that we are not in the market of speculating in rates. It's not like we take big gambles about what will happen with the rates going forward. I think we are fairly conservative when it comes to that. But air freight, it's a good -- it feels like it's a good business to be in right now. It has generated a lot of performance in the past quarters.

[Operator]

Our next question comes from the line of Daniel Roeska of Sanford Bernstein.

[Daniel Roeska, Research Analyst]

Two for me. I'd like to focus back on the Road Division for just a second. You mentioned the new TMS you're putting in Road. Can you give us a timeline and possibly also kind of what you're expecting in terms of impact from that in terms of conversion rate once that transformation is over? And second question, maybe a little bit detailed, we've seen the rise of labor cost for drivers. Especially in the U.S., that's been a topic. Are you seeing a similar trend in the other markets, especially Europe, for yourselves?

[Jens H. Lund, CFO & Member of the Executive Board]

When it comes to the TMS platform, I think we are piloting as we speak and making adjustments. It's a rather complex thing to replace our old system because it includes a lot of functionality that has been up -- built up through many years. So once this is done, I actually think, in the beginning, we will probably face productivity that is not higher than the one we see today. But then, afterwards, with planning capabilities and stuff like that, we should be able to see some benefits. But that's probably 3 to 4 years ahead of us right now, so we will not speculate too much about it. But of course, we do have ambitions to automate more and to take advantage of the planning capabilities as well and utilize the capacity we have. On the labor costs, I think it's clear that, of course, we see also increased prices for subcontractors on the driver side in Europe as well as in the U.S. So that clearly has a spillover impact, and that leads back to what Jens Bjørn had mentioned earlier that, yes, we get more from the customers, but the subcontractors actually also ask us to pay them higher rate. So it's a similar thing we see in Europe.

[Operator]

Our next question comes from the line of Bruce Chan of Stifel.

[Jizong Chan, Associate VP & Equity Research Analyst]

Most of my questions have been answered, but I just want to take a moment and go back to some of your commentary around customer positivity and the general feeling about the economic climate here. Specifically, looking at some of the rhetoric that's been going on around trade, especially some of it that's been originating here in the U.S., has that started to enter any of the customer conversations so far as far as if not maybe expectations for lower volumes, then at least planning for some possible disruptions?

[Jens Bjørn Andersen, CEO & Member of the Executive Board]

We haven't seen that from the conversations that we've had with our customers. Of course, it goes without saying that we are great believers in free trade, and any restrictions to free trade is not beneficial to DSV. If we do enter a period of time when we see big trade wars, that is definitely not in our interest. If that is just around the corner, I just don't know. It doesn't seem to be the case. And of course, if you hit the big volumes like steel and stuff like that, it's not something that we are, at first hand, really exposed to. There could be some spillover effects, I do understand that. But for the time being, it's not like we see a big rush where customers are placing additional bookings to get ahead of a potential, what you say, new tax which are being put on certain products. So we haven't really seen it, but it's not a scientific explanation. It's extremely difficult for us to track. We have hundred thousands of customers, and we cannot get intelligence from all of them. But it's not our understanding that we are just heading into a big storm that will significantly, what you say, negatively impact the volumes that we are handling.

[Jizong Chan, Associate VP & Equity Research Analyst]

That's very helpful. And just one quick follow-up here. You commented earlier this morning that you're not planning on making any acquisitions in the Road Division, of course, over the next few years. You've also got the new share buyback program in place. I'm assuming that this doesn't change anything with regard to your capital allocation strategy, specifically with regard to M&A. Can you give us maybe an update on M&A and your pipeline there, if possible?

[Jens Bjørn Andersen, CEO & Member of the Executive Board]

We've always initiated a new share buyback program every quarter. We do truly believe that the money rests best with the shareholders. And as the cash flow has been strong, we felt that doing a DKK 1.1 billion share buyback program was appropriate. We think what shareholders should expect to DSV is consistency, and we will -- it's extremely important for us that you, kind of, know what you get in DSV. So we cannot go into a situation where I would suspend or all of a sudden cease this policy because of M&A. But we are still very committed to M&A. We are in a fragmented industry. We've said this 100 times. It makes sense for us to take part in this consolidation. We feel that we have, in all modesty, created some value for shareholders in the past by doing M&A. So we are encouraged by the latest acquisition big data of UTi to continue. Unfortunately, the attractive candidates are not really, kind of, ready to enter into negotiations with DSV for the time being. But there will be opportunities arising. And of course, we have some plans also in the company, and we will work hard to make a transaction possible. But we will also have to remain disciplined to pay what we feel is the right price also for these assets. And I think it's only recently that we have, kind of, entered a phase where we are ready to do acquisitions after the integration of UTi. But I think that it is, at least, part of how the strategy, and it's something that we will work hard to make possible also in the future.

[Operator]

Our next question comes from the line of Lars Heindorff of SEB.

[Lars Heindorff, Analyst]

Just one question from me here. Regarding overhead costs, when you sum up the costs and EBIT and gross profit of the divisions and then compare that with the actual reported numbers, you normally get, sort of, the overhead cost, which actually was around DKK 40 million. A significant decline compared to previous years when you were in the process of cutting back on UTi and the overhead costs there. So just a question, is that, sort of, the level what we should expect for this year as well?

[Jens H. Lund, CFO & Member of the Executive Board]

So I think the level that you see in the -- on the cost side, in Q1, there's been a lot of change. There was also some issues with reclassifications last year and stuff like that. I think that is what you should expect, Lars, that the way we reported at the end in Q1 is what we expect for the remaining part of the year as well.

[Operator]

Our next question comes from the line of Jørgen Bruaset of Nordea Markets.

[Jørgen V. Bruaset, Senior Analyst]

I think most of my questions been answered, but probably just one on ocean freight with CEVA, a bit, sort of, more high level. I mean, on your sub-suppliers in ocean freight, we now have seen to be aligned just taking place and consolidating being executed on the container carriers. Do you see any real impact in that to your business model? And also, when looking at Q1, it looks like your reliability amongst the ocean carriers have been record low. How does that impact your business? And finally, also, if you probably could address some of the changes we see on the supplier side in terms of integration. Now with CMA moving into CEVA, how do you see that in context of your business model going forward?

[Jens Bjørn Andersen, CEO & Member of the Executive Board]

We cannot comment on the specific transactions of CMA's intention to acquire a small or a certain proportion of CEVA. But it seems like it's a strategy of this particular ocean carrier, and there's nothing really we can say about that. We do focus on our own business and make sure that we have a value proposition that is -- remains very strong, and we will focus on our -- to make sure that our processes are very efficient. It's very important to say that there are great differences between being an ocean carrier and being a freight forwarder. It is 2 important functions that each part delivers, so to say, but it's 2 totally different products. And I think we are well positioned to, kind of, take market share in this market that we in now. But of course, it's something that we are tracking, these new developments from the ocean carriers, and we will draw our own conclusions when we fully understand what it is that they are trying to develop, so to say. I didn't really get the first part of your question. What was that about with the ocean carriers?

[Jørgen V. Bruaset, Senior Analyst]

Yes, so in terms of reliability, for instance, how does that influence your business planning? I mean, now when we see record low reliability on ocean carriers, do you see any shift from ocean to air volumes in terms of the reliability being too low? Or do you see reliability being a bottleneck for your business planning?

[Jens H. Lund, CFO & Member of the Executive Board]

Basically, it's the nature of the freight forward to handle exceptions. So of course, we like to have -- that we can rely on the lead times that we get from the carriers. But I mean, we have to deal with the policy we get against -- it's a market issue, and our customers are well aware of this. So we have to handle these exceptions and offload the containers [ sooners ] and move the cargo if relevant. It's not that big issue that, sort of, causes dramatic commotion in our business, but we certainly do see that, from time to time, that there are disruptions in the supply chain. I think that's as close as we can get it.

[Operator]

Our next question comes from the line of Andy Chu of Deutsche Bank.

[Chi Onn Chu, Research Analyst]

Three questions, please, all on Solutions. Can you quantify your, sort of -- on your top 10 and sort of, list of bleeders and what's, sort of, annualized losses they're contributing or they could contribute going forward so just to give a flavor as to what that looks like? Secondly, in terms of the average contract length, could you just update us where you are in terms of your Solutions business? And then, in terms of your, sort of, current, sort of, book of business, is there much seasonality around the way those contracts are set up? Is there, sort of, a little bit more weighting towards Q4 and less in Q1? Was it pretty evenly split by profits as you look at it today?

[Jens H. Lund, CFO & Member of the Executive Board]

I think if we look at our bleeder list, I think we keep that internally. I don't think we would like to share that [indiscernible]. So I think that, sort of, answers that one. Then I think if we look at seasonality, I think, as Jens Bjørn explained, we had a weak first quarter. We normally have the lowest income in the first quarter, and then we generate higher income in Q2, of course, also in Q3, building out to Christmas. But certainly, also having a very strong quarter in Q4 as well. So I think that would be the normally split of our -- distribution of our income. When it comes to the contract length, many contracts, if it's like a normal operation, it's typically a 3-year contract. So you would have an average duration on these up to -- of 1.5 year. But you also see that, for larger customers that we move into big distribution centers, particularly, sort of, very large operations, you would typically have, let's say, a 5-year contract or a 10-year contract with a 5-year breakthrough as well, somebody can step in. And we actually see that. We signed quite a few of these, also, a little bit longer contracts. So if I should give you an estimate on the duration of our whole contract portfolio, it's probably between 2 and 2.5 years, which we believe is actually quite good and then, of course, knowing that it's skewed on the large accounts where we have an even longer duration. So -- and we've gotten it fairly well organized. If you listened into previous calls, you could see that we were talking about customer implementations all the time and having big issues in relation to that. I don't think we have solved implementing customers completely. We do make mistakes from time to time. But I think, overall, we've gotten better at implementing new volumes, and this certainly also has an impact on the profitability that we show.

[Chi Onn Chu, Research Analyst]

Okay. So you think from an industry standpoint, from your standpoint, that the, sort of, loss-making contracts, I guess, what [ you say you've ] been talking about or the industry has been talking about for more than a decade, you think that issue, certainly from your point of view, i.e. you're signing contracts at good prices and, sort of, able to execute against those targets, so they're, sort of -- the top 10 list shouldn't be an issue going forward? Is that -- or a listing is not a material issue? And then -- Because I guess the [indiscernible] contract just exists [indiscernible] as one think that they're going well and industry has a bit of a, sort of, a [ hit ] track record of 10 steps forward, 2 or 3 steps back or maybe sometimes more. So it's [indiscernible] obviously very difficult to get a sense of the sustainability of any, sort of, recovery.

[Jens H. Lund, CFO & Member of the Executive Board]

I think, basically, it's a big change for us when you implement a new cost. And I think that is the risk. I actually think that most customers, when they are up and running their price correctly, we got the business then sorted out. I think one of the things that has been all focus is to have much more control in the implementation phase and also that we standardize our processes. Because if we do this, then we will have staff that can work these processes in an efficient way, which is good. And then I think the whole part of management, in relation to an implementation, we see the gaps, too and then we can deal with them without it becoming too costly. I think that is some of the things that we're looking at. Of course, going forward, we face another challenge, and that is that we need more automation in the way we run our setups. So on the one hand, you standardize and then you will have a more automated way of producing. I mean, you've seen many videos on YouTube, and we, of course, implement some of these technologies as well. So we need to be also diligent going forward because the complexity increases. But given the current complexity, I think we're in good shape when it comes to implementations. We've just implemented some large e-commerce contracts, big volumes, a lot of small [ paid ] thousands of [indiscernible]. And actually, if you sit in [indiscernible] in my office, we don't see it in the months of reporting. So we can only say to the division that this is really well done. And years back, sometimes, we had implementations we were talking about for quite a while. And what the industry does, I think everybody's facing the same challenges on this one. So we just have to do better than the competition, then we're okay.

[Operator]

Our next question comes from the line of Finn Bjarke Petersen of Danske Bank.

[Finn Bjarke Petersen, Analyst]

Talking about IT, could you -- I can see you used DKK 113 million on intangibles investments in the first quarter, and you are mentioning rollout of IT systems. Could you give us status of where you are with your IT in all 3 divisions? And what is your expectations and -- for the rollout of new IT? And also what should be the CapEx going forward?

[Jens H. Lund, CFO & Member of the Executive Board]

I think if we take it overall, the overall topic in DSV is consolidation. So we have our standard platforms for each division, and then we consolidate volumes on that. I think it's clear to see that, on the Air & Sea side, if we start there, we actually have one country that doesn't operate on CargoWise, and that's what we moved on this year. Apart from this, all volume is basically on our CargoWise platform. So that's fairly consolidated. Here, we then work with milestones, increasing productivity, customer reporting, additional tracking information so that we get the last mile confirmation on and stuff like this. So that's certainly a key topic for the Air & Sea side. On top of this, of course, on myDSV platform, where we have online booking, and we have track and trace as well. So also, this customer interaction is being supported and digitized. But please remember as well that we do have, on the Air & Sea side, significant interaction with the customers where we receive bookings electronically as well. So we are digitized to a certain extent, and we are moving forward and digitizing our operation even more. So on our file handling, we are basically paperless, unless the authorities, of course, require paper documentation, which they do in certain areas. So that's the Air & Sea. I would say we are very advanced on the Air & Sea. If we look at it on the Road side, I already talked about the CargoLink before and consolidation of systems. That still has to basically go from the pilot phase, which it will do within the next 12 months or so, then we have a fairly good idea if the system can scale and if we have the functionality we need. The progress we're making shows us that we are on the right path, and I think we'll be able to make that. Within -- also production systems in Road and other areas, and here we are also consolidating. So still some ground to cover on Road, but I think we're in good shape. On Solutions, before UTi, we were working on consolidating on One VMS, not TMS but warehouse management system for the Solutions side as well. And then we acquired UTi. UTi had a very scattered landscape of systems. So basically, you could say that we were then back to square one. And we've done a lot of work on the DSV side, taking our whole legacy systems out, and now we are working on the UTi side. I think we will be grinding for the next 3 to 4 years, it's a rollout. We take it customer by customer, site by site, country by country, and move that out. I think on Solutions, some of the most exciting thing is that we actually now manage to establish a service catalog for a number of different things we can use as automation tools that will increase the productivity. I think many have seen the videos in [indiscernible] can move the cargo autonomously or [ different, sort of ], print and apply solutions, whatever we are talking about, voice speak or some used classes, whatever. These things we stand at the highest in a service catalog and then we can roll them out as well. And we see that many of the solutions we now deliver to our customers that -- include some kind of automation as well so that we increase the productivity. So I think also on the Solutions side, many interesting projects that should differentiate us from many of our competitors because not all of them have the capacity to invest in these projects. And this is then back to the figure of DKK 113 million in intangibles. I think you could easily see us spend between DKK 350 million and DKK 400 million on intangibles on a yearly basis. And going forward, if you have your model, you perhaps need an even higher number. And this is also the reason why we have relevance because we automate many of these processes and squeeze out many of the small competitors because they can't invest a similar amount. So IT, it's an ever important topic, and it will only become more important in the future. So I don't know if that sort of answered your question. We have many other IT things, but I could talk for hours, and I know Jens Bjørn is going to fall asleep, so I think we stop here now.

[Operator]

Our next question comes from the line of Stewart Todd of Lloyd's Loading List.

[Stewart Todd, Head of Strategic Communications]

Just a couple of questions around air freight. First of all, is the growth across the board? Or are there certain geographical zones and trade management are more dynamic than others at the moment?

[Jens Bjørn Andersen, CEO & Member of the Executive Board]

Well, it's across the board. We are -- of course, it's the traditional EMEA and Americas export out of those areas who is driving the air freight for us for the time being. So -- and it's normal industrial cargo. It's not like we have won some one extra perishables account with a high profitability. So it's out of these regions, and it's just many countries in DSV.

[Stewart Todd, Head of Strategic Communications]

Yes. Just to follow up. Is there anything you said about the verticals that are particularly dynamic at the moment? Are you seeing any comeback in the oil and gas vertical, given that oil prices are increasing?

[Jens Bjørn Andersen, CEO & Member of the Executive Board]

No, not at all. We are very limited in oil and gas. We have won some business out of Houston, I know, for some large clients recently. But the oil and gas vertical has deliberately been very small in DSV for some years. But you're right, it seems like, of course, the oil price is stabilizing, so you could speculate that it would be a better place to be in the future. But it's -- for us, it's pure speculation. There is nothing we can really do about that.

[Operator]

And there are no further questions at this time. Please go ahead, speakers.

[Jens Bjørn Andersen, CEO & Member of the Executive Board]

So it's good. Thanks very much for your good questions. You keep us alert here for more than 1 hour. We really appreciate that. Thank you to everybody who has listened in. A special thank you should go to the 46,767 DSV employees who have made this result possible. Without you, Jens Lund and myself, we could not sit here today with a big smile on our faces. So thank you, guys. You really rock.So we conclude this presentation now. And as we are in the middle of Q2, we will continue to work hard. And we will get back to you just after the summer holidays here in the Nordics with the Q2 figures. So on behalf of everybody here at the DSV team, thank you very much, and bye-bye.

[Operator]

This now concludes our call. Thank you for attending.