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Earnings Call Transcript

Earnings Call Transcript
2018-Q3

from 0
Operator

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

J
Jens Bjørn Andersen
CEO & Member of the Executive Board

Yes. Good morning, ladies and gentlemen. Welcome to this conference call where Jens Lund and myself will go through the Q3 2018 results that were just published this morning. We've been looking forward to giving you the information that we have here today for some time. So why don't we go straight into the presentation. I'll please ask you to carefully study the forward-looking statements that we have on Page #2 in the presentation you will find online. And after you have studied that, I'd kindly ask you to go to Page #3 where we have the agenda for this morning. It pretty much looks like it has for the last many quarters. First, the highlights of the quarter. The 3 divisions. Jens will talk about the financial side of the business, and we will wrap it up with Q&A. So why don't we go straight into the highlights on Page #4.We're very pleased with the performance and the results of the quarter. We've delivered what we feel is a strong set of numbers. The fact that the gross profit of -- increased organically 10% in the quarter is, of course, very strong. This is the profits we have on the files, essential for us to grow also the EBIT. So we have outperformed the previous quarters. You can see the year-to-date growth is 7%, but we've grown the gross profit in the quarter 10%, very solid. It also meant that the EBIT developed in the direction we wanted it to develop. It's grown 16% and 15% year-to-date. This means that we, this morning, just revised the full year outlook for the year where we have removed DKK 100 million at the bottom part of the range. So now we have a guidance for the full year between DKK 5.4 billion and DKK 5.6 billion and the adjusted free cash flow remains unchanged. We're also very solid in the capital allocation policy, so that means that we have also announced a new share buyback program this morning of DKK 1.2 billion. And Jens will account for what that means for the full year later on in the presentation. So that was the highlights of the quarter. So if we going to Page #5, you can see the development of our superstrong Air & Sea Division. Once again, I've said this many, many quarters in a row, fantastic results. They are living up to our expectations on all parameters. We've seen nice growth rates in both airfreight and sea freight. Airfreight grew 7% in the quarter, mainly driven by growth in exports from Americas and from Europe. We've seen slightly lower growth rates in sea freight, but the market is also growing. Yes, we have at least seen a sea freight growth of 4%, which we are also very happy about. There's been a lot of focus on the impacts from the trade tariffs, which have been imposed on the trade lane between the U.S. and China, and so far, we have seen very, very limited impact on that. All this means, has the effect that we will grow -- we have grown the gross profit close to 9%, which is, of course, extremely important for us. And you can see the incremental conversion ratio is above 66%. So it does not stay at the gross profit line. It also has an effect on the EBIT line. And this is, of course, something we are very, very happy about. And the conversion ratio is now all-time high in the division of 42.9%, which is also necessary if we need to achieve the long-term financial targets. Please remember that the conversion ratio is always high in Q3. Next slide on Page #6 describes the development we have had on the yields. As you have heard many times from us, we don't only talk about growth, we always talk about profitable growth. And you can see, on airfreight, we have managed on a year-on-year basis to grow the yields, the gross profit per tonne, with 5%. And in sea freight, we have managed to grow the yields compared to 1 year ago with 1%. So that's a pretty good development, which we are happy about. And we expect going forward, the yields to remain fairly stable also and which will hopefully lead to continued good performance in the Air & Sea Division. So strong set of numbers once again. Very, very good work from the Air & Sea Division.On Page #7, we can see the developments of Road is somewhat, in some terms at least, similar to what we saw in Air & Sea. Also, a good development on gross profit, which is the foundation for good EBIT results, growing close to 9%. Very, very good. Also grown our market share as we saw in Air & Sea. We've also seen better pricing and also we should not underestimate the turnaround of some low-margin activities in some countries have helped the gross margin to a healthy 17.6% in the quarter. I think it's too early to set that as the new kind of benchmark for the quarter, but we remain positive that the gross margin will stay at least above 17%. Conversion ratio is also strong in the division, 25.1% for the quarter. And we are super happy about that. What we're also very pleased and proud about is that we managed to finalize and fully roll out our customer-facing digital interface, myDSV, in the quarter. And this will be a driver for better customer service and also higher productivity and better inter -- better communication on -- from a digital point of view with our customers going forward. So good set of numbers from Road. It's nice to be able to say that. Solutions, they're also on Page #8. They continue the good developments we have seen in previous quarters. I can only repeat myself. Strong development also here in gross profit. Turnover gone up 25% but gross profit also 18%, and you can see EBIT has grown 60%. So pleased about that. It's good to see we have 8% new warehouse capacity, which has been added. And we have a good momentum in the division. Also here, we see a very positive impact from the long-term strategy we've had of consolidation in the infrastructure. And we have also seen, like we did see in Road, the impact of some improved operations in countries and on specific contracts which were not particularly profitable and successful in the past. We have used that previously as a kind of an explanation why the results were maybe not as we had expected in Solutions. So of course, it's very satisfactory to see that we have managed to turn some of these activities around as we indicated to you guys earlier on. So that was just the brief overview of the divisions, and now I'll just pass on the word to you, Jens. So please take it away.

J
Jens H. Lund
CFO & Member of the Executive Board

Thank you very much. And I'll just go on with the details on Slide 9, where we can see that we've had a turnover of more than DKK 20 billion in a quarter, which is the highest ever. We also see that the GP is up by 10% on a group level, so this is really good. We see that the EBIT is up with 15.7% in constant currency, so we've had a conversion ratio of almost 34% in the quarter, and that's also, I think, record levels we're talking about, but still we have to look after our fixed cost development because it's in times like this that we need to be careful about the development in our fixed cost. When we look at amortization, it's more or less the same as last year and, of course, a big part of that is IT amortization these days. When we talk about FX and financial items, we can see in the quarter that we are in the high end because we have had a few FX losses on some of the things where we had gains in previous quarters, so financial cost is quite low. The tax, basically there's not much to say about that. It's in line with our expectations. So all in all, this leads to GP margin of 22% for the group and EBIT margin of 7.5%. Conversion ratio, as I mentioned, almost 34%, and I think one thing that is really important, the earnings per share DKK 6.1 in the quarter and that's 22% up compared to the same quarter last year. So I also think that this is what you're looking for as a shareholder, it's growth. That's what it's all about. If we move to Slide #10, there's a strong cash flow generation of the group. We still tie up a high proportion of, sort of, yearly earnings in cash flow throughout the year. It's a very high season that we have at the end of September, and we are working hard to make sure that we get in line before year-end. There is pressure from the customers, as always, I would have said. So there's really nothing unusual happening on that one. If we take the leverage of the company, we are below 1x EBITDA, and that's also the reason why we have this share buyback of DKK 1.2 billion, where we try to go to sort of the lowest end of the range right now. It's what we're aiming for. The duration on the debt, 2.6 years. We may add a little bit of duration here in Q4, so that we also have a very comfortable situation when it comes to the debt side.So all in all, invested capital of DKK 20.9 million, and compared to last year, we're actually a little bit lower. So we have deployed less capital in the group and increased the income that leads to higher work. And we see that we are now above the 25% mark year-to-date, and this means that we are basically at the high end of guidance, and also historically, I think we're doing as we have stated on the return on invested capital. If we move to Slide 11, just basically, it's just to make sure that everything reconciles on our capital allocation, and you can see that if we do not repay debt and do not acquire companies, then we redistribute the cash that we generate to the shareholders. And that's sort of also what we plan to do this quarter. If we move to Slide 12, the guidance. As Jens Bjørn mentioned, we've just narrowed the range on the operational result. And I think that can always be expected towards the end of the year, that we can be a little bit more precise on the guidance, and, of course, we are happy that it's in the high end of the range that we have guided. The cash flow, DKK 4.2 billion, and the tax rate, 23%. It's basically unchanged and on financial items as I said. On the interest cost, we're probably a little bit lower than what we have guided. Not much. At least not enough to -- for us to change the guidance.So I think that was it on the outlook. And we are good to go on the questions now. So please fire away.

Operator

[Operator Instructions] And our first question comes from the line of Damian Brewer from RBC.

D
Damian Brewer
Analyst

If I can ask 2 questions, please. First of all, on the contract logistics business, could you give us an update of how you're thinking about the working capital versus profit returns on that business? On a historically, you've focused obviously on getting the capital down, but looking at the 9 months, you generated DKK 155 million of extra EBITDA for incrementally about DKK 340 million of working capital in that business. So where there are decent returns on capital, would you be prepared to let the working capital expand? Or is this the deep focus on reducing it? And then the second question -- sorry, this is a little bit cheeky, but we hear all time that Amazon is going to destroy the sector. There's disintermediation, increased visibility, heading to a recession, et cetera, et cetera. Given all that, why isn't the GP per unit falling? Because you'd expect with that, the GP per unit would be significantly reducing, and yet you're up between 1% and 5% year-on-year. So what is differentiating you from the market on your GP per unit performance?

J
Jens Bjørn Andersen
CEO & Member of the Executive Board

Damian, maybe I'll take the last. I assume you talk about the GP per unit in Air & Sea.

D
Damian Brewer
Analyst

Yes, exactly.

J
Jens Bjørn Andersen
CEO & Member of the Executive Board

Yes, sure. It's correct. There's a lot of speculation. There's a lot of things which are happening, but so far, most of these things are happening in the media. We have not seen it penetrating into our business, at least. When it comes to the GP per unit, we have to remember that a last proportion of the GP that we generate today comes from added-value services and not just commodity work, doing business from one airport to another or from one port to another. I think that is one of the main differences. Then, of course, I also think that the type of work that we do for our customers are expanding. All the time customers are asking for more and more services that also carry certain fees. And this is something that we have always been good at protecting in DSV. We see that as a strong asset, that we have a high GP per unit. It's something -- an asset we also want to protect. Sometimes that goes a little bit against the growth rates. We might not grow as explosive as others, but at least we've always managed to kind of protect the GP per unit. We have some very, very large, very sophisticated blue-chip companies, but we also have a lot of small and midsized customers. And they are not changing the way they do business to a very large degree. So I think that has also impacted it. So we actually don't think that the GP per unit will be, what you say, very volatile going forward. It's our expectation that it will continue to remain with some percentage points, of course, in the level that it is right now. We will fight everything we can to make that happen, at least. And then maybe, Jens, I think the net working capital question for Solution was directed to you somehow. I think that was the idea.

J
Jens H. Lund
CFO & Member of the Executive Board

Yes. I think we will hand that over to the accounting department. Anyway, what you look at is, of course, that, as you said, we have certainly managed to drive the unit forward. I think it's also fair to say we have implemented quite a bit of new business. Billing is sometimes a little bit slow when you implement. We also have certain clients still legacy from UTi, where we've not managed to find a solution yet to bring the working capital level down. And then, I think, there's still one thing you also have to look at in Solutions, and that's of course that in Q3, it's high volume, so at the end of Q3, so the level will of course also be high there. But when it comes to the return on invested capital, I think that we have an overall target of 25% that everybody has to adhere to, but sometimes, I guess, if you have new business you take on in Solutions, it might be that the first couple of years that we will settle for 20%. If they can do that, then we're also happy with them. But if you want capital in this company, our shareholders, they don't really differentiate that much when they look at us as a group. So we have to be quite tight and strict internally as well when we allocate the capital. So you can rest assured that there's no free lunch for Solutions. We have introduced something as well internally, it's called net working capital charge. And this is something that we have a lot of very healthy discussions about internally. And...

J
Jens Bjørn Andersen
CEO & Member of the Executive Board

It's very popular...

J
Jens H. Lund
CFO & Member of the Executive Board

No, not really. But we're very adamant about it. So I don't think you should think anything has changed. And there's a lot of focus here on Solutions as well.

D
Damian Brewer
Analyst

That's great. Can I just ask for one clarification on Jens' first point on the GP of the Air & Sea business. How much of it either sits in, what you described as, value-added service or in that SME category in Q3?

J
Jens Bjørn Andersen
CEO & Member of the Executive Board

It's probably between 70% -- 75% is the value-added services. We could not carry the GP per unit we had -- we have, if it was just a pass-through on the rates. So this is what also makes us comfortable when we talk about the future prospects of continuing to kind of protect this.

Operator

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

M
Mark John McVicar
Head of European Transportation Research

Two questions, please. First of all, if I look at the margins of the Air & Sea division in the first 9 months of this year, now you're already above -- slightly above your 2020 target. At what point will you trigger the next review of those targets? Or do you think they should be held where they are?

J
Jens Bjørn Andersen
CEO & Member of the Executive Board

I think that if you look at the long-term financial targets on the conversion ratio, we are still slightly below. We have a target which is higher than what we are at year-to-date, but of course, Mark, it's a positive problem if we should sit down and revise those. But I can assure you of one thing, and that is -- has always been the principle in DSV, if you reach a target, we agree on new targets also. So -- and this will also happen in the case of Air & Sea. It could be in conjunction with the new IFRS rules which will have an impact on the margins that we will revise, but it's still too early to say. It could just be revised as a consequence of the regulation, but as I said, if they reach the targets, we will sit down with the guys and see what new targets they potentially should have.

M
Mark John McVicar
Head of European Transportation Research

Okay. That's great. Second question, which you may or may not choose to answer, is that, obviously, we've all sat and watched the machinations around CEVA, and that's now history, but just at a high level, could you give us some sense of what attracted you to it in terms of geography, customer verticals, products, ignoring sort of the detail of the numbers, which I'm sure you're not going to give anybody.

J
Jens Bjørn Andersen
CEO & Member of the Executive Board

No, it's just kind of a proof that we still want to pursue value-creating M&A. We've known CEVA for some time. For various reasons, we were not ready to approach them at an earlier stage. We needed just to finalize the UTi work, so to say. We had a good business case. We felt that an acquisition of CEVA could create value for shareholders of both CEVA and also of DSV. There was not a copy but there was certain similarities to what we saw at UTi. We felt that, of course, we could improve the operation. We could lift the margins of the company. But as you correctly say, it was not meant to be. And that's the way it is sometimes for various reasons. And -- but we can say also today that the capital allocation policy of DSV is set in stone. We still believe very much that we have some ability in DSV to create value also through acquisitions. We're very motivated. The organization is very motivated to do it also. So that's still very high on our agenda going forward. So nothing has changed in that respect.

Operator

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

E
Edward John Rodney Stanford
Analyst

Following on from Mark's question about your approach to CEVA, could you give some indication as to whether that was something you were pursuing exclusively for a while? Or there's another way of asking, what's your M&A pipeline looking like, if you're able to perhaps give a flavor of that? And even if you can't on the second point, you've talked about the fact that your business doesn't appear to have suffered from any of the machinations going on between the U.S. and China. What are your customers telling you about how they're going to behave in Q4 and in Q1 next year in terms of anticipating a potential rise in tariffs? And then, how is that potentially affecting your outlook?

J
Jens Bjørn Andersen
CEO & Member of the Executive Board

When it comes to pipeline, of course, on M&As, it's difficult to give a lot of insight into that. But it's obvious, pursuing CEVA was something we did wholeheartedly, and that was the only thing we were thinking about for a long period of time. It was big, it had a potential to be a very large acquisition for us. So of course, we did not play on other horses, so to say, for a certain period of time. I think the pipeline looks exactly as it looked before. It's not a fantastic pipeline with a lot of opportunities where we could just go out and pick and choose the next one, but we will carefully maneuver in this market. And I'm sure that there will be openings which are also attractive for the shareholders of DSV and the company, of course. So we've not -- of course, there's some sort of a disappointment, of course, in the company, but we will kind of be revitalized again very soon. And then, of course, we will continue like we have done for many, many years. And when it comes to the volatility and the so-called trade wars, what we're hearing from customers, depending on vertical to vertical, is that there are certain movements -- it depends if you have like a dual-sourcing strategy, you might move some production elsewhere, but we are not seeing that production is being moved home, so to say, to the U.S. What we are seeing is production being moved in certain cases to other countries in Southeast Asia, to Bangladesh, to Vietnam, to Myanmar. And to be honest, this is something we have absolutely nothing against because as long as the volumes are not dropping overall significantly, then we are happy. You could speculate, of course, we have to be careful not to paint a too rosy picture on this. We don't know what's going to happen. But again, for a DSV-specific point of view, it's extremely important to say that the U.S.-China relations accounts for 10% only of the volumes that we carry, not of the whole company, but in one of the 3 divisions we have. I know it's the biggest, but -- so we are not super exposed to this Asia to Europe, and the transatlantic relationship is still far more important for us. So even if we would see an escalation, that does not keep us at wake at night with the knowledge we have right now, at least.

E
Edward John Rodney Stanford
Analyst

Sorry, perhaps if I may follow up. Clearly, Asia, Europe's not -- on the sea freight side, has not been particularly strong recently. Are you seeing any market -- softness in that market?

J
Jens Bjørn Andersen
CEO & Member of the Executive Board

Yes. You're right. For second quarter in a row, it seems like it's probably going to be negative territory. Q3 could actually be down 2% to 3%. We don't have the September numbers yet. So it's the biggest trade lane we have. So with that in mind, we're actually pretty happy with the growth rates that we saw in DSV. It represents -- Asia, Europe represents approximately 1/3 of our total volume. So the fact that we managed to grow 4% overall, we're actually pleased with that. So I cannot say that there are signs that things are really significantly picking up but it's not like it's falling over a cliff either.

Operator

Our next question comes from the line of Dan Togo from Carnegie.

D
Dan Togo Jensen
Research Analyst

A few question from my side as well here. Going back to Road and the turnaround here, you're saying your turnaround lower-margin countries, can you explain a bit about what you'd done here? Is it sustainable? And what not least, what is the, so to say, impact in Danish kroner if you can quantify? That's first question.

J
Jens Bjørn Andersen
CEO & Member of the Executive Board

Yes, we don't really have -- we have not disclosed the numbers, but it's a double-digit number for the quarter in Danish kroners, EBIT-wise. We have had -- we've talked about Norway for many quarters. We -- it's not like we're out of jail or anything like that, but of course, when you have something which is not super well performing, it also is annoying, it's irritating, but it also represents an opportunity, and this is an opportunity we have taken. Norway has improved. Turkey has improved. Netherlands have improved, and also to a certain degree -- not that we had issues as such, but we've seen a pickup in margins also in the U.S. So we're happy about that. Now, we're seeing kind of in the quarter, the first part, which was maybe the easiest, you saw the biggest impact, so -- and you can only count the EBIT improvement once, but it's not like they are at the end of the road in the improvement process. So I still believe that we will -- could potentially see an impact also going forward.

D
Dan Togo Jensen
Research Analyst

But is it client pruning? Or is it costs that has been...

J
Jens Bjørn Andersen
CEO & Member of the Executive Board

Not client. No, it's more improvement of the processes. Of course, some cost savings set up in the operational systems. Just better management, changing through some more hands-on operational people we have in certain countries. It's a combination. It's not shredding as such of customers. That is not the case.

D
Dan Togo Jensen
Research Analyst

And then a question on Solution. It's quite a, so to say, healthy improvement. You've done a profitability here, expanding also capacity. Looking into 2019, it's -- are we going to look at more or less similar expansion in warehouse capacity? And will it lead to sort of the same profit improvement? Or are there some things mitigating that?

J
Jens Bjørn Andersen
CEO & Member of the Executive Board

Maybe, Jens, you have just had the pleasure of having a lot of the senior management of Solution in meetings with you in recent weeks, so maybe you can expand with the freshest information on that.

J
Jens H. Lund
CFO & Member of the Executive Board

Yes. I think what you see, Dan, is Solutions take some time. It takes time to plan new facilities and it takes plan -- time to plan the IT infrastructure. So we have a roadmap, of course, where we are grinding our way through it. We've seen a lot of sort of impact of this. We have implemented a lot of automation in certain areas this year. We'll continue to do so next year. And then we will also introduce new facilities as well. Sometimes they show benefit quite fast and some of them take a little bit of time, but the progression in Solutions, it should certainly continue. But I don't think if you put 60% into your spreadsheets, then I think you probably overestimated somewhat, but we do expect also that results are driven forward in Solutions. So we've gotten better at implementations, we've gotten a better -- we got ourselves better organized and we clearly have to make progress, but don't expect 60%. You can expect something double digit in the lower end, I think, that's where we are coming from.

D
Dan Togo Jensen
Research Analyst

Understood. And then just a final question here on the M&A side. I understand the message on CEVA for now at least. But are you -- do you see other targets out there right now that potentially could offer the same sort of value to you in the landscape?

J
Jens Bjørn Andersen
CEO & Member of the Executive Board

The short answer is yes. There are other opportunities out there. Are they actionable? That's sometimes another question, but there are definitely good combination candidates out there in the market. And we will continue the dialogue and the surveillance, so to say, of these candidates as we have done for many, many years. And then I'm sure that one day we will be successful and also announcing a new value-creating acquisition. So it's not that all hope is out now, for sure not the case. We still believe that it will be possible for us to create value through M&A going forward.

Operator

Our next question comes from the line of Marcus Bellander from Nordea.

M
Marcus Bellander
Senior Analyst

I'd like to follow up on Dan's question regarding the Solutions business. Obviously, very impressive revenue growth, 25% year-on-year. But the gross margin was down quite a bit sequentially at least. Just how should we think about that? Is that the natural effect of the strong revenue growth because you're essentially taking market share at the expense of profitability? Or is it because you're ramping up these new facilities? Or what's going on there?

J
Jens H. Lund
CFO & Member of the Executive Board

I think what you will find in most of these areas as it gets industrialized and it gets professionalized, and you simply have to have higher throughput on the things that you are doing, so that's certainly a consequence. But there's probably -- if you look at this quarter, it is probably in the low end. And I would be cautious to have 22% as the run rate. It can be that -- I mean we will see when the budget comes out for next year, but I would expect that you should more look at year-to-date figure or something like this and not have too much focus on one quarter. But I think it's clear that also on Solutions, we have to get used to that we have to have higher throughput. If you look at the number of order lines that we produce, because also the things that we do get, the units they get smaller and smaller like with all the other services that we have because people they want faster and smaller or more frequent deliveries, really. So that's the trend that you see also on this. And then we have to get ourselves organized, drive cost out, leverage on our infrastructure like we do on all the other divisions as well. And as it seems, we seem to be in a pretty good position in order to do this.

M
Marcus Bellander
Senior Analyst

Understood. And second question, just I guess a housekeeping question. Other external expenses in Road was quite high in Q3, and I remember in the Q2 call, I think, you, Jens Lund, indicated a sort of a lower number on average, at least, for the second half of the year. Why the big swings in that other external expenses? And what should we expect going forward?

J
Jens H. Lund
CFO & Member of the Executive Board

I think you'll have to use the average run rate. We've had some accruals and things like that, that have been giving us a little bit of a headache internally. So that sort of -- I think if you look at Q2, we were in the low end, and now in Q3, it seems like they are in the high end. But I would think that they should be DKK 320 million to DKK 330 million going forward in the quarter. So I would go with that as a run rate.

Operator

Our next question comes from the line of Casper Blom from ABG Sundal Collier.

C
Casper Blom
Lead Analyst

First question regarding Road. You mentioned that the myDSV is now fully rolled out and, also, that it could give a bit higher productivity. Is this something that we should think about something that will sort of be visible when we do our numbers? Or is it more something that you need to do to basically defend the probability levels we're looking at now? And then my second question, which might be difficult to answer, but when you acquired UTi, you gave us a nice chart with some DKK 1.5 billion of synergies coming in different years, And there was also a little box in the years after that, never got a value you wanted. Would you say that, that box has now been sort of fully used up? And that we are seeing that in numbers? Or are there still things that you can basically extract from that acquisition? That's the questions for me, please.

J
Jens Bjørn Andersen
CEO & Member of the Executive Board

Maybe I will go with the myDSV. I certainly hope it's something you will -- going to see in the numbers of the Road division going forward. If we can isolate it, it's another case, but of course, this is what will be needed also for us to reach our long-term financial targets. This is one of the tools that we have in the toolbox to get there. It's both something that attracts new customers to us because they like the functionalities, digital interface is super good. We are more or less paperless in many departments now. And this is, of course, the way it goes. So it will hopefully help us also to grow the business, but also, we will see a productivity improvement because of this also. And of course, that will be reflected in the numbers, I very much hope so. You can also always debate, will we give some of that benefit away, and the competition in the market that it's likely that part of it will kind of disappear, but I would be very disappointed if we don't see it. But it should drive us going forward. Maybe, Jens, you can talk about it. It's a very -- it's a little bit kind of a hypothetical question you posed on -- and I remember, you were sitting with the rulers measuring this height, how big it was, this small kind of block we had at the end when we bought UTi, and there's been a lot of speculation about that. But Jens, you want to elaborate on it?

J
Jens H. Lund
CFO & Member of the Executive Board

Basically, it's clear that when we buy a company like UTi, I think, it's obvious to everybody, the synergies that we put into the business case and announced to the market, it's the half synergies. Then I think if you look at it now, we see that we get some additional benefits on top making it possible to sort of achieve the revised financial targets that we then put forward. And of course, this goes more into a roadmap. When you have this capacity that we have now, then you can leverage on initiatives that we make and drive the things forward. And I think if you look at our KPIs today, I think it's clear to see that it's been good for us to buy UTi. It's not only the impact of UTi, but it certainly helped us as well to drive the company forward. And as Jens Bjørn says, we can't really isolate it. And then to the question, do we have more ideas? The roadmaps we have for business development, they have never been, what can I say, more full of initiatives than they are now. If you speak to people in the organization, they say stop, no more initiatives, let's have a little break. So I think if you look at it, we will continue to drive the company forward. You can rest assured on that. Part of it we'll be able to keep ourselves hopefully and part of it will be given to the customers. So it depends on our change capacity, how much do we get to keep ourselves.

C
Casper Blom
Lead Analyst

Interesting. If I may just follow up, I think my questions sort of relates also to the fact, I mean, if there were sort of anything -- in the performance this year, if there's been anything sort of extraordinary that we could, say, that was due to these never-mentioned synergies basically feeding through, if there was sort of anything extraordinary this year that we shouldn't expect next year, or if it's just business as usual.

J
Jens H. Lund
CFO & Member of the Executive Board

No, I think, of course, through the initiatives we take on the closure of data centers, closure of IT platform systems and all of that, that certainly gives us some benefit and then, of course, that the UTi staff, it's very important that they get their productivity up to our level. They've done a wonderful job in the operation doing that. And of course, I think our outperformance, if you want to put it like this, it will probably be a little bit less next year. We can't necessarily drive it forward with -- I think it's clear to see that the margin or conversion rates have been really high. It might be a little bit lower next year.

Operator

Our next question comes from the line of David Kerstens from Jefferies.

D
David Kerstens
Equity Analyst

I have similar question regarding the final benefits from UTi, and I was wondering, if after the realization of all the cost synergies with DKK 200 million in the first half, if you're now starting to increase any benefit from commercial synergies on the top line and which is diving your relatively higher growth versus your friends in Switzerland. I'm wondering how long that would be sustainable. Then secondly, regarding Asia, Europe, did you grow or did your volume on Asia, Europe decline in line with the market? Or did you outperform that trade lane? And what are your customers saying is the main reason for the weakness? Because if you look at your European Road business, it seems to continue to grow very nicely at around 4%. And then finally, a highlight, inflationary pressures in the presentation. I was wondering, did your Road business benefit from the fact that there were no inflationary pressures on the labor side? Or is it the timing effect explaining the relatively high conversion ratio for your world trade business?

J
Jens Bjørn Andersen
CEO & Member of the Executive Board

Yes. The growth in Air & Sea -- I mean, if the question was, how did we grow? I mean, it's a -- there's a lot of ways where we have grown. It's -- you cannot say that we have stopped growing or it has only been because of UTi. Of course, we have a better network now, we have better capabilities. We are stronger now than we were before. We are ahead of the market also going forward. So we are pretty confident about that. We would be very disappointed if we, at least on a yearly basis, are not outgrowing the market. You can probably always find 1 quarter we lose a customer, but overall, it's a clear ambition of DSV to outgrow the market to take market share but still in a balanced way, so that we still manage to keep the high GP per unit that we have. I can only underscore that one more time, we feel it is a very strong competitive advantage to our -- to the company and also to the shareholders of DSV. This is something we want to protect also going forward. Asia to Europe, we have outgrown -- we've had positive growth in the quarter of something like 1% to 2%, so we've really outgrown that market. If it is correct, we still need to see September numbers, but it's very likely that it is retracting. So we're happy about that. It's a very good question you ask, what the hell, I'm sorry, is driving that? We're asking ourselves that question. It seems like there's some weakness in some of the strong economies on those trade lanes, Germany, U.K., maybe you can kind of explain U.K., why that is down a little bit because the domestic consumption and activity is still pretty strong. So it could be some destocking, of course, which is going on, but unfortunately, we don't have too good intelligence really telling us what it is that drives this. But I think that at least when we get into the new year, we will see, again, growth in those areas. It's overall, we still believe that the markets will grow also Asia to Europe in line with world GDP. I don't know, Jens, have you had any kind of remarks on the last question.

J
Jens H. Lund
CFO & Member of the Executive Board

Yes, I think the inflationary pressure on the cost in Road, as I said, there was probably also some accrual issue that where the number should have been seen more like on the year for Road. It's clear, of course, that we also see that there are certain constraints in certain areas as well. When it comes to labor, I think that's clear to everybody these days that this -- there are certain areas where there are bottlenecks. There are many areas where it's still possible to basically get staff in without too much wage pressure, but there's also a few areas, of course, where we see issues. So I think that's a little bit on the inflationary pressure and the conversion for roadmap.

D
David Kerstens
Equity Analyst

So your Road conversion benefited in the third quarter due to some timing effects, is that a fair conclusion?

J
Jens H. Lund
CFO & Member of the Executive Board

Yes, it is. So look, more added on a year-to-date basis or a little bit at least, as well, yes.

Operator

Our next question comes from the line of Robert Joynson from Exane BNP.

R
Robert John Joynson
Senior Transport Analyst

A couple of questions for me, please. First of all, a follow-up question on myDSV. You've already talked about the impacts that will have on the productivity at the existing business. But could you maybe just provide some commentary on the extent to which that will enable you to capture synergies better from M&A in the Road business going forward? And then the second question on the dividend. If we look at the balance sheet, even with the share buyback that's been announced today completed, the net debt to EBITDA will still be at the very low end of the target range. Could there be any potential to raise the dividend payout ratio going forward? Or is the intention still to maintain that at a relatively low level?

J
Jens H. Lund
CFO & Member of the Executive Board

I think when we look at myDSV, it's not something that will sort of, from day-to-day, revolutionize what we're doing. We had something called DSV e-services before. It's just an old outdated platform for our customers, but now we have a new portal solution where we can post different services activities. Right now, it's things like booking, it's like drag and trace and things like that you can do and you can see your stage for some shipment stuff like that in there as well. And we will, of course, develop this platform further. So I think it's an important tool. We still get the bulk or the majority of our shipments in via electronic data interchange. It can be EDI, it can be EXA mail or these kind of things as well. We get the bulk of the volumes today. But of course, we see there is also good sort of demand for this tool as well. So it's like a supplement, and I think we get the bulk of our bookings we get in electronically, we get very few in manually. So it's just to clarify that a little bit on myDSV. But it's a very important thing that we -- when you run different IT platforms, you have to get out of the old infrastructure and into something that is ready for the future and scalable. And that will, of course, always help us when we do M&A, that will enhance something that can scale our old solution, it was basically worn out because we implemented it way back. So that's a little bit on the IT side when it comes to that. When we come to the dividend payout, I think it's fair to say that we've always been in the low end when it comes to dividend payout because when we do M&A, it's important that we can sort of not allocate too much of the cash to our shareholders. But then we can use the funds we generate to, first of all, repay debt. And if we need to invest in the group, we can also do that as well. So we will increase the dividend payments, but I think if you want the dividend stock, you'll probably have to look somewhere else than DSV.

R
Robert John Joynson
Senior Transport Analyst

Understood. And maybe one additional question just regarding the recent -- this slightly different wording from the press release that you made on the 23 October, which simply stated that the CEVA board had been unwilling to engage with DSV. Could you maybe just elaborate on the extent of the communications that you actually had with the CEVA board following the 2 approaches?

J
Jens Bjørn Andersen
CEO & Member of the Executive Board

No, I'm sorry, Robert. We cannot do that. We cannot elaborate too much on that. What we can say is that it was kind of -- we say that there was an unwillingness from the board to engage with us at the price we offered. Basically, we were in dialogue with the board 3 weeks, and they had 5 days to review our second order -- our second offer, and there was no really willingness to engage with us on the basis of that offer. And of course, you can see -- seen in the lights of what happened afterwards, we kind of maybe also understand that we might never really have had a chance, but that stands for our own account. I think that's basically what we can say at this moment in time on the CEVA case.

Operator

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

J
Jizong Chan
Associate VP & Equity Research Analyst

I guess, first, I want to follow up on some of the questions on the Solutions side. You've obviously made some very nice improvements and very nice progress in conversion ratio year-over-year. And I guess I'm wondering given that performance, should we expect the same kind of seasonal ramp in margins from the 3Q to 4Q that we might normally see due to peak? And then second question, still on the Solutions side. Jens, you talked about warehouse automation in Solutions, is that mostly on the WMS and software automation side? Are you implementing some other measures? I know XPO has been pretty built-up on the co-bots and their applications, especially in e-commerce. And then maybe just a final question here, on the Air & Sea side, we've talked in previous quarters about the risk of some of the steamship lines growing into the traditional forwarding business. There's been some news about reshuffling it at Maersk, and we continue to see CMA loosely involved via CEVA. Just wondering if you have any update from a competitive standpoint as to what's going on there?

J
Jens Bjørn Andersen
CEO & Member of the Executive Board

Maybe I'll just take the last point. It's correct that some things are changing, and we've seen that over the last couple of years now, and we are following that as an interesting development, but so far, also, what we understand with CMA and CEVA, they will operate on arm's-length basis. It's still a very fragmented industry. We're one of the big players in the market. Our market share is very, very low single digit in terms of market share. So we have a market -- a strong market position when it comes to delivering the services that we do. And we don't really see the asset owners as a future competitor. This is not either what they're telling us either officially or when we meet up with them to discuss this. There are some sort of a symbiosis, it's may be too strong a word, but we need them, but they also need us. We control 50%. We have disrupted their industry many years ago. We control 50% of all the boxes which are being moved now. And it's 2 very different things, being a shipping line and a freight forwarder, we have a far larger value proposition. And I think that will continue to be the case, but that they want to expand on their service offerings on certain customer segments, which we are maybe not involved with today is maybe not unlikely, but so far, we are -- we have good dialogue with the shipping lines and we are not too scared about it. Jens, maybe on the Solutions side.

J
Jens H. Lund
CFO & Member of the Executive Board

Yes. I think if you look at Q4 last year, it was, of course, as you mentioned, have a big increase in earnings. And I don't think that we will be able to deliver 60% on top of that. I think if we look at some of the comparable last year, some of the quarters were also a little bit -- I don't know if you mentioned it, but I remember it, but we did talk about something called the bleeder list. And some of the quarters last year were impacted by certain customers where we had implementation stuff like that where we had big issues. We've not seen this so much this year, and I think some of the reasons behind is, it's actually a part of your second question where you say, what kind of automation is it you put in? And I think you must have studied this a little bit because your question is actually quite qualified. Because one of the things you can do is, under WMS platform, you can do a lot with that, and we have rolled out our standard platform and are still doing that. We actually have 3 rollout teams, so almost 60 people that do this change from the old platforms and onto the new. And next year, we will even go up to 4 teams. So we will increase our investment in this further. What it means is that if you have a new platform, you can patch up and you can then get the productivity up for the people that do the picking. And that's really good, so we can handle more orders per person per hour or per day or whatever, that's one thing, but the other thing you can do in order to help the staff that we have in the warehouse is to put different types of automation. And it can be just inbound, so auto outbound, so auto voice pick, print and apply. It can be many weasels that drive autonomous vehicles in the warehouse. It can be good to man. It can be different vertical lifts. There are many solutions. We have gone for a standard program where we have certain number of tools that they can pick from, so we don't have to reinvent the wheel, so to say, every time. So we actually do work on the WMS platform, which we touched upon, but also on some of the hardware or mechanization, whatever you want to call it, but we try to do it in a sensible way so that we don't overinvest. And then we try, of course, to get volume from the customers and -- so that we can utilize the capacity we have. And this means that when you automate things, you drive the prices down, you become competitive, but you still get to keep a bit of your money yourself, and in respect to the question we had earlier on, where the GP margin is a little bit lower these days, but it's still good for us. And that's what it's all about, that we have some EBIT lift.

J
Jizong Chan
Associate VP & Equity Research Analyst

And maybe just a quick follow-up, if I may. In terms of vertical split, how much of your Solutions business is related to e-commerce and then other segments today? And then where do you maybe see that going over the next couple of years?

J
Jens Bjørn Andersen
CEO & Member of the Executive Board

Overall, of course, e-commerce is still very small. It grows like hell. It's like we can almost double it from one quarter to another -- no, not maybe double it, but it is really -- is growing tremendously. But in the overall swing of things, it's still very, very small. Also, it has been good for us and also the traditional retail business has been very strong. And it just seems like there is a renewed appetite also in the industry amongst our customers to engage with companies like DSV to give their whole supply chain an overhaul. And the contract logistics capabilities we have, plays a very large role. This is by far, no disrespect to the 2 other divisions that we have, but the services offered in the Solutions division is the most complex, sophisticated that we do. And of course, when we can go in and act almost as a consultant -- supply chain consultant to our customers, it ties up the customer in a different way than it does in the 2 other divisions.

Operator

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

L
Lars Heindorff
Analyst

First question is regarding the airborne units and the yields. We've seen yields declining a little bit here at least quarter-on-quarter, and some of the numbers we've seen from some of your Swiss competitors suggest accelerating growth despite that everybody talks about declining growth in the market and that appears to be at the expense of yields. So maybe if you can give us a little bit of guidance into Q4 and maybe, also, a bit further about what kind of yields' environment you see in the air cargo space where I understand that capacity is still quite tight.

J
Jens Bjørn Andersen
CEO & Member of the Executive Board

You want some guidance for 2021 also or now that you ask? No, I'm kidding. It's...

L
Lars Heindorff
Analyst

I probably wouldn't mind it.

J
Jens Bjørn Andersen
CEO & Member of the Executive Board

Lars, it's -- we have given a full guidance for the year. And when it comes to certain KPIs, cash flow, EBIT. But of course, we can kind of say that we don't expect, maybe that's the way to approach it, the same negative development on yields that we saw last year. Last year were characterized by a really panic kind of like situation at the end of the year. Nothing tells us that we will fall into that this year, so that means, to cut a long story short, that we will see pretty stable yields going forward into Q4 and probably also going into next year. There's nothing that tells us that yields will either go sky high or that they will drop from the levels they're at right now. Of course, you will always see slight volatility, but if you analyze our yields, and I know you have done that, way, way back also you will see that the volatility is very, very low and, I think, that remains also should be the case going forward.

L
Lars Heindorff
Analyst

Okay. Still a lot of talks about the Solutions division, and it's quite impressive. So maybe both a question and a suggestion because I think most analysts are probably sort of searching for some kind of guidance there in terms of revenue growth and gross margin. I don't know if you can say anything about how many square meters you have, is that some -- is that a number that you can disclose? And what kind of growth you expect in the square meter size? I assume that there must be some kind of correlation between how many square meters you have and what kind of revenue growth you have.

J
Jens Bjørn Andersen
CEO & Member of the Executive Board

It's -- I don't think it's a secret. We run close to 6 million square meters in the division. And of course, it's something internally that we measure. It's not like we're obsessed with growth in that. We only open new warehouses if we have a customer relationship. We don't speculate in going out building warehouses hoping to fill them up afterwards. We've had, elsewhere in the industry, disastrous results following that strategy. So we will never do that. Of course, we can engage with the analysts. If you want more transparency, we're open to proposals to help you do your work better. We have only the same interest as you guys. So let's sit down and have a debate about that, and I don't know if you want to elaborate, Jens, on that.

J
Jens H. Lund
CFO & Member of the Executive Board

Problem is, there's not one order line. This is especially what we get paid for. The mix, it changes dramatically with e-commerce because we simply get so many order lines that we actually struggle ourselves a little bit. So have the transparency, to be quite honest, about it. Then, I think on the square meters, the empty square meters, the roadmapping of facilities, consolidation of them. I think this is something that we have focused on for many years, but I think the increased focus we've had sort of the last 3, 4, 5 years. This is the thing, the kind of business that we run, both air and sea, road and solutions, it takes years to swing these business areas around. It's not something you can do overnight. And I think it's the fruit that we harvest on some of this. And then I think we've been quite transparent about the -- we've had some implementation issues. And I think you can see from some of our colleagues that have just reported that it's not something that is uncommon in the industry that you try to take on a task that is rather complex and then you get off on the wrong foot. And then that's sort of what has happened. We shouldn't gloat too much about it. We can have a setback as well. So -- but right now, we enjoy it together with the Solutions division and they enjoy the many questions you ask to them on a day like this, since Jens Bjørn will go to their management meeting soon and you will see they will all have their head up high, which they've deserved.

L
Lars Heindorff
Analyst

And just a -- and then lastly, just a follow up on -- Jens Bjørn, you mentioned that automotive's one of the big verticals for you guys, has been very good. Most of the data we get from the automotive industry has been pretty poor lately. You haven't seen any sign of weakness or slowdown in that part of -- in that vertical?

J
Jens Bjørn Andersen
CEO & Member of the Executive Board

No, not on the companies that we work with. We track the volumes every month and they look good. I don't know if it's other. Yes, maybe, we've been lucky selecting the successful automotive companies, I don't know. We see no slowdown in the automotive vertical that we are doing. So we are fine in auto.

Operator

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

C
Chi Onn Chu
Research Analyst

Just one question for me. Just in terms of M&A, I think I agree with your comments, Jens, it's not a fantastic pipeline at present and something's come at the 3-year anniversary of your acquisition of UTi. You'll probably see if there's any asset that has come up for sale. So in terms of thinking now, I mean, a lot of this sort of perennial targets on the list are actually doing a lot of M&A themselves or want to do M&A themselves, so -- and it just feels that there's nothing really available out there. So in this sort of next few years, is the aim to sort of go down the list and make sort of smaller acquisitions? And -- or you're just going to wait till the window widens, whenever that might be and actually just go for what's ever -- whatever is available? Obviously, large-scale M&A makes more sense. But how are you going to judge that? If nothing opens up, say, for the next 3 years, are you going to be happy just to sit and wait and maintain your sort of consistent policy, net debt to EBITDA at 1 to 1.5x, ascended A+ share buyback. So can you just give us a bit of flavor of your thinking? Because the pipeline, as I see it, it kind of just closed.

J
Jens Bjørn Andersen
CEO & Member of the Executive Board

I don't necessarily fully agree with you that it's totally closed, then we would have communicated that also. We would sit around and wait. We would not necessarily, as you say, sit happily around waiting. We believe, and I think history has demonstrated that also, that we can generate value to shareholders through M&A, also large-scale M&A. But we have to also remember, this is very important, that even excluding M&A, the EPS growth of DSV can be quite healthy. We can probably grow it somewhere between, you can do your own assumptions and calculations, between 10% and 15%. The earnings, excluding M&A, can continue to grow quite significantly, I think. And we can also, I wouldn't say boost it, but then we will use each year's cash flow to buy back our own stock and that can also give, depending on the stock price, of course, an element. Then of course, investors will have to sit down and say, if this is attractive to them, an earnings per share growth of between 10% and 15%. This is what we can do excluding M&A. I think -- I still believe that you cannot say that there's been a lot of things up for sale. It's not necessarily also that things are up for sale. We can also sometimes trigger kind of a certain situation, if you know what I mean. So it's not like we are only sitting, waiting for the phone to ring. We also call up somebody sometimes, to put it that way, to get something going. And I'm not as -- I don't necessarily share your kind of a opaque view on the M&A, but what I do share is that it's not easy and there's a lot of work that needs to be done. But history has told us that certainly something happens, and if it happens, if an opportunity arises, we would be ready also to act.

C
Chi Onn Chu
Research Analyst

But is this outside of -- the history is kind of different now because of the industry has and continues to consolidate, so actually the targets at the top table are just obviously -- just by nature, just because of the consolidating industry, just -- it's not few in number, right, that was made last 20 years.

J
Jens Bjørn Andersen
CEO & Member of the Executive Board

We hope we'd be able to surprise you in a positive way going forward. You're right, there's more. But to be honest, I don't think there's been a lot of issue. If you analyze the last couple of years, it's been relatively limited. I mean, there's been a lot of talk about a lot of companies wanting to do a lot of stuff. But I don't actually think if you look at the different statistics also, I think, in our industry, M&A has been quite limited in '18 and to a certain degree also in '17. But I agree with you, we don't have a lot of -- a long list of open opportunities that we can just call. But we will remain disciplined. I think this is also something which we have promised our shareholders that we will -- we want to do transactions but only if they can generate value to shareholders. And I think that discipline is also something that we need to remember and an asset also that we need to protect in the company.

Operator

We are now approaching the end of our call, and I'm handing back to our speakers for any closing comments.

J
Jens Bjørn Andersen
CEO & Member of the Executive Board

Okay. But in that case, I want to take this opportunity to thank every and each of you who have participated, who have listened in also. We know it's not everybody who has questions. So thank you to you guys also. Thanks to all the good analysts who've come up with some good questions today. We actually appreciate that very much. We like the interaction that we have with you guys. It helps us to improve the company also. We are now heading into or we are in the very busy piece -- period of the last part of this year. So we will go back now and probably use the next couple of weeks to speak to investors, and then we will continue to run the company, and then we look forward to speaking to you guys again in this moment, at least, when we announce the full year results 2018. So thank you very much here from Hedehusene in Denmark.