Danish group turns in strong Q2 despite ‘soft’ transport markets, especially in air freight.
DSV today reported its best quarterly EBIT result ever despite ‘soft’ transport markets, especially in air freight, while also confirming that its takeover of Panalpina was “on track and progressing well” with closing expected in Q3 of this year.
The Denmark-based global freight and logistics group achieved a Q2 gross profit of DKK 5,285 million, an increase of 5.5% on the same period last year while operating profit (EBIT)? before special items, was up 4.1% to DKK 1,631 million, primarily attributable to the Air & Sea and Solutions divisions.
DSV’s Q2 revenue totalled DKK 20,079 million, representing underlying growth of 2.4%.
The group noted the positive development in the conversion ratio and operating margin, “a result of DSV’s scalable network and efficient IT infrastructure and backoffice functions.”
Q2 gross profit in the Air & Sea division increased by almost 6% to DKK 2,529 million while EBIT before special items totalled DKK 1 093 million, corresponding to underlying growth of 7.8%, compared to the same period last year.
Revenue increased by 6.5% to DKK 9,682 million.
The quarter saw sea freight volumes grow by 6% in Q2 but air freight volumes were down 2% in a “weak” market.Volumes were also impacted by the termination of high-volume, low margin business.
However, despite the challenging market conditions, DSV’s Air & Sea division posted a “record high conversion ratio of 43.2% and operating margin of 11.3% for the quarter.”
DSV’s Road division reported a Q2 gross profit of DKK 1,535 million, representing underlying growth of 4.8%, positively impacted by a favourable development in haulier capacity.
EBIT before special items totalled DKK 338 million, corresponding to a negative underlying growth of 4.3%, compared to the same period last year.
Revenue was down 0.4% to DKK 7,833 million but DSV underlined that due to seasonality (the timing of Easter), it was more relevant to look at the division’s first half-year 19 growth rate in turnover(+ 2.6%)
The Solutions (Contract Logistics) division posted a Q2 gross profit of DKK 1,186 million, representing “solid” 8.5% underlying growth, despite flat revenue which rose by 0.6% to DKK 3,147 million.
EBIT improved by 2.9% to DKK 241 million.
Following high growth in 2018, processes have been optimised leading to improved gross margin, DSV noted while there is a continued focus on improving productivity via automation and development of larger and more efficient warehouses.
However, the cost base continues to be impacted by IT migration and implementation of new technology in warehouses.
Jens Bjørn Andersen, Group CEO commented: “We are very pleased with the strong results for the second quarter of 2019. Global transport markets are soft – especially within air freight, but DSV has managed to outgrow the market while still delivering market leading profitability.
“We expect that the Panalpina transaction will close in Q3 and we look forward to combining two strong companies and leveraging our extensive networks and expertise to provide even stronger customer offerings.”
In the first six months of the year, DSV said it had “performed well and gained market share in all three of its divisions. The group achieved underlying growth of 5% in revenue, in gross profit (6.9%) and EBIT growth (9.0%).
DSV is on track to deliver on 2020 financial targets it added.
Putting more more colour on DSV’s Q2 performance, at a conference call with analysts earlier today, Andersen said it was “the highest EBIT result the group had ever achieved so we cannot be anything else but very, very happy about that especially when see the somewhat soft market we have operated in air freight.
“We have managed to outgrow the market again in all segments and also kept the profitability and margins of DSV.”
The Panalpina transaction, he noted was“well on track,” adding: “It’s progressing exactly as expected and we are pleased about that. We got the approval from the EU this Monday and we look forward to closing (the deal) which will hopefully happen in the foreseeable future – -maybe some time during the middle part of Q3.”
Turning to the Air & Sea division Q2 results, Andersen said they were “extremely impressive once again. They (the division) go from strength to strength. It’s exceptionally satisfactory to see this strong performance when we stand on the brink of a very big acquisition in Panalpina. It gives us comfort that our own house is in order so to speak and more than that – that we can deliver these very, very strong results.”
Andersen highlighted the 6% growth in seafreight volumes which was “much better than the market (+2%) and furthermore we saw very stable yield development.”
Air freight volumes had been weak in the quarter with DSV posting negative growth of 2% “but this was compensated by very strong yield development so we can not be too displeased about that,” he said.
Air freight yields were up 5.2% year-on-year and stable quarter over quarter. “Of course, we would expect in a soft market to see yields going up and this what we have seen in air freight. “We estimate that the market is down 5% and since we are only down 2% we managed to take market share.”
DSV’s seafreight business had also improved its yields (+2.5%) but Andersen said what was probably more important was that the group had “maximised” its volume growth.
“I think it’s a long time since we were able to show growth in seafreight in terms of TEU of more than 5% and that we have grown 6% in the quarter is very good in a market of modest growth (+2%). This tells us that the customers of DSV like the service, like the rates, they like our systems, technology and this has driven the growth.”
Asked at the call to elaborate on the factors which contributed to DSV’s strong performance in sea freight volumes, Andersen said: “It’s not, in particular, that we have won a large account. There are diverse reasons for this development. We’ve seen a strong performance on the intra-Asia trades, also on Europe to Asia and North America to South America has been strong for us. We have won some contracts with brand-new customers but we have also and this is probably the main reason, we have seen that existing customers have allocated new trade lanes to us.”
Andersen also drew attention to the Air & Sea divsion’s gross profit to EBIT conversion ratio of 43% – “up a couple of percentage points year on year and very high margins. Also the EBIT margin, the operating margin now remains in double-digit territory (11.3% in Q2). I think that stands comparison with any of our competitors and the division can be proud of themselves. Once again they have done an amazing job.”
Responding to question on whether he agreed with Kuehne + Nagel’s forecast that the airfreight market would a show a decline of 5% in volumes for 2019 as a whole, Andersen replied:
“We dont’t give official guidance on this (outlook for airfreight volumes). To be honest, it’s anybody’s guess. Maybe Kuehne + Nagel has market intelligence that we don’t have. I would look at the world a bit more optimistically than 5% (negative) growth for the full year.”
He said that in Q1 the volume decline had been less than 5% (compared to an estimate of -5% in Q2) which would mean there would have to be a decrease of more than 5% in the second part of the year (to reach -5% overall for the full year).
“We don’t believe this will be the case. I think our best estimate would be for the airfreight market’s decline in 2019 to be situated between what we saw in Q1 and Q2 .But it’s difficult to get strong intelligence on this.”
Source: Lloyd’s
