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Edited Transcript of DSV.CO earnings conference call or presentation 7-Feb-20 10:00am GMT

Q4 2019 DSV Panalpina A/S Earnings Call

Skibby Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of DSV Panalpina A/S earnings conference call or presentation Friday, February 7, 2020 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jens Bjørn Andersen

DSV Panalpina A/S - CEO & Member of the Executive Board

* Jens H. Lund

DSV Panalpina A/S - CFO & Member of the Executive Board

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Conference Call Participants

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* Alexander Irving;Sanford C. Bernstein Ltd; Analyst

* Casper Blom

ABG Sundal Collier Holding ASA, Research Division - Lead Analyst

* Chi Onn Chu

Deutsche Bank AG, Research Division - Research Analyst

* Cristian Nedelcu

UBS Investment Bank, Research Division - Associate Director and Aerospace & Defence Analyst

* Dan Togo Jensen

Carnegie Investment Bank AB, Research Division - Financial Analyst

* David Kerstens

Jefferies LLC, Research Division - Equity Analyst

* Frans Hoyer

Handelsbanken Capital Markets AB, Research Division - Analyst

* Lars Heindorff

SEB, Research Division - Analyst

* Marcus Bellander

Nordea Markets, Research Division - Senior Analyst

* Mark John McVicar

Barclays Bank PLC, Research Division - Head of European Transportation Research

* Muneeba Kayani

BofA Merrill Lynch, Research Division - Director & Head of European Transport

* Robert John Joynson

Exane BNP Paribas, Research Division - Senior Transport Analyst

* Samuel James Bland

JP Morgan Chase & Co, Research Division - Research Analyst

* Sathish Babu Sivakumar

Citigroup Inc, Research Division - Analyst

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Presentation

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Operator [1]

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Hello and welcome to the DSV interim financial report for the full year of 2019. (Operator Instructions) Today, I'm pleased to present Jens Bjørn Andersen, CEO; and Jens Lund, CFO. Please begin.

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Jens Bjørn Andersen, DSV Panalpina A/S - CEO & Member of the Executive Board [2]

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Thank you very much. Welcome, everybody. Welcome, ladies and gentlemen, to this conference call where Jens Lund and myself will go through the full year 2019 results for DSV Panalpina.

We -- there's no news in the format compared to what it normally is. So if you first take a look at the forward-looking statements on Page #2. And after that, go to Page #3, you will see the agenda for this morning. Me, I'll be starting with the highlights. And I will go through the integration update, when it comes to the integration between DSV and Panalpina, go through 3 divisions, whereafter Jens Lund will take over and go through the financial review, talk a little bit about the outlook we've given to the market this morning and also a very important slide, talking about the allocation to shareholders of the company. And as normally, we will -- as normal, we will conclude the presentation with a Q&A session, where we once again will ask you to limit the questions you might have to 2 questions, please.

So let's go straight into the results. The highlights is shown on Page #4. We have delivered the best, by far, best result ever in the history of DSV, producing over DKK 6.6 billion of EBIT for the full year. We are extremely happy and proud about that. It sets a new standard for our company, and it is a fantastic stepping stone to future growth when it comes to EBIT as well.

As you know, and as you will see in the following slides, there's a lot of numbers to go through. So I will just dwell on a few of those. That is the organic development in gross profit and EBIT for the year. Gross profit is up close to 6% and the EBIT is up slightly above 8%, and this is on an organic basis. We also have produced a satisfactory cash flow when you take everything into consideration about the integration of Panalpina.

The outlook for 2020. We've given an outlook with a DKK 500 million range this year from DKK 8.2 billion to DKK 8.7 billion. That lies very well -- that is in line with the business case we had when we acquired Panalpina. And it represents a growth in the EBIT between something like 23% and up to 30% increase year-on-year if we reach the high end of this range, which, of course, we will do everything we can to achieve, it goes without saying. So a very, very strong year, a very good year. Special year for DSV, of course, marked by the announcement 1st of April of the acquisition of Panalpina, which was something we have been looking to do for a very long period of time.

The integration update on Page #5 talks a little bit about how the integration between the 2 companies is going. Overall, we are very, very pleased with the integration. Things are going to plan. We have no setbacks. We have seen nothing unexpected. It's a big task, of course, but it's progressing exactly as we had hoped for. As of 1st of February, more than 20 countries have been onboarded. And that represents more than 60% of the Panalpina volume, which is, as we speak, now handled on the DSV IT platform. A big credit should go to the IT departments of both companies, but especially to the guys coming from DSV, which have done a great, great job in welcoming the new colleagues into the DSV IT world.

It's also important to say that it -- some of the larger countries, which have been moved over, U.S. was one of the first. We've moved China over, Hong Kong, Germany, Great Britain and others, the Nordic countries. And it is one of the most important things. So this is very, very satisfactory to see. We have still not seen any material customer loss from Panalpina, which is also something which is nice to see, and we are extremely pleased about that.

The cost synergies are, as we have indicated earlier, DKK 2.3 billion. And the expected time line is also maintained. You can see that we -- how the achievement of the cost synergies are outlined on the slide as well. Integration costs also as expected, the equivalent to the cost synergies. Maybe a little bit more came into 2019 than what you have expected. But then the good news is there would be less coming then in 2020.

So overall, we are very pleased with the integration. The company is coming together more and more day-by-day, becoming one company. And I'm 100% convinced that we will be a much stronger company together as compared to being 2 individual companies. And this is also the clear feeling I get from traveling around in the organization, speaking to the employees of our company.

Then we go to Page #6. It's the Air & Sea division. Once again, I've said it many times, rock-solid developments, really, really impressive performance. Our margins are top. We stand in comparison with the most in the industry. We've grown on an organic basis, the gross profit close to 6%; and the EBIT has gone up 12%. You can see a certain dilution, of course, of the margins now due to the fact that Panalpina obtained lower profit margins than DSV, but this is exactly as expected. And the hard work of restoring margins back to previous levels are ongoing as we speak. But again, a very, very strong set of numbers both for Q4 but also for the full year.

We have to remember that transport markets were relatively soft during the whole year, especially air freight. But despite that, the division have managed to produce extraordinary strong numbers. Please also remember that this Q4 will be the last time where we try to split the volumes into 2. It will simply be impossible for us going forward talking about what came from ex-DSV and what came from ex-Panalpina. We will have to see the numbers as one from Q1 2020.

Page #7, Air & Sea volumes. There was, of course, a significant, as you can see, impact from Panalpina. In Q3, we only saw impact about half of the quarter whereas here in Q4, we do see the full impact. In sea freight, you have to remember that Panalpina counted the volumes a little bit different than what we do in DSV. But going forward, we will create as much transparency on this as possible.

You can see that in DSV on a stand-alone basis, we did see a relatively, I would say, weak development on air freight. In the quarter, we were down 6%, where the market was down 4%. But if you actually exclude -- I previously talked about an industrial customer in Germany that we deliberately said goodbye to during the year, we estimate that we have development which is in line with the market development because this volume from this particular customer accounted for approximately -- about 2% of our volumes.

In sea freight, we did see a much more positive development, saw a growth of -- in the quarter of 6%, where the market was only growing 2%. So we did see outperformance also in Q4, which was a little bit a positive surprise because, as you know, we normally do see a slight -- less organic growth in times of integration. But overall, still strong developments, we think. And we will now, of course, work to see if we can get the margins back up as they were before.

Road freight is described on Page #8, also record-breaking results for the Road team. After some weakness in Q3, we -- I think, remembering I did believe that we indicated to you guys that Q4 would be much better. So the fact that we had an organic EBIT growth of 8.8% is, of course, extremely satisfactory to see. So a very, very strong end to the year, actually making it possible also for the Road team to show an EBIT growth year-on-year. So we're very pleased about that.

Some weaknesses in the market is still seen, especially in Germany, in the automotive sector, and of course in the U.K., related traffic due to the Brexit. But overall, again very, very strong results in Q4 and still also for the year, very, very strong margins that stand also here in comparison to anybody in the market. So congratulations to the team doing road freight, really, really well done.

The last slide before I hand over to Jens is the Solutions division. They just wanted to make a mark also with an EBIT result exceeding DKK 1,000 million, DKK 1 billion for the first time. This is -- they have entered into a new territory. Also here, we must say very, very strong execution from the team in the quarter. We actually do believe that this good momentum can continue in the future. You have to remember, analyzing the different quarters, there is a clear pattern also where you will see that in previous years also, Q4 is a very, very strong quarter. So the Q3 result does not necessarily mean that this is the rate you can expect going forward, but still very, very strong results.

And in DSV, it's like once you have crossed a magic marker, it -- I think Jens Lund and myself will have some difficulties seeing us going down below that marker again. And this is definitely also not the expectations from the leadership of the division. Good momentum, a lot of new customers coming in, better utilization in the warehouses and also a very good addition, many places in the world from Panalpina operations and Panalpina customers also. So also here, well done to the teams around the world doing contract logistics in DSV. You've done a really great job.

So with that said, I will hand over to you, Jens.

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Jens H. Lund, DSV Panalpina A/S - CFO & Member of the Executive Board [3]

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Well, thank you very much, and I will quickly move on. Slide #10. Here, of course, we can see that we had a revenue of DKK 94 billion. And it is due to the fact that we acquired Panalpina on the 19th of August that we only account for a part of Panalpina revenue. So if we'd had a full year impact, it would have been DKK 120 billion, so quite a significant number.

I think Jens Bjørn has spoken to many of the items. Perhaps we should just touch upon the IFRS 16 impact. Of course, it moves quite a bit between the different lines in our P&L. We have explained that before the year started. So hopefully, this is in line with your expectations. On another item that should be spoken about is just the amortization of customer relationships. It's basically a number you calculate in Excel, so there's no sort of cash flow behind the number. And some of you might want to take that into consideration when you do your modeling.

Then on the special items, DKK 800 million. It is a little bit higher than what we guided, but it's only accrual issue. So we will spend the remaining part of the money in 2020, and of course, see if we can perhaps do it a little bit cheaper. But that's the budget that we have in place, DKK 2.3 billion. The financial items, an unpleasant surprise this quarter. It is actually when the accounting rules, they state that for certain types of intercompany loans, you have to adjust them via the P&L and not via the equity. It's a so-called translation risk that we are talking about, and this had a negative impact here in Q4. This is mainly due to the Swiss franc, it's going up. And that causes this impact.

Tax, a little bit higher. It's probably mostly related to the restructuring, where we've already moved a lot of units around. And it's -- there are different kind of small taxes that has been paid in relation to do this. So it's not a significant number, but for the quarter, of course, it looks a little bit high. GP, I guess, we have to get used to a somewhat higher GP level now that we got the leasing adjustments. So we are at 25%.

And then I think also another thing we should just quickly touch upon is the number of FTEs. It certainly is a number that we care a great deal about. And we can see that from the end of Q3 until the end of the year, we have reduced the number of white-collar employees with more than 1,000. And this means that we are executing the integration according to our internal plans.

If we move to the next slide, #11, the cash flow overview. I think IFRS have more or less managed to create a cash flow statement that is completely unreadable. So this is basically the top of the thing that you have here and also if you look at it in the annual report, what we then try to do is to make the adjustments that will give you the free cash flow which you normally use in your models. And here, you can see that we are a little bit below 3 -- DKK 4 billion, so DKK 3.7 billion for the year.

We would have hoped that we could create a higher cash flow than last year. But of course, we pay special items. And we also have a situation where the working capital, of course, is a little bit under pressure. Because when you integrate a company, sometimes it causes some fluctuations in the working capital. There are many items that needs to be dealt with. And that causes a bit of commotion. So we are 3% currently. And we have to get towards the 2% mark. And we will work our way downwards during 2020.

On the net interest-bearing debt side, we're at 1.8x EBITDA. And of course, we still have the ratio of 2x EBITDA. But when we harvest the synergies and the Panalpina income comes into the joint P&L, we will get more debt capacity. Then we just added a number to the right on the bottom basically, where we strip out the goodwill and calculate the return on invested capital before tax and goodwill because that will make it possible to compare the performance of our company with a company that has still been built organically.

If we move to the next slide, the outlook. We have guided a range between DKK 8.2 billion and DKK 8.7 billion in operational result. As I said, we will then spend the remaining part of the DKK 2.3 billion we've guided on special items. So we spent DKK 800 million in '19. And now we spend 5 -- DKK 1.5 billion in '20. The tax rate is still 23%, so no different tax rate than what we have in our old long-term guidance.

And when we look at the assumptions, I think some of the main ones are, of course, that we still expect a positive development. Of course, if you see big changes in that, it will impact us as well. And we also say that we might grow a little bit slower. We have said that all the way along, due to integration. So that's unchanged as well as an assumption. And then of course, we lose a little bit of Panalpina volume. And then we expect to harvest the synergies as we go along. And I think that's it.

On a final note, I think, as a shareholder, what you're always interested in is, "What's in it for me?" And here, you can see the allocations for the shareholders both for '19, so a nice payout there. But also for the first part of '20, we already have sort of planned payouts of DKK 7.7 billion. So if you add what we plan to do in the second part of '20, we will surely surpass DKK 10 billion. We will probably end up in the DKK 11 billion, DKK 12 billion range, so also a nice payout. And we are quite confident in the things that we do. And this is obviously the reason why we can be very firm on this guidance.

Then on Slide #14, you have the dial-in details, and you can find them there. And then I think we are open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first is over the line of Alex Irving at Bernstein.

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Alexander Irving;Sanford C. Bernstein Ltd; Analyst, [2]

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Two questions from me, please. First of all, the pace of organic volume growth at Panalpina air freight looks like it slowed down a bit from around 2% in the third quarter to minus 3% in the fourth quarter. If you guys, if you could please give us some color on the factors that is driving this change, both at a market and company level, then how you see that evolving in 2020.

And second, I'd like to talk a little bit about Wuhan coronavirus, please, and how you're thinking about the impact of this in 2020, a little around the mitigating actions you're taking to any disruption, and any opportunities in helping existing customers to kind of recalibrate supply chains in response to this.

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Jens Bjørn Andersen, DSV Panalpina A/S - CEO & Member of the Executive Board [3]

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Okay. Great. I'll take those questions. It's correct that Panalpina did see a weak development in Q4 for air freight. There was actually an increase in perishables, but a decline in what we call general cargo. If you analyze the results of Panalpina before we came in, you would see that they had like a kind of a declining development. That did not necessarily stop just because of the fact that we came in. So that continued a little bit. There were some customers which were in the process of being terminated. We knew that when we came in. So the volume developments are actually as we had expected. This will, in Q1 -- during Q1 and 2, stabilize. And we do believe that even though we cannot separate the volumes anymore, but then it's our estimate that this will fade out and stabilize and that we will kind of from hereon be able to grow the volumes together. But it is correct that both Air & Sea were negative.

And it's good, let's address the corona straight away. Unless you have other very specific questions about the coronavirus, let's keep it to this. It's something we take extremely serious. We are very, very close to our staff in China. We do everything we can to make them feel that we care for them because this is what we do. They should not feel being let alone. We do everything we can to support our organization, supplying them with all the necessities that they need now, which could be sold out in -- locally in China. We are trying to source that from elsewhere on the globe. We are, together with the local management team, organizing ways of working from home. There are still a lot of areas in China where we do not go to the offices. And the only thing that we are saying is that we are very, very close to our customers, trying to help them as much as possible, very, very close to our staff. And we are kind of tackling the situation as it evolves day-by-day.

It's still very, very early days. This is, as you know, the first week, this week, we are in right now. It is what should have been the first week -- working week after Chinese New Year, so -- and the New Year holiday, so to say, have been extended in many places. So it's still too early to have a full overview of the total impact. But we are, together with customers, working on emergency plans to the degree that it is possible of getting cargo both in and out of China. But it is simply impossible for us to have an overview of the total implications that it could have for the supply chains in the world.

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Operator [4]

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We now go to the line of Mark McVicar at Barclays.

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Mark John McVicar, Barclays Bank PLC, Research Division - Head of European Transportation Research [5]

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Hope you're well. So two questions really. First of all, you said that kind of 4 months in, you've had minimal customer losses. At what point do you think you'll have a totally clear picture of what's going to go and what's going to stay? And then the second question, kind of a follow-up, is are you beginning to see, are your people in the field beginning to talk about or identify revenue synergies with those existing Panalpina customers?

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Jens Bjørn Andersen, DSV Panalpina A/S - CEO & Member of the Executive Board [6]

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Yes. Thanks. And we are well, thanks for asking. We are extremely well. So it's correct that it's still a little bit too early to say exactly what's going to stay and what's going to go. The outset is, everything stays. And then we need to work with a particular volume to make it profitable if that is not the case. I think the odd examples of agreements that we could not really understand, they have already been renegotiated. And then I think we are -- we are slowly getting to a situation where you would see a normalization, where we will treat all the new customers in the combined company as we did in the old days in DSV. And if we do lose a particular customer every once in a while, this is something that was also happening in DSV. And I would say if we lose a customer now, it would probably not -- only at least be to -- due to the integration, but it could be something.

We have many hundred thousands of customers in the combined company. And of course, as we speak, we will lose some customers and we will also win some customers. And lately, you might have seen that we have also won some relatively large accounts, which we are very positive about. And we actually do see an increased interest from customers that we did not really speak to in the past, contacting us, asking us how we can do more business together. We can clearly see that we have kind of moved up in the rankings, which apparently it seems like it is attracting larger customers. And I would also say the combination in DSV of a very strong local, decentral, empowered organization but also more muscles from a central sales key account structure in DSV also seems to be working really well. So I think that's what we can say.

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Mark John McVicar, Barclays Bank PLC, Research Division - Head of European Transportation Research [7]

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Okay. And the revenue synergies, anything being identified by your people in the countries?

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Jens Bjørn Andersen, DSV Panalpina A/S - CEO & Member of the Executive Board [8]

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Yes. It's happening, of course. There will be revenue synergies, for sure. There's no doubt about that. There will be both revenue synergies and also some procurement synergies. And this is, of course, what should take us the last bit to get back to the, what you say, the margins that we had. But Mark, it's so difficult to quantify because it's -- we talk about so many offices, so many different customers. So we have to see that reflected in the overall numbers hopefully in the coming quarters. But of course, we would be extremely disappointed if we didn't see that. And we have heard a lot of stories about customers coming in now, wanting to hear about a Road product. But to exactly be able to quantify it is very, very difficult.

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Mark John McVicar, Barclays Bank PLC, Research Division - Head of European Transportation Research [9]

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Yes. But it's directional, isn't it? That's great.

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Jens Bjørn Andersen, DSV Panalpina A/S - CEO & Member of the Executive Board [10]

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Exactly. Yes. Thank you.

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Operator [11]

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We now go to Nordea and Marcus Bellander.

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Marcus Bellander, Nordea Markets, Research Division - Senior Analyst [12]

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My two questions. First, regarding guidance, I'm just wondering whether or not you've accounted for the coronavirus effects in your guidance. And if you have, by how much? The second question is regarding Solutions and you touched upon this earlier. But the revenue growth in Q4 versus Q3 is 36% in 2019. It's usually something along the lines of 10%. So I'm just wondering if there is anything special has happened this quarter or if there's an explanation for the very strong performance that you could go into in more detail?

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Jens H. Lund, DSV Panalpina A/S - CFO & Member of the Executive Board [13]

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Yes. I think on the coronavirus, all the uncertainty, I mean we have guided a range and it's what we see now. We can't go in and change our anchor budgets for this. But I think we have guided a range for uncertainty, so nothing specific on that one. But of course, as you know, there is Brexit, there is the trade war, there is coronavirus. And that's the reason why we have a range. It's DKK 500 million. It's bigger than it's ever been before. So that's a little bit on that.

When we look at Solutions, I think we have added volume from Panalpina. We had, what can I say, a third quarter that was perhaps a little bit lower than the previous quarters. And then I think also that there's one thing you shouldn't underestimate, and that is the value of all these campaigns, things like this that are going on for e-commerce, et cetera. Many of these things, they actually happened here in the fourth quarter. And I think there is a direction that we do more B2C volume than we ever done before. That is -- it follows also the consumer pattern a little bit. So I would think that as -- apart from this, I would say it's business as usual. We are growing, we are adding more capacity, we are driving the unit forward. And I think we also saw that the Panalpina volumes, they fitted nicely into our structure. So all in all, I think that's what happened in Q4 in Solutions.

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Operator [14]

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We now go to the line of David Kerstens at Jefferies.

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David Kerstens, Jefferies LLC, Research Division - Equity Analyst [15]

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Two questions, please. First, on the Panalpina synergies, you said 5% realized in 2019. That's roughly DKK 115 million and I think about half the EBIT contribution of Panalpina in 2019. I just wanted to understand better how to get from the former reported numbers for Panalpina to the numbers that you include because it seems that they are a bit lower than what I have in my old Panalpina model.

Then secondly, on IMO 2020, we've seen a steep increase in freight rates during the month of December and January up until Chinese New Year. Are you encouraged by the ability to pass this through to customers? And will this be a full pass-through with no impact on yields in 2020?

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Jens Bjørn Andersen, DSV Panalpina A/S - CEO & Member of the Executive Board [16]

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Yes. Maybe I'll just quickly take the IMO 2020. We've said all along, it's a pass-through. Nothing here in life is easy. But this is something which has been well communicated from the industry. This is no surprise, no secret. Customers, transport buyers, they have known about this for a very, very long period of time. And I would say that we have in general been very successful in passing this on to our customers. And we don't expect that to have any negative impact on the yields. And maybe, Jens, you can just elaborate a little bit on the Panalpina kind of synergies.

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Jens H. Lund, DSV Panalpina A/S - CFO & Member of the Executive Board [17]

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What you missed in the calculation is probably the customer relations part as well. I think if you add that to it, then it should more or less add up because that's, of course, a significant number as well. And as I mentioned when I went through the numbers, it's something that you calculate in Excel. So there's no substance behind it.

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David Kerstens, Jefferies LLC, Research Division - Equity Analyst [18]

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Right. And that number is included in the reported EBIT contribution of Panalpina?

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Jens H. Lund, DSV Panalpina A/S - CFO & Member of the Executive Board [19]

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Yes.

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Operator [20]

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Our next question is over the line of Casper Blom at ABG.

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Casper Blom, ABG Sundal Collier Holding ASA, Research Division - Lead Analyst [21]

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First, a question regarding the share buyback. You mentioned you might do something or will probably do something in the second half of the year also. I believe you previously mentioned the possibility of doing some sort of reverse Dutch auction. Has that been taken off the agenda? And should we expect, I can say, just a normal safe harbor buyback in the second half of the year?

And then my second question, when sort of trying to bridge our way into Q1, 2 and 3, the volumes that you see in volume contribution from Panalpina in Air & Sea, is this sort of a fair base to use into the next couple of quarters, obviously sort of adjusted for any kind of normal seasonality?

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Jens H. Lund, DSV Panalpina A/S - CFO & Member of the Executive Board [22]

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Yes. I think I'll answer at least the share buyback. I can also take the other one. But the share buyback part is we actually did quite a bit of work to do a reverse Dutch auction. But it turns out that from a compliance point of view, we simply couldn't make it work. So we have to continue the safe harbor method. I mean there's nothing wrong with that, but we would have liked to do a faster adjustment of our capital structure. So now we're just committing to these probably DKK 11 billion, DKK 12 billion on the year of reallocation of capital to the shareholder. And then we will have to grind our way through it with a traditional safe harbor program. So that's one of the things that we didn't really succeed on. We had a lot of good intentions. But as you know, the road to hell is covered with good intentions (sic) [the road to hell is paved with good intentions.]

Then on the volume, yes, I think if you use the run rate for the fourth quarter, that's sort of the first time that we really got some visibility in the way that we account on the Panalpina volumes and also on the Panalpina financial numbers. So you should use that. We see that Panalpina, of course, had a higher quality. There are many companies we have bought. But there are still some differences in the way we measure and count. And that's the reason why you should use Q4 because here, it should be aligned.

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Operator [23]

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Okay. Our next question is over to the line of Lars Heindorff at SEB.

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Lars Heindorff, SEB, Research Division - Analyst [24]

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Two questions from my part as well. Firstly, regarding the outlook for 2020. I don't know if you can give us an indication around net financials. You had this issue with the exchange rates, which caused net financials for 2019 to be a bit higher compared to what you guided to or you've been indicating earlier on. That's the first part. And second part, regarding the earnings contribution from Panalpina in Road. As far as I can calculate, it's negative in the fourth quarter. I just want to hear any sort of explanation of what's going on there.

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Jens Bjørn Andersen, DSV Panalpina A/S - CEO & Member of the Executive Board [25]

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It's correct, Lars, that we did see a negative contribution from Panalpina in Road in Q4. It was some stand-alone business which was being done in Germany. We are in the process of rectifying that, so to say. You shouldn't expect that to continue. This will, very quickly, we hope, be turned into, first of all, a first step, a break-even business. And then of course, it needs to carry a certain profitability in DSV if it is to continue. But it is correct, as you say, we did see actually a negative impact in Q4 from some Road business in Panalpina. And then Jens, maybe you could talk a little bit about the net financials in the outlook?

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Jens H. Lund, DSV Panalpina A/S - CFO & Member of the Executive Board [26]

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Yes. I think, Lars, you should expect perhaps around the DKK 300 million in normal financial cost. And then of course, the IFRS 16 will come probably with another DKK 450 million. And then of course, the translation part, we need to exclude that because 1 day, currency goes up or 1 day, it goes down. But there's no external counterpart on it. So of course, we then try to upstream as much as we can when we restructure and all these things to reduce it to the furthest possible extent. But I think we have to get used to that the way IFRS works and the way that the company is constructed these days, it will lead to some fluctuations on this line. So when there's a positive one, we have to remember to strip it out. And if it's a negative one, like you saw this time, then we also have to strip it out and sort of exclude it. And I think there should be details in the numbers so that it is possible for you to see through this. Otherwise, we will have another look at it and make sure that this is also the case in the quarterly announcements.

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Operator [27]

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Okay. So the next question is from the line of Dan Togo at Carnegie.

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Dan Togo Jensen, Carnegie Investment Bank AB, Research Division - Financial Analyst [28]

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The first question is regarding the restructuring charges that you seem to be pushing a bit ahead of schedule than as what you communicated before. Does this indicate that you also were ahead of, so to say, the integration of Panalpina? I know that you don't really change the underlying effect of the synergies and the timing of that. But could you conclude on the back of the restructuring costs that you are a bit ahead of your original plans? That's the first question.

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Jens H. Lund, DSV Panalpina A/S - CFO & Member of the Executive Board [29]

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I think I should answer it. We are comfortable with the plans, Dan, quite comfortable.

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Jens Bjørn Andersen, DSV Panalpina A/S - CEO & Member of the Executive Board [30]

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We are at least not behind. Let me put it that way.

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Jens H. Lund, DSV Panalpina A/S - CFO & Member of the Executive Board [31]

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That's, I think, what you can get on that one.

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Dan Togo Jensen, Carnegie Investment Bank AB, Research Division - Financial Analyst [32]

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Okay, fine. And then a second question on your guidance and what it implies for organic growth, in my calculation, almost actually negative on -- when we look at the EBIT isolated, negative to maybe an organic growth of only 5%. You comp of 12% here in '19 and you start out guiding 2% to 9% as I recall it. It seems like there's a lot of precaution in this. You've touched upon some -- is it only down to Brexit, coronavirus, trade war, et cetera, on the negative side? Or are there other things we should be aware of?

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Jens Bjørn Andersen, DSV Panalpina A/S - CEO & Member of the Executive Board [33]

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I would say predominantly, it's the areas you just covered. I think even before the latest and probably the biggest uncertainty, the coronavirus, there were still some uncertainties, of course, surrounding 2020. But these are the main factors. I think it would be irresponsible for us to be extremely, extremely bullish and not recognize these topics. This is why we give a range, just to remove any doubt. We have a clear ambition of getting to the high end of that range. And of course, in an ideal world, to make much more money, this is the only -- I wouldn't say the only thing, but this is, of course, something which is very, very high of the agenda of any leader in DSV. But we just felt that it would be appropriate also to take some precaution into the guidance. And I guess you can say that is what represents the lower end of the range.

And also coming back again to the corona, it's simply not possible, of course, to say that we have put this amount of money aside or we have lowered the expectations with so much because of the corona. It's simply too early. It's simply too impossible for us to say exactly what effect will it have into the books. I hope we will get much more knowledge about this as the months progresses.

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Dan Togo Jensen, Carnegie Investment Bank AB, Research Division - Financial Analyst [34]

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Is it fair to argue also that some of the attention is taking away from, so to say, the underlying organic business out in the organization and that's more focused on the integration, in the process and that's why organic growth in the integration process is maybe a bit on the soft side?

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Jens Bjørn Andersen, DSV Panalpina A/S - CEO & Member of the Executive Board [35]

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If you analyze the results of these in previous -- after previous acquisitions, you will probably see a similar pattern, where we -- the first year, and this is the year where the integration really happens, is 2020. The whole organization works down hard on getting the 2 companies being put together. Some customers, not all, I have to say, but some of the customers are a little bit reluctant giving more business to the company. They have a wait-and-see approach. They want to want us to prove that we can handle the business before they allocate new business to us.

So you will see lower organic growth. You will see that it is more difficult to us than in a normal year to take markets here when the integration is at its hardest, you could say. But then of course, we do expect that once the company has been put together, I truly believe that this company will be much, much stronger than what it was before. And that we'll -- then we'll go out and take, this is our clear aim, aim to go out once the integration is over and grow faster than the market. This is almost a religion in DSV. And we believe that also to be the case in the foreseeable future, I can say.

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Dan Togo Jensen, Carnegie Investment Bank AB, Research Division - Financial Analyst [36]

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We hope for second half.

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Operator [37]

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Okay. So our next question is of the line of Robert Joynson at Exane BNP Paribas.

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Robert John Joynson, Exane BNP Paribas, Research Division - Senior Transport Analyst [38]

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Two quick questions for me. First of all, on the outlook, you said that you expect organic volume growth to be close to the underlying market. So for Air & Sea specifically, could you maybe just provide color on what growth rates you're assuming there? And then the second question, on procurement synergies, I appreciate that they're difficult to quantify, as you mentioned before. But maybe could you just provide some more anecdotal color on any procurement synergies that you've seen so far since closing the Panalpina deal?

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Jens Bjørn Andersen, DSV Panalpina A/S - CEO & Member of the Executive Board [39]

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Yes. But Robert, if we had to sit and just to discuss and exchange anecdotes, we could sit here all morning because we have a lot of really, really fun anecdotes that we could share with you guys. But I would refrain from doing that. But it is clear, and I think we have tried to indicate that to you guys earlier also, that we will see procurement synergies for sure. It goes without saying. It is the nature of the business. The larger you get, the more effective you can handle the operations. The more -- versus the cheaper, you can also procure both air freight, sea freight and other services. The problem a little bit is that you use this as a tool in the -- towards the competition also. You give a little bit of that away and that dilutes the margin. So that means that you don't get the full effect straight away in the P&L.

But then I know we can see from the behavior from our large suppliers that we have moved up. For some suppliers of air freight, we are their largest customer now. And of course, we would be again extremely disappointed, we would do a terrible job if we could not turn that into our advantage. We have to do that. And I know this is also happening. But again, to put a particular number into a spreadsheet for us and to quantify it 100%, it's simply impossible. But you saw that UTi. I think that is what made it possible for us to even exceed our previous margins we had before. We bought UTi after the integration was over. And of course, we can only hope for something similar to happen after this acquisition. There's a little bit of mix effect you have to take into consideration.

When it comes to the outlook, we are not macro experts in DSV. Most of us, at least we are freight forwarders, but we lean towards -- lean against other analysts who have views on this. And it seems like there's some consensus at least until now that world economy could grow up to 2%. And we would expect both air freight and sea freight to grow something in that neighborhood. This is the best estimate we have at this moment in time.

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Operator [40]

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We are now over the line of Sathish Sivakumar at Citigroup.

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Sathish Babu Sivakumar, Citigroup Inc, Research Division - Analyst [41]

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I have a few. Firstly, on the integration, how does this 60% of volume migration on to DSV platform translates into integration synergies? And also, could you update on the Panalpina's forward shared service centers and what are the targets on the integration of those service centers? And secondly, in your presentation, you mentioned about the corporate bond issuance. Could you please give more color on the size and the date of the issuance? And then lastly, if I can, on the Road division, if you could update on the rollout of the CargoLink Way Forward transport management system, that would be helpful.

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Jens Bjørn Andersen, DSV Panalpina A/S - CEO & Member of the Executive Board [42]

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Got all these, and if I counted them, 4 questions. They fall into the expertise that you have, Jens, so...

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Jens H. Lund, DSV Panalpina A/S - CFO & Member of the Executive Board [43]

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I think if we take the integration first. It's correct that the countries that are now working on CargoWise, they represent 60% of Panalpina's volumes. Then actually, what happens when they are moved over, there's a lot of volume that can be moved day 1. And some of the volumes will gradually flow over so that it's 100% on the DSV platform. That will take a couple of months before it's all in order. But we can see from the KPIs that we get that we have significant volume now being produced on our own transport management system. So all that going according to plan. And of course, when we can take up the double handling, then we can realize more and more synergies and we get the productivity in line with the productivity that we've been used to in DSV. The Panalpina staff, they will be able to operate just as efficient as the DSV employees. So that's really the journey we are taking on that one.

If we take the shared service centers, I think it's important to state that we're transferring, of course, the Panalpina volumes and merging them into the DSV structure as well. So I think on the European shared service centers of Panalpina, they are virtually more or less moved into the DSV shared service center. And then there's, of course, a couple of shared service centers in the Asia Pacific that are being closed. And then I think we will merge the one that is in Manila. So going forward, there will be a couple of large shared service centers. There will be one in Europe and there will be one in Manila as well. And that's progressing very well. There's good plan. There's good execution. And we're very pleased about that.

Then about the corporate bond, yes, we have mentioned that we will make a large share buyback and we need to bankroll this. Then I mean I can't say any specific dates on the bond because, then we would have had to send a release, and we are not ready for that yet. But we're working on the documentation, getting that in place. And then we should at a certain point in time be ready to announce this to the market as well.

And then on the CargoLink Way Forward project, we work on it in Lithuania and we've negotiated a deal with this vendor on the CargoLink Way Forward or that's almost final. And we are now pushing on to the next pilot country and then getting the functionality in. But we think we have the tool now that we need. And then we do have to extend the pilot so that we get all the functionality in. And there will probably be a couple of countries in the pilot phase, so still a slow movement, but I think we are on the right path. And we see that the system, it works well. So I think that was your 4 questions.

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Operator [44]

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We now go to the line of Frans Hoyer at Handelsbanken.

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Frans Hoyer, Handelsbanken Capital Markets AB, Research Division - Analyst [45]

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So I was wondering, you mentioned on Page 10, Slide 10 that with Panalpina for the full year, you would have had a turnover of DKK 120 billion. Could you give us the same number for gross profit and EBIT before special items, please?

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Jens H. Lund, DSV Panalpina A/S - CFO & Member of the Executive Board [46]

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Can we not provide them to you after the call? Because we -- I think we don't have them off the top of my head. Are they not in the report or something like this?

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Frans Hoyer, Handelsbanken Capital Markets AB, Research Division - Analyst [47]

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It could be. It could well be. Sorry. Then I'll...

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Jens H. Lund, DSV Panalpina A/S - CFO & Member of the Executive Board [48]

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I'll just ask -- I'll ask Flemming to send them over to you. But I think the GP will probably have been around DKK 30 billion as far as I can recall it. And what was the other number you were asking, was it EBIT?

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Frans Hoyer, Handelsbanken Capital Markets AB, Research Division - Analyst [49]

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Well, the same for EBIT before special, but...

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Jens H. Lund, DSV Panalpina A/S - CFO & Member of the Executive Board [50]

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But it's probably around DKK 7 billion off the top of my head, if I should be able to say something, yes.

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Frans Hoyer, Handelsbanken Capital Markets AB, Research Division - Analyst [51]

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And so -- okay, I'm trying to get at the underlying growth, the organic EBIT growth that you are factoring in, in your guidance.

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Jens H. Lund, DSV Panalpina A/S - CFO & Member of the Executive Board [52]

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Yes. We've had that. We have had that sort of conversation, I guess, around the guidance a couple of times now. But we have factored in -- if you take the upper end of the guidance, some few percent in growth in the EBIT. I think that's the way we calculate it ourselves. But I think also here, Flemming will be very helpful to do this math together with you. And then of course, if you add the synergies on this and a little bit lower in the guidance, of course, that is also factored in, that might be a little -- a slight negative growth. So it goes from slightly negative, depending on the scenario, and then to a slight positive organic growth in the guidance. I think that's all in this range that we are talking about. So probably from 2%, 3% negative to 2%, 3% positive, I think that's what we're talking about.

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Frans Hoyer, Handelsbanken Capital Markets AB, Research Division - Analyst [53]

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That's great. That's very kind. The other question is about your -- whether there are any new insights around perishables and freight management at this stage.

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Jens H. Lund, DSV Panalpina A/S - CFO & Member of the Executive Board [54]

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We published the annual report this morning. And I can tell you there's been no development since. So I think we are still investigating what -- how to deal with this from a strategic point of view. And of course, we have much more clarity on the numbers they produce right now. And we will then have to make our mind about the return on the invested capital. If they don't meet the hurdle rates, of course, we will have to discuss what to do about it.

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Operator [55]

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We now go to Bank of America and Muneeba Kayani.

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Muneeba Kayani, BofA Merrill Lynch, Research Division - Director & Head of European Transport [56]

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I wanted to ask about the competitive pressures, if you're seeing anything on a GP per unit basis. And is that included in your guidance? And then secondly, on cash flow, the working capital, could you quantify the impact from Panalpina on the working capital? And are all the special items cash?

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Jens Bjørn Andersen, DSV Panalpina A/S - CEO & Member of the Executive Board [57]

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While Jens here, he does some calculations on the cash flow, I can talk a little bit about the competitive landscape and the pressure, as you called it. No big change towards the end of the year or the beginning of this year. It is always super, super tough, working in a very, very fragmented industry as we are. We don't -- we have not kind of built any negative developments on yields into the guidance. We don't see ourselves as particularly vulnerable or anything right now.

There is over a long, long period of time, our income per units have been fairly stable, both in high growth and low growth environments, both in environments with very high rates and also in environment with very low rates. There is the famous delay effect, of course, as we have talked about. But overall, we don't see any significant development. I would say most of our competitors, they have a fairly rational behavior. There's none of them who've gone absolutely crazy with super low rates or being more aggressive than normal. So we expect on that front at least 2020 to be a fairly normal year.

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Jens H. Lund, DSV Panalpina A/S - CFO & Member of the Executive Board [58]

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And then on the cash flow side, it's right that we have the 3.3% here at year-end. And of course, there's been a slight outflow due to the sort of integration work, but probably also because there's more -- the percentage will come down towards the 2% that we used to have or be below. We will have to see that journey of how much we can work with it. It's clear that we can speed up invoicing, we can improve collection and we can make sure that we have the right terms on the credit side as well. But that's the journey we are on right now. And I think it's going to be interesting to see where it all ends up. But if you look at Air & Sea division in general, it has a higher consumption of working capital than the other divisions. So I think that's what we can say on the working capital right now and on the cash effect of it, that we should be able to squeeze a little bit of cash flow out in the next year.

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Operator [59]

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We now go to Andy Chu at Deutsche Bank.

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Chi Onn Chu, Deutsche Bank AG, Research Division - Research Analyst [60]

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Do you have any interest in any of the XPO assets in Europe, please?

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Jens Bjørn Andersen, DSV Panalpina A/S - CEO & Member of the Executive Board [61]

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That's a very direct question, I must say. We did note that XPO have initiated some sort of process. We have our eyes and attention, 100% focused on the integration of Panalpina. We cannot allow ourselves to be disturbed by anything else. We simply don't have, I would say, either the appetite really or the energy, so to say, to look at any potential further acquisitions at this moment in time. Most -- you have to remember also, most, not all, but most of these assets have been sort of past -- been past by our office some years ago. So we know them fairly well. And you could probably read into the situation that we, at least at that time, decided not to pursue those opportunities. And I don't necessarily think that, that strategy or that decision has changed in DSV. So I think it was not as a direct answer as your question. But I think this is what we can say at this moment in time.

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Operator [62]

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Okay. We now go to Sam Bland at JPMorgan.

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Samuel James Bland, JP Morgan Chase & Co, Research Division - Research Analyst [63]

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Two questions for me, please, if I can. The first one is on -- it's related to another question on air freight unit margins. So they've come up in the last 12 months organically in a weak volume environment. Do you look forward into 2020 and maybe volumes will strengthen a little bit? Do you expect to give any of that higher margin you're earning currently back as those volumes improve a little bit? And then on the expected sort of circa 5% Panalpina volume losses, should we interpret those as regretted losses and that you're losing profitable business at the EBIT level or actually the reason it's being lost is because you're willing to walk away from it at the current level of profitability?

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Jens Bjørn Andersen, DSV Panalpina A/S - CEO & Member of the Executive Board [64]

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Yes, thanks. That was really a good question, the last one, because we forgot to mention that. It's correct that a lot of this is not necessarily regrettable losses, as you put it. It's actually something that we were not too sad to see go for various reasons, both -- Panalpina were not in a position to turn this into profit. And you can also see that you might see some negative effect on the GP due to this customer loss, but you haven't seen any negative effect on the EBIT. In some cases, actually you would have seen the contrary. So this is not something we are too worried about. So yes, that's -- thanks for asking that.

In terms of air freight margins, you're right. As we enter into this year under normal circumstances, we would expect the market to improve, comparisons to get much easier. We will fight everything we can, of course, to keep the margins at the current levels. And this is the expectation we have at this moment in time. We have not built any negative development in as we don't see that as very likely. But of course, small variances should be expected from quarter-to-quarter, as you have always seen in DSV.

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Operator [65]

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Okay. Final question we have time for today is over to the line of Cristian Nedelcu at UBS.

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Cristian Nedelcu, UBS Investment Bank, Research Division - Associate Director and Aerospace & Defence Analyst [66]

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Two, if I may. First of all, we are seeing more and more airlines that are moving ahead with digital air cargo, so more live pricing, instant booking and so on. I guess the question there, do you see that as an opportunity to unlock productivity improvements for your operators and reduce costs there? And to what extent do you see that on a mid-term as a risk for a renewed push from the airlines to try to get some of the volume to sell directly to their BCOs?

The second one, could you give us a bit of color in terms of the volume split for each DSV and Panalpina in terms of door-to-door volumes or door-to-door volumes versus port-to-port or airport-to-airport contracts and how you see that dynamic, that volume split evolving going forward?

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Jens H. Lund, DSV Panalpina A/S - CFO & Member of the Executive Board [67]

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Okay. I think I'll answer the -- I'll try to give you a little feedback on that. So on the digital air cargo, I think one of the things that we have in our enterprise architecture is that we try to have a very, what can I say, consolidated data. And we try to have a high integrity because this drives productivity. Then whoever we can work with that is easy to interact with -- and, for example, the airlines, if we can do this in a more efficient way, then because we have more consolidated, more -- better quality of the data, we can probably do it better than our competitors if they are not that organized. So this means that we will be able to take advantage of these productivity gains.

Then of course, you are right, we then had to make the -- change management. But I think if you look at this company, it's all about change capacity. And we have a lot of change capacity, so I would say it would be very painful if it was not a big benefit for us. Whether they then want to go for some customers themselves, I don't think so. I think that they are not capable of coming up with, what can I say, the consolidation benefits that we have and also to give the commitments that we give. Of course, you will find specialties here and there. But in general, no, I don't see that happening.

Then on the port-to-port or door, I would say DSV probably has, through its more decentralized structure, a culture where you do more end-to-end business. Because people, they are also measured very hard on how much income they generate per transaction. So the more work they do, the better it is. And I think Panalpina, perhaps to a lesser extent, had this. So it represents an opportunity for us, and this is something that they're really trying to sell, of course, within the division. And I think most customers, they actually like that we go down that path because it means more control. And this is exactly what we want in a supply chain. So I think, of course, as a general answer because I don't have the splits, but this is at least the feedback that we get from the organization.

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Operator [68]

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Okay. As that was the final question for today, may I please pass it back to you for any closing comments at this stage?

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Jens Bjørn Andersen, DSV Panalpina A/S - CEO & Member of the Executive Board [69]

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Good. Thank you very much. Thanks for all your extremely qualified questions. We really appreciate those. And I'm sure we'll have bilateral discussions in the coming weeks with a lot of you. We'll meet some of you on roadshow activities.

I will save the best to last, and that is a great, great amount of gratitude going from this head office out to the super strong organization of DSV. You have once again produced a record-breaking, market-leading results that each of you can be extremely proud of. We are proud of you. You've done great. And we will not look over the shoulder. We have ambitious targets set forth for 2020 that I'm sure we will achieve together. So thank you to all of you, guys. Let me use this opportunity also, I know a lot of DSV hardworking employees, they also take the opportunity between customer calls to listen in to this webcast as well. So thank you very much.

We will be back with Q1 results before you know it. It will be extremely interesting to see, and we look forward to that date. Until then, thank you for listening in, have a good day, have a good weekend, and bye-bye here from Denmark.