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Edited Transcript of DSV.CO earnings conference call or presentation 2-May-17 9:00am GMT

Thomson Reuters StreetEvents

Q1 2017 DSV A/S Earnings Call

Skibby May 3, 2017 (Thomson StreetEvents) -- Edited Transcript of DSV A/S earnings conference call or presentation Tuesday, May 2, 2017 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jens Bjørn Andersen

DSV A/S - CEO and Member of the Executive Board

* Jens H. Lund

DSV A/S - CFO and Member of the Executive Board

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Conference Call Participants

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* Casper Blom

* Damian Brewer

RBC Capital Markets, LLC, Research Division - Analyst

* Dan Togo Jensen

Handelsbanken Capital Markets AB, Research Division - Research Analyst

* David Griffith Ross

Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Transportation Analyst

* Finn Bjarke Petersen

Danske Bank Markets Equity Research - Research Analyst

* Frans Hoyer

Jyske Bank A/S, Research Division - VP of Equity Research

* Jørgen Bruaset

Nordea Markets, Research Division - Assistant Analyst

* Lars Heindorff

SEB, Research Division - Analyst

* Lars Topholm

Carnegie Investment Bank AB, Research Division - Co-head of Research of Denmark and Financial Analyst

* Neil Glynn

Crédit Suisse AG, Research Division - Head of the European Transport Team and Global Transport Sector Coordinator

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the DSV interim financial report for the first quarter 2017. Today, I am pleased to present the CEO, Jens Bjørn Andersen; and the CFO, Jens Lund. (Operator Instructions) Speakers, please begin.

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

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Yes. Good morning, everyone. Welcome to this webcast conference call where we're going to go through the Q1 numbers 2017, Jens Lund and myself. We are pleased to welcome you to the conference call.

If we go straight into the presentation, you will see the disclaimer on Page #2. And having read that, we can maybe go to Page #3, which is the agenda for this morning.

First, I will go through the highlights of the previous quarter, talk a little bit about the business units that we have. And after that, Jens Lund will go through the financial review and also talk about the revised outlook that we have given this morning for the whole of 2017. As normal, we will conclude this morning's presentation with a Q&A session. (Operator Instructions)

So digging into the presentation. On Page #2 (sic) [Page #4], you will see the highlights on the previous quarter, Q1 2017.

We begin by saying that the integration of UTi is progressing according to plan. We're very pleased about that. We did promise a lot of things to you guys during 2016. And it is, of course, very nice to see these nice plans being also transformed into the P&L now. We can see the clear effect of the acquisition of UTi now in our numbers, and we are extraordinarily pleased about that fact.

It's important for us very early also in the presentation to flag the fact that we have a positive impact from a gain related to the property transaction of approximately of DKK 125 million, which affects both the GP and EBIT in our Road Division. You can see that later on in the presentation when we get to the Road Division.

We see a clear impact also on the gross profit, which has increased 17%. And the EBIT before special items in the quarter has increased 76%. If you exclude the one-off gain, it is healthy at 56%. You, of course, have to remember the fact that when you compare Q1 to Q1 2016, we only had the privilege of having UTi in the numbers last year for 2 months as we put the closing around the 1st of February, so we are missing a month in Q1 '16. Hence, we have some of that growth come from that effect.

The financial gearing is moving in the right direction. We are very pleased about that. It's going down in absolute terms, the debt, and the EBITDA is increasing, so the ratio is now at 1.6. So soon, we would be in the range that we have an aim to be in, which is between 1 and 1.5x net interest-bearing debt over EBITDA.

As a consequence of primarily the property transactions, we take the opportunity to fine-tune and lift the outlook for 2017, going from an EBIT range of between DKK 4.2 billion and DKK 4.5 billion to now a new outlook, which is between DKK 4.3 billion and DKK 4.6 billion for the full year 2017.

Just on a small note, it is also good to see for a change that the effect from FX is almost 0 in the quarter. It is relatively limited. As you can see on the illustrations to the right-hand side of Page #4, that it has only, to a very limited degree, affected both the gross profit and the EBIT, so it is easier to compare year-on-year.

Going to Page #5.

It is really a pleasure to see a very, very -- we feel very, very strong development of the Air & Sea Division, that grown the earnings almost 67%. And again, please remember 1 extra month of UTi compared to Q1. Regardless of this fact, it is really a fantastic result. We feel a big thank you should go to big parts of the organization. A lot of countries have really outperformed, also their own expectations, and we are very happy about this. So it's a strong result that's actually picked up during the quarter, which is also not unexpected. The end of Q1 was significantly stronger than the first part, which is also normal. What pleases us very much is also to see that the GP per unit improved sequentially in a somewhat challenging environment, and airfreight was even better also year-on-year when it comes to the yields. So that's good.

Of course, looking at the margins, delivering already in Q1 an EBIT margin of more than 8% and conversion ratio surpassing also 30%, actually being close to 33%, is really a very strong and very encouraging sign for us in a quarter which would normally not be characterized as one of the best quarters. Q1 is not the best quarter normally, so very encouraging signs. And I think it's a result that the whole Air & Sea operation can be very proud of.

What has our focus in the division now is, of course, to finalize the integration of UTi. It still remains to be done in a few areas. And then it's just about sales, sales and sales. We need to intensify our focus on gaining market share and use the new strengths of DSV also to take market share.

The markets were strong in the quarter. It is -- was very good to be able to see that the market for sea freight grew an estimated 4% and the market for airfreight growing a healthy 6%, which, of course, is a foundation also for strong results. So overall, very, very good also market conditions in Q1 for air and sea.

Going to Road on Page #6.

We also saw a very satisfactory result in Road. A good momentum. Gross profit and EBIT, as I said, was affected by a gain from property transactions of DKK 125 million. And even if you exclude that, the EBIT grew 16%. We have to take into account the effect of Easter. We had no Easter in Q1 this year, and that was the case in '16 where we did have Easter holidays in Q1. We estimate that, that switches approximately DKK 20 million between the quarters, which, of course, impacted us on a positive note this year.

So also, strong set of numbers from the Road guys, a good momentum. We see good developments in most parts of Europe, very strong results in Scandinavia, maybe apart from Norway, Germany doing extraordinary well, and also U.K., despite of the Brexit, also very strong results in the U.K. And actually, it's a pleasure also to see that some of the Southern European countries, maybe with Spain in the lead, doing fantastically.

The shipment count was growing at 12% in a market that only grew 3%. And if you exclude the impact from UTi, namely South Africa and the U.S., we grew the volumes 8% in Europe in the Road Division. And I think the Road guys can also be really proud of what they have achieved in Q1.

So before I hand over to Jens Lund, I will just take you through, on Page #7, the Solutions Division.

In absolute terms, one could probably say not the biggest improvement, but when you look at the margin or the impact or the growth in EBIT, it is actually over 40%, and it is absolutely in line with what we had expected. Q1 is traditionally, if you go back and analyze the numbers, the weakest quarter, still relatively fixed cost based -- basis in certain parts of the Solutions Division. So we can be also happy with the numbers. The margins are not the highest in the quarter, and we do expect them to grow in the future and for the rest of 2017.

But the division has grown from DKK 47 million to DKK 66 million in EBIT in the quarter. And also, we have good development, and we have a big potential also for future improvements if we manage to improve the situations in some of the new areas that we aim. So we're also very optimistic. And also, it's a pleasure to see that the Solutions Division are following the plans, and we also owe them a big thank you.

So that was it for me for here, the initial part of the presentation.

Now on Page #8, Jens Lund will take over on the financial review.

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

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Thank you, Jens Bjørn. And we will jump right into it. We just made a small note that we have to remember that UTi was only included in February and March in the comparable figures when we look at the numbers.

So if we look at our GP, up 17%. Excluding the one-off transaction, actually up 14%. So we are, of course, very pleased about this. If we then look at what is even more important is how much of the gross profit that we create do we get to keep, and here, you can see that we've grown this with a staggering 75% on the marginal conversion rate. So if we exclude the property gain, we've made almost a growth in the GP of DKK 500 million, and here, we keep 74% in EBIT. And this really demonstrates that what we -- some of it presented in as PowerPoint plans initially when we entered into the UTi transaction now materializes, and we can now find it in the so-called accounting as well. This is, of course, a very important thing for us in DSV. We always talk about from PowerPoint to P&L, and here, you can see that it certainly materializes.

If we take the special items, we follow the plans on the special items, you can see that we spent less and less efforts on the restructuring costs. It's mainly FTE-related costs plus, of course, certain facilities that we have to pay to get out of. But we are slowly, but steadily climbing our way through the remaining part of the integration.

When we look at the financial costs, they are a little bit above the sort of run rate of approximately DKK 75 million per quarter. This is due to FX-related adjustments. And we really see that there will be certain FX adjustments on the interest costs, there's nothing we can do about that, at least also here in UTi because we have not done all the [leading] restructurings we need to do, and some of these open restructurings will affect our FX result, unfortunately.

If we look at the tax, it's also a little bit on the low side. This is due to property-related income has a lower tax percentage, so this impacts our tax in a positive way. And we certainly can confirm that we will stick to the tax guidance we have given also on a little bit longer term.

When it comes to the margins, I just made a small note here that, basically, our operating margin or EBIT margin is around 5.5%, excluding the property transaction.

So we are slowly but steadily heading towards our old margin that we used to have prior to UTi. And this was sort of the first milestone in our plan, and we will then go for our long-term financial targets after that.

On the headcount, some of you have asked, why is it that we've not reduced the headcount? And here, you have to bear in mind that we made an adjustment on the way we count because the UTi headcount was not counted in the same way as we did in DSV, and that was done in Q3. So if you add these approximately 2,000 FTEs, you can see that we have been reducing the headcount dramatically.

If we skip to Slide 9, we can talk a little bit about [DEPS] and the development. Here, we can see that we've grown compared to 2016, and then the '17 numbers is on a 12-month rolling basis. The way we have calculated is from DEPS 12%. On a quarter by quarter basis, we have actually grown our earnings per share with 52%.

And on a final note, when we make M&A, many people are always worried about whether we'd meet our earnings, and here, you can clearly see that this is not the case. It is adjusted earnings per share we are talking about, so you have to bear in mind that our one-off items are split out.

If we move to Slide #10, there's a few issues to talk about on Slide #10. One of them, is of course, the net working capital, where we have higher level of working capital than we've experienced sort of prior to UTi. There's a few explanations that we have to take into consideration. One of them is that we have integrated UTi, and we are still not -- all our workflows are not 100% as they should be, so there are still some work to be done on the collections side. Another thing is, of course, the seasonality. It's a very high month in March, so this impacts the numbers. As well, the Easter came in April and this impacts us a little bit. And then, on a final note, there's also some property constructions that we have underway that have tied up some working capital. So if we adjust for these things, we feel that we have the situation under control, but there's still some ground to cover. I think if you look back at the ABX transaction, we also experienced that it took a couple of years before we got this fully under control, and then got to the target levels that we had at that time.

On the gearing, Jens Bjørn already touched upon it, 1.6x. And of course, we see that it is moving fast now when we see the synergies materialize, and then we pay debt, this certainly changes the number fairly quickly. And we had guided that if we didn't spend the money for M&A, we would be able to distribute capital to our shareholders in the second part of 2017, and this is very much the case when we look at the numbers.

If we move to Slide #11. On the outlook, Jens Bjørn already touched upon it. We've raised our EBIT guidance and basically kept the guidance on all the other items as is. Some of you have asked, should you not raise your guidance for adjusted free cash flow? And we've said, well, it was asset held for sale, so we actually had planned this. And then there's also been the question, well, then, at least for the gain, and we think if we guide DKK 3.5 billion, it's sort of approximately DKK 3.5 billion, it can be a little bit above or a little bit below. And it's fair to say that we are now more firm on the DKK 3.5 billion than we were before. I think that's how far we will get on this one.

When we look at the economy, that is the assumption for these estimates, it's clear that it is the current global economy and the growth estimates that still form the foundation. We have seen high growth, in particular, in airfreight, but we think this is probably not going to be as high in the coming quarters. There's been some bottlenecks and things that had to be straightened out via airfreight, so we stick to the current guidance.

This was basically it for me. So now Jens Bjørn and I, we will be happy to take your questions. And on Slide #12, you can see how you can get into the queue. So please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Lars Topholm of Carnegie.

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Lars Topholm, Carnegie Investment Bank AB, Research Division - Co-head of Research of Denmark and Financial Analyst [2]

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Yes. I thought of asking 10 questions wrapped into 2, but I'll stick to the rule, so just 2 questions from my side now. Regarding yields, so the first question, in Air & Sea, your yields are up sequentially, and in the air actually up year-on-year. Can you comment a bit on how that yield momentum was through the quarter? And also, if yields have been holding up in the beginning of Q2? And then the second question is for Road. So here, your number of shipments is up by 12%, but if I strip out the real estate gain, your gross profit is only up 4%. So that implies 8% lower gross profit per shipment. I wonder if you can comment on what is driving that. Is this something structural? Is it pressure? Or how should I see that?

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

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Thank you, Lars. Good questions. Let me start by talking a little bit about the yields. It's correct that we also did see a small deterioration or pressure on the profit per units. We've seen extremely volatile development on the freight rates, as you know. And I think it is fair to say that we are maybe a little bit conservative in DSV, and we're very cautious about giving long-term commitments. And we are not put in this world to speculate on how the future rate development is going to develop. So it was extremely good to see that we could kind of see -- well, we were not happy because we did see a pressure, but it was something that we had expected. It -- actually, the situation improved or normalized a little bit throughout the quarter, so we actually came off with a fairly good development. As I said, March was a significantly stronger than what we saw at the beginning. You shouldn't put too much emphasis on this. It is normal seasonality. January and February are not always very good months. So I think it's -- it was nice to see and it was, what should you say, what we had expected also. We have been trying to protect the margins. We see that as an asset, of course, at DSV, and we will do everything we can to protect that. So...

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Lars Topholm, Carnegie Investment Bank AB, Research Division - Co-head of Research of Denmark and Financial Analyst [4]

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Sorry to interrupt. But does that mean Air & Sea is right now -- or I mean, not looking ahead, but what you're seeing right now are higher than in Q1 on average? Would that be a fair interpretation?

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Jens Bjørn Andersen, DSV A/S - CEO and Member of the Executive Board [5]

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I guess it's something you will have to wait a little bit approximately 3 months to see. That's what we can say here. In the quarter, we did see a slight improvement, which was, yes, it was good to see. We were happy to note that, that was the case. In Road, you're right, we did impact the numbers with the transactions of Road. It is a little bit disturbed by some new activities coming in from both South Africa and the U.S. also, which has changed the profile a little bit in terms of number of shipments. Also, we have had a very good momentum in some of the Scandinavian countries, while we have been gaining a lot of business on the domestic market, which is a very high volume market, but also with a market with a very, very low GP margin. So I wouldn't be too concerned if I was you. Having said that, we have also tried to indicate that it was good to see a stabilization in the gross margin. And I think that it would be fair to say that, if you adjust for the property transactions, we are at 17.1% in a very weak, normally very weak, it's even more extreme in Road with January and February being very, very slow. So if you assume that we will be somewhere between 17% and 18% on the GP margin going forward with the new accounting rules we see -- we have in DSV, I think it's a fair, fair assumption that you can use.

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Operator [6]

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

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Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [7]

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Two questions from me then, please. First of all, can I just come back to the working capital? I mean, both at the Q4 and at the Q3 stage, you particularly highlighted some pressures and some changes needed in the Solutions business, that seems to have had the most expansion in working capital, almost DKK 1.1 billion in Q1. So could you talk a little bit about how far on the road you are with addressing those client issues, particularly the more capital-consumptive clients and how long that will take? And what do you think a normalized sort of capital, working capital intensity for the Solutions business is? And then can I just turn to the growth? And again, on the working capital comments, that you certainly imply that the business accelerated in March in terms of volumes, and therefore, would I suspect to be more working capital consumptive? But can you talk a little bit more about how you think about positioning DSV going forward? If you got higher base volume, do you need more staff in place, and therefore, are there less special items to be taken out? Or effectively, will you still focus on taking out the full cost effect, including staff, and try and get operating leverage quicker, but maybe at the risk of cost build later? Can you talk a little bit more how you're thinking of that?

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Jens H. Lund, DSV A/S - CFO and Member of the Executive Board [8]

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I think I'll answer the question about the working capital first. I think, first of all, when we look at the comparable figure last year, there might be that some of the things were not reported in the right division or in the right area in Q1. But it's also fair to say that Solution is too high on the working capital. And as in particular, one operation where we are looking into this, we had a deal on it, but it's been postponed, and now we are sort of basically reinforcing the arrangement that we had, and it will take a little bit longer time to get there. So we will have to wait until 2018 before this matter is fully resolved. On top of that, there are some issues in the Solution Division, also in other areas, but we should be able to get below the DKK 500 million mark in Solutions once we've gotten these things adjusted. Then, if we take the fact that we have tied up DKK 300 million to DKK 400 million in certain facilities we are investing in, in Road, and then, basically, the normal seasonality, then we should fairly quickly get to the DKK 1 billion mark, and this is that we can reduce the working capital. So there are certainly some ground to cover on this and we need to get even further down, but these are sort of the initial plans that we have when it comes to the working capital. When we then look at the integration and whether we can speed up some of the things that we are sort of executing on and that we have in our plans, I think it's fair to say that, basically, we'll speed up all the things that we can. But certain issues involve infrastructure and it might be IT infrastructure, it might also be a physical infrastructure, and there's sort of a limit to how much we can move with respect to these 2 things. So you will see that during the course of 2017, we will finalize the things that we are working on, but I don't think we can do it much faster.

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Jens Bjørn Andersen, DSV A/S - CEO and Member of the Executive Board [9]

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Maybe I can just elaborate a little bit on that. It's very clear to say that we have a very, very outspoken aim, and that is to take market share gains during 2017. Of course, as we've talked about in Q4, you have to do the selling before -- in advance before you will see it reflected in the numbers, so there is a delaying effect, if you know what I mean. And we want to achieve very much what we did see prior to buying UTi, that the incremental conversion ratio should be higher than the average conversion ratio. And we've also, to a very clear degree, as Jens described earlier, seen that in Q1, and we expect that to be the case also going forward for the first -- many, many quarters. We will have operational leverage opportunities, for sure. We can still fine-tune the machinery and optimize the way that we operate. We are nowhere near what you say in a perfect situation. So we aim to get back to what we did before buying UTi.

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Damian Brewer, RBC Capital Markets, LLC, Research Division - Analyst [10]

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Can I just follow on and just clarify 2 things? First of all, in the Solutions business, what caused the deal on one of the more working capital-consumptive clients to be postponed? And just to come back to the volume issue, just to be clear, you're still aiming on reducing the SG&A headcount by the same amount. It's just I remember going back to '08 and '09, it was either yourself, Jens, or one of your peers saying you didn't want to pay people to leave early to sort of pay them to come back later when the volume recovered.

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Jens H. Lund, DSV A/S - CFO and Member of the Executive Board [11]

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I think if we take the deal with this particular customer, it was postponed due to some changes in their operations, which they had extraordinary growth, and therefore, they couldn't execute on the plan that we had with them. So now this is there on the agenda, and then we will continue to make headway in relation to this. There will be a small improvement for the summer holiday, and then we will take it gradually as we move along. In relation to taking headcount out, I know our competitors. They have often had these ideas that we leave too many people in the operation, and then they don't have to rehire again. I think we look at it a little bit different. I think we try to rightsize the business, so we get the productivity up. And then when you have gotten the productivity up and there's extra demand, then this is really where you will see what is the next capacity you have in your infrastructure because then, normally, with the processes we have implemented and the improvements we have made, you can see that there's an extra sort of layer of productivity that you only get access to if you rightsize your business. Otherwise, people, they tend to get used to doing or producing a certain number of files and we don't maximize it. So we do it in a little bit of different way, and I have full respect for our peers for they look at it in another way. But we monitor the conversion rate so I think that what we do is actually working.

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Operator [12]

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

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Finn Bjarke Petersen, Danske Bank Markets Equity Research - Research Analyst [13]

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Two questions regarding organic growth, one in Road. What is the organic growth in the European business in the first quarter? Secondly, how do you see the growth in the start of Q2 in Air & Sea? And finally, if I may, how do your -- additional sales force or efforts, how do you see that play in on your gross profit going forward as you want to gain market share? Will that be on the -- will that be taking it through lower prices? Or do you think you can grow without any incentives on price?

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Jens Bjørn Andersen, DSV A/S - CEO and Member of the Executive Board [14]

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Yes, good questions. If I count it correctly, I think that was 3 questions, Finn.

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Finn Bjarke Petersen, Danske Bank Markets Equity Research - Research Analyst [15]

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Sorry, sorry.

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

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Maybe we can put the Road in Air & Sea and pretend that's one question. So the organic growth in Road in Europe was 8%, approximately 8% in the quarter, where we did see the market growing 3%. So it was quite substantial. And we had a good development in Road. When we look at Air & Sea in Q2...

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Finn Bjarke Petersen, Danske Bank Markets Equity Research - Research Analyst [17]

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Just one question there, Jens, before you continue. Is that adjusted for working days? Because it seems like quite.

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Jens Bjørn Andersen, DSV A/S - CEO and Member of the Executive Board [18]

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It's not adjusted for working days. This is the quarter-on-quarter. Working days will probably be about 2%. So you could argue, it's a good point, that the true organic, what you say, growth is 6% in the quarter because of the Easter. So it's a good point. In Air & Sea, as we cannot disclose too much about Q2, what we can say is looking at some kind of port statistics and stuff like that, it seems like the momentum has carried into Q2. So that's nothing really very different when it comes to Q2. We hope very much that we will see a continued strong development. Outgrowing the market is not easy without sacrificing a little bit on the margins, and we have said that, over time, we will see a slight decrease in the gross margin, which needs to be offset by productivity improvements. But it's not like we will go out now and fight like a madman to grow market share. I think it's fair to say that [in these 3], we've had also, going back in time, statements saying it's profit over growth. We will not grow for the sake of growth. It needs to be profitable growth. But we still must accept the fact that new business is carrying ultimately a slightly lower GP margin than the existing business. So a small reduction in the GP per unit or per consignment or GP margin in Road is likely to be assumed in the future. This is -- you can extrapolate from what you have seen in the past. This is also what we believe will happen going forward.

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Operator [19]

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

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Dan Togo Jensen, Handelsbanken Capital Markets AB, Research Division - Research Analyst [20]

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I only had 2 questions remaining, so that's very lucky. Seasonality in Solutions, you mentioned earlier. Can you give some flavor on which verticals it is that affects the seasonality in Solution, provides the ups and downs that we are seeing quarterly in EBIT? That's the first question. And then the second question was on property sales. Is there more, sort to say, in the pipeline that will affect the cash flow here in 2017?

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Jens H. Lund, DSV A/S - CFO and Member of the Executive Board [21]

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Yes. If we take the Solutions, I think you will see a different kind of retail that has an impact, but also some that relate to industrial production really because many areas, they do not start off in the beginning of January sort of on the 1st, but perhaps, if you go to Scandinavian countries, it's not unusual that the production starts around of sort of 6th to 8th of January. And then you have the whole infrastructure you have to pay for. So this is clearly not a good month. Then, we would have February as well, where there's fewer working days. And since we are paid by the number of order lines and we have the full infrastructure, February is not necessarily a good month either. So really, the first good month we would have in Solutions is March when you start a year. So it's quite a depressing sort of division to be in. But you take the retail as in it's both the wholesale chain that you're looking at, but of course, it's also the direct to stores, and then, of course, the e-commerce, people will spend most of their money up till Christmas. So a little bit less activity. On the property side, I think we had some asset held for sale on the balance sheet also at year-end. This is, of course, included in our guidance. I think it was approximately DKK 800 million we were talking about. And now we have changed some of this into cash with some of the transactions. And there's still some additional flow in relation to that. We also have a few properties under construction that has consumed a bit of working capital. So we should be able to get an extra inflow of up to DKK 0.5 billion, I should say, on the property side. And this is, of course, also something that sort of affects our DKK 3.5 billion guidance. So when we planned this guidance, we did foresee that we would be able to collect this money. So this is basically a little bit on the cash flow.

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Dan Togo Jensen, Handelsbanken Capital Markets AB, Research Division - Research Analyst [22]

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Sorry, just to clarify, it is included in the guidance, the additional DKK 500 million?

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Jens H. Lund, DSV A/S - CFO and Member of the Executive Board [23]

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Yes.

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Operator [24]

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

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Lars Heindorff, SEB, Research Division - Analyst [25]

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Two questions from my part as well. Firstly, regarding the market development in the first quarter here, we've been talking about some other questions, impressive yield development, at least in combining with your volumes. However, looking at the performance of some of your peers, they've been growing significantly more with significantly worse yield development, which may sort of point in the direction that they've been hunting market share. Just wondering if that is something that has affected you during the first quarter and if you believe that a pattern will affect you going forward. That's the first one.

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Jens Bjørn Andersen, DSV A/S - CEO and Member of the Executive Board [26]

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So the question is, if we have been affected by our peers hunting for business and growing? Was that...

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Lars Heindorff, SEB, Research Division - Analyst [27]

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I mean, just looking at the numbers, it appears that some of the other companies out there which have been growing faster but with worse yields, that they might have been hunting market share, at least in the -- as you all have been sort of indicating this roughly the same kind of market growth.

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Jens Bjørn Andersen, DSV A/S - CEO and Member of the Executive Board [28]

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Yes. It could appear that way, but I don't think it will be appropriate to comment too much on the development of our peers. I mean, they run their businesses and we try to run ours the best we can. But I can say that it's not like we have -- there's no particular of our competitors that has strongly attacked our customers. We all fight amongst each other. We take business from small, medium and big competitors. And sometimes, you also unfortunately lose some business. But there's no clear development. It's not like we have failed under siege or under pressure in no shape or form whatsoever. I think it is more a continuation of the trend we have seen for many years where the big players, they take market share gain from the smaller ones. The very heavy investments we do every year in digitalization and improvement of IT is something that the smaller players, they have difficulties matching, so to say. And the systems, the concepts that we can roll out with customers is very different from what you can offer when you are a very small player in the market where you have to rely very much on the relationships and niche products. So I think that is what we could say.

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Lars Heindorff, SEB, Research Division - Analyst [29]

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Okay. And then, secondly, a follow-up question on the conversion ratio that you spoke about earlier. Could you be a little bit more specific? You mentioned that you expect to see an improvement in your conversion ratio. Does that go for both Sea & Air and Road, or was it just 1 of the 2?

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

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Both of the divisions are -- have not reached their long-term financial targets when it comes to conversion ratio. So until we reach that, we will ask the heads of the divisions to do whatever they can to improve the conversion ratios. It's a work that is ongoing every day. And we have, of course, these aims. They still span the long-term financial targets. As Jens also illustrated earlier today, we need to first see the margins restored to what they were prior to UTi. But I must say, looking at Air & Sea, it's growing relatively fast, and we are happy about that. But we do expect to see improvements in both Road and the Solutions -- or Air & Sea, I'm sorry, Divisions.

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Lars Heindorff, SEB, Research Division - Analyst [31]

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Okay. Just a clarification. The synergies that you've achieved in the first quarter from UTi, are they only in Sea & Air? Or are there also some of that into some of the other divisions?

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Jens Bjørn Andersen, DSV A/S - CEO and Member of the Executive Board [32]

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In Sea & Air. But of course, we have seen some in Solutions. I would say also the most, to a lesser degree, in Road. That was only -- as you probably know, have been affected by the UTi acquisition in the U.S. and South Africa. So the largest proportion, it's a good assumption, comes from Air & Sea. That is right.

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Operator [33]

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

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Casper Blom, [34]

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It's my sort of impression that the way you've been thinking about 2017 is very much that in the first quarters, you will see a lot of [facilities] feeding through and then maybe in the second half focus more on gaining market share. Please correct me if I'm wrong there. And I was wondering if you could shed some light on your transparency on those 2 matters. When it comes to winning market share in the second half of year, do you have any transparency to how that may go already now? And also, with regards to the remaining synergies from the UTi acquisition, is it still so that we're sort of talking about things that have basically been carried out and now just have to feed through to the P&L? That's it for me.

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Jens H. Lund, DSV A/S - CFO and Member of the Executive Board [35]

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I think I will start with the synergies and Jens Bjørn can talk a little bit about the growth. I think you're fairly right that now, if we go back to 2016, we started to execute on the integration in Q2 really. That's sort of where we initiated a lot of the projects that we had planned. And then we have been executing now these plans or most of them, and therefore, you will also see a dramatic impact in here in Q1, Q2, of course, even more. And then slowly, it will materialize all the things that we have done. So you should get some less impact basically from new initiatives in the second part of the year. So that's a fair assumption. And I think that also leads to the fact that our operation, they can then focus more externally. And this is really where Jens Bjørn is sort of very adamant about the issue called growth and you can touch a little bit more on that?

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Jens Bjørn Andersen, DSV A/S - CEO and Member of the Executive Board [36]

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It's correct. It's a right way to look at it. I would say, Casper, we -- it's not like we will switch from one day to the other to growth. And don't misunderstand us. We have several thousand sales people who have been selling like hell also in 2016. But of course, they have been very also occupied with explaining the transaction, the impact of buying UTi, talking about practical issues with our customers, organizing new ways of booking procedures, helping setting up new IT systems. And of course, also, some customers have been slightly reluctant to add more business to us. They have had a little bit of wait-and-see approach, wanting us to demonstrate that we could still deliver a good service. And I actually believe we can deliver a better service now than what we could before buying UTi. And this is what we have to take to the market now. The days of explaining the transaction and all these practical things are almost behind us now. Now we can really go full speed ahead and go out and sell the new DSV to our customers, both existing customers, but of course, also to new customers. And if we are successful, we do believe that we will see these market share gains feeding through the system in the second half of this year.

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Casper Blom, [37]

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Okay. But is it so that you already now have sort of like a pipeline that is lined up with more potential new customers than you had last year? Or is it more just -- sorry about saying just, but is it more your expectation that now your guys will have more time to do it, and therefore, they should also win?

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Jens Bjørn Andersen, DSV A/S - CEO and Member of the Executive Board [38]

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It's a combination. I expect that they will have more time, and then they seldom disappoint us, I will say. And then, of course, we also have some in our, what we say, sales force system. We do have a much stronger pipeline now. We just have had meetings with the heads of the divisions, Jens Lund and myself here, in the last couple of weeks, and there are much more opportunities now which, with a bit of luck, can materialize. But of course, it's not something we can promise anything, but it looks quite okay, I might say, in the pipeline.

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Operator [39]

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

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Neil Glynn, Crédit Suisse AG, Research Division - Head of the European Transport Team and Global Transport Sector Coordinator [40]

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If I could just also ask 2 questions then. Following off from the last question. Just with respect to the sales headcount, as you focus on market share gains incrementally in the second half with a lot of the synergies and integration work done, is your current sales force headcount positioned for that? Or will you continue to add as you build up to that period? And then the second question, just to delve a little bit more deeply into Solutions. We've obviously seen a large gross profit margin decline quarter-on-quarter into the first quarter. Prior to the UTi acquisition, we have seen the gross profit margin fall pretty much every year over recent years, bucking the trend in 2016. So just interested in your thoughts as to, do we continue to see degradation in margin from 2017 onwards in Solutions at the gross profit level? Or how should we think about reaching a floor in gross profit margin in Solutions?

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Jens Bjørn Andersen, DSV A/S - CEO and Member of the Executive Board [41]

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Also here, a couple of very good questions. I will kick off the headcount on sales. We normally say everybody with the company [currently is really] a sales representative, so that goes, of course, not only for the sales people, but also the managers who has a managerial role. I think we have the right, what you say, set up when it comes to sales. But as you know, we are in many countries and I cannot exclude the option that a couple of countries, they need to hire more people. We will follow the developments. If we have a big potential in a country, it can also, from adjusted cost benefit analysis, be good to hire new salespeople because if they can bring in business which is substantially more worth than their salary, there should be no limit as to how many you should take in. But we are confident and comfortable with the current headcount, and I think we have what needs to be done to go out and attack the market. And maybe I can just use this opportunity also to say that we have restructured a little bit the approach we have had to the very large customers. It is now so that each of the divisions, they have their own Chief Commercial Officer now who will drive the business development in the divisions, and we already see now a very good development and a very good cooperation now in the divisions. So we have great hopes for this. And I don't know, Jens, if you will elaborate maybe on the margins in Solutions.

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Jens H. Lund, DSV A/S - CFO and Member of the Executive Board [42]

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There are few things to say about it. First of all, you're right that the customers, they do want more for less. Also, when it comes to Solutions, I think you can see that from some of the results of our peers slowed. When I've said that there's also something that we have changed a little bit, unfortunately, some of our countries had reported property cost below the GP line and we have straightened that out during the course of the last couple of years and also in relation to UTi, so we that now book the property cost above the line because it's really part of our gross profit capacity we have available. So this has also put the margin a little bit under pressure. I think we still run here now at 25% in the first quarter. So -- and given the fact that we've also still got some dealings with UTi volume that is not profitable, I do not necessarily see that it is that much under pressure as you perhaps suggest. So we would expect our GP margin to be between 26% and 27% when the year ends, I should say.

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Operator [43]

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

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Jørgen Bruaset, Nordea Markets, Research Division - Assistant Analyst [44]

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Two from my side as well. First of all, when we look at Q1 relative to the rest of the year in a historical context pre-UTi and you kind of stack that up against what you now deliver in Q1 and adjust for the DKK 125 million one-off item and benchmark that up against the midpoint of your guidance range, it looks to me that as if you're guiding for a more front-end-loaded year than what you have delivered pre-UTi. But from the color of it, it seems to me that with the group focused on organic growth in the second half of the year. I'm not quite able to bridge kind of those 2 angles. So basically, my question is, could you give some color on the phasing or the seasonality of what we should expect in '17 versus what we've seen pre-UTi?

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Jens H. Lund, DSV A/S - CFO and Member of the Executive Board [45]

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I think, basically, if you look at it, there are several things to it. I think, first of all, we've become a much more global company. So if you look at this, it changes the pattern of the income a little bit. Typically, we used to have a big Q4. That sort of has changed and we now see that the income has spread more out during the year. So that certainly changes something. And I think also when we give guidance, I think it's very important that we are sure we can live up to it. So I think this, of course, impacts it a little bit. We will get more UTi synergies as the year progresses. And of course, we need to execute on some of these plans, clearly, even if we have done a great deal of the work, so that impacts our deliberations a little bit as well. So there can be made many extrapolations on the first quarter result, and we will also make relevant adjustments when we are feeling comfortable with it.

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Jørgen Bruaset, Nordea Markets, Research Division - Assistant Analyst [46]

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Okay. So just a short follow-up on that. So what would you say is the key swing factors to the current guidance range? Is it more the internal factors? Or if it's more if we should see the strong momentum in Q1 volumes predominant in Air & Sea to be prolonged into the second half of 2017?

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Jens H. Lund, DSV A/S - CFO and Member of the Executive Board [47]

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I would say both things can swing we need to keep the focus on integration. And as we also touched upon earlier in this conversation, I think it was on the question from Casper Blom. It's very important that we, in the first part of the year, have focus on integration, get it completed. And then as Jens Bjørn has also alluded to, we need growth as well. And if the market is very favorable and we deliver on that, of course, that will be -- also be a good trigger for results, that's clear. So if we could have both and basically have them in the back, then we have a good situation.

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Operator [48]

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Our next question comes from the line of Frans Hoyer of Jyske Bank.

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Frans Hoyer, Jyske Bank A/S, Research Division - VP of Equity Research [49]

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Just a question on the Air & Sea volumes that, yes, they were up, but I thought they were up perhaps a little bit less than I had imagined. Could you talk about whether there was a bit of weakness there? And also, on the Easter effect, you mentioned DKK 20 million EBIT benefit in Road. Were there any effects in Air & Sea and Solutions, please?

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Jens Bjørn Andersen, DSV A/S - CEO and Member of the Executive Board [50]

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Yes, we're sorry it couldn't match your expectations on Air & Sea volumes. We did the best we could. There's no doubt about the fact that we have -- when you compare Q1 to Q1, one has to remember the fact that UTi carried a very big momentum when we bought them. It was, as we have talked about many times, not a particularly successful company from a financial point of view and that was reflected also in the volume development. So when we take that into respect, also the fact that we had to say goodbye to some loss-making, what you say, activity, we are pretty comfortable and satisfied with the numbers. We look so much forward to the next couple of quarters when the comparisons become much -- not easier, but it's a more like-for-like comparison. You can do -- really, when you can really compare things from the day when we took on all the UTi business onto our IT platform, then it's going to be easy like we have done in the past. So we were happy with the numbers. And of course, had we -- combined with the relatively solid development on the yields, we were pleased with the development. So if you don't grow so much, you would at least hope that you would see a good development on the yield. And if you grow like a lot, so to say, then maybe you can sacrifice more on the yield. When it comes to the DKK 20 million, it is primarily to do with the Scandinavian countries. We are also big in Air & Sea in Scandinavia, don't misunderstand. But you could argue a couple of million to DKK 3 million also in Air & Sea, but it is mainly affecting us in Road because there were more working days in March. March was a good month for Road, 23 working days, 5 Fridays, which is also something we count, and so it impacted us the most in Road.

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Operator [51]

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Our next question comes from the line of Dave Ross of Stifel.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Transportation Analyst [52]

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Well, if it makes you feel any better, you beat our expectations for volumes in Air & Sea.

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Jens Bjørn Andersen, DSV A/S - CEO and Member of the Executive Board [53]

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It makes us feel a lot better. Thank you.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Transportation Analyst [54]

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Following up just on the airfreight side, it's been very strong. Your tonnage was up 20%. Some of that was UTi, but not all of it, you're still gaining market share. As we look around the world, what do you attribute the strength in airfreight to, whether it'd be country specific or product specific?

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Jens Bjørn Andersen, DSV A/S - CEO and Member of the Executive Board [55]

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There was a lot of things happening in airfreight. It is unusually strong. I mean, we see the market also growing 6%, which is we can only cross our fingers that it continues. There was some disturbance on some sea freight traffic lanes also that did cause a spike in airfreight. There were some service issues, specifically eastbound from Europe to Asia, where we could get no traction. We could get no space, no capacity. And that, of course, led to some airfreight. But there's also a lot of really planned airfreight where it is actually the traditional air, what you say, lanes from Asia to the U.S. and Europe. So it's widely spread. It's not one vertical or any particular country specific that drives it. It was just -- and we saw it also at the end of 2016, just a strong quarter, which is nice to achieve.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Transportation Analyst [56]

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And then moving from the air to the ground side of things. Road was very solid in the quarter. You mentioned that Europe, not just the Scandinavian countries, there's also Southern Europe started to grow again. The global road system showed a 12% shipment growth. What was the European shipment growth? Do you break that up separate and look at that separately?

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

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For DSV, it was 8%, and then organically, 6%. But the market, we say that the market -- we estimate that the market in Europe grows approximately 3%. So it's not excessive or anything. It's not out of the normal, but we've grown twice the market, which we are happy about. So it's still quite modest growth rates, but still there's some kind of a good sentiment right now. It's a good momentum. And we also -- we've managed to fine-tune also our growth. Road is a good place right now. It's a -- the division, they work well together. They have a lot of new plans. They have a good momentum. So it's, of course, one thing is to feel that, but to see it reflected in the numbers is, of course, for us much more important, as Jens said, from PowerPoint to P&L is not something we give up on the estimates.

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David Griffith Ross, Stifel, Nicolaus & Company, Incorporated, Research Division - Director and Transportation Analyst [58]

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And lastly, as you're talking to the different division managers in Air & Sea, Road and Solutions, are they seeing the economy where global freight generally pick up as we move into 2Q and through the rest of the year? Is the, I guess, tone of business a positive one at your customers? Or are there any signs of slowing or concern?

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Jens Bjørn Andersen, DSV A/S - CEO and Member of the Executive Board [59]

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Take it for what it's worth. We are not macro economy specialists or experts. But it seems like there -- and it could also be company specific. We had a very strong quarter. We were very happy. We were -- there's nothing we would like more than to show some good numbers. This is why we go to work every single day. So maybe the positivity is influenced by some company-specific developments. But having said that, it seems like the end of '16 was good, the beginning of this year was good. There is a certain momentum. Of course, there's a lot of geopolitical issues that can concern you and that can scare you. But right now, it seems like the markets are better than they have been for a long, long time, which is encouraging, but we are super cautious. We have been disappointed many times in the past as well, but so far, it looks fairly well, I would say.

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Operator [60]

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And our next question comes from the line of Lars Topholm of Carnegie.

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Lars Topholm, Carnegie Investment Bank AB, Research Division - Co-head of Research of Denmark and Financial Analyst [61]

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Just a brief follow-up question. Depreciation in Air & Sea are DKK 31 million for the quarter. It's low compared to previous quarters. Is that a new level? Or how should I think about it?

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Jens H. Lund, DSV A/S - CFO and Member of the Executive Board [62]

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No. I think it's the customer relations that -- if you look at -- it's like a decreasing number, basically, as we -- if we go on year by year. So I think that's really been the big swing there. Apart from that, there is no change, Lars.

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Lars Topholm, Carnegie Investment Bank AB, Research Division - Co-head of Research of Denmark and Financial Analyst [63]

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So no new run rate?

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Jens H. Lund, DSV A/S - CFO and Member of the Executive Board [64]

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Yes. But you have to -- you can get it from our team in the IR department if it's likely. And also, if you look at the way we account for it, we do it with a percentage every year, so it gets less and less as we go along. So it's a declining figure.

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Operator [65]

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

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Jens Bjørn Andersen, DSV A/S - CEO and Member of the Executive Board [66]

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Okay. If that is the case, we would like to conclude the conference call. Thanks for listening in. Thanks for all your good questions. We really appreciate the interest. As you know, you are always welcome to contact Jens Lund or myself or the IR department. We will now be busy traveling out to speak to investors on road shows. We look very much forward to that. Thanks for all the hard-working and beautiful people of DSV. You've done fantastic. We really appreciate your efforts. Thanks to all you guys listening in. We will be back with the Q2 numbers when they are ready after the short holidays, some holidays here in Denmark. And until then, we would say thank you, and bye-bye.

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Operator [67]

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This now concludes our call. Thank you for attending.