DSV A/S (DSDVF) Q2 2023 Earnings Call Transcript

DSV A/S (OTCPK:DSDVF) Q2 2023 Earnings Conference Call July 25, 2023 5:00 AM ET

Company Participants

Jens Bjorn Andersen - CEO

Jens Lund - COO

Michael Ebbe - CFO

Conference Call Participants

Cristian Nedelcu - UBS

Alexia Dogani - Barclays

Robert Joynson - Exane BNP Paribas

Ulrik Bak - SEB

Muneeba Kayani - Bank of America

Samuel Bland - JP Morgan

Lars Heindorff - Nordea

Sathish Sivakumar - Citigroup

Michael Rasmussen - Danske Bank

Nikolas Mauder - Kepler Cheuvreux

Cedar Ekblom - Morgan Stanley

Marc Zeck - Stifel

Parash Jain - HSBC

Operator

Welcome to the DSV Interim Financial Report for the Second Quarter of 2023. [Operator Instructions] Today, I'm pleased to present Group CEO, Jens Bjorn Andersen; Group COO, Jens Lund; and Group CFO, Michael Ebbe.

Speakers, please begin.

Jens Bjorn Andersen

Good morning everybody and welcome to the conference call here from Hedehusene in Denmark. We're pleased to go through the results that we have published this morning and we might as well go straight to Page number 2 where you will see the agenda and also our forward-looking statements that we could kindly ask you to read.

Yes, the agenda is as you have seen on many previous occasions as well and as we have said the last couple of times when we go to the Q&A if you could restrain yourself to asking only two questions and also not ask questions that have already been posted.

So let's go straight into it on Page number 3, we have put down some of the highlights of the first half and of the second quarter. We're very pleased about the performance. We are happy about the result that we have published this morning for the second quarter of the year. It exceeds our expectations a little bit as we also saw in Q1.

We actually do believe that we have seen a pretty good and solid financial performance across all business areas in a market which is still soft and characterized by low volumes which we will get back to. The result has also led us to upgrade our guidance for the full year, so now which since range from DKK17 billion to DKK18.5 billion, meaning that we have taken away DKK1 billion at the low end of the range and increased the top part of the range with DKK 500 million.

Not to forget it's all about free cash flow of course and I think we can once again demonstrate the satisfactory position when it comes to the cash flow. It has been supported by significant reduction in net working capital like we saw in Q1 also. So very nice to see that we are still able to convert the earnings of our company to cash which it is all about.

Earnings per share, I guess this is also what you get as a shareholder. It's down, but it's just down 3% year-over-year, of course also supported by lower number of shares which is a consequence of the share buybacks that we have done in the periods and that is also what we are going to do now. We have announced a new share buyback program of DKK4 billion for the coming three months and that has been initiated also this morning.

Of course when you look at the numbers, needless to say we are comparing now Q2 this year with the best quarter in the history of DSV in 2022. EBIT is down 35%, but if you take an average of all the quarters we had last year, it's down 25%. So at least the comparisons are getting easier as we go along and enter Q3 very soon.

So now we go to Page number 4, and see of course when you see a result which is down 40% compared to a year ago, it's highly unusual in DSV, but I would still characterize the result as being very strong the market conditions taken into consideration. Gross profit, of course as you can see in the quarter down 27% impacted by lower volumes and slightly lower yields. Actually Air yields we will see in a second holding up pretty good, but Sea freight a little bit down.

What is good to see is that the freight markets have largely normalized after all the commotion we saw the last couple of years with all the significant supply chain disruptions we experienced. And I think it's great to be able to service our customers in a good manner and live up to the expectations that they have to a company like DSV.

We, as you will see in a second, we are underperforming the market, particularly in in Air freight. I'll come back to that. It has led to a further reinforcement of our commercial efforts. So we have plans to get back to growing faster than the market once we see the results of the efforts that we have, and also when we see probably a more normalization of the markets, and particularly in air freight.

Conversion ratios still I think with all margins it can stand the test of anybody in the market. We are pleased and proud about and still being able to deliver industry leading margins and the conversion ratio have stayed above 50% which is really nice to be able to see, also partly a consequence of the management's strong focus on cost in the quarter.

So on Page number 5, air freight, you can see that we have more or less the same development in volume as we had in Q1, so 21% down volume wise, year-on-year, whereas the yields are more or less the same. I think if you actually convert the yields to U.S. dollars, they are the same or even a little bit up.

It is a tradeoff. We do live from the GP and of course, if you protect the yields of course, you see sometimes a little bit negative development on the volumes. This is the way we have always done it in DSV. It is profit over growth. We do see some still behavior in the markets, which is maybe not super rational. We have decided to step away from those opportunities. And it's also may be worth to notice that we are not exposed to some of the verticals which are actually performing quite nicely and then the last quarter to mention one is perishables, which actually had a positive growth, but with yields which are only a fraction of course, of what we have in DSV.

So what is also important to stress is that even though we do report the volume developments in air freight, a number of tons number of TEUs in sea freight respectively, the internal measure that we use is number of shipments, meaning the number of invoices that we send to our customers. And we've calculated that both for Air & Sea is something approximately 7 to 8 percentage points better than what we see in terms of the overall volume. And that is the old explanation that we would rather move two times 500 kilos for our customers than one time a thousand kilos. The profitability is twice as high on that, even though it is still only one ton in these calculations. So internally, the developments look much better than the volume development that we show on this slide.

A little bit different development in sea freight. Better market developments for DSV. We are closer to the market, maybe a couple of percentage points off when it comes to growth, 7% down in improvement on the last two quarters. Again, as I said, the tradeoff is that yields are then dropping a little bit, so just to slightly below DKK5,000 which is still something which we are happy about.

Transpacific and trans-Atlantic are still the weakest trade lanes. Asia to Europe are actually doing quite nicely on that on that front. We hope that we will get into positive territory when it comes to volume growth when we enter the second half of the year, comparisons coming down inventory is probably also reaching a level where we will, can anticipate somewhat improved market conditions on sea freight.

We go now to Page number 7, road, not a lot to say, rock solid again. Great result from the organization. We've seen again market share gains in road. Unfortunately it's not possible for us to quantify as there are no official metrics or statistics that we can use, but both domestically and internationally, we feel that we are taking market share. There's still high demand for our new groups products in road and it's really nice to see.

Particularly Germany and the Netherlands have performed really well and a country like Germany, which is still the engine in Europe performing is really a pleasure to see. The flat lining of the graphs below have stopped a little bit, and we've seen an uptick both in the gross margin to 21%, and of course, also an EBIT margin of 5.4%, which the division can be really, really proud about. And we congratulate also everybody in the road division for a job really well done.

Last, but not least before I hand over to Michael Ebbe is Page number 8 Solutions Division. We have seen the impact also of the of the low activity levels in Air & Sea and particularly in APAC, in the warehouses we run an app in APAC, but still again margins, which also can be compared to anything in the industry we are happy about that. We have seen that the cost base have been impacted partly by inflation, and we are also here for the long run.

So of course, we are not only looking at the results from quarter-to-quarter, but we have done some investments which will hopefully enable us to see or to support EBIT growth in the future by expanding the warehouse capacity which is something which we believe will continue in the coming quarters as well. But DKK613 million is a great result for the Solutions Division and we are happy about the results and also the plans that the management and the team running the Solutions Division have for the coming period of time.

So, I think I will stop here and hand over to you, Michael Ebbe. So please?

Michael Ebbe

Thank you very much. If we go to Page 9, a few highlights here for the P&L for the first half of 2023. If we look at the revenue, clearly impacted by the lower freight rates as well as the volume as Jens just alluded to. So it's clear significant impact on that one. Gross profit was supported by our strong yields that we've been able to keep Air & Sea and improved margins in both in Road and also in Solutions as well.

If we take a look at the cost base, we've had some questions about that earlier as well. We have initiated some few cost savings programs. It's important to say that we keep an eye on the cost base say every month and every week. So it's not something that we have initiated large programs, but even though it seems like we have been able to reduce number of FTEs of roughly 1,900. It's mainly within the Air & Sea and the white collar staff there. It's also clearly that we have been seeing the cost inflation, so that works the other way around that.

Another number that a small comment attached to that is the FX adjustments. It's like, it's always, it looks a little bit strange, but that's as usual our internal funding that give raise to these deviations or fluctuations there. It has no impact on our cash flow.

Another thing that's worth to mention here is the tax rate which is close to 25%, especially this quarter, it has been impacted by the dividends that they have received from the subsidiaries from the last year high earnings, clearly when they come to Denmark, and we have to pay tax on the dividend that leads to higher tax payments this year. We stick to the long-term target of have our tax rate around 24%. So I think that's also important to take notice of. And then of course, like Jens Lund mentioned the diluted adjusted earnings per share for the ruling 12 months has been maintained and at a quite high level, so nearly DKK70 per share.

If we go to the cash flow slide on Page 10, we are pleased with the cash flow we have had reported here for the first half of 2023. Clearly, the reduction of our net working capital have had a significant impact offset a little bit by the higher tax payments that we have done here. So the net working capital improvement is of course impacted by the freight rates, but it's also the work that we have done to continue and optimize our processes even further after the last couple of integrations.

Currently, the net working capital sits at around 1.8% of the annual revenue. I think I've earlier said that we will be around 2%. So I think that's still the, the target. We cannot expect to see continue improvements in the range that we've done this half year. Our gearing ratio is also quite low, 1.2. So we will initiate or have this morning initiated a new share buyback. I'll come back to that later.

And if we look at our, our balance sheet, we have a strong balance sheet still. We have committed loans and facilities which are duration of 7.8 years, and we pay roughly 1% in interest. So it's a strong balance sheet as well as the cash flow with then lead to the initiation of a new share buybuck.

If we go to Page 11, mentioned a couple of times, we have started a new share buyback of DKK4 billion this morning that will run onto 23rd October so the next three months. As of today or this morning, we have acquired 5.7 million shares back here in 2023 at an average price of 1,275 DKKper share and we have around 2.7% of own shares of the share capital. This will then mean if we take this initiated share buyback this morning into consideration, we have committed currently to allocate 13, nearly DKK14 billion back to the shareholders. And then, of course depending on how the situation looks, when we come to the Q3 reporting, we will of course assess if there are room for even further share buybacks to be initiated back then, as we have always done.

It's also important to say that what you see here in Q3 and Q4 for the last program, it's estimations of whether it will be in Q3 or Q4. It, of course, depends on the execution from the banks. It's under the safe harbor program, so we are not able to kind of say to you guys whenever that will be bought back.

So next to the to the last slide from my side, Jens Lund already mentioned that we've decided to adjust our outlook a little bit, so we have upgraded to an area of EBIT between DKK17 billion and DKK18.5 and a tax rate of around 25%. Clearly the updated outlook we have assumed recovery in the global trade, so no significant worsening of the current economic environment in the second half here of 2023.

We also, in terms of the normalization that we have spoken so much about, we expect that to continue and also further decline in in the gross profit yields for Air and Sea compared to the level we had in first half of 2023. I think it's important here to mention that there is a connection between the yield and the volume. We've talked about that several times, and I expect that you'll have some questions to that as well. But it's important to say that it goes together like we have said all along.

For the Road and Solutions, we expect the markets to be flat or decline slightly. So, and for the tax rate I already touched upon that. And then of course, the currency exchange rates, if they remain at the current level that's also an assumption that we have made for this upgraded outlook for 2023. And I think that was it from my side. So I think we can go to the Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] The first question will be from the line of Cristian Nedelcu from UBS. Please go ahead you line will now be unmuted.

Cristian Nedelcu

Hi, thank you very much for taking my questions. The first one, if I look at 2024 consensus, the GP per unit in air and ocean are already around 9,000 and 4,500. Are you comfortable with that sort of levels? You've been delivering stronger yields over the last few quarters versus expectations, so are you comfortable with that level of normalization versus your old targets?

The second one, looking a bit at the cost in, again, in Air & Sea, the cost between GP and EBIT, can you tell us a bit how you expect the second half to play out? You talked about the reinforcement of commercial efforts. I don't know if that comes along with an increase in cost. Anything more on restructuring that you can do to bring cost down, just the moving parts, if you can tell us how to think of the second half versus the first half? Thanks very much.

Michael Ebbe

Yes. We don't guide, thank you for that question. As you know, we don't guide on specific yields, but it's with the assumptions that we will get back to a little bit better performance growth wise, it's not a bad, what should I say range that you are mentioning in your question, it's something that we can relate to, so we are fairly kind of comfortable with that. Should it mean that we all of a sudden start to significantly outgrow the market? As I said before, it's a tradeoff. It could have the negative consequence that the yields then would go down, but then the absolute GP would still be fairly okay. So, the yields you mentioned are okay.

When it comes to the reinforcement of the commercial activities, you should not assume any cost to that. It's more the focus we have, the way that we do deal with strategic opportunities in DSV and the way that we kind of in a more structured way deal with the sales activities, with the pipeline management, the way that we also control the commercial organization to a slightly different degree than what we did maybe in the past.

And from a general point of view, you should also not expect any cost to be booked under special items. But what you should expect is, of course, if we don't see an improvement going into the second half of this year in volumes that we will again, of course readdress the cost base and do the necessary as we have done in the past also. It's simply, we have assumed a pickup in volume in the cost base that we have right now. If that does not happen, natural consequence for us is of course, that the cost base should shrink in line with the volumes.

Cristian Nedelcu

That very helpful. Thank you very much. Just a very short followup though. What drives your assumption above the 8,000, 4,000? What is it that they're going to end up better than what you were expecting at the Capital Markets Day? Is it the mix? Is it, can you provide any color why are you comfortable in 9,000, 4,500?

Michael Ebbe

I said, it's -- we are not guiding, I don't want to get into too many discussions about the numbers. We have moved away from giving specific guidance on the yields. It's a combination of many things as I said before. The GP also is constituted on the number of shipments that we have. Sometimes that is also calculated in a different way than the yields. But of course already since the Capital Markets Day that we held, the service catalog and the number of services that we offer to our customers have increased. And the -- you can say the complexity in what we offer to customers have also increased, but we don't want to get into a situation where we sit and discuss if it's going to be a couple of hundred DKK up or down on the yields. We have the long-term financial, we have the long-term financial targets that we have set. We are super comfortable with those, and you should measure us on the progress towards those.

Cristian Nedelcu

Very helpful. Thank you very much.

Operator

Thank you, Cristian. The next question will be from [indiscernible] from Bernstein. Please go ahead. Your line will now be unmuted.

Unidentified Analyst

Good morning, everyone. Good morning, everyone. My first question is regarding the supply chain complexity. Well noted on your APAC air freight and sea freight volumes for the weakest development. But I was wondering if you see any evidence of companies relocating their production away from China or other structured location trends, so supply chain is becoming more complex as a result, and has this also played into your upgraded 2023 guidance?

And then the second one, essentially yields are obviously very good, volumes generally softer. Was anything else driving the yield besides the smaller average shipment sizes? And is this a deliberate commercial decision or simply the market to have smaller ship sizes?

And then lastly could you may be shed some light on the development of [indiscernible] and any news on that being rolled out to sea freight right now as well? That'd be appreciated. Thank you.

Jens Bjorn Andersen

On the supply chain it's correct that we do see more and more of our companies of our customers they have this China plus one policy where they try not to be too dependent on one supplier, that could also be not to be too dependent on a supply in another country than China. So the fact that supply chains are being more complex is absolutely a right assumption that you set out. This is what we see productions are being moved to neighboring countries like Vietnam, Indonesia, India also benefiting. It's all conscious where DSV, they have a strong foothold. So we can support our customers when they move. So that only makes things more complex, which is also better for us.

You're right in saying the yields it's more the markets that shipments have become smaller it's not something that we have deliberately chosen. What we have deliberately chosen, as I said initially, is to not participate in the tenders where rates reach a level where it will be breakeven or even loss making for DSV. As hard as it is good old large clients would simply say no and it's actually hard for clients to leave us as well. But if they get some sort of fantasy offer for some -- from somebody who has fixed capacity, they simply feel an obligation because the cost savings can be rather large. But we will then be patient and hope that these customers will eventually return for to DSV. And to be honest, I didn't really understand the last of your question, so I think it's a product that one of our competitors are offering.

Unidentified Analyst

I think the last one was more key touch [ph] any light on that? What has happened? How are we doing on that end?

Jens Lund

I think it's actually a colleague of ours that has reported this morning that, what can I say, has this specific way of describing certain digital services that they offer. Maybe you can talk about the digitalization efforts that we are doing and the strategy.

Jens Bjorn Andersen

Yes. But of course, driving productivity in a company like DSV is very much about digitizing our services and automating some of the back office workflows. And I think we have industry leading productivity in our company. So of course we also have similar, what can I say, services that we produce where customers they can to a large extent basically perform the service or request the service digitally, and then we can produce it in an automated way. I think this is fairly standard and it's something that many of the players in the industry they are capable of.

Unidentified Analyst

Thank you.

Operator

Thank you, Tobias. The next question will be from Alexia Dogani - Barclays Please, please go ahead. Your line will now be unmuted.

Alexia Dogani

Good morning. Thank you. It's Alexia Dogani from Barclays. Two questions as well, please. Just firstly, could you give us some color on the cost per shipment evolution? I guess then should we expect your focus on the higher yielding cargo to kind of come with a bit more cost because of the service suite and kind of demanding a kind of higher service intensity? So any color you could give on the cost per shipment into Q2 and forward would be greatly appreciated?

And then when we look ahead for 2024, and the comments you just mentioned Jens from the competitive landscape, should we expect to be able to sustain the level of earnings you're delivering this year, given the normalization has been slightly smoother, perhaps than we would have thought at the start of the year? Thanks.

Jens Bjorn Andersen

So it's not that I want to comment on everything, but I really want to say something on this. When you look at, on the cost per unit, you should not expect the cost per unit to increase. I think we actually have a great opportunity when volume starts to kick back in, in terms of operational leverage. It is -- we have caught cost. Michael explained that before, but it is simply a matter of fact that it is more easy for the operational units to increase productivity in a growth environment. So if volumes are starting to grow, we will not start to rehire a lot of the people. We will see improved productivity, and also that should have a positive effect on the margins.

It is simply much, much less complicated to do when you are a department or a branch manager out in the GSV organization, simply to cope with a little bit more volume in the existing cost environment. And when it comes to 2024, it's a little bit too early to give guidance on that, but we do know what the consensus is in the market. And I guess from an overall perspective, there's nothing we see, which kind of disturbs us greatly. So I think you guys you are, you've done a good job when it comes to kind of putting in some decent assumptions for 2024.

Alexia Dogani

Thank you.

Operator

Thank you, Alexia. The next question will be from the line of Robert Joynson from BNP Paribas. Please go ahead. Your line will now be unmuted.

Robert Joynson

Good morning everybody. A couple of questions from me, please. First of all, just on the EBIT guidance for the year, the revised guidance implies an average of between DKK3.8 billion to DKK4.6 billion per quarter for the second half. So the upper end of that is only just a little bit less, the run rate during H1, but the low end is almost 20% less. It's quite a wide range. Could maybe just provide some color on what scenario you're thinking about for the low end and likewise for the high end of that guided range?

And then just second question, a quick one, just with the Air & Sea division, the number of employees produced by about 6% between the end of last year and the end of Q2, should we expect to see further reductions during the second half, or do you think that headcount is now once again optimized in that business? Thank you.

Jens Bjorn Andersen

Yes. I will try to give a go on your questions Robert. In terms of our guidance for you, you're right how it looks for the second half of 2023. Clearly, it's also a range. We don't know all the facts for -- of what will happen. So it is based on a couple of scenarios and this is the best you can say estimations that we have done. And it is a matter of the combination of yield and volume where if we have higher volume, we expect a little bit lower yields and the other way around. That's it. Of course the yields like as been mentioned earlier, we expect that to decline and then it's a matter of how much the volume will develop.

In terms of number of FTEs in the Air & Sea division, it's a thing that we monitor closely. The efficiency of the per FTE and the number of shipments per FTE. So we monitor that closely. I think it's been mentioned that if things are as they are right now, most likely there will be a small reduction in number of FTEs, but no dramatic changes are expected based on what we see right now.

Robert Joynson

Okay, thank you.

Operator

Thank you, Robert. The next question will be from the line of Ulrik Bak from SEB. Please go ahead. Your line will now be unmuted.

Ulrik Bak

Yes. Hello. Just a question on your updated outlook. Previously you do have communicated some assumptions about volume and yield development, but as it was just also alluded to earlier this call, you've refrained from doing that right now, but still, can you still shed some light on what you have baked into your upgraded guidance?

And the second question is your comment on your guidance for Road and Solutions, you guide for flat to slightly declining markets for these two divisions in the second half of the year. What does that imply for second half earnings versus last year? Would that also mean slightly declining or flattish? Thank you.

Jens Bjorn Andersen

I think if we take G&C [ph] on the guidance and the yields, I think, you know, that we have covered that that part of the, what can I say, discussion for now, but we can take on Road and Solutions. We have seen a slight decline in the volume. Actually we've managed to still produce better earnings. I also think that this will be the case for the second part of the year. And this goes for both Road and Solutions. I think with our yield management, the way we've managed the capacity and basically also the operating efficiency that we have will help us to drive it in this direction. So I hope this, what can I say, covers your questions.

Ulrik Bak

That's very clear, thank you.

Operator

Thank you, Ulrik. The next question will be from Muneeba Kayani from Bank of America. Please go ahead. Your line will now be unmuted.

Muneeba Kayani

Good morning. This is Muneeba Kayani from Bank of America. So two questions from me. Jens you did talk about kind of inventory levels, and if you could just give a bit more color on what you're seeing as we head into peak season, do you think inventory levels now are kind of normalized and could go into a restocking if macro holds up, so a bit more color on that side?

And then secondly, just in terms of your guidance of yield decline in the second half, how much of that is based on kind of a normalization of market conditions and how much of that is based on kind of your market share and kind of being more volume focused into the second half and hence yields coming down? Thank you.

Jens Bjorn Andersen

Yes, I wish we had, maybe Michael will take the second part of your question. Thanks for posting both of those. I just wish we had really valid and strong statistics that we could point to when it comes to inventory levels. Transparency is always low, but some data suggests that at least the U.S. you know, I'm sure you follow this inventory to sales ratio, the growth remains relatively high on that, so we expect that levels will gradually normalize. It does make sense. We see it ourselves. The own warehouses that we run for our customers utilization of warehouses have come down just a little bit. So I think normal common sense tells us when we continue to consume and when inventories are not being, yes filled up again, that inventory levels will come down and hence also support sea freight growth in the coming quarters.

Michael Ebbe

Yes, mainly for the yield, the -- it's -- there are many moving parts in the yields. There are some internal factors which we obviously can affect in terms of productivity, efficiency and so forth and some external ones, whether it's the rates or whether it's surcharges and whatsoever, which we are -- can to a certain extent impact by the margin power, but not all. So, we don't have the exact split of how it is composed. We cannot de-compose it. The level that we have just spoke about, is the best estimates that we have when we look into the second half of 2023.

Muneeba Kayani

So overall, you think that market would also be kind of resetting down?

Jens Bjorn Andersen

Yes. Like we mentioned, I think so.

Muneeba Kayani

Thank you.

Operator

Thank you, Muneeba. The next question will come from the line of Samuel Bland from JP Morgan. Please go ahead. Your line will now be unmuted.

Samuel Bland

Hey, thanks. Thanks for taking the question please or thank you. I've got two please. The first one is this sort of shipments versus volume piece. You talked about that before. Is that a factor in both Air & Sea, and am I right in thinking that it sort of it makes the yield look higher than it otherwise would be?

And the second question, I know we've touched on it, it's this sort of tradeoff between volume and yield. Impression so far is that you've probably prioritized yield maybe a little bit over volume. Have we got to some sort of tipping point or has management changed maybe a little bit the view and you think it makes sense to maybe take in some lower yielding cargo now? I'm conscious of that sort of easier to increase productivity point you mentioned earlier. Thank you.

Jens Bjorn Andersen

Yes, thank you again for those questions. It's obvious that any new, at least sizable customer that we gain will always dilute yields. It's just a matter of how the competition works. It's very rare that you get a large customer with the same yields as you have on average on all your customer portfolio. We have in the region of 500,000 customers in DSV. So it's of course the incremental kind of conversion ratio discussion is interesting here, which also means that we can maybe accept a slightly lower yield than what we were willing to do in the past.

What we alluded to before was the fact that if we talk about an actually loss making business, you go in and you simply pay more to your supplier than what the customer pays you. This is not why we go to work in DSV. We simply refuse to do that. So, and when it comes to the number of shipments versus the number of TEUs and tones, you're right. You could say that makes the yields look lower, but that would also be in comparison when you compare with what the yields looked like a year ago, they would also have been lower. So it would kind of be to reset it at a lower level.

It's just to illustrate that the developments in DSV in terms of volume is maybe not as negative or dramatic as it could look. It's simply just a fact of the number of shipments from our customers, which has been slightly smaller, which is in essence not necessarily negative for us. It's not the bigger the shipment a customer books to us, the higher the profit, that's not how the mechanisms work. All the associated services that we produce for a customer are more or less the same regardless of or the profit structure is more or less the same regardless of the size of the shipment.

Samuel Bland

Yes, understood. Thank you very much.

Operator

Thank you, Sam. Next question is from Lars Heindorff from Nordea. Please go ahead. Your line will now be unmuted.

Lars Heindorff

Thank you for taking my questions, two from me as well. The first is regarding the average size of the shipments. You've been alluding to it early on the call as well, and you've been around long enough to experience at least a couple of macroeconomic cycles. So in your view, I mean, do you think that the average size of shipments will continue to decline or would maybe at a point where it's sort of starting to flattening out and at some point maybe if you see a pickup in the economy, they will start to increase again? That's the first one. And then the second one, which is more sort of maybe a nitty-gritty question, it's on the cash flow statements. There is DKK550 million related to acquisitions. How much of that is related to U.S. acquisitions that you’ve done as of lately? Thank you.

Jens Lund

Yep. I think Michael will take the cash flow part now that he's the guy in charge of that, I will take the macro thing Lars. I think it's a valid point that you bring up that typically in, what can I say, if the economy slows down people, they actually have the same shipment frequency, but sometimes the shipments, they get a little bit smaller. And that's also the reason why we mention it. But we don't use this as a way of counting in our external reporting, because here, I guess the industry norm is TEUs or tons.

I would also say that with the size that we have and with the strategic focus that we have on products like the LCL product for sea freight or also basically our consolidation efforts when it comes to air freight, we've probably had a little bit of extra focus on these services. And that is, as Jens Bjorn also talked about a little bit earlier, part of the yield explanation as well. And that's it. But it's very hard for us to de-compose this. But I think as a rule of thumb, there is some kind of a correlation between the development in the economy and the shipment size. That's what we have seen from the past and then I'm sure Michael, he will take care of the cash flow.

Michael Ebbe

Yes. Lars you're right. It is the biggest part of the amount you just mentioned. There is an adjustment and a smaller one as well included in that, but it is the biggest part.

Lars Heindorff

Okay. Can you get a closer?

Michael Ebbe

No, I can't get close into that. Sorry.

Lars Heindorff

Okay. All right, thank you. Thank you, guys.

Operator

Thank you, Lars. The next question is from Sathish Sivakumar from Citigroup. Please go ahead. Your line will now be unmuted.

Sathish Sivakumar

Yes. Thanks again for the presentation. I've got two questions here. So first key on the initial comments, where you flagged about rational behavior, is it specific in Air & Sea or is it more say has segment that you are seeing? I mean, and also like any trade lanes where you're actually seeing some irrational behavior and just to that, is it being done by say, top five freight forwarders or how does it work? Like, where are you seeing that competitive pressure coming from?

And secondly, in the Road segment if I look at your commentary in Q1 and as well as in Q2, you've highlighted this performance in Germany, what exactly, is it like a structural things that you changed there that is driving that or is it some of like, say competition is pulling back in that market and that's helping you all and where we are on the roadway forward project? Thank you.

Jens Bjorn Andersen

I'll just start with the air freight and then Jens can maybe talk about the second part of your question. We are not here to sit and complain and whine about the competition. We stand up to any competition in our industry. It's just to explain what is happening in the market. It's only, I would say, in air freight. Sea freight is normal, competitive kind of the market conditions that we see. I think and I'm not going to comment on -- from which direction this comes, but of course, we are short in terms of procurement of air freight, meaning that we track more or less the spot rate if some are not short, if they're long, if they have long commitments on capacity, planes hanging around different airports with no cargo, of course any cargo that you can get into these planes are better than flying half empty and this is a little bit what we see.

We think this will ease off some of the agreements, some of these at least agreements, lease agreements run out, and then we will get into a normalized market. So it's a temporary thing, but we just wanted to point to that fact for one of the reasons for the underperformance volume wise in air freight. But again the tradeoffs of is as I said initially, that the yields have kept the very high levels that they were at before, otherwise, of course, it would be more problematic for us. And yes, maybe on the Roads.

Jens Lund

Yes, I think on the Road side of, what can I say, the domestic operations in Germany, they have done slightly better. But I think on the international operations in Germany, we have invested heavily in that for the last couple of years. We've seen a good, really good performance there. And I think if we add these two things up, it's been quite a positive surprise and that's the reason why it's noted in the report. On the Road, what can I say? The roadway forward or the, what can I say the group, it's project that we are running where we will, where we have established this international groupers network. We are now from an operational point of view with a European groupers network fully up and running. And that's also what partially plays into the German results, that it helps them with their loads and capacity management on that.

So from an operational point of view, the network is fully operational and up and running. On the system side where we're supported with new IT infrastructure, we are running a little bit behind plan. We had to go live in Poland here in Q4. The next go lives will probably only be in Q1 because we've had some final deliveries. We have the last dependencies we have to weed out before we go live, and we haven't received them from the vendor in a condition where we can actually test and introduce it. So we are probably a quarter go late a quarter delayed when it comes to go lives, but we are still, what can I say, comfortable that the Solution will work and we'll be fully operational as expected before long. So overall, I think we are executing very well on the strategy when it comes to Road.

Sathish Sivakumar

Okay. Thank you.

Operator

Thank you, Sathish. The next question will be from Michael Rasmussen from Danske Bank. Please go ahead. The line is now unmuted.

Michael Rasmussen

Yes. Thank you very much. And two questions. First of all, if we could talk a little bit about the momentum in the Roads business during the second quarter, because according to at least the channel checking that I've been doing it seemed like June was a fairly strong month. So maybe if you could kind of confirm the exit rate on the Roads business, and also if you could add a little bit of comments into kind of the next quarters here for Roads specifically?

My second question is on the Solutions division, keep on getting some, delivering some rather strong across margins, even as utilization is rather low in warehouses, obviously right now. How should we think about this going forward when your utilization picks up and you've invested in optimization and so forth? This industry from a market perspective can go a lot further, I'm guessing. Thank you.

Jens Lund

Yes. I think as you state, the volumes that we produce and in Road of course it follows the normal economy, and it's like it's been doing slightly better. I'm not sure, if we are in very positive development in June, but the results we saw in June and the volumes that we produced were actually a little bit better than the previous ones so I think we can confirm that. And when it comes to Solutions I think the utilization is down a couple of percentage points. And you have to remember that you earn money in two ways in Solutions. One is the storage, where you basically resell the rent that you have procured and then the other one is the activity. So in and out of cargo vest, we call it as well, value-added services we might produce repack, go back, live manufacturing services, et cetera, we also produce. And I think it's clear that the level of automation and the level of complexity that we produce in Solutions, if we look at it overall has increased and this means that we can also create more value that we will then share with the customer on these services.

So let's say that the inventory levels, we get a couple of percentage as that will, of course, generate some extra income where we've already paid the rent and let's say that the activity levels they also increased. And I guess you're right with some of the automation that we have put in, in certain places, we will be able to capitalize even further on that. And it's been the strategy all along that we consolidate and that we introduce these things and that we also produce volumes with higher complexity and it's really nice to see that it also fills us through in the numbers. So I think that can confirm most of the things that you alluded to there.

Michael Rasmussen

Great, thank you so much. And any comments on Q3 Road, just a starting point here?

Jens Lund

It's July. It's always depressing. That's more or less what I can say because it's like it's a month, July and also in certain countries August where we are a little bit impacted from the holiday season. So it's not so easy to forecast, but I think on the tenders on the things where we've been into, it's been a positive experience where we seem to have fairly good traction. And for us it's of course nice to see what the market does, but it's also important for us that we gain a little bit of market share and I think we will be capable of doing that in the second half on Road we’ve seen.

Michael Rasmussen

Great. Thank you very much.

Operator

Thank you, Michael. The next question will be from Nikolas Mauder from Kepler Cheuvreux. Please go ahead. Your line will now be unmuted.

Nikolas Mauder

Hi thank you for taking the question. First one, during the call, I heard that you hope to get back into positive growth territory in sea during H2, may be some commentary on Air. I know that there is a straight off with yields and you probably don't know how it unfolds. But perhaps in your thinking, how will it go? And I'm sort of asking where your desired growth and yield combination for H2 would be? And secondly, given that you kicked off the commercial efforts probably sometime during Q2, can you comment on the exit rates for Air & Sea gross profit yields, please?

Jens Bjorn Andersen

Yes, it's correct that we have a clear statement saying that we want to grow faster than the market. Now the markets are not growing, but we want to outperform the markets. Exactly when that's going to happen, I don't know. But you're right in saying there's a delay in this. It's not the first day you reinforce your commercial activities or you -- it's also not the day you win a particular tender that the bookings start flowing in, sometimes there's a three, four months delay with the larger customers, it's fairly complicated to set up the booking interfaces and stuff like that.

So -- but let's see how it goes in the second half. We are adamant that we will at least bridge the gap and if we could get into positive territories that would be really, really nice as well. I don't know if there was anything missing or Michael or Jens, if you wanted to kind of contribute.

Jens Lund

I think it's -- I think on the ocean freight, I think the trajectory is quite good, I think, on the air freight when the market, it normalizes, and we get a better, what can I say, match between what can I say, capacity that have been committed a little bit longer term, but not necessarily sold. I think that we will see, that we will then start to gain market share. And our reinforcement of our commercial efforts, it is in this, what can I say, downward trend that we have seen that we try to strike a balance where we get paid for our services and it's not to be understood in such a way that we will start to take volume in order to show some nice volume numbers where we actually lose money.

Nikolas Mauder

Okay, that’s good. Thank you.

Operator

Thank you, Nikolas. The next question will be from Cedar Ekblom from Morgan Stanley. Please go ahead. Your line will now be unmuted.

Cedar Ekblom

Thanks very much, gentleman. It's Cedar Ekblom from Morgan Stanley. This is a more medium-term question. The opportunity for AI and machine learning has been for about in a process industry like freight forwarding and I'd like to get your perspective on where you see the dynamics for your business and your industry. What is the starting point today in terms of AI or machine learning solutions in terms of their penetration into the industry? And what are you most excited about or concerned about on this thematic on more like a three to five-year view? Thank you.

Jens Bjorn Andersen

I think Jens Lund will take that question, but as headcount-related costs represents about 70% of all our costs, this is something that we are super excited about that can really move the needle going forward. But Jens, maybe you can.

Jens Lund

Yes. I think when we move shipments, we need to, what can I say, we need to use a lot of data for that, and we source that from different sources. It could be an e-mail where the booking could be an online booking, could be an EDI or many other types of bookings. In these bookings, they also have a variety and quality. Of course, you can use things like AI, for example, on a booking, if you have the right conventions in place yourself, you have a solid booking domain, then you can use AI to enhance these bookings and sometimes also to sort the data.

That could then -- if we have millions of bookings that could then help the work, for example, in relation to a booking. The same goes for example, where we have something called AI Factory, which we are implementing on customs formalities, whether it's also quite a few details that have to be filled out in various systems. And here, you can both use the system to acquire the data, but you could also use the system basically to enhance the data, let's say, you would need to put something on called an Ajax code [ph] which is like the code that you would put on a different SKU to see what kind of duty you should pay on it, then you can ask, what can I say, the computer to do some of the work for you.

And it is couple of use cases just show to hear – I'll tell you here, and there will actually be multiple use cases like this and in many situations today, this is done by human intervention. So in reality, there are two sort of main types of question that our customers have. One is the booking or the work in relation to the booking and then the second question; you already always have in customer services also, where's my cargo? So you can use the technology to eliminate some of that work. But it all requires the domains, definitions, high integrity of data and then we need to embrace the new technology in order to get the productivity gains.

You also need a consolidated infrastructure. If you have that, you don't need to do it multiple times. So if you have a scattered system landscape, it's very difficult to get the benefits from AI tools. I don't know if it confused you more or if it helped you, but it was at least an attempt.

Cedar Ekblom

No, that does help and that helps a lot. Can I just ask a question then on, you say you have lots of data, different sources needs to be interpreted. How soon should we actually be expecting broad-based AI solutions to be implemented across your business?

And then the second question or a follow-up question, if we think about a lot of this stuff, it sounds like there's a cost benefit that you talked to, which is helpful, that if it sort of frees up capacity in the industry, do we not start thinking about this being a revenue risk as well with those lower cost ultimately passed on to customers in what is still a very competitive backdrop? Thank you.

Jens Lund

Yes. It's always been like that. I don't know any service industry where you don't have to produce for less. This is also the case here. Then the winners, they are going to be the ones that embrace it and adopt it first and the losers, they are going to be the companies, what can I say, that is basically they miss it or they miss out on the opportunity. I think it's going to be implemented. It's a little bit -- I don't know if you can remember blockchain. At a certain point in time, I can remember that I got a call and basically I was on vacation and I fought with blockchain that when I came home that DSV didn't exist anymore.

I think these technology changes, first, you develop a solution then you have to implement them in global organization, it takes years before you can do that. We have some tools that we are under implementation of, it's called AI Factory. So I guess we all understand what it is that it can do artificial intelligence. We're rolling that out, replacing some tools where we already had productivity efficiencies. It's a little bit more manual but being produced in shared service centers. Now the computer, it can do more work than it could before, but then we will eliminate people in Manila and in Warsaw. They're probably not the highest paid people that we have in the group. So it's not like it's a new idea, but it refines the way we do it.

And on customs formalities, I think we have a breakthrough because we really have, what can I say, an opportunity to consolidate some of this. This is not only in relation to us, but it's also in relation to the authorities. The authorities in certain countries now can receive customer clearances via API and that's really what we need in order, what can I say, to really capitalize on this.

So it depends on -- it will come in the next years, you will see it, and it's actually sort of baked a little bit into our strategy and into our financial targets already. If we then do it really well, we can outperform a little bit and move the needle. But you're quite right, we need to produce more volume for less money, which has been the case for what can I say, at least more than 20 years I've been part of it.

Cedar Ekblom

That's fantastic. Thank you so much for the explanation.

Operator

Thank you, Cedar. The next question will be from Marc Zeck from Stifel. Please go ahead. Your line will now be unmuted.

Marc Zeck

Yes, good morning. Thank you for my question. I am afraid I only got one. You talked about Europe ocean freight doing somewhat better than us. And I guess we can see an industry specific that Latin America, North, South, as well as Middle East is also doing quite well. Could you give us some color what is the main difference maybe in terms of verticals, maybe in terms of inventories, maybe in terms of customer structure that the U.S. is doing so well and the rest of the world is the motion more or less flattish on a year-over-year basis? Thank you.

Jens Bjorn Andersen

Yes. It’s -- you're right in saying that the development on Ocean is somewhat better than Sea or than Air. This is definitely what we are seeing. We have an overview of the different kind of verticals which are doing the best. We have seen also something like capital equipment and high technology. High tech has been actually having had a positive growth in the period. And some of this have the negative trend in air freight, which also tells us that it's a continuation of the trend that we have seen that customers are deliberately moving from Air to Sea, which is also some part of the advice that we are giving customers when we come to the customers' decarbonization efforts, of course, the best thing you can do is moving some of your freight from air into sea.

I'm sure you have the trade lane statistics yourself, where of course, Asia to Europe is performing the best and Trans Pacific being still somewhat under pressure. I think, yes, I guess that's what we can say at this moment in time.

Marc Zeck

Okay, thank you.

Operator

Thank you, Marc. The next question will come from Parash Jain from HSBC. Please go ahead. Your line is now unmuted.

Parash Jain

Yes, hi. Thank you for taking my questions. I have two, if I may. First, in one of the statement, you talked about that we're ready for M&A [ph] over of the largest side. And can you talk about some of the verticals, some of the region that that acquisition opportunities might arise. Is there the other side of France? Is it something in your backyard that has been talked about for a while?

And my second question is with relatively lower expectation of any peak season in 2023, particularly for ocean, does it put your air cargo operation in a sweet spot assuming if consumption held up, we may potentially see rush orders materializing sometime in late third quarter or early fourth quarter, which could potentially give a boost to your air cargo business? Thank you.

Jens Bjorn Andersen

I'm sorry, but the line was simply so bad that we could not understand your question. Maybe we can take the next question, and you can maybe jump on to a different line or something and you can ask the questions again. It's -- I'm sorry, we will probably answer the wrong questions if we try.

Parash Jain

Is it any better if I talk loudly and slowly?

Jens Bjorn Andersen

Yes, somewhat better, yes. So take one question at a time, please.

Parash Jain

Sure. First question is with respect to your upcoming M&A opportunities, when you talk about the larger ticket size acquisition, can you share some color on some of the opportunities in different parts of the world that you are keeping an eye on?

Jens Bjorn Andersen

We are both -- we have specific names as we always -- we've had the last 20 years. Some good companies that we would love to acquire, some of them are not for sale. Some might come up for sale, so we keep track of those. And then we are opportunistic in nature as well, meaning that, if an opportunity materializes all of a sudden, we are also ready. Nothing has changed in terms of the strategy of DSV. We still want to take part in the consolidation in the industry. The company is ready from a financial point of view and operational point of view also to do acquisitions basically of any size.

There's no particular geography. I mean, we like to acquire companies with a global reach like the three large ones we have done most recently, UTi, Panalpina and Agility and should we find companies with a similar structure, we would love to engage with them.

Parash Jain

Sure. And my second question was with respect to your expectation of a peak season in 2023. What we are hearing is that expectation of peak season in the Ocean segment is pretty low and therefore, closer to the time, if consumption held up, there is a bright possibility of a peak season in the air cargo. Do you echo that view or I'd appreciate any insight you may have on both the segments with respect to upcoming peak season?

Jens Bjorn Andersen

Very short answer and that is, yes, we can echo that.

Parash Jain

Lovely. Thank you so much and have a lovely day.

Jens Bjorn Andersen

Same to you. Thank you. Bye-Bye.

Operator

Thank you very much. We have a follow-up question from Alexia Dogani from Barclays. Please go ahead. Your line is now unmuted.

Alexia Dogani

Thank you. It's just a quick follow-up on the air freight market and based on the comments about committed capacity by competitors. I just wondered, have you seen any evidence of basically freighter capacity that got reactivated during the pandemic already exiting the market, given where rates and volumes are developing, because from memory, I remember the full freighter fleet is really old and I just wondered if you have seen any evidence of grounding already? Thank you.

Jens Lund

Yes. We've heard that a few freighters have been grounded. It's, of course, very old planes, as you say. They might not carry a lot of depreciation, but they have a very large consumption of fuel. So sometimes it's not possible, what can I say, to operate these planes at a profit if the rates are too low and this is a situation where they're in and some very old planes have now been grounded. It's not a big portion, but it's the first sort of stories we've heard about that, yes.

Alexia Dogani

Thank you.

Operator

Thank you, Alexia. The next question will also be a follow-up. It's from Cristian Nedelcu from UBS. Please go ahead. Your line is now unmuted.

Cristian Nedelcu

Thank you for allowing me one more question. In Air & Sea, could you remind us your exposure to small and midsized customers some of the channel checks that we are doing speaking with some of the shippers are telling us that they are still paying today 30% to 50% higher rates than in 2019 and actually, they're happy with it because it's much lower than last year. So I guess what I am going at, I wonder if we could be underestimating the decline in yields that could come in 2024 for a lot of the small and midsize shippers and any color that you could provide there?

Jens Lund

I think it's a very -- we actually have a segmentation of our customers. We call it A, B, C, D and E. You could typically have an E customer that it doesn't really mean anything in the volumes that we produce, that's where you could have a scenario like that. But I would say all the SME customers that have meaningful volume, none of them that we know of move freight that is so way out of market. They might pay a little bit more for their rates and under rates and they might pay a little bit more for our custom plans that if you are a very large customer or whatever it is that we produce of extra services for them. But I don't think we can recognize a situation where you can, what can I say, overcharge and like you just described that. I simply don't see that as at least the behavior that we have.

Then I think the proportion of SME customers, if we take the segmentation and let's say, we would go to the C, D and E clients, I think we are below the 50% mark and, let's say, our A and B customers are large customers and then sort of midsized, good large customers, they are a significant part of our operations today.

Cristian Nedelcu

Excellent, very helpful. Thank you very much.

Operator

Thank you, Cristian. Our last question is from Robert Joynson from BNP Paribas. Please go ahead. Your line will now be unmuted.

Robert Joynson

Thank you for the follow up. I know a bit annoying. There's been a lot of talk today regarding the number of shipments and how they're down by much less than the number of units handled. Just in that context, if we look at H1 specifically during which the number of air freight tons was down by around 20% year-on-year and the number of TEUs was down by around 10%, would it be reasonable to assume that the corresponding decline in the number of shipments was maybe quarter of those levels of maybe down 5% of air freight and down 2% to 3% for Ocean shipments, is that ballpark the type of dynamic that we're looking at? Any color would be great. Thank you.

Jens Lund

I think if we look at the number of shipments, we are more down, what can I say, between 5% and 10%, depending on which market we talk about. So that would be mid- to-high-single digits if I should translate that we are down and then, of course, a little bit more on the air freight side and a little bit less on the Ocean freight side.

Robert Joynson

So as a ballpark, maybe the number of shipments is down by roughly half the number of units. Is that a kind of fair guesstimate for us to go with?

Jens Lund

Yes, then you would be -- that would be fair.

Robert Joynson

Right. Perfect, thank you.

Operator

As there are no further questions, I will hand it back to the speakers for any closing remarks.

Jens Bjorn Andersen

Thank you very much. I think this is close to breaking the record for the most questions. We really appreciate that, thanks. Good questions also, all of them. Please feel free to reach out to the IR team if you have any further things you want us to mention or to comment upon. We will now continue the road show activities and we will go back to, yes, working towards delivering a continued strong performance in the company, and we thank you all for your questions, and we wish those of you who are still on holiday are still going on holidays, a wonderful summer, and thank you here from Hedehusene, DSV in Denmark. Thank you.