DSV A/S (OTCPK:DSDVF) Q2 2022 Earnings Conference Call July 26, 2022 5:00 AM ET
CompanyParticipants
Jens Bjorn Andersen – Chief Executive Officer
Jens Lund – Chief Operating Officer
Michael Ebbe – Chief Financial Officer
Conference Call Participants
Alex Irving – Bernstein
Cristian Nedelcu – UBS
Dan Togo – Carnegie
Sathish Sivakumar – Citigroup
Robert Joynson – BNP Paribas
Sam Bland – J.P. Morgan
Lars Hejndorf – Nordea
Michael Rasmussen – Danske Bank
Muneeba Kayani – Bank of America
Parash Jain – HSBC
Operator
Welcome to the Interim Financial Report H1 2022. [Operator Instructions] Today, I am pleased to present CEO, Jens Bjorn Andersen; COO, Jens Lund; and CFO, Michael Ebbe. Speakers, please begin.
Jens Bjorn Andersen
Thank you very much and welcome, everybody, to the half year 2022 results from DSV here at Hedehusene, Denmark. We will take you through the presentation and we’ll go straight into it. So after you have looked at the forward-looking statements on Page number two and the agenda which is similar to what it is normally, on Page number 3, we will go straight into Page number 4, showing some of the highlights of what we believe in DSV to be an absolutely amazing and fantastic result for Q2.
And I have to start by thanking everybody in our company. I know a lot of you are listening in. You are rock stars, you’ve done absolutely fantastic and we are all proud of the achievements that you have done in the quarter. We are still a people’s business and it is the employees of DSV that makes the big difference. It is a really good performance and it is across the whole organization, despite somewhat soft demand during the quarter, we’ll come back to that but we are also saying that congestion still remains an issue and the rates and yields are still satisfactory. We’re very happy about the fact that the GIL integration is very, very close to being complete. So less than a year ago, we acquired the company and now we have managed to integrate more than 17,000 employees and over 50 countries onto our platform is also an achievement which is not done by itself. So also thanks to everybody for that.
We should not underestimate and I know Michael will touch upon that later on, that also is something that makes us happy also this morning is that we are able to show a very strong cash flow also for the quarter. So it’s always a good sign when the money follows the EBIT result. So the cash flow is very, very strong. And that has led us to announce a new share buyback program. I think it must be the program with the highest value ever in DSV of DKK7 billion that we have initiated this morning. We have also upgraded the earnings guidance for the full year to between DKK23 billion and DKK25 billion, so DKK2 million — DKK2 billion up above the lower and the higher end.
And the EBIT speaks for itself, it’s very similar, the performance, to what we have seen in Q1. We have a 60% increase in GP and a 100% increase in earnings and it’s maybe interesting to note that we have not seen any deterioration in any KPIs during the quarter, Q2, carried a very strong momentum to the very, very end of the month of June. So, so far, so good, no signs in terms of yields and profits that things are deteriorating. So we think that is very strong.
So on Page number 5, absolutely amazing results from the Air & Sea operations and division. They’ve done, once again, a remarkable job. The growth patterns are similar, EBIT-wise, at least to what we saw on the previous page. And here also, EBIT is 100% up but also GP, in the quarter, growing by a healthy 75%. That is despite also that the organization have been through a very hard and complex integration. But we have also now started to see the results of this. We have good contributions from the GIL operations also. And of course, I think that a 64.4% conversion ratio and a 13% the EBIT margin speaks for themselves.
Page number 6, air freight. We are happy to be able to say that we have actually gained market share in Q2. We have seen an organic development of minus 4% for DSV but we do estimate that the market is worse than that, being in reverse, so to say, with between 7% and 10%. So we have actually been able to grow faster than the market and a little bit earlier than we had actually estimated and what we had indicated also to shareholders in the past. What pleases us also is the fact that we have continued to see a very good development in the yields going from DKK11,400 now to DKK12,500 in the quarter. So no deterioration in yields and this is something which, of course, have underpinned also the EBIT development of the quarter.
When it comes to the market, it has been negatively impacted in the quarter by the lockdown, the COVID-19 lockdowns in China but it is unfortunately not possible for us to quantify exactly what that has meant but it is something which has been negative. There is no doubt about that. Freight rates have declined a little bit but they remain very elevated as a result of still the disruption — supply chain disruptions but also as a result of very high fuel prices as we see right now.
So we go then to Page 7 and sea freight, more or less similar developments. We cannot say that we have taken market share. We estimate that the market in the quarter is down up to 5%. And we are down organic 5% in DSV. So while not losing share, we still see a little bit negative impact from some GIL business that have left the organization since a year ago but we are content with that development. Also here, we have seen a continuation in the upward trend in the yields from DKK5,900 to DKK6,500. So we are happy about that. And also, of course, if we are, as we expect and I’m sure you will ask those questions later, to see deterioration in the yields, I guess it’s better to see a deterioration from a high level than from a medium level. So that should also mean that the future impact of the absolute earnings will not be as severe.
So also here, we have seen and I’m sure you’re all aware of it, the congestion has been a topic during the quarter. It has eased on the U.S. West Coast but it has actually worsened on the East Coast and also now we see some disruptions breaking out or has been part of the picture in Q2 in Europe also. And also here, of course, volumes have been negatively impacted by the lockdown during the quarter that we saw in China. But we also see a weakened demand, also change in consumer behavior, going a little bit away from goods to maybe also, yes, spending money on things that people — that we all have not been able to spend money on during the COVID situation. So all in all, rock solid and record-breaking results from the Air & Sea operations. They continue to surprise us in positive ways. So really, really fantastic results.
Road also very strong results, we think we have growth in GP. We are busy. We are taking market share also in Road. It’s our clear understanding. Jens can elaborate on it later on but we do see really a lot of demand for our sourcing new or more structured services in Road which is an effect of the roadway forward project also. I think we have a better product to offer our customers now than what we had some years ago. So that is really satisfactory to be able to establish. That has also been reflected in the numbers, with a few, few exceptions, I cannot even think of one. All countries are actually living up to our expectations. And actually, in some of the very large countries in Europe, we see very, very strong results in Road. So we are happy about that.
There’s still tight capacity and we have seen increasing rates, also partly due to the EU Mobility Package and fuel prices, of course, also going up. But to be able, on an almost organic background, to grow the earnings by 18% is simply impressive and Road now have an EBIT of DKK1 billion for the first six months and I can remember, not that long ago, sitting in strategy meetings with Road, where they had some sort of a dream of achieving DKK1 billion not in six months but in 12 months. Those days are long gone. So strong operations, strong performance also from Road.
And the last slide, before I hand over to Michael, is Solutions. Also here, I guess, numbers speak for themselves. We are — we have seen a very strong impact also here from the successful integration and acquisition of Agility GIL. They have our new colleagues, some impressive figures that we really appreciate. And we can see it. But also organically, the old sort of to say DSV operations have continued the strong performance that we saw in the past. And some of you asked us what are the reasons behind that but we can point to the continued consolidation of our IT infrastructure and the more campus strategy that we have on the physical infrastructure in terms of warehouses and large multiclient facilities. It is simply more beneficial and we can see a higher productivity when we move together. So very strong growth in earnings, both for the quarter and also DKK1.5 billion for the first six months is very, very strong. So congratulations also to everybody in the Solutions division, you have also done really well.
So with that said, Michael, over to you.
Michael Ebbe
Thank you very much. So we will jump to Page number 10 for the P&L. I think Jens Bjorn has already concluded on the impressive results on EBIT level which has more than doubled. So I’ll only comment on a few other highlights from the P&L here.
We have in the profit for the period is not quite doubled as with the EBIT level and that’s due to the development on our special items which is due to our GIL integration cost as well as our financial items which is impacted by some intergroup exchange rate adjustments. There are no cash impact and we see that every time we do these integrations until we get the entire structure of our group companies in place according to the DSV model. So that’s why it’s not quite doubled. Another thing that is worth to mention is obviously our EPS growth which is more than 90% growth. It is clear, it’s mainly driven by the increase in our earnings but also our capital allocation policy. So that is an impressive result there as well.
If I jump to Page number 11, a few things worth noting is our cash flow. I’m really pleased to see the cash flow from the quarter and for the first half of the year. I have sat here for a couple of quarters mentioning the issues or the challenges we have had with our net working capital. So it’s good to see that it now has stabilized and remained — obviously, it remains at a high level due to the rates and also our GIL activity coming in. But if you look at it in percentages of our revenue, it actually has declined compared to last year. So that’s really nice to see. It’s an impressive number, DKK10.7 billion in adjusted free cash flow. It’s also clear that we pay more taxes when we have higher results, as you can see that as one of the negative developments. And then also we have a little bit of special items. But again, that’s due to the integration of GIL.
Another KPI that is worth mentioning is our gearing ratio. It’s 1.0, so it’s a really low number. And I will touch upon that on the next slide — Page number 12. Given our strong cash flow for the quarter and for the first half year, our strong balance and our capital allocation policy and our gearing ratio, as just mentioned, we have this morning, initiated a new share buyback of DKK7 billion for the next three months. We have finalized — yesterday, we finalized the old share buyback. And as written here, we have in first half of 2022, acquired 7.2 million shares of roughly DKK1,157 per share. So if we look at how much we then have allocated which is announced today, that is nearly DKK18 billion that we will return to the shareholders for 2022. And obviously, when we have seen how the development is in Q3, we will reconsider for the remaining part of the year. But it’s an impressive share buyback we have launched.
Then for — jump to the next page, Page number 13. This morning, we also upgraded our outlook for 2022, as Jens Bjorn briefly mentioned. It’s clear it’s a mixed picture. Obviously, we have had a tremendous and strong first half of the year which we’re very pleased with, as Jens Bjorn mentioned. And then when we look into the second half of the year, we have seen some soft development in the volumes. We also read the analysis and news coming from all over the globe. That has led us to guide for an updated outlook for between DKK23 billion to DKK25 billion. So a little bit — not as strong as first half of the year, a little bit softened taking the uncertainties and the expected development into consideration. So that’s why we have guided like we have. There is, of course — visibility, it’s difficult to see that further ahead but we are relatively comfortable with the guidance that we have given so far.
And I think that was it from my side. So we will go to the Q&A session.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from the line of Alex Irving of Bernstein.
Alex Irving
Two for me, please. So first on air freight, we’re seeing bellies-based returning, we’re seeing chargeable weight down market-wise but a sequential increase in GP yields. Maybe, how do you reconcile that [Technical Difficulty]? What do you think it would take to gross profit yields lower? My second question is on ocean. So you’re seeing spot rates coming down, I’m thinking about how you’re interacting with your carriers and how your customers are acting with you. Are you — actually your customers renegotiating contracts with the shipping lines or with yourselves or are you kind of sticking to contracts to keep — to continue to secure capacity as we get into the second half of the year? And how does that affect your ocean gross profit yields into the second half, please?
Jens Bjorn Andersen
Yes. For air freight, it’s correct that we’ll probably — as we have indicated, we will see yields coming down as rates come down. I think it’s a natural consequence. We are in DSV and that goes for both Air & Sea. We have always been maybe compared to others pretty short in the way that the contract — we are maybe a little bit more conservative risk adverse. You can have a long debate about what the right strategy is. We have some capacity at hand but at good terms but we have always felt the right thing for us is to be short in the market. This is probably also why we’ve been able to see the conversion or the yields increasing in the quarter.
And when it comes to sea freight, there’s not one uniform behavior from our customers. They also have different strategies of how to position themselves. But it’s also a natural consequence of what we have said this morning that we will somewhat or somehow, during the quarter, see a deterioration in yields. I’d still like to point out that we have not seen it during Q2. It ended really good. But with the anticipated developments in the markets when it comes to rate continuing probably to go down in a soft market, maybe more capacity coming in, we do also expect yields to come down. But also, again, not to nowhere near where they used to be prior to COVID.
Operator
Our next question comes from the line of Cristian Nedelcu of UBS.
Cristian Nedelcu
Three questions, if I may. In Air & Sea, could you help us a bit frame your full year guidance? What does it mean for GP per unit and for volumes in the second half? Secondly, in Air, you’ve outperformed in the first half, the market, in terms of volumes. Could you elaborate what is driving the outperformance? And if you think this can persist going forward? And the last one on Air & Sea conversion, it’s been running north of 60% with help from excess yields and but also some higher complexity costs in there but could you give us a rough indication if it weren’t for this congestion, complexity and excess yields, what sort of conversion ratio — what’s the normalized conversion ratio there?
Michael Ebbe
Yes. I’ll try to answer that. If we look at the GP per unit that we’re talking about or expecting in the second part of the year, we are trending somewhat downwards obviously. And I think we will go below the DKK10,000 per tonne on the air freight and we will probably also trend towards the DKK5,000 on — per TEU. So it will trend a little bit downwards from where we had. I actually think on the air development, Jens Bjorn already explained a little bit about that on the previous question where we are probably a little bit shorter but we’ve also certain lanes where we’ve committed some capacity and locked that in. We have the charter network, as you know and that we acquired through Panalpina. And here, we have structured setups that operate very efficient and where we also have good margins on operating them.
And then, of course, you asked, of course, a very important question as well, the conversion ratio, where is it going to be, with sort of set some more ambitions in relation to that. And of course, the 60% mark is also driven by yields that we are above that. We think actually that when we come out of this extra complexity and all that, we have some long-term financial targets and we should be able to live up to them and perhaps do a little bit more. The targets, as we’ve often said, it’s not how, it’s like — it’s not a lid, it’s not the ceiling. We are actually allowed to be higher. And then, of course, if we are systematically higher, we will update them every — on a yearly basis when we update our strategy and stuff like that.
So, I think you should expect higher productivity now that we have sort of integrated GIL and also with the investments that we make on the infrastructure as well that makes us more efficient.
Cristian Nedelcu
And on the Air volume outperformance, what drove it and what can — if it can persist going forward?
Jens Bjorn Andersen
We have said all the time that we aim for market share growth. This is still the ambition of DSV. Then it can vary a little bit from one quarter to the other. So we cannot sit here and guarantee that we will outgrow the market but we hope at least that to be the case going forward once the integration is over. I said it was a little bit earlier than we had estimated because we haven’t seen the full effect of the volumes that we said goodbye to deliberately at the beginning of the acquisition but we still have an ambition to grow faster than the market, both for air freight and sea freight.
Michael Ebbe
But we could mention a few verticals. I would say that high tech, we’ve done very well on that. And also probably pharmaceuticals would be an area where we also see some growth as well. But across the board, we’ve also done fairly well but high-tech is probably the most notable development.
Operator
Our next question comes from the line of Dan Togo of Carnegie.
Dan Togo
A couple from my side as well. Let’s start with the guidance. I understand that part of your guidance includes a more muted scenario for how volumes will develop in second half. Can you share some color or give some color on that? Is the lower expectation for volume developments here in ’22, is that explained purely by lower demand or some of the reasons also due to the more constrained market? Are you seeing more congestions, et cetera, impacting your second half? That’s the first question. Second question, on worst case, I mean, if we suddenly, so to say, hit a wall and growth declines further than the 1% to 3% that you imply here and we need to knock off, let’s say, another 3% to 5% of your volumes, how will that impact your guidance or, so to say, your EBIT? So what is that risk here in such a scenario?
And then finally, sequentially, how should we look at your expectations for volumes, so not the market but more sequentially here in the second half? Well, you normally can see at least — we do see a pickup in volumes in the course of Q3 and maybe later on for Air. Are we currently looking at what is a normal pattern for volumes during the second half? So that’s three questions.
Jens Bjorn Andersen
For the guidance, it’s — of course, we have had a lot of calculations made internally. We’ve had discussions about it. I think it will be irresponsible at this moment in time with all the anticipation of what could happen in the second half of this year to go with a normal split of earnings between the first half and the second half of the year, where normally the second half is slightly better than the first. I mean, we’re simply not in a position to be able to substantiate that. So what we have put into the — a little bit the spreadsheet then is that volumes will develop more or less like what we have seen here in Q2. And then the big deciding factor is, of course, the yields. And that implies also, as you could point out, that you can calculate yourself, that we expect yields to come down. We don’t know what the yields will be in Q3 and Q4. It’s also important to say our employees, they work hard every day to keep them as high as possible but it is likely that they will drop. But volumes, we are not modeling in that volumes will drop from where we are at, at Q2. You might have a point that Q3 is normally stronger. But I guess that was also the case last year.
Worst-case scenario, I don’t know. What we can say is for sure that, as I said, we don’t have — a lot of this is the flexible business model of a freight forwarder, not only DSV, that at least for our company, I can say we don’t have a lot of fixed capacity that we need to fill. We can adjust the cost base almost on a daily basis. Actually, we can also adjust very fast on the — blue collar is more or less flexible also. We have a lot of temporary staff on blue collar and we can also adjust on the white collar side. So should we hit a wall, as you point out, we will do what we can to protect the EBIT as we have normally done in the past also. So I think we have built in, at the lower part of our range, some kind of not worst-case scenario but a not-so-optimistic scenario.
Dan Togo
Any flavor on constraints and congestion at the moment? Is it getting worse? Is it sustained?
Jens Bjorn Andersen
I think it’s more or less the same, then it has changed a little bit from the U.S. and then we have some congestions in northern part of Europe and then also in Asia. So I think in total, it’s more or less the same but it’s not centered around the U.S. West Coast anymore, the way we see it.
Operator
Our next question comes from the line of Sathish Sivakumar of Citigroup.
Sathish Sivakumar
[Technical Difficulty].
Operator
Sathish, you sound very quiet. I don’t know if you have your headsets off or [indiscernible].
Sathish Sivakumar
Can you hear me now?
Operator
No, you sound very quiet and muffled, like, I can hear you but you’re very, very distant. I can’t make out everything you’re saying.
Sathish Sivakumar
Sorry about that. Yes, hello, can you hear me now?
Jens Bjorn Andersen
Very, very, very pale. Very — you fade away.
Sathish Sivakumar
Okay. I’ll try to speak up more. I’ve got three questions here. Firstly, on air freight, just a follow-up on the market share growth. Can you give some color on how do you actually perform by these regions like Asia to Europe and transpacific? And just a follow-up to that, how much of your charter network and block-based agreement is actually contracted out to, say, yielding sector like high-tech and pharma. The second question is around the — your exposure to industrial-type vertical versus retail segment? And where you are seeing increased fluidity despite the increase in conditions, i.e. which verticals have actually started to see more volumes come through, even though the conditions have gone up? And the third one is actually around the Solutions in terms of the utilization ratio, any color on the utilization ratio within your footprint and warehouses? And have you started to get some color from your customers on how they wanted to think about inventory levels going into potentially a continued slowdown. Those are my three questions.
Jens Bjorn Andersen
Thanks, Sathish. We are not sure we heard all of your questions. So we’ll try to answer them as much as we can. On Air, it seems like the split, if we should come, we don’t have it exactly at hand. It would be like the trade lane growth would be Asia to Europe, maybe minus 10% and transpacific minus 5% would be, I guess. So transpac still doing fairly well. I mean, retail, I guess a lot of what we move will eventually end out as retail. So it’s also a definition question but it’s, for sure, less than 20% in the way that we segregated between the verticals that we have. And on Solutions, the utilization of our warehouses is very high which is consistent also with the inventory levels that we all read about and what we hear about. So we have a good utilization of the warehouses. We still have access to new capacity. Maybe Jens can talk about that on some of the newly erected facilities. But in the more traditional ones that we’ve had and we have operated for many years, the utilization is probably the highest it has ever been. I don’t know, Jens, if you want to elaborate on…
Jens Lund
I think it’s — I think I saw one basically a property company that sort of we lease properties with and they send out a note, they said we are sold out. So — and you know it’s from the likes of Prologis, Panattoni, these type of companies. There’s no capacity available in the market. And of course, all our facilities, they are also full and the inventory levels are high. I think they are high due to two things. First of all, because I think people have stocked up or increased the stock levels but also because of business continuity plans. We see that customers, they want to hold more inventory in order to be confident that they can operate also with these, what can we say, bottlenecks that we see in the supply chain in general. So a little bit of color on that.
Sathish Sivakumar
That’s quite helpful. So are you actually starting to see some pressure actually going to get to or on the contracts that are coming up for renewal within Solutions wherein your customers are [indiscernible] that the volumes don’t.
Jens Lund
I think the problems we have with our customers on Solutions is that we find it hard for the — to find excess space for them. And of course, that leads to a situation where if we can solve these types of problems that we can also make sure that the cost base that we have is covered and that we get into a contracting structure that also works well for us.
Operator
Our next question comes from the line of Robert Joynson of BNP Paribas.
Robert Joynson
Hopefully, you can hear me okay. Three for me, please. First of all, on the share buyback, you announced a new program today of DKK7 billion to run for three months which compares to just over DKK8 billion during H1. So obviously, you posted doubling the monthly run rate on what is quieter since then what’s share priced [ph]. What’s the rationale for that? Is that simply that the run rate of free cash flow generation has improved? Or are there any other factors at play there? Second question on congestion which has worsened at the North European ports, as you mentioned. What do you see as the main reasons for that? Is it labor shortages, tracking capacity issues? What are you seeing? And also, do you sense that, that congestion may deteriorate further during the remainder of this year? And then the third and final question on the outlook, the container shipping rates. One of your peers mentioned yesterday they think rates could stabilize at 2x to 3x the pre-pandemic level. What is the DSV thinking in that respect?
Michael Ebbe
Should I take the share buyback? It’s correct that you can say for the first quarter, the share buyback that we had back then was one of the lowest. And now we have — you rightfully noticed that we have increased the share buyback to maybe the highest level on a monthly basis that we have had. It is due to the fact that we have had this strong cash flow, our strong balance sheet. And then we would like to adhere to our capital allocation policy and we also need to consider what is possible to buy back, given the safe harbor regulation and so forth. So that is the reasoning behind the amount of the share buyback. Jens Bjorn, would you touch upon the congestion part?
Jens Bjorn Andersen
Yes. The congestion is correct. It’s a different situation than what it has been in Europe than what we’ve seen in the U.S. There’s been some labor action in Germany which was probably the main reason for the congestion that we have seen. The infrastructure in general without offending anybody in the U.S. is maybe a little bit more modern in Europe, so we do expect that congestion — that will ease also going into Q3 when we talk about Europe. We are not commenting, we don’t, unfortunately, have a crystal ball. I wish I knew what rates would stabilize at. It’s also, I guess, a big difference if it’s 2x or 3x. But to be honest, we simply don’t know. So we don’t have any kind of specific view on that.
Operator
Our next question comes from the line of Sam Bland at J.P. Morgan.
Sam Bland
I have two, please. The first one is back on the guidance. You said on the comments earlier that there have been some sort of windfall profit from being short in the market while spot rates are falling. And I think part of what the guidance talked about is a gradual easing of supply chains to reduce gross profit yields. Wouldn’t it have the opposite effect if you’re short in the market and if there was an easing of supply chain, actually, you’d keep on having a bit of a tailwind from this short position in the market? And the second question is sort of linked to that question just asked on the 2x to 3x rate question. It’s more what’s your assessment of sort of the infrastructure? I guess it’s easy to add ships but it’s difficult to add things like ports. So where do you think infrastructure is, how much of the current congestion is driven by infrastructure and that, that might then be more difficult to do something about?
Jens Bjorn Andersen
I don’t know whether my two colleagues can think about the second question. But the first question, it’s not an unfair kind of view or statement that you are having or you’re coming with. It’s — normally, the trend is, as you correctly point out that if you are short in the market and if rates drop, we’ve talked about this with analysts and investors all our life, then there is a temporary gain. And it is the opposite when rates go up, this famous delay effect. It’s probably a little bit shorter now than what it is. Customers are more aware. We are also more aware about this ourselves. So it could — hypothetically, you’re right, meaning that Q3 is not going to be so difficult and that we will have to get into Q4 before we start to see a deterioration. But again, it’s unknown. There’s a lot of factors that play into this as well. So we are a little bit cautious promising too much. And as I said, with those assumptions, you could come to other calculations but we think that it would — with a great degree of uncertainty and the limited transparency, we have also be responsible to guide too high a figure today. And I don’t know about the rates, maybe Jens.
Jens Lund
I can say a little bit about that. The thing is, you’re absolutely spot on. You have, what can I say, the origin, you have the, what can I say, pre-carries and how is the capacity and how is the capacity at the port at origin. I think many have seen that in China and the Asia Pacific Asia region, there’s been significant investments in that. So that should, what can I say, over time, be able to handle the volumes that are needed. Then there’s been constraints on the equipment, the containers. I think there’s been investments in that. So that’s probably also easing. There’s normal capital allocation behind that. So that would basically normalize over time. Then there’s the vessel situation. I would say that it seems like there’s capacity coming in as well. So all these things, they should help.
What doesn’t really work is at destination. The ports, there’s been underinvestment across the board in Western Europe. If you look at the capacity also on haul, it’s on rail and all that, there’s no investment in infrastructure in that. And then we also have, of course, difficulties on the labor side. There’s a shortage of staff. So I think that is going to continue. So it’s going to be fragile, certain parts of it and certain parts of it is going to, I think, work out well. I think that’s sort of how you could have a look at it. So at destination, we will still face some issues.
And then, of course, having seen the spikes in demand like you’ve seen on the COVID, in particular in the U.S., then it simply overheats. And that’s sort of where you get these rate situations where they basically increase very much. And there’s no help for that because there’s no, at least that I’m aware of, significant investments committed that should basically resolve these issues.
Operator
Our next question comes from the line of Lars Hejndorf from Nordea.
Lars Heindorff
The first one is on the yield development as well. We had previously, both during the Capital Market Day and also I think in connection with the Q1 report, talked about the share of LCL volumes and how that was affecting your yields, obviously carries a higher contribution compared to some of the full loads. So I just want to get an indication or feeling for how that has developed and maybe whether you believe that with recent development, is that something which is more sustainable? That’s the first one.
Jens Bjorn Andersen
Michael will answer that. I just saw he raised his hand.
Michael Ebbe
Yes, I think what we have seen in Q1 — sorry, in H1 is you could say it’s roughly 6% of the volume corresponding to 20% of the gross profit for the LCL part.
Jens Lund
And, Lars, there’s been a focus on developing this.
Jens Bjorn Andersen
Yes and we keep on focusing on developing, like Jens mentioned.
Jens Lund
Because it’s a value add to — we are probably number one on groups globally. So we have significant volumes and we have more direct connections, we think, than most of our peers. Many of our peers, they actually work with coal loaders [ph] to a high extent. We also have many coal loaders that we work with but we try to build our own boxes where possible.
Lars Heindorff
But if I understand it correctly, then the 6% is up compared to where it’s been historically. So the question is basically, I mean, is this something which has been caused by change in demand from customers? Is it how you’ve been operating and what is actually sustainable is this or — I think you probably sense where I’m trying to get at this.
Jens Lund
If there’s money there and if there’s somewhere we can add value, of course, we push it. So if it’s 6% of our volume and 20% of our GP, I can tell you that it is something that gives increased focus within the division. So there’s a big push for developing our group with our LCL product within the Air & Sea division and actually also to try to see if we could develop, what can I say, some additional capabilities in combination with, in particular Road. So that’s definitely a focus area for us. And of course, then if you meet the market, if you have a good service and you live up to the customers’ requirements, I mean, you can sell the product with confidence and I think that’s exactly what we’re doing right now.
Lars Heindorff
Okay. And then the second question is just a follow-up on one of the previous one on Solutions. Still very, very strong growth when you talked about high utilization there. I don’t know what the organic growth is around 20%, maybe 30% in Solutions. Is that really sustainable? Or is this just mainly driven by the high utilization? And how do you see that develop going forward?
Jens Lund
Of course, we see that there is a significant demand right now. And we’ve been performing very well. We’ve also seen that we’ve acquired, what can I say, GIL. And they have also been doing exceptionally well. I think sometimes you see on Solutions that it need to plateau at a certain level and then you sort of get the thing consolidated and then we can continue the development. I can still remember when we made DKK300 million in a year in Solutions. Now it’s almost like we make that in 1.5 months. So we have managed to develop and drive it forward with this enterprise thinking that Jens Bjorn was talking about, where we consolidate the IT where we run the campus strategy and basically where we continue to drive the division in this direction. And from what we can see, it really works well with what the customers are looking for. So right now, we are fairly confident that we can continue the development. Whether we can have the same high increase also in a market that stagnates or perhaps declines or contracts, time will tell. But in general, the strategy and the plan, it works.
Lars Heindorff
Okay. And the last one is on the cost side and your ability to safeguard and protect your earnings in case, I think you talked about earlier, if we hit a wall. When COVID started, you initiated the cost cutting program. I think you took out close to 10% of your cost base in, I think, less than 12 months, maybe closer to 9%. This is only now 2, 2.5 years ago. In case we hit a wall, I mean, will you be able to carry through such a program once again?
Jens Bjorn Andersen
Lars, take comfort in the past. Look at the history and see what we have done in DSV over the years. I cannot remember one single time where we have just sat with our hands in our laps just waiting for things to clear, for the rain and the storm to disappear and for the sun to come up again. We normally do everything we can to safeguard the company. It’s not that dramatic. It’s just about retaining more or less the productivity level. It’s not like we will ask a lot from the organization to dramatically increase. If volumes are down, we need less resources and that can be done also in an easy manner, as I said, because a lot of the staff, they are temporary and we also have a turnover rate of employees which is double digit that either retires or changes job voluntarily. So it can be done fairly easy. And I’m sure that in the top drawer of a lot of our country managers desks, there are already plans, should we kind of get to that situation that makes it necessary for us.
Operator
Our next question comes from the line of Michael Rasmussen of Danske Bank.
MichaelRasmussen
Three questions from my side. First of all, on the ocean side, when you lose business to some of the carriers, can you just talk a little bit about what is actually driving your customers to change over to some of the carriers? Is it price levels, reliability service levels in general or what’s driving them? So that’s the first question. My second question is on the staff turnover. I noticed that you’ve reduced the number of staff by around 1,300, mainly in Road by 500 and also the unallocated is down by 250. Is this just natural from the GIL integration? Or is this actually that you’ve started to prepare a little bit for a slowdown in the business? My final question is for Michael. At the CMD, you talked about you didn’t see EBIT below DKK20 billion, I think you said any time in the strategy period. Obviously, with you now guiding DKK23 billion to DKK25 billion, obviously, 2022 is very, very safe. But I just — if you could reiterate that you also see this safe going forward still.
Jens Bjorn Andersen
We’ll give Michael some time to think about that last question and then Jens will talk about what drives the customer behavior on sea freight.
Jens Lund
Yes. If you sit and look at it, it’s clear that the carriers, they sometimes invest a little bit in some of these customers in order to, what can I say, get some of the large accounts onboarded. I have, till date, not heard that they’ve changed, what can I say, provider — service provider due to the service levels. On the contrary, I think we’ve sometimes — and that might be also that we like to hear that but they actually accept a lower service level because they can only use then, what can I say, one shipping line or perhaps sometimes they don’t run CFSs and stuff like that, that have the same volume or structure as ours or some of the forwarders they have. But the price difference sometimes is significant and that then persuades them, what can I say, to move in that direction. And of course, as long as the rates are what they are, I think there’s some competition that can invest in that. That’s the market. I mean we shouldn’t really moan about it. We’ve been competing with all kinds of companies during many years. and things, they move back and forth. So…
Jens Bjorn Andersen
But the low rates also come with some sort of commitment in terms of the length of the contract.
Jens Lund
Yes. But they’re going to have a fun time if the rates, they drop off because, of course, then we will phone and say, listen, we have a better rate for you. So — and that’s, of course, going to happen. So now the pendulum — it’s swinging in the direction of the asset owners, they are happy and all that. But it will swing back again. That’s how it works. Now I think Michael has thought about it. He’s actually, as you say, better off now because the results are higher but let’s hear what he has to say.
Michael Ebbe
Maybe I’ll start with the more easy one, for the staff turnover you asked too. The development is mainly driven by the GIL integration. And then also bear in mind that we do have normal floors on the cost base and the efficiencies. So that is mainly the impact that you see. Then as for my statement for the Capital Market Day, it’s clear. And also, if you also look at the home page where you can see the screen in the background, the DKK20 billion mark, it’s clear that we need to have some kind of development. So if we run into a hard recession, almost dropping like a stone, then it’s clear, a little bit more than difficult to maintain the DKK20 billion but in a normal environment and also coming back to what Jens Bjorn said about our cost base and our adaptability to that, then we still believe that we can have the DKK20 billion as a mark. But again, it’s very important for me to say that it’s clear that there need to be some volume that we can work with. So if the volume all of a sudden disappear or fall off like a cliff, then we will not be able to reach the DKK20 billion mark. I think that’s clear for most of you guys.
Operator
Our next question comes from the line of Muneeba Kayani from Bank of America.
Muneeba Kayani
I just wanted to go back to your comment on sea volumes being impacted by some discontinuation of the low-margin business. Were these DSV or GIL volumes? Can you talk about what sort of products these were? And is this kind of done at this point? Or do you think you need to do more of that? And then secondly, on cash flows which were very strong in the second quarter, given your EBIT guidance, how should we think about free cash flow in the second half? And could it be similar to the first half?
Jens Bjorn Andersen
When it comes to sea volumes, I can say that what needs to be done has been done. But you know when you compare with the performance a year ago, it takes some quarters before you actually see that the comparisons stack up, so to say. So it will probably take one or two quarters more before we get a like-for-like situation but it’s not big numbers compared to what we saw with Panalpina, where we had some issues with some of the — there were some larger degree of unattractive business in Panalpina with some of the perishables business, we did not like so much. With higher volumes, we have not seen the same degree in GIL. So we are talking about very low — it’s one or two percentage points or something, not more than that. So we cannot hide, so to say, behind that going forward and it will soon be out of the comparison numbers also. And I guess, Michael can talk to the cash flow but I hope he will say now that he is confident that the cash will follow the performance of the company. So…
Michael Ebbe
Yes. I think it will. Right now, we have a cash conversion, nearly one to one. And I don’t see why that should not continue for the remaining part of the year. We, of course, still need to have very tight focus on the net working capital management and then also, in general, for the operations. So — but I expect that it will continue the way I see it right now.
Operator
Our next question comes from the line of Parash Jain of HSBC.
Parash Jain
And if I may ask two questions. First, if you comment on near-term development with respect to demand, particularly with a lot of noise about U.S. demand capitulation in the summer, whereas hard data, on the contrary, reveals that demand for now remains resilient. Can you comment on what sort of visibility do we have coming into third quarter? And is it fair to say that if the midpoint of your guidance need to be hit, the half will be of two different quarters where we see probably a sharp deceleration in the fourth quarter as for the third quarter is unlikely to be very different from second quarter? Is that understanding fair? And my second question is with now GIL integration done and dusted, how do you see your next acquisition? Is it around the corner? Any color that you can share with respect to your pipeline?
Jens Bjorn Andersen
Good. You are caller number 10 and it’s not that often that we have to wait 10 questions to get a question about M&A. So I can take that. We are in no hurry in DSV. The future success of our company do not rely on us doing an imminent acquisition. Our strategy remains the same. We would like to take part in the consolidation of our industry. We have become a large company, probably number three amongst the global players but our market share is still below 5%. So we think all stakeholders have benefited from us doing acquisitions in the past. We’ve succeeded another successful integration with GIL confirming that apparently, we have some sort of template in the company that we can use. So we are optimistic about future M&A also. But as I said, we are in no hurry and we both have to be opportunistic in nature if something appears. And then, of course, we have our own plans that we have always had with targets that we are analyzing all the time and we’ll see when something happens.
And I don’t know about the near-term demand visibility, maybe, Michael?
Michael Ebbe
I think I can say a little bit like we have already touched upon a few times. Jens Bjorn said that correctly, of course, that we have seen a good momentum also in Q2 and that seems to — from what we can see so far to have continued in July. We have not received any numbers yet but it seems like it has continued. And then it’s also clear that the longer we see out in the future, the less is the visibility. So it’s a correct assumption, like you mentioned, that in Q3, we will likely see better off than in Q4.
Operator
And there are currently no further questions on the line at this time. So I’ll hand the floor back to our speakers for the closing comments.
Jens Bjorn Andersen
Thank you, everybody, for your good questions. We cherished those. Please reach out if you have any additional things you want us to elaborate on. If you have any investors who would like to speak to us, direct them toward us. We will start the roadshow activities now. For us, the summer holidays are over. So now it’s hard work until the Q3 message but we are eager to continue the journey. And we think that we have a stronger foundation in the company right now than we’ve ever had before to meet whatever challenges lie ahead.
So with that said, thank you very much here from Hedehusene and have a good day and goodbye.
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