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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, welcome to the DSV Interim Financial Report for the Second Quarter 2019. [Operator Instructions] Today, I am pleased to present the CEO, Jens Bjørn Andersen; and the CFO, Jens Lund. Speakers, please begin.
Thank you very much. Thanks for joining the conference call where we are going to go through our Q2 numbers, which we released this morning. The format will be well known. We'll go through a presentation, which you will find online. And at the very end, we will leave questions -- time for questions and answers. And once again, if I could request that you will limit yourself to 2 questions each and not ask questions which have already been asked. So you can read the disclaimer we have put in -- on Page #2, which is a little bit longer than normal due to the Panalpina transaction. And after you have spent some time on that, you can see the agenda for this morning on Page #3 where we will talk about the highlights, the business segments and we will sum up with a financial review and the status on the Panalpina transaction. So Page #4, we have put some of the highlights of the first 6 months and also the Q2 numbers. We're very, very pleased with the results that we have seen in Q2. We consider them good. It's actually the highest EBIT result we have ever achieved in DSV, so we cannot be anything else. I'm very, very happy about that, especially when we see somewhat soft market that we have operated in especially in air freight. We managed to outgrow the market once again in all segments. And this is, of course, extremely important for us. And even though we have outgrown, we have also kept the profitability and the margins of DSV. The Gross profit is up 5.5% in the quarter and is up about 7% for the first 6 months. We grew -- we managed to grow the EBITA 4.1%, where -- and the growth primarily came from Air & Sea. And as you will hear later on, Solutions and Road particularly were impacted by the effect of lower number of working days. We have talked about it many, many times. The timing of Easter is important. And when it comes to both Solutions and especially Road, you should view the first 6 months as a whole. The Panalpina transaction is well on track. It's progressing exactly as expected. We are pleased about that. We got the approval from EU this Monday. And we look forward to a closing, which will hopefully happen in the foreseeable future. It's expected to be in Q3. And if we are lucky, it could be in some time maybe during the middle part of Q3. So on Page #5, we can show that once again extremely impressive results of the Air & Sea division. They go from strength to strength. It's exceptionally satisfactory to see this strong performance when we stand on the brink of a very big integration of Panalpina. It gives us a comfort that, so to say, our own house is in order, and more than that, that we do deliver these very, very strong results. During the quarter, we saw sea freight volumes growing 6%, which is much better than the market, and we furthermore saw a very stable yield development. So air freight has been weak. You have seen that also by other market players, and the volumes have been down in the market. We also saw a negative growth rate of 2%, but actually this was compensated by very strong yield development. So we actually managed to grow the GP also and EBIT or -- and GP by 1%, even though the volumes were down. So we cannot be too displeased about that. Volume was also to a certain degree impacted by the termination of a high-volume but low-margin business that we managed to terminate. Maybe I would also like to point your attention to, we have to point the attention to the conversion ratio of 43%. It's up also a couple of percentage points year-on-year. Very, very high margins, also the EBIT margin, operating margin now remaining in double-digit territory of 11.3%. I think that stands comparison to any of our competitors. And the division, they can be proud of themselves. They have done once again an amazing job. So thanks to everybody for that. When we go on Page #6, you can see the yield developments. We are happy about it. Of course, we would expect in a soft market to see yields going up, and this is what we have seen in air freight. You can see that the yields are up year-on-year 5% and are stable quarter-over-quarter. What you can also see on Page #6 is that the market, we estimate, even though we don't have the final numbers yet, but we estimate the number for the market that it is down 5%. And since we are only down 2%, we managed to take market share, and we are happy about that. Yields in sea freight are also up, although to a slightly lower degree, but 2.5% year-on-year. What is maybe more important is that we have maximized our volume growth. I think it's a long time since we have been able to -- that we could show a growth in terms of TEUs of more than 5%. So it's a fact that we have grown 6% in the quarter is very good in a market with also a modest growth of almost 2%. So it tells us that the customers of DSV, they like what they see. They like the service. They like the rates. They like our systems, technology also. And that has driven this growth. And it is very satisfactory as it is exactly what we have in our strategy in DSV. We come to the Road division. I think we are also very pleased with the Road division. They follow their plans that we have agreed with the market. Sorry, this is bad timing. Some sort of fire alarm going on here in our building. So I unfortunately have to say that we will have to take a timeout on this call and follow the instructions and then we will get back to you as soon as we can. Sorry for the inconvenience. Okay. We are back online. The weather is pretty unstable here in Copenhagen today, so I don't know if it had anything to do with that, but it was a fire alarm that went off. And as we host this webcast in our own building here, of course, we had to evacuate like everybody else. But luckily, it was a false alarm. And we are back now continuing on Page #7 where we go through the Road division. I think I said that you should see the performance as one for the first half year, the seasonality plays a role. There was simply fewer working days in Q2 than what we saw a year ago. And the fact that we have managed to grow the earnings 3.5% year-on-year in the first 6 months is very, very satisfactory for us. And here in Road, even though we don't disclose the volumes anymore, the market has grown between 1% and 2%. Then we go through the Solutions division, the last division before Jens takes over. Also here, we have seen a solid 8.5% on underlying growth in GP, despite a somewhat flat revenue. I think it has a little bit to do with the mix of the business that we do. I know some of you have asked if we have seen a slowdown in the EBIT development. And you could argue that, but please bear in mind that we also indicated that the performance of '18 was exceptional, and we have reached a new level now. And the growth in EBIT will probably be somewhat slower going forward, but still, I think, very satisfactory. We will continue to focus on improving the productivity in the division with automization and digitalization and also through development of a much larger and more efficient warehouses. We will simply consolidate smaller sites into large sites. So we're pleased with the developments. And I think the margins are also extremely strong in the division. They have a good momentum. They have a lot of requests from customers. And we have a very good pipeline also when it comes to developing new properties for the division. So with these words, I will now ask Jens Lund to take over and go through the financial review.
Thank you very much, Jens Bjørn, and I'll quickly jump into it. I think when we come to the financial details, you're all aware of the IFRS 16 impact to the numbers. We've tried to make a disclosure where we focus on the quarter and also on the half year because it gets too much on one page. So we've sort of split it out on 2 pages. What you can see from the numbers anyway is that the GP adjusted for IFRS 16 is up 5.5%. So as Jens Bjørn said, the customers, they still like the service that we produce. So that's indeed very positive. The conversion, we get 4.5, 4.1% extra EBIT, so also converting a big part of this into extra income. We are a little bit high on the salary side mainly driven, as Jens Bjørn also alluded to, by perhaps the Road division and a little bit by Solutions, also perhaps a little bit driven by the seasonality as well with the Easter impact. On the numbers as well on the quarter, I think one of the most important things is on the financial items where we had some FX income last year. We haven't had this income in this year, and therefore it looks a little bit different on the net profit. But these FX fluctuations is simply a product of the way we report these days. So you cannot avoid them 100%, and they will impact our numbers from time to time. The tax rate, I would also like to point your attention to, is in the low end. We still guide the same tax rate going forward, but it fluctuates a little bit quarter-on-quarter. You should stick to something in the 24% range when you work with our numbers. So it's a little bit of seasonality we have in that. If we take the H1 numbers, I think we could use them just to elaborate a little bit on the 2020 financial targets. You can see that we are almost there on all of them. And I think it's good that we are able to live up to the guidance we have given on the strategic side, way back to the market because the numbers will, of course, be impacted now with Panalpina. So that will be probably the last time where we will report stand-alone numbers, where you can evaluate our performance. And I think we are very close, and we have even surpassed some of the guidance we gave on these numbers, so very happy about that. Slide 11, cash flow. The adjusted cash flow is DKK 1.8 billion. We are very happy about this. It's a good start to the year on the cash flow side. We are always a little bit back-end loaded when it comes to cash flow, so we are indeed positive about this. Also, the leverage is calculated where we have made some pro forma adjustments for IFRS 16 is 1.6x EBITDA. So we are also in a good financial position when it comes to our debt. And the working capital is also in line with our expectations. So all in all on the cash flow side, things are in control. And this also means that we have a situation where you have a high certainty in the numbers that we report. So that was a little bit on the cash flow side. If we then move a little bit further to the next slide, Slide 12, I can give you a short status on where we're at when it comes to the Panalpina transaction. We have completed a lot of steps, and we are sort of ready with most of the different topics. One of the outstanding issues is an acceptance of the tender offer, the second phase. And that will run out or expire here on the 7th of August, so that should then be completed. And then on the competition filing, we have one country outstanding and we are still awaiting this approval. Hopefully, we will get it fairly soon, then we should be all clear in relation to the competition authorities. And I can say in relation to this that it's not the EU, China or the U.S we're waiting for. So it's a smaller jurisdiction, but we won't mention any names in order not to put pressure on them. That is unnecessary. They have to do that work in the speed that they find orderly. So we will probably be able to close the transaction mid- to end Q3. So we haven't put a date on it yet, but I think that things are running according to plan. Since we have no guidance out there, we will jump immediately to the Q&A session and Jens Bjørn and I are eager to answer your questions. So let's jump into that. You can go to Slide #13 and see how to post your questions, and we look forward to take them.
[Operator Instructions] Our first question is from the line of Marcus Bellander of Nordea Markets.
2 questions, if I may. First, the volume growth in sea freight, 6% year-on-year, very impressive, and I guess we've seen the margin by which you outperformed the market increase in the past few quarters. I'm just wondering if you could elaborate a little bit on what's going on there. Have you won some large contracts? Or are you just sort of generally doing a better job than competitors? And if so, is there a certain segment of competitors that you are winning market share from? Any detail would be appreciated.
Okay. Yes. I can elaborate a little bit on that. We are always pleased to see that we are outgrowing the market. That is the clear strategy that we have. I think that is what shareholders should also expect from a large company like DSV, that we can grow faster than the market. We have the right tools. The digitalization, the investments in IT, that plays a role also. We simply have a product which is attractive to our customers. It's not like we have one particular large account. We have seen a diverse, what you say, reason for the development. We actually see really strong performance on Intra-Asia, but also on Europe to Asia and North America to South America, has been strong for us. So of course, we have won some new contracts with brand-new customers, but we have also -- and this is probably the main reason, we have seen that existing customers have allocated new trade lanes to us. And this is something we are always pleased about because it tells us that the customers like the product that they get in DSV.
All right. And this is my second question. I think Kuehne + Nagel was out recently saying that they expect the air freight market to decline by roughly 5% for the full year 2019, which seems like a pretty bearish statement. I'm just curious if you agree with them on that, or what you're seeing in sort of your current bookings?
We cannot base current bookings on anything, and we don't give official guidance on this. To be honest, it's anybody's guess. I'm not saying that Kuehne + Nagel is not capable. Maybe they have some intelligence that I don't have and that we don't have in DSV. I would look at the world a little bit more optimistic than 5 year -- 5% growth for the full year, taking into consideration that Q1 was less than 5%. So then that means that the second part of this year will drop more than 5% in H2, and we don't believe so. I think we will see it at a situation which is slightly -- somewhat between what we have seen in Q1 and Q2 would be our best estimate. But I said we don't have an official guidance, and it's difficult to get really strong intelligence on this also in the market.
Our next question comes from the line of Casper Blom of ABG Sundal Collier.
And also from me, a great job here, guys. First question is sort of regarding the kind of slowdown we're seeing a little bit in the underlying road market in Europe. Are you doing anything in particular to sort of protect you against that slowdown, for example, given fewer credit days to customers or in any way handling a potential counterparty risk? Or is that really not where you see the market at the moment?
I can answer that one. I think if you look at the counterparty risk and the way we work with our customers, we do take out credit insurance on most of the volumes that we sell in the market. So it's not like we sort of level ourselves up and increase our exposure or something like this in order to increase volumes. We also, of course, look at the subcontractors, their financial situation. Because we may have situations we depend on some of them and where we have to also split the volumes in ways so that we take out risk and taking care that we are able to execute all the transactions that customers book with us on a daily basis. So I think that's what I can say to that.
Okay. Then my second question is on IT. You mentioned it on the solution slide, for example, that you are migrating new IT. You've also talked about this new system that you're implementing in Road previously. Could you just give an update on where you are in that progress in terms of time line?
If we take the Solutions part, before we acquired UTi, we had nearly migrated all the volumes that we had on to one platform. Of course, when you buy a company like UTi, there's volumes on different types of platforms, and we had to move that onto the DSV platform. We are nearly there when it comes to the UTi volumes. I think we've got 6 to 12 months ahead of us, then we have done all that work. And then we are basically on the same platform. Unless sometimes in Solutions, you run on the platform of the customer, of course, they are not then on this particular platform. But the thing that we run in our multi-customer setups, they are on the same platform. When it comes to Road, we have done the [ growth tool ]. We've done the mobility solution. We have a very advanced mobility solution with handheld devices. It provides a lot of tracking information. We've got the equipment pool. And then we are working on the order management settlement part. We are piloting on this. And I think we're making good progress on that, but it will take some years before we got that one out when it comes to Road. On Air & Sea, we are good. We run the same platform we've rolled out years ago. And then we work on other initiatives like the CRM platform. We're actually updating that to an even stronger tool. And then, of course, we work on a lot of these things with customer interaction and the cloud-based Solutions right now. So that's sort of where we have to focus. So a lot of change, as usual, on the IT side. That's the only constant. You have new projects, new things we need to do in order to get the productivity of -- that's our bread and butter.
Sounds good. If I just may follow up on the Solutions part where you mentioned that you probably had 6, 12 months to go before being done with the current project. Obviously, things will be a bit blurry with Panalpina coming into numbers, but would it be fair to assume a little bit of a boost in earnings there once the migration is done, and you don't have those additional costs? Or will it just be a new thing coming up?
You could probably invest a little bit less if you had to sort of do no migrations for a certain period in time. But we might have chosen then to invest in further productivity if there was a good business case in that, and perhaps also discuss what's the next step on the solution side because we need to interact closer with our customers, and we need to automate more. So it's not big swings we're talking about. We will continue to invest. I think that's basically the plan.
What you will see here is where we -- of course, where we will aim -- sorry to interrupt there, where we will have an aim to grow the earnings more than what you have seen at the beginning of this year. Of course, we need to see also the effects of the investment in the P&L, if that was what you were about to say. A boost, it depends what you put into that board. We're a little bit afraid of promising too much, but of course, we want to see the results of the investments we are doing also.
Our next question comes from the line of Mark McVicar of Barclays. Okay. As we have no response from the line of Mark McVicar, I'll go to the next question from the line of Andy Chu at Deutsche Bank.
Just 2 questions, please. Just in terms of autos and tech, which these segments that some of your competitors are sort of pointing out as being a little bit weaker. Can you just sort of give us maybe a flavor of what you're seeing in both of those 2 sectors? And then just going back to Solutions, can you just give us a little bit of flavor? Because it's a pretty opaque division, and trying to sort of look at the sort of division from the outside. It's, obviously, a contractual business, contract by contract and obviously, we don't have that contract book in terms of new business, expiries, et cetera. Can you just give us a little bit more flavor in terms of the pipeline? The verticals are looking pretty exciting. I guess there will be more in the sort of e-segments at this point in time. And yes, maybe just a little bit more flavor to that, please.
When it comes to auto and tech, I can say a little bit about that. If we take tech first, it's never been a very large vertical in DSV. It seems like the large tech companies have chosen others than DSV. So we haven't really been impacted by that. But it's correct that a lot of things seem to be going on in the automotive sector right now. We are fairly large in that vertical, both in the EU and in particular I would say in the U.S., where we have seen less of an impact than what we have seen in Europe. I think to some degree, even maybe to a large degree, the negative impact in the volumes in air freight and the market stems from actually a weakness in the automotive sector. And we have also felt that so it's a fair assumption that, that also has been extremely weak in recent quarters. We hope to see an improvement going forward when it comes to auto, but we have lived good from the fact that we have mainly been focused on some of the U.S. companies. When it comes to Solutions, we've talked about that many years also. Some people question why do we have Solutions, why do we have to have this contract logistics division. We actually like it. It's a great addition to what we do in Air & Sea and Road. It ties together a one-stop solution to our customers. It actually grows a lot. There's a renewed focus on e-commerce that we are also very excited about. And it goes without saying that without the capabilities we have in Solutions, we would not have some of the customers we have today in the 2 other divisions. So it's even though we are 3 divisions, you should see it as one kind of DSV as we call it internally and one unit servicing the customers. And so we're happy about it, and we will continue also to grow and invest in contract logistics Solutions in DSV.
Just one question and a follow-up on contract logistics Solutions. What do you think the growth rate is in contract logistics? I mean it's pretty difficult to answer, I guess, given markets, geographies. But if you were to sort of give us a flavor of where you see DSV sort of has positioned and what should be sort of market growth rate for contract logistics, I mean is that a question that's possible to answer in terms of -- is it mid-single digit? Is that the right sort of flavor of growth rate?
It's probably not bad. I was about to say that again we don't have any intelligence, but that underpins what we are saying. But right now, it probably has the highest growth rates of the 3 divisions. If you say Road is growing 1% to 2%, air freight is in reverse gear and sea freight grows about 2%. I think contract logistics beat all of that. So it's not a bad place to be right now.
Our next question comes from the line of Aymeric Poulain of Kepler Cheuvreux.
2 question, if I may, the first is on myDSV. I think in the presentation, you referred to 250,000 shipments per month, which is about 3 million a year. And I was wondering if you could split these by verticals of Road and Air & Sea in particular, just to have a sense of the penetration and how it's evolving. And also, could you confirm this electronic booking type of device helped the conversion ratio going forward? That's the first question. And the second question is on the buyback program that you plan to do once Panalpina is finally acquired. If I look at your guidance in terms of net debt to EBITDA, it suggests something like 10, north of DKK 10 billion a year for the next 2, 2.5 years. And I was wondering in terms of the pacing of that buyback program, how you were planning to do that. This is quite a large amount. Would you do it through kind of a mechanical purchase mode? Or would you focus on the value metrics, so more opportunistic type of buyback program?
If we look at the electronic bookings, I mean it's natural that most of them are with Road. And I would say that it's more than 95% of that volume is Road volume. So it has a much higher penetration. And of course, getting bookings in electronically. I think in Road, we get overall, more than 95% of all bookings electronically. We get much more in via other electronic ways of exchanging data. So the high-volume customers, they would have EDI connections or some XML or different kind of ways of providing booking information. On the Air & Sea side, there are certain markets that are quite mature. And they have a good tradition for using also myDSV and online booking. Of course, we have a lot of EDI customers on Air & Sea as well, but we also have a lot of manual bookings that you get in within the Air & Sea division. So a low penetration you would have there, but it's also a little bit due to the nature because some of the transports are actually somewhat more expensive than the more commoditized services, if you could put it like this, in Road. So I think that explains a little bit on myDSV. But in general, the customers are very happy about myDSV tool. We've got a lot of positive feedback on that. And we, of course, very happy about it so that we can try to post other services on it like Track & Trace. We will get the quote tool on it pretty soon as well. And we have a road map for posting these services. On the buyback, you're quite right. We're talking about substantial figures. And I think we will run these buybacks in the usual format, then we might make 1 or 2 major adjustments once all the dust has settled surrounding the transaction, so that we perhaps make 1 or 2 large adjustments. That would be probably in next year that this will take place. But other than that, we will decide on it every quarter like we have had a tradition for. It gives a lot of comfort to our investors how we go about it, and we do not want to interfere too much with the market. A very opportunistic sort of approach means that we start to speculate against our own shareholders, and I don't think that's really something that we have a tradition for. So I hope that answers your questions.
Our next question comes from the line of Damian Brewer of RBC.
2 questions, please, the first one on working capital. Could you elaborate, particularly in the Solutions division, what changed there and allowed you to grow the business, but shrink the working capital utilization of that business? And not just for Solutions, but the group as a whole is now as far as you can get on working capital, or do you think you can take the efficiency further? And then secondly, and acknowledging you've outgrown the market on volume, you've delivered profitability and good incremental margins. But now the Air & Sea business is above your EBIT targets, above the EBIT GP conversion targets. If you are thinking about this business organically, are you putting Panalpina aside for the moment? Is there a danger now that the business is over-earning, and maybe you're turning away some volume we should be looking at? Or is that the wrong way to think about it?
Maybe I can take the last question first, Damian, and then Jens can elaborate a little bit on the NWC. We are not turning away business that has a lower margin than the average. It's a little bit a mistake to look at that way. It's clear that at least most of the new business that we get, they carry somewhat lower margin than the existing business that we have. Then when we get the business in, we get to know the business. We find better and more efficient and more cost-effective ways to operate that business, so that you will see a slow improvement, so to say, of those margins. But actually, a new business normally dilutes our margin. Then you can ask, how can you grow your margins when you also grow? But that is a consequence of what I just said is, of course, that we are growing the margins on the existing business that we have also through better utilization, through better agreements that we get also with the carriers. So it's a common mistake to exclude, you can say, a potential value-adding business if it doesn't live up to the average that you have. We must never get in that situation. And this is not the way we price our services also.
And on the working capital, I do think that when you are -- we used to have a target of 1%. But the more volumes you get from Solutions and Air & Sea, then the target has been pushed a little bit higher up. And we now say that if we can ever go below 2%, it's fantastic. We're now at 2.5%, and we have to remember that the optimal timing of that is always the end of the year. There can be some seasonality. There can also be some -- the payment of behavior of the customers, it varies a little bit, how are they doing, how are they doing on working capital. Some of them have a tendency to pay a little bit late. And therefore, when you look at it at the end of a quarter, sometimes they do pay their bills on time. Sometimes they hold back payments a day or 2. So I don't think you should read too much into the numbers. But in general we are, I think, at a good status right now on the working capital. And I don't think you can squeeze a lot more money out of it okay.
Our next question comes from the line of Lars Heindorff of SEB.
Also 2 questions from my side, the first is regarding the air cargo. You mentioned in the presentation and also you stated that you have been sort of terminating or maybe [ putting away ] some high volume low-margin business in the air cargo space. I just wondered if you could give us a little bit of more insight into just how much we're talking about here and what the impact is.
It's a fair statement -- a fair question, Lars. And we say that the terminated business had a negative impact of actually between 2% and 3% of volume in Q2 this year. But the impact on absolute GP is relatively limited. The business was actually phased out at the end of last year and at the beginning of this year in Q1 already. And for confidentiality reasons, we cannot disclose what customer it is or what country or region it relates to.
Okay. All right. Then the other part is regarding the sale of the business that you've done in the Road division in the U.S. You mentioned revenue impact on the full year, I think, was 600 million, an underlying 1.3% revenue growth. I just wondered if you could give us any insight into the impact on both GP and also EBIT, if there are any. I don't know whether it has been loss-making or also maybe why you actually sold it.
I actually wrote this down just before the conference call. So I'm happy I did that because I can answer very clearly to your question. It's correct that we say it had a turnover of approximately 600. It carried a lower margin, so it's we estimate -- or we know it's about 60 million GP. And EBIT, it has no effect, it was a breakeven business. The reason that we sold it was that the structure of the business didn't fit into our strategy. It was not an asset-light operation. It was real trucking companies in the U.S. with own trucks and materials that we inherited from UTi. And we were enthusiastic about it, and we gave it a shot, but we didn't succeed. So we said, let's get out of it and concentrate on the asset-light business that we run very successfully in the U.S.
Okay. And I assume that most of the -- I think the 126 million in the cash flow statement relates to the sale of that unit or that business?
That's the majority of it, Lars. Very close to all of it.
Our next question comes from the line of David Kerstens of Jefferies.
2 questions, please. Going back to the weakness in automotive as called out by your peers, is it fair to assume that the weakness was also mainly visible on your air freight business? Or did you also see impact in Road and in Solutions? And second question, with the closing of the Panalpina transaction now imminent, are you satisfied with Panalpina's performance stand-alone during the transition period with the somewhat weaker performance during the second quarter? Is there anything that concerns you?
Yes. I can answer those questions. We don't really comment on the performance of Panalpina, but so far, what -- I should say, a little bit what we have seen is we are happy with that. The performance is good. Our business case is intact, so nothing to worry about on that. And it's correct also as big also in our 2 other divisions, but we have seen it maybe to a slightly lesser degree than what the impact has been. It shows up more clear, you can say, in air than it does Road. It's more diversified. It's a bigger animal, so to say, in terms of number of shipments. But we have seen a slight decline both in Solutions and Road also. It's a fair statement.
Our next question comes from the line of Frans Hoyer of Handelsbanken.
Yes. It's a question about your view of the efforts by sea carriers to build this blockchain platform and the implications this may have in terms of sharing customer data. What is your view of that? And are you preparing to do to engage in that process more actively?
No, we are not preparing to engage in that process at this particular time. We are still in a wait-and-see position. As far as I know, no or very, very few, very limited amount of freight forwarders have engaged with the shipping lines. We share the data with them, a lot of the data anyway. So we are not too concerned about that. We are not against the concept. If it can help us, if it can help the industry and our customers, we are open to it. But the way we see it, it's very -- what you say, it's a little bit still in the early stages of the development. And we still need to understand exactly what it is that it can have of an impact in our own business. But I think once again, we have been able to prove in the quarter that there will still be room for freight forwarders also in the future, that shipping lines will not take over the market share that we have. The fact that we have significantly outgrown the market, of course, makes us satisfied that this can also continue in the future. And we develop constantly our own digital tools that -- to some degree, satisfies the needs also of our own customers.
Our next question comes from the line of Bruce Chan of Stifel.
Just a quick question here on IMO 2020, you've had a nice tailwind on the GP margin side from a software capacity environment here. And I'm just curious looking ahead towards implementation, what are your expectations as far as rate increases from the steamship lines and capacity as you go through the rest of the year?
The beauty about the IMO 2020 is a couple of things. First, we've had a trial, you can say, when we implemented it some years ago here in Europe. Because it was implemented the low sulfur regulations on the ferries that we use in our Road division in Europe. So we have some experience in the way we have communicated with the customers. Of course, we do expect that there will be some sort of surcharge from the shipping lines, and it will be 100% pass-through to our customers. It goes without saying that the price that needs to be paid for this, which I actually support very much due to environmental reasons, will have to end up by the transport buyers. So the shippers will have to pick up this, but we will have to see. It's still -- the jury is still out. It still seems like the shipping lines have not found a uniformed way of invoicing this, but we will find a way.
And then maybe just a quick follow-up here. As we look at some of the down-trading that we've seen from customers out there and some of the softness in the business environment, I don't think it's too bold of a step to say that with these increasing costs with IMO, with some of the tariff regulations, maybe we're seeing some increasing cost pressures out there. What's your take in talking to the customers as far as how they're bearing the load of all these increased costs?
I think you need to take the general rate environment into consideration also. I mean we -- I don't want to say something which can offend our customers, but they have enjoyed extremely low rates for a very long period of time. And it has been extremely cheap to import or export shipments around the globe now. So when you look at it in a longer perspective, historic perspective, I think the cost of transportation is still extremely low. And of course, depending on what vertical you're in, I think we're talking about relatively limited increases per unit, which is common now.
Our next question comes from the line of Robert Joynson of Exane BNP Paribas.
Most of my questions have been answered, but maybe just one remaining on Panalpina. It's now almost 4 months since DSV's offer was accepted. Now I know that both of you have spent a lot of time with Panalpina management and other employees over that period. Could you maybe just provide some color on what your main learning points have been during those discussions?
I think you have to rather have a little bit of patience. We will soon be able to talk much more about it, but I -- in general, we have had our case. We confirmed the Panalpina employees and staff, they have impressed us. They have been very open, transparent within the limitations of what we can do and say in this interim period, of course. We've been extremely appreciative of their support when it comes to this. And I think we -- that has also made us well prepared. And I think we have a very good plan that we can execute on once we get the green light from the authorities.
Our next question comes from the line of Mark McVicar of Barclays.
Sorry for not making the tech work earlier on. Just one question, really, the gap between sea freight market growth of 2% and the air freight market shrinking at about 5% is probably as wide as we've had for the best part of a decade, something like that. And quite often historically if the air freight market dips, the sea freight market dips with a lag, 6 months, 12 months. Aside from what's going on in the automotive industry, which you've talked about, are there other factors out there that you think have made air freight as weak as it is and that gap to be as large as it is?
You point to a very interesting point there, Mark. It's absolutely correct. And it's -- we've been struggling a little bit figuring out what the hell is that drives this negative volume in air freight apart from automotive. I think actually that some of these more emergency type of air freights that we saw a year ago, they have slowed down and disappeared. Customer supply chains have -- they're being managed a little bit more efficiently now. On the U.S., there was also a lot of pre-buying before the tariffs, so maybe stock levels are fairly high. But I'm myself trying to find reasons to explain this, and we -- you speak to one customer, and he says one thing. Then you speak to another customer, he tells you almost the opposite. So it's -- but it is also correct what you are pointing out that we have always said that air freight is some sort of early indicator. And this is also why we are -- what you say, tracking the developments closely. But as I also said many times, both sea freight and air freight over a longer period of time have traditionally always developed more or less in line with world GDP, and this is also what we expect to see going forward. And as I said at the beginning of this presentation, we are maybe a little bit more optimistic in terms of air freight than what you have heard from others.
Yes. And I guess the comp gets quite a bit softer. The comp goes negative, doesn't it, from November onwards, which should help, all other things being equal?
Absolutely right. Absolutely right.
And our next question comes from the line of Marcus Bellander of Nordea Markets.
Just 2 follow-up questions, housekeeping questions really. The first one, I noticed that other external expenses was very low in the Road division. I was just wondering if there was a particular reason for that.
There can be some accrual in the quarter. That has changed a little bit. I don't know if you've looked in the appendix on some of the numbers as well. But as I said, it's not -- we've not made some changes to allocations, provisions, anything like this that should make too much of a difference there. So there's no real -- I think you have to look at it on the half year.
Fine-tuning IFRS.
Flemming says fine-tuning the IFRS could be a topic as well that could play a role in that. So...
Okay. Great. And second question, I just noticed that your staff costs per employee, so to speak, has been rising quite a bit lately. And I'm guessing there are some currency effects in there from a stronger U.S. dollar perhaps. But I was just curious if this is something you're keeping an eye on, if you're seeing signs of wage inflation or something else?
We're monitoring the cost also on the salary side very closely. I still think that if you look at the conversion rate in all the overseas areas in the Air & Sea division, I think we are doing fairly good. But of course, we have invested a lot in staff with a lot of change projects in a division like Road, and this of course, shows in the numbers. So I don't think it's necessarily only the FX, but it's also some of the investments that we are making on the staff side when we roll out new IT platforms, stuff like that. It's a costly exercise also on the FTE side.
There are no further questions at this time. Please go ahead, speakers.
Okay. In this case, we would like to thank you all for participating. And once again, please accept my apologies for the short break that we had during the -- due to the fire alarm in the building. We will probably get back to you before the Q3 numbers are ready when we will announce the closing of the Panalpina team. We will hold a similar conference call as we have done today where we can elaborate a little bit more on the plans that we have for the combination of the 2 companies. But in the meantime, thanks for listening in, and have a good day.