DSV is a piece of Danish commercial history that keeps adding new chapters year after year and the desire to keep moving forward is deeply embedded in DSV’s DNA. Recently the company has completed a successful integration of a company in the United States. Increasing profitability is the highest priority while at the same time increasing the volume of transported goods. DSV masters the art of acquiring and integrating competitors – something which most companies do not achieve.

DSV is a unique story about growth and scale. To understand that DSV is in a league of its own, all you have to do is look at the earnings per share, which have grown by 18 percent annually for the past 15 years. It almost goes without saying that the company has been operating at a profit for all of those years as well.

Freight forwarders such as DSV benefit from global trade, but they help their customers with much more than booking capacity on ships or planes.

From the very beginning, the company’s story has been one of high growth and taking advantage of economies of scale. DSV is an abbreviation of De Samvirkende Vognmænd (in English; the cooperating haulers). It was founded in 1976 when 11 haulage carriers led by Leif Tullberg joined to collaborate and gain economies of scale. Today, DSV is a significantly larger company. While road transport was the entire business in the beginning, today air and sea freight is the largest division, making up around two thirds of the operating income. This might surprise some readers.

DSV is involved in the shipping of tonnes of goods from all over the world, but it does not own any transportation equipment itself. This is because DSV is a freight forwarder meaning that DSV buys capacity from a long list of subcontractors, for example, the Danish company A.P. Møller-Mærsk, when a customer has made a booking with DSV.  With this approach, DSV avoids the significant ongoing capital expenditures required for ships and planes, and as a result, the business model does not require a lot of capital at all. The quality of this business model is, among other things, reflected by a return on invested capital of almost 20 percent, which increases to a total of 75 percent, if adjusted for goodwill.

 One of the world’s five largest freight forwarders

The business model of a freight forwarder is thus significantly less dependent on business cycles and the ups and downs of freight rates than the companies owning the assets used for the freight of goods. As described above, DSV books cargo space from transport companies once DSV has received an order from a customer and charges an additional fee for the booking and services. The advantages for the individual customers are therefore that they do not need to check with a long list of transport providers and make comparisons – they can deal with just a single service provider, DSV. Shipping will normally not be part of their core competencies. If you manufacture clothes, and only ship five containers a month, it is attractive to rely on the expertise of DSV. The company was involved in the transportation of more than 1.4 million container units by sea in 2018.

DSV employs around 47,000 people and is operating in more than 75 countries where they provide air, sea and road freight in addition to the last division, Solutions. Solutions is the only division that does not work specifically with transporting goods. In Solutions, DSV assumes control of part or all of the value chain for companies through about 500 warehouses around the world. In this division, DSV coordinates with the customer and ensures that the right goods arrive at the correct destinations at the scheduled time.

On a global level, DSV’s market share is around two percent, but it is still one of the world’s five largest freight forwarders. The industry is thus much more fragmented than is typically the case for our companies. The 5 largest freight forwarders are estimated to hold a combined market share of around 15 percent while the top 20 hold around 30 percent. The largest freight forwarders gain market shares overall from the smaller ones, and as a result, the industry is slowly becoming more consolidated. This consolidation sometimes increases by step changes due to acquisitions, and DSV has been active in making acquisitions and is expected to remain an active consolidator.

A manager with 35 years of experience is the architect of successful integration

DSV’s management has made it clear that there will be less acquisitions from now on, but at the same time, the fewer acquisitions will be of larger companies. The latest acquisition was of UTi in 2016, raising DSV’s air and sea freight business to a new leve. It was successfully integrated with significantly greater synergies than originally expected. In 2018, the air and sea freight division had an operating income of 3.2 billion Danish kroner compared to 2.1 billion kroner in 2016. The integration was spearheaded by Carsten Trolle, the head of the air and sea division in DSV. Carsten Trolle has been with DSV since 1984 and used to head DSV’s American subsidiary which is the most profitable subsidiary in the company. He has been running the air and sea division energetically with a customer focus and business acumen since 2015.

The financial targets for the air and sea freight division are extremely ambitious. The so-called conversion margin, which states the operating income as a percentage of gross profit, is the primary number for analysing the efficiency of a freight forwarder. DSV’s goal is for this to reach 42.5 percent by 2020 – which will be among the highest in the industry. The air and sea division was progressing well in 2018 with an improvement of 3 percentage points, raising this key figure to an impressive 40.2 percent. More economies of scale and an ongoing strong focus on managing costs will help take the division past the finish line. Market shares were gained in 2018 in air and sea freight, and the operating income grew by an impressive rate of 18 percent organically.

Asia will represent an increasingly larger share of the air and sea freight business, and last year, this region represented 25 percent of the division’s gross profits. The region also achieved the fastest growth in operating income, growing by 24 percent. The Asian business is skilfully managed by Jakob Jeppesen, who has been with the group for almost 20 years in various management roles in Asia after he joined DSV at a very young age. The transport of goods from Asia to Europe represents approximately a third of all containers shipped by sea in DSV’s Asian operations, but the growth is significantly higher on the intra-Asian freight lanes.

The Road Division, which is the original part of DSV consisting of road haulage, currently contributes with 20 percent of the operating income. Road is headed by Søren Schmidt, who has been a committed manager of this division since 2008. This division is not as profitable as the air and sea division, which is reflected in the company’s financial targets. The target is for the division to have a conversion margin of 25 percent in 2020, and an operating margin of just under 5 percent. In part, these higher profits, from the current operating margin of just under 4 percent, are to materialise from a streamlining of the IT platform where the integration of Cargolink Way Forward will allow the division to achieve greater scale advantage.

 There will be a need for forwarders in the future

The very top of DSV consists of Jens Bjørn Andersen and Jens Lund. Jens Bjørn Andersen has been with DSV since 1988, and he has been CEO since 2008. He has previously demonstrated the ability to increase the profitability in the company’s business in Norway and the United Kingdom, and in his time as CEO, he has continued to demonstrate strong strategic skills and has kept the focus on the long-term value creating opportunities. The CFO, Jens Lund, has been with the company since 2002. He demonstrates a tireless focus on eliminating unnecessary costs and optimising the working capital year after year. Jens Lund is further heading how DSV can make the best use of information technology.

DSV has more than 1,300 employees working with IT, and the annual investments, including salaries, amount to approximately one and a half billion kroner, equivalent to two percent of revenue. Freight forwarders are not tech companies, but IT is already a major factor in their everyday work, which involves putting a lot of effort into streamlining everything that technology can help with. The IT spend more or less matches the operating costs in a medium-sized IT company.

Freight forwarders earn the majority of their money from value adding services and not merely from booking cargo space and reselling it. We thus perceive the risk of strong freight forwarders being replaced by IT platforms as minimal. Furthermore, DSV is a forwarder with a strong management team – as we see it, it is one of the best in the world.

We find it positive that the former CEO, Kurt Larsen, remains active as Chairman of the Board of Directors. Jørgen Møller, who headed the air and sea freight division before Carsten Trolle, is also active on the board. With their many years of experience, we assess that they can make significant contributions as sparring partners for the daily management.

As mentioned above, Solutions is a bit different than the two other divisions, and is also a bit more capital intensive, which in other cases is something we do not like as co-owners. Since 2012, Solutions has been headed by Brian Ejsing, who has been at DSV since 1986 and has a successful track record in DSV’s German division.

 44 percent growth in operating income

DSV leases 500 warehouses around the world. The locations of these have been selected based on where the customers need them to be. Solutions enters into contracts with customers, and then the division is responsible for the shipping of goods from production facilities to central warehouses and then subsequently on to the stores and so forth. Growth in Solutions will therefore have a knock-on effect on the rest of the business activities at DSV, and therefore, the value of the division cannot be measured solely by the earnings shown for it in the annual reports.

Despite this, the operating income grew by 44 percent in local currencies for Solutions in 2018 and the conversion margin increased to 23 percent from 18 percent the year before. This is an indication of a strong streamlining effort and strong capacity utilisation throughout the year.

The cash flow conversion is high in a freight forwarder like DSV, and the net income is thus more or less fully converted into free cash flows. In 2018, DSV’s free cash flows amounted to four billion kroner, and these were fully distributed to shareholders (with a little extra on top as well). A total of five billion kroner were distributed to shareholders through a share buyback programme of more than four billion kroner and an additional two kroner in dividends per share. This is equivalent to a return of more than five percent of the market value entering the year. In 2018, DSV will be paying 2.25 kroner per share in dividends, which is an increase of 13 percent compared to the year before. In 2019, management expects the free cash flows to grow by around 7 percent to just under 4.5 billion kroner. This corresponds to a free cash flow yield of 4.5 percent.

DSV is very disciplined in its allocation of the free cash flows. First, the cash flows will be spent on repaying debt, if the debt exceeds the company’s target of remaining below two years of EBITDA. If the debt is below this range, management will invest in expanding the business – either through investing in the existing business or via acquisitions. After this, excess cash flows will be distributed to the shareholders, mainly through share buybacks, as was the case once again in 2018.

Management has not notified of any expected share buybacks in 2019, which is due to ongoing negotiations with the Swiss company, Panalpina, where DSV has submitted an offer to take control of the company. Panalpina has significantly lower operating income, but it has decent conversion margins, and 90 percent of the business is within air and sea. It is assessed that DSV will be able to significantly increase the profit levels, just as they did with UTi, which was operating at a loss before it was acquired in 2016. In 2018, DSV was briefly involved in making an offer to acquire the Swiss forwarder CEVA – however, Panalpina is viewed as a more attractive business, and the balance sheet is significantly less complicated than is the case with CEVA due to prior private equity ownership.

Acquiring companies and optimising their operations require disciplines that not many have mastered to the extent that DSV has. However, it is also an endeavour that requires the commitment of large managerial resources, and it is not without risks either. Thus, it is essential that management carefully evaluates how capital should be allocated for this, including when it is most prudent to refrain from potential acquisitions. It is essential not to overlook the needs of current customers when large integrations are undertaken, as this might otherwise result in the loss of long-lasting and profitable customer relationships. We have great faith in DSV’s management being driven solely by the goal of optimising the long-term value creation, and that size is not a goal in itself.

New accounting standards impacting the recognition of financial lease commitments will complicate the reporting for DSV and will complicate the process of comparing peers, as there is a large element of estimation in the new standards. In 2018, DSV received a credit rating of BBB+ by Standard & Poor’s (S&P is also one of our companies which you can read more about in this book). This will help make it easier to access capital while also being a positive factor in relation to DSV’s many leasing contracts.

While large fluctuations in freight rates create uncertainty and lead to financial worries for owners of planes and ships, this volatility in freight rates can create earnings opportunities for freight forwarders. Customers will have a harder time figuring out what the current price should be when it fluctuates strongly every day.

We therefore note the freight forwarders’ continued value creation in periods where the owners of transportation assets are fighting a tough battle to maintain earnings power. To take an example, DSV’s operating income fell by 12 percent in 2009 to 1.7 billion kroner compared to an expected result of 2 billion kroner entering the year. Of course, we would prefer to see continuous growth, but if that kind of decline is what happens in a year where transported volumes are significantly decreasing, it only serves to illustrate the value of the flexible business model that DSV has.

DSV has come a long way since eleven hauliers combined their businesses – but there is still a long way to go, and as co-owners, we look forward to seeing what the future will bring for this world-class forwarder.