News / 'Exceptional profitability' from forwarding in 2015, but now DSV faces the bill for UTi integration

Danish 3PL DSV says it faces integration costs of Dkr1.5bn (US$226m) following the recently completed acquisition of US forwarder and contract logistics provider UTi Worldwide.

However, it believes that over the next three years it will recoup that expenditure through cost savings.

Announcing DSV’s full-year 2015 results in Copenhagen this morning, chief financial officer Jens Lund said there was likely to be greater time lag than usual for the takeover to be accretive to DSV’s figures.

“Normally you would see synergies from a takeover after three-to-six months, but in this case it will take about three years, so there is a bit of time lag,” he said.

Synergies are expected in areas including property, headcount and IT – the target for this year is Dkr450m, Dkr750m next year, with the final Dkr300m being clawed back in 2018.

“In order to get UTi up to the DSV level of returns we will have to do some extra work in 2018 and 2019, and will reach our long-term targets in 2019 and 2020. This [taking longer] was also the case in the takeovers of ABX and Frans Maas,” he said, adding that there had been no hidden horrors in UTi’s books.

He said DSV had yet to determine the number of redundancies that would result from the purchase, and admitted that DSV remained uncertain how many employees it had actually added to its roster through the acquisition.

“We are still trying to get the final figures – right now it’s a moving target,” he said.

DSV reported 2015 revenues of Dkr50.9bn, a 4.7% increase on last year’s Dkr48.6bn, while earnings before interest and tax (EBIT) rose 17.3% to reach Dkr3.05bn compared with Dkr2.6bn last year.

Chief executive Jens Andersen said the air and sea freight forwarding division outperformed the market – despite lower revenues due to plummeting freight rates. It managed to hit far higher EBIT numbers for both modes, chiefly – “a result of being able to provide greater added-value to forwarding clients”.

Air freight volumes were up 8% over last year, compared with market growth of 2-3%, while sea freight volumes climbed 2%, compared with a market growth of around 1%, the company said.

Profitability in the division was “little short of exceptional”, with a gross profit per teu – a key metric for many of the largest 3PLs – sailing past the $400 benchmark to reach $540 per teu, a 12% rise on last year.

Whether it can maintain that level as it moves on the full integration of UTi’s loss-making freight forwarding activities remains to be seen, and Mr Lund said the company expected to see a certain amount of attrition.

“What normally happens in a takeover situation is that we will find some contracts that are not profitable, so we will raise prices and the customer likely leaves, but that doesn’t have an effect on the gross profit.

“We estimate that UTi will lose around 5% of its freight forwarding volumes, but we also have to factor-in some growth, so our overall estimate is that volumes will decline by 0-5%, but that will also  have limited impact on gross profit.

DSV chief executive Jens Andersen

Part of the problem, claimed Mr Andersen, was down to UTi’s IT system, which had been under redevelopment for a number of years.

“The UTi operational people are very skilled but the infrastructure was not very transparent , so they might think they are making money but because of the allocation of costs and profit, they actually were not – so here we can help them,” he said.

Although recent results for UTi show a company losing freight forwarding market share, Mr Andersen said the acquisition continued to have “a very strong name in many parts of the world and some very loyal, long-lasting customers”.

He added: “Also, you shouldn’t underestimate the opportunities for cross-selling – I have been personally speaking to some of the biggest US customer and they are very interested in our European road freight operations, while some of DSV’s existing European customers are also very interested in the contract logistics operations in the US and what UTi has in South Africa.”

DSV’s road division also completed a turnaround following several weak years. It saw a 5% increase in consignments, and an 8% increase in EBIT before special items, in a market that Mr Andersen described as “super competitive” and having declining returns.

“Gross profit margin is lower than it used to be, and it’s not likely that it will go back to previous levels. We will simply have to get used to the fact that the days of 20% margins are behind us,” he said.

If there was one dark spot in the results, it was DSV’s supply chain management solutions unit, which saw fourth-quarter EBIT decline 30% and over the full year by 17%. This was partly the result of hugely successful fourth quarter in 2014, as well as number of special costs, Mr Andersen explained.

“The problems we had include a strike among staff in the Netherlands; we also increased start-up costs in a certain parts of Europe; and we had to write off €2m at an e-commerce project in Germany,” he said.