By Will Waters
Global freight forwarding and logistics group DSV Panalpina today announced that it is reluctantly having to let go of around 3,000 staff as part of a DKr1.4 billion (US$204 million) COVID-19 cost-cutting programme to align its costs with a significant drop in demand that is expected to continue throughout this year.
CEO Jens Bjørn Andersen said the staff reductions had already begun in some markets, with most of the 3,000 losses to be from among the company’s 30,000 white-collar staff rather than its 30,000 blue-collar workforce.
Although the company today also announced another set of industry-leading figures for its financial performance in the first quarter of this year, albeit below its pre-Covid expectations, Andersen said it was necessary to align costs with expected demand.
“We reacted swiftly already in March when we came to the realisation that this could have a severe impact on the volumes that we transport at DSV,” he told analysts and journalists today. “We have always done what we could to reduce the cost base or to align it with the activity level.”
In times of expansion, this meant additional resources, but the current circumstances required a reduction in resource levels.
“This is not something that we do lightly,” he said. “We have said this morning that in excess of 3,000 good, loyal employees will have to leave the company, and this is something that we do with a heavy heart. It means we are now aiming to reduce the cost base by something close to 10% of GP (gross profit), DKr 1.4 billion (US$204 million), on an annual basis.”
The cuts will affect all divisions, with approximately 50% in Air and Sea, 30% in Road and 20% in the Solutions businesses, with the measures “expected to be phased in during the second half of 2020, impacting all countries and all regions and all divisions”.
Andersen stressed that “these COVID-19 initiatives will come in addition to the announced Panalpina integration synergies”, adding: “It sometimes costs money to save money, and in conjunction with the savings, we will probably book something in the area of DKr1 billion in 2020.”
He told investors: “It’s also important for us to say we feel we have a very solid financial position and that we are ready to meet the challenges that may arise from the continuing developing Covid-19 situation.”
The announcement by DSV comes as other freight forwarders and logistics firms have been reviewing their staff levels. While many have taken advantage of government supported furlough schemes to provide a temporary response to falls in business levels, many have also internally announced permanent redundancies, with anecdotal evidence of some freight forwarders reducing their staff levels by 10-15%.
Despite the current situation with regards to COVID-19, DSV said it expects its ongoing integration of Panalpina, acquired last summer, to continue as planned. Indeed, this has been continuing in recent weeks and has been completed in 30 countries – equivalent to more than 70% of DSV-Panalpina’s volumes – and at the end of April that figure was almost 80%, Andersen said.
By July that is expected to reach more than 90%, “hopefully towards 95%”, with the rest being completed in the second half of the year. But by the end of July, “we will consider it done”, he said.
Commenting further on the impact of Covid-19, DSV highlighted that the global health crisis had “significantly impacted global trade in the first quarter of 2020. In February, the impact was mainly related to China and led to a decline in our Air & Sea activities. In March, the lockdowns across the globe impacted the activity level for all divisions.”
DSV estimates that the decline in activity negatively impacted its earnings before interest and tax (EBIT) before special items by DKK 250 million in the first quarter (Q1) of 2020.
Stressing that all its business units “continue to operate through the lockdowns, supporting critical supply chains” while “strictly following public health procedures and guidelines to protect the health of employees and ensure safe and reliable operations”.
With air freight market or industry volumes currently down by an estimated 20-30% in April and sea freight by 15-20%, year on year, DSV said: “The crisis will have a significant impact on activity levels in the coming months, and we have therefore taken initiatives to adjust our capacity and cost base. We are participating in government wage and fixed cost compensation programmes; however, redundancies cannot be avoided in certain parts of the organisation. We target annual cost savings in the level of DKK 1,400 million. The initiatives are expected to trigger restructuring costs of approx. DKK 1,000 million in 2020.”
Besides the impact on activity levels and earnings, DSV said the crisis had led to higher credit risk on customers, adding: “To mitigate this risk, we have tightened our authorisation policies for approval of payment terms and are closely monitoring trade receivables and overdue balances. As part of our normal credit policy, trade receivables are covered by credit insurance unless the customer is classified as a blue-chip company with low credit risk.”
Looking at the group’s overall performance in the first quarter, Q1 2020 revenue amounted to DKK 27. 3 billion growth for the of 36.6%, thanks mainly to the addition of Panalpina to the business. In Q1 2020, the Air & Sea division achieved an increase in revenue of 76.7%, Road a 2.0% decline and Solutions a 12.6% increase, compared to the same period last year.
“The growth was driven by the acquisition of Panalpina. However, activity levels in Q1 2020 were impacted by the COVID-19 situation, which led to a significant drop in freight volumes,” the group said.
“We estimate that the sea freight market declined by 5-7% and the air freight market declined by 8-10% in Q1 2020. The decline in volumes was partly offset by higher freight rates, mainly in air freight.”
The consolidated gross margin was 24.5% for Q1 2020, compared to 25.6% for Q1 2019.
Looking at earnings before interest and tax, EBIT before special items was DKK 1,566 million for Q1 2020, compared to DKK 1,454 million for the same period of 2019. In constant currencies, growth for the period was 7.6%.
In Q1 2020, the Air & Sea division achieved an increase in EBIT before special items of 12.9%, Road a decline of 12.8% and Solutions a 17.2% decline, compared to the same period last year. All in constant currencies. EBIT before special items in all divisions was negatively impacted by the COVID-19 situation.
“The growth in Air & Sea was driven by the Panalpina integration and cost synergies, which have been achieved in line with expectations in the quarter,” the group said. “The synergy impact is expected to increase in the coming quarters.”
The conversion ratio was 23.4% for Q1 2020, compared to 28.4% for the corresponding period of 2019. The group said the decline in the conversion ratio “was attributable to the Panalpina integration, which initially has an adverse effect on the margins of the Group,” adding: “As the integration progresses and synergies are realised, margins are expected to increase. Furthermore, the conversion ratio was negatively impacted by the lower activity levels following the COVID-19 situation.”
Commenting on the group’s performance in the first quarter, Andersen, said: “When this year started, we were really looking forward to demonstrating the strength of the DSV Panalpina combination. The COVID-19 crisis has obviously changed the agenda for everybody and hit our markets in a severe way, but we have been able to continue the integration as planned.
“All things considered, we delivered satisfactory results in Q1 2020 and our asset-light business model has shown its strength. The crisis will have a significant impact on activity levels in the coming months, and we are taking the necessary steps to adapt while supporting the supply chains of our customers and ensuring the safety and health of our employees.”