damco

The past few years have been particularly hard for Damco.

Its move from Copenhagen to The Hague in February 2013 was a disaster. It went from profit to a net loss of $111m that year, partly attributed to one-off relocation costs, which widened in 2014, spiraling to -$293m, and parent Maersk admitted that the forwarder had “lost its way”.

Damco financials 2014

Damco

Damco financials 2015

Damco

source: APMM

Damco’s plan to be “closer to its customer base” backfired badly when several key account executives declined to ‘move house’, considerably weakening the forwarding unit which, of course, is a ‘people’ business. So, instead of attacking the comfort zone of its rivals, it was forced to defend itself from aggressive competitors sensing blood.



 

Rolf Habben Jansen, ex-Deutsche Post DHL, was broadly given carte blanche to expand Damco’s reach around the world, while at home the problems were mounting. Sources have told us that it appeared clear immediately that “it would have been much cheaper to stick with a focused plan at home than seeking to outsource key customer functions to Asia”.

However, given the circumstances, with hindsight it is hard to totally blame Mr Jansen.

He was not given the support to run and develop the business, but was put under considerable pressure to place more Damco flags in the ground, similar to the brief given to APM Terminals’ Kim Feifer.

The emphasis was on growth, so insufficient due diligence was performed on the deals that were done, while major tenders that were hardly justifiable in terms of economics were often hard to win. Simply put, it could not afford the market rates.

After Mr Jansen was poached by Hapag-Lloyd at the end of 2013, long-serving troubleshooter Hanne Sorensen was drafted in by APMM chief executive Nil Andersen to sort out the mess.

“Under every stone I found a problem,” Ms Sorensen said privately to colleagues.

In keeping with her track record at APMM, Ms Sorensen got her head down, seldom appearing in public and refusing interviews. A colleague once said “Hanne is a workaholic; she is there when we come in in the morning and is still there late at night.”

Ms Sorensen uncovered accounting irregularities which spun Damco from a ‘profitable’ Q2 13 to a thumping year-end loss – and worse was to come in 2014.

But, just as she managed to get Damco back on track in the second quarter of 2015, “delivering a small profit”, Maersk began the first round of its soul-searching restructuring, which ultimately led to the “night of the long knives” dismissal of Nils Andersen in June 2016 and his protégé, Ms Sorensen, leaving the group that September, after 22 years of service.

“One day when I visit London we’ll talk about the Jansen and Hanne story a bit more,” one senior executive with direct knowledge of Damco affairs recently told us. “I see huge concerns for the 10,900 staff members now at Damco, of whom the FF [freight forwarding] part likely has around 50%,” he concluded.

Forwarding finances

Yes, the break-up of Damco is a story of people and numbers; but it also concerns the legacy of the management of the past decade.

A bit of history

Damco

source: Damco

Let’s start with the financials, in order to determine how many people might be affected by the recent announcement of AP Møller-Maersk Group (APMM), which said it would separate Damco’s logistics businesses from freight forwarding activities (Damco FF), incorporating the former under the parent company’s umbrella.

One obvious caveat is that Damco does not disclose its full numbers by business units, but based on reported figures, last year the entire division – essentially the old Damco – turned over $2.7bn, with $1.3bn being generated by air and sea freight activities. Meanwhile, some $1.4bn of sales were booked by supply chain management and warehousing as well as other value-added services.

Insiders have revealed that, given the nature of the services Damco has always offered in air and ocean as part of a conglomerate structure, it would be rather aggressive to assume a gross profit (GP) margin of up to 20%, which yields a gross profit of $260m. They warned me, though: its GP margin could be as low as 15% on declining revenues this year – but we have decided to ignore a bear-case scenario, although some insiders have pointed out that margins could be lower this year.

Nonetheless, assuming its trailing reported turnover represents net sales, rather than gross revenue, Damco might have about a quarter of a billion dollars to play with to sort out its operating expenses, taxes and, at least theoretically, a proportional part of interest expenses of group debt that it uses to finance its operations.

(Note: $260m is a rich estimate, not only based on the assumed top-end margins, but also if its gross revenues have to be adjusted somehow to derive net revenues. Then, GP could be as low as $200m.)

Unsurprisingly, it burned $100m in operating cash flow last year, which suggests its staff expenses, the chief operating cost for freight forwarders, are significantly heavier that they should be.

The last available numbers of Damco, snapshot

Damco

source: APMM

But to what extent? And, equally important, now that Damco FF is separated from the core shipping activities, is it sustainable?

While there will be cost savings for the parent company (check the wording of the announcement), Damco FF employees are the ones who should be having sleepless nights, whether or not Damco FF finds a partner. (More on this hot topic in the marketplace will be covered in our next analysis)

Internally, in terms of cost full-time equivalent analysis, Damco is benchmarked against Kuehne + Nagel, DSV and Panalpina, and certain comparisons raise eyebrows.

Based on the information we gathered, it is relatively safe to assume that about 4,000 people work under the freight forwarding division (air and ocean only), with the remaining 6,900 staff employed by its supply chain and warehousing sub-units, including a significant number in other hubs, based in service centres in India and the Philippines.

Given its level of estimated gross profit, we have looked at its implied gross profit (GP)/employee ratio, which is not a perfect ratio but provides a clue as to the level of cost efficiency that Damco FF must target as a standalone entity.

Efficiency

K+N’s 2017 group turnover amounted to CHF22bn, but only CHF18.5bn of net sales were booked last year. As part of the mix, it generated CHF10.6bn of freight forwarding net sales.

While group gross profit margin has been well over 35% since 2011 (35.9% in 2014; 39.6% in 2016), the underlying profitability associated with airfreight and seafreight activities was significantly lower, with a blended GP margin at about 23%.

Damco FF, of course, is a much smaller player than K+N. Lacking critical mass is one problem, another is its outdated IT platform, another is the lack of managerial guidance, another is a lack of coherence in the way origination and distribution costs and revenues are monitored and allocated across different regional hubs.

(Note: K+N’s net turnover in air stood at CHF4bn (6,600 staff) and CHF3.3bn, respectively, in 2017 and 2016, while net sales in seafreight came in at CHF6.6bn (9,500 staff) and CHF5.8bn, respectively, in the past two years.)

Having performed the same calculations for DSV and Panalpina, it is easy to assume that, even going with a 20% GP margin on $1.3bn of trailing revenues (for Damco air and sea only, Damco FF), and assuming those revenues are net revenues rather gross, Damco FF would have to reduce its headcount (again, estimated at 4,000 employees, based on the divisional revenues split) to 2,500 if it is to maintain a GP/employee ratio in line with Panalpina (FF operations only), which is significantly less profitable than DSV FF ($107k per head) and K+N FF (CHF151k per head), based on GP/employee ratios for comparable FF businesses.

Of course, when it comes to GP metrics, some adjustments ought to be made for comparable purposes (accounts from different jurisdictions, and even within the same country at times, are seldom perfectly comparable on a GP basis), but 1,000 redundancies could be a good proxy for how many people are running the risk of being axed at Damco FF.

This could lead to a hefty restructuring charge, but would also save about $100m annually, based on our estimates. One caveat is that streamlining Damco FF could be easier said than done, given the level of services that it must provide to remain competitive, but is that important now?

We will leave you to answer that question, but we have heard that many employees are gauging their options.

 

We hope you have enjoyed reading this premium content. This Market Insight will be available, along with a host of other content, exclusively to premium subscribers later this month. More information on how to sign up coming soon.

Alessandro Pasetti does not invest in the companies he covers. Alessandro Pasetti and The Loadstar team have no positions in any stocks mentioned in this market insight column, and have no plans to initiate any positions within the next 72 hours.

COMMENTS 0


Leave a Reply