Thank you very much, and thank you for joining this call with a relatively short notice, as you saw. And sorry, I'm here, as usual, with CFO Karina Deacon, and the Head of Investor Relations, Ron Holt, and I'm Torben Carlsen. Thank you for joining. You saw that we signed the transaction last night, and we thought given that this is a new geography and one of the rare expansions in our ferry network, that it was worthwhile giving an opportunity to hear more about the transaction this morning. Just on page three, a short reminder of who DFDS are. We have a transport network in and around Europe, combining ferry infrastructure with road and rail capacity.
Our earnings have fully recovered post COVID, and as most of you know, we have an outlook for the year of DKK 4.8 billion-DKK 5.2 billion EBITDA. We like to think of ourselves as an ESG front runner in our sector, and our decarbonization goals towards 2030 are on track. So what happened last night, or what was it that we announced last night? It was that we now expand our network into one of the more busy ferry markets in Europe, namely the Strait of Gibraltar, where we will acquire FRS Iberia, who operate the three routes from Spain to Morocco.
We think it is a high growth potential with some 8% annual average market growth expected for the next five years. We believe that we have been able to negotiate attractive transaction terms, and we believe that, with the knowledge we have from other areas, notably the English Channel, we'll also be able to leverage our experience in these areas, and we'll have further operational development opportunities in the area. Moving to page five. This is, as you said, the market-leading ferry operator with high reliability. It has operated since 2000. It's the only operator in the area that operate all the three Strait of Gibraltar routes.
The key route for us is Algeciras-Tangier Med, which is a Ro-Pax route with 50/50 freight and passengers. This route generates 60% of the total revenue and has a higher earnings share than the remaining routes, relatively seen. The two other routes, Tarifa-Tangier Ville, and Algeciras-Ceuta, are passenger routes deploying high-speed catamarans. In all three routes, the market share of FRS Iberia/Maroc is around 28%-30%, depending on market segment and season. As we have in the announcement, we expect revenue this year of DKK 1 billion-DKK 1.2 billion, an EBITDA margin in the range of 18%-20%, EBITDA margin of 11%-12%, and 750 employees, seven vessels. On average, fairly old.
Five of them owned, two of them chartered. And you can see the distribution across the three routes in the table on page five. Page six, macro environment. The EU Moroccan ferry market revenue is estimated at around DKK 4.5 billion, of which freight constitutes 25%. There's a forecast to grow 8% per year over the next five years. Moroccan growth is supported by nearshoring or the China Plus One strategies of many companies that are being implemented.
There's a balance in import and export rate on these routes, and there's a very close trade relationships between Morocco and EU, facilitated by various association agreements, and key trading partners, not surprisingly, Spain, France, Italy, Central Europe. Moving to page seven. You see the market share and also its development in cargo traffic, around 28%, and in passenger traffic around 30%, with some swings, of course, during COVID. Depending on route, 2-3, 1-3 competitors on the different routes. Turning to page eight. Why are we doing this? Well, it expands our Mediterranean network. We access the growth from nearshoring, as we do in Turkey.
Our capabilities from the channel, we believe are helpful in the further development and optimization of the trade on the Strait of Gibraltar. We see high growth of the freight segment on the Strait. We believe we can use some of the tools from the channel and elsewhere in our system to optimize passenger yield and to significantly increase the digital distribution of tickets. Longer term, we also believe that some of our tonnages on the channel will be suitable in the Strait of Gibraltar. There is some resilience in the market forces on the Strait of Gibraltar as the market is regulated by law and various concession and permits in the ports on both sides.
I will turn over to Karina for page nine.
Yes, and as we start out by saying, we think that we have got access to ferry infrastructure here at the attractive transaction terms. We are looking into an expected multiple of at around 6x EBITDA, based on the current expectations for 2023 numbers. The transaction will be financed in part by loan financing and then also existing funds. And we have, I'm almost tempted to say, as usual, we had great support from our core banks in financing the transaction.
When we look at the leverage, if we calculate that on a pro forma basis, assuming that we will include a raise by the end of the year, we see a slight increase in leverage, but only around 0.1 x. So, so not something that is changing our target of being in the range of 2-3 x earnings. When we look at the ROIs, we see it being accretive from day one, compared to our current return level requirement. And we also see an EPS accretive transaction from the outset. The transaction is, of course, subject to regulatory approval. Best guess for closing is towards the end of the year of 2023.
Good. On page 10, this is just a map of our current network and of course, the expansion into Strait of Gibraltar. And as we said, you know, a market supported by nearshoring, it's a high-growth freight market. We see development opportunities both from leveraging our skills on the channel but also as freight develops from the area. And as Karina just went through, we believe we have been able to to negotiate attractive terms. As we speak, our head of ferry, Mathieu Girardin, together with our head of passenger and and and also our head of freight sales, are in are in Tarifa to greet our new colleagues.
We also have a person from our strategy and consulting who will relocate to Spain for 4-6 months to manage our different integration and work streams. First, planning, of course, until we get the approval and then the actual implementation. That was it from our side, and then over for Q&A.
Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star, followed by one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you are using a speaker equipment today, please leave the handset before making your selections. Anyone with a question may press star and one at this time. Our first question comes from Michael Vitfell- Rasmussen from Danske Bank. Please go ahead.
Yes, thank you. Three questions from my side. I'll take them one at a time. First of all, if you could add some color on what kind of CapEx you're looking at. Also talked as you alluded to, the fleet is rather old. And just in the same combination, I see that out of the seven vessels you take over, five of them are relatively fast jet ferries. Will that look bad on your fuel consumption, and also on your ESG scores? Thank you.
The CapEx prospects are, you know, there is a tendency to use quite old tonnages in this area. And we, of course, not overnight going to change that. We have ambitions to add a third Ro-Pax on the trade. And that can either be an existing DFDS ship that we may have to modify. In which case there will be relatively modest CapEx, and we're also looking potentially for a third party that could happen in 2024. So there will be some CapEx. And then there will be some replacement if we are further a couple of years ahead of some of the old high speed ferries.
So all in all, compared to the remaining DFDS ferry system, a pretty light capital-intensive operation you can say, and we intend to continue like that. With regard to the fuel efficiency, they do not operate at as high speeds as you, for example, see in some of the Danish waters with high-speed craft. But of course, there are some something we're also looking at. The good thing in a midterm long-term perspective is, of course, that the distances here are such that there are more obvious solutions for the green transformation than on some of our longer routes. But in the short term, we are going to optimize.
We don't think it will have a major negative impact on our KPIs, as such.
Great. Thank you, Torben. I also note that Spain, a few months ago, gave some funding to the tunnel project. What is your thinking on that? Obviously, you know, a tunnel very well from the British channel. Any kind of implications in that? And here, I know it's obviously rather long term, but how should we think that into the equation here?
It's a complicated project. The depth is quite a challenge in this area, we believe. We also have some experience, of course, from Denmark buying or so, building tunnels and it's not going super fast always. We have looked into it of course. We do not believe, even if everything goes well, that this is something that will happen in the next 12-14 years. But that would require, you know, that everybody is completely focused on it and there are no political delays in that period, which we have seen in all other places that there will be.
So my final question is just on margins. You mentioned here 18%-20% at EBITDA levels. Once you are done doing what you do best and what you've done a lot of times in the past, should we expect margins to reach kind of existing businesses in your Med business, i.e., maybe 10 basis points, sorry, 10 percentage points upside?
I, I think we are a little more humble than, than this. The, the route has been operated well by the current owners. As, as we mentioned in the presentation, we think we have some, some tools that, that we can deploy here, that should bring, profitability up. But, but for now, we will, we will spend a little time, learning the, the operation, and then we will, come up with, with some more, solid, projections on, on that. But, but we are pretty confident that we can at least keep the, the current levels.
Great. Thank you very much. I'll jump back in the queue.
The next question comes from Dan Togo Jensen, from Carnegie Investment Bank. Please go ahead.
Yes, hello, and a few questions from my side as well. Competitors, can you give some color on who are competing against you and how they have, so to say, invested in this market in the past few years? It seems like market shares are relatively con... At least on the chart that you show here. So who is it you're up against, please?
The operators are. Baleària is the largest operator next to us. Then you have a company called Armas. You have Intershipping, and there are some combinations in ownership in those companies. So the structure is fairly stable. The tonnages can have some fluctuations because there is a very high summer season. So there are different tonnage situations from year to year during the high season. There are some stipulations on the Moroccan side that there should be 50/50 Moroccan and EU tonnage, which also means that it is a fairly, I don't know if it's maybe inertia market in terms of changes to the situation. But it's all capable competitors, which is for us always good, because then it's also rational competitors that we're up against.
Are they on par with you on market share-wise, so around this 30% as well?
Yes, varying a little bit per route. But they are about the same size.
Okay. Then you also have a strategy, and we've seen that in Northern Europe here. I've also seen it in Turkey now, with you taking in business on the logistics side. Any opportunities here? That's one thing, and the other thing is, it seems like that synergies that you are alluding to here primarily relies on expansion on the freight side. Is that correct?
We are, of course, if I start with the last first, focus on trade a lot, and this is for us the one of the attractions that we think that the Algeciras-Tangier Med line will benefit from strong freight growth over the next years. So that is definitely an attraction. In terms of logistics, we the HSF Group that we acquired used to have a small operation in Morocco, and some of the goods that go on the channel are fruit and vegetables from this area. We'll see, as we always do, if there are opportunities either in partnerships or else to also become a customer on our own routes as logistics. But there are no plans for that from the outset.
And then maybe a question for Karina. This, as I understand, does not, as far as I can see as well myself, doesn't really move so much on the financial side, at least. But still you're investing on more than DKK 1 billion Danish. Do you still have room for, let's say, an equal transaction that we know that you are negotiating at the moment, without having to raise more equity?
I think we do. As we've said all along, our target structure is to be leveraged between two and three. But in the event of special situations, we can also go above three for a short period of time if we can see a business case that would bring us back into the range. So I don't see that this transaction here makes us not capable of doing an equal transaction in 2024, if it turns out to be the right thing to do.
That's good. Thanks a lot.
The next question comes from Ulrik Bak from SEB. Please go ahead.
Yes, hi, Torben and Karina, just a few questions from my side as well. Can you perhaps allude to the historical financials of this company? What have the margins been, revenue trajectory, volume growth, over the past, say, five years?
We have, you know, it has been steady growth, but then during COVID, they took quite a serious hit, of course, with passengers stopping. Then in 2022, they had results above actually what we have shown here. And now in 2023, they are, you know, lightly above 18-19. So for us, it's not just an attractive acquisition multiple, but it's also an attractive starting point, you can say, in terms of downside protection, if you will, but also some upside potential when we look at, for example, 2022.
In terms of freight growth, what’s been the annual average growth rate historically?
I don't have that number here, but it has been a strong growth.
If we see a cargo back from the last five years, we do see it around double digits.
Yeah.
So it is in line with the expectations that we say that we have for the future.
The cargo comes from a fairly low level in our view. So that's, of course, also one of the reasons for this relatively high growth rates.
Okay. That makes sense. And these 8% growth over the coming five years, that's volumes, I presume, and not revenue?
Yes, and that's the market assumptions. We have lower assumptions in our base case, you can say.
Okay. Then a question to the sales process. Was it a structured process initiated by the sellers? How many bidders? How much can you share from, yeah, from the process?
It was a structured process. Sellers tend not to share how many other participants are in processes like that. But it's our impression that the last two, three months, we have been fairly alone in the process.
Any color on the rationale for selling? It seems like a very attractive area to be in growth-wise, and, you know, squaring that with a EBITDA multiple of 6x, it seems fairly low for a high growth area like this. So, and just please help us understand the, yeah, the rationale here.
Yeah, and of course, you would need to ask FRS, but what they say in the statement that we've seen is that this area is a little bit different than what they do elsewhere, where they operate significantly smaller vessels. And you know, like on the English Channel and stuff like that. So but they do that worldwide, and they mention that they want to sell this special business off to invest more in their core business. But you would have to ask FRS their reasoning.
Sure. And then my final question, just the composition of the fleet that you're acquiring. The majority of the vessels are owned. Are they all owned, or are some also chartered? And what do you consider the economic lifetime of the acquired vessels to be?
Well, I say five of them are owned, and two are chartered. They are older than we in general operate the vessels, but we can see that that's also what the competition does down there. We have one fairly new HSC on the Ro-Pax side. We are comfortable with us being able to reutilize and also just in the market find new tonnages. So we'll have to familiarize ourselves with the tonnages. We've had technical people from our own organization aboard all the vessels. So we're fairly confident that we can continue with the ones we take over. We'll add a Ro-Pax on the Ro-Pax route within hopefully less than six months.
Then, in 2026, 2027, one of the older ones will be exchanged. So we'll continue at a fairly low capital-intensive rate.
Okay, that sounds great. Thank you. No further questions at this time.
As a reminder, if you wish to register for a question, please press star and one. The next question comes from Lars Heindorff from Nordea. Please go ahead.
This morning, and thank you for hosting this. Also, a few questions from my side. Firstly, regarding, if you can give us a split between passenger and cargo revenue.
On revenue?
Yeah. We have on the, as we mentioned, the Algeciras-Tangier Med, it's 50/50. And then it's primarily passenger on the remaining routes. So it is a majority passenger and cargo revenue that we have here.
Okay, so and you said that Algeciras-Tangier, that was 60% of revenue, if I-
Yeah, correct.
Okay. Okay, and then, on the regulatory side, you write in the statement that there are some requirements, both from the Spanish and Moroccan sides, with respect to number of departures and also the capacity deployed. Can you give us a bit more details on that? Is that somehow that you are, I mean, required to have a minimum capacity at all times, or how does that work?
No, that depends a little bit from route to route and from whether you're on the Spanish or the Moroccan side. But basically on the Ro-ro trade, Moroccan imposes a 50/50 Moroccan EU split of the business. Which means that we have a concession or an authorization for one of our Ro-Paxes, which is Moroccan-owned, on that trade. And likewise, when we expand for a third, we need to get an authorization for this. On the Spanish side, you have licenses for two years in the port. That gets renewed. We are hoping that those licenses can be a little bit longer going forward.
There you have some also on the Ceuta route some demands on how old the tonnages can be that you operate if you want a concession. On that route, we operate without a concession. One of our competitors do have a concession. So it's a fairly complex picture, but a picture that we also believe once we have understood it is actually something that makes it a very attractive place to operate.
Is that, is that the reason why you are already now, you mentioned that you're planning to replace or, one of the, the catamarans, or was it by maybe two years down the road, something like that?
That is something that will also be an advantage in some of these license, yes. But it's not something we have to do.
Okay. But then you can continue to operate without a license on the Ceuta route?
Correct.
Okay. And then on the business, what about the vessels? I'm not exactly sure which vessels there are. I've been trying to dig them up, but when I look into Clarksons database, at least it looks like there is no information about scrubbers on these vessels. Are those all fitted with scrubbers, or how is that situation?
There are no scrubbers on these vessels.
Any plans to do install that?
No. We will have to look at, we don't have experience in fitting scrubbers on high-speed crafts. There are one of the high-speed crafts that are fairly new, which would be the one that we would look into if something can be done. But the very old vessels, we will not install scrubbers on.
Okay. So these vessels here, are they consuming 0.1, or what kind of-
Of, yes.
0.1?
Yeah.
Okay. And then on the synergy side, I think you've been over, at least on the cost side, that there probably doesn't sound like there will be much, maybe a little bit, but on the revenue side, are there any overlap between the and this is mostly within the cargo space, I assume, here and what you see in the other parts in the Mediterranean and in Turkey, where you operate. Do you have any overlap in terms of customers and stuff like that?
There is, there's some overlap also to the channel. But as usual, we do not include revenue synergies. But we will, of course, see if there are any advantages we can deploy here. But you're correct. It's not so much a synergy case. It is a growth case, and then also one where we think we can help with some of the experiences we have, primarily from the channel in how to optimize yield and digital distribution, which in turn then will reduce costs.
Okay. And then last but not least, maybe a question for Karina. The financing cost of this, roughly DKK 1.2 billion-DKK 1.3 billion that you pay for this, what should we assume?
I think I saw that you had assumed 5%, and I think that's a pretty good guess. Maybe a little bit above that, but that is what we're looking into.
All right. Thank you very much. Thank you.
We have a follow-up question from Michael Vitfell- Rasmussen from Danske Bank. Please go ahead.
Yes, sorry, that actually has been answered. It was just on the regulatory and the scrubbers, so that's fine.
We have a follow-up question from Ulrich Bak from SEB. Please go ahead.
Yes. Hello, thank you for taking my follow-up question. Can you just perhaps talk about, you know, the political risk, the stability of the Moroccan economy, perhaps also, you know, with reference to Turkey? What, what, what are we looking at here?
That's, of course, anybody's own assessment. We have looked into the political system in Morocco. We've looked into the relationship with Europe. It's a kingdom, as I'm sure you are aware. There seems to be quite good support for the king. It's the entry to Africa. If you listen to other companies operating in this region, it's the sure bet if you want to do something in Africa. So, we have at least judged that the country with regulations that you can rely on. It's again a growth country. They value the relationship, the close relationship with Spain, but to a broader extent, the EU. They are benefiting from this nearshoring.
They are a big part of the energy transformation with very attractive land space for both solar and onshore wind where we see some of the participants investing now probably heavily over the next years. So we think Morocco is a good place to invest in. Of course, it's not Germany, but as far as we can see and with the experts that we have consulted on this, it's a reliable place to invest in also for the future.
Okay, thanks. Do you already have customers who have already invested in production facilities, already have production facilities in Morocco, or are planning to do so in the near future? Do you have any anecdotal evidence like that?
Well, Inditex, one of our last customers in Turkey, also have production facilities in Morocco, just on top of the head. But otherwise, Morocco, it's automotive, so it's a number of the well-known automotive brands that are also in Morocco.
Okay, thank you so much.
We have another follow-up question from Lars Heindorff from Nordea. Please, go ahead.
Yes, thank you again for taking my question. So just to follow up on the CapEx requirement going forward. A couple of things. First, I don't know if you can say, and pardon for my ignorance, but I haven't had the time here this morning to dig into the cost of such a catamaran ferry. What if you're gonna buy a new one of those, what will be the cost of such a ferry?
I think it's too early to be too specific. But in our plans, we do have for this third Ro-Pax some CapEx in 2024, 2025, and for a new vessel in 2025, 2026. But it's you know, if you put in some DKK 30 million for each, then I think you are within a range that works.
$30 million, that's dollars, I assume?
Yeah, it was euros, but you can, you can-
Okay.
Do it as dollars.
Same thing. Okay. And will there be any—I mean, in case that you will have or want to operate on a license, will you need to do any form, any kind of CapEx on the terminal side? Will there be anything there, or will it only be vessels?
It's the CapEx on the terminals are done by the port authorities.
Okay. This is only vessel CapEx, which is required.
Yeah.
All right. Thank you.
This concludes the question and answer session. I hand back to Torben Carlsen for closing comments. Please go ahead.
Thank you very much, and thank you very much for the big interest and the good clarifying questions. We really look forward to this. We think it fits very nicely into our existing system and also where we have identified that growth will take place. So, we look forward to the approvals by the authorities and then to start the integration work and the operation on the Strait of Gibraltar. Have a good day and a good week.