Ladies and Gentlemen, Welcome to the DFDS Q4 Report 2023 Conference Call. All participants will be in listen-only mode, and afterwards there will be a question-and-answer session. Today I am pleased to announce Torben Carlsen, CEO. Please go ahead, sir.
Thank you, and Welcome to DFDS's Q4 and Full Year 2023 Conference Call. As usual, I am joined by Karina Deacon, our CFO, and Søren Brøndholt, our head of investor relations. I'm very pleased to deliver a solid result for 2023 in a year where markets have been challenging. Let us turn to page three, as this reporting also marks the completion of our Win 2023 strategy. Through the last five years we have expanded our network, both in terms of geography but also in terms of the products and services we offer to our customers. Now we enter a new strategy period, moving together towards 2030, where we initially focus on unlocking the network value we believe has been created in the previous strategy period. We'll unlock the value by continuing to deliver on our acquisitions.
We are in a very good starting point for acceleration of our organic growth, and we want, during this period, to deliver an adjusted free cash flow of DKK 1.5 billion per year. After the initial unlocking value period, we'll continue with further emphasis on the green transition by constructing six green ferries that will be in operation by 2030. We'll reduce our intensity of emission on land by 75%, and in this period we'll continue to deliver the DKK 1.5 billion free cash flow. Turning to the next page, more specific financial ambitions, we expect the ROIC to be around 10% when we reach the end of 2026. We will restrict our CAPEX between DKK 1.5 billion-DKK 2 billion annually in this period, and then, as mentioned before, deliver an adjusted free cash flow of DKK 1.5 billion annually.
During this period we will also gradually reduce our leverage from just under 3 to around 2.5 by 2026. Turning to the next page, the 2023 result was achieved in a year with many challenges. As mentioned, we delivered the 2023 promise set in 2019. In 2023, our freight ferry result underlying was close to level with 2022, and we were able to post a very strong passenger result. Logistics was impacted by slowdown, generally in the markets, and also one-off costs specific to DFDS.
Through the year we have engaged in capacity adaptation to fit demand, cost controls, and pricing initiatives to maximize the situation. Customer focus has been prioritized, as it always is, to support our organic growth ambitions. The headwinds are well known. The overcapacity on the Channel, the overcapacity created by the war in the Baltic Sea. Turkey was hit by a devastating earthquake early in the year, and elections and other developments in Turkey kept consumers and investors a little bit holding back, while higher interest rates in general curbed demand from primarily the consumers in Turkey.
On the road, what has mostly hit us is the slowdown in construction and the volatility and unpredictability of the meat flows that we carry. Customers have seen that there's overcapacity in the market and have engaged in unusually high tender activity, which of course put pressure on margins. Again, in 2023 we expanded our network. McBurney and Lucey are performing well. Estron was acquired in Q3, and we have moved some of their ferry volumes to our own routes. We continue to see some challenging in the Nordic and continental cold chain, but expect some recovery during the first quarter.
And then, of course, we closed the acquisition of FRS early 2024 and expect good results from FRS during 2024, and we'll report further on this when we talk again in May. The cash flow focus means that the adjusted free cash flow is a key metric, as you heard also before. We have engaged in some sale and leaseback transaction during 2023, and we may see more of that during 2024. Our leverage has stabilized and is set to go down, all things equal. We are challenged by the increased finance costs, which more than doubled due to, of course, the high interest levels. Turning to page six, and Karina now.
Yes. A few comments on the last quarter of 2023. So in Q4 alone we saw increasing revenue of 9% if we adjust for the bunker surcharges. This was driven by higher revenue from both ferry and passenger, and then also, of course, from the acquisitions in logistics. The increase in revenue didn't quite show up in EBITDA, which declined, but this was also expected because we knew we would have a significant negative impact from the lower oil price rates in Q4 2023 versus Q4 2022. Looking at the passengers, we saw 6% more passenger volume compared to Q4 2022, and on a like-for-like basis that was very much above 2022 if we look at the EBITDA, where we had some one-off income in 2022. Logistics also improved in terms of EBITDA, but it was driven by acquisitions.
We faced a challenge in market that Torben just described with low activity, and then we also had some one-off costs, for example, relating to adjustments of the capacity. If we turn to slide seven, if we look at the entire P&L and look at the items below EBITDA, we had a significant one-off income. We have already explained that. It was the DKK 95 million from the sale and lease-back of the three ferries that we did in October. In Q4 we saw an increase in depreciation. I've talked about that throughout the year, but the increase in this quarter was mainly driven by acquisitions, but also the impact of the sale and lease-back, which gives us higher depreciation.
Then we had changes in vessel deployment, so when we lease on IFRS rules we get higher depreciation than when we own the vessels, and then we also had a few write-downs as we have on an ongoing basis, but in Q4 there was perhaps a little bit bigger than what we normally see. Nothing dramatic in that, though. Acquisitions also impacted amortization, so that meant that we saw a decline in EBIT to DKK 358 million. As mentioned, also throughout the year finance costs was up. When we compare like-for-like we saw a doubling of the interest rates, so of course that has a huge impact.
Then unfortunately looking at foreign exchange differences, rather large impact because in Q4 2022 we had a large positive, whereas in Q4 2023 a large negative. So all in all when you look at the changes it is rather big. A few words on the full year 2023. So revenue up on if we look at slide nine, revenue up 2%, but if we exclude the BAF effect it actually increased 6%.
And of course also in freight ferry the impact from the BAF is seen, so we had a negative development in revenue, but if we exclude this BAF effect it was up 3%, and that was mainly driven by higher revenue in the Mediterranean. Our passenger revenue increased 16% driven by all three business units with the passengers after the recovery in volumes, where we in total 2023 was up 19% compared to 2022. Logistics revenue declined 8% organically, so that was related to the lower road transport volumes, but also we saw lower cost surcharges, whereas you recall in 2022 they were particularly high driven by the higher energy prices.
The acquisitions, of course, has a large impact, not least due to McBurney that was included from Q1. If we turn to slide 10 and look at EBITDA, I think for the first oh, sorry, the last time we can talk about Win 2023 because we delivered again on the target of DKK 5 billion, so the target we set out in 2019 we can now say, "Yes, achieved," and we also managed to increase EBITDA by, although not a lot, but about 1% compared to 2022. As we talked about a lot during the year, we were negatively impacted by the external events on the channel with capacity and the continued war in Ukraine. The expected negative impact of the decrease in oil price spread, of course, also had a significant impact on the freight ferry income.
On the other hand, we saw a significant increase in passenger activities, not only driven by the increased volume that I talked about, but also healthy increases in onboard spend, not only duty-free but also generally onboard our vessels. Logistics, as mentioned, benefiting from acquisitions, but the underlying earnings were below last year. Looking at page 11 on the P&L, it's a little bit the same explanation that I gave for Q4. We have an increase in depreciation.
It was mainly due to acquisitions when we look at it from a year-on-year basis, and the acquisitions also impacted the amortization, which together meant that the EBIT went down by 6%. Finance costs we already talked about, so the last comment I'll make is on tax. Effective tax rate was, if we adjust for one-offs relating to prior year, was 7.5%, so that is in line with what we normally see. You might recall that we have a large one-off in Turkey relating to the earthquake tax, so if we adjust for that we are at a normalized level of 7.5%. Page 12 on ferry, volumes for that year was down 8%, but we were still up in freight ferry revenue by 6% if we adjust for surcharges.
Main reason was the passenger activities, but also higher revenue in the Mediterranean and higher rates in some market areas. The EBITDA decreased slightly because the expected negative impact from the oil price could not be fully compensated for by the higher passenger results. If we look at the results they were relatively stable for North Sea and MED, but as we talked about now, many times channel and Baltic seas were, of course, impacted by the external events. Passenger earnings increased significantly.
As I said, more passengers and more spend, and then also a slight benefit from the lower bunker price. Logistics, as mentioned, especially the second half of 2023 was tough, where we saw a decline in road transport volumes, particularly linked to the UK, but also in certain industries like construction and the meat sector. And that impacted revenue, which was down 8%, but earnings also declined 5% when we measure organically. Throughout the system we have adapted cost levels to the new level of activity, and in most cases we were successful in maintaining earnings compared to 2022, but we had in a few of our areas we had declining income, not least due to one-offs related to, for instance, closure of various operations and other restructurings. Turning to page 14, a few words on the capital side.
We ended the year with a ROIC of 7.6% and 10.4% if we exclude the acquisition-related intangibles. So with the impact of the sale and lease-back, which of course was significant, we achieved adjusted free cash flow of DKK 2.8 billion, but when we exclude that we still saw DKK 1.3 billion excluding this sale. That was because we saw operating cash flow up, so it was at DKK 3.8 million, but not quite at the 2022 levels because it was reduced by negative change in working capital, but also the higher interest and tax payments.
But this operating cash flow was compensated for by lower operational CAPEX than we saw in 2022, and that is, as we have also talked about with the strategy, something that we look into to having a lower level of operating CAPEX. Net interest-bearing debt up 4%, but with the increased EBITDA we only saw a marginal change in leverage moving from 2.8x-2.9x, so maintained in line with our policy of being in the range of 2x-3x. And with that I will close the number part and hand back to you, Torben.
Thank you very much. On slide 16 we see that the decarbonization of our ferry and logistics operations continues to progress. Our emissions on the ferries are reduced 5% across our route network in 2023. Our Every Minute Counts program, which is to reduce the time in port and increase the time on the water, delivered more than what we had hoped for. We had 90 of the 125 ordered e-trucks deployed by the end of 2023. We continue to have the ambition of six green ferries by 2030, and we are on track in both divisions for our short-term emission reduction targets.
If we then move to page 18, then for the year we are proposing a total capital distribution of DKK 600 million, which equals 10.67 DKK per share, and this will be split a dividend of DKK 269 million, 63 DKK per share, and then a share buyback of the remaining amount of DKK 430 million. We will commence the buyback on the 12th of February and run it until the DKK 431 million had been bought. Our outlook on page 19, 2024, reflects a continued flat overall market environment.
There's financial, there's geopolitical uncertainty, and it remains elevated, especially for the first half. We only see a slight rebound in European growth, so overall the freight markets are expected to be flat-ish. We think that in 2023 we'll see a start of the Turkish growth again once the measures to curb inflation start to kick in. Passenger markets not fully recovered after COVID, so hopefully still some upside from this segment. We will, when we report Q1, report the new acquisition, FRS Iberia/Maroc, as part of the passenger ferry results.
More specifically on the outlook 2024 on page 20 we expect a growth of 5%-8% in revenue. It's the addition of the FRS business, but it's also organic growth and the pass-through of the ETS surcharges that started 1st of January. We have decided to guide on EBIT rather than EBITDA. With the IFRS, EBITDA is no longer a proxy for cash flow generation, and we believe that ROIC and EBIT are the numbers that better reflect our value generation. We have an outlook for 2024 on EBIT of DKK 2 billion- DKK 2.4 billion, midpoint slightly lower than 2023, as we in 2024 are negatively impacted by non-comparable one-off items in 2023.
Operating CAPEX of DKK 1.7 billion expected for 2024. Turning to page 21, what are our key priorities for 2024? It is, of course, executing on the revised strategy, unlocking value, continue to deliver reliable, efficient services to our customers, make sure that our capacity matches the demand, organic growth focus, integration of our acquisition and Strait of Gibraltar, and focus on improvement in some of our challenged areas. With that, over to Q&A.
We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touchscreen telephone. If you wish to remove yourself from the question queue, you may press star and two. If you are using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. Our first question comes from Ruairi Cullinane from RBC Capital Markets. Please go ahead.
Yes, good morning. My first question is, what's the rationale for the shift towards returning more cash through buybacks rather than dividends? My second question is, there's been quite a strong start to the year for freight volumes. Whilst your guidance in that regard looks more cautious, so is there anything one-off in January that means Northern European freight volumes may not continue to increase? And then finally, your adjusted free cash flow target suggests another sale and leaseback is likely if the Ekol acquisition goes ahead. Should we expect one if it doesn't? Thank you.
Let me yeah, the voice was a little challenged here, but I think the outlook is when you say we have a strong January volume-wise, we do not see one-off things necessarily in 2024. We had some elements in 2023 that are not recurring, which is part of the, of course, which is taken into account in our guidance for 2024 with the DKK 2 billion-DKK 2.4 billion. So I think that's the in terms of the adjusted free cash flow, the DKK 1.5 billion, you can say, is something that we think we can achieve also without further sale lease-back elements. An acquisition of Ekol is not hitting the adjusted free cash flow as that would be an acquisition if it were to happen.
And then your first question about why we or what our thoughts are around the capital distribution. I think we are pleased to see that our board agrees with us that it's a good time to give capital back through share buybacks, and that's what this is reflecting. This is a shift also from maybe what you've seen before that we will attempt to maintain a very limited direct capital distribution through dividends around DKK 3 and then use share buybacks as a residual for the capital we want to give back.
Great. Thank you. Just on the question as to the strong start to the year for freight volumes, I was just wondering why we couldn't look at that and think that that might continue into the rest of the year? Clearly, your guidance implies flat-ish Northern European freight volumes. Thanks.
I think the answer to the strong January is very much relating to the channel, which came in higher than what we expected. When we look at our competitors there, there were some dockings, and January is the period for dockings. So if competitors take more out for docking and we maybe gain some more, it's not representative for the entire year. So I don't know if you can call it a one-off effect, but it's just part of the cycle. Then when we take ours out for docking, we will lose a little bit more volume as well. So it's not a proxy for how the year should be.
January, this is a relatively slow month since it's the start of the year. It will also be a little bit bullish to just assume that that's what happens the rest of the year.
Okay. Thank you.
Our next question comes from Ulrik Bak from SEB. Please go ahead.
Yes. Hello, Torben and Karina. Thank you for taking my questions. I'll take them one by one. The first one is, if you could provide a status of the potential acquisition of Ekol. And also in that connection, how we should think about the announced share buyback. Could it be reduced if you acquire Ekol, or could it be increased if you don't? Yes, please.
We have no news on the Ekol acquisition. We will go to the market once there's news to report on that. I would not expect the share buyback program to be impacted by an Ekol acquisition, positive or negative.
Understood. And so obviously, there's a lot of uncertainty about the market outlook, but if it turns out more favorably than you're currently seeing, could that provide a step up in the share buyback potentially?
No. This would be the share buyback for 2024.
Understood. Then also a question on your volume expectations. In the January volume report, you saw another month with negative growth for the Mediterranean segment. In your outlook section, you state that you expect Southern Europe volumes to be higher than Northern European volumes. So can you just explain what provides you that comfort given that we entered the year with another year-over-year decline?
We are in close dialogue with our customers in that area. We've seen how the central bank in Turkey has increased interest rates to curb inflation. So it is not surprising to us that demand is somewhat sluggish in the beginning of the year. But we do expect that seen in 2024 as a whole, that these measures will also mean that growth will be back in Turkey.
Understood. Then my final question. What have you factored in in your guidance from the FRS Iberia Maroc acquisition? And also, you book it under the passenger segment, but in your volume reports for freight, you also include FRS volumes. So would that imply that revenue per lane meter will decline significantly in 2024 versus 2023?
I think that, yeah. Just to answer this, FIS is coming in with something above DKK 100 million EBIT in their outlook. And then sorry, then we had a little activity here, so I didn't hear the second half of your question. If you repeat that.
Yes, sure. You included in your ferry passenger segment, but freight volumes obviously impact your ferry freight segment. I see from the January volume report, you include the FRS freight volume in your ferry freight. So the revenue per lane meter, if you don't include any earnings in the ferry freight, that should decline in 2024 versus 2023.
The revenue per lane meter because you have more lane meters from this and you don't have revenue. Yeah. We have not looked into that. We will let us have a look, Ulrik, and make sure that you are able to compare these numbers and we are not skewing it by some reporting.
Understood. Thank you.
Yeah. Thanks.
Our next question comes from Lars Heindorff from Nordea. Please go ahead.
Yes, morning. Thank you for taking my questions. The first one is also on the guidance. Torben, you mentioned that the 5%-8% increase is partly caused by the ETS surcharges, and yet you expect volumes to be largely flat, at least the cargo volumes. So how much of that growth ballpark will come from the ETS surcharges? That's my first one.
I'd take that one. It's equivalent to about 1.5% of the increased revenue.
Okay. And then secondly, maybe sort of a housekeeping question. That's for you, Karina. You mentioned throughout the presentation there's a number of one-off items, both in terms of restructuring costs, closure of activities. As I understand it, also a bit of write-down here in the fourth quarter in logistics. Can you specify how much that is, both on the depreciation line and how much is above the EBITDA?
I will not give you an exact number. As we've stated, that if we exclude these one-offs, we are about on level with last year in the quarter. But it is a number of various one-offs. So of course, you could say it's part of the business to have restructurings, and that's also why we do it, and it puts us in a better position when we adapt our organizations.
So it's more of a sort of, you could say, almost like a service information saying, "By the way, this is not the underlying business that is delivering the results. We have a number of restructurings and one-offs because we adapt to the volume situation that we have." On the depreciation line, we have in total maybe something like to the tune of DKK 25 million-DKK 30 million. It's not massive amounts, but again, it's one of the explanations when we look at a quarterly figure.
The 25-30, is that all in logistics, or is it split between logistics and?
No, it's split. There's also something in ferry.
Okay. And then a follow-up on that. So maybe you can also, given the sale and leaseback, which obviously cause higher depreciation, the run rate and the depreciation charge that we have seen here in the fourth quarter, is that sort of the run rate we should expect throughout the course of 2024?
I think you will see higher depreciation in 2024 because, as I mentioned, we have some changes in our vessel deployment where we have some that we are having on a lease where we get added depreciation from that. We also have added depreciation from some of our relatively expensive ship dockings that we have or will make. We have from terminals as well. And then, of course, we have the acquisition impact. So all in all, you should expect to see higher depreciation in 2024.
Okay. And then last, maybe also a housekeeping question. The CAPEX for 2024, will that be DKK 1.5 or DKK 1.75? There's two different numbers in the report.
I hope not, but our intention is that DKK 1.75 is the guided CAPEX. I'm not sure where you see the DKK 1.5 or whether we made a mistake, but it is DKK 1.75.
Okay. In the guidance table on page 10, it says 1.5, and on the table on page 11, it says 1.75.
In any event, it's 1.75.
Okay. All right. Thank you.
Sorry for the confusion.
As a reminder, if you wish to register for a question, you may press star and one. Our next question comes from Dan Togo Jensen from Carnegie. Please go ahead.
Yes. Thank you. I'll do just a few questions left here. On the CAPEX side, the DKK 1.75, is there any flexibility in that number? Could it be revised, postponed, whatever, all depending on how you are hit during 2024? That's the first question. Second question is on the ETS. How does that impact the passenger side? Are you able to compensate the higher ETS in passenger prices, so to say? Thanks.
Hi, then. If we start with the passengers, then the honest answer is we don't know because the year has to pass, but we have introduced an ETS charge for passengers that will cover this.
That is included in guidance? I expect that you managed to.
We assume that there is a net zero impact from ETS. So it is included in the guidance, yes. And we have started selling tickets with the surcharge. So far, it looks as our assumptions are correct. In terms of flexibility on the CAPEX side, DKK 500 million of those investments are green investments, so improving the fleet's green profile. So in principle, we do have flexibility, but it is not something that we are intending to use unless something dramatically different than what we had expected should occur in 2024.
Okay. Sounds good. Thanks.
Thank you.
Our next question comes from Jesper Nielsen with Transportm agasinet. Please go ahead.
Thank you. Can you hear me?
I can.
Hello. Can you hear me?
Yes? Please go ahead.
Yeah. Thank you for taking my question. It is about the green transition of the logistics and ferry division. I know you're driving this kind of very ambitious project of this green traffic corridor of electric trucks. How is this going at the moment compared to the CO2 emissions? And my second question is, can you get the customers to help you finance this transition?
As you could see in our report, we have now deployed by the end of Q4 90 of our electric trucks, and they partly take part of these green corridors. The green corridors are complex discussions and not something that is established overnight because they also require green vessels and green fuels. But we are progressing according to plan with our emission reductions and our green plans for both logistics and ferry.
Can you get some customers to pay more by using these green trucks?
All the customers that are using the green trucks, they pay the corresponding cost.
Okay. It's a partnership you're doing with them.
Correct.
Okay. Thank you.
Thank you.
Our next question is a follow-up from the line of Ruairi Cullinane from RBC. Please go ahead.
Yes. Thanks for taking the follow-ups. Just one on the channel. I was wondering if you could have an update there and if the capacity sharing agreement has now been extended to cars and passengers and if that was one area where further capacity management actions could be made. And then finally, just net interest. What's the best guess for the outlook there in 2024? Thank you.
If I take the channel question, then Karina can comment on the net interest. The channel situation is stabilized, I guess is a good word. We continue to enjoy what we think are quite attractive market shares given our deployment of assets. So the capacity sharing with P&O has not been fully implemented on the passenger side. We expect it to be ready for the high season.
But we, of course, continue to see that we can better utilize our capacity through that capacity sharing. So nothing other than that dramatic to report on the channel. There's still lower capacity. And it seems that our initial ambition of the capacity sharing agreement with P&O to be more competitive vis-à-vis the tunnel is somewhat working. At least we can see that the tunnel have lost little market share and that the ferry sides have picked it up. Nothing to report there.
On your question from the financials, as I mentioned, Q4 is impacted by some negative effects. Obviously, we don't predict that we will have them. If we just look at the normal interest, we are probably a little bit lower than Q4 4x , but it will probably be somewhere between DKK 750 million and DKK 800 million on the financials.
Thank you.
Our last question is another follow-up from Lars Heindorff with Nordea. Please go ahead.
Yes. Hi again. Yeah. Thank you for my follow-up. If I may, I'll try to challenge you a little bit on the logistics part of the business. You reported -5% organic growth on the top line here in the fourth quarter, and yet you expect close to around about DKK 100 million EBIT improvement in 2024 compared to 2023. And that's on the back of something which I understand will be sort of flat-ish market. Now, if you adjust, Karina, for those one-offs, does that assume sort of a flat-ish underlying EBIT into 2024, or where are we on that scale?
We expect that we will improve in 2024. The one-offs that we talked about just now were in Q4. We've also had other one-off-type costs throughout 2023 in logistics. We do actually expect that we will see increased volumes in 2024 in the logistics business.
And then we also have the full-year effect of both McBurney and Estron. The two latter ones, how much will those contribute with that, roughly?
We don't have the specifics, Lars, but when you add these three elements, I think then we are quite confident with our guidance for logistics. It's the one-offs, it's organic growth, and it's the full-year impact of the acquisitions.
Okay. Well, thank you.
You're welcome.
Ladies and gentlemen, this was our last question. Mr. Carlsen, back over to you for any closing remarks.
Thank you very much to everybody for joining the call and the many good questions. We are excited about our new strategy. We are excited about our financial ambitions. In 2024, we will focus on delivering on those. We look forward to speaking to you again soon. Thank you very much, and have a good day.