Welcome to the Q4 and end of year report 2020. Throughout the call, all participants will be in listen-only mode, and afterwards there'll be a question and answer session. Please note that this call is being recorded. Today, I am pleased to present CEO Torben Carlsen and CFO Karina Deacon. Please begin your meeting.
Thank you very much. As usual, Karina and I are joined by Søren Brøndholt, our Head of Investor Relations today. Strong close to eventful 2020. I don't think anybody will disagree with 2020 being eventful. We saw our passenger result wiped out by COVID-19. With that, 2020 EBITDA reduced by DKK 1 billion from the pandemic. We also witnessed a quick recovery by our resilient freight ferry infrastructure from the Q2 disruption we also saw there. Our Mediterranean business continued in Q4. It's a strong Q3 performance and is on path to become value-generating for DFDS. Logistics 2020 EBITDA exceeded 2019, despite the COVID-19 situation and its heavy reliance on certain volatile businesses like automotive. Finally, of course, 2020 closed with a boost from the U.K. stockbuilding. To the right, you see some graphs indicating how the volume trends were during the year.
Let us turn to page four and talk a little more about Brexit. Important uncertainties behind us, COVID-19 lowers 2021 visibility. Brexit is finally done, that eliminates a main uncertainty for DFDS. There is a E.U.-U.K. no-tariff trade deal, which is expected to limit any shifts in trade from the Brexit. Of course, longer-term Brexit effects on U.K. economy and trade yet to emerge. We see continued uncertainty, not just due to the near-term Brexit effects, but also the continued travel restrictions, of course. On page five, we have a little more color to how the first month of post-trading Brexit has treated DFDS. The U.K. January freight volumes are in line with expectations for both North Sea and Channel. We've seen very high demand for our new route, from Ireland to France, which bypasses the borders to the U.K.
We need to see the long-term viability of such a route once the border crossings normalize. There's been a high demand from our customers and even customers that we've not had before for us to assist with customs clearance offerings, an area where we are benefiting from our very thorough present preparations for this event. The gains that we had expected from the introduction of duty-free, of course, delayed as travel restrictions persist. In the English press, there have been articles talking about Brexit and teething issues. As an insider, we have seen a little more than teething issues. The logistics business is hit by slowdown in transit times, which increase empty running and exceed an increased need for extra equipment, which of course, raises costs.
The integration between the customs systems and our systems and the customers' need to deliver the correct information have caused quite big operational challenges. We have employees that have been working non-stop, without days off for now, 40 days, as we work through these issues that every day, almost, we see improvements in. The hardest hit we've been in our seafood business in Scotland, where we even had to ask customers not to come to us for a short period, but where things are now recovering as well. It's not completely over. Once we have dealt with the operational issues from this January transition, U.K. has implemented a grace period that ends 1st of July, where we can potentially see new issues. All in all, a manageable situation. Again, we are pleased to have Brexit behind us.
With that, I'll turn to page six, where Karina will talk more about Q4.
Thank you, Torben. A few words on the Q4. We had a strong finish in our freight business, driven by the U.K. stockbuilding. Nevertheless, group revenue was down 6%, and that was entirely driven by the passenger activities. EBITDA on the other hand was on level with 2019 and looking back to the previous quarters, that was the first time in 2020 where we reached that level. The freight ferry was up DKK 184 million in the quarter, driven by the volumes, not least related to the U.K., but also driven by the operational efficiency in the Mediterranean. I'll come back to that in a little while. We had, of course, as you know, significant travel restrictions in place throughout Q4, and that impacted the passenger activities.
When we look across the three business units where we have passengers, so what we call the business unit passenger and the Channel and the Baltics, we saw a decline of DKK 186 million in EBITDA. With also logistics improving over 2019, we actually saw that the freight business making up for that loss in the passenger business. Let's turn to page seven, where we look at the P&L. As I just said, the revenue decline from the passenger business was compensated somewhat from the strong Brexit volumes. If we look at the ferry revenue alone, and then we exclude the bunker charges, ferry revenue was actually up by 11% and logistics was up 6%. The underlying business did very well. We've already talked about the Q4 EBITDA. I will not go into further detail now. A few words on depreciation.
What we've seen throughout the year is that we are lower than in 2019 due to the redelivery of certain freight or chartered freight ferries earlier in the year. On special items, we took a non-cash impairment charge of DKK 100 million related to the Oslo-Copenhagen route. We took that here in Q4. On the other hand, we could reverse some of the redundancy provisions that we had made after Q3. DKK 26 million was reversed due to the fact that we no longer expect to eliminate 800 positions, but are down to 700, as a result of the increased activities that we have seen throughout the system. Finance cost, a slight increase. We had an increase in the interest rates related to the temporary waiver of our covenants.
Turning to slide eight. If we look at the balance sheet, we are, in terms of total assets, more or less at the same level as 2019. However, looking at working capital, that was reduced by DKK 285 million compared to the end of 2019, mostly driven by a reduction in receivables in the Mediterranean, which we have talked about earlier in the year as well. What also helped towards the end of the year was a strong cash collection. As we have talked about throughout the year, we have monitored our accounts receivable very closely, and in combination with a huge effort by the team to collect extra cash up towards year-end, we finished the year quite strongly. That, of course, also impacted our cash flow.
When we now look at Q4, we can report a positive adjusted free cash flow of DKK 444 million, which of course also includes this positive impact from working capital towards the end of the year. Even if we look at the full year where we had the investments of DKK 1.6 billion, we can report a DKK 475 million positive adjusted free cash flow, i.e., taking into account the lease payments as well. In a very challenging year, we could finish with good cash flow generation. Looking at the return on invested capital, 3.5%, a significant decline from last year, obviously driven by the passenger services, passenger business unit, but also the results in not least the Channel.
If we look at one of the other areas we have talked about during the year, with a strong finish in the BU Med, they finished with ROIC on level with 2019, but with expectations of improvement going forward. Last comment on this page relates to the net interest bearing debt compared to EBITDA, where we report a ratio of 4.2x. It's of course an increase over last year, but good to see that it's slightly down compared to the third quarter, and it's well below our covenants, which as you know were increased during the COVID crisis. Now we have actually managed to stay under the original covenants throughout 2020. Few comments on the divisions.
Turning to slide nine. As we have talked about, the U.K. stock building had a significant impact, which is visible on the North Sea and the Channel results here in Q4. If we look at the North Sea, we saw 16% volumes up, and that was specifically driven by activity between the U.K. and the Continent. Looking at the Baltics, we did see freight volumes going up when we adjust for the closed route. However, the result was impacted negatively by extra capacity costs or extra capacity, which increased the ferry cost. Plus also the fact that particularly on the Baltics, we saw a significant increase in bunker costs on a net basis. Channel increased results, so very strong Q4 on the freight side, and that could offset a significant drop in the passenger volumes.
Turning to slide nine. Oh, sorry, 10. Looking at what we call the BU passenger, reporting a decline of DKK 135 million EBITDA compared to last year. With the number of passengers going from more than 300,000 to 21,000, it is clear that it's not possible to run a good business with no passengers. The positive news, again, this quarter like we had in Q3, the BU Med, very pleased to see them delivering DKK 105 million more than in the same quarter last year or 2019, driven by volume growth, which was partly resulting of the uplift in trades between Turkey and Europe, where we compared to 2019, of course, benefited from the depreciation of the Turkish lira. Not least encouraging was to see that on the internal lines, we also improved through the utilization of our rail services, also simply because of cost efficiency, where we saw lower operating costs.
Finally, on slide 11, if we look at the logistics business, they had a busy fourth quarter like the ferry business. However, they were hit by extra costs. Given the significant activities, there was shortage of, for instance, drivers and equipment, which increased costs throughout the system. When we look at Nordic, they increased EBITDA in the fourth quarter by DKK 16 million. We saw improved performance in our specialized services in Sweden and also our contract logistics in Sweden. We were helped by the acquisition in Finland, which continued to do well. Looking at the continent, we had an improvement of DKK 9 million driven by, as you might recall, we had some challenges in the special cargo business late 2019 and in the beginning of 2020, and also the Dutch acquisition. Comparing quarter against quarter, we have an improvement from that.
In the continent, the extra cost related to the stockbuilding was very profound. Even though we benefited from the volumes, we didn't see as much bottom-line impact as we could have hoped for. Lastly, U.K., Ireland, we report a decline of DKK 23 million. Not really a reflection of the underlying operation, very much due to one-off charges. We had a provision in 2020, we had a one-off positive in 2019. Together, they mean that we report a decline in the EBITDA. Also in the U.K., we saw extra cost related to the capacity issues.
With those words, I think we can close 2020, I'll hand the word back to you, Torben, for the outlook.
Very good, Karina. Page 13. First, very quickly, some underlying assumptions. Due to the stockbuilding in 2020, we expect our U.K. link freight activities to perform below 2020. Mediterranean, as Karina mentioned, are expected to improve earnings in 2021. Baltic Sea see some impact by increased capacity, which would be negative for BU Baltic. We assume that around 40% of the EBITDA decrease we saw in 2020 for our passenger service can be regained, with passengers returning towards the end of Q2 in our estimates. The consolidation of HSF Logistics Group, which is expected to take place from May, should generate revenues of around DKK 1.9 billion and an EBITDA of around DKK 250 million. Those assumptions on page 14 give us a revenue growth expectation of 20%-25% for 2021, up from the around DKK 14 billion that we have reported in 2020.
We guide a range of DKK 3 billion- DKK 3.5 billion EBITDA in a large range due to the elevated uncertainty from the pandemic and also the Brexit transition. We see EBIT of DKK 1 billion- DKK 1.5 billion and investments quite high at DKK 2.8 billion as we hopefully pay DKK 900 million for the HSF Logistics acquisition and spend DKK 800 million on two ferry newbuildings, primarily. Remaining are usual CapEx for the group. Turning to 15, what are our strategic priorities? We will focus on a successful integration of the HSF Logistics Group. We will pursue the different opportunities that arise from the post-Brexit situation. We'll continue to drive organic freight growth through our strong commercial setup. We'll see an increase and focus on delivering on the increase of the Mediterranean ROIC. We are preparing, have prepared our passenger activities to reemerge strongly once travel restrictions are lifted.
With that, we would like to hand over for Q&A.
Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad and you'll enter a queue. After you're announced, please ask your question. Our first question is from Marcus Bellander of Nordea. Please go ahead. Your line is open.
Yes. Thank you. Two questions, if I may. The first regarding the U.K. volume decline in Q1, or sorry, in January. Do you have any sense of how much of that is due to destocking and how much is due to the customs clearance problems?
It's difficult to split the waters there. The decline is probably a little bit less than we had expected from the stockbuilding picture we had seen in December. There may be some export from the U.K. to the continent that have been impacted, whereas we think that most of the import to the U.K. have not been reduced due to the teething problems.
Okay. Understood. The second question concerns your guidance for 2021. It seems to me like you're taking or you're highlighting the risks here, the U.K. volumes, et cetera. There are some positives as well. You've made large acquisitions. You have easy comps in Q2. You have some new routes. Mediterranean is running better. Passengers are coming back. I'm just wondering, in what scenario will you end up in the lower end of your guidance range?
It's good to hear your optimism, Marcus, and that you've seen some of the strategic initiatives that we have made. You are right, of course, we don't hope to reach only the DKK 3 billion, but it is fair to say that the recent months have seen a worsening of the pandemic outlook for our passenger business. We are getting a little concerned about our assumptions on passengers returning in big numbers in Q2. We just have to have a little more visibility to the whole Brexit situation where there was heavy stockbuilding in Q4, and it would be strange if that is not showing as a negative effect in Q1. So far it's a little bit less than expected, but it would be normal.
There are some technicalities as well on the fuel, et cetera, that we can maybe cover separately, but that's also dragging down the numbers a little bit.
Okay. Understood. If I can just follow up on that, and I understand it's a difficult question to answer, but the U.K. volume specifically, I totally understand that there is headwind here in Q1, but Q2 comps must be quite easy on North Sea and then the Channel also in Q2, are they not?
Well, of course, Q2 was impacted by a significant slowdown in the volumes. If we look at Q2 alone, yes, you're absolutely right. It is one of the uncertainties in our outlook that we really don't know to what extent and how quickly the volumes return towards the U.K.
Yep. No, understood. Uncertainty is high. Sorry for harping on this topic. That's all from me. Thank you.
Thank you. Our next question is from Ulrik Bak of SEB. Please go ahead.
Good morning. Also a few questions from my side. The first one, also regarding the guidance and what it requires to reach the low and the high end of the guidance range. If we take the passengers, you assume to regain 40% of the earnings decrease from passengers in 2021. Is that the assumption to reach the midpoint? If so, what is the assumption you have applied to reach the high and the low end? That would be my first question.
We have made one forecast where we have applied certain assumptions. Then we have applied a certain range to that forecast. I don't think we can answer specifically what would have to change on certain parameters to reach the bottom or the top. Obviously, one element to reach the top could be that passengers came back quicker or in higher numbers. Right now, that's not the indications when you see some of the vaccine rollout delays, et cetera. That is something that could, of course, lift us. Also, to Marcus' points from before, if the Q2 comps give us more headwind, sorry, more tailwind than we expect, that would also be an element that could lift us, obviously.
Yes. Okay. Thank you. Yes, to the U.K.-related freight, you state that you expect freight to be lower in 2021 compared to last year. Can you quantify it in any way? Get any closer to a number?
It’s a low one-digit reduction in volumes.
All right. Thank you. Question to the delta on EBITDA from the cost savings. Karina, you mentioned that the number of redundancies has been decreased from 800 to 700. What does that imply in terms of delta from the cost savings in 2021 versus 2020?
Yeah, of course, it has an impact. We guided after Q3 that we expected a run rate impact of around DKK 300 million. With the 100 people left, we are down to something closer to DKK 250 million, of which we have seen some DKK 100 million in 2020.
Okay. That's very clear. Another delta to the guidance is the state aid. If I remember correctly, you've got state aid amounting to around DKK 150 million in 2020. Is that completely gone in 2021?
Just to be exact on the number, it's 133 because we only have the salary compensation. It is not completely gone, but it's relatively low, and it's sort of month by month whether the furlough schemes are extended throughout the system. For the time being, it's not a significant amount that we have included.
Okay. Thank you.
You may note, we paid back the fixed cost coverage or forfeited that, the DKK 50 million. That may be the difference between the numbers you have.
Yes. Right. Thank you. A question to the U.K. trades currently. You mentioned the grace period, which is expiring on 1st of July, and you sounded to me a bit downbeat about what could happen following that date. What is the practical implications once the grace period ends?
The E.U. have implemented the customs border checks fully from day one. The U.K. have taken a stance where they said we'll only implement them fully in July. I didn't mean to sound downbeat, just raising the point that there will be teething problems again when we reach July. We have obviously learned greatly from this first round. We should also be mindful that for E.U., it's not so critical if goods cannot arrive from the U.K. For U.K., it's very critical if goods cannot arrive from E.U. We do expect that authorities and customs clearances will all work together to make sure that it does not become a bigger issue than it was in January, and hopefully a smaller issue with the experience both customers, operators, and authorities have at that stage.
Okay, that's very clear. To that, the U.K. trade, have your stance regarding Brexit and the implications of Brexit, has that changed since the end of December when the deal was made?
I think we are still very pleased there's a deal. We can see that there are these transit delays that is costing now money for the whole industry, and of course, the producers, and eventually, it will be the customers. We're a little concerned about how long it will take to get those transit times down again and take out the costs again. That's maybe a detail in the larger picture.
Okay. Thank you. Another one. Sorry, a lot of questions here, but there are very many moving parts. Your deal with the British Department for Transport, is that still ongoing, or has it been canceled by the U.K. government?
It has not been canceled.
Okay. Finally, two housekeeping questions. Just want to make sure that I get the net debt right. With the acquisition of HSF, the net debt increases by DKK 760 million , right?
The payment is EUR 125 million this year, plus there will be some associated investments in HSF this year. If you just look completely in isolation, it's probably a little bit more. Of course, then you have the cash flow.
You're acquiring some debt, right?
Yes. We're also acquiring some debt.
Maybe we need to come back to you, Ulrik, with that.
It's more than the DKK 600 million you mentioned that will be the net impact, because the payment alone is more than that.
Yeah. I was thinking apart from the payment, just the acquired debt on top of that. Yeah.
Okay. No, you are probably right. Yeah. That could be true.
Okay. A final question. The blended tax rate, following the acquisition of HSF, what does that amount to? Historically, you've had around 5% tax rate, as earnings become larger in the logistics area, I suppose the tax rate goes up. Do you have any indication about how much?
It's a little bit too early to tell, but you're, of course, absolutely right that we should assume that it will go up.
Could be a percentage point or two.
Okay. Thank you so much. No further question from me.
Thank you. Just as a reminder, if you have a question for the speakers, press zero one on your telephone keypad. There'll be a brief pause while we register any further questions. We have one more question from Ruairi Cullinane from RBC. Please go ahead.
Good morning. As you mentioned on the call, you've shown an encouraging improvement in the Mediterranean in H2. Clearly, you're running below your 8% targeted ROIC there. I was wondering what's next to bring the ROIC up in the Mediterranean. Is that much in your control, or is it more a continued normalization of the macro backdrop? Thanks.
Hi, Ruairi . It's both the normalization that we're seeing now from both the cost initiatives Karina touched upon and the macro strength. We also need to regain some of the market share we've lost to the overland transport. That can only happen once we get even more capacity in the Trieste port and more space, which we are working on. It's a gradual improvement through 2021, but also continuing in 2022.
Thank you.
You are welcome.
Our next question is from Marcus Bellander of Nordea. Please go ahead. Hey, Marcus, have you got a question?
Sorry, I was muted, but I was going to ask the exact same thing as Ruairi just did. I'll withdraw my question.
Okay. We've got one more question from Ulrik Bak. Please go ahead. Your line is open.
Yes. A final question on the Mediterranean segment as well. Recently, one of your main competitors in the Mediterranean segment, Grimaldi Group, has increased capacity in the Eastern Mediterranean. Do you think Grimaldi could pose any threat to your target to meet your minimum ROIC target?
We have to always be humble about our competitor's action, but that particular move is not something that impacts our business. We do have a stopover call from Turkey to Italy in Patras, Greece. It's very minimal volumes we carry from that stopover, and they may be impacted negative from this, but we definitely see this as a very normal move from Grimaldi's side and not aimed at our markets in particular.
Okay. Considering that Grimaldi is also a big ro-ro operator, do you think it's likely that they would enter the space that you are in being as profitable as it seems to be or become?
Well, we are approaching our cost of capital. I cannot speculate, of course, about what other operators are thinking or doing. What they have done is not something that we are concerned about. We welcome the extra capacity.
Okay. Thank you.
There are no further questions at this time, so I'll hand back over to our speakers.
Thank you very much, thank you, everybody, for listening on this busy day. As we enter an exciting 2021, we are eager to get to work and to see the effects of all our strong actions that were implemented during 2020. Looking forward to speaking to you, if not before, then for our Q1 release in May. Have a good day.