Earnings Call: Q4 2018

Feb 7, 2019

Summary

FY 2018 revenue rose 10% and EBITDA 11% to DKK 3.0bn, led by U.N. Ro-Ro. 2019 guidance targets 10%-12% revenue growth and DKK 3.8bn-DKK 4.0bn EBITDA, despite Brexit and market uncertainty.

Welcome everybody, apologize for this small technical glitch, but we should now be ready to do this Q4 and full year report. We call it growth set to continue in 2019. We are a little bit more optimistic going into 2019 than others may expect, and we will, through this presentation, explain why we are so. Let us turn to page three, where you have the headlines of the year, and we will talk about the core, of course, as well. Revenue is up 10% in what was a very busy 2018 year for us through acquisitions, tonnage decisions, and other things. Also, EBITDA is up 11% to 3 billion DKK. This, if you restate it for the new accounting rules coming into effect 1st of January 2019, corresponds to 3.6 billion DKK on an equivalent basis. EBITDA is up 20% to 688 million DKK in the fourth quarter of 2018. As mentioned, revenue and earnings is set to continue to grow in our outlook for 2019, which we will come back to. The outlook combines market growth prospects with lower visibility than normal due to Brexit and other things, but also what we call five key DFDS performance drivers, which will positively impact 2019. Those five elements are the things we control ourselves. When you take all of this in, then our EBITDA outlook for 2019 is a range from 3.8 billion DKK to 4 billion DKK based on the IFRS 16 standard. If we turn to page four, let me talk a bit more about the growth prospects for 2019 and why we say the visibility is slightly below normal. Of course, Brexit, we have discussed it a lot. We are getting closer, but the outcome is not clear. We do not base our outlook on a hard Brexit. We still believe and hope that a solution will be found. Of course, it is to some extent creating some uncertainty. Also, when you look at both the global and the European growth outlook, it is trending down a little bit. We have seen that in the fourth quarter last year, but it is still in positive territory. Whether the Eurozone will be around 1% growth next year or 1.5% is still up in the air at this point in time. Through our acquisition of U.N. Ro-Ro last year, the European Turkey trading environment is now a major factor for DFDS. We are, you can say, spreading a little bit the trading zones and patterns within our group. A big topic last year was, of course, the Turkish lira crisis, but that is now behind us. Due to, among other things, the increased interest rates in Turkey, we expect a rather flattish GDP growth in Turkey next year. We have other things in the tool bag to overcome that, which we will talk about a little later. Turn to page five, and a quick snapshot on these five performance drivers, which will help us to achieve the growth and earnings increase in 2019. Number one is, of course, the automatic benefit from our Mediterranean expansion, the full year integration impact of U.N. Ro-Ro, but also the expanded cooperation with Ekol Logistics, one of the largest logistics companies in Turkey. Second element is Brexit. Our preparation, which has been ongoing for more than a year, are well advanced now, and we are ready should the unfortunate situation of a hard Brexit occur. We have also, as you may have seen, entered into an agreement with the Department for Transport in the U.K. for providing additional services in case of a hard Brexit. I will say the conversations we have had with the custom authorities, both in the U.K. and especially in France, are making us more optimistic that the authorities will work constructively together with us and other transporters to achieve a smooth situation, as smooth as possible, given a potential hard Brexit. On the route network side, we will strengthen that by three new freight ferries coming into our network. The first was successfully delivered and underway en route from China to the Mediterranean, where it will be deployed here end of February. Vessel number two will also go to the Med, we expect, when it arrives in April or May timeframe. Fourth element is the ongoing digital focus. We will launch a number of applications and offerings to our customers, both on the logistics side and on the ferry side as we move further into 2019, and that will create additional revenue for us. The fifth element is the usual improvement in efficiency projects, where we always, every year, have a range of those, ranging from procurement efficiencies, special boost projects, as we call it, and a number of other things. Earnings should be supported by DKK 100 million from those initiatives. That is why we are, in spite of, you can say, the slightly reduced visibility, we are pretty confident on the things we can control that it will deliver in 2019. With those introductory remarks, I now hand over to Torben Carlsen, our CFO. Let us now look at our Q4 performance in detail, where we report a 20% EBITDA increase. Our revenue growth was 13%, mainly driven by U.N. Ro-Ro. As said, EBITDA was up 20% to DKK 680 million, also mainly driven by U.N. Ro-Ro, whereas our Northern European markets generally slowed somewhat in the quarter. We saw a depreciation increase of DKK 46 million, again, mainly due to the 12 new vessels that we have taken on in the U.N. acquisition. Finance this quarter was an income of DKK 11 million as currency losses on receivables in Turkey reversed as the Turkish lira heavily rebound or regained strength. As a result of all of this, profit before special items and tax was up 22% to DKK 423 million. Turning to page seven, where we look at full year 2018. We saw 10% revenue growth, again, driven by U.N. Ro-Ro. EBITDA for the full year up 11% to DKK 3 billion. The first ever, again, mainly driven by U.N. Ro-Ro and a 26% increase in logistics, who now deliver DKK 330 million EBITDA. Depreciation increase of DKK 153 million. Finance cost increase of DKK 111 million, which includes, for the full year, a DKK 42 million currency loss on the Turkish receivables. Profit before special items and tax slightly up compared to last year to now a DKK 1.7 billion. On page eight, going into a little more detail on the different activities, and we see that our North Sea was DKK 9 million higher than last year, with lower operating costs offsetting some weakness in our volumes. Baltic Sea, we had various technical glitches. That was the primary reason for this small earnings impact. Channel, minus DKK 3 million. It has been a tough second half for Channel with high bunker pricing, which has favored the competition that is not relying on bunker. To counter that, we saw some positive timing difference on the Newhaven-Dieppe route. The big change is, of course, Mediterranean, DKK 79 million additional EBIT due to the acquisition of U.N. Ro-Ro. Then logistics, some positive developments on that area when we combine it with the other pockets. Turning to page 9. We propose to resume dividend. As some of you recall, when we announced the U.N. Ro-Ro acquisition, we stopped our share buybacks. We have now said that the strength of our balance sheet and the prospects for 2019 that Niels talked about are relatively strong. We will resume dividend payments, the DKK 4, after the general assembly. During the year, our free cash flow was lowered due to the acquisitions by DKK 3.6 billion, but our free cash flow increased 23% when excluding these acquisitions. Our net interest-bearing debt EBITDA multiple is now 2.8 at the end of 2018. When we have the full year impact of Turkey, it will be 2.6. The leverage increased compared to Q3 due to the accounting treatment of the contract we entered for a long-term port terminal lease agreement towards the end of the year. Turning to page 10. I will talk about our outlook for 2019. As Niels stated, growth is set to continue. We still believe in a soft Brexit, and if it comes, it will support our growth and add upside. In a hard Brexit scenario, we believe prepared ourselves to the teeth. In addition, we have this mitigating DfT contract. Turkish exports expected to grow in 2019, and our performance drivers will inevitably help our 2019 prospects, the ones Niels just went through, including the addition of a very large customer in Turkey. DKK 2.5 billion of investments as three of our large vessels will come on board during the year, and we are investing further in terminal expansion to cover our growing businesses around Northern Europe and Turkey. So outlook for 2019, revenue growth of 10%-12%, EBITDA range of DKK 3.8 billion-DKK 4 billion, spread over our different activities, as you can see here, and then investments of DKK 2.5 billion. With that, I will turn back to Niels, who will talk about our priorities. Yes, in wrapping this presentation up, sort of the high-level thing, we need to be able to adapt to the market changes, as Torben pointed out. It can actually both go up and down depending on clarification on Brexit. We must be flexible both on our cost base and our capacity base, should things go in either direction. That is something we have been working on the last three, four years to increase that flexibility. Secondly, we have the five performance drivers. As always, customer satisfaction is key to us, both training-wise and measuring that. As we know, it is a key element to grow our top line, which is still a priority for us. Then, we are still looking at M&A activities. Probably not the size of U.N. Ro-Ro, but there may be one or two things which could be interesting during the year. So, in spite of the market uncertainties, we go optimistically into 2019, not the least due to these five performance drivers, which will provide a foundation for another good year for DFDS, we are absolutely certain. So with that, and I again apologize for the slight delay, we now hand over to you for any questions you may have. Thank you. Ladies and gentlemen, if you have a question for our speakers, please press 01 on your telephone keypad, and you will enter the queue. After you are announced, you can ask your question. There will be a brief pause now whilst we register your questions. Okay. Our first question comes from the line of Marcus Malander of Nordea. Please go ahead. Your line is open. Thank you. I have a few questions. First, the agreement with the Department for Transport, is that included in the guidance? And if the Department for Transport decides to utilize this capacity, where will you get the capacity from? Will you charter in ferries, or do you move around capacity in the network? That is my first question. We will move capacity around in our network. And we have also recently chartered in short-term vessel into our network so we can accommodate those needs. So there will be extra costs, of course, to live up to this contract. And go ahead. On the guidance, we have included some of these effects. We also see it partly as a mitigating factor, of course, in case of a hard Brexit, so that we have maybe been a little conservative in how we have included it in our guidance. On the other hand, it will reduce the impact in case of a hard Brexit. Okay. Thank you. My second question concerns Turkey. You say that you expect exports to grow in 2019. Is that based on what you have seen sort of year to date 2019? Because data until December suggests that exports are shrinking pretty considerably in Turkey. We do not have the official numbers for Turkey for January, but we do have our own January numbers, and we are 6% up in January over U.N. Ro-Ro standalone last year, January. This is the month where we have just taken on the new customer. So we are confident that the economy will take off on the export side during 2019. But even if it is a very modest takeoff, our volumes will definitely grow in 2019 compared to 2018. Okay. Thank you. Final question before I get back in the queue. If I do my maths correctly, it seems like North Sea volumes are up a bit in the quarter, but revenue is down quite a bit. What's the reason for that? Marcus, I think North Sea volumes are down in Q4. Okay. Scratch that then. Sorry. Okay. Thank you, Marcus. Thank you. Our next question comes from the line of Sindbjørn Pedersen of Danske Bank. Please go ahead. Your line is open. Yes. Good morning. Turkey, you said that your volume was up 6% in January year-on-year, but that includes a new Ekol agreement. How much does that contribute to that growth number? You can say that without Ekol, we would have seen a double-digit dip in volumes in January. I think that's as specific as we will be here. I think everybody should be a little cautious putting 2 months into January. We have had a fairly long Christmas holiday, New Year break in Europe this year, where we have seen fairly long closures of factories throughout Europe, and that is impacting both the North Sea continent but also indirectly in Turkey. It has been a slow end of the year and a slow first-week start. But the numbers are as Torben mentioned. Slow first-week start. What does that mean? Correct. Does that mean that is the two first weeks and then in the second half of January, we have a stronger growth? That is correct. How much is the growth in the second half of January? Too detailed. Yeah, your falling out in Q4 is basically explained by Turkey. You are better off in the North Sea as far as I see it, but that is probably some one-offs coming from low oil price, and you keep your bath a little bit longer. But Turkey is a significant disappointment. Absolutely. In Q4, especially towards the end of Q4, Turkey was disappointing. For us, the playing field has been leveled and reset in Turkey. As we have taken on this new customer, which means that even though volumes are down in Turkey towards the end of the year 10%-15%, we will see a very strong 2019 based on this situation. Q4 was, in addition to the general economic situation in Turkey, further rather hard hit with this yellow vest situation in France, where three departures was canceled to France during December. Yes. If you want to quantify the effect on the fourth quarter from the negative development at the end of the quarter, how much does that affect your EBIT in Turkey in Q4 2018? I think it gets too detailed, Finn. We are happy to, if you want to talk to Søren afterwards, we can give some- Okay some more details. But it was double-digit numbers worse than we had expected in Q3, what happened in Turkey in Q4. Okay. Then I just want to turn to the hard Brexit scenario, which you have not included in your numbers. What have you included? We have included that we will get a resolution one way or another, and that could be either there is an agreement to the plan or whatever new plan they come up with, and then the transition efforts will be ongoing through 2020, maybe a little longer, or you can say there is a postponement of the decision. Those are sort of the scenarios. I think it is difficult to, at this stage, predict what a hard Brexit will result in. But as I said before, we are more optimistic today that we will be able to handle the trade flows through the various bottlenecks. The next concern will then be what happens to the trade after a hard Brexit. How will the pound react? What kind of duties will be added to products for how long, et cetera? Will the U.K. go into recession or not? Those are some of the things we will have to evaluate thereafter. Then the question, okay, I understand that, and I do not believe in a hard Brexit either. You are saying your key growth drivers for 2019, you are talking about a soft Brexit would likely support growth and add upside. Do you have any estimates for that? I am just trying to get hold of your guidance, your spend and your guidance is only DKK 200 million, and you have previously said that you have a hard Brexit scenario that would cost at least DKK 4, maybe DKK 500 million. I think in that respect, one can consider your guidance optimistic or positive, as you have a very narrow spend. In the guidance that you are flagging a lot an increasing uncertainty. Could you help me a little bit there to understand the guidance? Yes. We do not guide for a hard Brexit and the impact you quantify there, that is not built into the numbers. As I said, it is a soft Brexit scenario, but we do think based on anecdotal evidence from our customers, that everybody is a little bit fed up with the whole situation, that there is no clarification, and they have put investments and decisions on hold. That is why we think once there is a resolution that the hard Brexit is off the table, then life go back to normal and people are fairly confident that there will be a solution where you can trade more or less like you do today with a bit between EU and England. That could in itself, create a little rebound in the trade. In case of the hard Brexit, where we agree with the impact you talk about, with the Department for Transport contract and the elements Niels mentioned in the presentation that we now see some very constructive moves from the border officials. We actually think that the impact from a hard Brexit is less than the numbers you mentioned due to these factors for us. Okay. Thank you. Just a final question. The investment DKK 2.5 billion includes new building and terminals. Could you split it on terminals and new buildings? There is a split in the report. Okay on page. I find it. Okay. Yeah. Thank you. Thank you. Our next question comes from the line of Ruairi Cullinane of RBC. Please go ahead. Your line is open. Hi, good morning. Could you talk a little bit about the evolution of your U.K. volumes over the quarter and into 2019? Is there any surge in U.K. volumes from customers ahead of the end of March? I don't think we've seen any significant changes over the quarter as such. Volumes were a little lower in Q4 compared to Q3, but it was marginally. It has also been a slow start in January. First couple of weeks, we can see volumes are increasing now on certain routes to and from the U.K., maybe indicating a little bit a build up of inventory as expected. It's not a massive thing, but I think it's a little bit higher than we would expect. Okay. Secondly on Turkey, are you able to talk about why Ekol Logistics chose you? Are they switching all of their volumes that they use their own shipping company for over to you? What they told us when they approached us was that they want to focus their effort and financial resources on developing their logistics business rather than their ferry business. They have stopped operating from Istanbul to Italy, where they had four vessels operating. They still operate to France. I have seen in some reports that apparently have had contacts with Ekol owner that there are also thoughts of stopping down that corridor. But of course, we cannot speculate in all their motives for this. It has been a tough environment cash-wise for a lot of domestic retailers in Turkey. Therefore, maybe this was a way to make the balance sheet a little less heavy for that group of companies. Given the amount of vessels we have and frequency, we are able to offer very attractive solutions for our customers, both on the ferry side, but also the intermodal side when they hit Italy and France, and distribute it further into Europe. Great. Thanks. Finally, what portion of your Turkish customers do you expect to switch over to paying in either cash or EUR over the course of 2019? We cannot answer that yet because we have not seen the full impact because of the 60 days payment terms in one of the options. But we certainly expect this to have a major impact in reducing our account receivable exposure. Minimum 50% reduction. Great. Thank you. Thank you. Just as a reminder to participants, if you do wish to ask a question, please dial 01 on your telephone keypads now. Our next question comes from the line of Lars Heindorff of SEB. Please go ahead. Your line is open. Yes, thank you. Question regarding M&A. You stated earlier in the call that you say that you still potentially are looking for some M&A opportunities. Can you give us an indication where in the world you are looking? Are we looking Mediterranean, North Sea? What kind of, if you can give any flavor for that. Europe. If we look right now, it is on the logistics side. I think we have plenty to look at on the ferry side and conclude those integrations. These are not huge acquisitions. Of course, we have a book of opportunities we look at, and as you know, we need to look at 10 before one will materialize. So it is much too early. Just to indicate that we still have ambitions if the price and conditions are right. Okay. The second question is regarding still U.K. and Brexit, some of the discussions that you had earlier on here during the call. Volumes are down, yet earnings are up in the fourth quarter in the North Sea, which is a fairly unusual correlation, because normally those two will follow each other. Can you explain why that is the case? Also maybe give a You have said a little bit maybe that there's been a small inventory buildup here in the U.K. Maybe talk a little bit about that. Yeah. We have seen small mix changes in the North Sea. I do not have the details here, but we potentially also reduced capacity slightly, in connection with the various fleet optimizations that can have impacted this. Then, as I think one caller mentioned, as bunker prices have dropped during the quarter, the pain we have had when it goes up with a one month, 45 days delay, comes back positively when the bunker goes down again, which has also helped us in Q4. Okay. The volume decline that you are seeing, is that something that has sort of been progressing throughout the quarter, or is it more related to the latter part of the quarter and maybe into this year, as I sense this has been the case with the volumes in Turkey? I think it is more stable in the U.K. But again, the same effects that Niels mentioned about Christmas and close downs in December impacted us. Except there has been extremely bad weather the first couple of weeks in January, and that has caused a lot of delays and cancellations. But barring that and seeing what has happened the second half of January, we do not see that it is a continued downtrend. Okay. Yeah. Your preparations for, I mean, now your guidance assumes what you call a soft Brexit, whatever that may be. You already stated that you have postponed dry dockings in preparation, so you were ready for any kind of possible scenarios. Now we are mid, almost halfway the first quarter. Is that still the case, that you have been postponing these things, and will that have an impact about the seasonality between the quarters going into the second quarter? No, not really. We have moved from now, you can say, end year, early January, some of the vessels to June, August. But in the big picture, it is not changing a lot. It is not. We simply just want to have as much capacity available if there is a pick-up, and so we can serve our customers well, but nothing to be concerned about. Okay. Just to be absolutely clear, you have not seen that pick-up yet? A marginal pick-up, but it is a little bit difficult at this stage to say how much is because we have had a long close down in factories over Christmas into January and then coming back, and how much is restocking in connection with Brexit. But volumes are firm right now in the trading. Okay. All right. Thank you, guys. Thank you. Our final question comes from the line of Marcus Malander of Nordea. Please go ahead. Your line is open. Marcus, you have your phone on mute. You will need to unmute. Sorry about that. A few housekeeping questions. What was the EBITDA contribution from U.N. Ro-Ro in Q4? I can come back with that, Marcus. It is not something that is disclosed in the report. I think normally we don't talk about that business unit, Marcus. No, I guess. But I think you did in Q3, so that's why I asked. Yeah. We can follow up on that. Next question. You've previously had a net debt to EBITDA target range of 2-3 times. Will you update that range given that it probably has changed a little due to IFRS 16? We haven't yet concluded if we want to change any of our financial targets, goals in connection with the IFRS 16. For now, we assume that we can stick with them. Okay. Final question or I guess it's as much an observation as it is a question. But the guidance range is still, the span is still DKK 200 million, but of course, your EBITDA is higher now than ever. So the percentage deviation that that range allows for is smaller, which is maybe a little surprising given the many uncertainties at the moment. Just wondering how you're thinking about that, or if you feel that your forecasting ability has increased lately. We have discussed it a little bit. But with these key drivers we talked about, we see that there is a firm bottom for DFDS in 2019. That led us eventually to keep the relatively narrow guidance range. Could we have expanded it upwards? We probably could. But we feel comfortable with this conservative approach. All right. That's very helpful. Thank you. Thank you. As there are no further questions in the queue, I will hand back to our speakers for the closing comments. Yes. Thank you very much, everybody, for joining, and we look forward to an exciting year. Have a good day.