M&A Announcement

Jan 26, 2021

Welcome to the DFDS conference call. Throughout the call, all participants will be in listen only mode. And afterwards, there'll be a question and answer session. Please note the call is being recorded. Today, I'm pleased to present Thorben Carsten and Karina Deakin. Morning, everybody. Here is Thorben. Karina and I are also joined by Saund Brunholt, our Head of Investor Relations. We're here to speak about the earlier today announced acquisition or agreement to acquire HSF Logistics Group. If you turn to Page two with our strategy shift, we will start by going back to the Win 23 strategy launched in 2018. You many of you will recall that there are four pillars and Pillar A talks about growing solutions to select industries. Today, we will not, at least during the presentation, talk about the other pillars. We can cover those if there are questions. But Pillar A, on the next page, the select industries we talked about that we would double back then were automotive, forest and metals and cold chain. HSF Logistics that we announced as an acquisition today will more or less quadruple our cold chain business once it is approved by the authorities. Moving to Page four. The acquisition is creating Northern Europe's leading cold chain logistics provider. The HSF Logistics Group includes four main brands: HSF Logistics operating primarily out of Holland EuroFresh, a German brand H and K Speedy Schon, Scandinavian based freight forwarder and Skiver Kuehler Transport, a primarily Danish based cold chain transport company. Total revenue around DKK 2,800,000,000.0 and EBITDA of DKK $320,000,000 with 1,800 employees. We have agreed an enterprise value of around €2,200,000,000 And we have also agreed a what we believe is an attractive transaction structure that leave our financial leverage unchanged. Karina will talk more about that later. Turning to the map on Page five. You can see that the acquisition is geographically in the middle of DFDS' strongholds in Northern Europe, And it will add strong market positions in the coal chain in Holland, Germany and Denmark and in addition, bring expertise in meat logistics where DFGS is only limited present today. Moving to Page six, a little background on HSF. It's an old fourth generation family owned business founded 1923 in Nijmegen in Holland. It merged in 2017 with N and K Spiritsjon, who a couple of years earlier had acquired Skive Kuehle Transport. The main business of the group is to be a cold chain logistics provider to meat producers and other food producers operating in temperature controlled supply chains. 2,500 customers and the business structure with three specialized focused business areas that we'll talk more about on the next pages. Historically, the financials have been fairly stable, And we also see a fairly 2020, although we don't have the final numbers. The first main business area on Page seven is between the continent and U. K. With integrated packaging and transport logistics for the food industry, where primarily pork and poultry is transported to The U. K. And for the most part of that, using dolau box pallets or other plastic packaging, making it an environmentally very attractive form of transport and also a transport where it is important to have both the loads out and the loads back since the same equipment is being used in this closed system. This business has relatively large storage and cross docking facilities in Nijmegen, including washing, etcetera, of the plastics. This part of the business is around 20% of group revenue, and the international part of the transport relies on a trucking operation intra group provided from Poland. Moving to Page eight. The second main business of HSF is Holland, Germany. Here, it's mainly beef and veal transportation. And backloads from Germany include fruit, vegetable, dairy and fries. Again, large storage cross docking facility in Holland and a very extensive hanging meat logistics facility in Holland. Again, around 20% of group revenue, 300 trucks, partly local, partly supplied by the Polish trucking operation. The 50% remaining revenue of the group is in starting point Scandinavia with N and K, Speedy Schon and Skiver Kruel Transport, international freight forwarding of meat and fish from Scandinavia to U. K, Spain, Italy and backloads of fruit and vegetables. And then Skiva Krill Transport, a very strong market position in Denmark with focus on dairy, frozen products and also meat. Turning to Page 10, A very strong treat of HSF is that in most of their transports, a number of value added services are integrated into the business model. It's rental, repair, cleaning of reusable packaging, strong offering of this packaging system that has been adopted well by slaughterhouses and logistics partners throughout HSF's geographical area. And it also means that there is a relatively strong integration by HSF into the customers' supply chains. On Page 11, we show first DFDS presence today in cold chain and how the acquisition of HSF complements and expands the presence primarily in Northern Europe, but also a more unusual a little more unusual for DFDS in Africa and China with relatively small operations. We will have a very significant fleet of trucks and refills and 2,005 people employed in this business segment. Billion of the total billion logistics revenue will come from our cold chain operation once the transaction is complete. With this, I will turn over to Karina for more details of the transaction structure. Thank you, Thorben. If we look at Page 12. As we said, we have acquired HFF for an enterprise value of €2,200,000,000 which will give us an enterprise value to EBITDA multiple of around seven based on the expected EUR $320,000,000 in EBITDA. The acquisition is made by a new company owned by DFDS, where we will own 100% of the ordinary shares. We will pay EUR $930,000,000 upfront on closing, and we will use that from our existing cash pool. We will then enter into a structure where we will have nonvoting preference shares to be owned by the sellers, and we have a call option to redeem those preference shares over a three year period, amounting in total to $810,000,000. In connection with the acquisition, we take over net interest bearing debt of million, and that is excluding the IFRS 16 adjustment. All in all, when we then look at the financial leverage and we include the earnings from HSF and the debt taking over, we are in a situation where the financial leverage will be basically unchanged by this transaction. We will remain 100% in control of the group, so it will be fully consolidated into DFDS as the preference shareholders only have a protective rights. We will, of course, have to wait for the regulatory approval of and some required employee consultations, and we hope that we will be able to complete the transaction in around three months. And then back to you, Thornton. Thank you very much, Karina. As I said in the beginning, we are very pleased that we have been able to convince the owners of HSF that DFDS is the right home for them going forward. In particular, are pleased because it is a significant pillar of our Win 23 strategy to grow our cold chain business. We have created a leading provider in what we believe is a very attractive niche market. There's good overlap with our ferry transport infrastructure with the heavy reliance on transportation from both Scandinavia and Holland to The U. K. We have not been able at this stage to determine the size of cost and commercial synergies, but we will come back with more details on that in connection with the closing of the transaction. This was our brief introduction, and we now pass over for any questions. Thank Our first question comes from the line of Casper Blum from ABG Sundal Collier. The floor is yours. Please go ahead. Thank you very much. Thorben and Carina and Saan, congrats on the deal. It's been on your wish list, know. So first question is, is this sort of a mission completed within cold chain? Or is still this an area that will still be on the M and A agenda for you? That's the first question, please. That's a good question. But and of course, right now, our full focus will be on a successful integration between DFDS and HSF. It is also obvious that we will get a very strong market presence in this area. And most likely, over time, new opportunities, therefore, will also appear exactly in an area where we are strong. Okay. Fair enough. Second question, though as I understand it, the seller will become a minority shareholder in this new company. So merely wondering if they will be entitled to receive part of the earnings in the period before you have bought back these preference shares? The sellers, they will not become minority shareholders. They will have preference shares. And there, they will get dividends as declared, if any, and they will also get an interest on their preference shares. But they will not be minority stakeholders. We do have minority stakeholders in the companies today, and they will obviously be included as minority shareholders. Okay. Thank you very much. And then finally, the margin that HSF delivers is above your own logistics margin today. Is there a structural reason for this in this specific area? Or are they basically just running a really, really good business? There is, in general, probably slightly higher margins in cold chain logistics than in ambient logistics. In addition, this business model we described, where they are tightly integrated with the supply chains of the customers, also allow them to bring more value adding services than maybe in a traditional customer relationship, which is also helping increasing the margins. Okay. Are they also delivering a higher margin than the cold chain business that you already have? I mean, we can only see the whole logistics business. But if you look at the existing DFDS cold chain, is HSF then also with a higher margin? And would this mean that you could lift your existing margin? Our cold chain business is also very attractive. So I think we are merging two high margin businesses here. Okay. My final question is then just sort of a hope here. Can you give any kind of quantification on potential synergies? Or is that still too early in the process? That is too early. We will promise to come back with that around closing of this transaction. Okay. Happy to try. Thanks a lot. Our next question comes from the line of Ben Toggle from Carnegie. Please go ahead. Yes. Thank you. I I would just like to continue on on synergies because I understand these two businesses are are quite complementary. Is it a fair statement to say that cost synergies are fairly limited? It is at least not an acquisition driven by cost synergies. You are correct in that. Can you then elaborate maybe a bit on not quantify, but elaborate where you do see some synergies on the commercial side? We believe that and of course, we have limited access to or no access to customer agreements on their side. But with the expanded geographical scope, complementary geographical scope, the complementary offerings in the meat, in the fish business, the capabilities in packaging that we will pick up, that there will be a number of interesting elements that our customers will buy into and likewise, HSF customers buying into some of our both geographical presences and skills. And then as we also say in the presentation, there's a good geographical match with our infrastructure ferry business. And there are, of course, opportunities to better utilize our ferries for HSF than they have done in the past. Okay. And could you maybe explain a bit about the process here? Has this business or has it been up for tender? Has or is it a long stretch process where you sort of say have got been going back and forth, maybe even have had some exclusivity to the owners of HSF? We know HSF and NNK since many years. They are customers with our ferry business. And it was originally our ferry colleagues that picked up that this could be an opportunity. We have then, over a couple of rounds, discussed what the strategic ambitions and direction was of the owners of the HSF group. And this has now finally, after quite some years, matured in this transaction. So it has been a pretty exclusive process. We believe it has been important for the sellers to find a home, a long term owner as opposed to maybe a financial buyer with similar values. So it's been a good process where we know each other well already at the outset. Okay. And then just finally, maybe to Karina on IFRS 16, if what will be the impact once you translate the lease assets? And maybe some explanation on the assets, exactly what is the leasing commitment here, just to get a grip on our understanding of how the numbers will be impacted? Yes. We estimate at the moment that we'll get a lease liability of a little bit more than DKK 300,000,000. And on the EBITDA side, we'll go for roughly the DKK $320,000,000 up to around DKK 400,000,000 under IFRS 16. Very helpful. Thanks a lot. Our next question comes from the line of Ulrik Back from SEB. Please go ahead. Yes. Hello, Carsten and Carina. Can you maybe give us a bit of a flavor of the 2020 numbers? I know you only presented the 2017 to 2019 numbers, but as 2020 has been an eventful year, so maybe you can shed some light about the development there. Yes. We don't have the they don't have the final numbers yet. They are a family owned business, not extremely well integrated in their finances. But of course, we have some indications. And they had a rough April, May as we did, especially the Dutch German business continued to be impacted by the restaurant close downs also in Germany. But the indications are that they will be fairly similar to 2019 in terms of profitability with a strong recovery the last half year here equal a little bit to what we are seeing in our own business. Okay. Thank you. That's very, very helpful. And then also to the sellers. What do you have a feeling or an idea of what the rationale for them to sell? You were talking about they were looking for a long term buyer, but why sell at all? Again, they're family owned, fourth generation, didn't have children that were interested in taking over the business. So again, without having all the reasons, of course, from their side, they want to the idea when we started talking about a merger. And as I mentioned before, it has been a multiyear process to get to this conclusion, where we have gotten gradually more and more accustomed to each other's and understand each other's ideas. So I think it has been an emotional day for the family giving this up, of course. But I think they are comfortable that there will be more opportunities for their people and customers in combination with DFTS. Okay. Thank you. So you also mentioned that you were you had some sort of exclusivity in the m and a process. Does that mean that you did not have competing bids? And was it more important for the family to get like a long term buyer than to get the highest price? Can you comment on that, please? Yes. It was an exclusive bid. They had retained an adviser, and they had made some testings in the market. But we think it had clearly a value that they knew that with DFDS, it would be a lasting solution. The owners still own still live in these cities in Wintershall and Nijmegen. And I think they didn't want a situation or they preferred if they could find a situation where maybe the company would not be sold every five or six years. And that was a main element. And we when we look at the valuation, we think it's attractive when we have done our DCFs, and we also think it's attractive when we try to compare with peers in the market of a similar size and business. Yes, that makes sense. And maybe a question for Karina. Can you please elaborate a bit on the deal structure and the mechanism to redeem the preference shares? Are there certain targets that need to be met for it to cost these €270,000,000 per year for the next three years? Or could it be less or could it be more depending on the performance of target company? The price is fixed, and we have a coal option to coal these $2.70 over a three year period. Should we elect to do it earlier, we can do so. But for the at the moment, the plan is that we will do it over a three year period, but the price is fixed. Okay. That's clear. And also a question on your financial position. As of thirtieth September, you had DKK735 million in cash. And assuming you will generate the same amount or a bit more in Q4 as you did in Q3, you will just have enough cash to pay the upfront amount of DKK930 million. So in that context, how comfortable are you with your liquidity position following the deal? I'm very comfortable. We have as you say, we have sufficient cash to pay this DKK $930,000,000 upfront. And you might also recall that we have a relatively large amount of committed facilities of EUR 3,500,000,000.0. So all in all, I think we are in a good financial position. Okay. That sounds great. No further questions from my side. Thank you. Our next question comes from the line of Markus Belander from Nordea. Please go ahead. Yes. Thank you. Just a few questions. First off, Karina, if you could clarify, you said something about that there are minorities in the business. How large are those minorities? This is a model primarily entertained by N and K in the way they have built some of the subsidiaries. And without committing completely, it's around 5% of the EBITDA is, in theory, helped by these minorities. And it is done more like a bonus system for the managers that run the different activities. We will enter a dialogue with them explaining, of course, that that's not normally how our bonus incentives are set up. On the other hand, if somebody prefers to keep these it's, for example, in the Polish truck operation and other places, it is also fine for us. But we'll look into that as we begin the integration. But it's not something that has a major impact on the cash flow. Okay. And 5% of EBITDA, that would be 5% of net profit as well roughly? Or Yes, 7%. Okay. Okay. Great. And then second question. Just just I'm just curious how how closely you will integrate HSF. I mean, will they retain their brand names or will you change those? Will you merge offices in some places or will it be a standalone business basically? We will do a full integration. And Nicolas, our Head of Logistics and Karina are already deeply involved in planning the integration. There is a one year grace period before we can change names and brands. But everything else, we can basically start as soon as competition authorities give their approvals. But it will take time. They are run a little bit like two or maybe even three different companies. Their integration is not fully complete since they merged in 2017. So especially on the systems side, on the financial side, it will take a little time before all our systems are in place. Okay. Understood. Thank you. And last question. Just curious where you think risks associated with this acquisition are, if there are any. In your due diligence, what did you focus the most on? What were the red flags, if any? Where could this go wrong basically? Basically? Or Or how how could could this this go go wrong? Wrong? Well, we always have to be humble, of course. But we have looked extensively into the impact of Brexit. We have looked extensively into the EU driver directives that come into play gradually and especially in 2022 to see how that can impact the business. And we have gained a lot of comfort in those areas. Brexit, of course, we know how we've been hit ourselves now. We think we can actually maybe help mitigate the impact when U. K. Also starts putting their border controls fully in place later in the year. But other than that, we have, of course, acquired a business with heavy focus in food and meat, where the growth is limited. But we see that as a very good balance to our otherwise heavy automotive and textile exposure where there's a lot of volatility typically. So we actually see that this is a very good addition to our business in terms of the stability that this food logistics will add to DFTS. Okay. Got it. Thank you. It looks it does indeed look like a good acquisition. So congratulations on that. That's all for me. Thanks. Thank you, Mark. The next question comes from the line of Rory Callanan from RBC. Please go ahead. Good morning. First question, a follow-up from the previous one, and I was just hoping you could talk me through any sort of Brexit teething problems that this business may have had. And secondly, could you confirm in which year you expect to deliver the 8% ROIC? Is that in the first year of the acquisition? And clearly, I understand the transaction structure designed not to impact financial leverage immediately. I was just wondering, how comfortable you were with current levels of financial leverage. I know you've still got the ambition to move to three times in the next few years. If you could expand on that, that would be great. Many questions. Karina, I think we'll start a little bit on the Brexit teething problems. Yes. I think it's fair to say that HSF has had exactly the same problems as the rest of us have with problems with getting to speak to the systems on the government side, the problems to have sufficient documentation from customers, etcetera, etcetera. But they are, like the rest of us, working through the pain. Of course, there will be, as Thornton just said, a next hurdle when we then start looking into bringing stuff into The U. K, where we then need to apply to the stricter border controls. We have a setup in DSDS where we use extensively our back office sensor in Potsdam. And there, we believe that we can also contribute to HSF when especially April 1 and July 1, COGS. So I think that it's simply something we just all have to work our way through, and it's not something we see as a huge risk. We know the obstacles now, and we also know how to deal with them. Do you want to repeat your next question, Roy? Yes. When do you I know you're targeting 8% ROIC. Do you expect to deliver that in year one from this acquisition? Or will it take a little bit longer than that? It's probably realistic to expect two, three years before we reach that. We, of course, need to see exactly the 2020 results and form an opinion on the integration benefits over the next couple of months. But we don't expect it already in 2021 to reach that level. Also because of the IFRS impact that Karine talked about earlier. Okay. Thank you. And you comfortable with current levels of leverage? Yes. Of course, we have a strategy that it should be between two and three. But given that it is entirely a product of the passenger business not operating, we are comfortable. And we've seen with the result that you got a sneak peek off in Q4 with an EBITDA at same level as last year without having a passenger business, we are able to keep reducing that leverage. So we are very comfortable. And with the structure we have in place here, we basically do not further increase the leverage. Thank you very much. Thank you. Our next question comes from the line of Stefan Roeler from KFW IPEX Bank. Please go ahead. Your line is open. Thank you and good morning. First question, you mentioned, the antitrust authorities and the clearance here. Do you expect any issues here? And can you elaborate a little bit on the market share of HSS and, of course, also then the combined group in the different regions? It's very small market share as we expect. And we don't expect any delays with the clearance. But the markets, we need to look now and we don't have access. There needs to be clean teams on both sides as this is being handled. But it is very small in the way EU define markets here. It's insignificant, and therefore, we don't expect any challenges. Okay. So it's quite huge and also fragmented market. So also with respect to your market position in the different three regions that you mentioned here? Correct. Okay. Okay. And the second thing, you mentioned the stability of the business. On the other hand, the the cold chain business now makes up, as I understood correctly, 50% of of total sales in the logistics division. Is it something where you see this as a good balance or, when you feel comfortable, or is it something which you would diversify later on with other acquisitions and other, well, logistics divisions? Well, as I said before, main focus now is, of course, on a successful integration. We believe that there will be commercial opportunities coming from this addition of HSF that we will pursue. The meat consumption as such is a relatively stable market development. But we would, of course, not be pleased if we were not able with this combined group to create growth. Okay. And last thing, with respect to the integrations, do you expect any, one off charges by integrating HSS? You mentioned, for instance, the the IT system, perhaps also the integration and and your financial reporting and things like that? We will have one off costs, and it's too early to quantify them at this stage. Okay, understood. Thank you very much. Our next question comes from the line of Lars Handel from SEB. Please go ahead. Your line is open. Thank you. Yes, good morning, and congratulations with the deal. It looks like a fairly attractive price. One of the things that I struggled a little bit maybe to understand is the rationale behind. You said that there's not a lot of cost synergies. You expect some commercial synergies, although you didn't really expect a lot of growth. And meat consumption is fairly stable, maybe even declining market going forward. So maybe if you could give us a little more insight to, I mean, what kind of commercial opportunities is it that you can pursue And do you actually expect this business to grow? I can see the way you put it last. It sounds a little big, bleak prospects. But back to where has DFCS historically been strong. We have been strong in cold chain. We've shown that we can generate attractive margins and growth by having a strong position in the fish and the general coal chain in Mid England. We believe by adding this business, we will further strengthen that. We have a business that we now take over that has very, very strong integration with their customers with the whole plastics setup. We believe that we can replicate this setup with some of our customers, for example, in the agriculture area. We believe that and then there is actually quite impressive growth both in ski vehicle transport and N and K with more general cold chain customers. And again, at a margin that is more attractive than in normal full load ambient transportation. So we do think that we'll be able to have a growing business with this, but also a business that will not have big dips like we sometimes see in some of our more volatile industries. And HSF has demonstrated that through this COVID pandemic situation as well that people eat the same amount of meat, whether there's a crisis or not. So we see a lot of things that we can do on the commercial side. There will also be cost synergies. And again, as we also said, there's also an excellent mix with our ferry infrastructure. So it checks all the marks and see from our side of the chair, Lars. Yes. No, I hope that you're right. Just one follow-up on that. Is it that the contribution into the ferry because, I mean, if you look at the numbers that you have in the slides about how many trucks and and trailers, etcetera, locations that they have actually bigger than your existing coaching. I mean, is is the contribution to the ferry division, is that a material part of the reason why you have made this acquisition? The acquisitions we do in the logistics space needs to be justifiable based on what we can do in logistics. And the same is true for this one. But of course, it is always an added element if the geographies match, so that we can also see that we'll benefit from moving cargo from other ferry operators or tunnels to our own infrastructure. All right. It is part of the upside here, but not a decisive one. Okay. Thank you. Thank you. Our next question comes from the line of Carsten Sondemore from May Invest. Go ahead. Your line is open. Hi, Thorpe and Karina. Congratulations on the acquisition. Just one question from me actually. Could you talk a bit about client concentration in the acquired activities and for how long these contracts with clients run? We have limited insights to because of the non clearance yet of the acquisition. But of course, we have a good understanding or a good hunch about what the main customers are. And they do have on their top six, eight list some customers that represent more than 20,000,030 million euros €40,000,000 And some of those customers also, is my guess, are customers that we have. So we will have some significant customers coming out of this. And historically, we've seen at DFDS that the bigger we become with very large customers, the better we can utilize all our different skills throughout the systems and capabilities. So we actually look forward to addressing some of these very large customers that we get in and where even if we have 40,000,050 million €60,000,000 even of combined revenue with them, we are still fairly small. And typically, some of these customers want to consolidate suppliers. So we see this more as a strength than as a weakness in this situation. Okay. Congratulations again. Thank you. Thanks, Karl. Thank you. There are no further questions at this point. So I'll pass back to Torben and Corine. Thank you very much, and thank you for the participation today. A short notice and also the good and interesting questions. We look forward to starting now, planning the integration. And as soon as the clearance come, we will start the actual integration. Have a good day.