Earnings Call: Q3 2019

Nov 12, 2019

Summary

Q3 revenue rose 2% and EBITDA held level with 2018 despite U.K. weakness and Turkish operational challenges. FY EBITDA guidance was narrowed without changing its midpoint, while investment guidance fell DKK 400m.

Welcome to the DFDS Q3 2019 report. Throughout the call, all participants will be in a listen-only mode, and afterwards, there will be a question and answer session. Please note that this call is being recorded. Today, I am pleased to present CEO Torben Carlsen. Please begin your meeting. Good morning. I am joined by Jesper Heiburg Mikkelsen, our CFO, and Søren Brøndholt Nielsen, our Head of Investor Relations, for this call. As our headline says, our full-year outlook is reaffirmed, although European economies are relatively flat in their performance. Q3 EBITDA on level with 2018 on Page 3, despite the U.K. slowdown. We are beginning to see some recovery of trading between Turkey and Europe. The outlook range on EBITDA level for 2019, we have narrowed to DKK 3.55 billion-DKK 3.75 billion from before DKK 3.5 billion-DKK 3.8 billion, so same midpoint. We see in this quarter how our business model is holding up in face of both the U.K. slowdown and the Turkish recession. Moving to Page 4. Group revenue is up 2%. EBITDA, as mentioned before, on level with 2018. The U.K. slowdown has impacted our ferry routes negatively, especially the Channel's pax volumes are impacted. We see good performance in the Baltic Sea. Mediterranean's EBITDA is above last year, but large operating cost increases offset the revenue growth almost entirely. Logistics division's EBITDA 15% up compared to last year, driven by all three business units. Moving to Page 5. Throughout the year, we have talked about our five key performance drivers for 2019, and some of them do face some headwind. The extended Turkish recession and operational challenges also in Turkey have meant that we have not seen the full benefits, neither growth-wise or EBITDA-wise, in Turkey in 2019. We are well prepared for Brexit. Brexit has obviously dragged on much more or longer than we had expected beginning of the year. We had an agreement with the Department for Transport leading up to the 31st of March. Much less important now, leading up to the next deadline. The route network we invested would be strengthened by three new freight ferries. The third is, as we speak, on its way to Gothenburg to assume operation in Sweden, between Sweden and Belgium. The two others are operating in Turkey as expected. Our work to digitize continues, and we start to see some real results from this work. Our long-standing thing about working on continuous improvement is also underway now, and all projects are on track. Turning to Page 6. Again, revenue up 2%, driven by Mediterranean growth and also our new route from Gothenburg to Zeebrugge in Belgium, which offset the U.K. slowdown. Margin is reduced due to the lower utilization on our U.K. routes and cost increases, disappointing ramp-up on the Gothenburg-Zeebrugge route, and operational complexity in Mediterranean. Again, the investments in Turkey have increased our depreciations, further increased through timing differences of dockings compared to last year. On the other hand, finance costs are halved. We do not have the negative currency adjustments that we saw in 2018, and we have reorganized the way we invoice and collect money in Turkey so that what was before finance cost is now touching our revenue instead. Finally, the result on profit before tax is an increase of 4%, now 647 million DKK. Some graphics on the U.K. trade slowdown that we have talked about on page 7, where we can see that Q3, both the exports and imports have been below last year, but also that in September, actually, the trade is exceeding last year. Probably an effect of the stockpiling leading up to the then expected 31st of October exit from EU. Page 8. We mentioned earlier in the presentation that Turkey EU trade is recovering. This is illustrated on this page where the orange bar is the current year's performance, where we can see on export, less surprisingly, the level is above 2017 and 2018. But even on import, we now see that the levels are solidly above 2018 and approaching 2017. So good signs that the predictions by economists next year of a 2%-2.5% growth in Turkey could materialize. Looking at the ferry division's EBIT on page 9, we see that the picture is uneven. North Sea is down due to the lower volumes we talked about on the North Sea, but also the ramp-up of the Gothenburg-Zeebrugge route. Baltic Sea, steady volumes, particularly Germany, Lithuania, doing strongly. Channel, down 54 million DKK, 10% lower pax volumes than last year, which is a general market trend, unfortunately, on the Channel, but also ferry cost increases with timing differences on dockings, et cetera. On the freight side, volumes are similar to last year due to some market share gains. Mediterranean, although up, disappointingly small difference to last year given that our volumes are up 24%, but unfortunately, costs likewise. These operational challenges are being addressed and will begin to show improvements Q4 and forwards. Passengers down 15 million DKK. Relatively strong performance Amsterdam, Newcastle, but weaker yields on Copenhagen, Oslo, combined with higher cost. So in total, 6% down to now 696 million DKK for the ferry division. A few words on what we are doing on the cost side for Mediterranean. We have added complexity when we added a large customer beginning of the year because we needed extra port terminals both in Istanbul, Trieste, and France, and also additional ferries. We have now taken the consequences of the complexity and simplified the network. We have our French route departing from one port in Istanbul, namely Yalova, going to one port in France, namely Sète, with four vessels trading on this route. As a consequence of this, Pendik port in Trieste is only serving Trieste with six weekly departures. So we now have clarity and simplicity both for our own staff and for our customers, which is already beginning to lead to efficiency improvements. We have still a congestion issue in Trieste, in Italy, which we are working through and expect to see some resolutions from 2020 forwards. In terms of scrubber installations, we will be ready with probably 3 to 5 scrubbers in January when the new 2020 low sulfur rules come into effect. Then during the next 6 to 8 months, the fleet will be fully equipped with scrubbers in interest. Moving to page 11. Logistics division EBIT is down in total 2%. However, some specialized services that were quite attractive last year in the Nordic and some one-off elements on pension accruals in the continent actually mean when adjusting for that all three business units are up during this quarter compared to last year with especially U.K., Ireland performing well after the restructuring and close down of certain activities last year. Page 12. Our capital structure, more or less even with a little downwards trend to now 3.1 net interest bearing debt to EBITDA. We have adjusted down the investment guidance by DKK 400 million due to some delay in certain port investments and also in the RoPax vessels to be delivered end of 2021. Which also means that our 2020 investments have been revised upwards slightly to now DKK 2.1 billion-DKK 2.2 billion. Our WIN23 strategy is progressing as planned. We have teams now in place for all initiatives, and tracking confirmation of the amounts, et cetera, have been gone through. Now execution phase will start from 2020, delivering the results. Turning to page 14. As we said in the front page, earnings outlook reaffirmed, investments lowered by DKK 400 million. When we look at Q4, we are off to a good start, although U.K. visibility is still low and of course still risk of new slowdown. Some firming up on Turkey/Europe trade. Revenue growth, which is less focus for us when we guide, we can now see will be around 6%. A lot of the downwards revision is Turkey and U.K., obviously. I have already said that we have narrowed our EBITDA range guidance but kept the midpoint. Moving to page 15. What are our current priorities? Not that much changed from last time, but a lot of focus on optimizing our Mediterranean operation, where the complexity still needs to be reduced, and where, with an improved customer service, we will not just gain from the growth in the economy that hopefully comes back, but also from regaining some of the lost market shares to the overland traffic. We have focus on our new route, Gothenburg-Zeebrugge, which needs to turn profitable in 2020. Then, of course, we continue full focus on a hard Brexit and the preparations for that. Although, we hope that some deal will be made between the U.K. and the EU. Then WIN23 is well on the way, and we will start seeing results from that during 2020. So a status from DFDS that is quite upbeat. We have challenges, which is obvious, with our business being primarily in the U.K. and second biggest exposure in Turkey. But the business model holds up in these times of uncertainty, and we look forward to talking to you again in three months' time. Have a good day. Sorry, I need to ask if there are any questions. Thank you. Ladies and gentlemen, if there are any questions, please press 01 on your telephone keypad. Once again, that's 01 on your telephone keypad if you would like to ask any questions. Our first question does come from the line of Dan Togo from Carnegie. Please go ahead. Yeah, good morning, and thank you, Torben, for the opportunity to ask a question. On the scrubbers that are postponed, can you elaborate a bit on this? Also, are you in any way compensated for this delay? That is the first question. I can elaborate on it. As we have commissioned, the first scrubbers experienced some technical issues with some leakages and some cracks. This is being worked through with the supplier and with our experienced people from our Northern European fleet. It's fair to say that the scrubber market is red hot at the moment, so it has been difficult to get the required attention in a timely fashion. We believe that we have that now, and we will progress as planned with the scrubbers, although with a slight delay. There's no compensation that has been agreed for that. Understood. On the operational challenges that you mentioned in Turkey, is that solely due to the empty trailers in the system or are there other factors that playing a role on the port side, for instance? Can you also maybe give some indication of where we are on empty versus full on that ratio now compared to where it has been historically? The empty trailers is not a significant part of the operational problems. The operational problems have been to coordinate where customers drop off their trailers or containers relative to where they wish that the container and trailers go to. This may sound fairly simple, but with three ports in Istanbul and two in Trieste and two in France, this has proven not so easy. It has also not been so easy to keep the required frequency from all drop-off points. In addition, we have had the new mega vessels with some time for the port crews to get accustomed to emptying 450 units instead of 250 units, and not creating congesting in the port at the same time. In Trieste we have an unbalance between the two ports in terms of how many vessels come in where, which have required a need for shunting between the two entities and congestion in some instances, meaning that we have simply not been able to get hold of a trailer leading trains, for example, to leave empty, or even ships with less cargo than could have been due to not being able to access the trailers or the containers. So it goes broader than the empty trailers. The empty trailer trend is going down as the import is growing, as you saw on the graph. But there are still empty trailers coming back. But I guess, just to follow up, that most of these issues you mentioned on the port side has been resolved with the new initiatives you have made. Except for Trieste. The rest of the issues have been more or less resolved. Okay, good. Just one final question. On the overland, you mentioned that you want to, with new set up and the new ferries coming in, you expect to regain some of the lost market share to overland, but will that have an impact on how you price your product also? No. This is simply a reflection of our less than usual performance standard that we have offered to the market, that have caused loss of market shares, which, in our mind, is in our own hands to correct. We are not talking about taking market shares that have left us for other reasons, including price. Okay, great. Thanks a lot. Thank you. Our next question comes from the line of Lars Heindorff from SEB. Please go ahead. Your line is open. Morning, gentlemen. A few questions from my part as well. Firstly, regarding the Channel and the contract with the U.K. government, can you indicate the level of contribution in the third quarter? Secondly, can you also maybe give us an indication about what kind of contribution we should expect from the new contract that you have won? That is the first one. We had a 6-month contract from 31st of March with the DfT, which we have taken the income of over the 6 months, and there was a DKK 20 million or so income from that in Q3. The new contract is insignificant. Okay, then on the Baltics, fairly sort of, I would say muted volume growth when we look at the lane meters. Still quite a dramatic improvement in the margin there. Is this cost out or what is the reason for the strong performance in terms of earnings in the Baltics? Last year, to my recollection, we had some significant cost on the fleet, which we have not seen again as a main element. Then, of course, the bunker price have also favorably developed since last year. There was also But the bunker price Passenger result in Q3. Yeah. Okay. But the bunker price, you normally say that is a pass-through. Is that correct understood? If I maybe clarify it a little bit, the spread between bunker types have widened. Okay. Then regarding the Zeebrugge Gothenburg, I assume that's the Stena contract. Is that operating in the full third quarter? Is it only partly in there in the quarter? It's in the- That's fully in the quarter. Yeah. Okay. The volumes that you have from that contract, which adds of course to the volume growth on the North Sea, should we expect that that will be representative for the volume in the coming quarters? Are there any kind of seasonality as there is normally in your business? There is, of course, some seasonality in the freight business as well. I think you can assume that this route will have the same seasonality as the remaining North Sea business. Okay. Then lastly, on Newcastle Amsterdam. Now with the Moby deal out of question, I am just interesting to hear your thoughts about alternatives. Obviously, this will have an impact on CapEx. Are there any other places you can go where you can find secondhand vessels to ramp up and get the capacity that you need on the route? Or do you need to go out and contract for new buildings? Or maybe alternatively just maybe postpone the decision? I do not know if you can give us some opinions on that. The option we have is to continue sailing with the two vessels we have. They could, according to our technical department, sail 10 more years. The other alternative is to see if Moby and its creditors reach a conclusion on the situation that led to the cancellation, and then potentially see if there is still a deal to be made there. The third option is to, as you also alluded to, look at alternative tonnages. All three options are realistic and is a possibility. But the first option, you mentioned that they can sail another 10 years. That will not give you the capacity that you need to grow on the route. Is that correctly understood? That will, of course, not enhance our freight capacity as the other vessels would. On the other hand, of course, the CapEx, as you mentioned, is lower. So we will sit down as the opportunities arise, and then in each case, we do a quite detailed analysis to see how we best create values for our shareholders. Then, we will go in that direction. But right now, it's, of course, a disappointment that Moby could not deliver the vessels as agreed. And the third option about, maybe still there's some likelihood on getting a deal with Moby and its creditors. Is there any timeframe on that when you get to a decision on that? I think, just out of respect for Moby and their challenges here, I think we will refrain from commenting on that. But we are, of course, in close contact with them on the status. Okay. Thank you very much. Thank you. Thank you. Our next question comes from the line of Marcus Bellander from Nordea. Please go ahead. Your line is open. Thank you. Just one question, if I may. The delay of the new building of the RoPax ships. Could you elaborate why the delays and what's going on there? So far, it is really the keel laying that was delayed, and therefore some payments are delayed. We may see three, six months delay on the first delivery. It is nothing that we are really too worried or focusing on right now. But it just had small implications for our cash flow during the period. But are they Sorry? Sorry. Are they delayed on your initiative or is it the shipyard that can not deliver? No, no. It is the shipyard that is No, we have a team in place out there monitoring it closely and working well with the yard. So it is a yard-instigated thing. Okay. Understood. Thank you. You are welcome. Thank you. Our next question comes from the line of Finn-Bjarke Petersen from Danske Bank. Please go ahead. Your line is open. Yes, good morning and congratulations with your strong results and the positive development in Turkey. I know that the question had been asked before about overland, but what is the overland market share now compared to a year ago, and how does it affect your new routes to France? First, thank you for the nice comments. We, of course, don't consider a result that is on par with last year to be strong. The situation in Turkey is that, without having the exact percentages, we have lost something around 5-6 percentage points compared to last year versus overland. Some of that we can probably attribute to our payment credit strategy, some of it to just mix changes among the customers, and some of it to our performance issues. We certainly believe that there is a likelihood that we can take, let's say, 50% of that back once operation is back on track. That is just in numbers. Is the overland, is the market share, how much is it today? It's around 50. They were around 45 before. Okay. Thank you. You are welcome. Thank you. Our next question comes from the line of Rory Cullen from RBC. Please go ahead. Your line is open. Good morning. Three questions, please. Firstly, could you just give us your latest view on where you are going to deploy your ro-ro new arrivals over the next couple of years? Secondly, on the widening spreads between low and high sulfur fuel, can you sort of talk us through the initial impact of that and just remind us the proportion of your fleet that has scrubbers? Then finally, there is still quite a wide range for EBIT at this point of the year. Your guidance seems to allow for a deterioration in Q4. If a no-deal Brexit was avoided in 2019, would you be able to tell us where you expect to lie this year? Thanks. The first question, the vessel that right now is on its way from China will be operating between Sweden and Ghent in Belgium, so Gothenburg, Ghent. Then we have three remaining. They can operate on the Sweden route to Ghent, or say Zeebrugge. They could also operate from the continent to the U.K., most likely the long route to Immingham, or they could operate in Turkey. Except for the one arriving now, next week, we have not determined exactly where they will go. It depends on the situation and the demand at the time of arrival. The second question was about the bunker spread. There, the existing fleet, excluding Turkey, our consumption, 60%-65% of the consumption is on vessels with scrubbers and the remaining without scrubbers, which means that those remaining will burn MGO. The fleet in Turkey, again, the ambition is during 2020 that it will be 100% scrubber equipped. And there, the alternative to heavy fuel is low sulfur, where there is not an established market yet. So what happens is, of course, when the spread goes out, we have a better contribution from our customers to the investments that we make in the scrubbers, which is the initial investments and commissioning, but also the slightly higher operating cost that you have when you operate scrubbers. I do not know if that answered your question, too. Yes. That is very helpful. Thank you. The third question you have to repeat, that was a little complicated. I was just hoping, given it is quite a wide a bit to range for this point in the year, I was hoping you could just talk us through what might make you finish up the year at the top of the end of your range, and what might lead you to end up at the bottom end of your range, if possible. It's of course, you can say, still a wide range of DKK 200 million at this stage, but it is small changes that can move us a little bit in the one or the other direction. We again do not see any major things on the U.K. side because it has now been postponed till January. I don't think I can say something specifically that will drive us one way or the other. Obviously, a further recovery in Turkey is good for us. If U.K. continues to trade a little bit stronger as it did towards the end of Q3, that will also help us. Okay. Thank you. Thank you. Our next question comes from the line of Stefan Rollo from KfW IPEX-Bank. Please go ahead. Your line is open. Good morning. I have, first of all, questions on Mediterranean business. You said you lost some market share to the land transport. First of all, I wonder how, let's say, easy your customers can change to land transport and on the other hand, how easy is it to get them back? Second, you said, well, you lost market share on the land transport. What about your second competitor, Ulusoy Lojistik? Do your customers also change to this kind of competitor? Second, with respect to your route to France, there is also Ekol Lojistik that is offering or operating a route to France. Do you now also, let's say, replace Ekol Lojistik on this route, or is it still a competitor of yours? Fourth question on the bunker and low sulfur fuel discussion. While we see in the market that some competitors, in particular in the container business, they are planning to install low sulfur fuel or sulfur fuel surcharges. Is it also an option for you to get through these surcharges for your customers? Thank you for the questions. In times where the economy is slow, some of our customers will have spare equipment, which makes it easier for them to convert to land transport. In general, they need one tractor for each trailer if they perform land transport where they need one tractor for three trailers when they use our services. They can move some traffic on the margin, especially when the economy is weak, but it is complex for them to move larger shares of their business, especially in a time like now where cash is not plenty in Turkey and investments are not easy to do. In terms of Ulusoy, they operate from the Izmir region, so a different area than our Istanbul and Mersin departures. There is very little competition between us and Ulusoy. They also do not see the same overland issue as the significantly longer driving from Izmir if you want to get to Germany. In terms of Ekol, they stopped their service to France in July. We are the only RoRo operator from Turkey to France today. In terms of the bunker, we certainly do have a so-called BAF mechanism, which is a bunker adjustment factor, which is tied to the fuel type that exists, which you need to apply to the regulations. For example, in Turkey, which is the new area that we will have regulation, we have introduced to our customers a BAF surcharge linked to the MGO fuel, but with industry relief factor to not have a very significant jump, but a jump we think they can afford and which is justified with the additional cost we have. Okay. Thank you very much. You are welcome. Thank you. Once again, if there are any remaining questions, it is 01 to register. There is a follow-up question from the line of Marcus Bellander from Nordea. Please go ahead. Your line is open. Yes. Thank you. I am just wondering if it is possible to quantify the impact of the wider fuel spreads in Q3. No, we do not have the exact quantification of that. As usual, there is always this delay of impact one month when prices go up or down or spreads increase or decrease. All right. Thank you. Thank you. As there are no more questions registered, I now hand back to our speakers for any closing comments. Thank you very much for all the good questions. Again, DFDS is looking forward to speaking to you all again in 3 months' time, where we will also provide, of course, guidance about 2020. Have a good day. This now concludes our conference. Thank you for attending, and you may now disconnect.