Earnings Call: Q2 2019

Aug 13, 2019

Summary

Q2 revenue and EBITDA rose, but U.K. freight weakness and Brexit uncertainty drove lower full-year revenue and EBITDA guidance. Mediterranean expansion and passenger earnings partly offset the pressure.

Hello, and welcome to the DFDS Q2 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 Torben Carlsen, CEO. Please go ahead. Good morning, and welcome to DFDS's Q2 call. Joining me today is Jesper Heilbuth, our interim CFO, and Søren Brøndholt Nielsen, head of investor relations. Growth continues, but Brexit lowers pace is our Q2 headline, reflecting that our combination of ferry routes and logistic solutions is robust and holding up well against the headwinds from current events, not least an exceptional high level of uncertainty about the outcome of Brexit. We have seen lower freight volumes in Q2 as the Q1 stockpiling in U.K. reversed during the quarter. This also makes it relevant to look at our half-year numbers, rather than Q2 alone. Current U.K. trading, also beyond Q2, is lower than last year, which we attribute to the increased uncertainty. In light of these events, and this situation, we have chosen to lower the full year EBITDA outlook by 6% and widen the range from DKK 200 million to DKK 300 million to reflect the reduced visibility on U.K. trade. Turning to our Q2 report, slide three. You see that Q2 revenue is up 9% to DKK 4.2 billion, and EBITDA is up 4% to DKK 989 million. H1 revenue is up 10% to DKK 8.1 billion, and EBITDA, for the first half, is up 8% to DKK 1.7 billion. As mentioned in the introduction, there is a negative impact in Q2 from reversal of U.K. stockpiling in Q1. As I also said, U.K. trade is currently lowered by the Brexit uncertainty. As a consequence, earnings outlook lower approximately 6%, from before an EBITDA prediction of DKK 3.8 billion to DKK 4 billion to now DKK 3.5 billion to DKK 3.8 billion against the 2018 restated result of DKK 3.6 billion. Turning to page four. We, as usual, look at our five key performance drivers for 2019 that, as you can see, some of them are facing some headwinds. The growth benefits from our Mediterranean expansion. We see the full year impact from U.N. Ro-Ro and the expanded cooperation with Ekol Logistics. We are well prepared for Brexit. We do see that some customers are not completely there. We are dealing with that, but do expect some disruption the first weeks following a potential hard Brexit. The route network we said would be strengthened by three new freight ferries, and that is on track. This digital business project should go live, which has happened. We are emphasizing further the effort to get the market traction on bookings on these. We have our usual continuous improvement efficiency projects, which all are on track. Turning to page 5. EBITDA margin lowered by stockpiling reversal in Q2 is the headline. Revenue growth of 9% driven by Mediterranean. Margin reduced by lower freight volumes from this reversal of stockpiling. The EBITDA increase driven by full-year Mediterranean impact, and also very positively, higher passenger earnings. Depreciation is up DKK 50 million, mainly again due to Mediterranean full-year impact. ROIC is now fully reflecting the Mediterranean acquisition, including the headwinds that we have faced initially into it. Turning to page 6. Diving further into the ferry division, where EBIT is up 3% to DKK 518 million. North Sea up DKK 1 million. Lower volumes from, again, the U.K. stockpiling reversal, but some mitigation from the DfT agreement that were in place until May 1st when DFDS canceled the agreement. Baltic Sea, minus DKK 7 million. Strong PAX performance, but some lower freight earnings Explanation for this. Channel, minus DKK 49 million. Lower freight volumes, slowdown in PAX markets. Clearly both impacted by the Brexit situation, but also a small market share reduction for DFDS, both in freight and PAX during Q2. Mediterranean full year impact of DKK 51 million, where last year we only had impact from June. In 2019, we had from the full quarter. Passenger, plus DKK 19 million. There is a positive Easter impact here, but it is also a positive impact that has continued beyond Easter. Turning to page 7. The logistics division, we have a negative development. Some impact both Nordic and continent from the U.K. reversal of stockpiling, but in the Nordic, not a surprising development as we saw the expiration of a large automotive contract last year, that we have this year at a different level as the main reason for the reduction in Nordic continent. As I mentioned, the negative impact from reversal of U.K. stockpiling and then a positive development inside U.K. and Ireland with improved result of DKK 3 million, with improved performance and also impact from large new contracts. Turning to page 8. A picture of our Win23 or illustration of our Win23 strategy, where we have four strategic pillars that will help us drive growth in the next five years. We are well on the way to deliver on this, have now mobilized the organization, have the leaders in place, and we will start reporting on progress as we move ahead on Win23 also in this quarter. Turning to page 9. The outlook. U.K. trade slowdown continuing beyond Q2. Brexit outcome seen from our side of the table, currently unpredictable. We could see a new round of stockpiling September, October. We have reduced revenue growth to 6%-8% and the EBITDA by 6%, so that we now guide revenue growth of 6%-8% from 10%-12%, and EBITDA range of 3.5 to 3.8 billion DKK, down from 3.8 to 4 billion DKK. Other guidance levels are unchanged. Turning to page 10. Priorities 2019. We will be adapting to the market changes, continue our Brexit preparations, full focus on optimization of our Mediterranean capacity utilization and operation, further development of the newly launched routes from Gothenburg to Zeebrugge and from Istanbul to Sète, deliver on our performance drivers, and focus on furthering our Win23 strategy. With this, we turn over for questions from the audience. Thank you. Ladies and gentlemen, if you do have a question for the speakers, then please press 01 on your telephone keypad and you enter a queue. After you are announced, please ask your question. Our first question comes to the line of Dan Tørgils from Carnegie. Please go ahead. Your line is now open. Yes. Hello, good morning. First question would be on the North Sea. Can you come a bit closer to quantify the impact of the compensation you got from Department for Transport here? Impact in Q2 is around DKK 50 million possibly. Then you told me, you mentioned it will also feed into Q3. Will that be a lower amount? That will be a lower amount. On the channel, your volumes are down by some 14%. Year-over-year, we can see numbers from Eurotunnel, where truck traffic is down around 10%. It seems like you've lost a bit of share here. How will you approach that in the second half? Do you expect to regain some of the lost share? How will that impact prices, et cetera? How will this play out? We do expect to regain some share. The historical situation on the channel has been that we gain share in the high seasons because of the configuration of our vessels. With the market down this year, there has been less of that natural market gain, share gain for us this year. But when we look at the current situation, we believe that we have corrected the loss of share, and will hopefully maintain that status for the rest of the year. Okay, thank you. Just maybe a few words on the management change you are making in Turkey, because Turkey disappoints a bit, and you are also mentioning additional costs to the ramp up here. Had there been some lack of control, or how should we see this management change? We have seen that, obviously when integrating such a significant operation, that things have been done in different ways. Selçuk, who had left, has done an excellent job in Turkey. But we saw with the complexity coming also from the new customer contract down there and the added departures and added ports operations, that it is important to have an even stronger DFDS DNA on site in Turkey. That is the background for the change, to stay very close to the operation through these demanding times. Okay. Thank you. You are welcome. Thank you. Our next question comes to the line of Lars Heindorff from SEB. Please go ahead. Your line is now open. Yes, morning. A question regarding the Baltics and the agreement that you made, or contract you made with Stora Enso recently. Had that had an impact on Q2, or how, or maybe it will be in Q3, and have the ramp up to that contract already started? What on earth actually after is the utilization that you have experienced in the Baltic, whether that have changed significantly because of this new contract? Good morning, Lars. The new route is actually North Sea, from Gothenburg to Zeebrugge. So it's reported in our North Sea. I can still answer the question. The utilization has, of course, been impacted by the ramp up. We took over, as far as I recall, June 17. A current operator left the market, and customers needed to find out to what extent they joined our route and to what extent they joined the competition route. But the business case that we prepared for this holds, as we expected, which means that the impact in Q2 is very limited. We start seeing some impact in Q3 and more so in Q4. Okay. When you say limited, I assume that it's because there's been some startup costs, as you mentioned. There's a startup cost. Plus, of course, utilization is low as we ramp up and get the new customers on board. Okay. We moved one. We took one vessel from the Ghent route and redeployed on the Zeebrugge route. So you can say instead of having four on Ghent, we now have three and three vessels operating. Okay. Then regarding your development in trading conditions, volumes were down quite significantly, both in the Channel and also in the North Sea, when we look at that. Maybe you could give us an indication, understand from your wording that the decline in volumes have maybe been exaggerated and caused by this development in U.K. But do you expect, or what have you factored in in your guidance that this is something, a trend that will continue into the second half, or what are you expecting connection with the Brexit, that this will be a kind of a one-off quarter where you have such bad volumes or whether they will improve going into the second half? The guidance for the year, the downgrade of the guidance reflect that the current conditions continue, which mean that we expect lower volumes compared to last year for the remainder of the year on those, the North Sea and the channel volumes. Okay. Can we- As we are on the channel. Is that in line with what you've seen so far in July as well? It is. Okay. The last part is regarding your capacity plans. If I recall it correctly, you may correct me, I think you will have one more vessel delivered here in the third quarter? Correct. When we look at capacity plans also in light of the volume trend that you've just explained to me, what kind of capacity growth are we looking at in those, both in the North Sea and I would say particularly on the North Sea, going into the third and the fourth quarter. We do not predict capacity growth on the North Sea Q3, Q4. Not from DFDS. Okay. But from your competitors, maybe? No, I have no information about that. Okay. Lastly, the special items. You have minus DKK 6 million in both the logistics and the ferry division, then I think you had minus 17 on the group level. Can you just explain what is that related to? We have had some organizational changes in connection with making the organization ready for Win23, then we have closed down, sold off some smaller associated companies to ADS with a DKK 10 million closed down cost. Okay. In logistics, the decline in volumes in the Nordic, as you mentioned, I assume it's because of some of the automotive contracts. Do you expect that also to continue into the third and the fourth quarter? No. The comparison should be like for like. Which implies? The large automotive contract we referred to expired in Q2 2018, so we don't have that strong comparison for the remainder of the year. We expect growth, hopefully in all areas in logistics in the remainder of the year. All right. Thank you very much. Welcome. Thank you. Our next question comes to the line of Marcus Bellander from Nordea. Please go ahead. Your line is now open. Thank you. Just wondering how you are thinking about adjusting capacity on the North Sea and the Channel now that volumes are declining, if you are reducing frequency or if there are any other measures you can take and will take. There can be some reduction of frequency on the Channel, middle of the night and others, where it may make sense to drop some sailings. But it is not straightforward as you then get out of routes, et cetera. But we will see what is possible, including also potentially changing size of vessels. But the assumption is, from the organization side, that Q3, September, October, will be quite busy with both Christmas and potential stockpiling coming along. So we do actually not see a need for dramatic capacity adjustments right now. Okay, understood. This new round of stockpiling, which you've mentioned a couple of times, is this your sort of gut feeling, or is this based on actual bookings or what customers are telling you? We don't have bookings reaching that far out, but some customers are expecting this, others are not expecting it. So, we'll have to wait and see. But the business management of close to the North Sea customers believe that there will be some impact in September and October. All right. Finally, just now that EBITDA guidance is being lowered, and your net debt to EBITDA is on the high side, I would say. Is that anything that makes you nervous at all as the former CFO? I think a leverage of 3.2 is not on the high side. It's quite a comfortable level. But of course, we make sure that we are also conservative and prudent on the balance sheet side, but nothing that keeps us awake this moment. Okay. Thank you. Thank you. Our next question comes to the line of Finn Petersen from Danske Bank. Please go ahead. Your line is now open. Yes, good morning. North Sea, quite a dramatic fall in lane meters, almost 10%. U.K. volumes, the official statistics shows it is around 6% drop in volumes between U.K. and the EU. Who is winning the market shares, and what is the split if looking at your U.K. exposure on the North Sea and the exposure to the continent? It seems like if you are following the general trend to the U.K., you should lose quite a significant volume on the Ghent routes. Could you help me a little bit understanding this? That was a complex question, Finn. But I think we believe, and our North Sea management believes, that there will be a reversal of demand September, October, which has led us to take a soft approach in light of some loss of market share, because we do not think it is healthy to lower prices in a situation where we think that all capacity will be required shortly. So do we have levers to make sure that our loss of market share corresponds to the markets? We do, but are patient at this moment when we talk about the North. But I still don't understand. It's not the future we're talking about, the last quarter. If the market is down 6%, you're down almost 10%. And this is the U.K. market, but you're for sure not down 6% on the continent market. That is not falling, is it? But, Finn, I don't think you can compare the U.K. trade of goods, which includes all kinds of goods, to the more specific trade that we are running. That's not an apple and apple comparison. But you can say the trend is similar. And if you look at the half year, I think we are down around 3% on the North Sea. So the market is more volatile because of this stockpiling ups and downs. So I think we have to see it over the longer periods. Okay. Let's call it a half year longer period. But anyway, I just have to understand, 10%, is that 10% to the U.K. and also 10% to Ghent, the drop in volumes? Or how should I look at the 10% lane meter drop in the second quarter? The Ghent comparison has, of course, been challenged a little bit by the fact that we've moved capacity to the new routes. So when you look at the total Belgium, Sweden, we don't have a 10% drop. Okay, because you moved capacity on June 17. It cannot make that huge difference to the Ghent route for the second quarter, can it? I am just wondering, are we looking at a genuine underlying market decline from Sweden to continent? Sweden to continent is less impacted than the North Sea south routes from Rotterdam. But of course, we have also seen that some of the automotive volumes are somewhat reduced. Okay. Market share, we know that Cobelfret have received two new vessels. Could you help me understand how that affect the market share and pricing dynamics in the North Sea? I believe that those vessels are deployed to Ireland and Spain. Okay. Thank you. You are welcome. Thank you. Just as a reminder, if you would like to ask a question, then please press 01 on your telephone keypad now. Our next question comes to the line of Ruairi Cullinane from RBC. Please go ahead, your line is now open. Good morning. Three questions, please. Could you first talk me through the impact of the closure of Alternatif Transport route between Turkey and France? Secondly, on Brexit, if there is a no deal Brexit at the end of October, do you think you would be able to offer customs clearance or duty-free fairly soon after that? Perhaps given the uncertainty and the possibility perhaps of securing a further contract with the DfT on similar terms, could you talk us through what Brexit outcomes might lead you to the bottom, or where you would sit in the range according to which Brexit outcome? That would be helpful. Thanks. Yeah. Let's start with Turkey. Alternatif stopped operating to France. They operated from the Izmir region to Sète, and we have begun a route from Istanbul to Sète. We are currently looking how we can best optimize the two routes we now have to France from Istanbul, and also have discussions with customers to see what port in France makes most sense for the market in Turkey, so that we hopefully, over time at least, can seek some consolidation on these routes. We have seen a relatively slow start to the Sète routes for natural reasons, which is normal when we start a new route. But we have also seen a positive spillover impact on our Mersin route, which, having struggled for a while now, start to show significant volumes above last year's volumes as probably customers that before used the France route have shifted to the Mersin Trieste route. So, in short, things are looking good. It was a positive news for us that Alternatif stopped the French route. In the U.K., we certainly expect if the rhetoric we hear from the U.K. now is such that come hell or high water, there is no EU after October 31, then we also do expect that there will not be separate agreements telling not to reintroduce duty-free, for example. Which means that we will be ready to introduce duty-free trade. Our vessels on the channel are built in a time where duty-free was there, so there is plenty of storage capacity. And of course, also Newcastle and Amsterdam will benefit from that. More complex, requiring more preparation is, of course, the declarations and helping the customers with that. But we have hired key positions. We have trained a number of people, and we are in close dialogue with authorities and customers to see how we can help this out. Plus, we have gained access to additional space for storage, et cetera, in the terminals. So we will certainly be ready to pursue any possibility to keep trade flowing, including, of course, also gaining revenue from these new services. On DfT, it seems like DfT is taking a slightly different approach this time in how they prepare. They enter into frame agreements so that if they need capacity, they have already agreed the terms. But it does not look like that they buy firm space as they did last time. We do not question their strategy, but of course, if stockpiling happens, then there may not be that much capacity to then buy. But we are in discussions and engaging with them to offer the best possible service in that connection. But you should not expect some one-off type income from that as it looks like right now. Okay. Thank you. You are welcome. Thank you. As there are no further questions registered at the moment, I will hand the word back to you, Torben, for any closing comments. Please go ahead. Thank you very much. The rest of the year, as the last answers also indicated, will offer both opportunities and challenges, and we are well prepared to meet both. The work to deliver on our new strategic and financial ambitions has started, and progress is well on the way, and I look forward to reporting about our progress to you going forward while we handle the current challenges on hand. Thank you very much for joining the call and your questions, and have a good day. This now concludes our conference call. Thank you all for attending. You may now disconnect your line.