Earnings Call: Q1 2019

May 9, 2019

Summary

Q1 revenue and EBITDA grew, led by North Sea and Mediterranean expansion, while Easter, Baltic costs and Turkey’s weak trade weighed on performance. 2019 EBITDA guidance was unchanged, although investment plans increased for the new Gothenburg–Zeebrugge route.

Hello, and welcome to the DFDS Q1 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 go ahead with your meeting. Good morning, and welcome to DFDS's Q1 call. Joining me today is Søren Brøndholt Nielsen, our head of investor relations. First quarter on track is our headline, and we are on track for the quarter, and on track to reach our earnings outlook of an EBITDA between 3.8 billion and 4 billion DKK for 2019. Turning to page 3 of the presentation. We see that Q1 revenue is up 11%, 3.9 billion DKK. EBITDA is up 13% to 677 million DKK. North Sea achieved a very strong result. Mediterranean delivers growth, but with the very fast ramp-up of a new agreement that reduced margins. We saw negative one-off impacts from Easter on passengers and from heavy additional vessel costs in the Baltic. As mentioned, our earnings outlook is unchanged, an EBITDA of 3.8 billion to 4 billion DKK versus a restated 2018 result of 3.6 billion DKK. Turning to page 4. We have a look at the market growth prospects for 2019 and beyond, where we still see visibility on Europe's growth dampened by Brexit uncertainty. Brexit, which as you all know, is postponed until end of October. Low growth outlook for Europe, and with consensus growth estimates softening. Current headwind for Turkey, Europe trading, particularly for the imports into Turkey, and the growth outlook has been reduced and could be further reduced following the cancellation of the elections in Istanbul recently. Turning to page 5. We go through the five performance drivers that we launched in connection with our annual report, and they are on track. We get the growth from Mediterranean expansion that we expected with the full year UN Ro-Ro integration impact and the expanded cooperation with Ekol Logistics. Then, of course, we now have added a new route, Gothenburg-Zeebrugge, that I will come back to later. Well prepared for Brexit. We have spent a lot of time in-house, and with parties outside of DFDS, including Department for Transport, who have now canceled the agreement that they had put in place as a contingency plan. Our route network is, as expected, strengthened by so far one new freight ferry. The second just released, on its way from China, and the third after summer. We have launched our first digital products, DFDS Direct and DFDS Spot. First bookings are coming in. We closely monitor our various improvement and efficiency projects, and they will deliver the 100 million DKK that we have previously communicated. Turning to page 6. Network expansion increases EBITDA and also capital costs. As mentioned, revenue growth of 11% driven by Mediterranean. Cost increase from the ramp-up, the same place. Additional dockings throughout the fleet and development of IT digital capabilities. The EBITDA, as the revenue, is mostly driven by full year Mediterranean impact. Depreciations increase of 72 million, also main cause, Mediterranean full year impact. EBIT before special items up 2% to 234 million DKK. Again, finance cost up due to the acquisition cost related to Mediterranean. Moving to page 7, where we take a closer look at the ferry division, where the EBIT is up 8% to 223 million. North Sea, plus 29 million from U.K. route capacity increased to accommodate the stockpiling. This is somewhat offset by lower volumes between Sweden and Belgium. Baltic Sea, minus 31 million. Here we have had and experienced a one-off tonnage cost and also bunker costs that had not been covered by BAF in order to maintain the capacity during dockings, and also due to deferred maintenance on our Baltic fleet. We saw some improvement on our Paldiski routes which last year lost market shares. Channel, plus 9 million. Increased freight contribution. We have lost some contribution from passenger, partly due to Easter, but also some loss of market share, which on the other hand is offset by better sea fares. Mediterranean, plus 43 million, which is, of course, because there was no UN Ro-Ro last year. Passenger, minus 30 million, which is again negative Easter impact, and then increased tonnage cost. Turning to page 8. Logistics division down, which is primarily driven by Nordic, minus 11 million, where we had peak volumes for very large automotive contracts in Q1 2018. We had also experienced some startup for a large new sideport shipping contract in Norway. But generally, activities apart from these two elements are doing well in the Nordics. Continent have also some of the effect from the large automotive contract 2018 that is now reduced. On the other hand, that has had some positive impact from the U.K. stockpiling leading up to March 29, and also very strong container operations from Holland. U.K. & Ireland improved its performance in all areas. We had various boost projects last year, with some challenges in Belfast and in certain contracts in the U.K. That has all been resolved. In addition, we have started up a large cold chain contract very successfully, both operationally and financially. Turning to page 9. As you all know, we paid our dividend in March of 4 DKK. The multiple leverage is now 3.3 at the end of 2019, with the Q1 2019 after some investments in particular in ports in the Mediterranean, and also further payment on new freight vessels. By the end of the year, we will be down to 2.8 times, which includes the investment in two new vessels for the new route between Sweden and Belgium of around 300 million DKK. Turning to page 10. Priorities for the remaining part of 2019. Adapting to market changes, we continue preparing for a hard Brexit in October. We hope that there will be some solution before the summer. But with the past experience, we have to continue the preparations. We optimize capacity utilization in Mediterranean, with some cancellations of departures, et cetera, et cetera, to take into account the reduced demand, especially on the import side. Then, opening of new route, Gothenburg-Zeebrugge. We announced separately this morning that we have made an agreement with Stora Enso to take all their base load of paper from Sweden to Belgium on a new route that we will open mid-June. A route that will, of course, also cater to freight forwarders and other customers. In connection with this, we plan to buy two vessels, as mentioned. We also plan to move one of the vessels that we currently have operating on Gothenburg, Ghent to Gothenburg, Zeebrugge, so that we will have three vessels operating on each route. Preparations for the operation and, of course, also we are reaching out to customers have begun here this morning. We will continue to focus on delivering on the five performance drivers, and then focus on top-line growth and continue to pursue also inorganic growth. The earnings outlook is unchanged except that investments have been increased from DKK 2.5 billion to DKK 2.8 billion with the acquisition of the two new vessels for the Gothenburg-Zeebrugge route. With that, we would like to turn over for questions. Thank you. Ladies and gentlemen, if you do have a question for the speakers, please press 01 on your telephone keypad and you will enter a queue. After you are announced, please ask your question. Once again, that is 01 on your telephone keypad. Our first question comes from the line of Dan Togo from Carnegie. Go ahead, your line is now open. Yes. Good morning. A few questions from my side. First of all, the DKK 100 million inefficiencies here in 2019, is there any impact of this in Q1? Another one in detail on Q1, the impact of Easter, a negative in first quarter, will that just reverse with these DKK 30 million in Q2? So that is the first two questions. Let us take the last. The DKK 30 million in passenger is not all Easter. That would be DKK 10 million-DKK 15 million of this. The remaining parts are related to some higher bunker cost and some higher vessel costs. The DKK 100 million is a continuous thing. That is coming, you can say more or less, proportionally over the year. It is also fair to say that some of these continuous improvements projects are necessary to counter price pressure, cost increases, et cetera. So, you may not be able to directly add it to the bottom line. But when we follow up on the projects, we make sure that we deliver the DKK 100 million on those specific projects. A question on Turkey. Can you elaborate a bit about the trading down there? I guess maybe there's been some startup calibration or, you can say some challenges in adding suddenly 30% additionally. So how has the trading been and how has the implementation of this 30% new capacity from volume from Ekol and maybe trading going into Q2, are you seeing any improvement? Trading has been slower than expected. The rebound that people were expecting, that could start in Q1, we have not seen. We have also not seen it going into Q2. I think a consensus is starting to develop that we are talking towards the end of this year or beginning of next year before the strong export driven rebound could happen. For DFDS, we have bigger volumes than UN Ro-Ro had standalone last year because of the new contract with Ekol. That has primarily impacted very positively the Istanbul-Trieste route. Mersin-Trieste and Istanbul-France have not had this boost, so they have a quite dramatic drop compared to last year. We saw this morning that Alternative have announced that by the end of June, they stop their France route, which means that we should also from Q3, see that our Trieste-French volumes exceed those of last year and even before the crisis. Can you elaborate on how much that could impact that route in terms of lane meters? I cannot give you that right now. We actually expect that it could impact both the French route and the Mersin-Trieste route since we suspect that Ekol have directed volumes that could go to Mersin to this route, which they now may split. It could be a positive for both the ailing routes, you can say. Then to the implementation, yes, we signed an agreement on the 21st of December, and we had to start operating the 29th of December. It takes 14 days to send ships from Northern Europe to Turkey. We were struggling a lot in the beginning. We had to find out where the customers preferred to sail from, as we now have two main ports in Istanbul, and also two ports in Trieste, or two terminals with different rail capabilities from one to the other. We had significant cost and over capacity during Q1. During Q2, we will gradually get much closer to running the capacity that we actually need. But for us, the most important thing has been in this ramp-up period to make sure both our new customer, but also our existing customers, could see that our main focus was on making sure that they could conduct their business rather than running it very tight and risking that customers would think that they needed other solutions than just DFDS. All in all, we are quite pleased with this, but it has been an expensive quarter, and that will continue into some of Q2 in Turkey. Then just one final question. The deal you struck with the British Department for Transport of, I believe it was EUR 47 million in case of a hard Brexit. Have you received or started to receive any of that? How will that impact profitability in Q2? I guess there is no effect in Q1. There is a very small impact in Q1. The Department for Transport has terminated the agreement, and we have received a compensation for that. We have also had cost in some of the repositioning of vessels, some of the dock postponements, and chartering in. I cannot tell you the impact yet in Q2, but the value of the contract is significantly reduced from the EUR 47 million due to the cancellation. Does it compensate for your cost or end with a profit, so there will be a small profit effect? We should have a margin at least in line with our normal operations. Okay. Thank you. Thank you. Our next question comes from the line of Lars Heindorff from SEB. Please go ahead. Your line is now open. Good morning, thank you for taking my questions. The first one is regarding the new agreement that you have made with Stora Enso, the CapEx for the two vessels. You stated in the announcement that it will reach revenue in excess of DKK 300 million. I am curious to find out what kind of margin such a contract can carry. I am sure you are not going to give me any sort of exact numbers, but is this going to be close to average margins that you obtain in the North Sea, or how do you see the margins on such a contract? Just to clarify, the contract with Stora Enso is not DKK 300 million. The contract with Stora Enso is a third or a fourth of that, but is the base volume that has allowed us to start the route. All the remaining volume will be primarily freight forwarders and potentially some industrial customers. So when fully implemented in 2020, we certainly hope that the margins on the route will be similar to other routes operating in that area. With the small caveat that, of course, a customer that brings the base volume for a route has attractive pricing. Okay. Just to clarify that. So one third or one fourth, you said, is Stora Enso out of the DKK 300 million- I will not guide you closer than that, but they will be a significant part of the volumes. Okay. But the remaining revenue up to the EUR 300 million, since you mentioned it, is it new volumes that you expect to bring into the North Sea, or is it existing volumes that will be rerouted into this from other areas? The structure today is that we operate a route with four vessels from Gothenburg to Ghent. Cobelfret operate, I believe, two vessels from Gothenburg to Zeebrugge. SOL, Swedish Orient Line, operate two and a half, three vessels from Gothenburg to Zeebrugge with the Stora Enso volumes. We do not believe that there will be more than DFDS and Cobelfret operating in 2020. So the volumes that today are carried with Swedish Orient Line, we will try to see if we can attract some of those customers. Okay. I am not sure you answered the question, but it is okay. Well, it means that it is existing volume in the corridor, but that we hope to attract those volumes that already exist in the corridor. Okay. Thank you. Then a follow-up on some of the Turkey, Mediterranean. I know you have changed your pricing mechanism in order to reduce the lira exposure. You previously had this 300 million exposure on your net working capital. I am curious to find out if the change in the pricing policy, which apparently, if I understand you correctly, has been fairly successful in reducing the lira exposure. What kind of impact has that had on the prices? Has it been necessary to accept lower prices in order to move customers to pay cash or in euro? You can say that before this, the impact from Turkish lira depreciation would hit the finance line. Historically, UN Ro-Ro have had 6, 7 million EUR of finance cost related to this depreciation. Last year, we then had a slightly higher amount due to the larger depreciation. Now, with 90% of the customers paying cash or in euro, we do not have that finance cost any longer. On the other hand, we have extended some incentives, a couple of percent, to change from Turkish lira payment to euro payment and also faster payments. You can say to a certain extent, we have hurt a little bit the top line, but have corresponding improvements on the finance cost. All in all, it should not cost us anything, but on an EBITDA level, it will cost us something. Okay. But cash wise, it is neutral. Okay. Then lastly, this is mainly related to logistics and some of the contracts that you had last year, with Volvo, the V60, and I think also you had something with the V90, if I recall it correctly. You said at some point that you will have a new contract this year, which is just smaller, and maybe less comprehensive, compared to the old ones. Can you give us any sort of indication about what is the magnitude of the difference there? No, but the reduction in Nordics in Q1, a large part of that relates to this reduction. But you are right, we have a new contract, and that has a longer duration. We are still very pleased and it is good levels. It was just an unusual strong last year, Q1 and some of Q2. Is it fair to assume that the difference between the EBIT you made in Q1 last year in Nordic and what you made this year is mainly attributed to the change in that contract? There is also impact from the paper stuff in Norway. The answer is no. The majority is from the automotive contract. Okay. Thank you very much, Tor. Thank you. Thank you. Thank you. Our next question comes from the line of Finn-Jarle Petersen from Danske Bank. Please go ahead. Your line is now open. Yes, good morning and congratulations with your new contract. I was just wondering, how do you see that influence the competition picture from Sweden to Benelux, this contract, and how do you see your potential optimizing the operation going forward, how that affect earnings? I can see that you are buying two very small and very old vessels, which does not fit into your operation. What do you intend to do with those, a couple of quarters down the line? That is the sort of question about the new contract, the new routes and competition in the North Sea. Yeah. Let us start with the vessels. Those vessels we have bought are actually a perfect match for what we need with the Stora Enso paper, because they do not need the speed, and they are very fuel efficient for this speed and trade. I note that it is the same vessels that Stora Enso or that, sorry, Swedish Orient Line operated on this trade. So you can say, given that now Wagenborg, who is the owner of the vessels, have sold these vessels to us, we do suspect that Swedish Orient Line is considering stopping their operation. That, I guess, answers maybe your question about the competition situation. Okay. This would imply that there would be Cobelfret operating, and there would be us operating from Gothenburg through Zeebrugge. What we do to optimize this is that we take one vessel that currently operate to Ghent and put that on the Zeebrugge route instead. Through this, we will have very attractive frequency to offer to the market. Also we will be able to optimize utilization of the ferries, we believe, given where the demand from the market is on the two ports in Belgium. We are extremely pleased with this agreement with Stora Enso, and they also have an option to extend it a further three years. We think that this is a very sound basis for starting this new route. Just a follow-up question. Today, you are saying that you expect Swedish Orient Line to stop. How many vessels are they operating today? We do not know in detail, but they operate these two vessels, plus, we understand they operate one more vessel on the line as well, which may not be fully utilized on this line. But we do not have any specific insight to the operation. Okay. Broadly speaking, the capacity on Göteborg, Ghent, Zeebrugge sort of a corridor, if we call that, is basically unchanged. It is just changing hands from three to two. I think you may see a slight reduction as well if they operate 2.5, three vessels, and we only operate the same, but then we reduce one to Ghent. Yeah. It is smaller vessels. It is the same vessels. What I am trying to find out, how does this fit into your renewal of your fleet, your investments, and were you receiving bigger vessels going forward in this year and next year, which you have to employ somewhere? Gothenburg, Ghent is still a candidate for deploying one of the larger Jinling vessels. Okay. Thank you. You're welcome. Thank you. Our next question comes from the line of Rory Cullinane from RBS. Please go ahead. Your line is now open. Oh, hello. My first question relates to your U.K. volume. You mentioned some stockpiling towards the end of the quarter. How has the U.K. been impacted in April and the start of Q2? Secondly, on the fourth, we can take them one at a time, perhaps. No, go ahead. Okay. Secondly, the Baltic Sea. I just wanted to confirm that the issues, dockings and deferred maintenance for that is something that only impacted Q1, and we shouldn't expect that in Q2. Then finally, on the Mediterranean, can you remind us what happened to market volumes between Turkey and Europe in H2 2018, and whether simply the fact that you're lapping those comps gives you some confidence to deliver growth into H2 2019? Let's start with the U.K. Yes, there was some stockpiling and also subsequently, or consequently maybe, in the beginning of April, there were very low demand, which of course then was accentuated by Easter. So April has been slow in the U.K. What then happens going forward, I guess, depends on what politically happens on Brexit. On Turkey, the H2 volumes started to decline. My guess is they were down 10%-12% versus the year before. That status is still the case in beginning of the year. So when it comes to comp in H2, or at least the last quarter, my guess is that we may see a stabilization of the market volumes. Then, of course, our volumes will be higher due to the changed situation with Ekol. And the Baltics. Great. Thank you. Sorry, yes. Baltics. Baltic was, again, there was cost related to maintaining the capacity during dockings. There was an experiment where we moved one of our larger ro-pax vessels, or almost passenger vessels from Amsterdam, Newcastle to the Baltics. That has had cost implications. And then we have had a BAF coverage issue that should not be repeated. And then thirdly, we have had this deferred maintenance. I cannot promise that there will not still be some deferred maintenance, but the other elements should be gone, going forward. Okay. Thank you. Thank you. Our next question comes from the line of Marcus Bellander from Nordea. Once again, if you do have any questions for the speakers, it is 01 on your telephone. Marcus, your line is now open. Thank you. Just wondering if there will be any ramp-up costs associated with the Gothenburg-Zeebrugge route. If you perhaps could indicate whether or not you expect it to turn a profit in 2019. I am sure there will be some ramp up. We of course have now one customer, and we need other customers to make this route profitable. Our expectations are that when seen combined, because of course, we have removed one vessel from the Ghent route, et cetera, you cannot see just the finances in isolation. But combined, we will slightly improve our financial result in 2019 already from this initiative. Then in 2020, we will hopefully start seeing close to a full impact. Okay. I imagine that the effect is small, so we shouldn't view the fact that you enter or sign a new large agreement, that you do not upgrade your full year guidance. That shouldn't be interpreted as a sort of downgrade of the underlying earnings, so to speak. No. This would not be an impact in any case that would have changed our guidance. Okay. Thank you. Second question, staying on this Gothenburg-Zeebrugge route. Do you know why SOL is stopping or closing down its operations? Is that because you sort of stole, if you will, the Stora Enso contract from them? Or had they decided on shutting down the route anyway, and you are just sort of picking up the pieces? We do not know. We have not had any contact with SOL at any time. We have discussed this contract with Stora Enso exclusively. Then, of course, when we started looking for vessels and could see that the vessels that are best suited for this trade were available, we imagined that maybe they would stop operating. But we don't know. You'll have to ask them. All right. Thank you. That's all from me. Thank you. Our next question comes from the line of Lars Heindorff from SEB. Please go ahead. Your line is open. Yes. Sorry to be back. Just a follow-up question. The cost that you talk about in the Baltics to dry docking and the extra maintenance, I am just curious to find out, was that something which is extraordinary, or was this something that was planned for already when you came out with your guidance in connection with the Q4 report? Some of it, we knew about the deferred maintenance. We were not able to estimate what this change of vessel would mean, and then this BAF issue was a surprise. Okay. All right. Thank you. Thank you. Thank you. As we do not have any more questions registered, I now hand back to our speakers for any closing comments. Thank you very much, and thank you for the good questions and the underlying interest for DFDS. We look forward to continuing our growth journey and speak to you again after Q2. Have a good day. This now concludes our conference call. Thank you all for attending. You may now disconnect.