Earnings Call: Q1 2018

May 9, 2018

Summary

Q1 EBITDA rose 10% to a record DKK 453m, while revenue growth guidance increased to 4% excluding U.N. Ro-Ro. Acquisition-related financing paused dividends and buybacks; FY EBITDA guidance is DKK 3.0bn–3.2bn including U.N. Ro-Ro.

Joining me, as usual, we have our CFO, Torben Carlsen, and Head of Investor Relations, Søren Brøndholt Nielsen. Let's get started and jump straight to page three. Headline, strong start to the year. It certainly is. It is probably the best Q1 result we have had ever in DFDS, so we are, of course, pleased with that. It is, however, one of the smaller quarters, but anyhow, a good start. If we look at the top line, we are up 9%, and that's one of the highlights of the quarter, our ability to grow the top line. There are a couple of items one should notice. The first one we've listed here is the Easter effect, the timing difference this year. Easter fell in March. Last year, it was in April. That has a small impact. It is a positive thing for our passenger side of the business and a slightly negative for the freight side of the business. Overall, we think this effect has a small net positive impact, but it was a very cold March and to a certain extent, also impacted the travel of our passengers, the travel pattern. The second effect is the collision. One of our large ro-ro vessels was hit by another vessel, and we had to take it out for five, six weeks. In order to keep a high customer service level, we did everything in our power to minimize the impact, swapped vessels around, chartered in substitute vessels. People worked overtime in the terminals, et cetera. When we look at the sort of knock-on effects of this collision, we talk about a bill around 15 million DKK on an EBITDA level impacting first quarter results. In spite of this, our EBITDA result was up 10% to 453 million DKK. Overall, the ferry routes were ahead of 2017, and the channel was a key driver. We'll come back to that. Also, in particular, our logistics division performed very well in the first quarter. Several large logistics contracts performed extremely well, and we managed to get additional business in the quarter. On that basis, we have raised the revenue growth outlook from 2%, as previously stated, to 4%, and both excluding the impact of U.N. Ro-Ro, which we'll talk a bit more about later. First, I'll hand over to Torben to take us through the numbers. On page four, headline says that top line growth drives improved earnings. As Søren just said, a 9% organic revenue growth, when adjusted for the usual lines, reported growth of 8%, an EBITDA increase to 453 million DKK, the highest EBITDA result ever in the history of DFDS. Depreciation has increased 7 million DKK. We bought Alphatrans, now trading under the name Special Cargo last year or 3rd of January, and that is now increasing depreciation together with the previously announced higher investments in IT and digital. On special items, in addition to the 150th anniversary share award last year, we also include here the cost we had in connection with redundancies made in Italy and the headquarters during Q1. When adding all this together, the profit before tax is up 18% to 200 million DKK before special items. The ROIC has improved to 19.3%. End of the year, it was around 19%, and the year ago, 17.6%. Turning to page 5 for a little more detail. Our North Sea business unit is up DKK 4 million. The result includes the DKK 15 million one-off cost caused by the Primula collision. In addition, ferry freight is typically negatively impacted from Easter, which was also the case this year. Channel up DKK 19 million due to a positive passenger impact from Easter, on the other hand. In addition, the freight volumes boosted by a slightly reduced competitor capacity during Q1. Passengers down DKK 21 million due to extra costs for bunker maintenance and a yield management project taking place in our passenger area. France and Med, DKK 11 million up, strong positive Easter impact, and cost savings compared to last year. Let's talk about the strong logistics results. Nordic is up DKK 17 million with strong results from the additional activities during the quarter. Continent is also up. Also driven somewhat by automotive, but also in general, a strong performance in the area, plus the inclusion of Alphatrans or Special Cargo. Moving to page 6, talking a little bit about our capital structure, where we, for some years, have been under the guided 2-3x leverage. With the announced acquisition of U.N. Ro-Ro with an enterprise value of DKK 950 million, the leverage on a pro forma basis, meaning that if U.N. Ro-Ro EBITDA impact had also been included for 12 months together with the purchase price, we see a leverage around 2.5. Due to this, we have suspended the planned dividends for August payout and also stopped our share buybacks, as you all probably are already aware. We will again, following the release of our Q4 results, review the capital structure and the corresponding distribution to shareholders. We have the share issue of DKK 1 billion connected to the U.N. Ro-Ro acquisition taking place on the 14th of May, and the Lauritzen Foundation, with its controlling influence, will participate pro rata with DKK 400 million. With this, I will turn back to Niels on page 7. On the next page here, given our busy agenda and many activities, we've tried to collect a number of the growth and efficiency events and activities shaping both 2018 and a little bit beyond to give you some guidance there. On the growth from acquisition box, we have two things. So far, we have the Special Cargo acquisition Torben mentioned, which is consolidated as of 3rd of January, contributing positively in the logistics division. Then, of course, the announced U.N. Ro-Ro acquisition, which is expected to close in June this year. We are currently planning for the integration, have had the first meeting with key managers from U.N. Ro-Ro and have another kickoff on Monday next week to plan for what we call day one, but also the 100-day plan immediately after closing. All of that is progressing as expected. There are four countries which need to sign off from a competition and other authority standpoint, and we achieved one of the four late last night from Italy, so there are three countries to go. Everything is progressing as expected and planned. Growth in the future will also come from the new buildings which we will deploy. We have four freight ferries, four ro-ro vessels under construction. The first one will be completed end of 2018 and arrive here in Europe early. We have also, as previously announced, two ro-pax under construction, which will come in, I believe, February 2021 and August 2021 if everything goes according to plan. Then we have signed a 10-year bareboat charter agreement for a new channel vessel to replace one of our older vessels at that time, which will be second half 2021. Those are some of the main decided tonnage expansion projects at this point in time. Then we have our usual range of operational efficiency projects. Some of them have been completed, others are ongoing. The Italian logistics activities have been restructured, which basically means closed down, and the part has been sold off as well. We have now said goodbye to the remaining employees there. We have a couple of boost projects, efficiency projects for a couple of logistic activities, which will be initiated here in the coming months. We have restructured slightly our corporate functions and said goodbye to a number of people earlier this year. Then we have closed a route from Rosyth in Scotland to Zeebrugge in Belgium in connection with an incident on board one of our vessels, and it will be out for four to six months. Given the financial performance of this route over the years and this vessel situation, we have decided to pull the plug, unfortunately, on that operation, as already announced. On the passenger side of things, we have initiated an onboard customer service and revenue project, which will run for the remaining part of the year to extract more value and make sure we have even more satisfied customers. There is a whole range of both concepts and processes which will be changed. As we have previously announced, we have Michelin star ambitions for one of our restaurant concepts on board the vessels, and that impact, which is generated both internally in the organization but also externally with medias, is proving to be a very interesting initiative. Digital, we are moving on with our investments. We are meeting the milestones we have set for ourselves, and that is going according to plan. This was just to give you a small insight into what is happening, and if we look to the next page, on page 8, what are then consequently the outlook for 2018 on an EBITDA level. As you see in the headline, we are now guiding, including U.N. Ro-Ro, DKK 3 billion to DKK 3.2 billion EBITDA level for 2018. The basis of this is the growth in the European economy, around 2% generally, as a pretty favorable trading environment, and we think we have reasonably good vibrations from a majority of the countries we are operating in. Of course, there are differences, U.K. being one of them, where the growth is somewhat lower, between 1% and 1.5% for the U.K. economy. On the basis of trading in the first quarter, we are raising the outlook from 2% to 4%, as previously mentioned, excluding U.N. Ro-Ro, and to 10% including U.N. Ro-Ro. The EBITDA range has gone up from DKK 2.65 billion at the lower end to now DKK 3 billion when we include U.N. Ro-Ro, and of the upper end from DKK 2.85 billion to DKK 3.2 billion. Investments forecast at DKK 5.2 billion, including the equity value of U.N. Ro-Ro and also the lengthening of two of their freight ferries, which is included in this plan. On the right-hand side in the box, you will see the split between the various divisions. Let us turn to the last page 9. Our priorities for 2018. Of course, number 1 is the integration of U.N. Ro-Ro, and as previously mentioned, it is progressing according to plan. It is to realize the plan steps in our digital strategy, which is rolling for the next 2, 3 years. It is still to focus on customer satisfaction. I mentioned the passenger side of the business, but it also goes for our freight side of the organization with our customer service scores and net promoter scores still being a key focus area. We will continue to push the projects and improve the performance, pursue new contracts, and also be ready to accept the vessels as they come in beginning 2019, as mentioned. We have just made a big acquisition, at least signed the deal and expect to close shortly, but we are still, of course, scanning the market for other opportunities, and it is difficult at this point in time to say anything meaningful about if and when it will come, but it is still on our radar screen and we have both financial and managerial capability to continue that. I think we are set for a very exciting 2018. There are generally good fundamentals in Europe. We have clear priorities. On that note, I will hand over to any potential questions. Thank you. Ladies and gentlemen, if you 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. Our first question comes from the line of Dan Togo of Carnegie. Please go ahead, your line is now open. Yes, hello and congrats with a strong start to 2018. First question on the passenger side. Could you please elaborate a bit more on, so to say, the effects of taking profits down by DKK 20 million? I guess a positive effect comes from Easter also here, but then you have a bonus against you and then some one-offs. First question would be, could you please elaborate and pinpoint the exact effects here? Thanks. As we mentioned, we have bunker. We have some timing issue on our maintenance side that is costing money. We have also seen, we talked about last year that we made a major restructuring of our passenger activities and how we sell or how we organize it in a more central way, not geographically, but how they work together versus before where it was country based. We have to also say that during these first 3, 4, 5 months after the launch of that new organization, we had lost some closeness to some of the markets, maybe in particular the Norwegian market, which has cost some passengers in this period. We believe when we look forward with May and beyond May bookings that this has now been corrected and is back on track. That is another explanation for the lack of what you would have expected to be a positive comparison to the year before because of the Easter. Also, this Easter from May to, sorry, from March to April is not as clean cut as it normally is, as a couple of the Easter days were actually in April this year as well. That is a little bit extra. The final impact, which Tor mentioned before, was we are running a big revenue management project with some external assistance, and there is also a handful of millions in one-off costs in the quarter from that. There is also the bunker, as Tor mentioned. If we put a number on, I think it is DKK 7 or DKK 8 million in the quarter. So those are some of the effects explaining it. A question on logistics that did particularly well, but it seems like EBIT is now, at least for the last two, three quarters, is in a range of DKK 40 million to DKK 50 million per quarter. Is that sort of to say, the run rate for logistics going forward, or is that MoSCoW, basically? What was the last word you said? Basically, with the new contracts coming in, I guess you can also see the effects in second half that it seems like logistics at the EBIT level has been lifted, or profitability level has been lifted to a range of DKK 40 million to DKK 50 million per quarter. Is that, so to say, a run rate for EBIT in logistics now? I think that is of course the ambition to keep that level, but we are not expecting the growth to continue at the same pace as you have seen in Q1. There's been one or two more temporary contracts, which will expire, and then there will be a gap in the middle of the year, and then perhaps some of these will continue later. Generally they are doing better, and we intend that to be the case in the coming quarters. But I would not just expect that things will continue to go at this positive pace. It is unusual with a 13% top-line growth, I have to say, in a market growing maybe 2% to 4% in the business we're in there. But let's see what they can do. They are definitely working hard. Is that also part of the explanation why you don't lift the EBITDA guidance while lifting the revenue guidance? Please explain a little bit more around that. It is very early in the year then, and I think we have a history of not lifting guidance before we are certain that we can deliver it. Okay. But just from the face of it, a lift of 2% on the revenue, usually it feeds quite heavily through to profitability as well. Do you think that- But of course, as you can see, most of that lift come through logistics. Right which has a lower margin than average. Yeah. Okay. Thank you very much. Thank you. Thank you. Our next question comes from the line of Marcus Welander of Carnegie. Please go ahead. Your line is now open. Thank you. A question on the channel. You mentioned reduced competitor capacity, and I am just curious whether this is temporary and due to maintenance or if there is something permanent here. It is probably a temporary phenomenon. They had an issue with a grounded ferry, which was out for an extended period in docking. Given their vessel set-up and five remaining vessels, it was possible for them to increase frequency, et cetera, and do some counter measures. There is no doubt that we have had a small one-time positive impact coming out of that. I think that is the honest answer here. Okay. Second question, maybe I missed this, but the CapEx guidance, you raised it by DKK 200 million. What is the reason for that? That is for the lengthening of two of U.N. Ro-Ro's ferries. That was not included in the 5.0. Okay. I think, to be honest, it was a little bit of an oversight when we announced the U.N. Ro-Ro acquisition. The lengthenings had already been announced, and we knew about them. But we had forgotten that we had already increased with our own investments in Ro-Ro when we compared the numbers. This is a bit technicality, but there is nothing changed in any of our CapEx view since last. Okay. Next question, the corporate headquarters restructuring that cost DKK 7 million in Q1. Was there anything specific there, or what was going on? Just given the investments in technology and the growth we have had in the head office functions over the past couple of years, there comes a time where you have to sort of revisit the set-up and how we work, and also to show the operation that we need to carry our burden of efficiency improvements. We went through that earlier during the year and said goodbye to a number of people here at the head office. We tried to find other solutions for a number of them, but of course, we are now unable to find solutions for everybody, and that included these redundancy payments. It is all behind us now and done with. Was this a sort of a general trimming, or were there specific functions that were shut down? We looked at across the entire organization and made these adjustments. Yeah. It was both those categories that were hit, and it was some 30, 40 people in total, or positions in total, that were impacted. And all levels, from assistants to vice presidents. All right. Thank you very much. Thank you. Our next question comes from the line of Lars Heindorff of SEB. Please go ahead. Your line is now open. Thank you very much. Question regarding the North Sea. The volumes increased quite significantly, if I recall it correctly, by 8.7%. That is even despite the incident that you talked about with the ferry, I assume. Can you give us any sort of indication where the growth is coming from, and also what growth would have been, were it not for that incident with the vessel? We can start with the first question. Growth is coming very big from automotive, both on our Gothenburg, Ghent, and our Cuxhaven and Immingham routes. We have large volume increases. Gothenburg, Ghent, we have an extra vessel compared to the comparison year. What the growth would have been had it not been for the incident, we would have had, yeah- Almost the same, because within a few days, we managed to get substitutes tonnages in, and we took from our internal routes and deployed to where it was needed. I don't think we lost a lot. Some was a little delayed in movements and maybe into April, but I don't think you should try and add anything revenue-wise. We did really our utmost to keep the customers harmless to the extent we could. The main part of the extra cost is because we obviously had a vessel that we haven't been operating. Yeah. Even at periods 2, because of the puzzle that had to be fixed there, plus a little loss of revenue. That's what makes up the DKK 15 million. Okay. Torben, you said that you had an extra vessel in the quarter here compared to the first quarter last year. How will that look, at least capacity-wise, going into Q2 and Q3? Will that also be the case that you will have one more vessel in Q2 and Q3 compared to Q2 and Q3 last year? On Gothenburg, Ghent. In Q2, yes. I think in Q3, there will be an overlap. A mix. That's where it was entered last year. Okay. Then regarding the Baltic Sea, with declining volumes, and you mentioned in the report here, lower market shares in region where capacity has been increased on competing routes. What routes are those, and is that something new, and is that something that you expect will continue? It's the northern routes that are hit by some competitors' movements. For example, our newest route, Paldiski-Hanko. But it's of course not a route that matters a lot when it comes to bottom line. But it has been impacted quite heavily on the revenue side, both that one and the adjacent route to Kapellskär. Any risk that you see similar moves from competitors in some of the basically risks that earnings will be under pressure on some of the other routes in the Baltic because of similar moves from competitors? Not as it looks right now. The geographics is different in the southern routes compared to the northern routes. It's difficult to predict. People are getting tonnages if they can, or moving around. In this case here, it was more they moved the departure times to optimize their routes, and that coincided with what we consider our good departure time. There are some efforts now ongoing to see if should we move our slot times, et cetera. We will have to see how our response will be up in that part of the Baltics. Okay. Just to follow up on the channel, maybe I didn't get it all right, but the question is, if I understood you correctly, you've been reducing capacity and your competitors has been increasing frequency during the first quarter. Was that correctly understood? No. In the first quarter, one of our competitors had a vessel out for extended docking period due to a grounding in December. Normally, I think they would operate with six vessels on that particular route, and they only had five. Some of that they were trying to compensate by fewer departures with the remaining vessels, but net result was that slightly less capacity, and we have probably benefited from that, even though this is our heavy docking season, the first quarter, and we also had some vessels out for slightly longer than planned. But net-net, we think it's been a little positive effect for us, which is probably a one-time event. Also remember our challenges last year on the channel Q1, where we lost market shares. We have regained, as part of this explanation Niels just gave, we've regained market share to close to where we think we should be. Okay. Lastly, tax rates. It was fairly high, I think it was 12% in the first quarter. What should we expect for the full year in terms of tax rate? This is driven by logistics, where we pay normal tax rates. For the full year, I would still expect to be in the 3%-5% range. Okay, so no changes to that? No. All the tonnage schemes are in place and no changes in this. Okay. All right. Thank you very much. Thank you. Thank you. Just to remind everyone, if you wish to ask a question, please press 01 on your telephone keypads. There are no further questions at this time. Please go ahead, speakers. Thank you for joining, everybody. We wish you a continued nice and sunny day, and have a great break tomorrow for those of you who have that.