Earnings Call: Q3 2017

Nov 14, 2017

Summary

Q3 EBITDA edged above the prior-year record, with 3% revenue growth and stronger North Sea freight. FY EBITDA guidance narrowed to DKK 2.65bn–2.75bn; passenger weakness and elevated digital spending remained offsets.

Ladies and gentlemen, welcome to the DFDS Q3 report for 2017. Today, I am pleased to present the CEO, Niels Smedegaard. For the first part of this call, all participants will be in listen-only mode, and afterwards, there will be a question and answer session. As a reminder, this call is being recorded. I will now hand over to the CEO, Niels Smedegaard. Please begin. Thank you, and welcome to our Q3 conference call. Joining me here in Copenhagen, I have Torben Carlsen, CFO, and Søren Brøndholt Nielsen, Head of Investor Relations. Let's get started and dive into the numbers on page 3, where you will get the first indication of our quarter. Q3 is typically our biggest quarter, hugely important for us, and we are very pleased that we came out this year with an EBITDA level of DKK 976 million, which is a marginal improvement on the all-time high we achieved last year. We can also see that return on the invested capital has improved to 18.1%. The driver of this is the growth in Europe, which is helping the freight side of the business, and it both goes in shipping and logistics. On the North Sea, we have seen volume growth of 8%, boosted by particularly more demand for the unaccompanied solutions. We see a lower growth in the total Channel freight market. It is only 0.4%, and it is possibly linked to the reduced availability of drivers during the quarter. On the passenger side, our high season earning is below our expectations. We will talk a little bit more about that. Generally, the projects we have undertaken during the year, our new digital solutions, and the M&A activities are key for our continuous improvement in both efficiency and earnings, and we will talk a little bit more about that. Let's turn to page 4. We will see some of the results in more detail. As indicated, things are going well on the North Sea. We are up DKK 58 million, and it is, of course, the impact of the higher volumes on most of the routes in the North Sea. Baltic Sea is slightly down DKK 3 million, primarily due to a lower passenger result. We have positive freight development on all but one route. On the Channel, we are down DKK 24 million. The passenger result is reduced by the depreciation of the pound, which we have seen in previous periods as well, but also an impact from the so-called Jungle closure in the Calais area, which happened last year. We have lower freight volumes, which are mitigated by higher freight rates in that business unit. Our passenger business is down DKK 15 million. We see lower demand from especially the Norwegian markets. We have also seen slightly reduced onboard sales in Scandinavia, and a small increase in the bunker cost is contributing to this small downwards adjustment on the results in the third quarter. Turning to logistics, the continent business is up DKK 7 million, and the result is boosted by growth in our high-margin solutions and contract logistics areas. The line other is down DKK 8m. It is higher corporate costs and a minus or a negative DKK 5 million from the divested Belfast reefer activity, which we have announced a little bit earlier. So all of these adjustment takes our Q3 EBIT result from DKK 738 in the third quarter 2016 to DKK 742 this year. With that, I hand over to Torben. Page five shows our consolidated profit and loss Q3 2017. We have a 3% organic revenue growth, both adjusted and unadjusted. Currency impact of DKK 49 million negative. Reported revenue is also up 3%. Our EBITDA increased 1% to DKK 980 million when we adjust for the divested Belfast reefer activity. In the numbers, we have a currency impact of negative DKK 8 million. Finance cost increased DKK 22 million due to lower net currency gain of DKK 14 million, and also costs related to tender offer for existing corporate bond, where we bought back a significant part when we issued a new bond recently. Due to the higher finance cost, our profit before tax is down 3% to DKK 708 million, and our ROIC for the last 12 months is slightly up to now 18.1% against full year 2016 of 17.8%. If we turn to page six, we show that our rolling year EBITDA is up 6%. So when we look at the last 12 months, we have a 6% growth in EBITDA, which is significantly higher than the Q3 result. Q3 last year was a very strong result, especially on the Channel. So we were expecting that the comp would be difficult, and are pleased that we still managed to just exceed last year's Q3 EBITDA results. We are also narrowing our EBITDA range like last year at this time, we narrow from 200 to 100. We do it symmetrical, so there is no news embedded in this. Turning to page seven. We talk a little bit about distribution, and we currently expect total distribution to shareholders in 2017 of DKK 1.7 billion, which is equal to 8% yield on our current equity market value. The total dividend will be DKK 10 per share, which equals a dividend yield of 2.9% on yesterday's share price. Our leverage multiple continue to stay low at around 1.0, although slightly up from 0.9 at year-end. This increase is due to the higher capital distribution and investments that we have undertaken, and which have increased our net interest-bearing debt to DKK 2.6 billion, up from DKK 2.4 billion at the end of 2016. Moving to page eight, we have a graph showing how growth is developing in the U.K., which remains an incredibly important market for DFDS. Underlying strong growth in Europe, which of course also helps the U.K. But more specifically, we see that the U.K. import continues to grow at a healthy rate of 4% in Q3. At the same time, the export is growing and now exceeding the imports with a growth rate of more than 8%. We expect GDP in the U.K. in 2018 to continue at around 1%, and therefore also continued growth in import and exports. We have, of course, seen this trend reflected in our numbers with volumes on the North Sea up 8% in Q3, and on channel, the total market has grown 0.4%. Turning to page 9, we provide a little more detail on our outlook for 2017, which as I mentioned before, has been narrowed to DKK 2.65 billion-DKK 2.75 billion on the back of this continued positive outlook for Europe, and a freight market that we expect to grow at least in line with the rise in GDP. We see a stabilization of the U.K. passenger markets going forward following adjustments to lower level of sterling. We also see an end to the impact from the jungle closure when compared to 2016 ending in Q4 2017. Revenue outlook of 3% and investments slightly lower than previously communicated. Primarily some investments in ports have been time delayed, and this has been countered slightly by our last night's announcement of an acquisition of Alphatrans to bring the total investments for this year to around DKK 1.6 billion. With this, I will hand back to Niels Smedegaard. Thank you, Torben. Let me put a few words on some of the key focus areas. If you turn to page 11, one of our trademarks in DFDS, I dare say our continuous improvement projects. Some of the things we've been working with during 2017 are listed here. The three projects, Top Line, which is focusing on the freight shipping sales side, yield management, globalization of surcharges, simplification of rate structures, et cetera. Also preparation for some of our digital solutions. We have achieved a number of things during this year, but it will continue into 2018 as well. On the channel, we have Carbon Momentum project focusing on increasing the onboard spend, whether it is retail or food and beverages. We have had some delays during 2017 for various reasons, but we are beginning in the past three months to see now the impact. Average spend is picking up, and we will see the full benefit of this project in 2018. On the logistics side, it is our Haulage Drive project, one of the biggest cost elements in logistics, with a number of organizational and structural changes, and we are seeing good benefits there. There has been also some difficulties generally in Europe, securing the needed haulage capacity, and this project has helped counter some of those difficulties, which I think all operators have experienced, particularly in the third quarter. Moving on to page 12, our investments in digital solutions. We started to look at these things back in 2014, and I would say particularly during 2017, we've had a lot of traction. We have quite a high ambition to deliver best-in-industry experience. We are investing in both customer solutions and operational efficiency aspects in all three businesses. This year, actually right now, we have kicked off both a new strategy and new organization, which will unify the business and our digital and IT resources in order to better support the Top Line growth and accelerate our time to market for various solutions and applications. We expect quite some benefit from this in the coming years. These things are not coming for free. We are, for a company our size, I think, investing significantly on top of the normal IT spend. We have increased with DKK 50 million in direct costs in 2017, over last year, and we have DKK 30 million additional investments in this area. This will be something which will only increase in the coming years. Turning to page 13. A big part of our strategy is focusing on value-creating investments and M&A activities with the focus and underlying the value creation element more than the Top Line growth. It is very important for us, both when it comes to the vessel side and freight capacity or the M&A side. It is very pleasing to be able to announce, as Torben Carlsen mentioned last night, the acquisition of Alphatrans, a company based in, among others, in Holland. Good synergies with the rest of the logistics business, also expanding our network in certain segments. A company with around EUR 45 million in revenue, more than 700 trucks and more than 200 staff members, which will later this year join the DFDS family. Moving on to page 14. Priorities going into next year. Customer satisfaction is a key element for us. We know it will assist growing the Top Line. The continued push for efficiency projects, I mentioned some of those who will continue into next year. There is a few others in the pipeline. Our investments in the digital IT side will continue also to impact, you can say, indirectly our numbers. We will start the preparation for delivery of two of the four ordered ro-ro vessels, and then full benefit of the Carbon Momentum project. Also on the logistics side, we will make sure that we follow through on the restructuring activities on the logistics side. A couple of activities have caused us some problems in 2017, and we believe we will have those solved when we get into 2018. With that in mind and those initiatives and activities on our plate, combined with the positive outlook for the European economy in 2018, we look forward to 2018 with excitement and a good deal of confidence. With those remarks, we will now hand over to any questions you may have. 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 Marcus Bellander of Carnegie. Please go ahead. Your line is now open. Thank you. First question regarding English Channel. Eurotunnel volume figures have suggested a pickup in volume growth in the past couple of months. Is that something you recognize as well? I think if we look at the total market, then there is still growth, but it is not a strong growth. I think in this last month, it looks like Eurotunnel has had stronger growth than the ferry market. But again, as you know, over the year, there is some seasonality, which shifts market shares between ferries and Channel. But overall, we continue to see growth, although at a modest pace. But it is correct that also on the passenger side, we have seen some small improvements. So it could indicate that things have bottomed out, so to say. So I guess we are cautiously optimistic and share your view. All right. Thank you. Second question then on Alphatrans. I assume you do not want to disclose what you are paying for the company, but maybe you could talk a little bit more about synergies. You mentioned synergies with your own logistics division, but are there also revenue synergies with the shipping division? Is Alphatrans already a customer of DFDS Shipping, or can you move volumes to DFDS ships? It is correct. We talk about the synergies with logistics. There will be possibilities for putting offices together, both potentially in Holland and the U.K. Alphatrans is currently primarily a customer of non-DFDS ferry operators. So there may also, in future, be some value hidden there. And that would mainly be on the English Channel, or? That would be primarily on the North Sea routes. Okay. Understood. Holland, U.K. Okay. Last question from me then. The cost increases due to investments in digitalization. You mentioned DKK 50 million direct costs and DKK 30 million of investments. Niels, I think I heard you say that they are only going to increase going forward. Is there no element of these costs that will disappear when you are done with the initial investments? I think some will say we have a little technical debt, as they call it. We have been probably too lean and mean. We have had a little external help to benchmark ourselves. We are, of course, proud of the situation, but have come to realize that there are probably a little catch-up in certain areas. Most of these investments, or the majority of what I am mentioning here, is really going towards increasing speed to market and the interface between back-end system and the front-end applications. A lot has been achieved so far, but we can see it will continue definitely into 2018 with slightly higher numbers with the visibility we have right now. Some of these investments are not bringing immediate benefit. But we are convinced that they will bring benefit eventually, both on the cost side but also on the revenue side. But there is probably a 12 months time lag, at least. Okay, understood. That was all for me. Thank you. Thank you. Our next question comes from the line of Dan Togo of Handelsbanken Capital Markets. Please go ahead. Your line is now open. Yes, good morning. A few questions from my end as well. There is quite a discrepancy between profit development in the Channel and the North Sea. Is there any cannibalization, so to speak, between the two markets, i.e., volumes moving north from the Channel to the North Sea? Is there a risk that this might swing back at some point? If possible, could you quantify it? We think that whether we can call it cannibalization or but in a period where the pricing on the Channel has been very low, freight has been driven through the Channel. Price levels are now more normal on the Channel and some have moved back. There has been some periods of drivers shortage, which is also better than accommodated with unaccompanied traffic on the North Sea. We have also, despite the clearance of the jungle, there are still drivers that prefer not to be exposed to the refugee situation on the Channel. We believe that when we see 8% growth on the North Sea and the Channel is growing by 0.4%, that part of that is a shift of volumes from the Channel to the North Sea. This is more a normalization rather than Yeah a short-term factor that we are We think it is a normalization, yes. Okay, good. Can you also maybe elaborate a bit on the strong volume growth you are seeing currently in North Sea? Is it out of Sweden? Is it Volvo Cars? Is it paper? Any commodities moving particularly fast at the moment? It is broad based. We see growth between Sweden and continent. Some is, of course, linked to the success of Volvo. We have added a fourth vessel in the Gothenburg-Ghent corridor in August. Has not sort of seen full impact in the quarter. There is a ramp-up there. Volumes are strong. Towards England, we see a broad-based solid increase in volumes, which is driven by the numbers Torben mentioned, both still growth at around 4% on the import and close to 8% on the export is up. Those elements is keeping a broad-based trade going between Europe and the U.K. That is, of course, encouraging. A question on deliveries you are taking on here in 2018. Are there any additional costs involved with that, education of employees, et cetera? No. We will get them beginning 2019. There are no costs sort of P&L wise. It will be linked to the delivery of the vessel early 2019, so nothing there. Okay, then just a final question on your efficiency programs. These have run for a period of time. Could you some way give some flavor or maybe even quantify a bit what you expect the total outcome or effect on EBIT is from these programs? I assume you look forward into 2018, so we will not comment on this at this time. When we come back with an outlook for 2018, I think we can be a little bit more specific on that element, but not until we have finalized our budget for 2018. Okay. Thank you. Thank you. Our next question comes from the line of Jørgen Buraset of Nordea Markets. Please go ahead. Your line is open. Thank you very much. Looking a bit on your capacity development into 2018 and your last 12 months run rate, is there a fair assumption that the run rate should be above what you report for the last 12 months, given that you still have a pickup in utilization on new capacity for next year? Thank you. It's difficult to say specifically, and I don't think our run rate capacity is a key factor. We have a few routes with some limitations, but in general, we are able to accommodate extra volume on nearly all routes. I'm not sure where you're going, but I don't think you need to factor in the capacity. Okay. Just any general comments on utilization levels in the quarter in terms of where your optimal level. Are you satisfied with the level of utilization given that you have seen some weaknesses in volumes? We would always like more volume. We make sure part of maintaining our infrastructure situation is that we need to make sure that customers can grow their businesses. Like we have done with Gothenburg-Gent, we choose to add capacity, even in periods where we maybe could get away with not adding capacity. But we believe long term, it's better for us to always make sure that the customers can grow with us. We would always like more volume, but we believe we have a good balance of supply and demand, which is also reflected in the good results. We have added one vessel in the quarter, as Torben mentioned, and we think the utilization of that vessel will improve during the next quarter or so. I think we will see a small improvement there. Then we may have one route where there is some constraints, but that would be it. As growth continues into next year, we should see a slightly better utilization. Okay. That is very clear. Thank you. Just a final housekeeping question on the CapEx reductions versus your initial expectations. Is that strictly a phasing adjustment to your guidance, or do we see any sort of nominal changes to your CapEx levels? In terms of Alphatrans, should we expect any related CapEx to that going into 2018, or is that strictly for 2017? Thank you. The Alphatrans is, of course, adding to CapEx here. The others are primarily phasing. We have them specified in a number of smaller items, and of course, some of them may disappear, but in general, it is phasing. In terms of whether there is an earn-out structure with Alphatrans, but all of the CapEx will be accounted for in 2017. Okay. Excellent. Thank you very much. Thank you. Our next question comes from the line of Lars Heindorf of SEB. Please go ahead. Your line is now open. Yeah. Thank you. A couple of questions regarding the Channel. You mentioned a little bit about prices and also the removals of the Jungle. We have been discussing this in some of the previous conference calls. Could you give us an update on to what extent you have regained some of the market shares and you are now back to what I would call normal state, and also about maybe a little bit about the prices. You mentioned that you have increased prices on the Channel and to what extent that sort of have affected demand. Yes. We have, we think for good reasons, increased prices beginning of this year and in combination with a vessel was out for docking and increases in oil prices and BAF adjustments, that caused with some customers some heartburn, and we saw our market share was reduced during the first quarter. We have since then seen, let's call it a normalization, and we have month by month clawed back what we feel is a natural market share, and I think end of quarter 3, we are very close to where we need to be on the freight side. So I think that situation is more or less normalized. On the passenger side, also a very competitive market. I think we have not seen the same swing in market share, we are more or less where we need to be, but that's the impact of the lower pound, the weakness in the passenger market during the past year, which has put pressure on yields. And then a small effect overall for us, the move of the Jungle has pulled back some of the cargo and passengers, which artificially earlier was on the Dover-Dunkirk route, are now floating back to the normal location, which is the Dover-Calais, and there we share part of that with P&O. So I think we are getting close to a more normalized situation with the knowledge we have right now. And we are not going into detail on pricing here, but we have generally maintained our price increases on the freight side. They are still in place, and we have not conceded on any of those. Okay. Thank you very much. Regarding the North Sea, you mentioned that you added a vessel there in August. I know if you can, if that had sort of some significant impact on the volumes, then maybe also if you can just remind me about the upgrading of some of the North Sea routes with some of the bigger vessels, exactly how that is progressing and the timing. We can say that the growth in the North Sea is around the same level, slightly lower excluding the Ghent extra ferry, but strong growth also on the Continent-U.K. routes. Okay. The new ferries, we have had delivery of two Flensburger vessels that are deployed on the North Sea, and they are operating according to plan. We have, among others, reduced four vessels on Rotterdam-Immingham to three vessels as part of this increase in average size. Is that the last thing about the fewer vessels and bigger vessels, is that part of the reason for the margin improvement? Do you think that's sort of a significant contributing impact on the improving margins? It's a factor, but it's not a big factor. The fourth vessel we had only also. We didn't have a full year of four vessels operating on that corridor. The margin improvement is really the broad-based improvement in capacity utilization throughout the North Sea. Also, the terminals are benefiting greatly from our increased Volumes volumes, exactly. Okay. Since they are all captive terminals. All right. Thirdly, regarding Alphatrans, I know it's limited apparently how much you can disclose, but can you tell us if they actually are making money? If so, can you sort of give us an indication about margin levels? They are making money, and I think for now, you can probably assume that they are at market levels. Okay. You can Yeah. No, that's fine. Lastly, regarding the CapEx, I've been asking about this for many quarters in a row now. Have you come any closer to a conclusion about what to do in terms of CapEx in the passenger division and renewal of those vessels? No. There are no attempts right now or investigations into new buildings there. We have invested in technical prolongation of the vessels so that we have the option to continue with the vessels. We have just finalized the plan for the docking of Crown Seaways, which is one of the vessels on Copenhagen-Oslo for January next year. They have up to a maximum 10 years left there. But of course, eventually we will have to do something, but now is not the time for new building vessels there. Okay. But if you should continue to operate those for another 10 years, what kind of CapEx do you need to sort of, I assume that they will need to go into some kind of an upgrade. That is correct, but I think that is something we can maybe take offline. It is not something that would alter our general CapEx guidance. Okay. All right. Thank you very much, guys. Thank you. Our next question comes from the line of Finn-Bjarke Pedersen of Danske Bank. Please go ahead. Your line is now open. Yes, good morning, and also congrats from here for the CFO of the year, Torben. I have a question about prices. How do you see the price development in the North Sea? I am just wondering, if we look at volumes that is up 8%, and we have bunker prices up 25%-30%, probably, versus the same time last year, and the average prices is roughly, let us say 1%, if we divide with the lane metres. Could you elaborate a little bit about the underlying price development in the North Sea? We, of course, have some mix changes as well with the changed vessels that we have entered. In general, it is not a secret that competition in the South is strong. That means also that price developments are relatively weak. There is also these elements of mix changes that you have seen, which makes it difficult just to comment on the specific prices. There is a reason we have a Top Line project that we have to focus on pricing, sophistication, et cetera. Generally, it is difficult to go out and get significant price increases. So, we need to be smart about it, of course. But is it not correct, moving cargo from the channel with only three operators to an area where you probably have five operators and the potential increase in capacity in the coming years, not least from Cobelfret, would increase the price pressure in the coming years in that area? Not sure you can say that. There are a number of factors, how the logistics companies are operating. Do they have accompanied or unaccompanied security issues, turnaround time? There is a number of different things. Share of wallet. Instead of spending 150 EUR on the channel, they spend 500 EUR on the North Sea to get on the ferries. There are many parameters in that. Would be careful making those conclusions. Okay. Thank you. Thank you. Our next question comes from the line of Lars Heindorf of SEB. Please go ahead. Your line is open. Yeah. Hi again, guys. Sorry, just a follow-up question on the Baltic. You added to this new route, Hanko-Paldiski, I think it was last year. Can you just remind us, will that have an impact into Q4 as well this year, or? Because there's been quite a big difference between the underlying growth and the headline growth that you've been reporting in terms of lane metres. Q4 is like for like. Okay, thank you. That was it. Thank you. Thank you. Just to remind everyone, if you would like 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. Thank you everybody for joining in today, for your good questions, and look forward to talking to you next time. Have a great day and goodbye. This now concludes our call. Thank you for attending. Participants, you may disconnect your lines.