Earnings Call: Q2 2017

Aug 17, 2017

Summary

Q2 EBITDA rose 6% to a record DKK 738m, led by North Sea growth and improving logistics, while Channel results remained pressured. FY EBITDA guidance was maintained at DKK 2.6bn–2.8bn, with planned distributions raised to nearly DKK 1.7bn.

Hello, ladies and gentlemen, and welcome to the DFDS 2017 Q2 report. Throughout this, 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. Today I am pleased to present CEO Niels Smedegaard. Please begin, sir. Thank you. Also welcome from us here in Copenhagen to our Q2 conference call. Joining me, as usual, CFO Torben Carlsen, and Head of Investor Relations, Søren Brøndholt Nielsen. Steady progress is the headline on this presentation. If we turn to page 3, we can dive into the real content. We see a steady earnings growth despite a slightly lower channel result in the second quarter. Overall, we are very pleased to report that the EBITDA for the quarter is up by 6% to 738 million DKK, which is a new record for a second quarter. Throughout this small presentation, there are some impact from what we call the late Easter in April, which is making comparison a little bit difficult with previous year where Easter was in first quarter. Generally, freight is negatively affected by the late Easter here in the second quarter, and passengers positively impacted. Overall, we are very pleased with the North Sea result, which is increased mainly driven by significantly higher volumes. We are 6% up in the quarter and most trade lanes, but also trade lanes to and from the U.K. The channel is impacted by weak price trends in the passenger market and the lower freight market share. We will talk a bit more about that later in this presentation. Logistics came back in the second quarter. Results has now improved to above the level of 2016 for the same quarter, driven primarily by performance improvement in the Nordic. Also the two acquisitions we made late last year are delivering above our expectations and fitting nicely into our organization. All in all, you can see on the right-hand side the quarterly development since 2013, steady progress. On this backdrop and performance through the year, the board has yesterday afternoon, evening, decided to increase the dividend and also launch a new share buyback. Those two things in combination will increase the capital distribution to our shareholders this year to around 1.7 billion DKK, up from 1.3 billion DKK in 2016. If we turn to the next page, more details on the quarter. Again, North Sea, positive development. The impact from the higher volume and reversal of the BAF lag due to slightly falling oil price during the quarter is helping us. We have also seen increases in what we call the automotive volumes on our different routes. All in all, very solid performance on the North Sea. Baltic Sea also up. We have a positive impact from the Easter on the passenger side of the business, and also the positive situation from BAF in the Baltic as well. We also have the addition of the Hanko-Paldiski route, which is now starting to make money. The passenger side of the business, we are slightly down. Yes, we have the Easter passenger result is above last year, but we have slightly lower freight volumes and also higher cost, including higher bunker costs, impacting the passenger side of the business marginally. On the channel, we are a little bit down. It is, as I mentioned before, due to a lower freight market share, particularly in the beginning of the quarter, which is mitigated by higher freight rates. We increased our freight rates on the channel 1st of January, and we seem to have lost a little bit of market share as a consequence of that. We have had record passenger numbers in the Easter, but that has been offset by negative impact by the depreciation of the pound, which we have seen throughout the period, well, since the Brexit vote. That depreciation of the pound has made it more expensive for passengers to travel to the continent. We are seeing generally lower passenger numbers on the channel, and as a consequence, also a weaker pricing power for the operators. We have had a cost increase from efficiency program, our Carbon Momentum, which we launched in the first part of the year. We have also had a significant upgrade to one of the ferries operating on the channel, which is negatively impacting the results. Vessel Pool is up DKK 28 million, a positive variance from one-off depreciation and re-delivery cost in 2016, not occurring in 2017. Those are the main issues there. On the logistics side, up DKK 2 million, we have a positive impact from volumes in Sweden. We have some new contracts as well, but underlying a good organic performance in Sweden. We have good performance in key continent areas. It is a mixture of higher volumes and margins. Where we struggle is in Belfast and Grimsby. We have been struggling there for a while. Then we have a negative impact of a couple of million from the depreciation of the pounds. The acquisition I mentioned before is delivering above expectations and have been well integrated. From that little deep dive, I hand over to CFO Torben Carlsen. On page five, you have our consolidated Q2 numbers. Our reported revenue is up by 4%, which translates into 2% revenue growth when adjusted for currency acquisitions and bunker impact. The currency impact alone is a negative adjustment of DKK 19 million. Our EBITDA increased to DKK 738 million, and our margin to 20%. No material currency impact included here in this quarter. Lower depreciations due to one-offs in 2016, as Nils explained, where a ship was moved from assets held for sale. Net finance cost is reduced due to the generally lower interest environment we are experiencing. As a result of these above elements, our profit before tax is up by 12% to nearly DKK 500 million for the quarter. Our return on invested capital at the highest ever, 18.1% before special items. Turning to page 6, we have due to the shift in Easter in 2017 from Q1 to Q2, we have included a slide showing the full half-year numbers as well, where the Easter impact is evened out. You can see that revenue and earnings trend overall, for the first half is in line with what you see for Q2. Freight volumes up 1%, despite the 7% decrease on the channel, as the decrease on the channel is offset by higher volume growth in other business units, notably North Sea. Passenger volumes, again, when Easter impact is out, are up 1%, even with flat volumes in channel, which is then countered by growth on the passenger business unit. Turning to page 7 and distribution. We have announced today that the board has decided to raise the interim dividend from the intended DKK 5 to now DKK 7 per share. Also the board decided to launch a new share buyback of DKK 300 million, which we expect to complete before February 2018. So now, total distribution of almost DKK 1.7 billion for 2017 is planned, which equals a 9% yield on our current equity market value. In terms of dividend yield, we now have DKK 10, which equals 2.9%. The leverage is still relatively low at 1.1 net interest bearing debt to EBITDA at the end of Q2, slightly up from year-end as investments have kicked in. Also the capital distribution we've done in the meantime has driven up our interest-bearing debt from DKK 2.4 billion to DKK 2.8 billion. Turning to page 8, which then as a consequence of our Q2 result and the continued positive outlook for Europe, shows that we maintain our outlook of an EBITDA range of DKK 2.6 billion to DKK 2.8 billion. We see continued robust freight markets, continued impact of the pound depreciation in the U.K. passenger markets, and the lower earnings on the channel, where our market share on the freight side is trending up, but still lower earnings are offset by the strong performance of other business units. The only change to previous outlook, which we have announced before, is that investments are up DKK 100 million, following the order of the two new freight ships made in June. With that, back to Nils. We turn to page 9. You have a list of these major performance drivers for DFDS, and in continuation of Torben's comments on the outlook for the year, just a small quick update here. On the left-hand side, you'll see deployment of new ro-ro vessels. We received the first of two new ro-ro vessels, 21st of July, a couple of months delayed from the yard, but is now smoothly operating on the North Sea where this capacity is needed. We get the next one with a little luck mid of September on schedule. In terms of growth, we have discussed that and talked about the different areas. If we look at the uncertain elements, we have framed the passenger volume growth. There, we have seen since the Brexit vote last year and the depreciation of the pound a slightly soft passenger market, at least on the U.K. side. That is continuing, as we mentioned, into 2017, and we think that will continue. As long as the GBP is hovering around these levels, it will be 15%-20% more expensive for Brits to go abroad. Until we sort of capture new segments from the continent going the other way, it will be a soft market, both demand-wise, but also price-wise. I think that is something we will just have to try and combat and live with for the coming period. On the right-hand side, you see the issue of the uncertainty of the whole Brexit process and what that does to the U.K. economy, and also for a company like DFDS with towards 50% directly, indirectly of our revenue generated, both within shipping and logistics from the U.K. So a fairly important question. To give you our view of that, you turn to the next page 10, where we have tried to illustrate how we see the world right now. Generally, we think the global economy is performing well, which is a good foundation also for the European economy. We believe that the European growth will continue. There is a reasonably favorable environment, of course, different pace in the different European economies, but it is reasonably well for a business like ours. That also positively impacts the U.K. economy and trade, of course. So far, U.K. GDP growth in real terms is around 1.7, and we think the latest official estimate is around 1.6% for the rest of 2017. When you have growth, it is good for the transporters. Even a small positive growth, it means additional trucks, trailers will have to be moved on roads and across water. If you look at the right-hand graph, you will see the value of U.K.-EU trade, and you will see the blue line that it is an import market predominantly. It is a westbound market. A lot more is imported to the U.K. than exported. You also see since the Brexit vote in end of Q2 last year, it has continued up both on the import and the export side. That is reflected in also, you can say, partly the GDP growth. If we zoom in on the growth rates in exports and imports, you will see at the lower graph that very, very strong development on the import side, also following the Brexit until Q1 2017, where it is trending down a little bit, but still at around 5% level growth on the import side. With a couple of quarters lag, the export really started to take off, and we see that picture also in our volumes. That is, of course, an encouraging sign, partly offsetting, you can say, some of the potential reductions on the import side. So overall, U.K. is still open for business, and we can see it reflected in our numbers. You can then ask, "Hmm, why do we see a difference on the North Sea where your volumes are up by 6% and you have an almost flat development on the channel?" Not sure we have all the answers, but when we talk to our internal and external customers, some of the explanations coming up are, first and foremost, there is a normalization of the pricing levels on the channel versus the North Sea. For a number of years, we had a very ruthless competition where all operators lost significant amount of money. Through the last couple of years, we have seen a normalization of the price levels. We, I think, did our fourth price increase January this year. Some of this traffic, which has been attracted to the channel in past years, are moving back to the more normal trading corridors, could be Rotterdam, could be different places. Migrant issues are still impacting the mindset of certain drivers, both in the Calais area and also to a lesser extent, around Dunkirk. At nighttime, a number of drivers, they prefer other routes than the channel. That could also push some of the volumes further north or away from the Calais area. Then there's some discussion around lower availability of drivers, also related to U.K. being less attractive destination for drivers due to the lower pound. So a number of factors are explaining the differences between these two regions. But again, U.K. is definitely open for business still. We believe it will continue to be so for the foreseeable future. Moving on to page 11. Excuse me. We are steadily progressing on our strategic priorities. Nothing new on this list. The customer focus, the top-line side is important for us. Have implemented new CRM systems, a lot of training of our people. Our various improvement projects are continuing on the logistics side, on the hull side, onboard spend projects going well. Our fleet renewal, as I mentioned, get two vessels in here or the last of the two this year. We have ordered in a total of four new big ro-ro vessels to deliver in 2019 and 2020. Good progress on the digital side, both the front-end systems and back-end development. On the M&A side, we are continuing. We have things, not transformational elements, but we do have some things in the pipeline we hope we could conclude during the rest of this year. But let's see how that goes. All in all, we see a good outlook for the European economies. We also welcome the initiative from the U.K. government this week, suggesting a couple of methods for EU and U.K. to solve the customs challenges of Brexit. We know it's still early days, but there seems to be a recognition of hard Brexits when it comes to customs should be avoided at all cost. There'll be lots of rhetoric, we are sure, on both sides, but we are confident that the importance for both part of continued free-flowing trade is so important that they will find a solution. Then we continue with the things we can control, and we have good traction. So we go into the second half of year fairly optimistic. With that, we conclude the presentation and will now hand over to questions. Thank you. Ladies and gentlemen, if you wish to ask a question and you haven't already, please just press zero and then one on your phone keypad now. After I announce you, just ask that question. If you find that question has been answered before it's your turn to speak, just press zero and then two to cancel. There'll be a brief pause while the questions are being registered. We go over to the line of Lars Heindorf at SEB. Please go ahead, Lars. Your line is open. Thank you. Yes, morning. A couple of questions from my part. Firstly, regarding the Baltics. I think in the report that you write about underlying volume decline of 2.1%, but headline growth in lane meters of 17%. Is that different? Is that solely explained by the new routes, Hanko-Paldiski, or is there something else that plays in? Then maybe if you can just remind me when that route was up and running, I.E. should we expect a continuation of the difference between what is headline and what is underlying also going into Q3? The difference is entirely due to the new route, Hanko-Paldiski, that started operation in Q4. Okay. So it will have an impact as well also in Q3 this year as well? Correct. Yeah. Okay. Regarding the North Sea, still, as you mentioned also in your presentation, fairly solid volume growth. Maybe if you could give us a little bit of, shed some light on what is driving this besides some of the things that you mentioned here in the end of your presentation. I am particularly interested in the progress of the Volvo contract, and maybe if you can give us some kind of indication about what kind of magnitude the development in that contract has for the growth and the volumes. The Volvo contract is really starting up now in the latter part of August. There has been a ramp-up during the second quarter, both a little bit in our logistics business, but also on the Gothenburg-Ghent route. The big push will come now, let us say from September, where we also will put in a fourth vessel on the Ghent-Gothenburg corridor. It will push up the volumes, but there will be some sort of stepwise cost from this fourth vessel. So in terms of bottom line, it is not a huge and significant impact, I would estimate at this point in time. Generally, we see a broad-based good volume picture across the North Sea. We talked about the Volvo contract, but also to and from the U.K. We have seen on a couple of our routes a more balanced development. As I demonstrated before, it was a westbound market, and we have very low rates for empty trailers coming back. As they now begin to fill up, that would also improve the situation. So we have seen a better balance, and things seem to be moving fairly well. There will be a little technicality on our Rotterdam corridor. We have had up to four vessels serving one route, smaller vessels, but that will now be replaced by three vessels here from mid-July as we get the new tonnage in. So there will be some sort of small adjustments there, maybe a little bit less volumes, but hopefully an improved bottom line due to a more efficient setup with three vessels. That reduction in the new and the three vessels, which I assume is bigger and more efficient than the older one when you used to have four, that's not offset by the extra ship that you mentioned in the beginning on Gent? No, that was just comments on the Rotterdam corridor. The first discussion we had was a fourth vessel on Gent. Yes, we'll have significantly more volume which will be handled by the fourth vessel, but we'll not see a significant increase on the bottom line. Okay. Then, thirdly, regarding the pricing on the channel, can you tell us a little bit about how much you have raised your prices? It's difficult to get my head around these things, because we don't have all the inputs. What we have is revenue, and we have lane meters, and then we can calculate the development in, I would say, revenue per lane meters. But there is some other income as well from some of the terminals. So maybe a few words on the pricing there, and also a little bit about, if you know, is there something else about the pricing which our key competitor, P&O, if they have just kept prices or what they've done. We are not going into details as you indicate or you know. It's a sort of an open line, this, and we need to be a little sensitive in these matters. But from the numbers and market share, et cetera, it's not a secret that we have been very firm on our pricing. We did that 1st of January. We unfortunately also saw an increase in the oil price during that period, which, when you added these elements together, would be a double-digit percentage increase for our customers. We took a ship out in February for long term and a significant refurbishment. So it was a bad cocktail, which some of our competitors benefited from in various areas. That cost us market share. We now have the vessel back in shape. Oil prices come down a little bit, and we are slowly but steadily improving our market share on the freight side on the channel to something which we think is a more natural level for a company with our capacity. I think that's probably as close as we can get it on the pricing side. There are some elements on vessel, et cetera, we can follow up on bilaterally if you need more clarity. Okay. Then maybe a follow-up on the market shares, because you had a very strong increase last year when you started up. Also, I'm sure that the development with the jungle and all the other things have had an impact as well. Then you lost market share here, at least in the first half of this year. You write in your report that the market share was recovering during the second quarter and into the third quarter. Could you elaborate a little bit on that and what you believe is a sort of, I would say, I can call it a steady state, but at least more reliable market share going forward? When we sort of look at the pattern between tunnel and ferry operators, of course, there are different seasonality, but the tunnel tends to be around 40%, and then the two ferry operators sort of split the remaining market, and we have roughly the same capacity. You can do the math, that would give 30% to each of the ferry operators. Yeah. We have been below that here in the first and second quarter, but are sort of clawing back and are getting closer to the 30% going into the third quarter. But it's still a tough competition, and we are fighting, and so that hops up and down. And then on, I know I stick to this issue here, but I do not know, maybe you can give us an insight on the length of the contract, because when you are going to renew some of those contracts there, are you going to be equally tough on the pricing going forward, or what sort of, will you adopt to maybe closer to DFDS? I think we are getting too detailed now, Lars. That information we are, of course, not flagging to anybody. So, I think this is probably as much as you can get on this topic. That is fine. All right. We had a dip in our market share, and we are recovering it. We think it's in the past. That's basically our message. Okay. All right. Thank you for your help, guys. You're welcome. We now open the line of Finn-Bjarke Petersen at Danske Bank. Please go ahead. Your line is open. Yes. Good morning and congratulations with a strong result. Thank you. If we look at the North Sea as such, the level that we are seeing in the quarter in terms of EBIT margin. Performance relative to last year, is that something that is sustainable going into Q3, Q4 and into next year? We hope so. We work hard on that. Let's talk about some of the vessel movements that are coming and, of course, they can marginally change some of these margins. We don't see anything in the market that should change it. There's no one-offs, because you're talking in the report about delayed BAF collections and so forth. The result that we see in the second quarter is not affected of some one-off that we should think of. Then if you focus on the first half year, then there will be no such impact, because we had a negative BAF delay in Q1 and a positive in Q2. So if you just look at the full 6 months, then there are no one-offs. Then the final thing is M&A. It's no secret that somebody's trying to sell a company called Scandlines. And Nils Sjö said something in the press, you're not interested this time around as you were in 2013. Could you give a little bit of flavor to that? Yes. I said that Scandlines does not have the same strategic interest as last time around, given the introduction of the low sulfur, that implementation we have seen, and also the size of the company. They have sold off part of the company. Doesn't mean that we will not look at it, but strategically it is not as important. The shorter crossing, which we thought could have an advantage point if the oil price would have increased by 50%, as we were looking at back in the second half of 2014, has not materialized. There's a different fuel cost picture today. So strategically, it's not as important as we thought it was at that time. If we can come to an agreement where we get a nice financial return, sure, we'll look at it, but we do not think we are front runners in this game, to be honest. So, we don't think it's around the corner. Okay. Any other M&A except for buying freight forward every now and then. But some of the big ones, you mentioned there is no major ones. But if you should try to think a little bit about where could you make any transforming acquisition like you did with the Norfolkline and the entrance in the English Channel? We still think that there are possibilities for that. However, it requires a willing seller and an agreement on price and so forth. But I think we will repeat, there is not a transformational acquisition around the corner in 2017. It is more the bolt-on, smaller type thing we have in the pipeline. And I think also the board's decision on the distribution policy can be seen in that light. Yeah, but if we go to distribution policy, if you do not have any major acquisitions, when are you going to the full Monty of the gearing? That you should ask the board about. Very good answer. Thank you very much. You're welcome. We're now over to the line of Marcus Palander at Carnegie. Please go ahead. Thank you. A question that's not really related to the Q2 reports. You've ordered four new big vessels. Aren't you concerned that's going to reduce flexibility of your network? I'm thinking partly because you'll have fewer chartered ships and more owned ships, but also in the sense that these ships are much bigger, so maybe they'll be harder to move around in the network. Customers will have to accept less frequent sailings, et cetera. If you could share your thoughts on that. Thank you. We think the size we have ordered here is still handling a good turnaround time and also enabling a reasonable frequency. We have routes in our systems where we can deploy these vessels. It is not just one specific route, but there is a number of routes where these vessels can be deployed. We are not afraid of losing flexibility. You are correct that we have four or five chartered, six maybe, chartered in ro-ro vessels and will now get four we own. But we think the economics of these vessels are superior, and that is why we are going in this direction. It is not a huge and dramatic move, but it will give us some advantages when we look into the future, the demand we are seeing. We could have built them maybe 20% larger, but then I think we would start to run into some of the issues. We are very comfortable with both the flexibility of the vessels and the configuration we have. Maybe a follow-up on that, if I may. Is this a way of lowering unit cost and thereby keeping more volume. Is it a defensive move, or do you think that this will actually produce tangible profits for you? We think it will deliver tangible profits. We see growth. The customers we talk to in the corridors, we have these vessels planned, are firm in their commitments and their plans. We think this makes a lot of sense, and it has a number of routes. We have maybe three or four vessels operating should we see a downturn, and we expect within the next 10 years there will be a downturn, then the economics of these vessels and swapping from three to two vessels will still be beneficial to us. So both in the more offensive perspective, but also a more defensive, the economics and the costs of these vessels and the timing of ordering these vessels when the yards are on their knees, because other shipping segments are really struggling and have been doing so for a number of years. It really makes sense for us to deploy some of our capital into reinvestments here. Comparison with when we built last time in 2007, we get almost twice the size for the same price or a little bit lower. It makes a lot of sense for us now. Okay, understood. Thank you. Okay. If anyone has any further questions at this stage, please could you press zero and then 1 on your phone keypad now? It seems like you've answered every single question. Back to you for any closing comments. Thank you everybody for joining this call. We wish you a nice day and talk to you again in 3 months' time. Bye-bye. This now concludes the call. Thank you all very much for attending and you can now disconnect.