DFDS AS

CSE:DFDS

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, welcome to the DFDS Q1 Report for 2018. Today, I'm pleased to present you the CEO, Niels Smedegaard. [Operator Instructions] And as a reminder, this call is being recorded.I will now hand over to Niels Smedegaard. Please begin.

[Niels Smedegaard, President & CEO]

Thank you, and welcome, everybody. Joining me, as usual, we have our CFO, Torben Carlsen; and Head of Investor Relations, Soren Brøndholt.Let's get started and jump straight to Page 3. Headline, strong start to the year. It certainly is. It is probably the best Q1 result we have had ever in DFDS, so we're, of course, pleased with that. It is, however, one of the smaller quarters, but anyhow, a good start.And 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. And 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, 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 5, 6 weeks. And 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, et cetera. And when we look at the sort of knock-on effects of this collision, we talk about a bill around DKK 15 million on an EBITDA level impacting the first quarter result. In spite of this, our EBITDA result was up 10% to DKK 453 million. Overall, the ferry routes were ahead of '17, 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 logistic 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.But first, I'll hand over to Torben to take us through the numbers.

[Torben Carlsen, Executive VP & CFO]

On Page 4, headline is that topline growth drives improved earnings, as Niels just said, a 9% organic revenue growth when adjusted for the usual lines, a reported growth of 8%. And EBITDA increased to DKK 453 million, the highest EBITDA result ever in the history of DFDS. Depreciation has increased DKK 7 million, report Alphatrans now, trading under the name Special Cargo last year or sort 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 150-year share award last year, we also include here the costs 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 DKK 200 million before special items. And the ROIC has improved to 19.3%. End of the year, it was around 19%, and a 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 is also the case this year.Channel, up DKK 19 million due to a positive passenger impact from Easter on the other hand. And in addition, the freight volumes boosted by a slightly reduced competitor capacity during Q1.Passenger is 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. And Niels talked about the strong Logistics results, and 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 2x to 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. And 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.

[Niels Smedegaard, President & CEO]

So on the next page here, given our busy agenda and many activities, we tried to collect a number of the growth and efficiency events and activities shaping both '18 and a little bit beyond to give you some guidance there.On the growth from acquisition box, we have 2 things. So far, we have the Special Cargo acquisition Torben mentioned, which is consolidated as the 3rd of January, contributing positively in the Logistics division; and then, of course, the announced U.N. Ro-Ro acquisition, which is expected to close in June this year. We're currently planning for the integration, have had the first meeting with the key managers from U.N. Ro-Ro and have another kickoff on Monday next week to plan for what we call day 1 but also the 100-day plan immediately after closing. And all of that is progressing as expected. There are 4 countries which need to sign off from a competition and other authority standpoint, and we achieved 1 of the 4 late last night from Italy, so there are 3 countries to go. But everything is progressing as expected and planned.Growth in the future will also come from the new buildings, which we will deploy. We have 4 freight ferries, 4 Ro-Ro vessels under construction. The first one will be completed end of '18 and arrive here in Europe early '19. We have also, as previously announced, 2 ro-paxes under construction, which will come in, in, I believe, February 2021 and August '21 if everything goes according to plan. And then we have signed the 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. So 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 path has been sold off as well. And 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. And then we have closed a route from Rosyth in Scotland to Zeebrugge in Belgium in connection with an incident onboard one of our vessels, and it will be out for 4 to 6 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 as a whole range of both concepts and processes, which will be changed. As we have previously announced, we have a Michelin Star ambitions for one of our restaurant concepts on both 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.So this is 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 '18. The basis of this is the growth in the European economy, around 2% generally, is a pretty favorable trading environment, and we think we have reasonably good vibrations from a majority of the countries we're 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. And 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 at 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 2 of their freight ferries, which is included in this plan.On the right-hand side in the box, you'll see the split between the various divisions.Let's turn to the last page, Page 9, our priorities for 2018. Of course, number one is the integration of U.N. Ro-Ro, and as previously mentioned, it's progressing according to plan. Managed to realize the planned steps in our digital strategy, which is rolling for the next 2, 3 years. It's 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'll 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 '19, as mentioned.We've 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's 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.So I think we are set for a very exciting 2018. There's generally good fundamentals in Europe. We have clear priorities. So on that note, I will hand over to any potential questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Dan Togo of Handelsbanken Capital Markets.

[Dan Togo Jensen, Research Analyst]

First question on the passenger side. Could you please elaborate a bit more, 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 balance against you and then some one-offs. So first question will be, could you please, yes, elaborate and pinpoint the exact effects here?

[Torben Carlsen, Executive VP & CFO]

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 when it was country based. And we have to also say that during these first 3, 4, 5 month after the launch of that new organization, we have 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. But 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. But that's a little bit of extra.

[Niels Smedegaard, President & CEO]

And the final impact, which Torben mentioned before, was the -- 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. And there is also the bunker, as Torben mentioned. We put a number on it, I think it's DKK 7 million or DKK 8 million in the quarter. So those are some of the effects explaining it.

[Dan Togo Jensen, Research Analyst]

And then a question on Logistics that did particularly well, but it seems like EBIT is now a leap for the last 2 or 3 quarters. Is it in the range of DKK 40 million to DKK 50 million at the quarter? Is that, so to say, the run rate for Logistics going forward? Or is that most [ comp ] basically?

[Torben Carlsen, Executive VP & CFO]

What was the last word you said? Is the...

[Dan Togo Jensen, Research Analyst]

Basically, with the new contracts coming in, I guess, you can all 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 50 million at the quarter. Is that sort of, so to say, a run rate for EBIT in Logistics now?

[Torben Carlsen, Executive VP & CFO]

I think the -- that's, 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.

[Niels Smedegaard, President & CEO]

There's been 1 or 2 sort of 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. So 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 are in there. But let's see what they can do. They are definitely working hard.

[Dan Togo Jensen, Research Analyst]

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.

[Torben Carlsen, Executive VP & CFO]

It is very early in the year, Dan, and I think we have a history of not lifting guidance before we are certain that we can deliver it.

[Dan Togo Jensen, Research Analyst]

Okay. But just on the face of it, I mean, a lift of 2% on the revenue usually it peaks quite heavily through to profitability as well. So do you think that...

[Torben Carlsen, Executive VP & CFO]

As you can see, most of that lift come through Logistics, which has a lower margin than average.

[Operator]

Our next question comes from the line of Marcus Bellander of Carnegie.

[Marcus Bellander, Research Analyst]

A question on the Channel. You mentioned reduced competitor capacity. And I'm just curious whether this is temporary and due to maintenance or if there is something permanent here.

[Niels Smedegaard, President & CEO]

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 vessels' setup and 5 remaining vessels, so they were -- it was possible for them to increase frequency, et cetera, and do some countermeasures, but there's no doubt that we have had a small onetime positive impact coming out of that. I think that's the honest answer here.

[Marcus Bellander, Research Analyst]

Okay. And second question, your -- and maybe I missed this, but the CapEx guidance, you raised it by DKK 200 million. What's there reason for that?

[Torben Carlsen, Executive VP & CFO]

That is for the lengthening of 2 of U.N. Ro-Ro's ferries that was not included in the 5.0. 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 of a technicality, but there is nothing changed in any of our CapEx views since last.

[Marcus Bellander, Research Analyst]

Okay. Okay. And next question, the corporate headquarters restructuring that cost DKK 7 million in Q1. Was there anything specific there? Or what was going on?

[Niels Smedegaard, President & CEO]

We 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 setup and how we work and also to show the operation that we need to carry our burden of efficiency improvements. So we went through that earlier during the year and said goodbye to a number of people here at the head office. We try to find other solutions for a number of them, but of course, we are unable to find solutions for everybody, and that included these redundancy payments. But it's all behind us now and done with.

[Marcus Bellander, Research Analyst]

And was this sort of a general trimming? Or were there specific functions that were shut down?

[Niels Smedegaard, President & CEO]

We looked at across the entire organization and made these adjustments.

[Torben Carlsen, Executive VP & CFO]

Yes. And it was both those categories that were hit, and it was some 30, 40 people in total or positions in total that were impacted.

[Niels Smedegaard, President & CEO]

And all levels, from assistants to a vice president.

[Operator]

Our next question comes from the line of Lars Heindorff of SEB.

[Lars Heindorff, Analyst]

Question regarding the North Sea. The volumes increased quite significantly, if I recorded correctly, by 8.7%, and that's 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 kind of growth -- or what growth would have been were it not for that incident with the vessel?

[Torben Carlsen, Executive VP & CFO]

We can start with the first question. Our growth is coming from -- very big from automotive, both on our Gothenburg-Ghent and our Cuxhaven-Immingham routes. We have large volume increases at Gothenburg-Ghent. We have an extra vessel compared to the comparison year. And what the growth would have been had it not been for the incident, we would have had...

[Niels Smedegaard, President & CEO]

Almost the same because we were -- within a few days, we managed to get substitute tonnage in and we took from our own internal routes and deployed to where it was needed. So 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.

[Torben Carlsen, Executive VP & CFO]

The main part of the extra costs is because we've had to pay for -- we obviously had a vessel that we haven't been operating and even at periods, too, because of the puzzle that had to be fixed here, plus a little loss of revenue, that's what makes up the DKK 50 million.

[Lars Heindorff, Analyst]

Okay. But, Torben, you said that you had an extra vessel in the quarter here compared to the first quarter last year. How will that look in -- at least capacity-wise, going into Q2 and Q3? Will that also be the case that you will have 1 more vessel in Q2 and Q3 compared to Q2 and Q3 last year?

[Torben Carlsen, Executive VP & CFO]

On Gothenburg-Ghent?

[Niels Smedegaard, President & CEO]

In Q2, yes. And I think, in Q3, there will be an overlap.

[Torben Carlsen, Executive VP & CFO]

A mix. That's the way it was entered last year.

[Lars Heindorff, Analyst]

Okay. Okay. Then regarding the Baltic Sea. With decline in 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?

[Torben Carlsen, Executive VP & CFO]

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 messes 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.

[Lars Heindorff, Analyst]

Any risk that you see similar moves from competitors in some of the -- I mean, basically, risks that earnings will be under pressure on some of the other routes in the Baltic because of similar moves from competitors?

[Torben Carlsen, Executive VP & CFO]

Not as it looks right now. There's a different -- the geographies is different in the southern routes compared to the northern routes.

[Niels Smedegaard, President & CEO]

It's difficult to predict. People are getting tonnage if they can or moving around. In this case here, it was more -- they move the departure times to optimize their routes, and that coincided with what we can say our good departure times. So there are some efforts now ongoing to see should we move our slot times, et cetera. So we will have to see how our response will be up in that part of the Baltics.

[Lars Heindorff, Analyst]

Okay. And then just a follow-up on the Channel, maybe I didn't get this all right. But the question is, if I understood you correctly, you've been reducing capacity, and your competitors have been increasing frequency during the first quarter. Was that correctly understood?

[Niels Smedegaard, President & CEO]

No. We -- in the first quarter, one of our competitors had a vessel out for extended docking period due to a grounding in December. And normally, I think they would operate with 6 vessels on that particular route, and they only had 5. 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 we also had -- 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 a little -- had been a little positive effect for us, which is probably a onetime event.

[Torben Carlsen, Executive VP & CFO]

And also, remember, our challenges last year on the Channel, Q1, where we lost market shares, we have regained -- as part of this explanation that Niels just gave, we've regained market share to -- close to where we think we should be.

[Lars Heindorff, Analyst]

Okay. And then lastly, the tax rates. It was fairly high. I think it was 12% in the first quarter. Is there anything -- what should we expect for the full year in terms of tax rate?

[Torben Carlsen, Executive VP & CFO]

This is driven by Logistics where we pay normal tax rates. So for the full year, I would still expect to be in the 3% to 5% range.

[Lars Heindorff, Analyst]

Okay. So no changes to that?

[Torben Carlsen, Executive VP & CFO]

No. All the tonnage schemes are in place, and no changes in this.

[Operator]

[Operator Instructions] And there are no further questions at this time. Please go ahead, speakers.

[Niels Smedegaard, President & CEO]

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, and goodbye.

[Operator]

This now concludes our call. Thank you for attending. Participants, you may disconnect your lines.