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DFDS AS
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Ladies and gentlemen, welcome to the DFDS Q1 Report 2023 Conference Call. [Operator Instructions] Today I am pleased to announce Torben Carlsen, CEO. Please go ahead.
Thank you very much. Good morning, and welcome to DFDS' Q1 2023 conference call. I am as usual, joined by Karina Deacon, our CFO; and Soren Brondholt, our Head of Investor Relations. We are off to a solid start in 2023 as we achieved the Q1 results above our expectations. We continue to feel confident about the resilience of our combined trailer road and rail transport level and our supplementary contract Logistics solutions. In addition, as you have seen, our passenger performance is strong. We are of course closely monitoring our markets as Freight volumes did slow down in Q1. We will continue to adapt our operations to mitigate impact from this slowdown.Now let's take a closer look of Q1. On Page 3 that line [indiscernible] is that the result is well in line with our expectations, but that uncertainty slowed trade volumes. Solid Q1 result achieved DKK 1 billion more than 20% off from last year. The development in the Freight markets were mixed. We saw a continued slowdown in the Channel and also in the Baltic Sea volumes. We saw lower volumes in our Logistics business as well. But Freight Ferry and Logistics results were supported by higher unit revenues and margins. The passenger recovery is on track and our 2 new acquisitions performed very well. So those were the quick introductory highlights, and then I'll pass over to Karina on Page 4.
Thank you. Just a few initial comments before we take you to the numbers. As you might have noted already, we have a few changes in our financial reporting. Firstly, the following segments in our management review has been aligned with the segments in the financial statements. So we now have the Ferry division and the Logistics division and no business units under that. That means we have, at the same time, expanded the divisional reporting tables with additional financial information and some key figures, including the Ferry Freight volumes per area. In addition, we provided a split of the Ferry numbers for revenue and EBITDA into Freight and passenger. When we look at the passenger revenue and earnings, we consolidate the passenger numbers from [indiscernible] and the passenger activities from our [indiscernible] on the boards of sea and on the Channel. When we assess the profitability from the passengers from the OpEx side, we allocate all joint costs to the Freight side. That's just one thing to be aware of, but this is equivalent to what we have done during the COVID time where we talked about the profitability of the passengers.The aim of the change is to simplify our reporting and also strengthen the progress and the overall direction of the [indiscernible] rather than spending time on discussing many smaller moving parts. And we think that with this change, we also aligned the number of segments to our peers and the way they report.The last thing to mention is that to further simplify the reporting, we have retired the line special items and no longer make the distinguishment between special items and normal operating costs.The results [indiscernible] comments section to Page 5. Revenue, an increase of 9% to DKK 6.3 billion or at least 6% was organic. The increase was very much impacted by the passengers returning, which added almost DKK 200 million in revenue. We more than doubled the number of passengers versus Q1 '22, where we still have some descriptions based on COVID-19.In Freight, we saw an increase of DKK 140 million, very much driven by bunker surcharges. The underlying Ferry revenue was flat as the volume decline of 9% was offset by higher rates and other revenue. Underlying revenue in the Logistics was also on level with Q1 '22 due to a reduction of volumes, especially in the coaching, we'll come back to that later.And in the acquisitions where we have 1 month of McBurney and 3 months of Lucey, of course, also added revenue.Turning to Slide 6 on the P&L. The EBITDA up 23% is very much driven by the recovery in the passenger business and a higher result in Logistics. Depreciation, small increase of 4% was basically all due to acquisitions. So with a significant increase in EBITDA and a modest development in depreciation, we also saw the results will go down to EBITA, which was up 69% to DKK 403 million and hence the margin increased 2.3 percentage points to now 6.3%. Further down on the P&L finance cost was up by DKK 75 million. We do see higher interest rates if we take interest rate and increase the margins, we saw almost a doubling in the numbers since Q1 '22.We also had an increase in net interest paying debt, which, of course, also had an impact on the interest cost. In addition, I just have to mention that there was a one-off income in 2022 of around DKK 10 million relating to value adjustments, which should be taken into account when comparing.Finally, normally, we don't talk a lot about the tax line because it's not a significant cost parking, but we have seen a significant development in this quarter because of a one-off charge in Turkey. They introduced an earthquake tax aimed at the specific industries, and we were one of them. So we have had to provide DKK 46 million for that. There's no change in our underlying tax and for the effective tax rate, we still see that between 5% and 7% on a full year basis.Turning to Page 7. A few words on the balance sheet and our cash flow. Starting to look at ROIC. We have introduced a new measurement when we talk ROIC. So we look at ROIC before appreciating intangibles, i.e. we take out goodwill and we take our customers for contracts which are incurred due to the acquisition. That is to give an insight into our operational performance, not having the historical acquisitions into [indiscernible]. So when we look at that, we have ROIC before acquisition intangibles increasing to 12%, and we had these traditional awards increasing to 9%, up from 4.6% in Q1 '22 and up from 8.7% at year-end. The CapEx was reduced by the completion of newbuildings in 2022. And that also means that when you look at adjusted free cash flow, we saw a significant increase of around DKK 800 million because we no longer have these newbuilds investments.Even after the acquisition of McBurney and capital distribution in the form of the dividends and the share buybacks, we maintained leverage in our target range. It was 2.9%, of course, well ahead of the 4x earnings that we had in Q1 '22.On Slide 8, the last couple of quarters, I have talked a little bit about our interest-bearing debt. We had a refinancing in the first quarter where we issued bonds of NOK 1.5 billion, NOK 1 billion with 3 year maturity and NOK 500 million with 5-year maturity. And then we have subsequently swapped the principles and NIBOR to Danish kroner, fixed rates, meaning that the bond carries interest with the holding of between 5% and 5.5%. At the moment, we have a fixed interest debt around 50% of our total debt.Turning to Slide 9. Looking further into the Ferry division, an increase of 21% in EBITDA. If we look at Freight only, we increased focus at the volume reduction of 9% is partly be offset by higher rates. And that means that all our networks were above last year if we exclude the Channel. Then, we have talked a lot about, and it was also where we saw the largest decline in volumes they were down 14%. The market continued to decline. We saw a contraction of 6% in Q1, and then we have the impact from the improved capacity from Q2 to the new competitor.[indiscernible] continued to decline now 20% within the cost situation there, of course, is still impacted by the war and then top comparisons from '22 where [indiscernible] the impact inventory. Passenger activities were significantly up. We've already talked about the number of passengers coming back. When we compare to 2019, the number of passengers are index 85. But underneath that, [indiscernible] are ahead of '19. So it is a channel that is impacting negatively. So despite only having an end of 35, our EBITDA was actually on level for 2019.If you turn to Slide 10 on the Logistics EBITDA up 38% of course, impacted by acquisitions. But if we exclude acquisitions, we had 21% organic growth. The improvement came from both divisions, both dry and cold where we in dry. So revenue up 6% adjusted for acquisition and also a healthy improvement in margins. Cold Chain revenue was down. We have seen a rather significant decline in volumes, not least related to the meat industry. But despite the volume decrease, we saw margins improve overall by improved process of management and also that we look into overall capacity and was benefiting from better balances in the transportation flow.Well that is the run through of the financials. So back to you to you Torben.
Thank very much, Karina. On Page 11, you see that during this quarter, our CO2 emission intensity on our Ferry business reduced 7% across our network, which is in line or actually a little bit ahead of our climate action plan aimed at reducing emissions by 45% by 2030 compared to the 2008 baseline. 27 of our 125 ordered etrucks were deployed in Q1, and we expect to double the deployment during this quarter with good and strong interest from customers who are willing to also adjust operational KPIs for this new equipment that requires slightly different needs in terms of loading infrastructure, et cetera. Solar panel installations continue and were in this quarter, completed in our last facility in facilities in Winterswijk in Holland and Neuenkirchen-Vorden in Germany. We have for 2023 included ESG targets for our emissions, our safety and our gender diversity in all bonus schemes.Moving to Page 13 and our outlook. We, of course, look to the expectations for the European economy when trying to predict volumes and activity levels going forward. And we still expect the Ferry division EBITDA below 22% due to the Freight slowdown that we've seen in Q1 and in April net, as we mentioned before, by the situation in Ukraine with the war and the Channel overcapacity. Logistics EBITDA is unchanged in terms of our outlook, which is ahead of '22, and this is driven by the operational flexibility that we have seen demonstrated in Q1 and also the positive impact from our acquisitions. On the CapEx side, nothing new to report, as Karina mentioned, we have no newbuilding activity, and therefore, the CapEx reflects the ongoing investments in our operations.Turning to Page 14 and key priorities for 2023, they have not changed a lot since we talked last, but we continue to very closely monitor the situation in the markets, and we adapt capacity to demand changes as we have done in Q1, and this is, for example, in Logistics, the last part of the information for the strong results. We continue to pursue organic growth and have seen that DFDS is involved in more tenders and more activities from customers that in the past as we become better and better at marketing our whole suite of services and offerings.We are also continuing to look at growth through M&A and other initiatives, as always. Cash flow generation is high on our agenda, of course, with the increasing interest environment that has been dropped in the priorities. And also the intensity and safety in improvements continue to be something that we talk a lot about in [indiscernible] and where we see strong results. First now in the initiatives safety, we still have a long way to go before we are pleased. And we continue to move various green transformation projects forward as we've also done so far.With that, we turn it over for Q&A.
[Operator Instructions] The first question comes from Dan Togo Jensen from Carnegie.
A few questions from my side here. Let's just take them one by one. To start with your expectations for Q1 because you started out saying that it was above your own expectation here in Q1. Could you be a bit more specific with which areas, in particular, surprised you, so to say, on the positive side in Q1? That would be the first question.
The passenger side has performed well and also better than we wanted to project a quarter ago. Logistics, we've seen, as Karina mentioned, lower volumes, and we have been very pleased to see that we've been able to improve the results despite this situation. So this is also better than we had hoped for.
And do you expect these, so to say, bits to be sticky and sustainable throughout this year. So there's no one-off character in any of this?
There are no -- well, that's 2 different statements that you made there Dan you are correct. There are no one-off elements that in a significant way like this. But how this will continue to develop is, of course, the open question, given the economy right now. So that's also the background for us seeking the outlook for the year.
And then I'd like to jump to Turkey. You have this earthquake tax, which is retroactive. Is this a one-off which should be considered and one-off, so that will be one question regarding Turkey? Another one would be -- you are in talks -- at least to have disclosed you and talks with Ekol for the road business, international road business. What's going on in Turkey right now impacted by the earthquake, the election, the economy in general? Can you give us an update here? How is that impacting these talks regarding a possible transaction with Ekol?
I think that on the tech side, we can, of course, not get any guarantees when a government imposes a one-off, whether way at some point in time to do it again. But all our intelligence says, it is a one-off, and it was something that was related and calculated based on the '22 results, and it was something that should help fund the buildup of after the earthquake. So as far as I can possibly predict this is a one-off.
And in terms of the broader situation in Turkey, then the earthquake has created some congestive issues in Mersin subsequently, which is our port closest to the earthquake area. So that has led to some slowdown. What we can also see and hear from our colleagues in Turkey is that our customers' customers are taking a cautious look and postponing initiatives as they await the outcome of the elections. There's, of course, an outcome that on Sunday, there's a clear result in round 1, but there's also an alternative that they go in round 2. So we expect for a couple of months that there is some slowdown in activities in Turkey as the markets try to decipher the result of the elections. Also, and I'm sure that this is not an official explanation, but maybe just human nature. It is our expectation that competition authorities are not going to come out with a final conclusion on the -- our ability to acquire Ekol while this political uncertainty exists. So we think that, that will also potentially last a couple of months while whatever the outcome of the result is trickles down the administration.
But you still have an appetite to increase your investments in Turkey despite these sort of say, kind of rouge behavior from the government?
If you're talking about the one-off tax, then yes, that's, of course, unfortunately, I think then I read Danish newspapers they talk about imposing one-off taxes also on dealers in electricity and other. So there's nothing that has made us worried about being in Turkey. Turkey is an extremely strong economy, saw our highest growth in '22 and probably a normal reaction by market players. It was the same we saw in the U.K. leading up to Brexit. Until you know exactly your conditions, you hold back with activity levels. So no, we are definitely bullish on the Turkish economy, if you look a little bit further ahead.
And then just one question here. The final one for me. On the bunker spreads that clearly is benefiting you at the moment. Can you elaborate a bit on how the impact is in here in Q1? And how we should sort of say, see the impacts from this in coming quarters?
If you recall the development in the spreads in 2022, it was taking off from April onwards. That means that when we compare in Q1 this year is the costs that we will go into difficult comparisons from Q2, 3 and 4. And that means that a slight help in Q1 this year and a reversal, so a negative in the next 3 quarters.
Of course, yes, when you compare year-over-year, but the underlying benefit is still positive, I guess.
Well, but that that's a meaningless thing to say because there has always been a spread between the 2 fuel types, and that was of course the background for investing in scrubbers. So I think the only thing that is meaningful is to compare to what was it last year as Karina just did, there will continue to be a positive impact for the full year as far as we can predict if you just compare to that there is a spread between the 2 fuel types.
Your next question comes from Michael Vitfell-Rasmussen from Danske Bank.
Three questions from my side. First, a follow-up on Turkey. Do you still expect volumes to be growing for the full year despite that we've seen these issues and you also flagged that the uncertainty or the awaitness from customers is likely to continue in the next couple of months? That's my first question. My second question also relates to the [ BAF ] but more to the top line impact. So in Q1, you had Ferry revenues growing 4%. You had volumes declining by 9%. So that's a 15% difference here. And I do know that, yes, both types of bunker oil was up in the early part of Q1, but then they were actually down for the quarter as such. So just to understand the delay impact here, is that roughly a few weeks, a month that we're looking at because when we look at the Q1 year-on-year prices, then the negative impact is rather visible here.And then finally, on the Channel. So we now start to see that the Irish are starting to lose market share, both versus you guys in particular if we look in the March numbers, but also versus P&L. And as I see it, prices are relatively aligned between you 3. So if you could add some commentary on that? And also if you could add some comments on the Seafarers Act?
Okay. You may have to repeat the second one. But let's start with Turkey. We continue to see growth in Turkey for the full year, modest 1-digit growth in Turkey despite the situation. In terms of [indiscernible] the impact is close to DKK 100 million.
Is this from Q1 -- on top line.
On top line. So you can say the compensation of the lower volumes is the mix between the -- on the revenue side of the [indiscernible] and the price increases on the Ferry side. The Channel, I'm sorry for missing the first part of that.
Yes, I was asking into the market share movements. We see that, for example, if you look to Irish Ferries, I think they're down nearly 400 basis points versus their peak market share, which was a one-off. I understand that. But just if we look at kind of the recent months, they continue to lose market share both to you and to P&O. And when I look at pricing, it seems to be relatively in line. So if you could comment on those dynamics here, I guess it's probably something to do with your charter share agreement with P&O. And then also talk if you could add some comments on the Seafarers Act.
Yes. Yes, yes, that's part of it. The market share -- I don't know what pricing you referred to. There is no publicly available information on the Freight prices. We, of course, have some guesses, but even we don't know exactly what the price picture is on the passenger, you can scrape the websites because it's a very dynamic market. But our impression is that we are probably able to command slightly higher Freight prices than both P&O and Irish Ferries. The loss in market share by Irish Ferris recently is driven by gains by P&O primarily as they are recovering from their out-of-service period last year. We are able to maintain slightly better market share than our production here. And as I said before, probably at higher average Freight rates than the competition. So why is that? We've always been able to maintain higher prices, we believe. But of course, now with the space charter agreement with P&O, we have a solid Freight product that allow us or our customers to have frequent departures, which we believe is helping us maintaining our position. And when you look at P&O's numbers, is probably also a part of why they have recovered so strongly. But of course, we don't -- we only have the efficient numbers to guess upon. So we -- it's a tough market, as we have said all along, we believe we are the strongest operator. We are doing good. We are doing better than -- also maybe through the first question of today before -- it's also an area where we are performing better than we had expected going into the new year. So in the situation that we have there, we are quite upbeat. So of course, we have preferred that there was not this overcapacity situation. On the Seafarers Act, it's a complex picture it's both legal action in France and in the U.K. And we are happy to see that the politicians believe that a level playing field should be established. It takes time to take effect. And in the meantime, you can say we have a slight cost disadvantage on the total operation and we will -- we have also said publicly, we'll continue to live with that as long as we can see the positions are working towards a leveling of then the playing field but nothing new really to report on that.
[Operator Instructions] Your next question comes from Ulrik Bak from SEB.
Just a couple of questions from my side. On the capacity utilization, which is the nice details you have on the Ferry side taken that share which you also see on the high and the low is like a level? And what those levels were on [indiscernible].
Like the sound quality is very bad. It's difficult to hear your question.
Sorry, is it better?
Yes, better.
Okay. So on your capacity utilization, which is a new information that we haven't had before, which I really appreciate. But perhaps you can mention which geographies saw the highest and the lowest utilization levels? And what these levels were the maximum and the minimum utilization across the geographies?
Sorry, I don't have those details. And it's, I guess, by nature, the Channel has very low utilization, Ro-Ro services have very high utilization. So it's all relative. And I suggest that maybe if it's something that we can disclose that you sent an e-mail and we can try to help you, but it's not details that we can share now.
All right. Then a question on your passengers and volumes corresponding --
Can you really get close to your microphone, you're very hard to hear.
Okay. I'll try again. Sorry. The April passenger volumes corresponded to 84% of the 2019 level, how much further upside to this level compared to 2019? Do you expect there is in the current competitive environment? I know you said that other routes were above 2019 levels, but given the competitive tension on the Channel, do you expect this 84% to improve?
I think it all depends on how the high season on the channel develops whether one thing to support the overcapacity, which has taken parts away from us, but it's also a market that is still suffering. And whether it's suffering from [indiscernible] or Brexit is, I guess, hard to say. We will extend the state charter agreement and have started testing extending the state charter agreement with P&O to also include tourist passengers. So we are hoping that, that will help in terms of market share versus per tonne. But it really remains to be seen how their appetite for traveling between France and U.K. develops. On the 2 -- on the other services, we are quite confident that as to the new [indiscernible] over time will recover even further as also the international segments come back.
Then another question about the bunker spread. Over the past couple of months, we've seen the spread decline quite significantly. And in that context, did you anticipate such a decline? And can you finally share what you have factored into your guidance in terms of this bunker spread for the rest of the year?
We did anticipate it because we can also move the forward rates, which were going down. So yes, we did anticipate that. I don't think I can give you a specific number what we have factored in, but we have factored in a decline. I think just say enough to the [indiscernible] at the level where we are today because it is relatively low compared to what we've seen in the last year, but we have [indiscernible] would be significantly lower than '22.
There's nothing in our outlook that worries us in relation to the fuel development.
Then a question on Logistics. I saw you did quite well in Q1, but is there any particular seasonality in this part of your business with cold chain and the dry goods where we should expect an improvement later on in the year?
There is seasonality is October, November month by always very, very large in all 3 segments, but nothing like in passenger, of course. So when you talk about improvements, it's of course always compared to the same quarter the year before. So you will see stronger results from Logistics. But whether we are able to maintain the 23% organic improvement depends a little bit on how the softening of the volumes continue over the year.
And in terms of margin, the margin you printed in Q1. Is that just 1 step in the right direction? Or could it improve even further over the coming quarters?
It's too early to say. But we work, of course, very hard on keeping the margin improvement that we have. And it is a challenge in an environment in leasing volumes.
Your next question comes from Ruairi Cullinane from RBC.
My first question relates to the Baltic Sea, where you'll now start to sort of lack comps, which were impacted by the Ukraine war?
Ruari, sorry. We cannot hear you. The line is -- I don't know if it's on, but if you can try to -- one more time.
Sure. So my first question related to the Baltic Sea, where you're now starting to lack comps that were impacted by the Ukraine war. So do you think you can grow volumes over the remainder of the year in the Baltic Sea? And then the second question relates to your sort of stage of your CapEx cycle with low ferries on order. And clearly, this year, it looks like sort of more than the equity free cash flow depending on what happens with Ekol could be deployed on Logistics and M&A. Is that something we should expect going forward with deleverage just to come from increases in EBITDA?
I think you're asking the Baltics is now that we have comps that were also created during the war, whether we can expect increases in volumes. I think realistically, the impact of the war, there was a quite slow ramp-up of the volume impact as companies gradually stopped their activity in the Baltics. So we do not expect a volume uptick in '23 in the Baltics, probably to the contrary. In terms of CapEx, we do not expect any major CapEx from shipbuilding. I think in '24, there will be some conversion costs for some of the vessels to be able to travel on methanol, but it will stay at those levels for the coming years. And then you're right, then of course, there are acquisitions that already this year, we have spent some of the improvement on the McBurney acquisition, obviously.But was that an answer to your second question, we couldn't completely hear it, but I hope that, that answers your question.
Partly -- yes, it did. I guess, the other part of it was just could this be a representative year where you've already done one Logistics acquisition and you're eyeing up Ekol going forward, should we expect a slightly lower run rate on Logistics M&A?
Well, the acquisitions are, of course, more random. So I don't think I would probably exclude these larger acquisitions in your planning and then hopefully, if they come, they add value rather than the opposite. But in terms of the CapEx level, could it increase 10% or so or even 20%, probably, but it's probably a good level to reckon in the next couple of years.
Your next question comes from Lars Heindorff from Nordea.
A few questions regarding the Logistics division. The incremental margin that you delivered is actually quite impressive in the first quarter. And I just want to get some more flavor on actually what is driving this? Is this caused by the recent acquisitions, which is kicking in and there are some significant margin difference there compared to what you used to have? Or what is the reason for this? And then a second question also regarding Logistics is, I don't know if you can indicate sort of, again, ballpark numbers, what kind of -- what -- sorry, what share of your total volumes are moved by your own trucks you own production.
Okay. Let's start with the margin question. The margin improvements comes from 3 elements, I guess. We've had -- we always had some units that for one or another reason, performs below expectations, and we've been able to create some quite strong turnarounds in some of those units. We have, in general, very good at passing on the cost increases to our customers, and that now starts to then also mean that our margins pick up to where we should be. And then thirdly, yes, there are good margins in the acquisitions, and that has probably also helped a few basis points on this. So that's the margin. And well, and in addition to these, you can say, the [ proper ] units that have been turned around, there's also just been a very -- generally very good balancing of flows. And in some instances, we even lost flows that maybe have helped us because it has created a better balance subsequently. So hopefully, a solid improvement that we're able to maintain -- the other question.
About the share of in house...
Yes. That's a little more -- and it's very regional where we have the -- our cold chain has a high share of in-house haulage, whereas our dry business has a very low sales of in-house volumes. It has to do a little bit with the specialization of the flows. But I don't think that we have a specific percentage for you.
And the reason why I'm asking about this, of course, the margin improvement besides the impact from the M&A, I mean, higher home production if you have better prices and volumes, i.e., all else equal should lead to a more significant lift in the margins as well?
Yes. I think what we've seen with declining volumes on the cold side, we need, for example, is that we've had to reduce some of our in-house haulages both by reducing on the number of trucks and number of drivers in the cold business in Poznan, Poland where we run the sorting operation. So I don't think that this is driving a structural change in margins, but we are, of course, we can say, very focused on making sure that we address the capacity as volumes are softer. Also the in-house process.
And then just a follow-up. You said you had 3 areas or 3 units, which have been to [indiscernible] which has now been improved. What are those 3?
No. I think I said there were 3 reasons for the improved margin.
Your next question comes from Dan Togo Jensen from Carnegie.
Just a follow-up here because you keep on returning to this, the weakness in the meat industry. Can you share your thoughts here? What's going on? Is it more structural because consumers are trending away from meat? Or is this a temporary thing because meat has become too expensive and you're seeing this recession like or slowdown at least in the U.K., for instance, where you simply can't afford meat for a while, and then it will swing back at some point. Some thoughts there would be appreciated.
It's a marketplace that, of course, we have colleagues that follow closely. But I think we've seen that production moves from Denmark to Germany to Holland and back and forth, depending a little bit on the prices that the slaughter houses are able to pay for the producers. So it's simply a reflection of that depending on these movements that may impact our flows and volumes, is an underlying trend of meat dropping by 0.5% to 1% per annum probably. But that's not the reason for these ranges. So we don't believe they are structural, but it does just post some challenges for us in the -- in balancing the flows.
So that means that this can swing back at some point and be an obvious effect of basically depending on where you source your meat.
Right.
Thank you. This concludes our Q&A session. I'll now hand back to Torben Carlsen.
Thank you very much. And thank you for the good, the many questions. As mentioned, we remain confident about our ability to perform in 2023 and maintain our financial strength. On the back of this confidence, we continue to pursue development opportunities both organically and otherwise, to enhance our customer offerings and to strengthen our network. So we look forward to speaking to you again see you. Thank you very much, and have a good day.