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DFDS AS
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Ladies and gentlemen, welcome to the DFDS Q2 Report 2018. Today, I'm pleased to present the CEO, Niels Smedegaard. [Operator Instructions] As a reminder, this call is being recorded. I will now hand over to the CEO. Please begin.
Thank you, and welcome everybody to our second quarter call. Joining me as always, I have CFO, Torben Carlsen; and the Head of Investor Relations, Soren Brøndholt. We will take you through Q2 highlights and the numbers. We will also talk about U.N. Ro-Ro and the current situation and impact around the Turkish lira volatility towards the end of this presentation.Let's turn to Page 3. The quarter, which was fueled by our acquisitions, showing growth both on top line and earnings. We were able to come to a close the U.N. Ro-Ro transaction fast and consolidate already from the 7th of June, resulting in DKK 141 million additional revenue on the top line and DKK 50 million EBITDA. Our group revenue is up 6% and EBITDA up 9% to DKK 802 million. So when you look at the graph on the right-hand side, you'll see another good development for the second quarter compared to previous years. EBITDA outlook for the year is unchanged at DKK 3 billion to DKK 3.2 billion, and Torben will talk more about that a little later. Our financial leverage is increased following the acquisition of U.N. Ro-Ro, and you have the numbers here, both pro forma basis and reported basis.Let's turn to Page 4 and try and go behind the numbers in the second quarter. We ride a bit more headwind than tailwind, and that is primarily due to the increasing bunker price throughout the quarter. In fact, the price is up 47% in this quarter versus 2017, a little tailwind from the lower dollar, but all in all, a significant increase of costs. And when you sort of incorporate the different factors, we think the total EBITDA impact in the quarter is around DKK 40 million. Some of this is a temporary phenomenon. We do have bunker adjustment clauses in our various rate contracts, but there is 1 to 2 months of lag before that is worked into the numbers. So a negative impact here in the second quarter. Also, a little negative impact from the currency side, especially the Swedish kroner was down during the quarter versus last year, adding another DKK 8 million-ish to the EBITDA impact.We'll talk more about some of the other factors. You'll see later that basically all units are doing on level with the previous year's quarter or better, except on the passenger side. They're, of course, impacted by bunker, but also seem to have had some disruption due to the World Cup. A number of the inbound international guests did not turn up as expected. Overall, we think there's a decent underlying growth and in spite of the various political issues we have seen during the quarter.With that, I will hand over to Torben, who will take us through the numbers.
On Page 5, you see that our 6% revenue growth is driven by both U.N. Ro-Ro and continued growth in our freight volumes. When just looking at like-for-like basis, we are up 4% on revenue. EBITDA is up 9% to DKK 802 million, as Niels mentioned, driven by U.N. Ro-Ro and strong growth logistics. The depreciations increased DKK 35 million, mainly due to acquisitions and continued investments in IT and digital. Special items spiked to DKK 63 million due to DKK 47 million from acquisition costs. And due to the increase in depreciation and acquisition, we see a flat profit before tax of DKK 494 million.ROIC impacted by our newly acquired assets, so that we now have 16.9% ROIC, which will, as we have a full year comparison, drop to 13% with the full year U.N. Ro-Ro impact.Turning to Page 6, where we can see the EBIT impact across the different business units. We see that North Sea is up DKK 8 million from continued volume growth, which is reduced by a lag in bunker cost recovery. Channel, plus DKK 1 million, strong market share development but positive root contribution offset by extra ferry maintenance costs, and again, lag in bunker cost recovery. The Mediterranean is up 22% (sic) [ DKK 22 million ], which is the impact of the addition of U.N. Ro-Ro. And as Niels mentioned, our passenger unit is down DKK 30 million. This cost increase is from bunker, is increased ferry maintenance and then some adverse impact from change in overseas booking behavior and weakness in our Norwegian sales.On the Logistics side, Nordic shows DKK 9 million-plus due to strong results from contract logistics activities, which are offset from lag in recovery of higher haulage costs, again, due to the increased bunker costs.And also, Continent is up DKK 5 million from continued good trading, offset from lag in recovery of the higher haulage costs and also due by the addition of Special Cargo earlier this year.Turning to Page 7 and our capital structure, which is in line with our target leverage. We see that our net interest-bearing debt to EBITDA is at 2.9 end of Q2. And again, with a full year pro forma impact of U.N. Ro-Ro, this would drop to 2.4. We completed the share issue in connection with the transaction of DKK 1 billion in June as previously announced. And the net impact is that our interest-bearing debt increased to DKK 9.5 billion by the end of the quarter. And as usual, the board will, in connection with the release of the Q4 numbers, review our capital structure and distribution.Turning to Page 8. You see that our EBITDA outlook is unchanged at DKK 3 billion to DKK 3.2 billion. We expect real GDP growth above 2% also for the remainder of 2018. We have seen some slowdown in the U.K. market but expect demand for our ferry and logistics services to remain robust also in H2. Our development of digital and IT capabilities are progressing as planned. The only small change to our outlook is that our investments are down from DKK 5.2 billion to about now DKK 5 billion. And for obvious reasons, our outlook is associated with a somewhat higher level of uncertainty than usual due to the Turkish lira volatility that Niels will talk more about on Page 9.
Thank you, Torben. On Page 9, let's talk a bit about Turkey and the situation surrounding the currency. Depreciation of Turkish lira is not a new thing here in '18. This is a natural thing given the higher inflation rates in Turkey vis-à-vis euro or U.S., for that matter, partly a consequence of the high GDP growth in Turkey, which was around 7% last year and also into Q1 this year. When you look at the inflation rates '16 and '17 versus the depreciation you'll see on the graph on the right-hand side for the same 2 years, you'll see that they're sort of roughly depreciating 7% additionally over the inflation.And then we come to what happens here in August '18, where the diplomatic rift with Washington and Turkey sort of pushed the lira over the cliff for a while at least. And that's, of course, a situation with numerous consequences.If we zoom in on what will it mean for us, turn to Page 10. There are 2 effects. Let's start with the first one. It will have an impact on our financial line items and we sort of term it a one-off effect. It is a currency loss on our debtors. The way we operate, the way the company has operated for years, is to set the prices in euro based on sort of the estimated depreciation of the Turkish lira through the year. In other factors, the pricing is set. The time we invoice the customer, that euro amount is translated into Turkish lira. Until the customer pays, we have an exposure to the Turkish lira. And it's -- they typically pay within a 60-day period. We have roughly an exposure of around DKK 300 million at any given point in time. So when we then get the sizable depreciation, of course, it has an impact. At the bottom of the page, we have shown the impact recorded in our books for this situation in June, DKK 6 million. In July, where the depreciation picked up, it was 7%. It amounted to around DKK 27 million. And then we show the impact from 1st of August to the 15th of August, where the impact is DKK 48 million. You can say unrealized. It will fluctuate up and down with the Turkish lira development. But based on these numbers from June through August 15, the impact on our finance line is DKK 81 million. And again, that number can change, depending on what happens here in August. So that's the first item.The second item is described on Page 11. That's more the trading side. So far, we have had a fairly balanced import/export scenario. But we can see, as the Turkish lira also have devaluated or depreciated during 2018 and due to the growth in the Turkish economy, export volumes has increased 17% during the first half year, whereas the volume -- or the import volumes were up only 3%. And that difference is, of course -- that divergence in growth rates is starting to create some imbalances. The current depreciation is impacting, to a larger extent, these imbalances. But once the Turkish lira is stabilized, we expect imports, of course, to sort of resume but likely at a lower level. It is simply more expensive to import stuff into Turkey, whereas Turkish goods will be very, very competitive, and the depreciation will fuel the export out of Turkey.Net-net, this will, of course, initially have a negative impact. However, the drop in import will be not only mitigated partly from the growth in the export volumes, but also the fact that a significant part of the import to Turkey is not consumption-driven, but it is import of semi-manufactured goods which will be used in the manufacturing process of finished goods in Turkey and then reexported. So there's some elements, you can say, working in favor of a reasonable stable development. But net-net, we expect the period will lower especially important volumes.But with the current visibility we have, we do, as Torben mentioned before, maintain our EBITDA outlook for the year, both for U.N. Ro-Ro and for the group as a total.Turning to Page 12 and just a quick look at the priorities for the rest of the year. Of course, integration of U.N. Ro-Ro is high on the agenda. We'll finish our 100-day plan here at the 18th of September. The work in the 18 work stream is progressing extremely well, good cooperation and encouraged by the synergies which we identify as we continue this work. Then we have a range of internal things. Everything from the digital strategy development Torben mentioned over efficiency projects, turnaround situations, et cetera, and also preparing for the first of the 2 Ro-Ro new buildings, which we'll get beginning next year. And in addition to this, we continue to look at potential value-creating acquisitions as well. So yes, some choppy waters around Turkish lira right now, but we are confident we can deliver the guidance we have established. We have a good team in place in Turkey. It's not the first time that Turkey is exposed to a hard time. A few years ago, there was an attempted coup which created some disruption for a couple of months, and then Turkey was back on track. We'll, of course, be monitoring this closely, but there is a good resilience in Turkey in situations like this. So we are, in spite of the seriousness, we are comfortable around the situation.So with that, we would like to hand over to any questions you may have.
[Operator Instructions] And our first question comes from the line of Finn Bjarke Petersen from Danske Bank.
Question is regarding, not surprisingly, Turkey. If we look at the -- you're starting out with a balanced trade. Could you give some indication what is your free capacity or utilization rate on the lag going from Turkey to Europe? That's one question. The other question is, how is pricing affected by the changed situation? And finally, has this any cost implications?
Thank you, Finn, for 3 good questions. Let's start with the first one. I think roughly the utilization, on average, is around 82%. So there is a little more space left on the vessels to pick up an increased export. But of course, U.N. Ro-Ro has peak departure dates, so there are certain days which are more favorable. And there, the vessel would be close to full. But I think we can accommodate a little bit more, and then we'll just have to evaluate the situation and see if we need to do any vessel swaps within our network also from Northern Europe. On the pricing impact, I mean, our prices are set and we operate with those prices. So there is no sort of immediate change to the prices. Of course, if we see a significant slowdown in the imports, we will have to work with our customers to make sure that the round-trip situation is working like we are doing always. We'll, of course, work together with our customers to get through a temporarily difficult situation. On the cost side, part of our costs is in dollars, part is in euro and part is in Turkish lira. And of course, with this depreciation, that will play in as well, but we are not at this time sort of breaking that down with more detail for you.
Okay. But I reckon that the first is bunker and the rest is all ship-related costs and then the final, is that your terminal cost in Turkey or something?
Staff cost is typically in Turkish lira.
Staff? Is that all staff?
In numbers of staff, yes. The far majority is in Turkish lira.
Okay. Now you mentioned that you had a -- you mentioned the effect on the Turkish import/export, 17%, but that is not your volumes, is it? What is your volume development in U.N. Ro-Ro in the second quarter and first quarter this year, year-on-year on import/export?
We are just conferring here to...
Thank you. Our volumes are up with similar numbers in the first half year on the export side.
On the export side?
Yes.
And you started with a balanced trade?
We started the year more or less with a balanced trade.
Okay. And then the question is the customers. Because here, we're talking about a -- typically, you have a round-trip, not a one-way, like the North Sea. So that means -- does that mean that all your customers are basically Turkish companies?
It is primarily operators out of Turkey.
But it's not all customers.
Not 100%, but by far the majority.
The majority is Turkish, yes.
Okay. And what is the alternative route? That's one thing. But are there other alternatives they can use for this export?
The main alternative is to go via the road if they completely sort of change their setup and employ more drivers, et cetera. However, the drivers are -- as we understand, are typically paid in euros. So it's not like we are getting a dramatically different competitive scenario between road and sea.
Okay, good. And then to something completely different, one-off costs.
How many questions do you have, Finn?
How many could I -- am I allowed? Just one more?
Yes, absolutely.
Okay. There are one-off costs in both passengers and the English Channel, I understand. Passengers because the vessels are turning pretty old and have to go through 25 years' special survey. And could you elaborate a little bit about how much extra costs are there in the result due to those things?
I think we will not characterize the costs in passenger as one-offs. They are largely split between higher fuel costs and higher vessel costs, which is indeed related to the investments that we have done in the vessels over the last years, which are depreciated over relatively short periods. So that's where the main cost drivers come from. The revenue is more or less on level with last year, despite the fact that we are adversely impacted by the Easter. So it is a cost-driven downturn in passenger.
And then a final thing. The negative effect that we show in the second quarter in passengers due to a bad mix -- and I understand that's incoming passengers -- is missing. How much of that effect do you see spreading to the high seas in Q3?
It will continue into Q3.
Our next question comes from the line of Lars Heindorff from SEB.
Lars Heindorff. First, regarding the guidance, you mentioned that the impact from bunker in the quarter is roughly DKK 40 million on EBITDA. Could you give us any indication what kind of assumptions you have made for the second half in your guidance?
We are assuming that -- well, we know what the bunker cost is right now. So we will see a continued slightly negative impact in the beginning of the quarter. And then we believe that we will have a more neutral development for the rest of the year.
So you assume roughly flat from Q1 levels. Is that correctly understood?
Correct. That's correct.
And then regarding U.N. Ro-Ro, the impact here in June. And what I'm after is the seasonality in earnings down there. Is June unusually strong? Or is there -- I mean, how is seasonality looking on those trades in U.N. Ro-Ro?
June is not a strong month, but very roughly you can say that the second half is stronger than the first half of the year in terms of volumes.
June was impacted by the Ramadan and also the election, which played a certain role. And then in August is their big summer holiday. There's another big week coming up next week, where Turkey basically shuts down. So it's probably one of their weakest months is in August and then kicking up to a high season in September.
Okay. Understood. Between first half and second half roughly, normally?
It's -- what do you want to call it? 55-45. It's -- there's more...
A bit close.
Yes.
Okay. And then regarding -- you mentioned yourself earlier in your presentation a little bit about U.K. and you've seen a bit of softness there. But still, when we look at the North Sea, mainly they're still growing mid-single digits, almost 6%, so looking pretty healthy. How much capacity have you added year-on-year to achieve that growth?
On the face of it, I would say we haven't added capacity.
There is some. Compared to Q2 last year, there is extra capacity on the Ghent route and also we have some larger ships -- not more ships, but some larger ships on Cuxhaven. But I...
But they're not huge lines. So they...
No, no, but capacity-wise, it's perhaps 5%, 7%, in that ballpark.
And then you do see a little switch from the Channel towards the North Sea due to these continuing difficulties for our customers to get drivers, haulers, so you will see a slightly declining overall Channel freight market. So it's 1 point...
Yes, yes. Around 1%.
Around 1% down, and some of that is moving up to the North Sea to us, and of course, to some of our competitors. So they're artificially boosting the North Sea.
But we also cut back some capacity between Holland and the U.K. to Rotterdam, Immingham.
Okay. And then -- and going into the second half, is that -- when we look at that sort of year-on-year capacity growth, is that going to be same trend as we have seen now? You mentioned 5% to 7% in the second quarter? Will that be more even compared to last year?
It will not be more compared to last year. I'm not convinced that we have much more capacity second half than we had last year, but we can -- go into that.
I'm just trying to get a sense for the underlying growth. I mean, of course, if you add a lot of capacity, I mean, you should grow also your volumes, but...
That's not it. It's not -- the capacity added in Cuxhaven is more technical, that we had to put in a larger ship than we, in reality, need. So it is not a -- this is not a capacity-boosted growth scenario. We are moving the ships a little bit around to adjust for where we see the current growth, but there are no new vessels coming in.
And then overall, we have shut down one route, the Zeebrugge-Rosyth, on the North Sea. So that -- those volumes will -- it was a breakeven at best, slightly loss-making route, but that will disappear also in the coming quarters.
Okay. And last question, maybe a follow-up on some of Finn's and that is regarding -- still regarding U.N. Ro-Ro. I don't know if you can give us any indication about sort of the costs. I mean, you talked a lot about the balance on the trade and how the imbalance, obviously, increased with more export and less import. But the cost of rebalancing trailers for those customers, how is that impacting the cost base and margins?
I don't think it's impacting the cost base, not a lot. There will be some specials, you can say, will impact the top line a little bit, the revenue side, that we have to work with the customers to get their trailers back, et cetera, and that will put pressure on the yields. I think that will be the major effect you can see from that.
Our next question comes from the line of Ruairi Cullinane from RBC.
I've only actually got one question remaining, and I was just wondering if there's any risk of impairment just mechanically from the depreciation of the Turkish lira. With -- you have the deterioration in financial performance U.N. Ro-Ro first. If you could talk us through the rest of that, that will be great.
Yes, thank you very much. No impairment in sight due to these developments. So nothing there. Part of the acquisition price is on our balance sheet as goodwill. Some of it is spread across customer portfolios and our long terminal contracts in both Istanbul and Italy. And no need to worry about any impairment thought at all.
[Operator Instructions] And our next question comes from the line of Marcus Bellander from Nordea Markets.
First question regarding Turkey. You mentioned that you expect the drop in imports. Is that sort of your best guess? Or is that what your people on the ground are seeing already now?
That is what our people on the ground are seeing already now.
Okay, understood. Second question, you mentioned in the presentation that your exposure to the Turkish lira was about DKK 300 million due to debtors. But is there no offsetting lira exposure to creditors?
There is some, but we can see that the net exposures on our finance is this: we, of course, benefit from our local costs in lira, but it's minor compared to the numbers you see here.
But I think we should mention, in all fairness, that given the developments, we have started a dialogue with our customers, which was announced yesterday or the day before yesterday, mechanisms to neutralize the depreciation or appreciation impact in the payment period. Where that will end up remains to be seen, but we can see both some of our customers introducing that and some suppliers to try and mitigate or protect ourselves from the open position from invoice until payment. So again, we are in the boat together, our customers and us. And we want to make sure that the ultimate manufacturer or order giver is not having a windfall profit on account of us or our customers, but it's a difficult and tough situation to work through. But nonetheless, we have embarked on that road.
Okay. And last question regarding the Channel. It seems like there were some extraordinary costs -- ferry maintenance, et cetera. That looks to me like you are roughly DKK 50 million below on EBITDA compared to where you should have been, given the -- given what revenue you recognized. Is that the fair estimate?
Did you say 1-5?
No, 5-0.
On Channels?
Maybe you should -- that's -- the Newhaven-Dieppe route is also part of Channel now. I don't know if that can impact the margins you're looking at.
I think the maintenance -- the ship costs we're talking about is more in the DKK 10 million, DKK 15 million range.
Yes.
So -- and then pricing have been relatively stable on the Channel, maybe slightly down on the freight, but then up on the passengers. So there shouldn't be a deficit there.
Our next question comes from the line of [ John Eric Schmidt ] from [indiscernible].
Just a quick question regarding the Channel. You said you won market share there. How did you manage to do that?
You can say that it's a recovery from 2017, where we lost some market share, and it has been accomplished with a strong effort by our team on the Channel, but also some lag of capacity with our ferry competitor and some operational disruptions with the tunnel. But we believe that we have come back to a level that is sustainable going forward.
Okay. Because you said the pricing is stable, so there's no kind of like a pricing war going on, which means declining prices?
No.
It's a very tough and competitive market, but it's not irrational pricing as we have seen in the past.
Okay, right. And maybe one last question about Turkey. Do you think the margin profile is going to change due to the imbalance between imports and exports? Or is that not going to influence at all?
I think it will be impacted for a while, while this situation will be normalized. I think we have to and we have factored that in our guidance here to a certain extent.
Okay. Because you said that you don't think -- even though it might normalize the currencies, that you don't think the imports are going to come back to the same level as they used to be.
We don't think it will be a 3-, 4-week quick fix and then they are back. There are some structural issues in the Turkish economy. This whole situation, political disputes, et cetera, has triggered that. So instead of getting it in 18 months or 12 months, we are now getting it now. And there will be some adaptations taking place in the Turkish economy, an improvement of the balance of the deficits on the trading, current accounts, et cetera. And the economy will work through those issues. And then thereafter, we'll see an improvement -- may even be an export-led recovery, given the higher productivity and the integrated trading Turkey has with the EU and the very then favorable, from a biased perspective, Turkish lira rate. But we will see some months we are sure where this will have a negative impact. At least, that's our starting assumption.
Our next question comes from the line of [ Deiter Todt ] from [indiscernible].
The first question on Brexit. Just to get your views on this European Commission plan to bypass U.K. and French ports for Irish freight. Most Irish freight, as you know, at the moment goes toward Calais. Is that going to impact you?
If that were to happen since we're operating there, you can say yes, potentially it could impact us. But we have routes on the North Sea where we could pick it up. Or if it really materialized, we would have to, you can say, redeploy some of our tonnage. We're operating also in Ireland both on the logistics side and on our smaller container vessels side. So we would adapt to that situation. But I think, right now, everybody is in planning mode for both a hard Brexit and a soft Brexit. So there are lots of plans floating around. Our main scenario is that we'll have much more discussion and big headlines, and it will be dramatic. But at the end, we expect people will come to their senses and a conclusion, a result, will be achieved. But in case it's not, then we have our plans for how we are going to react, and we are already preparing now.
Can you give us a bit of color on that, on those plans?
Well, for obvious reasons, we will not sort of go into detail, but it's being able to handle trailers standing for a longer period in the terminals. It's on the systems side. It's in a number of different areas, partners we are working together with. It's on the staffing side. So we are ready if this unfortunate hard Brexit situation were to occur.
Thank you. And as there are no further questions registered at this time, I hand back to our speakers for any closing comments.
Thank you, everybody, for joining. Thank you for the good questions, shedding some light over the situation. We look forward to talking to you again when we come to Q3. Thanks a lot, and have a great day.