DFDS AS

CSE:DFDS

Earnings Call Transcript 2021-Q2

[Operator]

Hello, and welcome to the DFDS Q2 Conference Call. [Operator Instructions] Today, I'm pleased to present Torben Carlsen, CEO; and Karina Deacon, CFO. Please begin your meeting.

[Torben Carlsen, President, CEO & Member of Executive Board]

Thank you very much. And as usual, Karina and I are joined by Søren Brøndholt, our Head of Investor Relations. First, let me apologize for the delay. The provider of the call had provided a wrong PIN code, which we deeply apologize for. But hopefully, many have now been able to join anyway. Strong freight performance offset lag in passenger pickup is the headline on Page 3. The quarter saw a significant recovery of freight earnings compared to the 2020 lockdowns. Mediterranean continued its strong performance on the back of good volume growth between Turkey and Europe and the effects of operational improvements. There was, in the quarter, a positive impact from our new Irish route from agreements with the U.K. Department for Transport and the newly accelerated customs clearance services that we provide. Passenger volumes, unfortunately, strongly impacted by travel restrictions in Q2. To the right of Slide 3, you see the graphs, the solid black line, with the volumes of freight, which is a very positive development. And then, of course, the blue line showing how the passengers have continued to perform very bad, even in July volumes significantly below July 2020. Turning to Page 4. I'll hand over to Karina for more details on the numbers.

[Karina Deacon, Executive VP, CFO & Member of Executive Board]

Thank you, Tom. And we all know that Q2 '20 was significantly impacted by the lockdown. So when we compare the numbers there, we do see solid increases in all our numbers, so revenue up 51% and EBITDA up 77%. So we, of course, also compared to the more normal 2019. And there, we didn't quite reach the same level. But if we look at the underlying number, this was all due to the missing passengers. If we look in 2019, the passenger business across the BUs contributed with DKK 369 million. So if we adjust for that, we have a significant increase in the freight business also compared to '19. The underlying numbers are an improvement in volumes compared to 2020 of 32%. But if we compare against Q2 '19, we also there saw an increase now of 5.5%. In addition to the volumes growth, we saw strong results in BU Med in North Sea, and we also benefited from the new Rosslare-Dunkirk route as well as the DfT agreements. Auto and Logistics, we saw improvement following the uptake in volume compared to Q2. And when we look at the last passenger contribution, it was actually a slight improvement compared to Q2 '20, mainly due to more passengers on the Baltics, but also due to tax-free sales on the channel. But we should, of course, be -- have in mind that the total passenger area is still loss-making with DKK 70 million in the quarter. If we turn to Slide 5 and look at the P&L revenue improvement. That was, of course, mainly due to the increased volumes, but we also benefited in general from new routes, the agreements with the Department for Transportation, and there was also an increase in the bunker surcharge following the higher oil price. Moving further down in the P&L. Depreciation increased following new charters. But even so, our EBIT increased significantly to DKK 393 million. Special items, relatively small amount relates to an accounting gain of the sale of a small rural ferry. So all in all, when we look at the bottom line, our profit after tax before special items was almost DKK 300 million compared to the loss we saw in Q2 2020. Turning the page, a few words on the capital side. Tangible assets increased. That was due to the addition of new builds and some charter ships. Looking at the cash flow, we had a significant improvement in adjusted free cash flow. It improved from DKK 100 million Q2 2020 to more than DKK 600 million in this quarter. We did have positive working capital contributions. Because of the increased activities, we did see both receivables and payables increasing. But the net effect was higher payables, particularly due to the increase in oil prices. If we look at our net interest-bearing debt, it was reduced. And with the improvement in our LTM EBITDA, we saw the expected reduction in our leverage to 3.6x EBITDA, and that was a continuation of the trend we saw in Q1 and also continuing down from 4.2 at year-end. Same picture goes for ROIC. There was also a continuation of the improvement we reported in Q1. So now we are at the 5.6%, of course, still missing the contribution from our passenger business. Turning to Slide 7. Looking into the Ferry Division, the improvement of DKK 373 million was particularly driven by BU Med as well as the North Sea. North Sea saw volume growth of 36%, supported by investments in new and more efficient capacity, plus also the benefit of the agreements with DfT. This agreement came to an end at the end of June. So we will not see that anymore in the numbers going forward. Baltic Sea, a slight reduction in EBITDA. We did see a positive impact of higher volumes. Volumes increased 19%. However, it was more than offset by higher operating costs, including an increased bunker charge. Channel, a lot happened in the Channel this quarter. We benefited from the new route we mentioned a couple of times as the DfT agreement. But the most encouraging was to see the uptake in duty-free sales. We, of course, mainly have a truck driver still, but there's continued interest from the truck drivers, and it continues at a high level. We, of course, still need passengers to return to assess a sustainable level of the duty-free sales. If we turn the page to Slide 8, then looking at BU passenger, we had a decline in EBITDA. That was basically because of the OFC route where we had hardly any revenue in Q2 '21 due to the lay-up of both vessels. Last but not least, Mediterranean continued, now the fourth quarter in a row, with very positive results, benefiting significantly from the increased volumes. You probably recall that Q2 '20 was significantly impacted in BU Med of the lockdowns. But also benefiting, of course, from all the efficiency measures and operational improvements that we have seen the last year. Finally, a couple of words on Logistics. You might recall that we had a relatively slow start to Q1 after Brexit. But at the end of Q1, we saw strong results and that continued into the beginning of Q2. However, during the quarter, the results were increasingly showing the impact of increased haulage and equipment costs and also the driver shortage, particularly in the U.K. So this is an issue that we are monitoring very closely and trying to solve to the best possible way. If we look at the regions, even with these difficult market conditions, we saw Nordic up DKK 17 million as the Swedish automotive activities recovered compared to 2020. Continent, they were on level. We did see recovery in the Netherlands. But we still have some challenges in our Belgium operations, partly impacted by imbalances in the freight or in the traffics.Finally, U.K., Ireland, up DKK 14 million, improved cold chain results and also the continued positive impact from our customs clearance activities. That concludes the review of the financials. So back to you, Torben, for some comments on ESG.

[Torben Carlsen, President, CEO & Member of Executive Board]

Thank you very much, Karina. This quarter saw the introduction of quarterly ESG reporting from DFDS. First, on environment, we have a number of emission-reducing initiatives ongoing across our various logistics businesses. Some of them are listed in the blue box to the right. A couple of highlights. We will have a green ferry on the waters by 2025. That's at least the ambition that has been given to a dedicated team and group to deliver where we have collected all the brains and experience to successfully launch this green ferry in 2025. We'll start electric truck operations in August, together with Volvo and in the first instance also servicing Volvo. And we expect the number of electric trucks to expand in our fleet over the fall. The electric trucks have less capacity, cargo capacity, but customers are willing to pay extra to make sure that we move in the right direction environmentally. And of course, DFDS is supporting and spearheading that effort in many instances. On the social side, our female land hiring ratio is increasing and this first half year reached 39%. We have a goal of having at least 30% female colleagues. And that's, of course, moving closer with a hiring ratio of 39%. It's not just about the percentage, it is also about getting more females at higher positions. And that is, of course, a longer haul, but one we are fully dedicated to. We have launched for all managers and all colleagues a diversity and inclusion toolbox to address biases and ways to make sure that we attract the right applicants, that we promote for the right reasons and for the right skills. In terms of governance of our ESG efforts, we have a range of initiatives and each EMT member has individually been assigned responsibility for reaching the goals. And that, of course, includes myself and Karina.Moving to the 2021 outlook then on Page 12. You can see that the outlook is unchanged, DKK 3.2 billion to DKK 3.6 billion, which we launched in April. Since April, freight has performed well above our own forecast. The upswing has been offset from the fact that we don't see any anticipated passenger pickup versus 2020 at this stage. And we also see a later consolidation of the HSF Logistics Group passengers. Originally, we thought there would be a pickup of around 40% or DKK 400 million from the loss in 2020, the DKK 1 billion loss. After Q1, we said that we expected it now to be DKK 250 million or 25% pickup. Now unfortunately, we can see that there will not be a pickup in 2020, especially July and August have been disappointing. But we do expect some return towards the end of the year. But net-net, it will be at the same level as 2020, so short DKK 1 billion compared to 2019. HSF Logistics Group is now consolidated a couple of months later than originally thought and that will impact EBITDA negatively by around DKK 50 million. Those 2 negative effects, as said in the first bullet, is outweighed by the fact that freight is performing better than expected, and therefore, the outlook stays the same. There's still some uncertainties in the outlook around the pickup in travel and also a potential impact from a new ferry competitor on the channel. And as mentioned, the HSF Logistics Group is now expected to be consolidated during September. Moving to Page 13, some more details around the outlook. Has changed a little bit between our 2 divisions as Logistics is negatively impacted by the delay of HSF. And then to stay in the same range, of course, Ferry Division has been upgraded slightly. But no major movements and net no movements at all also on the top line. And the investment side, we achieved our outlook. So moving to Page 14. What's next for DFDS? We will move swiftly to integrate the HSF Logistics Group successfully once we get the approval. We have planned well and are ready to move. We'll continue to pursue the post-Brexit opportunities that you've already heard about, customs clearance, duty-free, make sure that the new routes continue to perform satisfactory. We have, as we talked about last year, made a more firm commercial structure. We start to see some organic commercial wins and gains, and we need to continue with that. Some passengers have been negatively impacted by the congestion, lack of drivers, et cetera. That, of course, impact also our ratings with the customers and we need to make sure that we restore that. Of course, others are hit by the same development, but we will not let us hold back by that. And part of that is to manage the truck driver shortage, particularly in the U.K. We have a SWAT team working from truck to truck and driver to drive to restore capacity so that we don't have to turn away customers, especially on the Logistics side, and we are beginning to see some progress. And then, of course, our service-minded staff are all prepared to the return of passengers in larger numbers so that we can see the impact of the adjustments to the cost base and the product offering that we implemented during 2020. So before passing over to Q&A, in summary, we are, as DFDS, well equipped for the challenges ahead, of which driver shortage is top of the immediate action list. Our freight business has demonstrated resilience through Brexit, Turkish currency crisis and the pandemic. Passengers' return is delayed but this will pick up during the next quarters. And together with the addition of HSF, this repositioned DFDS as strong as ever. So with this little intro, over to Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Dan Togo from Carnegie.

[Dan Togo Jensen, Financial Analyst]

One at a time here. Firstly, if I'm not totally wrong, we could potentially have been looking at a lift of guidance of more than DKK 300 million had it not been for the passenger part and HSF being postponed. Could you give some wording on where it is in particular that you've seen stronger-than-expected development? I guess it's relating partly to North Sea and the Med, but some more flavor would be nice.

[Torben Carlsen, President, CEO & Member of Executive Board]

You are correct that the Med has continued to see the benefits of a lot of operational initiatives implemented in the previous quarters. And then, of course, also a very stable development in trade with the EU has supported a better-than-expected development in the Med. North Sea, we have seen volumes continuing strongly. And as we also mentioned, we've had some support from making capacity available for Department for Transport. On the channel, we are also better than expected with -- despite the lack of passengers, we've seen good market share and relatively okay volumes compared to our expectations. And the new routes and new activities in the Channel has helped as well and probably to a larger extent than we expected.

[Dan Togo Jensen, Financial Analyst]

Can I ask about the initiatives in the Med? Are we at the end of the road here or just in the start of the journey, so to say? So is this just gaining pace and so the momentum will continue? How should we look at it?

[Torben Carlsen, President, CEO & Member of Executive Board]

It's -- we risk that our colleagues listen in as well. So we don't want them to give the idea that the journey has come to an end. They continue to work extremely hard on improvements. We still have challenges operationally, especially in the Trieste region with too little space. We try to manage the demand on different routes, different destinations. And with the volume increases we see, we may also have to add more capacity to the region in terms of tonnage with some of the challenged routes. So hopefully, we haven't seen the last of this. We are very much focused on delivering a service to the customers that live up to the demand. As you know, the main competitor here or the only competitor is the road and the road don't fight back. So it's simply a matter of having the right frequency and service level to gain volume.

[Dan Togo Jensen, Financial Analyst]

And then a few more specific questions regarding DfT. How much is the impact actually here in the first quarter? How much have you received from DfT? That's the first one. And the other one relating to HSF. You say the impact here is around DKK 15 million negative in the guidance, but then you take Logistics down by DKK 100 million. So what is the remaining EUR 50 million?

[Karina Deacon, Executive VP, CFO & Member of Executive Board]

Let me give a go then on the DfT. We haven't stated the specific amount, but it's fair to say that it's a substantial double-digit amount in million that we have in Q2. It's the same amount as we had in Q1. And as I said, it finishes now. So now we are on our own from that perspective. On the HSF, it is -- if you are asking for the exact numbers, it's actually DKK 63 million that we take out from the 2 months. And then it's a question of rounding. There's no specific -- instead of giving an odd number, we said, okay, then we take it down, too. And then maybe you could say, okay, that's DKK 27 million too much but -- for DKK 37 million. But anyway.

[Dan Togo Jensen, Financial Analyst]

Understood. Understood. And then just a final question here on ESG, then I'll leave the floor to others. On the ESG side, what kind of propulsion or fuel are you aiming at for this zero-emission vessel that now seems to be a freight carrier rather than cruise ship. So what happened to the cruise ship plans you had? So 2 questions, propulsion or fuel, and then what happened to the cruise ship plans you have?

[Torben Carlsen, President, CEO & Member of Executive Board]

In this presentation, I just call it a ferry, I think. But we don't know exactly what ferry it will be. There are 3 elements that we need to solve for to accomplish this. One is to have the technology on the ferry building side, so having suppliers, having the engines, et cetera, that work with green fuels. And the second is to have availability of green fuels. And the third, of course, to have customers who want to be part of this journey. And those are the elements we are working on. In terms of what fuels, it will then be the earlier we succeed, the more it's probably going towards some methanol in the first instance. But we believe a little bit longer term that hydrogen and...

[Soren Brondholt Nielsen, Vice President of Corporate Communications & IR]

Ammonia.

[Torben Carlsen, President, CEO & Member of Executive Board]

Ammonia will be very interesting alternatives. And we have also entered partnerships with a couple of passes that expect to have hydrogen respectively, ammonia already in the 2025-2027 time frame. But of course, a lot of questions are outstanding here, and that's why we had to launch a dedicated department to make sure that we do all that is possible to progress in this area.

[Operator]

And the next question comes from the line of Casper Blom from ABG.

[Casper Blom, Lead Analyst]

A couple of questions from my side also. Tom, you mentioned the increasing competition on the channel. And I suppose that a lot of your customers right now sort of want to live up to the frame agreement they have this year and maybe receive some bonuses -- volume bonuses later in the year. So how do you prepare for that increase in competition when you look into 2022? Is there anything you can do about it? Or do you just have to see how things pan out? That's the first one, please.

[Torben Carlsen, President, CEO & Member of Executive Board]

We have a very strong product on the channel with some unique selling points that are hard to match. For example, the fact that we also have the Dunkirk route or line. We have built relationship with these freight customers for many, many years. So we are quite confident that the strong product, the strong presence and the customer service setup we have will protect us. Competition pops up from time to time in different places and we just have to focus on our own product and our own service. And there, we were just, Karina and I, with our colleagues from EMT on the -- in Calais and Dunkirk the week before, and the team is completely confident that they will be able to maintain a very strong market share on the channel. We have had, you can say, before we learned of this new competitor, we have been very much focusing on how can we strengthen the ferry product against the other competition down there, which is the tunnel by increasing capacity and frequency for our customers. And we are going live with this capacity-sharing agreement with the P&O in October. So that's really where our effort is to see how we can make the ferry product even more exciting and more attractive for the freight customers.Then we'll have to see what this new -- we haven't seen -- the new competitor has one vessel and has picked up, as far as we understand, very few freight units so far.

[Casper Blom, Lead Analyst]

Okay. Do you have any insight to what they are offering clients, customers? Is it merely a price offering, a lower price offering that they come with? Or do they have any other weapons in a sort of attempt to attract customers?

[Torben Carlsen, President, CEO & Member of Executive Board]

I -- we don't know. We don't have any insight to that. We can only see the vessel. And we can see that our equipment is more than competitive and we'll take it from there. And of course, with the launch of our new ferry, which replaces Calais Seaways, we have 2 to 2.5x the freight capacity on that new variant, and the fuel will be around the same as for the old ferry. So we have significant unit cost reductions, of course, also as we start operating and competing.

[Casper Blom, Lead Analyst]

Fair enough. Then I'll jump to the passenger business. Obviously, it's a little bit of an unfair question because no one knows exactly how all this will pan out. But what are sort of the longer-term assumptions that you work with for the passenger business when looking into '22, '23, '24? Do you want to share anything on sort of when you expect things to be back to 2019 levels? Or if you would expect that it never will be back to '19 levels?

[Torben Carlsen, President, CEO & Member of Executive Board]

Well, we're maybe not the best to ask after, for the third time now, have been wrong on our projections on the return of passengers. But...

[Casper Blom, Lead Analyst]

But I'm still interested to hear what you assume.

[Torben Carlsen, President, CEO & Member of Executive Board]

We definitely believe that the passenger business will be back. I personally do not think that in '22, we'll be back to '19 levels. Especially on the Oslo-Copenhagen route, we have been relying a lot on overseas customers and passengers. And as we said last year, there's probably a need for a year where things to normalize before these customers are back. But when it comes to European travel, we expect to be very close to normal in the high season of '22. But of course, we will learn a lot as the next month passes. Norway needs to relax a little bit their grip on their population for this to happen. And French -- France needs to become more successful in convincing their countrymen that vaccines are good. And then it seems that, without being too scientific, that maybe the AstraZeneca has not been as effective against the delta as the newer, what are they called, RNA vaccines. So it's also an assumption that between now and June next year, England has, of course, gotten the virus under control. And once these things have happened, then, of course, countries need to ease the restrictions. With all the uncertainty we have now, it's too uncertain to travel. You don't want to get locked down or put in quarantine in a country that is not your own. So there are a number of uncertainties there. But we are quite -- mentally reassure people who will want to travel once it's easy to travel again.

[Casper Blom, Lead Analyst]

Yes. Fair enough. And then my final question, and apologies if you already touched upon it, my line fell out at one point. But the acquisition of HSF and the delay in closing of that deal, could you talk a little bit about what is causing this delay as opposed to the competitive authorities? But what is it they're asking for? Why is it dragging out? And is there any risk that this will not go through as you initially expected it?

[Torben Carlsen, President, CEO & Member of Executive Board]

The authorities in EU have been very thorough in the questioning. And one of the successes of EU is, of course, that you can move goods across borders without too much registration. But now you want us to say what our market shares are in different places where there's maybe not good statistics. Their concern -- they don't mention what their concern is. But through the questions we receive, it looks like they want to make sure they understand the relationship between our Ferry business and Logistics business, especially maybe in areas where we have very strong ferry presence to make sure that customers are not negatively impacted by us expanding in the logistics side. But that's, of course, how our business model has been for the last 20 years. So we are aware of how we need to deal with the logistics customers and our Ferry business and the margins. The underlying economics are such that it makes much more sense for us to have a third-party ferry customer than to somehow do something to get them to stay away to get our own logistics, low-margin logistics business on board. So we think that they will also come to that conclusion. There's not a risk of the deal not going through, but of course, it can drag out for some reason.

[Casper Blom, Lead Analyst]

If I just may follow up, have you got any impression to how the HSF has developed on its own? I suppose it's always a little bit tricky when a company is in this kind of limbo for such a long time.

[Torben Carlsen, President, CEO & Member of Executive Board]

Yes, that's very concerning. And it's not good for a company that for 7, 8 months have been waiting for an event that has been delayed. So -- but they -- we don't have all the details. But of course, we are planning for the integration. We received some 2020 numbers, and they are performing as we expected, it looks like. And we'll, of course, look into more details, hopefully, already in September in that as well.

[Operator]

[Operator Instructions] The next question comes from the line of Ulrik Bak from SEB.

[Ulrik Bak, Research Analyst]

Torben and Karina, also a few questions from my side. In terms of freights, you mentioned in the report that congestion and shortage of truck drivers and equipment have affected your business in Q2. Can you maybe just elaborate a bit on whether this has had any effect on your ferry volumes or whether it's just in the Logistics part of the business, but also looking ahead, as you mentioned that it will linger in Q3 as well. And also if it has had -- what the implication has been on your earnings in Q2?

[Torben Carlsen, President, CEO & Member of Executive Board]

Yes. One of the reasons we made the rounding that Karina talked about before was probably also that Logistics have been impacted the recent weeks from this -- from these extra costs that they are incurring. Because one thing is, of course, you lack drivers and that -- then you lose revenue. But you also increase your cost because the turnaround times for your equipment increases and the cost of equipment then goes up. So there has been some impact because the demand is there. And it's, of course, heartbreaking for our logistics colleagues not to be able to pick up all the demand that is there. As I mentioned, there is a SWAT group working on fixing this. And we are doing that step-by-step, driver-by-driver and truck-by-truck, as I said, to correct the challenge. In terms of the impact then on ferry, it seems that somehow freight managers to get to the port even if our logistics is not there. And it's not necessarily that the large logistics companies are doing better than the smaller, or it's a little bit how they've been positioned in terms of owning their own trucking, et cetera, et cetera, where those with more owned trucks have performed better and have picked up business from others. And that's, of course, a good thing for our Ferry business. Where the Ferry business has probably softened a little has been from especially in the automotive industry with the lag of chips with very short notice. Factories have been shutting down. Maybe 1 week they say now we're confident we have the chips we can produce. And then 3 weeks later, all of a sudden, it comes to a hard stop. And that's happening throughout the system. And that's, of course, costing some challenges here and there. But luckily, most other sectors are doing extremely well as you can see from our total volume numbers. I don't know if that answers most of the questions you post there.

[Ulrik Bak, Research Analyst]

Yes, yes. That's all right. But then second question, when you reported your Q4 report, you said that you expected low single-digit negative freight volume growth in 2020 versus 2020. Given your very strong performance in freight in Q1 and Q2, can you provide an updated estimate for this full year estimate?

[Torben Carlsen, President, CEO & Member of Executive Board]

It is -- we -- I don't think we haven't updated volume, not at least at hand, but it will be a positive volume growth compared to 2020 now. What happened in Q1 was, of course, that the effect of the store inventory building in Q4, we had expected that Q1 would be a lot worse than -- or especially January, February was a lot worse. But already in February, we were back to previous years. So we -- now we definitely see a positive volume development in '21. And we may even see a little inventory building towards the end of the year as the next round of Brexit comes into play.

[Ulrik Bak, Research Analyst]

Okay. So what about Q3 and Q4, you expect to be able to deliver positive growth there?

[Torben Carlsen, President, CEO & Member of Executive Board]

Q4 is -- was very, very strong volumes last year. So -- but the 2 quarters combined, yes, positive growth.

[Ulrik Bak, Research Analyst]

Okay. Very clear. And then my final question is on this duty-free sales. You improved the EBITDA of passenger activities by DKK 4 million year-over-year. And you're right that this increase is mainly a result of the duty-free sales. And that's despite having roughly 50% fewer passengers on the Channel routes during Q2. Can you maybe disclose how much sales has changed per passenger compared to before Brexit and what your average margin is in this business?

[Karina Deacon, Executive VP, CFO & Member of Executive Board]

We should bear in mind that it is truck drivers, so it's not representative for all passengers. But what we see is that this average spend per truck driver has developed from around EUR 2 up to just below EUR 20, meaning that they take basically their full allowance of what they're allowed to take under the duty-free rules. Our margins, we're not disclosing the exact margins, but obviously, there is a good healthy margin on things like that varying, depending on which type of goods it is. So the numbers are not huge in Q2 yet. But as you know, the revenue was not huge either. So just the fact to have a small income was a positive on the duty-free. But obviously, it's something that when we welcome the passengers back, that we are monitoring very closely. We don't expect that the amount will be as high as the truck drivers per passenger. But still, there is a big difference between the 2 and then up to EUR 15, EUR 20 as we see now.

[Ulrik Bak, Research Analyst]

Okay. Very clear. And those margins, you say healthy margins, is that closer to group average? Or is it closer to Logistics average margins?

[Karina Deacon, Executive VP, CFO & Member of Executive Board]

Are you -- you can say they're higher, much higher than Logistics. That would be a fair assumption.

[Torben Carlsen, President, CEO & Member of Executive Board]

Closer to group average. Yes.

[Operator]

And as there are no further questions, I'll hand it back to the speakers for closing remarks.

[Torben Carlsen, President, CEO & Member of Executive Board]

Thank you very much. Thank you very much for the good and energizing questions. We look forward to talking to you again when we release next quarter's results. Have a good day.

[Operator]

This concludes our conference call. Thank you all for attending. You may now disconnect your lines.