DFDS AS

CSE:DFDS

Earnings Call Transcript 2022-Q2

[Operator]

Welcome to the DFDS Q2 conference call. [Operator Instructions] Just to remind you, this conference is being recorded.

Today, I am pleased to present to Torben Carlsen, CEO. Please begin your meeting.

[Torben Carlsen, executive]

Thank you very much. Good morning, and welcome to DFDS' Q2 2022 Conference Call. I am, as usual, joined by Karina Deacon, our CFO; and Søren Brøndholt, our Head of Investor Relations.

We delivered excellent Q2 results across all business units and, as you know, raised the EBITDA outlook already in July. This is the result of solid efforts across the organization to continuously improve and adapt our customer offerings to market changes. We're also strengthening our offerings and gaining scale through acquisitions, the latest one being Lucey Transport Logistics in Ireland.

Let's take a closer look at the quarter. As the headline sales, again, excellent Q2 results. And let me provide a little insight for these numbers.

Passengers are coming back faster than we expected. And they spend more money than they did in '19. We see a strong logistics growth, with margins restored by a concerted effort throughout the Logistics division. Our Channel market share is holding up relatively well as the competitive situation evolves in that market. Our financial leverage, we can now see we'll enter the policy target range of 2 to 3x during second half of the year. The macro uncertainty that we see in the world driven by war in Ukraine and inflation may or may not tip Europe into recession in '22 or '23. We'll come back to that later.

Turning to Page 4. As mentioned, it was all business units that contributed to the result, which is, by the way, an all-time high quarterly result for DFDS. Our revenues are up 67%, EBITDA up 63% to now DKK 1.46 billion. Ferry freight EBITDA is up 13% to DKK 948 million, driven by Mediterranean growth and higher North Sea earnings. The Passenger EBITDA, and here, we count all Passenger revenues regardless of business unit. It's up DKK 325 million to DKK 255 million, whereas we had a loss of DKK 70 million in 2021. The Logistics EBITDA more than doubled to DKK 274 million through improved cost coverage and the HSF acquisition.

I'll now turn over to Karina for more details.

[Karina Deacon, executive]

Thank you, Torben. Let's look at Slide 5, where we have the split of the revenue increase of 67%. As mentioned a couple of times now, the revenue from Passengers went up quite significantly. We were, compared to 2019, at index 71 in terms of volume of passengers. And together with the fact that they spend more added DKK 642 million to the revenue number from last year.

Also in the freight ferry business, we saw increased revenue. It was a reflection of volume growth of 4%, but that's certainly also positively impacted by the stronger surcharges as the oil price increased significantly, as you all know, in the second -- or yes, in the second quarter.

Logistics, here split between organic growth and the growth from acquisitions, organic growth of equivalent to 15% derived from both new activities in logistics, warehousing and more custom services, et cetera, but also definitely showing the impact of the price increases and the surcharges that we have worked hard on and passing on to customers.

Acquisitions account for about DKK 1 billion and represents HSF and ICT Logistics acquired in January this year.

If we turn to Slide 6, a few more words on the income statement. We have already covered top line and EBITDA. So I will not say so much about that. I'll get back to the composition of EBITDA later. But the EBITDA grew 63%. And then when we look at EBIT, we grew that by more than 100%. So in this case, with the depreciation in line with what we saw in Q1, we actually saw the bottom line impact of the growth on top line that we were missing, not least in Q1. That also meant that when we look at right at the bottom of the P&L, profit before tax was up 135%.

Turning to Slide 7. Assets up relatively, a significant 18%, a true reflection of HSF but also the newbuilds that we acquired during the year. Looking at the working capital, decreased DKK 400 million. And then when we look at the operating cash flow, it was also positively impacted by a positive development in working capital.

So with no huge CapEx expenditures in this quarter, we saw adjusted free cash flow of around DKK 800 million. The strong earnings and the following cash flow improved our leverage. And now we saw a leverage of 3.3, which was a decrease from 3.7 at year-end and 4.0 after Q1, so following the trend that we had anticipated. As we've also stated in the outlook and as Torben mentioned, we do anticipate to reach the leverage target ratio between 2 and 3 by -- before the end of the year. And with the numbers we report here today, I feel confident that we will soon reach that target.

On ROIC, we saw an increase to 6.1% from a little bit more than 5% at year-end. Of course, it remains impacted by the Passenger business, which is not fully yet back in terms of an LTM basis. To a certain extent, also a lower level in [indiscernible]. But I think it's worthwhile mentioning that we've actually seen quite a good improvement in [indiscernible], which is now at 6.3% after Q2.

Turning to Slide 8. Relatively quick review of the business units, all improving compared to last year. North Sea, up 21% after growth in revenue and lower operating costs. Mediterranean continues to show the results we've seen now for many consecutive quarters, 13% (sic) [ 33% ] volumes in -- uplift in Q2. And now we have also seen improved results from the port terminals and the rail activities, and we have included the small acquisition of primeRail in the numbers here for Mediterranean.

On the Channel, we saw a doubling of earnings, and that was all due to the passenger activities. Volumes were up 10%, driven by the suspension from P&O of sailings through most of the quarter. But the EBITDA from freight was more or less on the level as higher cost and the ramp-up of Sheerness-Calais would offset the volume impact. And then we also had the one-off income from departments for transportation in the last year.

So looking at the passenger side, we were in -- on the Channel, index 67 compared to 2019. As we've talked about a number of times with the effect of duty-free sales earnings, they were significantly up and even above the result of the second quarter in '19.

Baltics, as expected, after the situation in Ukraine, volumes were down. We ended down by 18%. But still, we were able to improve EBITDA by 7% as we adjusted our cost level and the capacity, and we also saw higher income from passengers.

Finally, passenger of EU, so that represents the overseas Oslo-Copenhagen route and the Amsterdam-Newcastle, improved earnings significantly with the return. As you might recall, we didn't even sail on the Oslo-Copenhagen last year. And we saw an index of passengers here of 76 compared to 90. As you also saw this morning, we announced that July numbers and in July for the new passengers, we are now above 100, so very good news.

Going to Logistics on Slide 10. Overall, EBITDA from Logistics more than doubled, of course, with the help from HSF but also due to higher margins in the Dry Goods business. Dry Goods increased 76%. We had huge efforts in getting the surcharges and price increases in place, and we saw the result of that in the increasing margin.

We've also seen higher activity in areas like the customs and warehousing. And we also had a successful turnaround of one of our problematic areas in the Sweden-Belgium corridor. And generally, we saw actually high growth in the Netherlands.

Cold Chain, up DKK 85 million, and that was driven by the acquisition of HSF. The Nordic and German activities were pretty stable. But on the continent, we saw a slight decline in volumes due to disruptions in the European meat supply market due to the Ukraine war. But there was a significant focus on cost recovery and that meant that the overall results, they were as expected.

The only slight disappointment here in the numbers were related to our Cold Chain business in the U.K., where we see significantly lower volumes in the seafood business in Scotland. And of course, that impacts the overall results.

So with that run-through, I will give the word back to you, Torben.

[Torben Carlsen, executive]

Through the quarter, we continued our focus on reduction of CO2 emissions. And on the Ferry side, we accomplished a reduction of 4% during the quarter. We are now preparing for further shore power installations on 4 ferries later in the year. The preparations for our first eTrucks are progressing well, and we will start in Q4 with the electric trucks.

In terms of getting a green ferry on the water in '25, the most likely scenario now looks like a conversion of a convenient -- sorry, a normal ferry to an e-methanol dual-fuel ferry. We'll come back with more information on that relatively shortly.

In Logistics, we have spent a lot of quality time during the quarter to see what specific targets we should set for that business and have come up with that we will reduce 50% the emissions by 2030. But on an absolute level, which, of course, will put us under tremendous pressure to achieve large reductions as we foresee to continue our inorganic growth and logistics through acquisitions as well.

Turning to Page 13 and the outlook. We raised the EBITDA outlook in July, as we mentioned, and we further increased the revenue outlook today to 40%. The increase from the 35% mentioned in July to 40% is driven a lot by the high energy prices that we typically pass on to our customers. Passenger EBITDA is now expected to recover to 80% of pre-COVID earnings, whereas we previously had expected 60%. Our investments have increased some due to additional opportunities for investments and also the acquisition in Ireland.

Turning to Page 14. And our key current priorities remain organic growth, where we have been quite successful in Q2 on the back of the commercial focus that we first launched during -- or changed commercial focus that we first launched in June '20 during the COVID times and where we see significant traction. We need to continuously make sure, with the inflationary picture, that we also get the right prices for our services. We are still early days with the duty free and think we can optimize further there. The green projects that I mentioned have our full focus. And then we continue to see where there are opportunities to grow our customer offerings and network through M&A or inorganic activities.

With that, we turn over for questions.

[Operator]

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

[Dan Jensen, analyst]

Congrats with a strong Q2 here. But when I look into the traffic numbers, you also announced today for July, it is one of the more weaker observations we've had for a while now. Can you share some color here? Most markets are actually down traffic-wise. What are you seeing right now? And how should we approach the second half when we talk volumes? That's the first question.

[Torben Carlsen, executive]

Okay. Hello, Dan. The volume report was announced today, and the reduction of, I think, 6% is primarily driven by the Channel market contracting in July. We've seen some ups and downs in that market, which seems to be relatively volatile. So we are not ready yet to conclude that the contraction will continue in the market. As you know, volume-wise, the Channel is probably close to 50% of our volume. So when that market goes down, it impacts the overall volume report. But through the rest of the system, we see a relatively good support throughout. So it is a matter of whether this is a permanent situation in the U.K. or Channel market or not. And we cannot really conclude that. In terms of the market shares, we are doing fine in the general market.

[Dan Jensen, analyst]

But there have been no single incidents or something that could -- disruptions that could explain this development?

[Torben Carlsen, executive]

It's holiday season. And of course, you've seen disruption. And you have, of course, had a strong passenger period. So whether freight has chosen other avenues or have postponed certain things to avoid the traffic chaos, it's very difficult to say. So for us, there's not a consistent picture that can point to a recession has set in.

[Dan Jensen, analyst]

Okay. Good. Then on M&A, HSF, the impact here. Is that solely the DKK 80 million that we see in the Cold Chain? Or are there other effects we should be aware of just to get a feeling for what is the acquisition effect on EBITDA or EBIT for that matter? And also maybe some color on the synergies that you're getting here. How are they progressing? And what should we look out for? Have you changed your assumptions on that one?

[Torben Carlsen, executive]

The EBITDA is a mix of -- the improvement in Cold Chain is a mix of the HSF impact. And as Karina mentioned, the negative development in our existing Cold Chain. So the impact from HSF is bigger than DKK 80 million.

Karina, do you have the...

[Karina Deacon, executive]

Yes. The HSF contributes with roughly what we expected around DKK 100 million in the quarter in rough numbers. And then when you ask about the synergies developing as expected, we have relatively small numbers. We also knew that it was a ramp-up, but we have something like around EUR 1 million included in the result for Q2 from synergies. Some -- or many of the things we're working on has a lower ramp-up before they really materialize.

[Dan Jensen, analyst]

Yes. Good. And then on the Baltics, clearly, you have mitigated part of the impact from the war in Ukraine. First initial guesses, so to say, on the impact here was somewhere between DKK 150 million to DKK 200 million. It seems like it's going to be a lot less. How should we approach this? Can you give some more guidance here?

[Torben Carlsen, executive]

I think it's -- I don't know that it's a lot less, but it is probably distributed differently than we originally thought, whereas, as you can see, in Baltic, we've been able to mitigate. Then on the other hand, the inflationary pressure that comes from the war on energy, et cetera, et cetera, is impacting both us and also some of our customers in terms of supply chain disruption. So the impact is not showing as directly in the Baltic region. But it is, of course, a big part of the whole recessionary thing we are talking about throughout the system. So we cannot point to exactly where it's coming, you can say.

[Dan Jensen, analyst]

But can you give some kind of guidance? Are we talking about a 3 million -- 3-digit million number still in terms of negative impact?

[Torben Carlsen, executive]

Throughout the system, you probably are. But I think, as I said, it's -- Ukraine war has now turned into something a lot bigger in terms of the economic impact, right, because it's supply chain disruptions for customers. It's inflation. It's all of these things which naturally also impact the DFDS.

[Dan Jensen, analyst]

All right. Okay. Then just one final question from my side here on the bunker spreads. Where -- what is the impact from that here in this Q? And which routes benefits the most from this development?

[Torben Carlsen, executive]

The -- when you refer to the bunker spread, it's the spread between the MGO and the HFO, but -- and there have been a big volatility in both fuel types throughout the full year. And then you have the time lag. When the fuel goes up, the MGO then it's only impacting the surcharges the following month and vice versa when it goes down. So we probably do have a positive impact, or we do have a positive impact during the quarter, and it will be North Sea and, to a certain extent, the Baltic that typically would benefit in such a situation as this is where we have the biggest scrubber proportion.

[Dan Jensen, analyst]

And still the guidance that you made for 40% growth, which is primarily due to VAT or increasing fuel cost, that did not lead to any change because you just assume you get no benefit. Is that correct?

[Torben Carlsen, executive]

The last change from 35% to 40% has not prompted any changes to the EBITDA. And yes, that's correct.

[Operator]

Our next question comes from the line of Ulrik Bak at SEB.

[Ulrik Bak, analyst]

Also a couple of questions from my side, and I will take them one by one. Firstly, also on the bunker surcharge and the spread of it, what have you assumed about this spread for Q3 and Q4 in your current guidance?

[Torben Carlsen, executive]

We have assumed something around the current levels. So a relatively straightforward continuation of the current situation. Any swings in that would not put our guidance in jeopardy either way.

[Ulrik Bak, analyst]

Okay. All right. But -- and then a question on your guidance. Normally, we see in the pre-COVID world, we see Q3 being stronger than Q2 due to the passenger peak season. And if I factor this into my spreadsheet, the low end of the guidance and even the midpoint looks quite conservative, in my view. Can you perhaps elaborate a bit on the assumptions you have made in your guidance for the second half of this year?

[Torben Carlsen, executive]

We, of course, want to make sure that when we make an upgrade like this that we also deliver on that. Have we seen certain developments in the meantime that could skew us towards the lower or the higher end of that? Passengers, a continued strong rebound, maybe the recessionary clouds have become slightly more gray than they were, on the other hand, 2 or 3 weeks ago. So when we look at this, we think that the guidance reflect that. And it's still a fairly wide spread that we have in the guidance that things can move a little bit up and down, and we are still safe.

[Ulrik Bak, analyst]

Okay. And then my third question on this duty-free sales that you've had in Q2. You previously mentioned a spending level per passenger of around EUR 20. Can you confirm that that's the level that you are looking at? Or is it even higher than that?

[Karina Deacon, executive]

If you recall our discussions over many quarters, I've said many times, or we need to see more passengers before we are able to really say something about it. And I think we have now seen a number of passengers return. And we didn't quite see the spending in the magnitude that we saw from the drivers. So the amount that you are saying up to EUR 20, we haven't seen that when we now have the passengers on board. We haven't lost our optimism about getting it up to what I've talked about before EUR 18, EUR 19, but it's not what we see at the moment.

[Ulrik Bak, analyst]

All right. And any initiatives to try to -- to increase that spending level, what are you planning?

[Karina Deacon, executive]

It's very small thing, very operational things on the vessel itself about where do drivers buy their stuff, where do other passengers buy their stuff and how things are set up in the shop, et cetera. So it's very worrisome.

[Operator]

[Operator Instructions] Next question comes from the line of Ruairi Cullinane of RBC.

[Ruairi Cullinane, analyst]

I was hoping you could talk a little bit about the drivers of the very strong freight volume growth that you're seeing in the Mediterranean. And I'm interested in whether this can continue and even compound next year.

And then secondly, given you sort of highlight recessionary risks, could you just talk about which sort of business units may be sort of notable growth drivers in 2023, if it is a weaker macro backdrop?

And then finally, should we be expecting -- what kind of uptick should we be expecting in net interest as a result of high interest rates and you're floating rate debt?

[Torben Carlsen, executive]

Ruairi, you are falling out a little bit, but let me try the first couple of questions. And then Karina can talk about the interest.

Turkey or Mediterranean, we are seeing strong growth, and there are no indications that it shouldn't continue. When we discussed with the business unit, they are looking for more tonnage rather than less tonnage. But of course, as we all know, the Turkish economy is a difficult one to interpret, but export seems to continue its very strong momentum also, of course, given the -- probably the drive towards more regionalized production.

I think your next question was where would we mostly see impacts from a potential recession.

[Ruairi Cullinane, analyst]

Sorry, it was -- since I wasn't that clear, it was actually -- if there is a recessionary environment in 2023, sort of what business units would you highlight as growth drivers? I guess perhaps there would be a further passenger recovery you'd be hoping for next year, maybe the Mediterranean. But interested to hear your thoughts across your business.

[Torben Carlsen, executive]

Growth drivers in a recessionary environment, there's a very high likelihood that Mediterranean would hold up well. We have a lot of -- given our relatively small market share in Logistics, I would be very confident that we would be able to continue our good development in Logistics by gaining larger shares with existing customers and new customers and connecting more networks as we've done during this year. And in the opposite if the recession gets a firmer grip, North Sea routes could be the ones that could feel the impact, especially if it's a U.K. situation. But all in all, we will, of course, use the levers we've used before to also adapt the capacity.

I don't know if that answered those 2 questions, Ruairi.

[Ruairi Cullinane, analyst]

Yes, that's very helpful.

[Torben Carlsen, executive]

Then Karina can talk about whether we have any interest risk.

[Karina Deacon, executive]

Yes. I won't call it a risk as such. But of course, you're right. When -- with floating rates, we also foresee a slight increase in the interest rate. If we look into next year, it could be to the tune of maybe DKK 50 million, but it's something that we're currently looking into more details around. And we also have some bonds that expires this year, and we're looking how to refinance them. So I think I'll be able to come back with a little bit more detail on that after the next quarter.

[Ruairi Cullinane, analyst]

Okay. Actually, since I was the final question, I was hoping I could ask one more and just quite a broad question. But since it's been some time since your 2018 Capital Markets Day and you're sort of continuing with these Logistics acquisitions and there are also sort of media reports about a potential sort of acquisition in Turkey, perhaps you could just sort of remind us of the strategic rationale of these Logistics bolt-ons and acquisitions in a bit of detail. That would be great.

[Torben Carlsen, executive]

Certainly, Ruairi, you're right. It is a while since our last Capital Market Day. Søren has been starting to air whether we should plan another one next year. So we'll come back on that.

In terms of the Logistics expansion, we are seeing both the Logistics expansion as complementary to our Ferry network. You've seen strong synergy potential on the HSF, for example, with a number of -- or volumes that could be shifted to our Ferry network. We see that with our strategy to grow with customers performing more services for them, Logistics is an avenue into the contract logistics or the warehousing, which puts us closer to them in terms of also gaining their transport work, both on land and on sea. So it is really a network philosophy to have a strength throughout and the 2 businesses complementing each other and supporting each other in the growth avenues.

The focused commercial strategy that we launched in 2020 had a lot to do with that. And it's in that area, we see a lot of the organic growth now coming where we go to customer with an end-to-end solution. And we participate in tenders that we were not invited to before because we were just maybe an appendix with a ferry route, but now we can offer the whole solution.

But we will come back with more details and, of course, also examples of how this works well together.

[Operator]

We have one further question come through, a follow-up from Ulrik Bak at SEB.

[Ulrik Bak, analyst]

Just a follow-up question on your '23 target of 10% return on invested capital. I noticed that your invested capital increased during this quarter. And that also implies that the EBITDA absolute level for '23 should be north of DKK 5 billion according to my calculation, at least. Would that be a realistic target if we enter a recession?

[Torben Carlsen, executive]

I think we've talked about an ambition of 10% and the target of 8%. The answer, it's a little bit -- if you just asked if it's realistic to end at DKK 5 billion, I'd say yes. If there is a deep recession, will we likely be impacted? Of course. If it's a surface thing that impacts some here and the economy gets going again, then we have not negated on our DKK 5 billion goal. So -- but of course, the macro can be so hard that is not happening. And I don't know what is implied in your question on that. But with the things continuing as they look now, DKK 5 billion is absolutely within reach.

[Operator]

And as there are no further questions at this time, I'll hand the floor back to our speakers.

[Torben Carlsen, executive]

Thank you very much. And thank you very much to everybody for joining the call and your challenging questions. As you can hear, we are pretty confident about achieving a strong '22. And as was also alluded to here, the first thing would be a high-growth Q3 quarter. If activity levels slow down in parts of our network later in the year, we will deal with that as we have also dealt with the other challenges in recent years. But by continuing to provide reliable and efficient services and solutions to our customers, keep the focus on operational efficiencies and also if required to introduce structural changes to adapt, we are quite confident of the near future.

So I look forward to speaking to you again soon, and thank you very much.