DFDS AS

CSE:DFDS

Earnings Call Analysis

Revised Outlook amid Challenging Market Conditions

In Q2 2024, DFDS faced significant challenges, leading to a revised earnings outlook for the year. Despite market headwinds, the company maintained its guidance for an adjusted free cash flow of DKK 1.5 billion. Organic growth stood at 3%, but EBITDA decreased 10% year-on-year. The company's EBIT dropped 28% primarily due to cost pressures and rate reductions. Looking ahead, the focus is on stabilizing ferry market positions and turning around the Nordic Cold Chain unit, with expectations of a market rebound by Q4. CapEx was reduced, keeping cash flow targets on track.

Navigating Challenging Waters

In the recent earnings call for Q2 2024, DFDS faced multiple challenges that affected its financial performance. The company reported a 9% revenue growth, primarily driven by acquisitions, although organic growth stood at a modest 3%. This indicates that DFDS is growing but heavily reliant on previous acquisitions to boost its top line. However, despite the revenue increase, the company reported a 28% decrease in EBIT, underscoring the pressures from market dynamics and operational challenges.

Pressure on Earnings

The significant drop in EBIT can be attributed to several factors, including adverse cost developments and pressure on freight rates. The Freight Ferry EBITDA fell by 8%, or DKK 60 million, despite favorable volumes. Additionally, the Logistics segment's margins suffered from inefficiencies and a shift in trade flows, leading to an organic EBITDA decline of DKK 56 million. Notably, DFDS's Nordic Cold Chain was highlighted as a significant underperformer, necessitating a focused turnaround strategy.

Financial Guidance Adjustment

DFDS revised its earnings guidance downwards in July, now expecting EBIT between DKK 1.7 billion to DKK 2.1 billion, a reduction from the previous range of DKK 2 billion to DKK 2.4 billion. This adjustment reflects the current economic landscape and the company's struggles with price pressures across its ferry routes, particularly in the Baltics and Channel. The guidance reinforces the cautious outlook for the second half of 2024.

Capital and Cash Flow Management

Despite these challenges, DFDS maintained a strong operating cash flow, which rose 32% to DKK 1.3 billion during the quarter, bolstered by effective working capital management. The company continues to target an annual adjusted free cash flow of DKK 1.5 billion for 2024, a goal that remains on track despite CapEx reductions totaling DKK 250 million due to timing and strategic decisions.

Strategic Outlook and Growth Opportunities

Looking ahead, DFDS is focused on protecting its ferry market positions and addressing the operational issues within its Logistics division. The company is optimistic about a growth rebound in Q4, driven by improved volume expectations in regions like Turkey and the U.K. Additionally, the integration of Ekol Logistics is anticipated to strengthen DFDS's competitive position in the Mediterranean, although management cautioned that this will be a substantial undertaking in the near term.

Sustainable Initiatives and Shareholder Returns

DFDS remains committed to its green transition goals, with ongoing investments in battery ferries and e-trucks, as well as enhancing its operational sustainability. For shareholders, the company has declared a DKK 600 million capital distribution for the year, which includes a completed share buyback program amounting to DKK 431 million, emphasizing its dedication to returning value to investors.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, welcome to the DFDS Q2 Report 2024 Conference Call. I'm Sava, the Chorus Call operator. [Operator Instructions] and the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Torben Carlsen, CEO. Please go ahead.

[Torben Carlsen, executive]

Thank you very much, and welcome to this call. I'm joined by our new CFO, Karen Boesen; and Søren Brøndholt, Head of our IR.

Q2 turned out to be a more challenging quarter than expected. And as you know, we consequently revised the earnings outlook for 2024. I'm pleased to report that we still expect to deliver an adjusted free cash flow in 2024 of DKK 1.5 billion. We are dealing with 2 sets of challenges. One is market headwinds linked to the overall European macro picture and transport market dynamics. The second challenge is our own performance.

For some of our activities, performance is also impacted by market dynamics, but we have underperformed in certain areas, particularly our Nordic Cold Chain unit. If I look beyond Q2, DFDS' strategic positioning is strong. We are positioned to tap into growth from nearshoring. Our ability to engage with large transport and logistics buyers is stronger than ever before.

We see a U.K. where the leadership wants to improve trade relations with the EU, we see a Turkey well on its way to reduce inflation with a good potential for the economy to bounce back in 2025. But let's dive into Q2 and talk more about our performance and the challenges.

If we move to Page 3, a recap of our moving together towards 2030 strategy. It's unlocked network value. It's the green transition and it's our financial ambitions. And just reminding you of our financial ambitions, it's an annual adjusted free cash flow of DKK 1.5 billion. It's a ROIC in 2027 of around 10%, and it's a leverage reducing to 2.5x by 2026.

Moving to Page 4, to then see where we are in relation to those ambitions. First, ROIC. Q2 last 12 months, we are 6%, quite a distance away from our ambition. Ferry is at 8%. We did not see delivering above the ambition, but the Baltic/Channel currently impacted by our capacity. Logistics at 4%. We'll come back to this. But our second half year focuses on earnings turnaround.

Not much to say about CapEx, we have reduced the outlook DKK 250 million due to timing and other decisions. The adjusted free cash flow of Q2 was DKK 0.7 billion, and we still expect to deliver the DKK 1.5 billion for the year. In terms of leverage, leverage reduced 0.1% compared to Q1. But with the Ekol acquisitions, we'll see a slight increase expectedly Q3 or Q4.

Moving to Page 5 and the headline of our report navigating challenging markets, we delivered organic growth of 3% despite these challenging markets. Our financial performance, though, was below expectations and ferry was impacted by volume and rate pressure in addition to adverse cost dynamics. Logistics was impacted by margin pressure, a shift in customer flows, and one underperforming business unit.

Looking to second half of the year, the European growth rebound expectations have softened. Our focus is on continued protection of ferry market positions as ferry is expected to face continued market headwinds. For Logistics, key second-half priorities are price, warehouse volumes, and turnaround of Nordic Cold Chain.

Our cash flow outlook is maintained as mentioned, and the top priority remains to deliver on financial ambition of DKK 1.5 billion of annual adjusted free cash flow. Strong Q2 cash flow was delivered and with reduced CapEx in the second half of the year, our cash flow outlook is on track.

In the strategic perspective of this unlocked value of expanded network, our organic growth ambition continues to be supported by strong customer pipelines. The acquisition of Ekol Logistics network is expected end of Q3. We strengthened our Mediterranean business setup and the sale of our Oslo route was driven by our transport network focus where we believe a better owners could bring the Oslo forward.

Moving to Page 6. I will hand over to Karen for some words on our reduced EBIT.

[Karen Boesen, executive]

Thank you, Torben, and good morning, everyone. So, zooming in on our EBIT, first and foremost, as mentioned by Torben, we do have a healthy revenue growth, 9% overall and adjusted for acquisitions and the ETS, which is also a new element in our revenue this year. We see a 3% organic growth, which is still solid for the quarter.

However, our EBIT is reduced 28% due to various factors that we will come back to later in the presentation. But overall, you see a reduction compared to same quarter last year and ferry of DKK 133 million and DKK 60 million in Logistics, which then takes us to the EBIT of DKK 519 million for the quarter.

If we move on to income statement, which is on the next slide, I will quickly go through the numbers, but not in too much details as we will come back to them and you can obviously read for yourself.

Overall, our revenue growth, as mentioned, is 9%. And in summary, and in line with what we gave of guidance, updated on 22nd of July, we do see still a revenue growth in line with our guidance and expectations for the year as well. However, our EBITDA this quarter decreased 10% compared to same quarter last year.

And then at the same time, we have an increase in depreciation of 11% and an increase in our amortization as well. Then obviously, you end with a significantly lower EBIT of the 28% negative. In addition to that and below the EBIT, we also have increased finance costs, driven by higher interest rates for the unhedged part and slightly higher leasing debt.

So, a few words more on the revenue, although I have said quite a bit already, mainly driven overall by the acquisitions, a little bit of half of the growth of the 9% is coming from the acquisitions that we made over the past 12 months. And then on the real growth, we see 4% in Logistics, which is true organic growth coming from various regions, some up, some down, but a net growth of 4% organically.

And then we also see an increase in Passengers, mainly driven by our Channel routes. The ferry freight growth here, you see in revenue is predominantly the ETS that comes in through the top line and then get passed on to our customers.

And with that, I will hand back to Torben.

[Torben Carlsen, executive]

Thank you. On Page 9. Our Freight Ferry EBITDA is down 8%, as mentioned, or DKK 60 million. Excluding DKK 54 million decrease in oil spread hedging income compared to last year. The organic decrease is driven by rate pressures and adverse cost development.

The Passenger EBITDA is up DKK 25 million due to higher volumes and spending in Channel, offsetting negative Strait of Gibraltar contribution due to the seasonality of this new business. Depreciation increases of DKK 49 million, which is due to higher cost of dockings, the sale, and leaseback impact of the 3 mega Ro-Ros implemented last year, and the Strait of Gibraltar acquisition.

More details on Logistics on Page 10, with an organic EBITDA decrease of DKK 56 million, driven by 20% of the revenue with margin pressure shift in trade flows and Nordic Cold Chain underperformance.

For the remaining part of our business, the 80%, we saw a flat development with general margin pressure, but offset by improved performance in mainly Sweden, contract logistics, our special cargo unit, and our U.K. Cold Chain.

We gained EBITDA from acquisitions of DKK 9 million, and depreciation increased by DKK 21 million of which DKK 8 million came from acquisitions.

Moving to Page 11. Cash flows and capital. Our operating cash flow is up 32% to DKK 1.3 billion, driven by a strong working capital performance. Operating CapEx is, as expected, DKK 300 million, and an adjusted free cash flow for the quarter of DKK 0.7 billion. Last 12 months, we had DKK 2.3 million. However, this is positively impacted by the sale-leaseback of the 3 freight varies. Leverage, as mentioned, is lowered to 3.1x net interest-bearing debt to EBITDA.

With that, moving to Green on Page 13. We see continued progress on both our green and social targets, our ferry emission intensity reduced 3% for our own fleet, 2% across route network when including charter vessels, our first deployment of battery ferries on the Channel still expected by 2029. We are waiting response from EU funding for ammonia vessels for green corridors.

And the rollout of e-trucks continues with now 150 net trucks in operation, including now also Germany, and we have added and continue to add mega charging facilities this time in Rotterdam to service our trucks. In terms of female representation, we increased this 3-percentage point in management positions still, of course, far below our targets, but a move in the right direction.

In terms of safety, we rolled out a safety program for all our land-based employees, and we continue to see positive results from this. Moving to Page 15, not so much new, but DKK 600 million of capital distribution for the year, dividend already paid, share buyback of DKK 431 million, of which DKK 270 million is completed by the end of last week.

Page 16, Outlook 2024. It's a more challenging year than previously expected. We now see a growth rebound in Q4. We see a continued pressure on our ferry routes. On the other hand, we probably have seen on the road transport bottoming out of the hole or capacity. And therefore, we also see an improvement of our margins during the second half. On the Passenger side, the markets are stable, somewhat softer demand in the Baltics, but no real concerns anywhere.

On Page 17, as mentioned a couple of times, our cash flow outlook is unchanged, although the EBIT range is lowered. We continue to keep the strong top line performance driven by acquisitions, as mentioned by Karen, but also by solid organic growth.

The EBIT outlook range is lowered. We did that already mid-July to now DKK 1.7 billion to DKK 2.1 billion, whereas before, it was DKK 2 billion to DKK 2.4 billion. CapEx is also reduced. And as mentioned, the adjusted free cash flow continues to remain DKK 1.5 billion.

Prices for second half for DFDS is, of course, to protect and to deliver, continued organic growth focus, continued focus on protecting our key ferry market positions at enterprise accounts, and fill the warehouses where we have empty space.

Logistics turnaround, price focus, cost focus and a reversal of the fortunes of Nordic Cold Chain, we continue to deliver on our short- and long-term targets on the green transition. We have a lot of focus on Strait of Gibraltar and the continued success of the integration and also, of course, the performance, which we can sensibly measure after the high season, after Q3.

Ekol Logistics is moving closer in terms of regulatory approval for the acquisition, and we are ready to start the integration once the approvals have been received.

With that, we turn over for Q&A.

[Operator]

[Operator Instructions] Our first question is from the line of Lars Heindorff from Nordea.

[Lars Heindorff, analyst]

A couple of questions from my part. First, maybe a little bit of a house keeping. Can you tell how much IFRS contributed in terms of revenue and EBITDA in the second quarter?

[Torben Carlsen, executive]

Revenue is DKK 257 million. And then I think we are around -- it's a small double-digit negative EBITDA.

[Lars Heindorff, analyst]

Negative EBITDA?

[Torben Carlsen, executive]

Due to seasonality, that was as expected, yes.

[Lars Heindorff, analyst]

And then maybe a few words on exactly what it is that you're doing in Cold Chain talk? There are several mentioned in your text about the restructuring and the cost, which appears to be super high at least for the quarter. So, can you elaborate a little bit on that? And then also, what kind of run rate should we expect in terms of the cost in Logistics in the coming quarters?

[Torben Carlsen, executive]

I can certainly comment on the first, which is basically, the entity has been quite successful in getting customers. The customers are very large customers, and there have been very big swings in their trade and in the geographies that they move things around. This is fresh meat. This is retail in Denmark, for example.

And this has led us to lose a little bit control over the operation. So, while we have been growing the top line, we have not sufficiently managed our cost, primarily polish, both third party and our own polish.

We have also probably gained business at the wrong pricing. But again, once the balancing of those flows turn out to not happening because of changing production patterns among the customers, the costs have gone wrong. And we have now revamped the organization.

We have started 6, 8 weeks ago, a relatively focused project to turn this around. And we expect to go from a negative situation in the Danish business to a breakeven by the end of the year.

[Lars Heindorff, analyst]

And is it only Denmark that is loss making?

[Torben Carlsen, executive]

We have various places with minor losses that are being also addressed, but this is the only place where there is a significant issue.

[Lars Heindorff, analyst]

And in Denmark, I mean, just to get this clear, whether this is solely caused by Cold Chain and whether there's also some drive haggle included, how much is what you do in Denmark? Is that on Cold Chain?

[Torben Carlsen, executive]

We also do dry and both entities are impacted.

[Lars Heindorff, analyst]

But those contracts that have been winning apparently had strong prices. How long will they stick?

[Torben Carlsen, executive]

I cannot go into the details, and it's an element, it's the pricing, but it is the balancing and also our execution that are parts of the problems. It's not just the pricing of 1 or 2-cost contracts.

[Lars Heindorff, analyst]

Then in the ferry parts. We've been talking about the price pressure in the Baltic now for at least a couple of quarters. You mentioned in the guidance downgrades that that has been spread to the other part of the North Sea as well as China.

If you exclude the ETS because it's a little bit difficult to carve that us, what would be your sort of Baltic on how much the average price per lane meter is down in the freight part of the business?

[Torben Carlsen, executive]

I don't think we disclose that so accurately normally. And it is, of course, very much a split per geography that is the relevant one. But we are seeing single-digit reductions in overall, a small single-digit reduction and higher single-digit reductions in Baltics and Channel.

[Lars Heindorff, analyst]

And then just the last one, then I'll head back in the queue. The guidance downgrade of the DKK 300 million. You mentioned in the statement there, and I think a bit late July, it was caused by 3 factors: price increases in freight, price pressure, and then the logistics. Can you say anything how those three parts of, you call it, factors, how they are distributed around the DKK 300 million? Is it equally DKK 100 or how is it?

[Torben Carlsen, executive]

Well, I think you can get a clue by looking at our new guidance where Logistics have been reduced from a midpoint of DKK 575 million to DKK 412 million. So, about half, I guess, in logistics and half in ferry, ferry gone down from the midpoint of, was that DKK 150 million, reaching 25% to a midpoint of DKK 150 million each .

[Operator]

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

[Ulrik Bak, analyst]

First question is also on your guidance downgrade from July where we can now see that it's obviously driven by both segments. But just for the Ferry segment, can you perhaps help me understand how the development surprised you on the downside because volumes seem to have been quite strong.

At Q1, you also mentioned that volumes were higher than you expected. And given the way the contracts are structured; I would expect that you have some quite good visibility on the pricing of your ferry contracts. So, how is it that you were surprised on the downside here? That would be my first question.

[Torben Carlsen, executive]

It's maybe easier that I explain what has happened than whether we should have been surprised or not. But the volume development in Q2 has been favorable, but primarily driven by Channel and Baltics where we have the biggest pricing issues, whereas we have maintained volumes or almost maintained volumes in the Mediterranean but also there with a slow economy having incentivized customers on board at generally lower prices.

So, you can say Channel and Mediterranean have delivered below expectations in pricing and North Sea have seen that or we've seen that the rebound in volumes have not happened in the North Sea in Q2. It's probably postponed till end Q3, and that has also had a negative impact.

So, on the Ferry side, that's the 3 areas that are causing the impact. Then there is a technicality on the fuel spread that has gone against us as well adding to the downturn.

[Ulrik Bak, analyst]

And you mentioned in your opening remarks that you expect a rebound in the market by Q4. So, what kind of rebound are we looking at here? What is your assumption? And just geographically, what would that mean? Would it make you able to increase prices in Baltics and Channel?

[Torben Carlsen, executive]

Well, I cannot specifically say exactly what it will mean. But it's obvious, if the volumes increase, as we expect in the U.K. impacted areas and in Turkey, then we will have a firmer pricing picture as well.

[Ulrik Bak, analyst]

Then a question on the English Channel. If you can just provide a status of the competitive landscape and also your decision to pull out of the space charter agreement with P&O and also the potential financial impact from this decision?

[Torben Carlsen, executive]

Yes. The competitive situation is, of course, that with the P&O move to sell a ferry and enter slot charter with Irish Ferries that we have to assume that there will be both competitors for a while. For us, the new setup is not attractive at this stage. We don't believe it will have a negative impact for us to withdraw.

As part of the new setup, one vessel has been removed from the Channel, which obviously also benefits us. And furthermore, we see that some of the savings we were able to produce from changed schedule, we believe that we can actually maintain most of those without losing market share. So, we do not see a financial impact from the partnership.

[Ulrik Bak, analyst]

I think it sounds interesting that you expect to maintain market share without increasing your frequency. But in the event that you see -- It's on the back of one reduced vessel, right?

[Torben Carlsen, executive]

There is instead of 10 vessels, 9 vessels and we still have 3. Yes, and then, of course, we continue our strong solo situation position on Dunkirk.

[Ulrik Bak, analyst]

But just in the event that you are with the same frequency of losing market share, would you accept that loss of market share? Or would you be inclined to increase your frequency to maintain the market share? Just to understand your priorities.

[Torben Carlsen, executive]

For now, you've received an assessment of the situation. I cannot speculate what we to do if things turn out differently at this point in time.

[Ulrik Bak, analyst]

And then my final question on Logistics. You have acquired Ekol, it hasn't been finalized yet, but is there a potential that this acquisition can support the development of your current challenges in the Logistics Division?

[Torben Carlsen, executive]

I think immediately, it will not support. It will, of course, be a big task in itself to integrate Logistics. I think once the successful integration has happened, it will support our Ferry business for sure in the Mediterranean, and it will support our Continental Logistics business. But from day 1, it will, of course, be something that we will have to focus a lot of attention on.

[Ulrik Bak, analyst]

And perhaps just a follow-up. Have you received any indications from Ekol's current customers from a reaction to this acquisition positive or negative?

[Torben Carlsen, executive]

No, we are not allowed to have any commercial interactions with their customers before the approvals have been received.

[Ulrik Bak, analyst]

Then perhaps your own existing customers in this segment?

[Torben Carlsen, executive]

Our own existing customers are, of course, primarily Ekol's competitors, the other freight forwarders from Turkey. And they have been asked by the competition authorities in Turkey, how they looked upon this and have overwhelmingly been okay with DFDS acquiring Ekol.

[Operator]

[Operator Instructions] Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Torben Carlsen, CEO, for any closing remarks.

[Torben Carlsen, executive]

Thank you very much to everybody for joining the call, and thank you for your good questions. For the rest of the year, our top priorities are to continue to protect our key Ferry market positions and to turn Logistics earnings trend around, as also mentioned during the call.

In parallel, we're addressing these priorities, we'll continue to unlock the value of our expanded network and continue to move our green transition forward. And, of course, let me just also highlight our commitment to return excess capital to shareholders. We look forward to talking again when we report on progress at the Q3 conference. Have a good day.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.