DFDS AS

CSE:DFDS

Earnings Call Transcript 2021-Q3

[Operator]

Hello, and welcome to the DFDS Q3 conference call. [Operator Instructions]. Today, I'm pleased to present Torben Carlsen, please begin your meeting.

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

Thank you very much, and welcome to everybody to DFDS' Q3 conference call. I am, as usual, joined by Karina Deacon, our CFO; and Soren Brondholt, Head of Investor Relations. Demand was high for our freight, ferry and logistics services in Q3 as reflected in reported revenue growth of 22%. Supply chain bottlenecks in global trade have been a talking point for some time. During Q3, these bottlenecks became more widespread across Europe and started to impact our regional ferry and logistics operations, although with some differences across regions.The 2 biggest contracts in our European network are the strong Turkey-EU trade and the slowdown we currently see in trade between the U.K. and the EU. So let's now take a closer look at the quarter. If you turn to Page 3 of the presentation, we mentioned that there is a high freight demand, but that it is offset by supply chain bottleneck costs.Our freight earnings continued to be above 2020. Mediterranean growth, as mentioned in the introduction is driven by strong Turkish exports. The U.K. trade volumes slowed, driven partly by supply chain bottlenecks, but also complications from COVID and Brexit. Logistics margins lowered in our system by extra cost from these supply chain bottlenecks. It was a slow passenger recovery where we missed July and August, which are the high season month, but volumes picked up towards end of Q3 as is also evidenced from the graphs to the right on Page 3.Turning to Page 4. A number of strategic events took place during Q3 with DFDS. The acquisition of HSF Logistics Group was approved by the authorities and is consolidated from the September 14, in the numbers you see. We further announced the acquisition of the remaining 80% of ICT Logistics clearances pending and expected in Q1. We acquired a small Swedish haulier supporting a new contract with Volvo for delivery of finished cars. We entered new logistics agreements for logistics centers that would open in 2022 and 2023. And, we deployed our new channel ferry, Cote D'Opale between Dover and Calais.With this, I will turn over to Karina on Page 5.

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

Thank you, Torben. As mentioned, we saw a strong activity in Q3, and that was evidenced by an increase in revenue of 22%. Unfortunately, EBITDA didn't follow the same trend and ended up on level with Q3 last year due to the mainly supply chain bottlenecks that Torben also talked about. If we compare to the normalized level in 2019, the shortfall was all due to missing passenger income. Compared to 2019, we were almost DKK 500 million behind in the third quarter of '21. So both the freight ferry and also logistics were ahead of 2019. The ferry freight EBITDA was up 3%, and that was a reflection of another strong quarter in BU Med, but it was offset by the trade slowdown in the U.K. and also higher ferry operating costs in the North Sea and Baltics. I'll come back to that shortly.Total passenger EBITDA, so if we include both our BU passenger unit, but also the passenger business on the channel and Baltics, we saw a decline of DKK 43 million compared to last year. As you all know, the travel restrictions continued in the beginning of the quarter, significantly in Norway and the U.K. If we look at logistics and improved EBITDA of 4%, but we have included HSF from September 14, contract logistics and cost on activities has somewhat offset the impact of supply chain bottlenecks, but the main reason for the increase came from HSF.Finally, just a small matter, non-allocated costs were reduced, it's a technical thing, if we look at the DKK 12 million, that we have in Q3 of 2021, one that reflects a normalized level, whereas 2020 was a catch-up in Q3 to reflect cost savings last year. If we turn to Slide 6 and look at the P&L. Revenue, as I said, up 22%, driven by a number of reasons. We did see organic freight growth, but also impact from the new routes that we have talked about before. The higher topline was also the reflection that we did impose price increases to cover the cost, including also an increase in our bunker surcharge following the increase in bunker [ oil ].Finally, HSS contributed to DKK 129 million to topline. If we look at further down the P&L, depreciation increased. We had new charters for the new routes that we started, meaning that we saw an increase of DKK 57 million. That was also a reflection on the finance cost, where the interest effect of the new charters increased the total finance cost.On the tax, we saw an increase in growth in the nominal payment, but also in the effective tax rate, and that was due to a higher proportion of taxable non-ferry activities. Special items, DKK 28 million in income reflected the sale of a building in Ghent, where our ferry and logistics operations moved in together in various existing premises.If you turn to Slide 7, if we look at the balance sheet, obviously, a significant impact from now is the inclusion of HSF. We are still in the process of preparing the purchase price allocation. So some minor changes might come. But so far, goodwill is estimated at around DKK 750 million. If you look at the cash flow, it was strong this quarter. Our operating cash flow improved 23% up to DKK 1.1 billion, partly due to improvement in working capital. We had a positive impact from accounts receivable, but the main improvement came from payables, which was impacted by the increased oil prices.If we look at our interest-bearing debt, obviously, the payment of HSF had an impact. So we were slightly up, but if we look at leverage on an LTM basis, we saw the expected reduction. So now we report leverage of 3.3 times EBITDA following the trend that we have seen in 2021. Finally, on ROIC, it increased to 5.2% from 3.5% last year and also at year-end.Turning to Slide 8, a few words about the business units in Ferry. Overall, a decline in EBITDA of DKK 24 million. And we saw overall volumes slightly above last year, but down 1% on an adjusted basis after 9% reduction in volumes on the channel. North Sea was reported higher volumes and also RPM, but we saw an increase in costs driven by supply chain bottlenecks, which increased the complexity of our port and terminal operations.We also increased capacity, but with the lower utilization on a certain U.K. continental routes, it had a negative impact on earnings. Baltics were down DKK 21 million compared to last year. We actually saw a positive impact of passenger business, higher volumes and higher earnings, but we also had the higher cost there. We expanded capacity on most routes, and we had several ferries deployed for shorter periods, which increased the cost.On the channel, the volume reduction obviously had an impact. And given the travel restrictions, we also had 45% lower tax. If we turn to Slide 9. BU [ pack ], I will not say more about that. We've already covered. But the last comment on Mediterranean continued the positive trend from previous quarters. We now saw 12% volume growth in the quarter of Q3. We continue to have stable operations and also saw improved results for port terminals and rail activities.Finally, on Slide 10, Logistics. Overall, our logistics business, as we said was impacted by the supply chain bottlenecks, and we did see significantly increased haulage and equipment costs and the impact of driver shortage, particularly in the U.K., but also increasingly in Europe. If you look at the regions and look at Nordics, they were up, and on the positive side, we saw improved results in our contract logistics business, and we also had positive impact from the inclusion of the Nordic part of HSF. As we have informed, we will go in from Q4, separate our cold chain business. But for now, it's included in the geographical segments here.We also had the help of a one-off income relating to previous acquisitions. These factors, they offset the lower results for the forward in traffic, particularly those linked to the U.K. Continent was down DKK 4 million, and here, we also saw the impact of supply chain bottlenecks, which meant that in some instances, we had to cap the volume that we sent across the U.K. Also, our Belgium result was reduced by imbalances in the traffic caused by automotive production stops.U.K. and Ireland, an improvement of DKK 8 million, and that was driven by improved cold chain results as well as continued good results from our customs clearance activities. So that was a summary of the numbers. And back to you, Torben, for a few comments on ESG.

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

Thank you very much, Karina. It was also in DFDS an active quarter in relation to ESG. We ordered 100 electric trucks from Volvo. That is the largest order ever placed for electric trucks worldwide. We continue our ambition to decarbonize our full truck fleet, not just the electrification, but also with sustainable fuels.We continue our analysis in a dedicated department on how to get a green vessel on the water by 2025. We expect to make some decisions during Q1 2022 in that relation. On the gender diversity side, we saw an increase of our female gender ratio from 23% end of the year 2020 to now 25%, still small steps and particularly challenged at sea to improve the ratio, better traction for land-based position.We turn to Page 13. We'll talk about first outlook and then our priorities. Our EBITDA outlook, midpoint is [ kept ], but we have narrowed the range to now DKK 3.3 billion to DKK 3.5 billion. As the year comes to an end, we need less range. Freight momentum currently is mixed. Headwind from the supply chain bottlenecks that we have addressed already, mainly impacting logistics and U.K. flows. Mediterranean growth on the other hand, is expected to continue and the HSF integration is on track.We see a passenger pickup, and it's ongoing also into Q4. Of course, the current rise in corona incidents across Europe could pose a risk. Passenger earnings, that was still expected to be on level with 2020 as we catch up during Q4. Our investments are reduced from DKK 3.5 million to now DKK 3.2 billion for the year.Turning to Page 14, and our current priorities is of course to continue the integration of the HSF Logistics Group. We are off to a good start. Great energy in the work, different work groups and identification of a number of especially commercial opportunities that we are pursuing. We need to manage the supply chain cost following the congestions and the challenges we talked about. And also with EU mobility package coming closer, we are preparing for how that could impact and influence the different cargo flows that we see through our system.We'll continue to pursue various post-Brexit opportunities and prepare for the final implementations now with U.K. going live from January 1. We'll continue our drive for organic growth through our special teams dedicated for this. And then, we'll prepare for hopefully a fuller return of passengers as we move forward.With that, I will turn over for Q&A. Please go ahead.

[Operator]

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

[Ruairi Cullinane, Analyst]

My first question is, I'm interested in your view on how long current supply chain bottlenecks may last? And how long you expect to be incurring these additional costs for? Secondly, a question on how things are on the ground in Turkey. So clearly, there have been some reports of macro instability there, but volumes are pretty strong, and I've also seen media reports of companies nearshoring to the Eastern Mediterranean. So I was interested in how you and your customers saw things? And then finally, what are your expectations for CapEx now over 2022 and 2023? And linked to that, what are your capital allocation priorities? And what would you want to see before you reintroduce the dividend?

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

Many good questions. Let's start with the cost side. Some of the cost increases that we see are probably structural. For example, the increased cost for drivers and hauliers, it's rare to see the salaries once they've gone up, that they go down again. So for us, it is more a matter of also making sure that those costs are passed on to our customers and ultimately the end consumers. And there, we see that in terms of the more structural cost increases and there are also cost increases in relation to fuel on the logistics side. And that those will be more or less passed on during Q4 to our customers. Then there will still be the instability in the chain that we have seen and a planning complexity that we may still struggle with during another quarter. So you will not see a full return, but a gradual return to a more normal margin situation on the logistics side, especially.On the ferry side, we have managed to reduce the congestion challenges already quite significantly as our main customers are now better handling their driver shortages. But of course, there, we also have some corona-based cost with crew challenges and delayed capacity costs, where some of our customers simply ship less because of the challenges in the system. So that's impacting a little bit volumes, maybe more than costs on the ferry side.But, you'll see a gradual return during Q4 to a more normal situation, but probably still be some overlays into '22. But we get better and better at passing on the cost to those who should truly cover them. And if we move to Turkey, then we have seen amazingly that the macro challenges that you referred to are not really impacting our operation. There is a balance issue to a certain extent, that import is less balanced with exports than it used to be. But the disadvantage that received from that is outweighed by the share size of the export growth.The political situation is not something that impacts apparently our customers nor our operation. We continue to work with the challenges we have with capacity, especially in the terminals. And there seem to be a little light at the end of the tunnel there that we'll get more space in Trieste. And therefore, we'll continue to support the growth we see in Turkey.With regards to the CapEx, I'll pass over to Karina, but it sounded like you wanted guidance a little bit out in the future that we normally don't give.

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

Well, we can at least talk a little bit about next year, which is not changed compared to what we have expected before. We have the 2 GSI vessels for the Baltics coming in. We have expected in our outlook for this year that we will get one of them here in -- towards the end of Q4, and we will get the second one in 2022. So those 2 are the remaining ordered vessels. Then, we need to add sort of a normalized CapEx level. And as it stands right now with our recent acquisitions, we are probably in the tune of around DKK 1 billion.So when you look into 2022, we could expect something like 1.7%, 1.8% is the current view right now. Then you also talked about the M&A and our appetite is intact, and we have a healthy pipeline. And when I look at the balance sheet, I'm sure that there's space for both more acquisitions as well as resuming the dividend that we have not done the last 2 years. So of course, I can't quantify the exact M&A, but it is still in the agenda.

[Operator]

And the next question comes from the line of Ulrik Bak from SEB.

[Ulrik Bak, Research Analyst]

Also a couple of questions from my side. Firstly, a follow-up on the question on congestion. Can you maybe provide an estimate of the EBITDA effect from these issues during Q3? And also, how much of these costs are structural and how much are from the supply chain instability?

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

We cannot give you those details unfortunately, Ulrik. And it's not because we are necessarily unwilling, it's simply a very, very complex matter where you have elements driving things in many directions. But it is responsible for the disappointing if you will this development in the logistics margins, for sure, and is also impacting shipping to a certain extent.

[Ulrik Bak, Research Analyst]

Right. And then to the contract price adjustments on the ferry business, because you want to pass on these costs to your customers. How is that feasible and with how much time lag can you adjust those contracts?

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

We generally do annual negotiations with customers. But some of it is more technical, whereas we in the past, always have had adjustments for fuel in all our ferry business and in most of our logistics business, we need to have that more fully implemented in the logistics side. And then we will potentially have other automatic measures implemented in certain of the contracts, which we can sense that customers are willing to discuss as long as it's a cost-driven and transparent measure.

[Ulrik Bak, Research Analyst]

So do you expect to be able to fully offset the negative impacts that you've seen in Q3 when you look into 2022?

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

If not immediately, then definitely during 2023, we should be able to offset the cost -- sorry, 2022.

[Ulrik Bak, Research Analyst]

Very good. Then a question on the channel freight market, it has declined now for 2 years in a row. And in this context, do you have knowledge of what the general inventory level is in the U.K. currently? And if the current freight volumes imported to U.K. is at a sustainable level to meet U.K. demand?

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

Again, we don't have a scientific overview of the full supply chain, obviously. But what we hear is that ship owners are capping their goods being sent to the U.K. because they've seen these supply chain issues. So expectations are that inventory levels are lower than normal, and that some of the downturn we've seen is overstated. And you've, of course, heard stories about empty sales, et cetera, in certain areas of the U.K. as well.

[Ulrik Bak, Research Analyst]

And then a question also on the channel and Irish ferries. What impact has -- or what market share have they gotten in Q3? And what is a fair market share expectation for 2022, assuming that they continue with their current 2 vessels?

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

I believe that they have a 1.5% market share on the freight side in Q3, looking to some...

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

2.5% of the ferry.

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

Yes. 1.5% of the total channel, 2.5% of the ferry market. So very modest so far, a little bit more successful on the passenger side. Of course, amidst a very depressed passenger market. I don't think we are the right ones to talk about what is a fair share of Irish ferries. We're probably a little biased on that. But there's no doubt, of course, that they will have a larger share as they increase capacity.

[Ulrik Bak, Research Analyst]

And then a final question on your guidance. Now with just a bit more than one month to go of 2021, you still have an EBITDA range of DKK 200 million. What should happen in order to reach the top versus the low end of this guidance range? If you can provide any color on that, please?

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

We think DKK 200 million is quite a narrow range even with the short period that we have left. But to get in trouble at the lower end, COVID should escalate and cause problems, not just to passengers, but also to freight systems and to reach the [ old ] level. And again, that's not how we set these ranges, but then obviously, we would need to see maybe COVID easing again and some of these supply chain challenges that we've talked about here, easing as well, and faster than we maybe expect currently.

[Operator]

[Operator Instructions]. We have one more question from the line of Stefan Roehle from KfW IPEX-Bank.

[Stefan Roehle, Corporate Credit Analyst]

I have 2 questions. First of all, on the Turkish business again, you have a new route to Tarragona. Could you shed some light on the figures on this route? How important it is in your growth that you have shown? And you also mentioned that in the previous calls, you mentioned that it is, first of all, a limited route from -- with respect to timing. So is it now a permanent route? And then you said you have probably the opportunity to get some more capacity in Trieste. So is it on your owned terminals or is it that you can also enter the PLT terminal or the left intermediate maritime terminal that [ Yalova ] used to use? This is the first part.And the second part, again, on the channels. I mean, if I read correctly, you sold another ferry Calais Seaways to Irish ferries. So is it that you deliberately reduced capacity on the channels because perhaps of the space charter agreement or space share agreement with P&O Ferries and the trend towards unaccompanied trade? Or how could we interpret it?

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

If we start with Turkey, then Tarragona is one vessel out of the 18 vessels we operate in the system. So it's a marginal, but positive impact. I do not recall we've said it's a temporary thing. It is very much driven by a large customer and his or their contract with the last textile company, but it's seeing good traction. The space in Trieste is in the first instance, space for trailers to be parked, which is not part of the 2 terminals you mentioned here. We are seeing if the line from Mersin could enter the one of those and have started also using one of the other terminals to create more space in the main terminal.Moving to the channel. We have sold the old ferry, Calais Seaways, but that was planned as part of the deployment of Cote D'Opale that we got delivered in summer, which has more than doubled the capacity and less fuel consumption than the old ferry and a much higher reliability. So there's nothing linked to the capacity sharing agreement in that transaction.

[Operator]

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

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

Thank you very much for joining the call and the good questions. As our Q3 report illustrates, the supply chain bottlenecks are an immediate challenge that we and, of course, others in the transport and infrastructure sector are working hard to resolve. Looking ahead, we continue growing our customer offerings and our business and look forward to 2022, where we get the full year impact from the HSF acquisition and the other growth initiatives that we have talked about on this call and previous calls. Of course, in addition, we are expecting passengers to return in much larger numbers than they did in 2021, which will significantly boost our earnings.So look forward to speaking to you again soon, and thank you. Have a good day.

[Operator]

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