DFDS AS

CSE:DFDS

Earnings Call Analysis

DFDS Q3 Bolsters EBITDA Outlook Amidst Headwinds

DFDS stayed resilient in Q3 2023, delivering solid results with EBITDA guidance firmed at DKK 4.9 billion to DKK 5.2 billion, despite challenges like lower freight volumes and oil price spread impacts. Revenues dropped 2% but rose 7% adjusted for lower fuel surcharges. Remarkably, Passenger EBITDA soared by DKK 0.2 billion, thanks to continued recovery, while Logistics grew 8% to DKK 0.3 billion. Adjusted free cash flow hit DKK 1.7 billion, reflecting careful capital expenditure mainly for maintenance. The Ferry Division boasted a 29% increase in passenger results and adapted capacity to match market demands, counteracting a 5% dip in ferry freight volume. Despite a 21% organic earnings drop in logistics, DFDS concentrates on a high-growth market entry and cost corrective measures to bolster this segment shortly.

Firming up on Financial Forecasts

DFDS, a robust and resilient transport and logistics company, has experienced a solid quarter, leading to an adjustment in EBITDA guidance to now DKK 4.9 billion to DKK 5.2 billion for the investor to note. This guidance revision reflects a steady performance amid various market challenges, suggesting both stability in operations and an ability to steer through uncertainties.

Key Result Drivers and Market Adaptation

A highlight for investors is DFDS' strong passenger season, particularly noticeable in the Channel operations, which has helped sustain financial outcomes despite a 5% dip in freight volume. The company is also proactively managing its capacity to align with market demand – a testament to its agile commercial strategy. Additionally, DFDS is cautiously navigating market headwinds, including an overcapacity situation in the Baltics and softer but recovering Turkish volumes. However, investors should be aware of the normalized oil price spreads, which negatively affected the income in this quarter.

Diversification and Resilient Network Performance

DFDS reports that its versatile network has effectively compensated for lower transport market activities, particularly in building materials and meat volumes. This resilience signals to investors a strong operational foundation that can withstand market fluctuations. Recent company acquisitions are performing well, bolstering optimism about growth prospects, such as the upcoming FRS Iberia/Maroc transaction that opens doors to a high-growth market area.

Cash Flow and Capital Expenditures

A crucial metric, the adjusted free cash flow, has seen an increase, now trending at DKK 1.7 billion over the last twelve months. This is a significant indicator of financial health, particularly as the majority of this year's capital expenditures are earmarked for regular maintenance rather than expansion, which can be seen as a prudent allocation of resources.

Revenue and Earnings Composition

While revenues have slightly dipped by 2%, an adjusted increase of 7% tells a more favorable story when excluding the impact of lower bunker surcharges. Investors should particularly note the contrasting movements within the divisions: The Ferry freight EBITDA has seen a decrease primarily due to oil price spread changes, while Passenger EBITDA has increased significantly. Logistics EBITDA saw an 8% increase but still remains below the previous year when considering organic results, affected by market slowdowns and one-off costs.

EBITDA Margin Improvement Despite Challenges

Despite lower revenue, DFDS has improved its EBITDA margin to 22.1%. However, depreciation rose due to logistics acquisitions and warehouse expansions, and finance costs increased as well due to higher interest rates – almost three times compared to last year.

Return on Invested Capital and Leverage

The ROIC before acquisition intangibles decreased slightly from the previous year, now standing at 10.9%. Nevertheless, the ratio aligns with the company’s current targets, although there has been a slight decrease in ROIC to 8%, attributed to an increase in invested capital. Operating cash flow remained strong; however, it saw some impact from negative working capital changes and rising interest payments, leading to an adjusted free cash flow of approximately DKK 500 million. DFDS maintained its leverage ratio at 2.9x, even with new acquisitions factored in, which is a robust sign of financial management.

Divisional Performance Insights

The Ferry Division reported a revenue decrease of 5%, but there was an adjusted increase of 10% when deducing the BAF surcharge effect. Notably, while the freight ferry side saw a 26% decline due to oil spread changes, the Passenger segment surged by 29%, powered by a 6% hike in passenger numbers nearing pre-COVID levels. The Logistics Arm faced a 21% downturn organically, with significant challenges arising from activities linked to the U.K., the Baltics, and specific industries like meat exports and construction.

Sustainability and Gender Ratio

On the sustainability front, DFDS has successfully reduced its emission intensity by 4% across its ferry routes, signifying commitment to environmental standards. Logistics operations have similarly seen green developments with 61 out of 125 electric trucks in operation, with more deployments expected. The company is also making strides in increasing the female gender ratio amongst its managers, although acquisitions have momentarily affected the total gender balance. Safety metrics have shown improvement, further underscoring DFDS' commitment to responsible operations.

Outlook Adjustment Based on Divisional Performance

Investor attention is drawn to the revised EBITDA forecast, with the Ferry Division’s outlook getting a boost following an impressive passenger high season and expected freight volumes to mirror the 2022 levels. On the other hand, the Logistics outlook has been modestly downgraded following certain challenges, even though corrective actions are beginning to yield positive results.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, welcome to the DFDS Q3 Report 2023 Conference Call. [Operator Instructions]Today, I'm pleased to announce Torben Carlsen, CEO. Please go ahead.

[Torben Carlsen, executive]

Good morning, and welcome to DFDS' Q3 2023 conference call. I am, as usual, joined by Karina Deacon, our CFO; and Soren Brondholt, our Head of Investor Relations.I'm very pleased that DFDS delivers another quarter that was solid and that led us to firm up our outlook this morning to an EBITDA range of now DKK 4.9 billion to DKK 5.2 billion. Our combined ferry growth and rail transport network and our supplementary contract logistics solutions continue to show resilience.Let's turn to Slide 3 for a brief overview of the quarter's key result drivers. We had a very good passenger season, especially on the channel. We maintained the underlying freight ferry result on level with last year despite a 5% lower volume situation. And we continue to focus on adapting capacity to market demand using our expanded commercial model to fill our capacity and balance our growth. We navigate the headwinds on the channels from the overcapacity situation in Baltics due to the war in Ukraine. Turkish volumes are somewhat soft at the moment, but showing signs of recovery. Oil price spreads normalized during Q3 with a negative impact to our income in Q3 as well.Transport markets are impacted by lower activity levels, particularly in building materials and meat volumes. But as mentioned, the resilient network are able to compensate for these elements. Our recent acquisitions are performing well, and we are looking forward to the closing of the FRS Iberia/Maroc transaction, which gives us access to a high-growth market area.Finally, our adjusted free cash flow is increasing and now trending last 12 months at DKK 1.7 billion as our CapEx this year mainly comprises regular maintenance.So let's take a closer look at Q3 by turning to Page 4. As mentioned, we are -- the EBITDA at the same level as Q2 and Q3 in '22. Our revenues are down 2%, but up 7% when adjusted for bunker surcharges. The Ferry freight EBITDA is down DKK 0.2 billion, driven by the lower oil price spreads. On the other hand, Passenger EBITDA is up DKK 0.2 billion with contributions from all markets as passenger recovery continued in this quarter. Logistics EBITDA is up 8% to now DKK 0.3 billion, although the organic result is below '22, driven by a market slowdown and one-off costs.With this, I will pass over to Karina and turn to Page 5.

[Karina Deacon, executive]

Yes. Let's have a closer look at the revenue. As we mentioned, it decreased 2% to reach DKK 7.2 billion, but it was significantly impacted by the lower surcharges as the fuel cost declined. So if we exclude these charges, the revenue was up by 7%.If we look at the waterfall to the right, the surcharges, they are evident when you look at the ferry revenue, so that's why we see the large decline there. If we exclude the BAF, freight ferry was actually up 7% driven by higher revenue in the Mediterranean and then slightly offset by lower channel and Baltics revenue. The Passenger activities increased DKK 200 million after an increase in all business units carrying passengers. If we look at Logistics, their total revenue was up, but organic growth was minus 13% due to lower volumes in parts of the business and also lower surcharges in Logistics. The acquisitions, of course, added a significant amount to the Logistics revenue.If we turn to Slide 6 and look at the P&L. We've already discussed the EBITDA that was on level with last year due to the Passenger activity and the Logistics, which then offset the lower freight ferry earnings. But given the lower revenue that we saw an increase in the EBITDA margin to 22.1%. Depreciation was up 12%. It is mainly due to the acquisitions in Logistics, but also due to the expansion of the warehouse activities. Then finance cost, rather significant increase in the impact of the higher interest rates is visible compared to last year. So we now have an average interest rate, which was almost 3x higher than it was last year.If we turn to Page 7 and look at the balance sheet and the cash flow, starting at ROIC before acquisition intangibles KPI we introduced earlier this year, we saw a decrease to 10.9% from 11.4% in Q3 last year. And the same development was seen in ROIC, which was now at 8%, so in line with our targets at the moment, but a slight decrease from last year due to an increase in invested capital. If we look at the operating cash flow, like we also saw a good development in Q2, it was DKK 1.1 billion here in Q3. It was slightly reduced by negative working capital development and higher interest payments. Operating CapEx was DKK 400 million. And with that, it led to an adjusted free cash flow of around DKK 500 million. And if we look at an LTM basis, we now have adjusted free cash flow of more than DKK 1.7 billion. That's also reflected in our leverage, which was 2.9x and unchanged, both from last year, but also from the previous quarter despite we had acquisitions in the period.Turning to Page 8 for the Ferry Division, reported freight ferry revenue down 5%, but up 10% adjusted for the lower BAF surcharge. And that's also reflected in EBITDA, which was down 1% due to the strong Passenger result, which offset the decline in freight ferry. But if we look at earnings on the freight ferry side in isolation, we see a decline of 26%, but it was entirely driven by the changes in spreads where we saw a decline in the spread in Q3 this year compared to the high spread in Q3 last year. So that means that the underlying result in Ferry was in line with Q3 despite the fact that we saw lower volumes, and that was helped by both higher RPM, so rates but also capacity adjustments done throughout the system.On the Passenger side, we saw an increase in the result of 29%, and it was driven by 6% more passengers, which brought us to Index 90 compared to the pre-COVID levels. We also benefited from higher spend and not least on the duty-free in the U.K. and then we had the bunker savings within the Passenger division. Finally, we saw a positive one-off effect from a reversal of a provision related to COVID-19. It's important to mention that, that reversal was already included in our expectations when we earlier in the year have made our outlook.Turning to Page 9 on the Logistics. Overall revenue slightly up, but as I mentioned before, down organically after lower activity and surcharges. That lower activity, of course, also impacted earnings, which was down 21% organically. It should be noted though that a significant part of the decrease, around half of it was due to one-off costs, mainly relating to a closure of one of our offices. This one in Bruges. And then we unfortunately saw a customer going bankrupt within the building construction industry. The underlying was stable. If we look at the contract logistics, but we did see lower activity and earnings, particularly in road transport to and from the U.K. and in the Baltics and also in certain industries like meat export but also building construction. So Q3 was generally a challenging quarter with the price pressure from customers who are looking to benefit from overcapacity in the haulage market.With that, I'll pass the word back to you, Torben.

[Torben Carlsen, executive]

Thank you. So on the ESG front, we continue to decrease our emission intensity on the Ferry side by 4% across our route network, driven by our continued schedule optimization and technical vessel upgrades. We have or had by the end of Q3 50 electric trucks in operation. Today, that's 61 out of the 125 trucks we have ordered, they will be -- the remaining will be deployed over the next quarter or so. Our female gender ratio improved 3 percentage points to 19% when measuring across all managers. The total gender ratio is negatively impacted by acquisitions in the short run. Safety, high priority level for DFDS, the ratios improved for both sea and land operations in terms of number of incidents and a number of related days [ off ].So if we turn to the outlook on Page 12. As we mentioned, it's firmed up. We have narrowed the range from DKK 4.8 billion to DKK 5.2 billion to now DKK 4.9 billion to DKK 5.2 billion EBITDA. The Ferry Division outlook has been raised after the strong passenger high season. In Q4, we expect our freight volumes to be close to the level of 2022. Logistics, you've seen in Q3 with some challenges. And on the back of that, we have reduced the outlook for Logistics, although we see the corrective actions taken to begin to have a positive impact. On revenue, the outlook is unchanged. And on OpEx or CapEx, sorry, on CapEx, the outlook is reduced to DKK 0.1 billion on the back of the sale of the 3 freight ferries that took place in October.On Page 13, we look the remaining '23 and the key priorities. Capacity management continued to be a focus area to align with the demand in the markets. We've done that relatively successful in Q3 and expect to be able to continue that success. We adapt our cost through a number of initiatives. And then there is a strong focus on keeping the customers we have, doing more business with them, attract new volumes to the network that continue to be a very attractive network for our customers. Our green transformation projects continue to be moved forward. And on the -- especially on the social side, especially on the health side, we have a new health and safety system for the land-based employees that, as I mentioned before, beginning to show good results. And then we expect approval of the FRS Iberia/Maroc acquisition, either late Q4 or very early Q1.With this, we hand over for questions.

[Operator]

[Operator Instructions] The first question comes from the line of Michael Vitfell-Rasmussen with Danske Bank.

[Michael Vitfell-Rasmussen, analyst]

I'll start off with 3 questions. First of all, looking at the Q3, it looks like onboard sales were up by only 4% year-on-year, but ticket sales were up by 24% year-on-year. Maybe you can talk a little bit about what's going on, on the -- I guess, it's the tax-free driving that? So that's my first question.My second question is, are you seeing any risks of other customers moving into financial problems? And if you could just remind us of the share of revenues that you derive from building construction customers?And my last question is, if you could add a little bit of expectations on volume growth in the Med? When should we expect kind of the near-shoring case to unfold also given the political unrest in the area and the things within Turkey?

[Torben Carlsen, executive]

Michael, I'll answer your last question, and then Karina can comment on the 2 others. The volumes in Turkey are flat to negative at the moment. As you I'm sure are aware, Turkey has now engaged in more traditional financial policies to curb inflation, and they have increased interest rates to 35%. This could [ temper ] on domestic demand. We have very balanced flows from Turkey to Europe and back. So that reduces our volumes. In addition, Germany is close to recession, and it is the biggest market of Turkey. So those 2 elements are what is causing the current flat to negative volume development. And we believe that, that will continue for a period, but that sometime during '24, Turkey will be back in growth mode. They seem to be navigating the geopolitical tensions relatively skillfully. And, of course, they continue to have a very important geographical location. So we'll see this China Plus One or this is not something we can measure directly, but we can see customers moving production. But, of course, the 2 other elements that I mentioned are more important factors right now.So, Karina, on both sales and...

[Karina Deacon, executive]

If we go to your question about the onboard sales, we've seen a good development here in the third quarter. We talked a lot about the duty-free in the U.K., and we've seen a very positive development there. If we look and compare to the same quarter last year, we've seen an uptake of around 20%. So very much in line with our expectations. So in this quarter, we have seen less of a positive impact in terms of the seafare. But the onboard spend has driven the revenue improvement significantly.Then to the building construction, we don't have, as you know, a full visibility about the percentage, but it's not a huge part of our business in the building construction. And, of course, it's very, very ordering annoying to have to face a customer bankruptcy. We had our eyes on the board, I would say, and we are monitoring the development. In this case, it just really came overnight. We are in close dialogue with the customers we have in that space, and we are not at this moment in time concerned about any of our receivables in that area.

[Operator]

The next question comes from the line of Ulrik Bak with SEB.

[Ulrik Bak, analyst]

Also a couple of questions from my side. I'll take them one by one. The first one on your volume report out this morning as well. Channel volumes actually increased year-over-year for the first time for a long time. And comparing it to your truck volumes, which were down 14% in October, it seems quite striking. Can you perhaps just share some comments on the market dynamics in the segment and the competition between the tunnel and the other operators? And how we should think about this volume growth going forward? Should it just be positive from now on?

[Torben Carlsen, executive]

Ulrik, the market is still declining, but relatively modest at this moment. We have done well in the quarter. We believe that it's a combination of our strong and reliable services, including the fact that we both serve Calais and Dunkirk. We also believe that the partnership that we launched to have a product that better can compete with the channel is beginning to show its strength when -- in the cooperation with the shared space with P&O. And this has led to us actually gaining volumes in a declining market this quarter.We believe that the Eurotunnel will respond to this. We've seen that they are removing some of their surcharges, electricity surcharges, for example. So I don't think you can just assume that we will grow from now on. But we think our strategy works and with the volumes that exist on the channel, we are clearly performing well. And as Karina said, we've also seen very good development on our onboard spend from the passengers, which also contribute to the channel success.

[Ulrik Bak, analyst]

Okay. That's very clear. And then perhaps currently, I guess, there's a contracting season underway in most of your ferry segments. Also, to your channel segment, with Irish ferries now having enough operational for full year and now perhaps we'll be able to attract some of the customers which may have been reluctant to shift to a new operator last year. How are you approaching this contracting season with that in mind?

[Torben Carlsen, executive]

Well, we, of course, focus on our own strength. And we are a profitable operator. And therefore, customers will sign up with us knowing that we will be there for the full year. And we have loyal customers that, that have been with us for many years. So it is a competitive market. We are quite confident in our ability to keep our customers and then we'll see what goes on with prices over the next month. But we go into '24 with confidence and with a profitable business, and not all competitors on the channel are profitable.

[Ulrik Bak, analyst]

Okay. But with your comment about Eurotunnel reducing some of its surcharges and the structural overcapacity, what impact do you reckon it will have on your revenue per lane meter on the channel segment in '24 versus '23?

[Torben Carlsen, executive]

I cannot give you any answer to that. It will be better to first negotiate it with the customers.

[Ulrik Bak, analyst]

Makes sense. Then a question -- a clarification question. On Page 8 of your slide deck, you state that freight ferry -- no, Ferry freight result is down DKK 0.2 billion to DKK 0.5 billion by higher net bunker costs. Why is there a range here in the quarter?

[Torben Carlsen, executive]

It's not a range. It's down DKK 0.2 billion to DKK 0.5 billion.

[Ulrik Bak, analyst]

Okay. That makes sense. And so, what is the trajectory over the coming quarters? I noticed that the spread peaked in Q3 last year. So should we assume this number to gradually decline over the coming quarters?

[Karina Deacon, executive]

I think we said all the time that we faced tough comps in both Q3 and Q4. And I expect that Q4 can be at around the same level as we had in Q3 when we look at the negative impact.

[Ulrik Bak, analyst]

Okay. Then my final question, in your Passenger result, you mentioned that there is some impact from bunker cost savings and the provision reversal. Can you quantify these 2 factors in Q3?

[Karina Deacon, executive]

Yes, the provision is around DKK 50 million. And the positive is also is not the same amount, but it is double-digit from the bunker.

[Operator]

The next question comes from the line of Lars Heindorff with Nordea.

[Lars Heindorff, analyst]

The first is on the bunker. It's quite a bit of a gap between the report decline of 5% in the Ferry Division and you said that if you adjust the BAF surcharges and you've all been up by 10%. Now, will we see same level of discrepancy between [ you ] going into the fourth quarter? And also maybe just a few words on those bunker surcharges and the potential headline -- sorry, headwind as you had also maybe into the early parts of next year. This is a quite significant move.

[Karina Deacon, executive]

I think you've got to split the 2 because there's the revenue impact, which is clearly just a reflection of the level of the price -- oil price, which was very high last year. So there we have this DKK 500 million, DKK 600 million impact on the revenue line. And you have the spread, which is what impacts our bottom line. And that's what I just said to Ulrik that, in Q4, we will also have a negative impact from the spread compared to relatively high spread levels in Q4 '22. Then when we go into first quarter and continuing into '24, we are at more, if I may use the word normal levels compared to sort of historical levels. So there, we don't expect to see the same volatility. Certainly, not as it looks now, but I don't dare to predict about the oil price you have public colleagues who bet at that.

[Lars Heindorff, analyst]

And then on Logistics, the 13% decline in organic revenue. Can you give us split between cold and dry? And also, to what extent is this driven by, again, is an impact from diesel and bunker surcharges, is this driven by volumes?

[Torben Carlsen, executive]

It is driven by both the diesel surcharges have come down significantly, and volumes have also reduced, as I think we said in the introduction, the mid-markets have been relatively severely hit across Europe, also construction is hit. So it is a combination of a number of factors in -- across the businesses.

[Lars Heindorff, analyst]

And you -- can I push you try to put some numbers on the volume decline?

[Torben Carlsen, executive]

No, I don't think we know. We don't...

[Lars Heindorff, analyst]

And then you mentioned in the presentation also, you talked about the -- and also, it's in your report about the automotive backlog, which I gather this to some extent, is securing at least some kind of a volume at these stores here in the third quarter. I mean, how far are we into that? What's your impression on that part?

[Torben Carlsen, executive]

It's definitely easing. We still see a relatively long delivery times on -- in the truck market. So there, we still have a very predictable volumes, you can say, depending on the car manufacturer, it's beginning to reach the backlogs.

[Lars Heindorff, analyst]

Okay. And on the -- you mentioned -- I think Karina mentioned that you were at Index 90 compared to pre-pandemic levels in the Passenger division. What is your expectations as we head into next year? Do you actually believe that we will see, given the macroeconomic backdrop that we will see that passenger volumes will continue to grow also into next year?

[Torben Carlsen, executive]

I think we are -- our thinking is that, the passenger levels will hold up also in '24. So we are probably more confident about the Passenger business than the freight business where we just have to look at the environment and see that there is some softness. On the Passenger side, I think we can work our way through even if the recessionary trends continue.

[Lars Heindorff, analyst]

Okay. And then maybe more a question on the net financials for you, Karina. As far as I can see, there's quite an increase in the interest cost here in the third quarter also compared to the previous quarters. What sort of run rate should we expect as we head into the coming quarters here, given the interest rate levels that we have?

[Karina Deacon, executive]

Well, the quarter we have here in Q3, there were no exceptional items impacting that. So best guidance at the moment would be something similar with a little caveat that in Q4, this is very technical. But when we sold the [ tingling ], then there were some swap agreements associated with that. So that will bring the Q4 down. So there, we will be not on DKK 195 million in Q3, maybe more like DKK 150-ish million expected. But looking into '24, we are at a little higher level than we'll in Q4.

[Lars Heindorff, analyst]

Okay. And then the last one, then I'll stop, and which is going back to the freight division. Utilization levels, you actually managed to hold up utilization, I would say, fairly well given the market that you talked about and difficulties out there. I mean, will you -- should you be able to uphold the utilization levels above the 50% mark as we head into a normal or will be tough Q4?

[Torben Carlsen, executive]

We don't look at it like on a consolidated basis. It is very much a look by route. And on every -- in every market, we try to adjust capacity through demand. So we don't expect very large different utilization factors in Q4 '23 versus Q4 '22. We will be able to compensate, we believe, for adjustments in the market.

[Lars Heindorff, analyst]

But in Q4 last year, it was DKK 57 million, actually even higher than you had here in Q3.

[Torben Carlsen, executive]

Okay. But again, we don't look at it like this. We look at it, how can we adjust the demand? It depends a little bit how many ferries we have in dock and what we have done on the -- with 1 or 2 vessels added in Turkey or vice versa? So we expect to be able to keep the profitability, if I didn't put it like that at the same level.

[Lars Heindorff, analyst]

If I can try and ask in a different way, then do you expect to have any significant changes in the offered lane meters?

[Torben Carlsen, executive]

Yes. We are constantly looking 2, 3 weeks ahead and seeing do we need 5 departures or do we need 6 departures? Can we take out a departure here on the channel? Can we -- so that's a constant adjustment to demand.

[Operator]

[Operator Instructions] The next question comes from the line of Chris Lewis with Freight Business Journal.

[Chris Lewis]

Can you hear me?

[Torben Carlsen, executive]

I can hear you.

[Chris Lewis]

Okay. I was wondering whether you have allowed in your spending projections for your investment in electric vessels on the channel or indeed on other routes. And what effect do you think this is going to have on your revenue and costs going forward? And when would you expect electric vessels to start having such effect?

[Torben Carlsen, executive]

Well, in order to deploy the electric vessels, we need green power to the ports in Dover, Dunkirk and Calais. Predictions are that depending a little bit on the port that, that would be ready by '28, '29. So -- and then we need to develop the vessels, which has never been constructed electric vessels in that size. So there's no impact, which means that they will also be ready about that time frame where the electricity will be ready. So there's no immediate impact to our costs from this initiative.

[Chris Lewis]

Okay. When would you expect this to be an impact from 2029 onwards?

[Torben Carlsen, executive]

Well, we would start seeing CapEx cost in '25, '26 probably with the first vessels and then we would expect the first vessels -- we would expect to have 1 or 2 battery vessels in operation before 2030.

[Chris Lewis]

Okay. And would you be expecting to do similar projects in other parts of the world? Or would you just concentrate on Dover-Calais, Dover-Dunkirk?

[Torben Carlsen, executive]

Well, if you look towards the 2050 and 0 emissions, then the other routes where we could deploy it, electric vessels would be on the Strait of Gibraltar, which also have fairly short crossings.

[Operator]

The next question comes from the line of Ruairi Cullinane with RBC Capital Markets.

[Ruairi Cullinane, analyst]

My first question is, to what extent of Asian passengers on the Oslo-Copenhagen route recovered? And I know you commented on the call that you expect sort of passengers perhaps in line with 2023 levels in 2024. So perhaps you could walk us through what may be drive us into 2024 as others? And I'm thinking in Asian passenger recovery may be one of them.And then perhaps finally, if you could just talk us through the rationale for the sale and leaseback that you announced in October?

[Torben Carlsen, executive]

Yes, if we start with the passengers. I think before COVID, we probably had upwards towards 125,000 international passengers on the Oslo-Copenhagen route. And there's probably still a recovery potential of some 60,000, 70,000 Asians, North Americans in those numbers, whether they will all come in '24 remains to be seen, of course. As China is opening, that's where some of the push should come from.On the sale leaseback, historically, we have owned 50%, 60% of our vessels and chartered in others in connection with our new building programs during the 2015 to 2022, we have acquired vessels. So we thought it was a good time to reduce a little bit the balance sheet as interest rates have been towards 0, which has made good sense for us to own it. We can see that the negative impact to us from charter leaseback now has almost disappeared as interest rates have increased and charterers have not correspondingly increased their demands. So that's why we have made this transaction which then, in addition, helps a little bit our leverage and our ROIC numbers. So we'll probably see more of that during '24 with a handful of more vessels or so. Yes.

[Operator]

We have a follow-up from Ulrik Bak with SEB.

[Ulrik Bak, analyst]

Just on your revenue per passenger, which increased 9% year-over-year. You already alluded to that it was driven in part by duty-free. But how much more potential do you think there is to further increase this going into 2024, please?

[Karina Deacon, executive]

I think the level of spend per person is relatively high. So I would not dare to just project that it will go further. Of course, what would be nice if we got more passengers back on the channel. But that, as you know, that is a more complicated thing at the moment. So I'm not overly optimistic about predicting further improvement than compared to what we have now.

[Ulrik Bak, analyst]

That's very clear. And then a question about the status of the potential acquisition of Ekol. Can you provide any color of what's the latest development then?

[Torben Carlsen, executive]

Yes. There is no new development. As you know, we -- the competition authorities approved the transaction in July. And it means that we have -- we're doing due diligence at the moment, and we will come back to the market if there's any positive outcome from that.

[Ulrik Bak, analyst]

Okay. And then my final question on the EU ETS and how it will affect your revenue and potential earnings in 2024 versus '23? And also, how you will handle it? Because as far as I understand, you need to charge your customers upfront, but you won't know the exact amount before later date. How does that work in -- and flow into your P&L?

[Torben Carlsen, executive]

I think we -- there's no rules about how we charge our customers. But we do intend to pass on the ETS cost. And we will do that as customers consume the lane meters and the CO2. And we expect that in general, the industry will pass it on to customers. So we don't see any P&L impact from this.

[Ulrik Bak, analyst]

Okay. I've seen from some container carriers who have provided information to their clients, which are showing very different levels of these surcharges. So I was just wondering, I mean, that there must be some confusion at least as to how large the surcharges should be. And also, I understand that you need to buy the certificates at an auction at a future date where you won't know the exact price. So how do you determine the potential surcharge from that?

[Torben Carlsen, executive]

Well, there is a market price for the ETSs, and we will be very transparent with our customers and show, here's the price and here is the surcharge per route. So I think it will be very, very similar to what they're used to from us on the bunker surcharge. So we don't foresee confusion. We've spent also the better part of their share, explaining and discussing with customers so that they also understand the mechanism. We then have different options for when we buy the ETSs, but we will obviously make sure that we don't keep open positions here.

[Operator]

The next question comes from the line of Dan Togo Jensen with Carnegie Investment Bank.

[Dan Jensen, analyst]

And it seems like I was kicked out of the Q&A queue. So I have a few questions left here. But it seems like that you through this quarter has mitigated a 5% decline in volumes in freight through prices and fleet adjustments, I should say. How sticky are these initiatives? And then are there room for more, so to say, if we see volumes take another hit in coming quarters? That would be the first question.

[Torben Carlsen, executive]

We do expect that the volumes will -- or the volume decline will level off going into Q4. So that's what we are preparing for. I think we are pleased that we -- through Q3 and also previous quarters have shown that we can mitigate the loss in volumes. And our belief is, we can continue to do so. Of course, there's a limit if volumes drop significantly. But with the current outlook, that's at least what we are aiming for.

[Dan Jensen, analyst]

And then on the bunker spread again, Karina, you alluded to that the net impact here is negative by some DKK 180 million compared to last year and you expect a more or less similar effect in Q4. But when I look at the spread last year, it did decline in Q4, and we are actually now seeing that the bunker is and the spread is increasing again, suggesting that the spread effect should be less in Q4 compared to what it was in Q3 at least. But are there any hedging effects, et cetera, we should be aware of here?

[Karina Deacon, executive]

Well, we have hedged as we move forward, but it's not that I'm facing a big negative on the hedging. So this is really the numbers that we get when we compare on a like-for-like basis. So there's nothing strange that there has a different impact.

[Dan Jensen, analyst]

No, no. But it's just what you -- first of all, also apply as an assumption for the bunker spread, I guess, a development here in Q4. But, I guess, you already include whatever projection we've seen so far in bunker spread.

[Karina Deacon, executive]

Yes. And for Q4, we have hedged a large portion of our spend. So we sort of know where we're going to end more or less.

[Operator]

We now have a follow-up from Lars Heindorff with Nordea.

[Lars Heindorff, analyst]

Yes. It's a follow-up on the sale and leaseback transaction. And also Torben mentioned that you're likely to do more of this going into next year. What is the primary purpose of these transactions? I mean, if I read the statement that you came out with -- in October when you did the first one, you mentioned that it lowers your leverage only marginally. So I'm just curious to get my head around exactly what's the point of these things here. And also, the leaseback period, how long is that?

[Torben Carlsen, executive]

It's a 5-year lease. Well, some of the effects are hidden a little bit by the accounting treatment of IFRS 16. So the future lease payments are treated as debt. In reality, though, it was a transaction that gave us DKK 1.5 billion in, which means that we reduce our bank debt, our real debt by DKK 1.5 billion in doing such a transaction. So we thought, both it helps our leverage, it helps our ROIC. And we also thought actually that maybe it could be useful for the market to see that we can control the assets without owning them. And therefore, there is no need to be too worried about the leverage, for example. So -- but for now, it's -- again, it's back to how we used to have the balance between owned and chartered vessels, and we will now gradually build that up so that there will be a portion of our vessels that are not owned by us. So I think that's also usual across all the shipping segments for that matter.

[Lars Heindorff, analyst]

Yes, yes. And the 5-year period, why 5 and what will happen when the 5-year period expires, will you then need to go out and secure or prolong the leases? Or do you need to then go out and buy something new? I don't know?

[Torben Carlsen, executive]

We have a construction that means that we can decide at that point. But we have a right to buy the vessels back.

[Lars Heindorff, analyst]

Okay. And then lastly on leasing here. The impact from transition, what will that do to your depreciation line?

[Karina Deacon, executive]

The impact of the transaction, it's about DKK 20 million more depreciation per quarter. So very quick, that must be DKK 80 million per year.

[Lars Heindorff, analyst]

And that's all right of use, of course, as you...

[Karina Deacon, executive]

Yes, exactly.

[Operator]

There are no more questions. I will hand back over to Torben Carlsen.

[Torben Carlsen, executive]

Thank you very much. And thank you for joining the call. Thank you for the questions. We are very excited about the launch of our new strategy, our adjusted strategy and a new set of financial and operating targets at our Capital Markets Day, the 13th of December. We hope to see many of you in person in Copenhagen for that event. You can, of course, also attend virtually, but we hope to see you or many of you in person.Look forward to speaking to all of you again soon. Have a good day.