DFDS AS

CSE:DFDS

Earnings Call Transcript 2017-Q4

[Operator]

Ladies and gentlemen, welcome to the DFDS Q4 Report 2017. Today, I'm pleased to present our host, CEO, Niels Smedegaard. [Operator Instructions] As a reminder, this call is being recorded.I'll now hand over to CEO, Niels Smedegaard. Please begin.

[Niels Smedegaard]

Thank you, and welcome, everybody, to our conference call. It's the usual team. Together with me here in Copenhagen, our CFO, Torben Carlsen; and Head of Investor Relations, Søren Brøndholt.Let's get started and turn to Page 3 of the presentation. We are very pleased with our strong performance in 2017, and it is a great platform for further development of DFDS, as it says here on the top. We ended 2017 well: 12% higher in the fourth quarter, brings EBITDA up to DKK 2.702 billion, and that's an increase of 4%. And that is a new high for us. It is also a new high when you look at the return on the invested capital. We have now reached 19% before special items, and you will see the graph on the right-hand side.Going forward here into 2018, we will be focusing on 3 tracks in the company. Number one is the continuous drive to improve customer services, experience, et cetera, but also to operate more efficiently and to reduce the cost base. The second track will be continued increasing investments in our digital and IT capabilities, something we started a couple of years ago, and that trend will continue. We'll talk a bit more about that later. And then of course, the continued pursuit of shareholder value creation through acquisition opportunities as they may arise during the year. Regarding new share buyback and dividend, et cetera, Torben will come back to that a little later in the presentation.Let me now hand over to Torben, so he can take us through the numbers.

[Torben Carlsen]

On Page 4, if you see the consolidated Q4 P&L numbers and other KPIs, showing a 4.7% organic revenue growth on an adjusted basis versus the reported revenue of -- growth of 4.4%. EBITDA increased 12% to DKK 574 million. You saw a decrease in our depreciation, which was a technical issue related to a write-down in Q4 '16, which was partly reversed in Q4 '17. Special items are spiking somewhat, and that is due to the recent closure of our Esbjerg terminal and the sales of the Belfast reefer activities. The profit before tax is up 29% to DKK 346 million before special items. And as Niels mentioned, the ROIC is now at 19%, up from 17.8% end of '16, when we look at ROIC before special items.Turning to Page 5 and some more details from our different business units. You see that North Sea with a plus of DKK 37 million compared to last year, continue the positive development that we've seen throughout the year with higher volumes still benefiting this business unit.Channel is up by DKK 24 million, DKK 25 million, impact from somewhat lower ship operating costs and especially higher passenger volumes, somewhat offset by impact from Jungle closure in Calais last year.Passenger disappointing with a DKK 48 million decrease compared to last year. We've suffered from some passenger mix changes, especially Norwegian business guests not showing up in the same numbers, but also some negative mix changes on our Amsterdam Newcastle route. Norwegian kroner is soft, and that hits us particularly hard on this activity. Bunker costs going up, and this is the one activity where we do not have full hedge from our customers. We have then also changed allocation principles, which hurt Passenger compared to the other business units.Nordic and Continent are up jointly DKK 19 million, very solid development for our high-margin logistics solutions and contract logistics solutions in those 2 areas and also very positive trend in our general transportation services in those 2 units. U.K., Ireland on the other hand, has seen a decrease of DKK 14 million versus last year. As we've mentioned before, we've been struggling in Belfast, where most of the activities or many of the activities have now been sold off. We've also had startup costs with some large contracts in our Peterborough vicinity, plus the Salmon volumes have been somewhat lower than last year during this Q4.Turning to Page 6. We talk a little bit about the distribution to shareholders, which reached 9.2% in 2017 or DKK 1.7 billion, which is, again, 9.2% when -- in relation to our equity market value. Our leverage is on -- measured on net interest-bearing debt to EBITDA at 0.9, which is on level with end of 2016.For '18, we propose to increase the dividend from DKK 10 to DKK 11 per share, with DKK 4 being paid out after the General Assembly in March and the remaining payout intended to be paid out after Q2.We also today launched a new share buyback program of DKK 400 million. The old program expired 2 or 3 days ago, and we expect this to complete latest 15 of August, just before the Q2 release. And during the year, the Board will reassess our capital structure, including potential further share buybacks in view of our potential investments, both in vessels and related to M&A activity.With that, I'll turn back to Niels Smedegaard that will talk a little bit about our key focus areas for 2018.

[Niels Smedegaard]

Thank you, Torben. Yes, we closed the book on '17 and look a bit ahead, and if you go to Page 8, you'll see some of the key performance drivers and their likelihood as we see it right now here in 2018. I'll not go through all of them, but starting at the left-hand side, you will see some of the factors which will for certain impact us. As we have mentioned earlier, there will be an increase in IT and digital, both P&L costs, but also in investment, and that will impact our P&L in '18.We have Alphatrans added to our portfolio, both on a revenue and income basis, excuse me, and we will lose the revenue from the divested and closed logistics activities, which will pull down the top line. Bunker cost has increased recently, and that is, as Torben mentioned, impacting the Passenger side. It will be interesting to see what happens from here.Going to the next column, freight shipping volume is predicted to grow around 2%, passenger volumes on level with '17. But the other element impacting us in '18 from a P&L perspective is slightly higher shipping capacity costs. We have a fourth vessel full year on the Gothenburg-Ghent route, and that is a route which is a likely candidate for the new big vessels we get very early in '19, and that, you can say, is an investment in the future, more efficient setup we will be able to implement beginning of 2019. That is impacting us like the digital IT investments.Moving to the next column, the competitive environment is still there. It's a tough marketplace, and we expect that to continue, with some players are adding a little capacity here and there, and it does put a limit on the pricing power and opportunities we are having. But nevertheless, we are, of course, trying to get what we believe are fair price increases through also in '18.On the macro side, the U.K. GDP growth is predicted to be significantly below the EU average and given our significant exposure to the U.K. market, it is impacting us. We are happy that the U.K. is still growing, but at a slower pace, unfortunately, than the -- than the rest of the EU economies. And then the usual exchange rates, oil price changes, which will impact us positively or negatively.Moving on to Page 9. All of these things have been baked into our budget for '18, and we are now indicating an EBITDA range between DKK 2.65 billion up to DKK 2.85 billion versus the DKK 2.7 billion for 2017.And as I mentioned, it's a result of European growth in general around 2%, but only 1% in the U.K. economy. We are not adding significant shipping capacity, and that is impacting, of course, also the volume development in the business for '18. We do have expiry of a large logistic contract mid-2018, which is pulling somewhat down top line-wise on the Logistics side. They will, however, improve on the earnings side in the Logistics business.And then the 2 elements impacting our bottom line is the digital and IT investment. We are up around DKK 100 million extra cost-wise for '18, and the benefits are only accruing sort of towards the third, fourth quarter of '18. So there will be a 2-, 3-year payback on that investment, and that will penalize us a little bit in '18. That, combined with the higher vessel costs I mentioned, will play a small impact here in '18.On the investment side, we forecast DKK 1.1 billion, including DKK 300 million to new buildings and around DKK 200 million to expansion of port facilities in preparation for higher volumes going forward. On the right-hand side, you will see the breakdown between the different divisions and non-allocated items.Turning to Page 10. Continuous improvement projects, that is in our DNA, and in spite of excitement over new digital capabilities, et cetera, it will continue to be a focus area for us. As you have seen it in the past, we are currently running a pricing and yield project, particularly on the Passenger side. We get some expert assistance from the outside to make sure that we are as sharp as we can in the passenger markets, and we are also upgrading in several sectors on the freight side.Starlight is a new project looking at the whole onboard experience on our cruise routes. Back in 2008, we ran another similar type project, Lighthouse. At that time, this is now time, again, to turn everything and make sure that we have top-class performance and experience. And of course, it needs to translate into increased earnings as well.On the Channel, we will finalize Carpe Momentum and get the remaining positive effects out of that during 2018. We have seen, in particular, the second half of '17, good progress, but there is a little more we can extract out of that.And then on the Logistics side, we have, particular, the operation to and from Italy causing us some heartache right now, and we will fix it or close, sell it off, during the first half of '18. That's the plan.Moving on to Page 11. Digital capabilities. It's on everybody's radar screen, including ours. We did some very good work last year with a new digital IT operating model. It's supposed to increase our time-to-market and the whole scalability and create more flexibility in our architecture. We will launch several digital product during 2018, including what we call a unified.com project, a whole new web presence for the entire organization, better user experiences when you are online with DFDS, but also beefing up on the innovation side and the so-called smart data teams. All of this costs money, but it will eventually produce benefits for the company as well.We are also looking at higher degree of experimentation, but also into future technologies and their viability; what will work and not work and where should we be present and active and where should we be a fast follower. And that amounts to the DKK 100 million on the P&L side, and then, of course, also additional investments. But it plays a role for us. Take our Passenger side of the business: More than 85% is online revenue generation, and we need to be as sharp as possible and increase the conversion rates, et cetera.Turning on to Page 12. Priorities for '18, they're clear: Realize our digital strategy, make sure we are close to the customer, increase the satisfaction, growing the top line, push the efficiency projects, improve performance on the Passenger business unit side and then the few challenged Logistics activities and then prepare for the delivery of the 2 ro-ro new buildings early '19. And then try and succeed with value-creating M&A activities.So we have a plan for '18. Actions are mapped out. So now, it's basically roll up the sleeves and then aim for a new record EBITDA year also in 2018.So with that, we close the presentation, and we'll hand over for any questions you may have.

[Operator]

[Operator Instructions] And our first question is coming from -- that's from Jørgen Bruaset of Nordea Markets.

[Jørgen V. Bruaset, Senior Analyst]

Just a quick question from my side on the scope for further cash distribution to shareholders. So with your current financial gearing and the share buyback you launched today, should we expect close to 100% of free cash flow should be distributed to shareholders? Or should we assume a similar run rate to what we see now guided for the first half of '18?

[Torben Carlsen]

We distributed around DKK 1.7 billion last year. And barring any large M&A activity, I would expect the same level in 2018.

[Operator]

[Operator Instructions] Okay, there seems to be no further questions at this time, so I'll hand back to our speakers for the closing comments.

[Niels Smedegaard]

Well, thank you, everybody, for listening in. We conclude the call now, and wish you all a great day. Goodbye.