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DFDS AS
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Welcome to the Q4 and End of Year Report 2020. [Operator Instructions] Please note that this call is being recorded.Today, I am pleased to present CEO, Torben Carlsen; and CFO, Karina Deacon. Please begin your meeting.
Thank you very much. As usual, Karina and I are joined by Søren Brøndholt, our Head of Investor Relations today.Strong close to eventful 2020. I don't think anybody will disagree with 2020 being eventful. We saw our passenger results wiped out by COVID-19. And with that, 2020 EBITDA reduced by DKK 1 billion from the pandemic.But we also witnessed a quick recovery by our resilient freight ferry infrastructure from the Q2 disruption. We also saw there. And our Mediterranean business continued in Q4 its strong Q3 performance and is on path to become value-generating for DFDS. Logistics 2020 EBITDA exceeded 2019 despite the COVID-19 situation and its heavy reliance on certain volatile businesses like automotive.Finally, of course, 2020 closed with a boost from the U.K. stockbuilding. To the right, you see some graphs indicating how the volume trends were during the year. But let us turn to Page 4 and talk a little more about Brexit.Important uncertainties behind us, but COVID-19 lowers 2021 visibility. Brexit is finally done, and that eliminates a main uncertainty for DFDS. There is an EU-U.K. no tariffs trade deal, which is expected to limit any shifts in trade from the Brexit. Of course, longer-term Brexit effects on U.K. economy and trade yet to emerge. But we see continued uncertainty, not just due to the near-term Brexit effects but also the continued travel restrictions, of course.On Page 5, we have a little more color to how the first month of post-trading Brexit has treated DFDS. The U.K. January freight volumes are in line with expectations for both North Sea and Channel. We've seen very high demand for our new route from Ireland to France, which bypasses the borders to the U.K. Of course, we need to see the long-term viability of such a route once the border crossings normalize.There's been a high demand from our customers, and even customers that we've not had before, for us to assist with the customs clearance offering, an area where we are benefiting from our very thorough preparations for this event. The gains that we had expected from the introduction of duty free, of course, delayed as travel restrictions persist.In the English press, there have been articles talking about Brexit and teething issues. As an insider, we have seen a little more than teething issues. The Logistics business is hit by slowdown in transit times, which increased empty running and exceed -- and increased need for equipment, extra equipment, which, of course, raises costs.The integration between the custom systems and our systems and the customers' need to deliver the correct information have caused quite big operational challenges. We have employees that have been working nonstop without days off for now 40 days as we work through these issues, that every day, almost, we see improvements in the [indiscernible] we've been in our Seafood business in Scotland where we even had to ask customers not to come to us for a short period, but where things are now recovering as well.It's not completely over. Once we have dealt with the operational issues from this January transition -- U.K. has implemented a grace period that ends 1st of July where we can potentially see new issues. But all in all, a manageable situation, and again, we are pleased to have Brexit behind us.With that, I'll turn to Page 6 where Karina will talk more about Q4.
Thank you, Torben. A few words on the Q4. We had a strong finish in our Freight business driven by the U.K. stockbuilding. Nevertheless, group revenue was down 6%, and that was entirely driven by the passenger activities. EBITDA, on the other hand, was on level with 2019. And looking back to the previous quarters, that was the first time in 2020 where we reached that level.The freight ferry was up DKK 184 million in the quarter driven by the volumes, not least related to the U.K., but also driven by the operational efficiency in the Mediterranean. I'll come back to that in a little while.We had, of course, as you know, significant travel restrictions in place throughout Q4, and that impacted the passenger activities. When we look across the 3 business units where we have passengers, so what we call the business unit Passenger and the Channel and the Baltics, we saw a decline of DKK 186 million in EBITDA. But with also Logistics improving over 2019, we actually saw that the Freight business making up for that loss in the Passenger business.Let's turn to Page 7 where we look at the P&L. As I've just said, the revenue decline from the Passenger business was compensated somewhat from the strong Brexit volumes. If we look at the Ferry revenue alone and then we exclude the bunker charges, Ferry revenue was actually up by 11% and Logistics was up 6%. So the underlying business did very well.We've already talked about the Q4 EBITDA. I will not go into further detail now. A few words on depreciation. What we've seen throughout the year is that we are lower than in '19 due to the redelivery of certain freight -- or chartered freight ferries earlier in the year. On special items, we took a noncash impairment charge of DKK 100 million related to the Oslo-Copenhagen route. We took that here in Q4. On the other hand, we could reverse some of the redundancy provisions that we had made after Q3. DKK 26 million was reversed due to the fact that we no longer expect to eliminate 800 positions but are down to 700 as a result of the increased activities that we have seen throughout the system.Finance costs, a slight increase. We had an increase in the interest rate related to the temporary waiver of our covenants.Turning to Slide 8. If we look at the balance sheet, we are, in terms of total assets, more or less at the same level as '19. However, looking at working capital, that was reduced by DKK 285 million compared to the end of '19, mostly driven by a reduction in receivables in the Mediterranean, which we have talked about earlier in the year as well.What also helped towards the end of the year was a strong cash collection. As we have talked about, throughout the year, we have monitored our accounts receivable very, very closely. And in combination with huge effort by the team to collect extra cash up towards year-end, we finished the year quite strongly. That, of course, also impacted our cash flow. So when we now look at Q4, we can report a positive adjusted free cash flow of DKK 444 million, which, of course, also includes this positive impact from working capital towards the end of the year.Even if we look at the full year where we had the investments of DKK 1.6 billion, we can report a DKK 475 million positive adjusted free cash flow, i.e., taking into account the lease payments as well. So in a very challenging year, we could finish with good cash flow generation.Looking at the return on invested capital, 3.5%, a significant decline from last year, obviously driven by the passenger services -- Passenger business unit but also the results in not least the Channel. If we look at one of the other areas we have talked about during the year, with a strong finish in the BU Med, they finished with a ROIC on level with 2019 but with expectations of improvement going forward.Last comment on this place -- page relates to the net interest-bearing debt compared to EBITDA where we report a ratio of 4.2. It's, of course, an increase over last year, but good to see that it's slightly down compared to the third quarter and it's well below our covenants, which, as you know, were increased during the COVID crisis. So now we have actually managed to stay under the original covenants throughout 2020.A few comments on the divisions, turning to Slide 9. As we have talked about, the U.K. stockbuilding had a significant impact, which is visible on the North Sea and the Channel results here in Q4. If we look at the North Sea, we saw 16% volumes up, and that was specifically driven by activity between the U.K. and the continent.Looking at the Baltics, we did see freight volumes going up when we adjust for the closed route. However, the result was impacted negatively by extra capacity costs -- or extra capacity which increased the ferry costs, plus also the fact that we saw on -- particularly on the Baltics, we saw a significant increase in bunker costs on a net basis.Channel increased results. So a very strong q4 on the freight side, and that could offset a significant drop in the Passenger volumes.Turning to Slide 9 -- sorry, 10. Looking at what we call the BU Passenger, reporting a decline of DKK 135 million EBITDA compared to last year. But with the number of passengers going from more than 300,000 to 21,000, it is clear that, that is not possible to run a good business with no passengers.And the positive news, again, this quarter, like we had in Q3, the Mediterranean, very pleased to see them delivering DKK 105 million more than in the same quarter last year or '19 driven by volume growth, which was partly resulting of the uplift in trade between Turkey and Europe where we, compared to '19, of course, benefited from the depreciation of the Turkish lira. But not least encouraging was to see that on the internal lines, we also improved through the utilization of our rail services but also simply because of cost efficiency where we saw lower operating costs.Finally, on Slide 11. If we look at the Logistics business, they had a busy fourth quarter like the Ferry business. However, they were hit by extra costs. Given the significant activities, there was shortage of, for instance, drivers and equipment, which increased costs throughout the system. Nevertheless, when we look at Nordic, they increased EBITDA in the fourth quarter by DKK 16 million. We saw improved performance in our specialized services in Sweden and also our contract logistics in Sweden. And then we were helped by the acquisition in Finland, which continued to do well.Looking at the continent. We had an improvement of DKK 9 million driven by -- as you might recall, we had some challenges in the Special Cargo business late '19 and in the beginning of '20. So comparing quarter against quarter, we have an improvement from that. And then also the Dutch acquisition. In the continent, the extra cost related to the stockbuilding was very profound. So even though we benefited of the volumes, we didn't see as much bottom line impact as we could have hoped for.Lastly, U.K., Ireland, we report a decline of DKK 23 million, not really a reflection of the underlying operation but very much due to one-off charges. We had a provision in '20, and we had a one-off positive in '19. So together, they mean that we report a decline in the EBITDA. Also, in the U.K., we saw extra costs related to the capacity issues.With those words, I think we can close 2020, and I'll hand the word back to you, Torben, for the outlook.
Very good, Karina. Page 13, first, very quickly, some underlying assumptions. Due to the stockbuilding in 2020, we expect our U.K.-linked freight activities to perform below 2020. Mediterranean, as Karina mentioned, are expected to improve earnings in '21. Baltic Sea sees some impact by increased capacity, which will be negative for BU Baltic. We assume that around 40% of the EBITDA decrease we saw in 2020 for our passenger service can be regained, with passengers returning towards the end of Q2 in our estimates. And then the consolidation of HSF Logistics Group, which is expected to take place from May, should generate revenues of around DKK 1.9 billion and an EBITDA of around DKK 250 million.Those assumptions, on Page 14, gave us a revenue growth expectation of 20% to 25% for '21, up from the around DKK 14 billion that we have reported in 2020. We guide a range of DKK 3 billion to DKK 3.5 billion EBITDA, a large range due to the elevated uncertainty from the pandemic and also the Brexit transition.We see EBIT of DKK 1 billion to DKK 1.5 billion and investments quite high at DKK 2.8 billion as we hopefully pay DKK 900 million for the HSF Logistics acquisition and spend DKK 800 million on 2 ferry newbuildings primarily. And then remaining are usual CapEx for the group.Turning to 15. What are then our strategic priorities? We will focus on a successful integration of the HSF Logistics Group. We will pursue the different opportunities that arise from the post-Brexit situation. We'll continue to drive organic freight growth through our strong commercial setup. We'll see an increase and focus on delivering on the increase of the Mediterranean ROIC. And then we are preparing -- have prepared our passenger activities to reemerge strongly once travel restrictions are lifted.With that, we would like to hand over for Q&A.
[Operator Instructions] Our first question is from Marcus Bellander of Nordea.
Two questions, if I may. The first, regarding the U.K. volume decline in Q1, do you have any sense of -- or sorry, in January, do you have any sense of how much of that is due to destocking and how much is due to the customs clearance problems?
It's difficult to split the waters there. But the decline is probably a little bit less than we had expected from the stockbuilding picture we had seen in December. So there may be some exports from the U.K. to the continent that have been impacted, whereas we think that most of the import to the U.K. have not been reduced due to the teething problems.
Okay. Understood. And the second question concerns your guidance for 2021. It seems to me like you're taking -- or you're highlighting the -- sort of the risks here, U.K. volumes, et cetera. But I mean there are some positives as well. You've made a large acquisition. You've made -- you have easy comps in Q2. You have some new routes. Mediterranean is running better and then passengers are coming back. I'm just wondering in what scenario will you end up in the lower end of your guidance range.
That's -- it's good to hear your optimism, Marcus, and that you've seen some of the strategic initiatives that we have made. And you are right. Of course, we don't hope to reach only the DKK 3 billion, but it is fair to say that the recent months have seen a worsening of the pandemic outlook for our Passenger business. And we are getting a little concerned about our assumptions on passengers returning in big numbers in Q2.And then we just have to have a little more visibility to the whole Brexit situation where there was heavy, heavy stockbuilding in Q4. And it would be strange if that is not showing as a negative effect in Q1. So far, it's a little bit less than expected, but it would be normal. There are some technicalities as well on the fuel, et cetera, that we can maybe cover separately, but that's also dragging down the numbers a little bit.
Okay. Understood. If I can just follow up on that, and I understand it's a difficult question to answer, but the U.K. volume specifically, I mean, I totally understand that there will be -- that there is headwind here in Q1, but Q2, I mean, comps must be quite easy on ports, sea and then the channel also in Q2, are they not?
Well, of course, Q2 was impacted by a significantly slowdown in the volumes. So if we look at Q2 alone, yes, you're absolutely right. But it is one of the uncertainties in our outlook that we really don't know to what extent and how quickly the volumes return towards the U.K.
Yes, yes. No, understood. I mean uncertainty is high. Sorry for harping on this topic. That's all for me.
Our next question is from Ulrik Bak of SEB.
Also a few questions from my side. The first one, also regarding the guidance and what it requires to reach the low and the high end of the guidance range. If we take the passengers, you assume to regain 40% of the earnings decrease from passengers in 2021. Is that the assumption to reach the midpoint? And if so, what is the assumption you have applied to reach the high and the low end? That would be my first question.
We have made one forecast where we have applied certain assumptions. And then we have applied a certain range to that forecast. So I don't think we can answer specifically what would have to change on certain parameters to reach the bottom or the top. But obviously, one element to reach the top could be that passengers came back quicker or in higher numbers. Right now, that's not the indications when you see some of the vaccine rollout delays, et cetera. But that is something that could, of course, lift us.And also, to Marcus' point from before, if the Q2 comps give us more headwind -- sorry, more tailwind than we expect, that would also be an element that could lift us obviously.
Yes. Okay. And yes, to the U.K.-related freight, you state that you expect freight to be lower in 2021 compared to last year. Can you quantify it in any way, get it any closer to a number?
It's a low 1-digit reduction in volumes.
Right. And then a question to the delta on EBITDA from the cost savings, Karina, you mentioned that the number of redundancies has been decreased from 800 to 700. What does that imply in terms of delta from the cost savings in 2021 versus 2020?
Yes. Of course, it has an impact. We guided after Q3 that we expected a run rate impact of around DKK 300 million. And with the 100 people left, we are down to something closer to DKK 250 million, of which we have seen some DKK 100 million in 2020.
Okay. That's very clear. And so another delta to the guidance is the state aid. If I remember correctly, you've got state aid amounting to around DKK 150 million in 2020. Is that completely gone in 2021?
Just to be exact on the number, it's DKK 133 million because we only have the salary compensations. It is not completely gone, but it is -- it's relatively low. And it's sort of month by month, whether the furlough schemes are extended throughout the system. So for the time being, it's not a significant amount that we have included.
You may note we paid back the fixed cost coverage or forfeited that, the DKK 50 million. That may be the difference between the numbers you have.
Yes, right. And then a question to the U.K. trade currently. You mentioned the grace period, which is expiring on 1st of July, and you sounded to me a bit downbeat about what could happen following that date. What is the practical implications once the grace period end?
The EU have implemented the customs border checks fully from day 1. And U.K. have taken a stance where they said, we'll only implement them fully in July. So I didn't mean to sound downbeat, just raising the point that there will be teething problems again when we reach July. We have obviously learned greatly from this first round.And we should also be mindful that for EU, it's not so critical if goods cannot arrive from the U.K. But for U.K., it's very critical if goods cannot arrive from EU. So we do expect that authorities and customs clearances will all work together to make sure that it does not become a bigger issue than it was in January and, hopefully, a smaller issue with the experience both customers, operators and authorities have at that stage.
Okay. That's very clear. And to that, the U.K. trade, has your stance regarding Brexit and the implications of Brexit, has that changed since the end of December when the deal was made?
I think we are still very pleased as a deal. We can see that there are these transit delays that is costing now money for the whole industry and, of course, the producers and eventually it will be the customers. So we're a little concerned about how long it will take to get those transit times down again and take out the costs again, but that's maybe a detail in the larger picture.
Okay. And another one. Sorry, a lot of questions here, but there are very many moving parts. But your deal with the British Department of Transport, is that still ongoing? Or has it been canceled by the U.K. government?
It's -- it has not been canceled.
Okay. Yes. And then finally, 2 housekeeping questions. Just want to make sure that I get the net debt right. With the acquisition of HSF, the net debt increases by DKK 760 million, right?
The payment is EUR 125 million this year, plus there will be some associated investments in HSF this year. So if you just look completely in isolation, it's probably a little bit more. But of course, then you have the cash flow.
You're acquiring some debt, right?
Yes. We're also acquiring some debt.
Maybe we need to come back to you, Ulrik, with that.
If you -- it's more than DKK 800 million -- it's more than the DKK 600 million you mentioned. That will be the net impact because the payment alone is more than that.
Yes. Yes, I was thinking, apart from the payment, just the acquired debt on top of that. But yes...
Okay. But then you're probably right. It's DKK 100 million -- yes, that's probably -- that could be true.
Okay. And then a final question. The blended tax rate following the acquisition of HSF, what does that amount to? Historically, you've had around 5% tax rate, but as earnings become larger in the logistics area, I suppose the tax rate goes up. Do you have any indication about how much?
It's a little bit too early to tell. But you're, of course, absolutely right that we should assume that it will go up.
It could be a percentage point or 2.
[Operator Instructions] We have one more question from Ruairi Cullinane from RBC.
As you mentioned on the call, you've shown encouraging improvement in the Mediterranean in H2, but clearly, you're running below your 8% targeted ROIC there. I was wondering what's next to bring the ROIC up in the Mediterranean. Is that much in your control? Or is it more a continued normalization of the macro backdrop?
It's both, the normalization that we're seeing now from both the cost initiatives Karina touched upon and the macro strength. But then we also need to regain some of the market share we've lost to the overland transport. That can only happen once we get even more capacity in the Trieste Port and more space, which we are working on. So it's a gradual improvement through '21 but also continuing in '22.
Next question is from Marcus Bellander of Nordea. Marcus, have you got a question?
Sorry, I was muted, but I was going to ask the exact same thing as Ruairi just did. So I'll withdraw my question.
There are -- we've got one more question from Ulrik Bak.
Yes. A final question on the Mediterranean segment as well. Recently, one of your main competitors in the Mediterranean segment, Grimaldi Group, has increased capacity in the Eastern Mediterranean. Do you think Grimaldi could pose any threat to your target to meet your minimum ROIC target?
We have to always be humble about our competitors' action, but that particular move is not something that impacts our business. We do have a call over -- a stopover call from Turkey to Italy in Patras, Greece. It's very, very minimal volumes we carry from that stopover. And they may be impacted negative from this, but we definitely see this as a very normal move from Grimaldi's side and not aimed at our markets in particular.
Okay. But considering that Grimaldi is also a big ro-ro operator, do you think it's likely that they would enter the space that you are in being as profitable as it seems to be or become?
Well, we are approaching our cost of capital. But I cannot speculate, of course, about what other operators are thinking or doing. But what they have done is not something that we are concerned about. We welcome the extra capacity.
There are no further questions at this time. So I'll hand back over to our speakers.
Thank you very much. And thank you, everybody, for listening on this -- in this busy day. As we enter an exciting 2021, we are eager to get to work and to see the effects of all our strong actions that were implemented during 2020. So looking forward to speaking to you, if not before, then for our Q1 release in May. Have a good day.