Dfds A/S Copenhagen Ord

Thank you very much and welcome to this call. I am joined by our new CFO, Karen Bosen, and Søren Bornholt, head of our IR. Q2 turned out to be a more challenging quarter than expected. And as you know, we consequently revised the earnings outlook for 2024 I'm pleased to report that we still expect to deliver an adjusted free cash flow in 2024 of 1.5 billion Danish kroner. We're dealing with two sets of challenges. One is market headwinds linked to the overall European macro picture and transport market dynamics. The second challenge is our own performance. For some of our activities, performance is also impacted by market dynamics but we have underperformed in certain areas, particularly our Nordic coal chain unit. If I look beyond Q2, DFDS's strategic positioning is strong. We are positioned to tap into growth from nearshoring. Our ability to engage with large transport and logistics buyers is stronger than ever before. We see a UK where the leadership wants to improve trade relations with the EU. We see a Turkey well on its way to reduce inflation with a good potential for the economy to bounce back in 2025. But let's dive into Q2 and talk more about our performance and the challenges. If we move to page three, a recap of our moving together towards 2030 strategy. It's unlock network value, it's the green transition, and it's our financial ambitions. And just reminding you of our financial ambitions, it's an annual adjusted free cash flow of 1.5 billion. It's a ROIC in 2027 of around 10%, and it's a leverage reducing to 2.5 times by 2026. Moving to page four to then see where we are in relation to those ambitions. First, ROIC Q2 last 12 months, we are at 6%, quite a distance away from our ambition. Ferry is at 8%. We're not delivering above the ambition, but the Baltics and Channel are currently impacted by overcapacity. Logistics at 4%. We'll come back to this, but our second half year focuses on earnings turnaround. Not much to say about CapEx. We have reduced the outlook to 150 million due to timing and other decisions. The adjusted free cash flow of Q2 was 0.7 billion, and we do still expect to deliver the 1.5 billion for the year. In terms of leverage, leverage reduced 0.1 compared to Q1, but with the ECOL acquisitions, we'll see a slight increase, expectedly, Q3 or Q4. Moving to page five and the headline of our report, Navigating Challenging Markets. We delivered organic growth of 3% despite these challenging markets. Our financial performance, though, was below expectations. And ferry was impacted by volume and rate pressure in addition to adverse cost dynamics. Logistics was impacted by margin pressure, shift in customer flows, and one underperforming business unit looking to second half of the year the european growth rebound expectations have have softened our focus is on continued protection of ferry market positions as as various expected to face continued market headwinds for logistics Key second half priorities are price, warehouse volumes, and turnaround of Nordic cold chain. Our cash flow outlook is maintained, as mentioned, and the top priority remains to deliver on financial ambition of one and a half billion of annual adjusted free cash flow. strong Q2 cash flow was delivered and with reduced CapEx in the second half of the year, our cash flow outlook is on track. In the strategic perspective of this unlocked value of expanded network, Our organic growth ambition continues to be supported by strong customer pipelines. The acquisition of eco-logistics network, the expected end of Q3, will strengthen our Mediterranean business setup. And the sale of our Oslo route was driven by our transport network focus, where we believed better owners could bring the Oslo route forward. Moving to page six, I will hand over to Karen for some words on our reduced EBIT.

Thank you Torben and good morning everyone. So zooming in on our EBIT, first and foremost, as mentioned by Torben, we do have a healthy revenue growth, 9% overall, and adjusted for acquisitions and the ETS, which is also a new element in our revenue this year. We see a 3% organic growth, which is still solid for the quarter. However, our EBIT is reduced 28% due to various factors that we will come back to later in the presentation, but overall, You see a reduction compared to the same quarter last year in ferry of $133 million and $60 million in logistics, which then takes us to the EBIT of $519 for the quarter. If we move on to income statement, which is the next slide, I will quickly go through the numbers, but not in too much detail, as we will come back to them, and you can obviously read for yourself. Overall, our revenue growth, as mentioned, is 9%, In summary, and in line with what we gave of guidance updated on 22nd of July, we do see still a revenue growth in line with our guidance and expectations for the year as well. However, our EBITDA this quarter decreased 10% compared to same quarter last year. And then when you at the same time have an increase in depreciation of 11 million, an increase of 11% and an increase in our amortization as well, then obviously you end with a significantly lower EBIT of the 28% negative. In addition to that and below the EBIT, we also have increased finance costs driven by higher interest rates for the unhedged part and slightly higher leasing debt. So a few words more on the revenue, although I have said quite a bit already. mainly driven overall by the acquisitions. A little bit of half of the growth of the 9% is coming from the acquisitions that we made over the past 12 months. And then of the real growth, we see 4% in logistics, which is true organic growth coming from various regions, some up, some down, but a net growth of 4% organically. And then we also see an increase in passengers, mainly driven by our channel routes, The ferry freight growth here you see in revenue is predominantly the ETS that comes in through the top line and then gets passed on to our customers. And with that, I will hand back to Torben.

Thank you. On page nine, our freight ferry EBTA is down 8%, as mentioned, or $60 million. excluding 54 million decrease in oil spread hedging income compared to last year. The organic decrease is driven by rate pressures and adverse cost development. The passenger EBITDA is up 25 million due to higher volumes in spending in channel, offsetting negative state of Gibraltar contribution due to the seasonality of this new business. Depreciation increase of 49 million which is due to higher cost of stockings, the sale and lease back impact of the three mega ROROs implemented last year and the Strait of Gibraltar acquisition. More details on logistics on page 10 with an organic EBITDA decrease of 56 million driven by 20% of the revenue with margin pressure, shift in trade flows, and Nordic cold chain underperformance. For the remaining part of our business, the 80%, we saw a flat development with general margin pressure, but offset by improved performance in mainly Sweden, contract logistics, our special cargo unit, and our UK cold chain. We gained EBITDA from acquisitions of 9 million, And depreciation increased by 21, of which 8 came from acquisitions. Moving to page 11, cash flows and capital. Our operating cash flow is up 32% to $1.3 billion, driven by a strong working capital performance. Operating capex is, as expected, $300 million. and an adjusted free cash flow for the quarter of 0.7 billion. Last 12 months, we had 2.3. However, this is positively impacted by the sale-leaseback of the three freight ferries. Leverage, as mentioned, is lowered to 3.1 times net interest-bearing debt to EBITDA. With that, moving to green on page 13, we see continued progress On both our green and social targets, our ferry emission intensity reduced 3% for our own fleet, 2% across route network when including charter vessels. Our first deployment of battery ferries on the channel still expected by 2029. We are awaiting response from EU funding for ammonia vessels for green corridors. And the rollout of e-trucks continues with now 150 e-trucks in operation, including now also Germany. And we have added and continue to add mega charging facilities, this time in Rotterdam, to service our trucks. In terms of female representation, we increase this three percentage point in management positions still of course far below our targets but they move in the right directions in terms of safety we rolled out a safety program for all our land-based employees and we continue to see positive results from this moving to page 15 Not so much new, but 600 million of capital distribution for the year. Dividend already paid, share buyback of 431, of which 270 million is completed by the end of last week. Page 16, outlook 2024. It's a more challenging year than previously expected. We now see a growth rebound in Q4. We see a continued rate pressure on our freight routes, ferry routes. On the other hand, we probably have seen on the road transport a buttoning out of the the haul is over capacity and therefore we also see an improvement of our margins during the second half. On the passenger side, the markets are all stable, somewhat softer demand in the Baltics, but no real concerns anywhere. On page 17, As mentioned a couple of times, our cash flow outlook is unchanged, although the EBIT range is lowered. We continue to keep the strong top line performance driven by acquisitions, as mentioned by Karen, but also by solid organic growth. The EBIT outlook range is lowered. We did that already mid-July. to now 1.7 to 2.1 billion, whereas before it was 2 to 2.4 billion. CapEx is also reduced, and as mentioned, the adjusted free cash flow continues to remain 1.5 billion. Priorities for second half for DFDS is, of course, to protect and to deliver. continued organic growth focus, continued focus on protecting our key ferry market positions, add enterprise accounts, and fill the warehouses where we have empty space. Logistics turnaround, price focus, cost focus, and a reversal of the fortunes of Nordic cold chain. will continue to deliver on our short- and long-term targets on the green transition. We have a lot of focus on Strait of Gibraltar and the continued success of the integration, and also, of course, the performance, which we can sensibly measure after the high season, so after Q3. Eco-logistics is moving closer in terms of regulatory approval for the acquisition And we are ready to start the integration once the approvals have been received. With that, we turn over for Q&A.

Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Questioners on the phone are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. Our first question is from the line of Lars Heindorf from . Please go ahead.

Yes, morning. Thank you for taking my questions. A couple questions for my part. First, maybe a little bit of housekeeping. Can you tell me how much FRS contributed on terms of revenue and in the second quarter?

The revenue is 257. And then I think we are around, it's a small double-digit negative EBITDA.

Negative EBITDA.

Due to seasonality, that was as expected, yes.

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

I can certainly comment on the first, which is basically the entity has been quite successful in getting customers. The customers are very large customers, and there have been very big swings in their trade and in their operations. in the geographies that they move things around. This is fresh meat. This is retail in Denmark, for example. And this has led us to lose a little bit control over the operation. So while we've been growing the top line, We have not sufficiently managed our cost, primarily haulage, both third party and our own haulage. We have also probably gained business at the wrong pricing. But again, once the balancing of those flows turn out to not happening because of changing production patterns among the customers, The costs have gone wrong and we have now revamped the organization. We have started six, eight weeks ago a relatively focused project to turn this around and we expect to go from a negative situation in the Danish business to a break-even by the end of the year.

And is it only Denmark that is loss-making?

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

And in Denmark, just to get this clear, whether this is solely caused by cold chain and whether there's also some dry cargo included, how much is what you do in Denmark? Is that only cold chain?

We also do dry and both entities are impacted.

Okay, but those contracts that you've been winning apparently at wrong prices, how long will they stick?

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

Okay. Then in the ferry parts. We've been talking about the price pressure in the Baltics now for at least a couple of quarters. And you mentioned in the guidance upgrades that that has been spreading to the southern part of the North Sea as well as the Channel. If you exclude the ETS, because it's a little bit difficult to carve that out, What would be your sort of ballpark take on how much the average price per lane meter is down in the freight part of the business?

I don't think we disclose that so accurately normally. And it is, of course, very much a split per geography that is the relevant one. But we are seeing single-digit reductions in single, you know, overall a small single-digit reduction and higher single-digit reductions in ball-6N channel.

Okay. And then just the last one, then I will head back in the queue. The guidance to upgrade. of the 300 million. You mentioned in the statement there in, I think, late July, it was caused by three factors. Price increases in freight, price pressure, and then the logistics. Can you say anything how those three parts of, you can call it factors, how they are distributed among the 300 million? Is it equally 100 or how is it?

Well, I think you can get a clue by looking at our new guidance where logistics have been reduced from a midpoint of 575 to 412. So about half, I guess. in logistics and half in ferry. Ferry gone down from a midpoint of, what is that, 150, 1825 to a midpoint of, yeah, 150 each.

Okay. All right. Thank you.

You're welcome. Thank you. Before we take the next question, A reminder to all the participants, if you wish to register for a question, please press star and one on your telephone. The next question is from the line of Ulrich Bach from SEB. Please go ahead.

Yes. Hi, Torben and Kaan. Thank you for taking my questions. First question is also on your guidance downgrade from July. I can now see that it's obviously driven by both segments. But just for the ferry segment, can you perhaps help me understand how the development surprised you on the downside? Because volumes seem to have been quite strong. At Q1, you also mentioned that volumes were higher than you expected. And given the way the contracts are structured, I would expect that you have some quite good visibility on the pricing of your ferry contracts. So how is it that you were surprised on the downside here? That would be my first question.

It may be easier that I explain what has happened, then you can judge whether we should have been surprised or not. But the volume development in Q2 has been favorable, but primarily driven by Channel and Baltics. where we have the biggest pricing issues, whereas we have maintained volumes or almost maintained volumes in the Mediterranean, but also there with a slow economy, having incentivized customers on board at generally lower prices. So you can say Channel and Mediterranean have delivered below expectations in pricing. And North Sea have seen that, or we've seen that the rebound in volumes have not happened in the North Sea in Q2. It's probably postponed till end Q3. And that has also had a negative impact. So on the ferry side, that's the three areas that are causing the impact, then there is a technicality on the fuel spread that has gone against us as well, adding to the downturn.

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

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

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

Yeah, the competitive situation is, of course, that with P&O's move to sell a ferry and enter slot charter with Irish Ferries that we have to assume that they will be both competitors for a while. For us, the new setup is not attractive at this stage. We don't believe it will have a negative impact for us to withdraw. As part of the new setup, one vessel has been removed from the channel, which obviously also benefits us. And furthermore, we see that some of the savings we were able to produce from change schedule we believe that we can actually maintain most of those without losing market share. So we do not see a financial impact from the withdrawal from the partnership.

Okay. I think it sounds interesting that you expect to maintain market share without increasing your frequency.

But in the event that you see... Well, it's on the back of one reduced vessel, right? There's instead of ten vessels, nine vessels. And we still have three. And then, of course, we continue our strong solo situation position on Dunkirk.

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

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

Okay. And then my final question on logistics. You have acquired Ecol. It hasn't been finalized yet, but is there a potential that this acquisition can support the development of your current challenges in the logistics division?

i think immediately it will not support it will it will of course be a big task in itself to integrate logistics i think once the successful integration has happened it will support our ferry business for sure in the mediterranean and it will support our continental logistics business But from day one, it will, of course, be something that we will have to focus a lot of attention on.

And perhaps just to follow up, have you received any indications from Ecol's current customers from a reaction to this acquisition, positive or negative?

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

And perhaps your own existing customers in this segment?

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

Okay, that's understood. Thank you so much. No further questions.

You're welcome. Thank you. For any further questions, please press star and 1 on your telephone. Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Torben Karlsson, CEO, for any closing remarks.

Thank you very much to everybody for joining the call, and thank you for your good questions. For the rest of the year, our top priorities are to continue to protect our key ferry market positions and to turn logistics earnings trend around, as also mentioned during the call. In parallel with addressing these priorities, we'll continue to unlock the value of our expanded network and continue to move our green transition forward. And of course, let me just... also highlight our commitment to return excess capital to shareholders. We look forward to talking again when we report on progress at the Q3 conference. Have a good day.