Dfds A/S Copenhagen Ord

Good morning and welcome to DFDS's Q3 2024 conference call. I am joined here by Karen Bosen, our CFO, and Søren von Holt, our Head of Investor Relations. This morning we released our Q3 numbers and last Friday, November 1, we lowered our 2024 outlook for EBIT and the adjusted free cash flow. The outlook change was partly driven by our financial performance and partly by the termination of the ECOL acquisition, which we also announced last Friday. The termination of the agreement is, of course, unfortunate, but we believe the right decision under the circumstances. As many of you know, ECOL Logistics is a large and valued customer in our Mediterranean route network. Given our customer relationship and an ongoing dialogue about the future post-determination, I cannot at this stage provide additional information about the situation. We have a very strong Mediterranean ferry product, and we continue to see Turkey as a compelling growth market. In the coming weeks, we'll continue the dialogue with the eco-logistics about the future relationship, both as a supplier and as a customer at the owner's terminal in Yalova. So let's now turn to our Q3 performance and the outlook for the rest of the year. If we turn to page three, we will, as usual, start with a reminder of our moving together towards 2030 overall elements to reach the strategy. It's about unlocking network value. It's about the green transition. And it's about financial ambitions when it comes to adjusted free cash flow and ROIC and leverage in particular. Obviously, as you can see on page four, the trend line for some of these financial ambitions are not heading in the right direction. Our ROIC is at 6% last 12 months. Our capex is reduced as we are tighter on our investments. And unfortunately, we also had to lower the adjusted free cash flow to 1.2 billion expected for this year on the back of the reduced EBIT and leverage. remains above 3 as EBDA is slightly down. Moving to page 5 with a headline of working through market and operational headwinds, Q3 was a challenging quarter. We also expected that, but we had expected that during the quarter we would start to see a rebound. which did not come. We've achieved organic revenue growth, particularly driven by logistics, and of course, fully in line with our strategic focus. The growth is possible through our customer focus and our strong network. Despite the growth, as mentioned, the financial performance was down, and this is due to the intensified price and margin pressures that we do experience in several markets. It's a pleasure to report that the first high season for our acquisition in the Strait of Gibraltar was performing, was showing a great performance in line with our expectations. And we continue to see relatively strong performance also in October. The rebound did not happen in Q3, and we can now see that also Q4, we have a slowdown in the European economy. We are particularly sensitive to the automotive sector where things are tough. We also see that the continued terrible war in Ukraine is putting a damper of growth in the Baltics, and it's also spreading a little bit to Eastern Europe, which then with the trade between Baltic Eastern Europe and Sweden is a tough situation. On the full load, this is primarily in the continent, we see continued overcapacity, and therefore also very difficult environment to get the price increases that are necessary to cover the inflationary pressures that we experience. Then, when we look to the outlook, the Q3 results were below expectations, obviously, 2.4 is actually what drives the outlook change. And we have now lowered it to 1.5 to 1.7 billion from before 1.7 to 2.1. And as I mentioned, the cash flow reduced the same size. As we move forward, it continues to be a strong organic growth focus. We have seen that from an 11 ferry operation on the Calais Strait, we are now down to eight ferries. P&O have reduced two. Irish ferries have reduced one ferry. Whether this is a permanent adjustment remains to be seen, but it means that we are in a stronger position when it comes to rate negotiations for 2025 We've seen a competitor entering the Turkish market. The existing landscape was that there were two row-row operators, now there are three, and that approximately half of the cargo moves by road and half by ferry. So that's, of course, a challenging situation. Compared to the overcapacity that we've seen in the channel. It's two different markets. The channel has been a market that has been reducing over many years in the past, whereas Turkey is a growth market, and therefore we also think that it is easier to handle new capacity. We completed the previously announced sale of the Oslo route, And as mentioned, we terminated the agreement with ACON. If we move to page six, we have an attempt of giving a overview of our ferry network. And if we look at, yeah, of our transport network, if we look at the First, the ferry network. We've tried to use some coloring here, where the dark blue is a market that is a growth market. The light blue are more low growth, and then the gray is decreasing. And if we start with the market developments that we see throughout the system, then the North Sea is a relatively flat but stable low-growth market. Mediterranean, a growth market, and we saw the numbers we released this morning on volume that despite the new competition, we still have growth in our system in October compared to last year. Channel is a flat market market Last 12 months, I believe, down 0.2%. And Baltic Sea, of course, after a major revaluation of the market size, now also flatties to low growth. Straight off Gibraltar, a strong growth market. On the passenger side, we see that the channel continues to see strong rebounds from COVID, whereas the Baltic Sea is a decreasing passenger market, on the back of less migrant workers, less activity levels, and straight of the browser, strong growth market. In terms of the logistics arena, we have split for this purpose the revenue in two buckets. One bucket, 70% of our revenue where we have reported a 4% EBIT margin up 0.1% actually from last year where we see good growth in the freight and where we are also then able to retain our margins. And then we see the challenge logistics areas, approximately 30% of our revenue where we see overcapacity and where we are in markets with low growth or no growth. So, this is just to give a picture of our markets as we see them and how we deal with the different parameters in the markets. There are some comments here about the different elements in the market. You can study those afterwards. Then if we turn to page seven, just a reminder of who we are and why we have the logistics and ferry network the way we have it. It's network strength, it's customer focus that characterizes us. The unique combination of ferry, road, and rail in the corridors and regions, combined with logistic solutions, provide a very strong offering to our customers. We have strong people. Our operational skills and resilience mean that customers get reliability, frequency, efficiency from DFGS. We've talked now about new competitive situation in the MET. We've talked a little bit about how a situation in the channel is developing. And those of you who have been investors for many years have seen other situations like this, where we have a very good and strong track record of overcoming periods with intensified competition. So with those few words, then I will hand over to Karen for a more detailed walkthrough of the numbers on page eight.

Thank you, Torben, and good morning, everyone. As Torben said, challenging quarter. New was going to be challenging, but still challenging also in terms of the outcome. Overall, we do see a good revenue increase, which we are happy with. Overall, across the group, a 4% increase in our organic revenue. This is split with 7% coming from logistics and 2% from our ferry operations. So happy with that. Unfortunately, it does not translate into the same growth as the EBIT. Our EBIT is down compared to the same quarter last year with about 11%. And if you see the EBIT down, You will also see that Ferry is only slightly down and has an okay-ish performance for the quarter, given also the external circumstances that Tom also alluded to, whereas our logistics business is significantly down compared to the same quarter last year. And this is due to both external factors but also some internal factors that we will come back to later in the presentation. Moving to the next slide. Just very high level on our income statement. You can study it in detail later, obviously. Revenue up, $8 billion revenue for the quarter. EBITDA of $1.5 billion, down 3%. However, I would have to remind everyone that we did have $135 million of one-offs in our 2023 results of Q3. So that means that there is a gap there to be closed. But obviously, we also have straight-up Jepaltar now included in 2024, so they more or less go out against each other. Ultimately, we are down on our EBIT, as mentioned, and also our financing cost is slightly up compared to a previous quarter. Moving on to zooming in a little bit more on our 4% organic growth, coming mainly from logistics with the 7%, And from passengers within ferry, where we in particular on Channel saw a good quota for passengers on our Channel ferry routes. The freight ferry increase you see here is mainly driven by our BAF arrangements. And then you see the larger revenue driven coming in from Strait of Gibraltar mainly and a little bit from Estuarine. So overall a healthy top line, but as I said, not translating into the results that we would like to see. Zooming in on ferry, we have an overall variance of only 23 million, so not significant. Again, freight down slightly, and then we see the positive uptick from our passengers. If we look at overall the lane meters, they are decent and stable to somewhat. Obviously, we have the situation in Mediterranean and Ferry where we have seen a competitor enter on our Istanbul-Trieste route that was also mentioned previously, and that we do see impacting this quarter slightly and will also impact the Q4. Strait of Gibraltar is not listed here separately, but we are content with the result, and it's fully in line with expectations from the acquisition of the Strait of Gibraltar routes. Then moving to logistics, slide 12. If we look at the overall results, it's, of course, absolutely not satisfactory for us. What we do and what you will see both in our report and obviously also speaking to in this presentation is We can isolate the problem areas really to 30% of our revenue, and we have isolated those very clearly where they are from, and we have focused plans to turn those around, whereas we have 70% of the business that runs with an 8-bit margin of, on average, 4%. So a lot of attention going into these areas. These are impacted a lot by external factors, the Brexit phase three, the UK food imports, which is continuing to be lower, market pressure due to competition and overcapacity in the continent of Europe, and then particularly our own Nordic coal chain that is challenged due to also market situations and as a consequence of that overcapacity in our own infrastructure. If we move on, cash flow. Cash flow was also lowered as part of our guidance as a consequence of the lower earnings, which means that we are managing our capex. We have also lowered our capex slightly for the year, but not to an extent that we can maintain our 1.5%. Just a free cash flow for the quarter is around 400 million, also reflecting that this is a good quarter for us generally in terms of seasonality in our business, but not enough to keep it. And our leverage is up due to the lower APTA, so we are slightly up this quarter. And moving on to moving to green, I'll pass on back to Torben.

Thank you Karen. On page 15. Line progress on green and social targets. We continue to reduce our emission intensity from our ferries. 1% bone feed, 2% across route network when including the chartered in vessels. We had applied for EU funding for an ammonia green row row corridor project. Unfortunately, The application was not approved, so at the moment we are not moving forward with those ammonia vessels. In terms of e-trucks, we now have 117 in operation. Latest was a launch in the UK with 10 e-trucks and exciting customers. We expect to... to increase further 1015 this year. We are rolling out shore power in the terminals we call and on the ships that call those terminals, which is part of living up to the EU regulatory framework that comes into effect in 2025, where you need to have 2% of your fuel from sustainable fuels and where the electricity from the shore power is included. And that's also why we are expanding the investments here. In terms of women ratios, the non-office positions increased two percentage points on the back of our wave of talent programs in Turkey, Spain, Morocco, where we've been able to attract significant numbers of women for our ship personnel. Safety, we have significantly increased the focus. We now have much more transparency. We still need to get more information more results, but we are on the right track. Moving then to page 17, total capital distribution of 600 million this year. The share buyback is close to complete with 384 million bought so far. out of a total of 431. Then moving to page 18, the outlook, Karen has already talked about it, but we don't expect the growth road rebound in Europe this quarter, which is partly driven this. We have an increased competition situation in Turkey, the margin pressure on our full load businesses continue, whereas passenger is still delivering positive impact. Moving to page 19, a repetition that the EBIT range and cash flow outlook is lowered. Slight difference with revenue now that we don't have ECOL the last quarter. But more importantly, of course, the EBIT outlook now 1.5 to 1.7 rather than 1.7 to 2.1. And then just a free cash flow of 1.2 billion. Then moving to the last page before the Q&A. What are our priorities? It continues to be the organic growth focus, protecting our key fairy market positions and continue adding enterprise accounts, these plus 10 million euro accounts that typically buy several products from us. Strong focus on the logistics earnings trends. We have seven targeted turnaround projects that are securing the turnaround. We have a strong cost focus. It's clear that the inflationary pressure is tough on us in markets where we cannot get similar price increases. So we are taking out cost in our different entities throughout the network. Then the green transition will continue to deliver on our targets. And in the Mediterranean, we will, of course, adapt to the new situation to secure the continued profitability of our business. With that, I will turn over to Q&A.

We will now begin the question and answer session. Anyone who wishes to ask a question, may press star and one of the telephones. 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 disable the loudspeaker mode while asking a question. Anyone who has a question may press star and one at this time. Our first question comes from Ulrich Back in ACB. Please go ahead.

Yes, good morning, Tom and Con. First question on the Mediterranean segment. So in light of this intensified competition and now also the uncertainty related to ECOL, has anything changed to the way you approach this segment? And also if you can guide us a bit in terms of the price impact from the intensified competition would be great. Thank you.

I'm not sure what you mean by change the approach, but of course it's different to navigate in the market where you have more competitors than we've been used to. So we've moved closer to our customers, making sure that they have the conditions that they need to continue to use us. And one element there is, of course, the price, as you mentioned. I cannot give you a specific, you know, what it means, but it's clear that price increases that we had planned are not coming through. To the contrary, we are instead seeing reduced prices in this area, primarily hitting our Italy-Istanbul line.

Okay, thank you. Just in terms of your capacity, can you please just remind us, so how much capacity do you have, and is there any considerations in terms of, you know, reducing it, moving it? Are there any charges that you would consider to hand back? Any thoughts along those lines?

Yeah, I think we have We have shouted out one vessel that was coming back to the system and now we are not bringing it back. And we have started a route from the European side in Istanbul, which also takes capacity. We have started the route from Italy to Egypt last week or this week. And then there may be one more vessel that will come out of the system, depending on what happens the next month.

Okay. And just a follow-up question to this new Italy-Egypt route. So what kind of ramp-up period should we expect from this? And when do you expect it to be a bit positive?

As always with routes like this, where there is no route today, it will take some time. So you should expect that there's no positive EBIT in 2025 from this route.

Okay. And then question on, again, on ECOL. I acknowledge that you commented at the beginning. When you announced the ECOL deal, you postponed your 10% growth target to 2027 from 2026, which now still seems to be the case despite the termination. Can you please just elaborate on your thinking behind not moving it back to 2026?

I think, of course, we have had a tough 2024 period. We now have this new competitive situation in Turkey, regardless of ECOL going through or not. So it would not be prudent to promise a 10% ROIC two years from now, given where we are. We are revising or reviewing these ambitions But we need to see how especially the Mediterranean market pans out over the next quarter or so.

Understood. And then final question from me. Just the guidance downgrade. The midpoint in ferry on EBIT is reduced by 160 million. Can you say what the rough split is among your different geographical segments? You mentioned Mediterranean is obviously a part of it. But what other segments are also revised down? And then if I can add, the non-allocated items are reduced by 50 million. If you can also share what they relate to, it would be great.

Thanks. Yeah, the non-allocated, I don't know if I can cover that. But the MED is, of course, a significant part of the midpoint downgrade. And then we continue to see... some weaknesses in the Baltics as well.

Okay, and no further comments on the non-allocated items?

I'm not sure. I think you can maybe reach out to maybe reach out to Søren afterwards for some details on that. Okay, understood. Thank you so much.

Our next question comes from . Please go ahead.

This morning, thank you, and also a few questions from . The first is a bit of a housekeeping. Karen, it's probably related to you. It's on page 11. There is a waterfall chart showing the impact from the acquisition including one-off items, which is $27 million. How much is one-off items and how much is M&A?

It's a fair question. It's a little bit of a mix because we are only looking at the EBIT impact. I think we'll have to come back to you on the specifics of that unless Søren can give me the number.

The one-offs are the $135

And then we have Strait of Gibraltar with 150.

Yeah. So it's plus 150 for Strait of Gibraltar and then minus 135 for one-offs last year. Okay.

All right. Thank you. And then if I can get back to some of the questions that I asked about the Mediterranean. The new route, Torben, you said that it's not going to be positive in 2025, but it's going to be, I mean, to what extent is it going to be negative?

It will be minor impact. I really don't think you should always find that we're excited about it. It is a development route. It's immature markets that are developing this route, but it's nothing you can put in your models that will impact anything.

And how come? Because if I understand it correctly, normally it takes at least one to two years before you get up to the side utilization. If you start up a new route, there are some costs related to chartering vessels. at least running the vessel.

Then put 1 million loss in your model Euro, right? But I'm just saying that it's not something that moves the needle here.

Okay. All right. And then on the guidance for the full year, which you lowered last week, You had a part of the explanation was also that you have included some costs related to the cancellation of the e-call, which I interpret that you don't really know how they're going to react yet. And if I understand your comments from this call here earlier, this is a. something which is specifically related to the cost of cancelling, i.e. legal costs and stuff like that? Or is it just the reaction, i.e. potential loss of volumes? What's the reasoning behind that?

It's a combination. And again, an early estimate, of course. But we believe that with the new guidance, we can cover some variations if we are not 100%

It's just for the sake of, I don't hope it's going to end up there, but if they decide, or ECOL decide to move away all volumes, I am correctly understood if it's around about 22% of your volumes out of Turkey, what will the implications be?

Last 12 months it's 13% of our volumes. And the consequences are, of course, pretty dire. Remember that even with the new competition, we're the only operator between Mersin and Italy and Istanbul and France, where Ecol is a large customer. So if we just look at 24, we don't think it's a realistic scenario that we will lose all volumes.

But you said, did I hear you correctly, 13%, 1.5%, 1.3%, sorry?

1.3%, yeah.

But if I recall correctly, in earlier occasions you've been stating it's been above 20%?

In the past it has been indeed above 20%.

Okay. And then on the logistics side, now the question which I've been asking you before is that if you have any considerations about split between own production and just running it by sub-suppliers given the market and the outlook also particularly that part which is in the co-chain any further considerations on that part?

You're right that this is definitely one of the big attention areas in logistics in these seven projects that I mentioned. A number of those have that issue as one of the top priorities, and we are gradually reducing the percentage of own, or maybe I should rather say the absolute own production in several areas.

And how fast can you do that? Is this something that you can do within a quarter, two quarters?

It's something that we do continuously. But there can be, of course, commitments on equipment and others that delay this. But we are catching up. with the wrong balance that we've had. And whether it will be done in Q4 or whether it requires a little Q1 as well remains to be seen. Great. Thank you.

You're welcome.

As a reminder, if you wish to register for a question, you may press star and 1. Our next question comes from Tanto with Carnage. Please go ahead.

Yes, good morning. I have a couple of questions from my side as well. Starting with Turkey or MET, the Istanbul-Trieste routes where you now face competition, how much is that? I seem to recall it's around 50% of your network or your volumes down there. And in order for you to have actually reported growth here on the MET routes in October, Can you elaborate a bit on that? Is it because the other parts, Virgin Italy and to France, is going double-digit at the moment and compensating? Or are you actually having somewhat success with keeping some of the volumes between Istanbul and Trieste so that the impact here, at least on the volume side, is so far modest? Some comments here would be nice.

Normally, we, of course, don't go into this many details, but you are, of course, right. I think it's a little more than 50% the Trieste Istanbul. But we are seeing relatively strong growth on the other routes. And we've also been relatively successful in maintaining customers. The new competition have been quite successful in converting road business and rail business as part of their volumes. but of course have also tapped into our Trieste volumes.

And then maybe you can give some comments on the free cash flow guidance that you have of 1.2 to 1.5 billion, or the long-term guidance of 1.5 billion. How realistic is it that we will see that level again in 2025? And what will the levers be to reach the 1.5 coming from 1.2 here in 2024?

Well, I had this slide, or whatever it was, where we tried to show how the network is maybe the fitness of the different areas. And we do, of course, expect that if we look away from Mediterranean for a moment, that we will see improved results across our network next year. And then, of course, the question is how impacted Mediterranean is before I can answer this question then.

Understood. And then maybe on logistics, you were pretty bold at the Q2 and expecting a rapid return in Q4 on profitability in the logistics business. Is that just postponed one quarter or are these levers simply not available to you so we will see a long-stretched downturn in... logistics in going into 2025, just to get an understanding on how rapid we are going to see a recovery.

So you're right, we are disappointed that we didn't see the recovery in Q4. I think we said that we would be better than last year in Q4, and now we are probably hoping that we can be at the same level as last year, and then the recovery will come. The levers that we have in the different, we call them boost projects, the seven projects that I mentioned, are valid. Some of them, of course, are easier to implement than others, but we don't expect a prolonged recovery.

Thank you.

Thank you. Our next question is a follow-up from Ulrich Bach. Please go ahead, sir.

Yes, thank you for taking my follow-up questions. So first one on CapEx. Now since July, you have cut your outlook for CapEx by 350 million DKK. So can you please just put some words on what is it that you're not spending money on in 2024 and whether we should foresee a pickup in CapEx in 2025 instead?

There's not a one-to-one. Some of it is simply things that we will not be doing. Others may come back. Maybe we were too conservative in the first guidance. And also logistics. We are changing a little bit the philosophy of TAPEX versus OPEX.

All right. So OPEX should increase in logistics. Just to clarify your last comment.

No. This is back to the question. I think it was from Lars about the balance between own equipment and third-party haulers.

Okay. That makes sense. And then during the presentation, you mentioned that you will stop the ammonia vessel projects. How will this impact your medium-term green capex profile, if any?

I'm not sure I said we would stop it or delay it, but we are not, you know, it will certainly be a delay of the ammonia vessels. In terms of our green targets of 45% reduction by 2030, there's no change.

But the CapEx need, the ones that you outlined on your capital markets in December last year, are they still firm or would they be postponed a bit?

They could be postponed. On the other hand, we are looking at whether some of the channel fairies could come earlier potentially. But there is, of course, a likelihood that that capex will be slightly lower in the period running up to 2030.

Okay, makes sense. And then the final question here is on the Gibraltar straight. To my knowledge, there's a concession that's coming up for renegotiation on one of the routes. Can you please just share what route is it and how much a larger share of your business down at Gibraltar. Does that make up today?

You're absolutely correct. On the Spanish side, there is a tender of access to birth, and that is a Tarifa-Tanjaville route. It's a pure passenger route. The largest route we have down there is the Algeciras-Tanjamet, where it's row packs. When we made the acquisition, I think the tariff was 25% of the EBITDA. So we'll see. We, of course, feel that we have a very good offer in. It's a 15-year tender. So we'll have to see. They have delayed the decision until the end of the year.

And when will the new concession come into effect? Is it 1st of January or later? No.

I think it's April. It's a little bit before the high season. Understood. Thank you. You're welcome.

Ladies and gentlemen, this was our last question. A hand back to Mr. Carlsen for any closing remarks.

Thank you very much. I don't know if it's a good sign with so many questions, but I appreciate, of course, taking the time to dig a little bit deeper in our numbers. For the rest of the year, our top priorities are to continue to protect our key ferry market positions. Of course, Mediterranean is a top priority within that. and priorities to achieve continued organic growth and to turn the logistics earnings trends around. As you saw from the volume numbers this morning, we had pretty firm volumes, which is actually a little bit better than expected. But thank you very much for joining the call, and thank you for your questions. Look forward to speaking to you again soon. Have a good day.