Dfds A/S Copenhagen Ord

Ladies and gentlemen, welcome to the DFDS Q1 Report 2025 conference call. I am Hili, the chorus call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Torben Carlsen, CEO. Please go ahead.

Thank you, and good morning, and welcome to DFDS's Q1 2025 conference call. I am joined here, as usual, by Karen Bosen, our CFO, and Søren Bonnhold, our head of IRR. Our Q1 report headline is that our 2025 transition is progressing. As you may recall, we labeled 2025 a transitional year in our latest annual report. So 2025 is a year where we lay the groundwork for improving financial performance following the events of 2024. I'm pleased to report that the earnings trend improved towards the end of the quarter following execution of multiple turnaround actions during the quarter. There is still a lot of work to be done and further actions are being executed as we speak. When we report Q2 in August, the improving earnings trends should become more visible. In a moment, I'll give you my view of the current geopolitical events and macro trends and how they can impact DFJS. With our exposure to high-growth net-shoring markets, we believe DFTS is well positioned for what seems to be a de-globalization trend. Before we start, let me highlight our focus on financial solidity. Karen will take you through the details, but we do expect to end the year with a financial leverage ratio that is below the current level. Let's now take a closer look at the evolving market changes and at the Q1 results. If you turn to page three, a reminder of our moving together towards 2030 ambitions, unlocking network value, delivering on our green transition, and a strong cash flow focus with a long-term leverage target of two to three times. Page four. Geopolitical market and competitor environment. Geopolitically, the U.S. trade and tariff policy changes, of course, make intra-European trade flow impact uncertain. There is a recession risk. But as I mentioned in the introduction, long term, this should be positive for nearshoring, positively positive. favoring DFDS. Unfortunately, the war in Ukraine, the duration remains uncertain. We've also seen in Turkey some political risk increase. But lately, of course, we saw that President Trump reached out to President Erdogan to see if they jointly could solve the Ukraine situation. On the market side, as I mentioned, the geopolitical events could cause European recession. We haven't seen it yet. We don't see it in our volume numbers. The continent road market remains very competitive. The food and mouth disease that has stopped meat export to UK has now resumed, but it at least initially very low volumes. The oil spread between MGO and HFO is down, putting some pressure on our earnings. On the competitive side, especially Istanbul Trieste, we are dealing with the competitor entry in 2024, and we also see some increase of freight capacity between Holland and UK, lately. Moving to page 5, as I mentioned also in the introduction, the transition is progressing as our actions start to deliver. If we look at Q1, Then the ferry division, excluding BU-Med, delivered above 2024. It was helped by some one-off events, but still the Mediterranean result was reduced significantly, as Karen will come back to. The new BU in logistics was adding a lot of cost. from the turnaround impacting Q1. The remaining logistics division was below expectations. This is now primarily driven by some situations in the BU continent. We are progressing on our three focus areas. We have adopted the Mediterranean capacity to the new competitive situation. And we have started to implement price increases after the significant price reductions we saw during Q4. These price increases have been well adapted throughout the Mediterranean system. The test turnaround, so the former ECOL We maintain the break-even target towards the end of the year, although the turnaround has proven slightly larger in scope than originally seen. Logistics boost projects are progressing. We are deploying structural solutions, and in other places, commercial and cost initiatives are making the trick. So performance recovery cash flow focus is what we are focused on in DFDS. And we see the transition year progressing according to plan. The three focus areas are delivering as expected. Despite this, Q2 and Q3 will also be below 2024. and only in 2025 will you start seeing results significantly above 2024. We have a working capital program in place. We have strong CapEx focus, and we are going to reduce leverage as we get into the second half of the year. I will hand over to Karen on page 73.

Thank you, Torben, and good morning, everyone. First, revenue, a positive story of 8% growth in Q1. This is all driven by the acquisition of the former , now , Turkey and Europe South. If we eliminate for the acquisition, the growth is slightly negative, and this is mainly driven by operations that has some revenue decline coming from the Mediterranean situation. and some impact of the Easter, which in 2024 were included in Q1 and in this year is in Q2. On logistics, we still see organic growth of 2%, and then that is driven by the UK and Ireland, which is positive for us. But again, overall growth driven by the acquisition. Turning to the next slide, slide number eight, our income statement for the quarter. You will see another income, which is a compensation from insurance from a total construction loss of one freight ferry, the Finlandia ferry that grounded back in late 2024. And that income obviously helps and supports our EBITDA in this quarter. Still, we see a lower EBITDA driven by the troubled areas that we have talked about before and that we'll come back to later in this presentation. Net effect of depreciation with the addition of the acquisition of ECOL and the sale of the Copenhagen-Oslo route makes the development more or less flat. And then we have an offsetting write-off of the Finlandia ferry of $83 million, taking the overall net EBIT impact of this particular situation with Finlandia ferry to $33 million that is included in the EBIT below. Financing costs reduced $10 million to $185 million, and this is despite the increase the increased net interest-bearing debt of approximately $1.5 billion interest-bearing debt, and this is due to lower interest rates of just above one percentage point compared to the same quarter last year. Then turning to page 9, we visualize here our EBIT this quarter as opposed to the following for the previous four years. And obviously, this highlights that this is not a satisfactory result, as we have also clearly communicated. However, it was expected. We see the reductions mainly driven by the two divisions almost half-half. And in the following page, I will go into more details about what drives those reductions. Turning to page 10. If we look at ferry division, overall, if we disregard the Mediterranean, which I will come back to, we have a reduction overall of around $48 million driven by the rest of the network. This is a combination of higher bunker cost and the easter timing difference that I referred to before, and then overall also some performances above that sort of offset these. Overall, the impact for the rest of the network is minus 48 million. If we then look at Mediterranean, we see a significant reduction as opposed to last year. This is expected. We saw it in Q4 2024 as well. However, this is not an average over the three months. We see an improvement coming in March already compared to the impact in January and February. and we are on an improving trend and therefore are beginning to see it reintroduced. Price increases in the beginning of the year, a new price increase in 1st of March down there, following a period where competition had been a lot on prices and we had had to lower our prices to keep the volumes. We are now in a situation where we start increasing our prices and therefore we expect this to be the bottom out of this situation. Several one-off items included here. I mentioned the 33 million from the total construction loss. And then also, we had the Ulster-Copenhagen route in as a negative in Q124. And as we no longer are the owners of that, that affects our comparison of variance positively. So that's our ferry. If we then turn to logistics, try to display on page 11. We try to display it the same way with an impact if we isolate the newly acquired business of 53 million negative coming from our existing or previous business units also with Nordic continent and UK island. UK island, solid performance on track. The main impact we see is coming from from the continent where we were impacted by the food and mouse disease in Germany that prevented meat export throughout Q1 from the continent into the UK. And there were also some lower flows on the automotive side in our, again, the Belgian area. Overall, then, we're coming to the loss that we see from our newly acquired business unit. This is in line with expectations, slightly lower. but we knew it was going to be a tough quarter. Turnaround is ongoing, and Torben will come back to that further on. The one-off item is reflecting the fact that we had a positive income in Q124 of provision releases that we no longer have, obviously, in this quarter, so I wanted to show that transparently. Then turning to my last page, page 12, our cash flow and capital. I'll take you a little bit through that. We had a net improvement of working capital of about 400 million, which helps obviously our operating cash flow quite well. CapEx under control and about just below 300 million offset by the income from the fairies' construction loss, which takes us to a free cash flow of just about 500 million for the quarter. and an adjusted free cash flow of around $250 million. The net interest-bearing debt increased compared to the same quarter last year of about $500 million, driven mainly by the equal acquisition facility that we entered into in November. But if we look at it comparing to Q420, our net interest-bearing debt actually reduced $400 million, mainly driven by the working capital improvements. The leverage ratio is slightly up compared to previous quarter and, of course, significantly up compared to same quarter last year. And this is driven by the lower EBITDA now with the loss-making activities included for this quarter and the increase in net interest-bearing debt if you compare to same quarter last year. With that, I will hand back to Torben.

Thank you, Karen. If we turn to Page 14, moving to green and great place to work. Yes, we still value those two items. On the ferry emissions, our intensity reduced 6%. In this quarter, we bought biofuel that customers were willing to pay for, and we reduced the number of high-speed craft sailings, which are very fuel-intensive sailings, in this quarter. As some of you may have seen, IMO have come out with new greenhouse gas targets. We support this. We are aligning our plans to live up to those targets. On the e-trucks, we have added another five e-trucks this quarter. The pace is slowing down a little bit. We need to make sure that the trucks we deploy are paid for by customers and fit the operation. And in some places we have had to buy HVO and other low emission fuels in a transition period. On the safety side, very, very happy to see that the efforts we have to improve land safety are starting to pay off. after 12-18 months of very focused efforts, hopefully we can maintain the good traction. Balance between males and females in management, one percentage point improved compared to one year ago. Then, moving to the 2025 focus areas and page 16, A short intro. The majority of our network is upholding performance or improving performance. We have the new agreement with Jersey that will be profitable. We are exiting the Tarifa-Tangia-Will route on our Strait of Gibraltar business, but the business that remains is performing better than... the network including the Tarifa-Tandiaville route in 2025. If we look at the logistics division excluding the newly acquired tests, then on 70% of our revenues, we have a margin of 4.5% EBIT margin up from 2024. and it's the remaining 30% revenues that we are addressing in our boost projects. The tables show that North Sea is on par in terms of performance, Mediterranean I'll come back to, Channel Jersey will improve in 2025, Baltic Sea on level, and Strait of Gibraltar improving. In the logistics division, Nordic is now stabilized after the boost projects have worked. The continent continues to be challenged with the two areas Karen mentioned before. UK, Ireland is improving. And Turkey, Europe South, I will come back to. So if we turn to page 17, the three focus areas, I know you've heard it already, but it is our life adapting Mediterranean turnaround of tests and our logistics boost projects. On page 18, if we start with adapting Mediterranean ferry business to new competitive environment, Our capacity was created on the Istanbul Trieste corridor in September 24. Pricing dropped dramatically during Q4 24. In 25, we have reduced capacity on the corridor. We have also reintroduced price increases first in January, then in March. They have been relatively well received by our customers and with the capacity reductions and price increases, we are able to maintain reasonable capacity utilization. We are maintaining a reliable high frequency offering from Turkey to Europe. which is something that it seems like especially the large customers are valuing. We are convinced that we will succeed with getting Mediterranean back on track but of course it will only be in Q4 of this year that we will see that we are performing better than the year before because In 24, there were no competitive pressure in the first two and a half quarters. Moving to page 19, TES, the former ECOL. It's about right-sizing the network and adapting equipment to the size of the business. We took over 3,700 employees. To date, this has been reduced to around 3,000. And this has come from office employees in Turkey, also office employees in countries that we have closed. And then it has come from reduction of fleet, where we have reduced 400 trucks and corresponding drivers. We have also reduced locations across the eight countries, some of them already and some of them in progress. So with this, we are seeing clearly improvement in run rate losses and a conviction that the turnaround to a around zero result in November is still on track. Finally, page 20, logistics boost projects progressing. We had eight boost projects in 24. If you see in the table, the blue ones are exiting the boost. We have made 215 headcount reductions in these projects, announced a further 180 with discontinued activity, closed offices. We have merged locations with structural solutions, and we have initiated closure of two surplus warehouses. We are not out of the woods everywhere yet. But if you look at the eight areas, three of them, as I said, have exited a boost. Denmark and Germany, the structural initiatives have been implemented, and the same goes for the Baltic. And what we then have left is Ghent, where we have a clear plan for how to get the profitability back. and, of course, continent UK, where we are struggling with both the Brexit Phase 3 and the food and mouth disease mentioned before. But those two, Ghent and the fresh meat from Germany, Holland, into the UK, are the main outstanding issues as we look to the coming quarters in logistics. So with that, turning to page 23, to outlook 25 amidst the evolving macro and market changes. We don't expect much help from the market growth. Of course, uncertainty is increased by US policy shifts. We continue to see growth from Mediterranean and North Africa. We assume road transport markets will remain highly competitive, although we see some ease of surplus capacity. And in the passenger markets, we see the more stable channel in principle still have some leftover growth from COVID that we hope to see materializing during the high season this year. Turning to page 23, our EBIT outlook is overall unchanged. Despite a terrible quarter, we knew that this quarter was coming and it has not changed our outlook. We will have growth in revenue of around 5%. It comes from some organic growth and then a relatively large impact from the net of acquisitions divestments primarily in Turkey. The ferry division has raised its outlook from 900 million to 1 billion EBIT, and conversely, logistics division has lowered its outlook from 300 to 200 million. Operating capex, 1.6 billion unchanged, but net now 1,500 due to the cash flow from the total constructive loss . And free cash flow continues to be around a billion as well. Key priorities, I guess they are clear from the walkthrough of this deck. But we want to protect and grow our underlying network, and this is a lot of focus on organic growth. We have our three specific turnaround focus areas that are on track and that we will keep focusing on. In addition, we have a general cost focus, we have a very specific cash flow focus, and we continue to deliver on our green transition and diversity targets. With that, we hand over to the operator for Q&A.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on the 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 disable the loudspeaker mode while asking a question. Anyone who has a question may press star and one at this time. We have a first question from the line of Ruriri Kulinane from RBC Capital Markets. Please go ahead.

Good morning, Rory Cullinane, RBC. The first question, following the price increases in March, when would you next expect to change prices potentially on the Mediterranean? Secondly, on the full year 25 guidance, I'd just be interested to know what contribution you're factoring in from the turnaround measures. You know, could you talk around the sensitivities around your guidance? What could spark you to need to upgrade or downgrade the guidance? And then finally, in terms of working capital, is the factoring programs that motivated by a desire to keep governance headroom comfortable? And I wondered if you had considered asking for a temporary government waiver at H1 alternatively as in the pandemic. Thank you.

Thank you, Rory. The projections for BUMED are driven by, I guess, two main elements. The adaptation of the capacity to the demand and then a price recovery trajectory. The price measures that we want to implement in 2025 have already been communicated to our customers. So we are pretty knowledgeable about the adaptation of those among our customers. The second part is then the cost measures through adaptation of capacity. So far, we have been quite accurate in seeing the volumes that our customers are bringing to us and have been able to match the capacity. We have planned reductions later in the year. So when you ask about the certainty here, there's little risk in terms of price increases because they are already We already know how the adaptation rate of those are. So it is more if we are able to manage capacity with demand. And there the swings are less, you can say, if we get it a little bit wrong. And we are able to then also fairly quickly adjust should we be wrong. So I would say that the certainty of our BUMED numbers going into our outlook for 2025 are fairly certain. I don't know if that answers your question, but what we then have in mind is further price recovery in 2026. because we will not be fully back to normal in 2025. If you then look at the factoring question, we have seen our net working capital deteriorate somewhat also due to the Mediterranean situations, and we felt that given how factoring was available to us, we can see it's relatively commonly applied, at least in Danish large-cap companies, that it made sense for us. The cost of the factoring is less than our normal financing, and it would indeed help our adjusted free cash flow. It would indeed help our leverage situation. There's no concern in relation to our leverage. I think we mentioned somewhere in the report that we have a plus 25% headroom to our current leverage covenants with the banks. But of course, the factoring has helped achieve that headroom.

Great, thank you.

We now have a question from the line of Ulrik Back from Danske Bank. Please go ahead.

Yes, hi, Torben and Karen. A couple of questions from my side. I'll take them one by one. So firstly, you state that the Mediterranean ferry segment reported a negative EBIT of around 200 million in Q1. How does that compare to Q4? And it would be very helpful if you could perhaps split that negative contribution by month from January to March and perhaps also share what the trend is in April.

I think we reported a swing from last year of 200 million in EBIT for the Mediterranean. And that, of course, gives an indication of what the full impact of the competitive entry has been to DFDS. There is some seasonality, but it's not completely off to multiply that by a factor of four. And that is, of course, quarter by quarter going to reduce as the capacity adaptation and the price increases are kicking in. And in Q4 of this year, we will perform above Q4 last year.

Okay, understood. And then also on the Mediterranean segment. So the current status of the competitive environment, how would you define that? I guess it's not far from stable at the moment, but it has improved compared to where we were in Q4. So also back to the question about price increases. So is it correctly understood that you are not planning to increase prices further compared to what you did on 1st of March?

That's not entirely correct. But the price increases we have planned have already been communicated to our customers.

So when will that come into effect?

I think that's too specific, Ulrich, but they will come during the year and the customers have been informed. Whether this is a stable competitive situation, we are making adjustments to our fleet based on the capacity need we can see. Customers have not welcomed our price increases, but they seem to... continue to send their cargo to us. We can also see that the competition is picking up cargo. Some is converted from land. But whether it's a stable situation, we don't know. For us, we have a good demand-supply situation inside our business. And that's what we are fully focused on maintaining now going forward the next three quarters.

Okay. And then to your ferry guidance increase of 100 million, is that perhaps just put some more words about your state that it reflects improved trading in several areas. So it's not only Mediterranean, which is perhaps going a bit better. So what else is in there?

Karen, you may want to add, but I think straight-up Gibraltar is definitely performing really well as one element, and then it's a number of smaller improvements across the network.

Okay, and then a final question from my side. You have a comment about P&O increasing capacity and increased competition in the North Sea segment, I believe. How should we think about that and also combined with comments about a weak European automotive sector? Are you doing anything about your capacity or pricing to reflect those movements?

No, it's in the already P&O is already available in that corridor and maybe it's highlighting it too much but But it's just to illustrate that growth is low between what we call North Sea, South and the UK and there are many operators. So it is hard to see price increases and improved results through. On the other hand, we are saying that our North Sea operation is relatively stable. P&O is not directly in our corridors, but of course there can be spillover effects. And we just note that there is some addition of capacity. P&O also has a captive logistics arm, so a lot of the volumes are catered from their P&O ferrymaster logistics arm.

Understood. Thank you so much.

As a reminder, if you wish to register for a question, please press star and 1 on your telephone. There are no more questions at this time. So I would like to turn the line back over to Mr. Tom Carlson for any closing remarks. Please go ahead.

Thank you very much. Thank you for listening in. We know it's tough times for DFDS, so we appreciate your support and interest. As I mentioned in the introduction, we are completely focused on executing on actions that will improve our financial performance in Q2 and the rest of the year. You can rest assured that improving the financial leverage is also a top priority. Thank you very much for joining the call and your questions. Look forward to speaking to you again soon. Have a good day.

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