DFDS A/S (DFDS) Earnings Call Transcript & Summary

Welcome to the DFDS conference call. [Operator Instructions] Please note, the call is being recorded. Today, I'm pleased to present Torben Carlsen and Karina Deacon.

Good morning, everybody. Here, it's Torben. Karina and I are also joined by Søren Brøndholt, our Head of Investor Relations. We're here to speak about the earlier today announced acquisition or agreement to acquire HSF Logistics Group. If you turn to Page 2 with our strategy sheet, we will start by going back to the Win23 strategy launched in 2018. You -- many of you will recall that there are 4 pillars, and pillar A talks about growing solutions to select industries. Today, we will not, at least during the presentation, talk about the other pillars, we can cover those if there are questions. But pillar A, on the next page, the select industries, we talked about that we would double back then our automotive, forest and metals and cold chain. HSF Logistics, that we announced as an acquisition today, will more or less quadruple our coal chain business once it is approved by the authorities. Moving to Page 4. The acquisition is creating Northern Europe's leading cold chain logistics provider. The HSF Logistics Group include 4 main brands: HSF Logistics, operating primarily out of Holland; Eurofresh, a German brand; N&K Spedition, a Scandinavian-based freight forwarder; and Skive Køletransport, a primarily Danish-based cold chain transport company. Total revenue around DKK 2.8 billion and EBITDA of DKK 320 million, with 1,800 employees. We have agreed an enterprise value of around DKK 2.2 billion. And we have also agreed a -- what we believe is an attractive transaction structure that leave our financial leverage unchanged. Karina will talk more about that later. Turning to the map on Page 5, you can see that the acquisition is geographically in the middle of DFDS' strongholds in Northern Europe. And it will add strong market positions in the cold chain in Holland, Germany and Denmark. And in addition, bring expertise in meat logistics, where DFDS is only limited present today. Moving to Page 6. A little background on HSF. It's an old fourth-generation family-owned business founded 1923 in Nijmegen in Holland. It merged in 2017 with N&K Spedition, who a couple of years earlier had acquired Skive Køletransport. The main business of the group is to be a cold chain logistics provider to meet producers and other food producers operating in temperature-controlled supply chains. 2,500 customers and a business structure with 3 specialized focused business areas that we'll talk more about on the next pages. Historically, the financials have been fairly stable, and we also see a fairly 2020, although we don't have the final numbers. The first main business area on Page 7 is between the continent and U.K. with integrated packaging and transport logistics for the food industry, where primarily pork and poultry is transported to the U.K. and for the most part of that using Dolav box pallets or other plastic packaging, making it an environmentally very attractive form of transport and also a transport where it is important to have both the loads out and the loads back since the same equipment is being used in this closed system. This business has relatively large stores and cross-docking facilities in Nijmegen, including washing, et cetera, of the plastics. This part of the business is around 20% of group revenue, and the international part of the transport relies on a trucking operation intra-group provided from Poland. Moving to Page 8. The second main business of HSF is Holland-Germany. Here, it's mainly beef and veal transportation, and backload from Germany include fruit, vegetable, dairy and rice. Again, large storage, cross-docking facility in Holland and a very extensive hanging meat logistics facility in Holland. Again, around 20% of group revenue, 300 trucks, partly local, partly supplied by the Polish trucking operation. The 50% remaining revenue of the group is in, starting point, Scandinavia with N&K Spedition and Skive Køletransport, international freight forwarding of meat and fish from Scandinavia to the U.K., Spain, Italy and backloads of fruit and vegetables. And then Skive Køletransport, a very strong market position in Denmark. We focus on dairy, frozen products and also meat. Turning to Page 10. A very strong trait of HSF is that in most of their transports and a number of value-added services are integrated into the business model. It's rental repair, cleaning of reusable packaging, and strong offering of this packaging system that has been adopted well by slaughterhouses and logistics partners throughout HSF's geographical area. And it also means that there is a relatively strong integration by HSF into the customers' supply chains. On Page 11, we show first DFDS presence today in cold chain, and how the acquisition of HSF complements and expands the presence, primarily in Northern Europe, but also a more unusual -- a little more unusual for DFDS in Africa and China with relatively small operations. We will have a very significant fleet of trucks and refills and 2,500 people employed in this business segment. DKK 4 billion of the total DKK 8 billion logistics revenue will come from our cold chain operation once the transaction is complete. With this, I will turn over to Karina for more details of the transaction structure.

Thank you, Torben. If we look at Page 12. As we've said, we have acquired HSF for an enterprise value of DKK 2.2 billion, which will give us an enterprise value to EBITDA multiple of around DKK 7 billion based on the expected DKK 320 million in EBITDA. The acquisition is made by a new company owned by DFDS, where we will own 100% of the ordinary shares. We will pay DKK 930 million upfront on closing, and we will use that from our existing cash pool. We will then enter into a structure where we will have nonvoting preference shares to be owned by the sellers, and we have a call option to redeem those preference shares over a 3- year period, amounting in total to DKK 810 million. In connection with the acquisition, we take over a net interest-bearing debt of DKK 460 million, and that is excluding the IFRS 16 adjustment. All in all, when we then look at the financial leverage and we include the earnings from HSF and the debt taken over, we are in a situation where the financial leverage will be basically unchanged by this transaction. We will remain 100% in control of the group, so it will be fully consolidated into DFDS as the preference shareholders only have protective rights. We will, of course, have to wait for the regulatory approval of -- and some required employee consultations, and we hope that we will be able to complete the transaction in around 3 months. And then back to you, Torben.

Thank you very much, Karina. As I said in the beginning, we are very pleased that we have been able to convince the owners of HSF that DFDS is the right home for them going forward. And particularly -- in particular, we are pleased because it is a significant pillar of our Win23 strategy to grow our cold chain business. We have created a leading provider in what we believe is a very attractive niche market. There's good overlap with our ferry transport infrastructure with a heavy reliance on transportation from both Scandinavia and Holland to the U.K. We have not been able at this stage to determine the size of cost and commercial synergies, but we will come back with more details on that in connection with the closing of the transaction. This was our brief introduction, and we now pass over for any questions.

[Operator Instructions] Our first question comes from the line of Casper Blom from ABG Sundal Collier.

And Tom and Karina and Søren, congrats on the deal. It's been on your wish list, I know. So first question is, is this sort of a mission completed within cold chain? Or it still is an area that will still be on the M&A agenda for you? That's the first question, please.

That's a good question. But -- and of course, right now, our full focus will be on a successful integration between DFDS and HSF. It is also obvious that we will get a very strong market presence in this area. And most likely, over time, new opportunities therefore will also appear exactly in an area where we are strong.

Okay. Fair enough. Second question, though -- as I understand, the seller will become a minority shareholder in this new company. So merely wondering if they will be entitled to receive part of the earnings in the period before you have bought back these preference shares.

The sellers, they will not become minority shareholders, they will have preference shares. And there, they will get dividends as declared, if any, and they will also get an interest on their preference shares. But they will not be minority stakeholders. We do have minority stakeholders in the companies today, and they will obviously be included as minority shareholders.

Okay. And then finally, the margin that HSF delivers is above your own logistics margin today. Is there a structural reason for this in this specific area? Or are they basically just running a really, really good business?

There is, in general, probably slightly higher margins in cold chain logistics than in ambient logistics. In addition, this business model we described, where they are tightly integrated with the supply chains of the customers, also allow them to bring more value-adding services than maybe in a traditional customer relationship, which is also helping increasing the margins.

Okay. Are they also delivering a higher margin than the cold chain business that you already have? I mean we can only see the whole logistics business. But if you look at the existing DFDS cold chain, is HSF then also with a higher margin? And would this mean that you could lift your existing margin?

Our cold chain business is also very attractive, so I think we are merging 2 high-margin businesses here.

Okay. My final question is then just sort of a hope here. Can you give any kind of quantification on potential synergies? Or is that still too early in the process?

That is too early. We will promise to come back with that around closing of this transaction.

Our next question comes from the line of Dan Togo from Carnegie.

Yes. I would just like to continue on the synergies because I understand these 2 businesses are quite complementary. Is it a fair statement to say that the cost synergies are fairly limited?

It is at least not an acquisition driven by cost synergies, you are correct in that.

Can you then elaborate maybe a bit on -- not quantify, but elaborate where you do see some synergies on the commercial side?

We believe that -- and of course, we have limited access to no access to customer agreements on their side. But with the expanded geographical scope, complementary geographical scope, the complementary offerings in the meat, in the fish business, the capabilities in packaging that we will pick up, that there'll be a number of interesting elements that our customers will buy into. And likewise, HSF customers buying into some of our -- both geographical presences and skills. And as we also say in the presentation, there's a good geographical match with our infrastructure ferry business. And there are, of course, opportunities to better utilize our ferries for HSF than they have done in the past.

Okay. And could you maybe explain a bit about the process here? Has this business -- or has it been up for tender? Or is it a long stretch process where you, sort of say, have been going back and forth, maybe even have had some exclusivity to the owners of HSF?

We know HSF and N&K since many years. They are our customers with our ferry business. And it was originally our ferry colleagues that picked up that this could be an opportunity. We have then, over a couple of rounds, discussed what the strategic ambitions and direction was of the owners of the HSF Group, and this has now finally, after quite some years, matured in this transaction. So it has been a pretty exclusive process. We believe it has been important for the sellers to find a home, a long-term owner as opposed to maybe a financial buyer with similar values. So it's been a good process where we know each other well already at the outset.

Okay. And then just finally, maybe to Karina on IFRS 16, if -- what will be the impact once you translate the lease assets and maybe some explanation on the assets? Exactly what is the leasing commitment here, just to get a good understanding of how the numbers will be impacted.

Yes. We estimate at the moment that we'll get a lease liability of a little bit more than DKK 300 million. And on the EBITDA side, we'll go for roughly the DKK 320 million up to around DKK 400 million under IFRS 16.

Our next question comes from the line of Ulrik Bak from SEB.

Can you maybe give us a bit of a flavor of the 2020 numbers? I know you only presented the 2017 to 2019 numbers. But as 2020 has been an eventful year, so maybe you can shed some light about the development there.

Yes. We don't have -- they don't have the final numbers yet. They are a family-owned business, not extremely well-integrated in their finances. But of course, we have some indications. And they had a rough April, May as we did, especially the Dutch-German business continued to be impacted by the restaurant closedowns also in Germany. But the indications are that that they will be fairly similar to 2019 in terms of profitability, with a strong recovery the last half year here, equal a little bit to what we are seeing in our own business.

Okay. That's very helpful. And then also to the sellers, what -- do you have a feeling or an idea of what the rationale for them to sell? You were talking about they were looking for a long-term buyer, but why sell at all?

They -- again, they're a family-owned fourth generation, didn't have children that were interested in taking over the business. So again, without having all the reasons, of course, from their side, they warmed to the idea when we started talking about a merger. And as I mentioned before, it has been a multiyear process to get to this conclusion where we have gotten gradually more and more accustomed to each other's and understand each other's ideas. So I think it has been an emotional day for the family giving this up, of course. But I think they are comfortable that there will be more opportunities for their people and customers in combination with DFDS.

Okay. So you also mentioned that you were -- you had some sort of exclusivity in the M&A process. Does that mean that you did not have competing bids? And was it more important for the family to get like a long-term buyer than to get the highest price? Can you comment on that, please?

Yes. It was an exclusive bid. They had retained an adviser, and they had made some testings in the market, too. But we think it had clearly a value that they knew that, with DFDS, it would be a lasting solution. The owners still own -- still live in these cities in Winterswijk and Nijmegen and I think they didn't want a situation, or they preferred if they could find a situation where maybe the company would not be sold every 5 or 6 years, and that was a main element. And when we look at the valuation, we think it's attractive when we have done our DCFs, and we also think it's attractive when we try to compare with peers in the market of a similar size and business.

Yes. That makes sense. And maybe a question for Karina. Can you please elaborate a bit on the deal structure and the mechanism to redeem the preference shares? Are there certain targets that need to be met for it call this DKK 270 million per year for the next 3 years? Or could it be less? Or could it be more depending on the performance of the target company?

The price is fixed, and we have a call option to call this DKK 270 million over a 3-year period. Should we elect to do it earlier, we can do so. But for the -- at the moment, the plan is that we will do it over a 3- year period. But the price is fixed.

Okay. That's clear. And also a question on your financial position. As of 30th September, you had DKK 735 million in cash. And assuming you will generate the same amount or a bit more in Q4 as you did in Q3, you will just have enough cash to pay the upfront amount of DKK 930 million. So in that context, how comfortable are you with your liquidity position following the deal?

I'm very comfortable. We have, as you say, we have sufficient cash to pay this DKK 930 million upfront. And you might also recall that we have a relatively large amount of committed facilities of the DKK 3.5 billion. So all in all, I think we're in a good financial position.

Our next question comes from the line of Marcus Bellander from Nordea.

Just a few questions. First off, if -- Karina, if you could clarify, you said something about that there are minorities in the business. How large are those minorities?

This is a model primarily entertained by N&K in the way they have built some of the subsidiaries. And without committing completely, it's around 5% of the EBITDA is, in theory, held by these minorities. And it is done more like a bonus system for the managers that run the different activities. We will enter a dialogue with them, explaining of course that that's not normally how our bonus incentives are set up. On the other hand, if somebody prefers to keep these, for example in the Polish truck operation and other places, it is also fine for us. But we will look into that as we begin the integration. But it's not something that has a major impact on the cash flow.

Okay. And 5% of EBITDA, that would be 5% of net profit as well roughly or...

Yes, 5%, 7%.

Okay. Okay. Great. And then second question, I'm just curious how closely you will integrate HSF? I mean will they retain their brand names or will you change those? Will you merge offices in some places or will it be a stand-alone business basically?

We will do a full integration and Niklas, our Head of Logistics, and Karina are already deeply involved in planning the integration. There is a 1-year grace period before we can change names and brands. But everything else, we can basically start as soon as competition authorities give their approvals. But it will take time. They are run on a little bit like 2 or maybe even 3 different companies, their integration is not fully complete since they merged in 2017. So especially on the systems side, on the financial side, it will take a little time before all our systems are in place.

Okay. Understood. And last question, just curious where you think the risks associated with this acquisition are, if there are any. And what's -- in your due diligence, what did you focus the most on? What were the red flags, if any? Where could this go wrong basically? Or how could this go wrong?

Well, we always have to be humble, of course, but we have looked extensively into the impact of Brexit. We have looked extensively into the EU driver directives that come into play gradually and especially in '22 to see how that can impact the business. And we have gained a lot of comfort in those areas. Brexit, of course, we know how we've been hit ourselves now. We think we can actually maybe help mitigate the impact when U.K. also starts putting their border controls fully in place later in the year. But other than that, we have, of course, acquired a business with heavy focus in fruit and meat where the growth is limited. But we see that as a very good balance to our otherwise heavy automotive and textile exposure, where there's a lot of volatility typically. So we actually see that this is a very good addition to our business in terms of the stability that this food logistics will add to DFDS.

Okay. Got it. Look, it does indeed look like a good acquisition. So congratulations on that.

Thank you, Marcus.

And the next question comes from the line of Ruairi Cullinane from RBC.

First question, a follow-up from the previous one, and I was just hoping you could talk me through any sort of Brexit teething problems that this business may have had. And secondly, could you confirm in which year do you expect to deliver the 8% ROIC? Is that in the first year of the acquisition? And I clearly understand the transaction structure is designed not to impact financial leverage immediately, I was just wondering how comfortable you were with current levels of financial leverage. I know you've still got the ambition to move to 3x in the next few years. If you could expand on that, that would be great.

Many questions. Karina, I think, will start a little bit on the Brexit teething problems.

Yes, I think it's fair to say that HSF has had exactly the same problems as the rest of us have with problems with getting to speak to the systems on the government side. So the problem is to have sufficient documentation from customers, et cetera, et cetera. But they are, like the rest of us, working through the pain. Of course, there will be, as Torben just said, a next hurdle when we then start looking into bringing stuff into the U.K. where we then need to abide to the stricter border controls. We have a setup in DFDS, where we use extensively our back office center in Poznan. And there, we believe that we can also contribute to HSF when -- especially 1st of April and 1st of July COGS. So I think that it's simply something we just all have to work our way through. And it's not something we see as a huge risk. We know the obstacles now, and we also know how to deal with them.

Do you want to repeat your next question, Ruairi?

Yes. When do you -- I know you're targeting an 8% ROIC? Do you expect to deliver that in year 1 from this acquisition? Or will it take a little bit longer than that?

It's probably realistic to expect 2, 3 years before we reach that. We, of course, need to see exactly the 2020 results and form an opinion on the integration benefits over the next couple of months. But we don't expect it already in '21 to reach that level. Also because of the IFRS impact that Karina talked about earlier.

Okay. And are you comfortable with current levels of leverage?

Yes. Of course, we have a strategy that it should be between 2 and 3. But given that it is entirely a product of the passenger business not operating, we are comfortable. And we've seen and with the result that you got a sneak peek of in Q4 with an EBITDA at same level as last year without having a passenger business. We are able to keep reducing that leverage. So we are very comfortable. And with the structure we have in place here, we basically do not further increase the leverage.

Our next question comes from the line of Stefan Roehle from KfW IPEX-Bank.

First question, you mentioned the anti-trust authorities and the clearance here. Do you expect any issues here? And can you elaborate a little bit on the market share of HSF and, of course, also then the combined group in the different regions?

It's very small market shares. We expect we -- and we don't expect any delays with the clearance. But the markets, we need to look now, and we don't have access. There needs to be clean teams on both sides as this is being handled. But it is very small in the way EU define market share. So it's insignificant, and therefore, we don't expect any challenges.

Okay. So it's quite huge and also a fragmented market. So also with respect to your market position in the different 3 regions that you mentioned here.

Correct.

Okay. Okay. And second thing, you mentioned the stability of the business. On the other hand, the cold chain business now makes up, as I understood it correctly, 50% of total sales. In the Logistics division, is it something where you see this is a good balance or when you feel comfortable? Or is it something which you would diversify later on with other acquisitions and other, well, logistics divisions?

Well, as I said before, the main focus now is, of course, on a successful integration. We believe that there will be commercial opportunities coming from this addition of HSF that we will pursue. The meat consumption as such is a relatively stable market development, but we would, of course, not be pleased if we were not able, with this combined group, to create growth.

Okay. And last thing with respect to the integrations, do you expect any one-off charges by integrating HSF? You mentioned, for instance, the IT system, perhaps also the integration in your financial reporting and things like that.

We will have one-off costs, and it's too early to quantify them at this stage.

Our next question comes from the line of Lars Heindorff from SEB.

Congratulations with the deal. It looks like a fairly attractive price. One of the things that I struggle a little bit maybe to understand the rationale behind. You said that there's not a lot of cost synergies. You expect some commercial synergies, although you didn't really expect a lot of growth. And the meat consumption is fairly stable, maybe even a declining market going forward. So maybe if you could give us a little more insight to, I mean, what kind of commercial opportunities is there that you can pursue? And do you actually expect this business to grow?

I can see the way you put it, Lars, it sounds a little bleak prospects. But back to where has DFDS historically been strong, we have been strong in cold chain. We have shown that we can generate attractive margins and growth by having a strong position in the fish and the general cold chain in mid-England. We believe by adding this business, we will further strengthen that. We have a business that we now take over that has very, very strong integration with their customers, with the whole plastics setup. We believe that we can replicate this setup with some of our customers, for example, in the aquaculture area. We believe that -- and then there is actually quite impressive growth, both in Skive Køletransport and N&K, with more general cold chain customers. And again, at a margin that is more attractive than in normal full-load ambient transportation. So we do think that we will be able to have a growing business with this but also a business that will not have big dips like we sometimes see in some of our more volatile industries. And HSF has demonstrated that through this COVID pandemic situation as well that people eat the same amount of meat, whether there's a crisis or not. So we see a lot of things that we can do on the commercial side. There will also be cost synergies. And again, as we also said, there's also an excellent mix with our ferry infrastructure. So it checks all the marks and see from our side of the chair, Lars.

Yes. No, I hope that you're right. Just one follow-up on that is that the contribution into the ferry. Because I mean, if you look at the numbers that you have in the slides about how many trucks and trailers, et cetera, locations that they have, it's actually bigger than your existing cold chain. I mean is the contribution to the ferry division, is that a material part of the reason why you have made this acquisition?

The acquisitions we do in the logistics space needs to be justifiable based on what we can do in logistics. And the same is true for this one. But of course, it is always an added element if the geographies match, so that we can also see that will benefit from moving cargo from other ferry operators or tunnels to our own infrastructure. So it is part of the upside here, but not a decisive one.

Our next question comes from the line of Karsten Søndermølle from May Invest.

Congratulations on the acquisition. Just one question from me, actually. Could you talk a bit about the client concentration in the acquired activities and for how long these contracts with clients run?

We have limited insight to -- because of the non-clearance yet of the acquisition. But of course, we have a good understanding or a good hunch about what the main customers are. And they do have, on their top 6, 8 list, some customers that represent more than EUR 20 million, EUR 30 million, EUR 40 million. And some of those customers also, is my guess, are customers that we have. So we will have some significant customers coming out of this. And historically, we have seen at DFDS that the bigger we become with very large customers, the better we can utilize all our different skills throughout the systems and capabilities. So we actually look forward to addressing some of these very large customers that we get in. And well, even if we have EUR 40 million, EUR 50 million, EUR 60 million even of combined revenue with them, we are still fairly small. And typically, some of these customers want to consolidate suppliers. So we see this more as a strength than as a weakness in this situation.

Thank you. There are no further questions at this point. So I'll pass back to Torben and Karina.

Thank you very much. And thank you for the participation today, a short notice, and also the good and interesting questions. We look forward to starting now planning the integration. And as soon as the clearance come, we will start the actual integration. Have a good day.