Ekol Lojistik AS (DFDS) Earnings Call Transcript & Summary

As usual, I'm joined by Karen, our CFO; and Soren, our Head of Investor Relations. Thank you for joining the call with this short notice. We had hoped that there would be 30 minutes more, but the funds took a little bit longer to clear but thank you for those who managed to join. Let's turn to Page 3. Just to remind everybody what the deal it is. It is basically that we can now combine our ferry and road model that we successfully display in the North Sea to also the Mediterranean, Turkey, Türkiye-Europe flows. Ekol international transport has around DKK 3.3 billion revenue and 3,700 employees that now are DFDS employees. We get access to global manufacturer customers in high-growth, Türkiye-Europe transport market, solidifying the near-shoring strategy or the strategy to get closer to the markets where you see near-shoring growth fueled. The financial performance of the acquired network needs to be turned around as there is an expected loss for the full year 2024. The ambition is to get back to a 5% EBIT margin by end of '27. Turning to Page 4. Ekol is strategically an excellent fit with our business model. It feeds volumes to our Ferry network. It adds scale to our Road & Rail network and it gives access to a new customer portfolio for our logistics solutions. Turning to Page 5, a little more detail on Ekol, it's primarily full load and part load transports from Türkiye to Europe. Most of their transports are not just road but intermodal using either road/ferry/ rail, road/rail combinations. There's a very high share of in-house haulage. There are third-party ferry/rail operators. They offer complementary logistics services, warehousing customs. And it's -- the large customers are European and global manufacturers with production in Türkiye. The service -- the sector served are the same as we have with our ferry automotive, industrial parts, textiles, garments. They have their own office in 10 European countries in addition to Türkiye. As mentioned on page -- in the beginning on Page 6, the financial performance is challenged there are commercial and operational challenges, some loss of market share. Türkiye is in the special situation that there's high inflation, the currency is not depreciating to the same extent against euro. So companies with euro inflows and primary cost in Turkish lira are in general channel, and that is also the case for Ekol who then in addition with some loss of market share, have some overcapacity. We have, together with the Ekol management team, built what we believe is a solid turnaround plan, looking at the root causes and first, we expect that there will be annual revenue growth at least 5% per year. And we do think that with the measures that will be taken and the good work of our new colleagues that able to get the company back to around a breakeven by the end of 2025. As you can see in the table, the company will post a negative result this year, 3,700 people, I said, 1,300 trucks, 4,000 trailer swap bodies, 600 containers and cross-docking and warehousing facilities that we are taking over. A little more detail on Page 7 on the turnaround and integration plans. Of course, first, it's an integration of our teams. It's to make sure that we increase the volumes and also consolidate across the now combined network where we can, increase the equipment utilization, align the trade flow changes that followed from the situation I mentioned before with the depreciation misalignment and then, of course, make sure that customers that are Euro customers also cover the increases that we see from the inflation in Turkey, equipment utilization, equipment efficiency and then coordination between the different modes of transport to maximize utilization. In a Phase II, also year 1, but later, it's about integrating the acquired European network with the existing network. A lot of prework has been done. But now we need to go to implementation and, of course, verify our assumptions to see how we can maximize the benefit of this strong addition to the network and do that in a profitable way. Where there are volumes that are going on road, we will try to, of course, use or redirect them to our varies. And then we have customs, clearance also as part of this deal, and we'll integrate that with our extensive customs organization to leverage best practice in both places. And then when the turnaround has happened and looking more forward, we are, of course, looking at then how to build the product portfolio leverage what we have in the remaining system, both ways and optimizing the network for growth. So on November 1, we sent the message that this transaction that we signed in April had been abandoned. On Page 8, there are some details of the now enter deal. It's an enterprise value of DKK 1.8 billion, 0.55x EV sales multiple, the change to when we abandoned the deal is that debt incurred since the signing is now excluded from the revised agreement. We have entered an option agreement that gives us the right to extend our good and strong cooperation with the Yolova Port, which is owned by the same owner as the Ekol International Transport Network. The equity value is unchanged since last, and we have financed it with existing funds and new financing. Turning to Page 9, impact on DFDS. Immediately, our outlook remains unchanged. We see this stabilization of our Mediterranean route network volumes. What do we mean by that? Well, with Ekol being part of our family, their trailers will travel on our ferries wherever it is feasible. And then with the transaction and the relatively compressed earnings. There will be a leverage increase of 0.3x, all other things equal. So in conclusion, on Page 10, our Mediterranean business model with today's move has been strengthened, our proven ferry/road business model from Northern Europe is now replicated in the Mediterranean with a very strong base cargo. We get access to end customers in the high-growth Türkiye-Europe transport market and further position us in -- to take advantage of the near-shoring or the deglobalization that takes place in the world. And it gives us a possibility in the current market situation in Turkey where new competition has entered to enhance our possibility to protect and grow our stronghold in the Mediterranean. So with that short intro, we will pass over for Q&

[Operator Instructions] And we have the first question coming from the line of Lars Heindorff from Nordea.

Yes. Congratulations with deal, after all a little bit forth and back. The first one is on the integration costs. I don't know if you can say anything, will there be some integration costs, what magnitude?

There will be integration costs, particularly for IT and over a 3-year period, this is a -- together with all integration costs approaching a 3-digit million krone in Danish krone.

Okay. And the anticipated increase in the EBIT margin in Ekol to 5% by '27. I don't know if you can quantify or give us any indication what's driving that? Is this just -- is this market improvement? Is it the integration of the systems. Is it that we don't expect hyperinflation in Turkey anymore? Or what's some of the details behind that?

The company in the past has made a 5% EBIT margin during hyperinflation. So it's not the hyperinflation that is the problem. The challenge is that Türkiye has kept the value of the currency higher than normal economic markets would do with the currency in inflationary situation. I think they do that on purpose to curve inflation. So there will be a period where there will still be a challenge in terms of the cost pressure versus the revenues in euro. But the primary path towards recovery of the margin are to -- I call it, regain commercial strength in the market, it's a very strong organization with the ownership of DFDS, we are certain that some of the lost volumes and businesses over this period can be regained and of course, also in a growing market overall. And then it is that the company has a higher cost base than some of the competition, go to the reduced volumes they have experienced and therefore, some empty equipment, less utilized equipment. We also believe that this part can be addressed and then it's the integration of the European business with our business that should produce benefits.

Okay. And they achieved also 5% margin before the pandemic, I know you showed us the numbers that it was 4.8% in '22. But if you go back a bit further, and before the pandemic, they were still operating with 5%?

I don't have all the historical numbers here, Lars, but a 4% to 5% margin or even 4% to 6% margin in these markets is not unusual.

No, not during the pandemic. And then just on the terms. Clearly, the price is different when you originally announced the deal back in April, it was DKK 1.9 billion and now you say DKK 1.8 billion. But apart from that, what are the changes to the terms, if you can say anything about that? Because when you -- this is now 2 weeks ago, when you announced that you were stepping away because Ekol haven't fulfilled some terms, which should have been some -- yes, which should have been fixed before the closing? I mean what have changed besides the price?

Well, the price but also the enterprise value, which you will not see from the numbers have improved compared to 2 weeks ago and more than the DKK 100 million you can see there. Then we have agreed an extension option in the strategically very important terminal of Yolova as a different -- as another change since last year. And then there were a couple of the less, but also important things like transfer of SAP licenses, et cetera, that have come in place since then.

And the debt level, how much of that increase? Because now you say, it's equity value of DKK 1.5 billion, which means that the debt of DKK 300 million, what was it before?

It has not -- in the deal you see now, it has not increased since April. If we had done the deal on April -- on November 1, you would have seen an increase.

How much?

I don't think it's appropriate that -- I think the important thing for you is to know what we actually did the deal on.

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

And also congratulations from me on landing the deal. Just a follow-up on the purchase price that Lars just asked about. So you say that the equity value has -- is unchanged, DKK 1.5 billion, and the EV is now DKK 1.8 billion versus DKK 1.9 billion in April. So the debt level has declined from DKK 400 million to DKK 300 million. So how -- can you please just elaborate why is it that you say debt less decreased more than that?

The debt level in April and the debt level in end of October were different.

Okay. So it's not just a discount of 5% that you're getting?

I don't think it's appropriate that we hear on a call like this talked about -- I think the important thing for you is to see what have we actually paid for the company. And strategically, does that make sense? It's a stretched price. I think everybody can see that given the current earnings levels. But with the competitive situation in Turkey on balance, we believe that back in April, we believe it now with the increased or intensified competition in Turkey. But financially, it was just a little too stretched and there were these solvable conditions as well. And now the parties have gotten back together and have put together a deal that we all can live with.

Okay. Then a question on the 2024 performance. You say that earnings are negative for '24, but can you quantify it in any way? And also you don't provide an EBITDA estimate for '24. Can you guide us here as well?

Yes. EBITDA is probably also red 0. So that's where we are. It's been a tough year, as I mentioned, for the reasons before. We don't think it's anything structural they have maybe been a little bit harder hit than the general industry in Türkiye but still enjoys a very, very strong position with the main industrials.

Okay. So for '25, you state that you want to break even by year-end. And then you have the integration costs of a 3-digit million amount. So what kind of earnings drag from the operational business would you expect for '25 from the acquired company?

We have not been able yet to do the timing over '25. As you can realize, we have focused a lot on getting the transaction back on track. And numbers are a little bit delayed due to the nature of the carve-out of this business in the existing business in Turkey. But we'll come back in connection with Q4 with a more detailed outlook.

Okay. Understood. And you say that this turnaround is nothing structural that's harming the earnings of Ekol. But given that it's been such a long process, has Ekol lost any key personnel, any key customer relationships during this process?

They have, but they may not have lost relationships fully. So they are definitely recoverable. They have lost some people that every company would lose it in such a prolonged period of uncertainty. Turkey has a lot of good people. Ekol has retained a very strong team, and we believe that the certainty that is created today by the seller and buyers by doing this transaction is very welcome, and we will certainly be able to get the right quality of the organization in Türkiye, but also in the European network.

Okay. And then in terms of your unchanged '24 guidance. It was my impression that part of the downgrade from 2 weeks ago was driven by the termination of the Ekol deal. So am I mistaken here? Or are there still some costs that are related to the Ekol deal, which were higher than initially expected?

I think obviously, we don't have those costs any longer. We will have Ekol, we'll start to incur costs connected to that. So we still think that this range is the right range Will we be in a more interesting end of the range with this? Probably.

Okay. And then the last question here is on your leverage level. At the end of Q3, you had a net debt to EBITDA of 3.3x. It will now be increased by 0.3x according to your slides. And with Grimaldi also putting pressure on earnings in '25, how should we think about your leverage level going into '25 and also your ambitions to distribute capital to shareholders and also your midterm target of 2.5x? Are these still realistic?

I think the -- maybe there is a slight improvement to what you say there from the sale of the Oslo ferry. This is just the individual impact from this deal so whether we end the 3.5x or 3.6x remains to be seen. But the dividend capacity share buyback capacity we need to discuss, of course, with the Board and what their views are in connection with the finalization of the year. Are we delayed with the 2.5x leverage? Yes, compared to '26, absolutely.

We have a follow-up question coming from the line of Lars Heindorff from Nordea.

Yes. So it's just the difference between EBIT and EBITDA suggests depreciation levels to the tune around DKK 160 million to DKK 170 million. Can you say anything about that depreciation? Is this hardware? Is this customer relations, i.e., amortizations and do you expect that it will be roughly the same level in '24 as it was in '22 and '23?

Just checking a few numbers. I think we think maybe the current depreciation is a little bit less than what you indicated there, but maybe we can come back on that. And then I lost a little attention because I was checking that. What was the other part of the question, Lars?

That was a composition of the depreciation in April. Is this hardware? Is this customer relations...

Sorry, this is primarily trucks and trailers. There's no -- if there is, it's very, very limited. There's no IP or anything like, it's trucks and trailers. Maybe some warehousing stuff.

Yes. Understood. Understood. And then maybe just a last one, now maybe I'll be pushing you a little bit here, but you've been acquiring quite a bit of companies since 2020 in the logistics space. And we've been talking about this before that integration is maybe not where it should be. HSF is one example, and IT systems still not in place. What's make you so confident that you can do this also now you talked about the SAP license and stuff like that, that you can do that turnaround. If this is sort of most of that turnaround is caused by things that you do and you decide and not by the market?

I don't know -- I'm not sure. I fully understand what you're saying. Obviously, it's a challenging integration. The good thing about Ekol is that it's full load, part load using a large part of ferry, it's what we do in the system. So our systems are better prepared for this integration than for the HSF integration. Focus will be on the commercial recovery and the cost-out exercise rather than integrating the company from day 1. There will be some ERP systems and others that we would want to prioritize. But other than that, we'll focus a lot on the, you can say, commercial operational elements. Are we extremely confident and comfortable that we can achieve that? I think we are fairly confident and in similar in the companies we bought with similar services, we have actually been quite successful. And again, here, it is a big part of the collaboration between ferry and logistics that needs to work as well to achieve this. And then there is a structural thing with the Turkish market, the currency parity and how that has both put a pressure on costs and has changed the balance of flows. And those, of course, we need to also see the market help us a little bit. I recently visited an event with the Turkish Finance Minister so I think for him, there's nothing surprising in what they are doing now and then towards the end of '25, if it goes with inflation as they're hoping, they will also relax the currency parity. So hopefully, we will both be able to pull off the plans we have put down ourselves and also get a little help from the macro when looking 9, 15 months ahead.

Okay. And then just how much of the margin uplift is caused by the cost out?

We cannot give you those details at this stage.

Okay. Can you say anything? Is this -- when you talk about own production in terms of -- because also a sense when the size of depreciation, they must own quite a bit of trucks. So assume that the share of own production is fairly high or maybe I'm mistaken.

Production of -- own production is very high. And we'll, of course, look at whether there's a possibility to change that but of course, it's also the cost out. It will be a combination of filling the network with more volumes, which will automatically help the utilization and efficiency and then it's making sure that we have the right setup.

[Operator Instructions] There are no more questions at this time. I would now like to turn the conference back over to Torben Carlsen for any closing remarks.

Thank you very much, and thank you again for the quick calling in. Sorry for the short notice, and also, some apologies for not being able to answer all the questions in detail. As you can imagine, this has been a tough process for us. First, the past is walking away from each other and then coming to back together, as you can see, we are closing at the same time as we sign here to make sure that there's no uncertainty in any of the organizations. We have very excited new colleagues. We have the first people on the way to Turkey now, I'm joining the next -- early next week. And we will come out with more detailed information when we get to Q4 when we've had a chance to solidify the plans and making sure that we get the latest up-to-date situation in the company. So thanking for your patience as well. We are absolutely convinced that this is the right way forward for DFDS. And hopefully, we'll soon be able to demonstrate that further. So have a good weekend, and once again, thank you.