Ekol Lojistik AS (DFDS) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the DFDS conference call. I am George, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] 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, sir.

Thank you very much, and welcome to everybody. Apologies for the short notice to join this call. I'm joined today by Karina Deacon, our CFO; and Niklas Andersson, our Head of our Logistics business. If we turn to Page 3, a -- we have some highlights on the transaction. It's a transport network with DKK 3.5 billion of revenues, 3,700 employees. Once the transaction is approved by the EU competition authorities will transfer to DFDS. The acquisition replicates our ferry road business model in Northern Europe and now also to cover the Mediterranean region. We get access to end customers in the high-growth, Turkiye-Europe transport market and with high growth expectations are around 14% annual growth until '28, in line with also the previous years. The financial performance of the acquired network is stressed by the overcapacity that we've also seen in the remaining markets throughout Europe. But we have a plan, we believe, where we -- our existing colleagues and our new colleagues will be able to get back to acceptable income levels after 2024. We are now in a period where we planned the integration and we, of course, have restrictions on what we can do during this period, but we will spend the time wisely, making sure that they want, we are ready to kick off the integration plans. If we move to Page 4, and I believe you may need to double-click to show the full Page 4, operator. Then you've seen this slide during our Capital Market Day, where we've had the expansion period from '18 to '23, and where Ekol fits into that expansion period, although we've only managed to sign the deal in '24, and then, of course, we will continue to focus on unlocking value from '24 to '26, and going into green transformation mode up until the end of this decade. Moving to Page 5. And again, I think you may need to double-click to show the whole Page 5. We show how our model with freight routes where we combine freight and where we do freight solar as is in the case in Mediterranean and where we operate 4 terminals, in combination with our door-door, full load transports, our part load transports, and our complementing rail services and the complementary logistics solutions with varying degree of implementation around our network. We see that Ekol fits really, really nicely into this business model and this strategy. Ekol is the largest customer on our Mediterranean network, ferry network. They are the largest customer in our Rail that connects Trieste and set to Northern Europe, Germany and U.K. And there are a number of very interesting customers, logos in Ekol's portfolio that we now get either further access to or new access to together with the existing business. Moving to Page 6. Looking at the transport market between Turkiye and Europe, we expect with these growth rates that the market between '23 and '28 will double almost at this relatively stable rate at 14% annual growth. When we look at the different segments, then Road is growing with a slower pace than sea. And therefore, the market shares are changing with an increasing sea market share. This is, of course, not only RoRo, this is also container and other modes of sea transport, but we expect this trend to continue also during this period. So this was a little bit background. And with that, Niklas, on Page 7, forward will take us through what the company is and why this is an interesting company. Over to you Niklas.

Thank you, Torben. And as it says in the headlines, Ekol Lojistik, the leading international transport network in Turkey, where the network offers full load and part load transport with a ratio of 60-40 as well as complementary service such as customs and other services as well. We look at the network we see an increase of [indiscernible] with exempt the DFDS' operational model to Turkey by combining the [indiscernible] logistics capabilities in line with remaining ferry network. Also, geographical expansion of logistics and a little bit to what Torben talked about on previous slide, we are expanding the DFDS Logistics to a high-growth market, and we expect future growth rates to be accelerated by [indiscernible] trends. It's a complementary geographical footprint. The potential to create a pan-European network creating transport corridors in Western Europe and Eastern Europe for the existing network. DFDS Logistics to provide backloads to the existing Ekol network and to fill that network with backlog and have a better balance. And also potential for optimizing the international operations by consolidating in the network as well. Of course, all in all, a strong platform with value creation potential with the size and the industry focus, which I will come into the next slide, we see it's a perfect match to DFDS and DFDS Logistics. Next slide, please. Here, you can see as well on the customer portfolio for Ekol. You can't see that, but I will allude to with. It's mainly European and global companies. They are with production or assembly plants in Turkey and in Europe, connecting a very important route between the 2 countries or Turkey and Europe. Primary sectors served our automotive industrial parts and textile and garments. And automotive and textile customers have highest revenue per customer and combined revenue exceeds 60% of these different segment revenues. Next slide, please. As Torben alluded to, financial performance became challenged in '23. And the revenue were lower than '23 to EUR 486 million due to challenging market conditions and some loss of market share. And the EBIT margin was 2.5% in '23 as network utilization declined where the adoption of the total network where you can see on the right well with the trucks and trailers not adopted to the decline in the market and market share. And a total of around 6,000 transport equipment units are owned within this system. Torben will comment more to the figures later. Next slide, please. Short on the business and integration plan to improve the financials. Phase 1 is to increase the acquired networks volume throughput. I talked about that on previous slides. From our own and also the acquired network, improve the equipment utilization and have the right amount of assets and in-source several agency services. That will happen in the first phase. Phase 2 gain scale benefits from integration of existing and acquired network as well, move select volumes from different routes into our ferry/rail system and integrate our customs organizations together. And Phase 3 is to provide the complementary logistics products and optimize even more throughout the network. And with that, I'll hand over back to Torben on next slide, Slide 11.

Thank you very much Niklas. The transaction terms and completion, expectations, enterprise value of 7.6x '23 EBITDA or DKK 1.9 billion. Sales or sales multiple of 0.55 based on '23. We're financing the transaction with our existing funds and new third-party financing. We have clearance by the Turkish Competition Authority, but we need also clearance by the EU merger control. And as we say here, we expect that, that should be cleared by the beginning of Q4 this year. If you move to Page 12, then the outlook for DFDS changes in the revenue outlook as we expect a couple of months to impact so that our growth increases by 3 percentage points compared to previously announced the EBIT outlook of DKK 2 billion to DKK 2.4 billion remains unchanged. Net interest-bearing debt to EBITDA expected to increase by 0.3 closing probably to just exceed 3x. And due to the lower than normalized earnings for Ekol at the moment, the acquisition, including the accounting implications of the acquisition means that our ambition to achieve 10% ROIC in '26 is moved to 2027. All the financial ambitions that we have communicated previously remain unchanged. Page 13. In summary, we see this as a strong, a high-growth addition to the DFDS network, Niklas covered some of the network benefits on the previous slide. But it means that we established a portal business to complement our Mediterranean business, again, completely similar to what we have on our strong North Sea routes. We get access to end customers in high-growth Turkiye-Europe transport market. We believe that we know how to run a business like Ekol. And in conjunction with the skill and strong people we acquire, we believe that we will have a very strong integration plan ready when the transaction is approved. So this was some high-level highlights, will obviously be more specific with some of the financial projections as well when we get to closing. For now, our focus is on making sure that the process with EU runs smoothly and that we plan the integration through our normal work stream set up during this period. So with that, over for questions.

[Operator Instructions] Our first question comes from Ruairi Cullinane with RBC.

My first question is just how things have started off the business in 2024? Secondly, you highlighted at your CMD that cash flow yields have been perhaps more attractive than ROIC in some of the logistics M&A you've done. I just wondered how we should think about that in the context of this transaction? And then perhaps you won't be able to comment too much on this, but just how we should be thinking about 2025 EBIT contribution?

Thank you, Ruairi. I think it's too early for us to guess on both '24 and '25. We are not surprised if '24 is at the same subdued level as '23, given how markets in general react at the moment and also because some of the market shares that Ekol has locked in also through '24 and part of '25. So that probably answers your first question. In terms of cash flow yield versus ROIC, there's no doubt that this will be accretive on cash flow yield before it becomes ROIC accretive. And in terms of EBIT, after the accounting '25 will be a relatively modest to neutral EBIT impact for the business. This is also the reason for postponing the ROIC target by 1 year because what we do expect to happen is that when we get to mid-'26, end of '26 that we will have reached the traction that we require to meet our ROIC targets.

Our next question comes from Dan Togo Jensen with Carnegie.

Congrats with finally making this transaction. Can you elaborate a bit maybe on the revenue of DKK 3.5 billion in Ekol? How much of that, so to say, is already a pass-through from DFDS, so to say, cost with DFDS? So how much can you say is already part of the internal or will become internal revenue in DFDS? And then maybe a CapEx question. You take quite a lot of assets here in connection with this transaction. Can you elaborate a bit about the state of these assets? Have they pushed out CapEx? So there is a sort a CapEx commitment hitting you in coming years due to this? And then maybe finally, some flavor on how the numbers throughout '23 has developed, the 2.5 percentage point EBIT margin that you alluded to and also the revenue, I guess, of course, it's an average. So how has the sequential development been in terms of margin throughout '23 in order to get some sort of an indication of where we should start the year of '24?

Thank you, Dan. In terms of internal revenue as it becomes, it's probably DKK 0.5 billion that you can subtract when it gets consolidated in DFDS. In terms of CapEx, of course, when a business is for sale, the sellers are cautious with CapEx. We've had a so-called lockbox mechanism for a while. So you can say that some of the postponed CapEx are benefiting us at closing as additional cash. So we've not been too worried about it, at least not the last 12 months or so. In terms of the development, you're absolutely right. I guess the implicit question is there is a downward trend through '23 do remember that most of '24 will not hit us because it's very late in the year that there will be a closing. So we see very good initiatives and good things happening that -- so that we believe that we will have a reasonable starting point, at least at the level of the average '23 and then with upside as explained before.

Our next question comes from Ulrik Bak with SEB.

Question on this market share loss that Ekol has experienced through 2023. Can you please elaborate on this development? And if you know who they have lost market shares to? Is it due to the small scale of this particular freight forward? And how are you intending to change this development? And could they get any benefit from becoming part of the DFDS? That would be my first question.

Well, I think when markets go down, obviously, freight forwarding is a slight remedy for their market shares and maybe Ekol had lost a little focus on the or taken off the hands of the steering wheel, having maybe expected that this transaction would be a little bit faster. And then everybody else is trying to benefit from this. From our diligence, we know the customers, but it's a variety of customers in primarily the automotive space. But it's also maybe a lack of innovation in terms of developing new customer routes and segments. So I think we have a good understanding of what has happened. In terms of what we can do, the focus we have on organic growth that we elaborated on during the Capital Market Day, is, of course, something that will expand into this region. Some of the customers, we know extremely well already, others we have marginal exposure to, and they will now become quite big customers for us. We'll continue to operate in a fair and transparent way to the market so that those who compete for door-door business, they have the same access to ferry rates so that it becomes those with the right solutions for the customers that win. And there, we have seen that we can go into such discussions with Niklas' organization with some confidence that we can pick up our business and market share. And it's, of course, also easier to operate in a growing market than in a declining market. And there, we see Turkey growing quite significantly. So yes, we have discussed that at length, of course, with the sellers and their commercial organizations, how they see the market and combine that in our own knowledge and down the first plan, and we'll refine that during this integration phase.

Understood. And the second question on whether you can provide any color of the historical financials before the COVID years, particularly the EBIT margins, what levels they were hovering at before COVID?

I'd rather stand from that since this is a carve-out equal total consisted of domestic contract logistics and transport business plus this international part. And they have not, in the past, split it and reported separately. Of course, they do have some high-level knowledge about it, but it will be too much uncertainty to share that publicly. But it's not -- the '23 levels is not an unusual level as far as we could derive from our analysis.

Okay. And then third question on whether some of your customers, well, how they have reacted to this transaction? Of course, they have been seeing it coming for a long time. But do you see any risk of losing any volume from some of your other customers as you will increasingly probably compete with them now acquiring Ekol?

That's always a risk, of course, to lose customers. It has been good for us that the process with the authorities have been done in reverse order because they have, of course, been out asking the market. They've asked customers, they've asked competitors, what they would feel about this transaction. And they've come to a conclusion that this is not something that upsets the market to an extent that they should decline the transaction. I think we may come into the market with, what should I say, a more predictable behavior in the market than maybe -- Ekol has been very innovative, quite aggressive and have over a short period of time, gained a lot of market share. And there, our approach is more as it has been in the North Sea. We, of course, want to gain business, we develop business, but it's not may be the best option for us to aggressively go after a customer that is already on board our vessels, but rather to see how we can develop a new business, how we can convert from container business, how we can convert from the road. The road doesn't fight back as customers or competitors do. So we are -- yes, we are humble about this threat or complication, but we've just been able to demonstrate in all other markets that we can handle it without upsetting our customers.

[Operator Instructions] We have a follow-up question from Ulrik Bak.

Just a few more questions from my side. This transaction of DKK 1.9 billion, how is it structured? Is there an earn-out element in there somewhere? Or is it all upfront cash?

This is all upfront cash.

All right. And then in terms of synergy potential, I know you...

Some of it is debt that we -- you can say the equity value is more like EUR 200 million, 1.5-ish. So some of it is leasing debt and other debt.

Okay. So cash impact, EUR 200 million?

Yes.

Understood. Then a question to the synergy potential. I know you wrote in the statement that it's still -- you're still working on that, and you'll get some clarity towards closing. But can you still say a few comments on which areas and perhaps not the size of it, but yes, anything that you might be able to quantify?

We -- if we start with maybe the easy part in Europe, there, we have complementary markets, but we also have overlapping markets. And in both instances, there will be quite significant synergies. The way their significant France presence can work with our Belgium presence to fill North going where we may have the South going or vice versa. We have -- we'll get access to some warehousing in Poland -- strong presence in Poland, which will help us fill the train we just started from Poland to the U.K. or to Holland. So there are a number of things which I would call low-hanging and low-risk things that we can do in the integration of the European network that will position us even stronger in a number of commercial discussions with customers, but also cost-wise. And then on the Turkey side, we are quite humble. We will rely a lot on the management team that we inherit from Turkey. Of course, we will sparkle in some DFDS resources, but then we will have to look even closer at their network and see are there some flows where today, it makes sense for them to drive because of the composition of the equipment or other elements where we say, well, actually it makes sense for us to put it on board the ferry. We can reduce the equipment and then we can put it on the ferry routes and further on with the train from Trieste, for example. So it's not -- I think in the Turkey side, I don't expect people synergies to any large extent. We don't have any on-the-ground logistics forces there. In Europe, we'll optimize. It is mainly complementary and commercial opportunities, but there will be some overlapping offices where, of course, we will also find some synergies. So that's the main elements.

Okay. Then my final question is about the graph that you have about the transportation market size between Turkey and Europe growing at a CAGR of 14%. Can you provide a split between volume and price here?

No. This is -- as you have seen, this is the total. So this is the -- this is including both. My guess is that 3% to 4% of that is probably price -- 3% to 5%, let's call it.

Ladies and gentlemen, this was the last question.

Thank you very much. Thank you very much for joining, again, with a short notice. We look forward very much to talk more about this transaction, once it gets clear. And once we start being able to communicate [indiscernible] cost benefits. [indiscernible] enjoy the rest of the day.