FRS Iberia/Maroc (DFDS) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the DFDS conference call. [Operator Instructions]. Today, I'm pleased to announce Torben Carlsen, CEO. Please go ahead, sir.

Thank you very much. And thank you for joining this call with a relatively short notice, as you saw. And sorry, I'm here, as usual, with CFO, Karina Deacon; and the Head of Investor Relations, Søren Brøndholt; and I'm Torben Carlsen. Thank you for joining. You saw that we signed the transaction last night. And we thought given that this is a new geography and 1 of the rare expansions in our ferry network that it was worthwhile, thanks for giving an opportunity to hear more about the transaction this morning. Just on Page 3, a short reminder of who DFDS are. We have a transport network in and around Europe, combining ferry infrastructure, road and rail capacity. Our earnings have fully recovered post-COVID. And as most of you know, we have an outlook for the year of DKK 4.8 billion to DKK 5.2 billion EBITDA. We like to think of ourselves as an ESG frontrunner in our sector and our decarbonization goes towards 2030 are on track. So what happened last night or what was it that we announced last night, it was that we now expand our network into 1 of the more busy ferry markets in Europe, namely the Strait of Gibraltar, where we will acquire FRS Iberia who operates 3 routes from Spain to Maroc. We think it is a high-growth potential with some 8% annual average market growth expected for the next 5 years. We believe that we have been able to negotiate attractive transaction terms. And we believe that with the knowledge we have from other areas, notably the increased channel, we will also be able to leverage our experience in these areas, and we will have further operational development opportunities in the area. Moving to Page 5. This is, as you said, it's a market-leading ferry operator with high reliability. It has operated since 2000, is the only operator in the area that operates all the 3 Strait of Gibraltar routes. The key route for us is Algeciras-Tanger Med, which is a ro-pax route with 50 freight and passengers. This route generate 60% of the total revenue and has a higher earnings share than the remaining routes relatively seen. The 2 other routes, Tarifa-Tanger Ville and Algeciras-Ceuta passenger routes deploying high-speed catamarans. And in all 3 routes, the market share of FRS Iberia/Maroc is around 28% to 30% depending on market segment and season. As we have in the announcement, we expect revenue this year of DKK 1 billion to DKK 1.2 billion, an EBITDA margin in the range of 18% to 20%, EBIT margin of 11% to 12%, 750 employees, 7 vessels, on average fairly old. The 5 of them owned, 2 of them chartered. And you can see the distribution across the 3 groups in the table on Page 5. Page 6, macro environment the EU-Moroccan ferry market revenue is estimated at around DKK 4.5 billion of which freight constitute 25%. There is a forecast to grow 8% per year over the next 5 years. Moroccan growth is supported by near-shoring or the China plus 1 strategies of many companies that are being implemented. There is a balance in import and export trade on these routes. And there is a very close trade relationships between Morocco and EU facilitated by various association agreements and key trading partners, not surprisingly Spain, France, Italy, Central Europe. Moving to Page 7. You see the market share and also its development in cargo traffic around 28%. And in passenger traffic, around 30% with some strengths, of course, during COVID, depending on route 2 to 3, 1 to 3 competitors on the different routes. Turning to Page 8. Why are we doing this? Well, it expands our Mediterranean network. We access the growth from nearshoring as we do in Turkey. Our capabilities from the channel, we believe are helpful in the further development and optimization of the trade on the Strait of Gibraltar. We see high growth of the freight segment on the Strait. We believe we can use some of the tools from the channel and elsewhere in our system to optimize passenger yield and to significantly increase the digital distribution of tickets. Longer term, we also believe that some of our tonnage on the tender will be suitable in the Strait of Gibraltar. There is some resilience in the market forces on the Strait of Gibraltar as the market is regulated by law and various concession and permits in the ports on both sides. I will turn over to Karina for -- on Page 9.

Yes. And as we start out by saying we think that we have got access to ferry infrastructure here at the attractive transaction terms. We are looking into an expected multiple at around 6x EBITDA based on the current expectations for 2023 numbers. The transaction will be financed in part by loan financing and then also existing funds. And we have -- I'm always tempted to say, as usual, we had great support from our core banks in financing the transaction. When we look at the leverage, if we calculate that on a pro forma basis, assuming that we will include FRS by the end of the year, we see a slight increase in leverage, but only around 0.1x. So that's something that is changing our target of being in the range of 2x to 3x earnings. When we look at the right, we see it being accretive from day 1 compared to our current return level requirement. And we also see an EPS accretive transaction from the outset. The transaction is, of course, subject to regulatory approval. Best guess for closing is towards the end of the year of '23.

Good. On Page 10, this is just a map of our current network and of course, the expansion into Strait of Gibraltar. And as we said, a market supported by nearshoring, it's a high-growth trade market. We see development opportunities both from leveraging our skills on the channel, but also as freight develops from the area. And as Karina just went through, we believe we have been able to negotiate attractive terms. As we speak, our Head of Ferry, Mathieu Girardin, together with our Head of Passenger and also our Head of Freight sales in Tarifa to greet our new colleagues. We also have a person from our strategy in consulting who will relocate to Spain for 4 to 6 months to manage our different integration work streams, first planning, of course, until we get the approval and then the actual implementation. That was it from our side and then over for -- to Q&A.

[Operator Instructions] Our first question comes from Michael Vitfell-Rasmussen from Danske Bank.

Yes, 3 questions from my side. I'll take them 1 at a time. First of all, if you could add some color on what kind of CapEx you're looking at also Torben as you alluded to, the fleet is if rather old. And just in the same combination, I see that out of the 7 vessels, you take over 5 of them are relatively fast jet ferries. Will that look bad on your fuel consumption and also on your ESG scores?

The CapEx prospects -- there is a tendency to use quite old tonnage in this area. And we are, of course, not overnight going to change that. We have ambitions to add a 1/3 ro-pax on the trade, and that can either be an existing DFDS ship that we may have to modify in which case, there will be relatively modest CapEx. And we're also looking potentially for a third party. That could happen in '24. So there will be some CapEx. And then, there will be some replacement if we are further a couple of years ahead of some of the old high-speed ferries. So all-in-all, compared to the remaining DFDS ferry system, a pretty light capital-intensive operation, you can say, and we intend to continue like that. With regard to the fuel efficiency, they do not operate as high speeds as you, for example, see in some of the Danish waters with high-speed crafts. But of course, there are some -- something we're also looking at. The good thing in a midterm, long-term perspective is, of course, that the distances here are such that there are more obvious solutions for the green transformation than on some of our longer routes. But in the short term, we are going to optimize, we don't think it will have a major negative impact on our KPIs as such.

Great. I also note that Spain a few months ago, gave some funding to the tunnel project. What is your thinking on that? Obviously, you know a tunnel very well from the British channel. Any kind of implications in that? And here, I know it's obviously rather long term, but how should we think that into the equation here?

It's a complicated project. The depth is quite a challenge in this area, we believe. We also have some experience, of course, from Denmark buying, also building tunnels and it's not going super fast always. So we are -- we have looked into it, of course. We do not believe even if everything goes well that this is something that will happen in the next 12 to 14 years. That would require -- that everybody is completely focused on it and there are no political delays in that period, which we have seen in all other places that there will be.

And so my final question is just on margins. You mentioned here 18% to 20% at EBITDA levels. Once you're done doing what you do best and what you've done a lot of times in the past, should we expect the margins to reach kind of existing businesses in your Med business, i.e., maybe 10 basis points -- sorry, 10 percentage points upside?

I think we are a little more humble than this, that the route has been operated well by the current owners. As we mentioned in the presentation, we think we have some tools that we can deploy here that should bring profitability up. But for now, we will spend a little time learning the operation. And then, we will come up with some more solid projections on that, but we are pretty confident that we can at least keep the current levels.

The next question comes from Dan Togo Jensen from Carnegie Investment Bank.

Yes, a few questions from myself as well. Competitors, can you give some color on who are competing against you and how they have so to say, invested in this market in the past few years? It seems like market shares are relatively -- to consider at least on the chart that you show here. So who is it you up against, please?

The operators are Balearia, is the largest operator next to us. And then you have a company called [ Amas ]. You have intra-shipping and there are some combinations in ownership in those companies. So the structure is fairly stable. The tonnage can have some fluctuations because there is a very high summer season. So there are different tonnage situations from year-to-year during the high season. There are some stipulations on the Moroccan side that there should be 50-50, Moroccan and EU tonnage, which also means that it is a fairly, I don't know if it's maybe inertia market in terms of changes to the situation. But it's all capable competitors which is, for us, always good because then it's also rational competitors that we are up against.

And this -- but are they on par with you on market share-wise around this 30% as well?

Yes, varying a little bit per route, but they are about the same size.

Okay. Then you also had a strategy, have you seen that in [indiscernible]. I'd also see it in Turkey now with you taking into business under the logistics side. Any opportunities here? One thing. And the other thing is it seems like synergies that you are alluding to here primarily relies on expansion on the freight side. Is that correct?

We are, of course, if I start with the last first, focus on freight a lot, and this is for us 1 of the attractions that we think that the Algeciras-Tanger Med line will benefit from strong freight growth over the next years. So that is definitely an attraction. In terms of logistics, the HSF Group that we acquired used to have a small operation in Maroc and some of the goods that go on the channel are through investables from this area. We will see, as we always do, if there are opportunities either in partnerships or else to also become a customer on our own routes as logistics, but there are no plans for that from the outset.

And then maybe a question for Karina. This, as I understand, by start as far as I can see as well as myself is, it doesn't really move so much on the financial side, at least. But still, you're investing on both at DKK 1 billion. Do you still have room for, let's say, an eco transaction that we know that you are negotiating at the moment without having to raise more equity?

I think we do. As we said all along our target structure is to be leverage between 2 and 3. But in the event of special situations, we can also go above 3 for a short period of time. If we can see a business case that would bring us back into the range. So I don't see that this transaction here makes us not capable of doing an eco transaction in '24, if it turns out to be the right thing to do.

The next question comes from Ulrik Bak from SEB.

Just a few questions from my side as well. Can you perhaps allude to the historical financials of this company? What have the margins been, revenue trajectory, and volume growth over the past, say, 5 years?

We have -- it has been in steady growth. But then in -- during COVID, they took quite a serious hit, of course, with passengers stopping then in 2022. They had results above actually what we have shown here. And now in '23, they are lightly above '18, '19. So for us, it's not just an attractive acquisition multiple, but it's also an attractive starting point, you can say in terms of downside protection, if you will, but also some upside potential when we look at, for example, on '22.

But in terms of freight growth, what's been the annual average growth rate historically?

I don't have that number here, but it has been a strong growth.

If we see a cut off back from the last 5 years, we do see it around double digits. So it is in line with the expectations that we say that we have for the future.

And the cargo comes from a fairly low level in our view. So that's, of course, also 1 of the reasons for this relatively high growth rates.

Okay. That makes sense. And this 8% growth over the coming 5 years, that's volumes, I presume, and not revenue?

Yes, yes. And that's the market assumptions. We have lower assumptions in our base case, you can say.

Okay. Then a question to the sales process. Was it a structured process initiated by the sellers? How many bidders, how much -- can you share from the process?

It was a structure process. Sellers tend not to share how many other participants are in processes like that. But it's our impression that the last 2, 3 months, we have been fairly low in the process.

And any color on the rationale for selling? It seems like a very attractive area to be in growth-wise and squaring that with an EBITDA multiple of 6x. It seems fairly low for a high-growth area like this. So -- and just please help us understand the -- yes, the rationale here?

Yes. And of course, you would need to ask FRS, but what they say in the statement that we've seen is that, that this area is a little bit different than what they do elsewhere they operate significantly smaller vessels and like on the [ Elf] channel and stuff like that. So it's -- so -- but they do that worldwide. And they mentioned that they want to sell this special business off to invest more in their core business. But you will have to ask FRS their reasoning.

Sure. And then my final question, just the composition of the fleet that you're acquiring. The majority of the vessels are owned? Are they all owned? Or are some also chartered? And what do you consider the economic lifetime of the acquired vessels to be?

Well, 5 of them are owned and 2 are chartered. They are older than we, in general, operate the vessels, but we can see that, that's also what the competition does down there. We have 1 fairly new HSE on the ro-pax side, we are comfortable with us being able to reutilize and also just in the market, find new tonnage. So we'll have to familiarize ourselves with the tonnage. We've had technical people from our own organization about all the vessels. So we are fairly confident that we can continue with the ones we take over, we will add ro-pax -- on the ro-pax route within hopefully less than 6 months. And then in '26, '27, 1 of the older ones will be exchanged. So we'll continue at a fairly low capital-intensive trade.

[Operator Instructions] The next question comes from Lars Heindorff from Nordea.

Thank you for hosting this. Also a few questions from my side. Firstly, regarding if you can give us a split between passenger and cargo revenue?

On revenue.

We have on the -- as we mentioned, the Algeciras-Tanger Med, it's 50-50. And then it's primarily passenger on the remaining routes. So it is a majority passenger and cargo revenue that we have here.

Okay. So and you said that at the Algeciras-Tanger, that was 60% of revenue, if I remember correctly?

Yes, correct.

Okay. What's -- okay. And then on the regulatory side, you guide in the statement that there are some requirements, both from the Spanish and Moroccan side with respect to a number of departures and also the capacity deployed. Can you give us a bit more details on that? Is that somehow that you are, I mean, required to have a minimum capacity at all times? Or how does that work?

No. That depends a little bit from route to route and from whether you're on the Spanish or the Moroccan side. But basically, on the ro-ro trade Moroccan imposes a 50-50, Moroccan EU split of the business, which means that we have a concession or an authorization for 1 of our OpEx, which is Moroccan route on that trade. And likewise, when we expand for a third, we need to get an authorization for this. On the Spanish side, you have licenses for 2 years in the port that gets renewed. We are hoping that those licenses can be a little bit longer going forward. And there, you have some also on the Ceuta route, some demands on how old the tonnage can be that you operate if you want a concession on that route. We operate without a concession. One of our competitors do have a concession. So it's a fairly complex picture, but a picture that we also believe once we have understood it is actually something that makes it a very attractive place to operate.

Is that the reason why you are already now -- you mentioned that you're planning to replace 1 of the catamarans? Or was it by maybe 2 years down the road or something like that?

That is something that will also be an advantage in some of these license, yes. But it's not something we have to do.

Okay. And then, you can continue to operate without a license on the Ceuta route?

Correct?

Okay. And then on the business, do you -- what is the -- I'm not exactly sure, exactly which versus, I've been trying to pick them up. But when I look into Clarkson's database, these look like there are no information about scrubbers on these vessels. Are those all fitted with scrubbers? Or how is that situation on that?

There are no scrubbers on these vessels.

And any plans to do installer?

No. We will have to look at -- we don't have experience in fitting scrubbers on high-speed crafts. They are 1 of the high-speed crafts that are fairly new, which would be the 1 that we would look into if something can done. But with the very old vessels, we will not install scrubbers on.

Okay. So these vessels here, are they consuming 0.1? Or what kind of cost?

They consume 0.1, yes.

0.1?

Yes.

Okay. And then on the synergy side, I think you've been over at least on the cost side that probably -- it doesn't sound like there would be much maybe a little bit. But on the revenue side, are there any overlap between the -- and this is mostly within the cargo space? I assume here and what you see in the other parts in Mediterranean, in Turkey, where you operate, do you have any overlap in terms of customers and stuff like that?

There is some overlap also to the channel. But as usual, we do not include revenue synergies. But we will, of course, see if there are any advantages we can deploy here. But you're correct. It's not so much a synergy case. It is a growth case. And then, also 1 where we think we can help with some of the experiences we have primarily from the channel and how to optimize yield and digital distribution, which in turn then will reduce costs.

Okay. And then last but not least, maybe a question for Karina. The financing cost of these roughly DKK 1.2 billion, DKK 1.3 billion that you pay for this. What should we assume?

I think I saw that you assume 5%, and I think that's a pretty good guess. Maybe a little bit of that, but that is what we're looking into.

We have a follow-up question from Michael Vitfell-Rasmussen from Danske Bank.

Yes. Sorry, that actually has been answered. It was just on the regulatory and the scrubber. So that's fine.

We have a follow-up question from Ulrik Bak from SEB.

Can you just talk about the political risk, the stability of the Moroccan economy, perhaps also with reference to Turkey? What are we looking at here?

That, of course, anybody's own assessment, we have looked into the political system in Morocco. We've looked into the relationship with Europe. It's a kingdom, as I'm sure you are aware. It seems to be quite good support for the King. It's the entry to Africa if you listen to other companies operating in this region, it's the sure bet if you want to do something in Africa. So we have at least got that the country with the regulations that you can rely on. It's again, it's a growth country. They value the relationship, the close relationship with Spain, but to a broad extent, the EU. They are benefiting from this nearshoring. They are a big part of the energy transformation with a very attractive land space for both solar and onshore wind where we see some of the participants investing now probably heavily over the next year. So we think Morocco is a good place to invest in. Of course, it's not Germany, but as far as we can see and with the experts that we have consulted on this it's a reliable place to invest in also for the future.

Okay. And do you already have customers who have already invested in production facilities, already have production facilities in Morocco or are planning to do so in the near future? Do you have any anecdotal evidence like that?

Well, in this section, 1 of our large customers in Turkey also have production facilities in Maroc is just on top of the head, but otherwise, Morocco is automotive. So it's a number of well-known automotive brands that are also in Morocco.

We have another follow-up question from Lars Heindorff from Nordea.

So just a follow-up on the CapEx requirement going forward. A couple of things. First, I don't know if you can say and pardon for my ignorance, but I haven't had the time here this morning to dig into the cost of such Catamaran ferry. What if you're going to buy a new 1 of those, what will be the cost of such a ferry?

I think it's too early to be too specific. But in our plans, we do have for the -- for this third ro-pax, some CapEx in '24-'25 and for a new vessel in '25-'26. But if you put in some EUR 30 million for each, then I think you are within a range that works.

And 30 million, that's dollars, I assume?

Yes, it was euros, but you can convert it.

Okay. And will there be any -- I mean, in case that you will have to or want to operate on a license. Will you need to do any kind of CapEx on the terminal side? Will there be anything there? Or will there only be vessels?

It's -- the CapEx on the terminals are done by the Board of [indiscernible].

Okay. So this is only vessel CapEx, which is required?

Yes.

This concludes the question-and-answer session. I hand back to Torben Carlsen for closing comments. Please go ahead.

Thank you very much, and thank you very much for the big interest and the good clarifying questions. We really look forward to this. We think it fits very nicely into our existing system and also where we identified that, that growth will take place. So we look forward to the approval by the authorities and then to start the integration work and the operation on the Strait of Gibraltar. Have a good day and a good week.