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Edited Transcript of DFDS.CO earnings conference call or presentation 13-Aug-19 8:00am GMT

Q2 2019 DFDS A/S Earnings Call

Copenhagen Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of DFDS A/S earnings conference call or presentation Tuesday, August 13, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Torben Carlsen

DFDS A/S - President CEO & Member of Executive Board

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Conference Call Participants

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* Dan Togo Jensen

Carnegie Investment Bank AB, Research Division - Financial Analyst

* Finn Bjarke Petersen

Danske Bank Markets Equity Research - Analyst

* Lars Heindorff

SEB, Research Division - Analyst

* Marcus Bellander

Nordea Markets, Research Division - Senior Analyst

* Ruairi Cullinane

RBC Capital Markets, LLC, Research Division - Associate

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Presentation

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Operator [1]

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Hello and welcome to the DFDS Q2 2019 Report. (Operator Instructions) Please note that this call is being recorded. Today, I'm pleased to present Torben Carlsen, CEO. Please go ahead.

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [2]

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Good morning and welcome to DFDS' Q2 call. Joining me today is Jesper Heilbuth, our Interim CFO; and Søren Brøndholt, Head of Investor Relations.

Growth continues but Brexit lowers pace is our Q2 headline, reflecting that our combination of ferry routes and logistics solutions is robust and holding up well against the headwind from current events, not least an exceptional high level of uncertainty about the outcome of Brexit. We have seen lower freight volumes in Q2 as the Q1 stockpiling in U.K. reversed during the quarter. This also makes it relevant to look at our half year numbers rather than Q2 alone. Current U.K. trading also beyond Q2 is lower than last year, which we attribute to the increased uncertainty.

In light of these events and this situation, we have chosen to lower the full year EBITDA outlook by 6% and widen the range from DKK 200 million to DKK 300 million to reflect the reduced visibility on U.K. trade.

Turning to our Q2 report, Slide 3. You see that Q2 revenue is up 9% to DKK 4.2 billion and EBITDA is up 4% to DKK 989 million. H1 revenue is up 10% to DKK 8.1 billion and EBITDA for the first half is up 8% to DKK 1.7 billion. As mentioned in the introduction, there's a negative impact in Q2 from reversal of U.K. stockpiling in Q1. But as I also said, U.K. trade is currently lowered by the Brexit uncertainty. And as a consequence, earnings outlook lower approximately 6% from before and EBITDA prediction of DKK 3.8 billion to DKK 4 billion to now DKK 3.5 billion to DKK 3.8 billion against a 2018 restated result of DKK 3.6 billion.

Turning to Page 4. We, as usual, look at our 5 key performance drivers for 2019 that, as you can see, some of them are facing some headwinds. The growth benefits from our Mediterranean expansion. We see the full year impact from U.N. Ro-Ro and the expanded cooperation with Ekol Logistics.

We are well prepared for Brexit. We do see that some customers are not completely there. We are dealing with that but do expect some disruption over the first weeks following a potential hard Brexit.

The route network, we said, would be strengthened by 3 new freight ferries. That's on track. This digital business project should go live, which has happened. We are -- emphasize further the effort to get the market traction on bookings on these, and then we have our usual continuous improvement -- efficiency projects, which all are on track.

Turning to Page 5. EBITDA margin lowered by stockpiling reversal in Q2 is the headline. Revenue growth of 9% driven by Mediterranean. Margin reduced by lower freight volumes from this reversal of stockpiling, and the EBITDA increase driven by full year Mediterranean impact and also demonstrably higher passenger earnings. Depreciation is up DKK 50 million mainly again due to Mediterranean full year impact. And ROIC is now fully reflecting the Mediterranean acquisition, including the headwind that we had faced initially in Turkey.

Turning to Page 6, diving further into the Ferry Division where EBITDA is up 3% to DKK 500 million -- DKK 518 million. North Sea up DKK 1 million. Lower volumes from, again, the U.K. stockpiling reversal, but some mitigation from the DfT agreement that were in place until May 1 when DfT canceled the agreement.

Baltic Sea, minus DKK 7 million. Strong pax performance, but some lower freight earnings, explanation for this.

Channel, minus DKK 49 million. Lower freight volumes, slowdown in pax market, clearly both impacted by the Brexit situation but also a small market share reduction for DFDS both in freight and pax during Q2.

Mediterranean, full year impact of DKK 51 million. Where last year we only had impact from June, in 2019 we had from the full quarter.

Passenger, plus DKK 19 million. There is a positive Easter impact here, but it is also a positive impact that has continued beyond Easter.

Turning to Page 7, the Logistics Division. We have a negative development. Some impact, both Nordic and continent, from the U.K. reversal of stockpiling. But in the Nordic, not a surprising development as we saw the expiration of a large automotive contract last year that we have this year at a different level as the main reason for the reduction in Nordic. Continent, as I mentioned, has a negative impact from reversal of U.K. stockpiling and then a positive development inside U.K. and Ireland, a result of DKK 3 million, the improved performance and also impact from a large, new contract.

Turning to Page 8, a picture of our Win23 or illustration of our Win23 strategy where we have 4 strategic pillars that will help us drive growth in the next 5 years. We are well on the way to deliver on this, have now mobilized the organization, have the leaders in place and will start reporting on progress as we move ahead on Win23 also in this quarter.

So turning to Page 9 and the outlook. U.K. trade slowdown continuing beyond Q2. Brexit outcome, seen from our side of the table, currently unpredictable. We could see a new round of stockpiling September, October. We have reduced revenue growth to 6% to 8% and the EBITDA by 6%. So that we now guide revenue growth of 6% to 8% from 10% to 12% and EBITDA range of DKK 3.5 million to DKK 3.8 million, down from DKK 3.8 million to DKK 4 million. Other guidance levels are unchanged.

Turning to Page 10, priorities 2019. We will be adapting to the market changes, continue our Brexit preparations, full focus on optimization of our Mediterranean capacity utilization and operation, further development of the newly launched routes and from Gothenburg to Zeebrugge and from Istanbul to Sète, deliver on our performance drivers and focus on furthering our Win23 strategy.

With this, we turn over for questions from the audience.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Dan Togo from Carnegie.

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Dan Togo Jensen, Carnegie Investment Bank AB, Research Division - Financial Analyst [2]

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First question would be on the North Sea. Can you come any closer to quantify the impact of the compensation you got from department of transport here?

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [3]

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Impact in Q2 is around DKK 50 million positive.

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Dan Togo Jensen, Carnegie Investment Bank AB, Research Division - Financial Analyst [4]

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And then you told -- you mentioned it will also feed into Q3. How much should -- is it? Will that be a lower amount or...

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [5]

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That would be a lower amount.

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Dan Togo Jensen, Carnegie Investment Bank AB, Research Division - Financial Analyst [6]

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And then on the Channel, your volumes are down by some 14%. Year-on-year, we can see numbers from your Channel where truck traffic is down around 10%. It seems like you have lost a bit of share here. How will you approach that in second half? Do we expect to regain some of the lost share? And how will that impact prices, et cetera? How will this play out?

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [7]

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We do expect to regain some share. The historical situation on the Channel has been that we've gained share in the high seasons because of the configuration of our vessels. With the market down this year, there has been less of that natural market gain, share gain/loss this year. But when we look at the current situation, we believe that we have corrected the loss of share, and we'll hopefully maintain that status for the rest of the year.

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Dan Togo Jensen, Carnegie Investment Bank AB, Research Division - Financial Analyst [8]

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Okay. And then just maybe a few words on the management change you are making in Turkey because although Turkey disappointed, but then you were also mentioning additional cost due to the ramp-up here. Have there been some lack of control? Or how should we see this management change?

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [9]

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We have seen that obviously, when integrating such a significant operation, that things have been done in different ways. (inaudible), who had left, has done an excellent job in Turkey. But we saw, with the complexity coming out from the new customer contract down there and we added departures and added ports operations, that it will -- it is important to have an even stronger DFDS DNA on-site in Turkey. That's the background for the change, to stay very close to the operation through these demanding times.

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Operator [10]

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

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Lars Heindorff, SEB, Research Division - Analyst [11]

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A question regarding the Baltics and the agreement that you made -- contract you made with Stora Enso recently. Has that had an impact on Q2? Or how -- or maybe it will be in Q3. And has the ramp-up to that contract already started? What I'm actually after is the utilization that you have experienced in the Baltic, whether that has changed significantly because of this new contract.

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [12]

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The new route is actually North Sea from Gothenburg to Zeebrugge. So it's reported in our North Sea, but I can still answer the question. The utilization has, of course, been impacted by the ramp-up. We took over, as far as I recall, June 17. A current operator left the market and customers needed to find out to what extent they joined our route and to what extent they joined the competitor route. But we -- the business case that we prepared for this holds as we expected, which means that the impact in Q2 is very, very limited. We start seeing some impact in Q3 and more so in Q4.

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Lars Heindorff, SEB, Research Division - Analyst [13]

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Okay. When you say limited, I assume that it's because there's been some startup cost, as you mentioned

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [14]

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Yes. The startup cost plus, of course, utilization is low as we ramp up and get the new customers onboard.

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Lars Heindorff, SEB, Research Division - Analyst [15]

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Okay. And then also, regarding...

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [16]

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We moved 1 -- we took 1 vessel from the Ghent route and redeployed on the Zeebrugge route. So you can say instead of having 4 on Ghent, we now have 3 and 3 vessels operating.

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Lars Heindorff, SEB, Research Division - Analyst [17]

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Okay. Then regarding your development sort of in trading conditions, volumes were down quite significantly, both in the Channel and also in the North Sea when we look at that. Maybe you could give us an indication. I understand from your wording that the decline in volumes have maybe been effectuated and caused by this development in U.K. But you expect -- or what have you factored in, in your guidance that this is something, a trend that will continue into the second half? Or what do you expect in connection with the Brexit? That this will be sort of a kind of a one-off [color] where you have such bad volumes or whether they will improve going into the second half?

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [18]

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The guidance for the year -- the downgrade of the guidance reflect that the current conditions continue, which mean that we expect lower volumes compared to last year for the remainder of the year on those, the North Sea and the Channel routes.

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Lars Heindorff, SEB, Research Division - Analyst [19]

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Okay. And then...

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [20]

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That's on the Channel.

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Lars Heindorff, SEB, Research Division - Analyst [21]

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And is that line with what you've seen so far in July as well?

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [22]

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It is.

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Lars Heindorff, SEB, Research Division - Analyst [23]

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Okay. And then the last part is regarding your capacity plans. If I recall it correctly, you may correct me, I think you will have one more vessel delivered in the third quarter.

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [24]

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Correct.

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Lars Heindorff, SEB, Research Division - Analyst [25]

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And when we look at sort of capacity plans also in light of the volume trends that you've just explained to me, what kind of capacity growth are we looking at in those -- both in the North Sea and -- obviously particularly in the North Sea going into the third and the fourth quarter?

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [26]

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We do not predict capacity growth on the North Sea in Q3 and Q4 up from DFDS.

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Lars Heindorff, SEB, Research Division - Analyst [27]

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Okay. But from your competitors maybe?

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [28]

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No. I have no information about that.

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Lars Heindorff, SEB, Research Division - Analyst [29]

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Okay. And lastly, the special items, you have minus DKK 6 million on both the Logistics and the Ferry Division. And then I think you had some -- minus DKK 17 million on a group level. Can you just explain what is that related to?

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [30]

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We have had some organizational changes in connection with the -- making the organization ready for Win23. And then we have closed down, sold off some smaller associated companies, (inaudible) with a DKK 10 million close-down cost.

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Lars Heindorff, SEB, Research Division - Analyst [31]

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Okay. And in Logistics, the decline in volumes in the Nordics, as you mentioned, I assume, is because of the -- some of the automotive contracts. Do you expect that also to continue into the third and the fourth quarter?

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [32]

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No. Now the comparisons should be like-for-like.

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Lars Heindorff, SEB, Research Division - Analyst [33]

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Which implies...

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [34]

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The last automotive contract we refer to expired in Q2 '18, so we don't have that strong comparison for the remainder of the year. So we expect growth, hopefully, in all areas in Logistics. We remain optimistic.

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Operator [35]

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

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Marcus Bellander, Nordea Markets, Research Division - Senior Analyst [36]

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Just wondering what -- how you're thinking about adjusting capacity in the North Sea and the Channel now that volumes are declining, if you are reducing frequency or if there are any other measures you can take and will take.

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [37]

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There can be some reduction of frequency on the Channel middle of the night in August where it may make sense to drop some sailing. But it's not straightforward as you then get out of routes, et cetera. But we will see what is possible, including also potentially changing size of vessels. But the assumption is from the organization side that Q3 September, October will be quite busy with both Christmas and potential stockpiling coming along. So we do actually not see a need for dramatic capacity adjustments right now.

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Marcus Bellander, Nordea Markets, Research Division - Senior Analyst [38]

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Okay. Understood. And this new round of stockpiling which you've mentioned a couple times, is this your sort of gut feeling? Or is this based on actual bookings or what customers are telling you?

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [39]

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We don't have bookings reaching that far out, but customers -- some customers are expecting this. Others are not expecting it. So we'll have to wait and see. But the business management of -- close to the North Sea customers believe that there will be some impact in September and October.

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Marcus Bellander, Nordea Markets, Research Division - Senior Analyst [40]

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All right. And finally, just now that EBITDA guidance is being lowered and, I mean, your net debt-to-EBITDA is on the high side, I would say, is that anything that makes you nervous at all as the former CFO?

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [41]

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I think a leverage of 3.2% is not on the high side. It's quite a comfortable level. But of course, we make sure that we are also conservative and prudent on the balance sheet side. But nothing that keeps us awake at this moment.

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Operator [42]

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Our next question comes from the line of Finn Petersen from Danske Bank.

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Finn Bjarke Petersen, Danske Bank Markets Equity Research - Analyst [43]

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North Sea, quite a dramatic fall in lane meters, almost 10%. U.K. volumes, the official statistics show it's around 6% drop in volumes between U.K. and the EU. Who is winning the market shares? And what is the split if looking at your U.K. exposure in the North Sea and the exposure to the continent? It seems like, if you are following the general trend to the U.K., you should lose quite a significant volume on the Ghent route. Could you help a little bit understanding this?

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [44]

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That was a complex question, Finn. But I think we believe and our North Sea management believe that there will be a reversal of demand September, October, which has led us to take a soft approach in light of some loss of market share because we do not think it is healthy to lower prices in a situation where we think that all capacity will be -- will require [shorting]. So do we have levers to make sure that our loss of market share corresponds to the markets? We do but are patient at this moment when we talk about the North Sea.

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Finn Bjarke Petersen, Danske Bank Markets Equity Research - Analyst [45]

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But I still don't understand. It's not the future we're talking about, last quarter. If the market is down 6%, you are down almost 10%. And this is the U.K. market, but you're for sure not down 10% -- or 6% on the continent market. That is not falling, is it?

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [46]

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But Finn, I don't think you can compare the U.K. trade of goods, which include all kinds of goods, to the more specific trades that we are running. That's not an apple-to-an-apple comparison. But you can say that the trend is similar. And if you look at the half year, I think we are down around 3% on the North Sea. So you -- the market is more volatile because of this stockpiling ups and downs. So I think we have to see it over the longer periods.

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Finn Bjarke Petersen, Danske Bank Markets Equity Research - Analyst [47]

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Okay. Let's call a half year longer period. But anyway, I just have to understand. 10%, is that 10% to the U.K. and also 10% to Ghent, the drop in volumes? Or how should I look at the 10% in lane meter drop in the same quarter?

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [48]

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In Ghent, the comparison has, of course, been challenged a little bit by the fact we've moved capacity to the new route. So when you look at the total Belgium-Sweden, we don't have a 10% drop.

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Finn Bjarke Petersen, Danske Bank Markets Equity Research - Analyst [49]

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Okay. Because you moved capacity on 17th of June, it can't make that huge difference to the Ghent route for the second quarter, can it? I'm just wondering, are we looking at a genuine underlying market decline from Sweden to Continent?

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [50]

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Sweden to Continent is less impacted than the North Sea-South routes from Rotterdam. But of course, we have also seen that some of the automotive volumes are somewhat reduced.

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Finn Bjarke Petersen, Danske Bank Markets Equity Research - Analyst [51]

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Okay. Market share, we know that Cobelfret have received 2 new vessels. Could you help me understand how that affect the market share and pricing dynamics in the North Sea?

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [52]

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I believe that those vessels are deployed to Ireland and Spain.

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Operator [53]

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(Operator Instructions) Our next question comes from the line of Ruairi Cullinane from RBC.

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Ruairi Cullinane, RBC Capital Markets, LLC, Research Division - Associate [54]

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I have 3 questions, please. Could you first talk me through the impact of closure of alternative transport routes between Turkey and France? And then second on Brexit, if there is a no-deal Brexit at the end of October, do you think you'd be able to offer customs clearance or duty-free fairly soon after that? And perhaps given the uncertainty and the possibility perhaps of securing further contracts with the DfT on similar terms, could you talk us through what Brexit outcomes might lead you to the bottom or where you would sit in the range according to which Brexit outcome? That would be helpful.

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [55]

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Yes. Let's start with Turkey. Alternative stopped operating through France. They operated from the East Meridian to Sète, and we have begun a route from Istanbul to Sète. And we are currently looking how we can best optimize the 2 routes we now have for France from Istanbul and also have discussions with customers to see what [court] in France makes no sense for the market in Turkey so that we, hopefully, over time at least, can seek some consolidation on these routes. We have seen a relatively slow start to the said routes for natural reasons and -- which is normal when we start a new route. But we have also seen a positive spillover impact on our Mersin route with -- having struggled for a while now. Started to show significant volumes above last year. So volumes, as probably customers that before used the France route, have shifted now to the Mersin-Trieste route. So in short, things are looking good. It was a positive news for us that alternatives stopped the French route.

In the U.K., we certainly expect if the rhetoric we hear from the U.K. now is such that come hell or high water there is no EU after 31st of October, then we also do expect that there will not be separate agreements telling not to reintroduce duty free, for example, which means that we will be ready to introduce duty-free trade. Our vessels on the Channel are built in a time where duty free was there, so there's plenty of storage capacity. And of course also, Newcastle-Amsterdam will benefit from that. More complex, more -- keeps -- requiring more preparation is, of course, the declarations and helping the customers with that, but we have hired key positions. We have trained a number of people, and we are in close, close dialogue with authorities and customers to see how we can help this out. Plus we have gained access to additional space for storage, et cetera, in the terminals. So we will certainly be ready to pursue any possibility to keep trade flowing, including, of course, also gaining revenue from these new services.

On DfT, it seems like DfT is taking a slightly different approach this time in how they prepare. They enter into frame agreements so that if they need capacity, they have already agreed with the terms. But it does not look like that they buy firm space as they did last time. We do not question their strategy. But of course, if stockpiling happens, then there may not be that much capacity to then buy. But we are in discussions and engaging with them to offer the best possible service in that connection. But you should not expect some one-off-type income from that as it looks like right now.

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Operator [56]

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And as there are no further questions registered at the moment, I will hand the word back to you, Torben, for any closing comments. Please go ahead.

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Torben Carlsen, DFDS A/S - President CEO & Member of Executive Board [57]

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Thank you very much. The rest of the year, as the last one has also indicated, we'll have both opportunities and challenges, and we are well prepared to meet both. The work to deliver on our new strategic and financial ambitions has started and progress is well under way. And I look forward to reporting about our progress to you going forward while we handle the current challenges on hand. Thank you very much for joining the call and your questions and have a good day.

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Operator [58]

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This now concludes our conference call. Thank you all for attending. You may now disconnect your line.