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Edited Transcript of DFDS.CO earnings conference call or presentation 9-May-19 8:00am GMT

Q1 2019 DFDS A/S Earnings Call

Copenhagen May 21, 2019 (Thomson StreetEvents) -- Edited Transcript of DFDS A/S earnings conference call or presentation Thursday, May 9, 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 - 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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Welcome to the DFDS Q1 2019 Report. (Operator Instructions) Please note that this call is being recorded. Today I'm pleased to present CEO, Torben Carlsen. Please go ahead with your meeting.

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

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Good morning, and welcome to DFDS' Q1 call. Joining me today is Søren Brøndholt, our Head of Investor Relations. First quarter on track is our headline and we are on track for the quarter and on track to reach our earnings outlook of an EBITDA between DKK 3.8 billion and DKK 4 billion for 2019.

Turning to Page 3 of the presentation. We see that Q1 revenue is up 11% to DKK 3.9 billion, EBITDA is up 13% to DKK 677 million. North Sea achieved a very strong result, Mediterranean delivers growth but with very fast ramp-up of a new agreement at reduced margins. We saw negative one-off impacts from Easter on passengers and from heavy additional vessel costs in the Baltic. As mentioned, our earnings outlook is unchanged, an EBITDA of DKK 3.8 billion to DKK 4 billion versus a restated 2018 result of DKK 3.6 billion.

Turning to Page 4. We have a look at the market growth prospects for 2019 and beyond, where we still see visibility on Europe's growth dampened by Brexit uncertainty. Brexit which, as you all know, is postponed until end of October. Low growth outlook for Europe and with consensus growth estimates softening. Current headwind for Turkey-Europe trading, particularly for the imports into Turkey and the growth outlook has been reduced and could be further reduced following the cancellation of the elections in Istanbul recently.

Turning to Page 5. We go through the 5 performance drivers that we launched in connection with our annual report and they are on track. We get the growth from Mediterranean expansion that we expected with the full year U.N. Ro-Ro integration impact and the expanded cooperation with Ekol Logistics. And then of course, we now have added a new route, Gothenburg-Zeebrugge, that I will come back to later. Well prepared for Brexit, we have spent a lot of time in-house and with [hatches] outside of DFDS, including department of transport who have now canceled the agreement that they had put in place as a contingency plan.

Our route network is as expected, strengthened by so far 1 new freight ferry, the second just released on its way from China and the third, after summer. And we have launched our first digital products, DFDS Direct, DFDS Spot. First bookings are coming in and we closely monitor our various improvement and efficiency projects and they will deliver the DKK 100 million that we have previously communicated.

Turning to Page 6. Network expansion increases EBITDA and also capital costs. As mentioned, revenue growth of 11% driven by Mediterranean. Cost increase from the ramp-up, the same place additional dockings in -- throughout the fleet and development of IT/digital capabilities.

The EBITDA as the revenue is mostly driven by full year Mediterranean impact. And depreciations increase of DKK 72 million also main cause Mediterranean full year impact. EBIT before special items up 2% to now DKK 234 million. And again, finance cost up due to the acquisition cost related to Mediterranean.

Moving to Page 7, where we take a closer look at the Ferry division, where the EBIT is up 8% to DKK 223 million. North Sea, plus DKK 29 million from U.K. route capacity increased to accommodate the stockpiling. This is somewhat offset by lower volumes between Sweden and Belgium.

Baltic Sea, minus DKK 31 million, here we've had experienced one-off tonnage cost and also bunker costs that have not been covered by BAF in order to maintain the capacity during dockings and also due to deferred maintenance on our Baltic fleet. We saw some improvement on our Paldiski routes, which last year lost market shares.

Channel, plus DKK 9 million increased freight contribution. We have lost some contribution from passenger partly due to Easter, but also some loss of market share, which on the other hand is offset by better sea fares.

Mediterranean, plus DKK 43 million, which is of course because there was no U.N. Ro-Ro last year. Passenger, minus DKK 30 million, which is again negative Easter impact and then increased tonnage cost.

Turning to Page 8. Logistics division down, which is primarily driven by Nordic minus DKK 11 million, where we had peak volumes for very large automotive contracts in Q1 2018 and had also experienced some start-up for a large new side port shipping contract in Norway, but generally, activities apart from these 2 elements are doing well in the Nordics.

Continent have also some of the effect from the large automotive contract 2018 that is now reduced, and on the other hand have had some positive impact from the U.K. stockpiling leading up to the 29th of March and also a very strong container operations from Holland. U.K., Ireland, improved in performance in all areas. We had various [booth] projects last year with some challenges in Belfast and in certain contracts in the U.K. That has all been resolved. And in addition, we've started up a large cold chain contract, very successfully both operationally and financially.

Turning to Page 9. As you all know, we paid out dividend in March of DKK 4. The multiple leverage is now 3.3 at the end of 2019 -- the Q1 2019 after some investments in particular imports in the Mediterranean and also further payment on new freight vessels. By the end of the year, we will be down to 2.8x, which includes the investment in 2 new vessels for the new route between Sweden and Belgium of around DKK 300 million.

Turning to Page 10. Prioritize -- priorities for the remaining part of '19. Adapting to market changes, we continue preparing for a hard Brexit in October. We hope that there will be some solution before the summer. But with the past experience, we have to continue the preparations.

We optimized capacity utilization in Mediterranean with some cancellations of departures, et cetera, et cetera, to take into account the reduced demand, especially on the import side.

Then, opening of new route, Gothenburg-Zeebrugge. We announced separately this morning that we have made an agreement with Stora Enso to take all their baseload of paper from Sweden to Belgium on a new route that we will open mid-June, a route that will of course also cater to freight forwarders and other customers. Connection with this, we plan to buy 2 vessels as mentioned. We also plan to move one of the vessels that we currently have operating on Gothenburg-Ghent to Gothenburg-Zeebrugge, so that we will have 3 vessels operating on each route. So preparations for the operation and, of course, also reaching out to customers have begun here this morning.

We will continue to focus on delivering on the 5 performance drivers and then focus on topline growth and continue to pursue also inorganic growth. The earnings outlook is unchanged except that the investments have been increased from DKK 2.5 billion to DKK 2.8 billion with the acquisition of the 2 new vessels for the Gothenburg-Zeebrugge route.

With that, we would like to turn over to -- for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And 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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A few questions from my side. First of all, the DKK 100 million in efficiencies in 2019, is there any impact of this in Q1? And another one detailed on Q1, the impact of Easter, negative in first quarter, will that just reverse with this DKK 30 million in Q2? So that's the first question -- first 2 questions.

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

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The -- let's take the last. The DKK 30 million in passenger is not all Easter. That would be DKK 10 million, DKK 15 million of this. The remaining parts are related to some higher bunker costs and some higher vessel costs. The DKK 100 million is a continuous thing, and so that is coming, you can say more or less proportionally over the year. It is also fair to say that some of these continuous improvements projects are necessary to counter price pressure, cost increases, et cetera, et cetera. So you may not be able to directly add it to the bottom line. But when we follow up on the projects, we make sure that we deliver the DKK 100 million on those specific projects.

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

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And then a question on Turkey. Can you elaborate a bit about the trading down there? And also, I guess maybe there has been some start-up calibration or you can say some challenges in adding suddenly 30% additionally, so how has the trading been? And how has the implementation of these 30% new capacity from volume from Ekol? And maybe trading into -- going into Q2, are you seeing any improvement?

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

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Trading has been slower than expected. The rebound that people were expecting that could start in Q1, we have not seen. We have also not seen it going into Q2. And I think a consensus is starting to develop that we are talking towards the end of this year or beginning of next year before the strong export bound -- export-driven rebound could happen. For DFDS, we have bigger volumes than U.N. Ro-Ro had stand-alone last year because of the new contract with Ekol that has primarily impacted very positively the Istanbul-Trieste route. Mersin-Trieste and Istanbul-France have not had this boost. So they have a quite dramatic drop compared to last year. We saw this morning that Alternative have announced that by the end of June, they stop their France route, which means that we should also from Q2 -- sorry, Q3 see that our Trieste-French volumes exceed those of last year even before the crisis. So...

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

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Can you elaborate how much that could impact that route in terms of lane meters or on ...?

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

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I cannot give you that right now. We actually expect that it could impact both the French route and the Mersin-Trieste route since we suspect that Ekol have direct volumes that could go to Mersin through this route, which they now may split. So it could be a positive for both the ailing routes, you can say. And then to the implementation. Yes, we signed an agreement on the 21st of December, and we had to start operating the 29th of December and it takes 14 days to send ships from Northern Europe to Turkey, so we were struggling a lot in the beginning and we have to find out where the customers prefer to sail from, as we now have 2 main ports in Istanbul and also 2 ports in Trieste with 2 terminals with different range capabilities from one to the other. So we have significant cost and overcapacity during Q1. During Q2, we will gradually get much closer to running the capacity that we actually need. But for us, the most important thing has been in this ramp-up period to make sure both our new customer, but also our existing customers could see that our main focus was on making sure that they could conduct their business rather than running it very tight and risking that customers would think that they needed other solutions than just DFDS. So all in all, we're quite pleased with this, but it has been an expensive quarter and that will continue into summer of Q2 in Turkey.

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

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And than just one final question. The deal you talked with the British Transport Minister of, I believe it was EUR 47 million in case of a hard Brexit. Have you received or started to receive any of that? And how will that impact profitability in Q2? I guess there's no effect in Q1.

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

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There is a very, very small impact in Q1. We have -- they have terminated the agreement and we have received a compensation for that. We have also -- have had cost in some of the repositioning of vessels, some of the dock postponements and chartering in. So I cannot tell you the impact yet in Q2, but the value of the contract is significantly reduced from the DKK 47 million due to the cancellation.

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Dan Togo Jensen, Carnegie Investment Bank AB, Research Division - Financial Analyst [10]

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But does it compensate for your cost with a profit, so there will be a small profit effect?

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Torben Carlsen, DFDS A/S - CEO & Member of Executive Board [11]

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We should have a margin at least in line with our normal operations.

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Operator [12]

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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 [13]

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So the first one is regarding the new agreement that you have made with Stora Enso, the CapEx that you -- the 2 vessels -- for the 2 vessels. You stated in the announcement that it will reach revenue in excess of DKK 300 million. I'm curious to find out whether -- what kind of margin such a contract can carry? I'm sure you are not going to give me any sort of exact numbers. But is this going to be close to average margins that you obtain in the North Sea? Or how do you see that, the margins on such a contract?

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

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Just to clarify, the contract with Stora Enso is not DKK 300 million. The contract with Stora Enso is 1/3 or 1/4 of that, but is the base volume that has allowed us to start the route. So all the remaining volume will be primarily freight forwarders and potentially some industrial customers. So when fully implemented in 2020, we certainly hope that the margins on the route will be similar to other routes operating in that area, with the small caveat that, of course, a customer that brings the base volume for a route has attractive pricing.

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

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Okay. So just to clarify that, so 1/3 or 1/4 you said, is Stora Enso out of the DKK 300 million...

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

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We'll not guide you closer than that. But they will be a significant part of the volumes.

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

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Okay. But the other -- but the remaining revenue up to the DKK 300 million, is that something that -- since you mentioned here, is that something -- is it new volumes that you expect to bring into the North Sea? Or is it existing volumes that will be rerouted into this from other areas?

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

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We -- the structure today is that we operate a route with all vessels from Gothenburg to Ghent. [Coverfreight] operate, I believe, 2 vessels from Gothenburg to Zeebrugge; and SOL, Swedish Orient Line, operate 2.5, 3 vessels from Gothenburg to Zeebrugge with the Stora Enso volumes. And we do not believe that there will be more than DFDS and Coverfreight operating in 2020. So volumes that today are carried with Swedish Orient Line, we will try to see if we can attract some of those customers.

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

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Okay. I'm not sure you answered the question, but it's okay.

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

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Well, at least I (inaudible) that it is existing volume on the -- in the corridor, but that the volumes would -- we hope to attract those volumes that already exist in the corridor.

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

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Okay. Then the follow-up on some of the Turkey, Mediterranean. I know you've changed your pricing mechanism in order to reduce the lira exposure. You previously had this DKK 300 million exposure on your networking capital. I'm curious to find out if the change in the pricing policy, which apparently if I understand you correctly has been fairly successful in reducing the lira exposure. What kind of impact has that had on the prices? Have you been -- has it been necessary to accept lower prices in order to move customers to pay cash in euro?

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

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You can say that before this then the impact from Turkish lira depreciation would hit the finance line. So historically, U.N. Ro-Ro have had EUR 6 million, EUR 7 million of finance cost related to this depreciation. Last year, we then had a slightly higher amount due to the larger depreciation. Now with 90% of the customers paying cash in euro, we do not have that finance cost any longer. On the other hand, we have extended some incentives, a couple of percent to change from Turkish lira payment to euro payment, and also, yes -- and also faster payment. So you can say to a certain extent, we have hurt a little bit the top line, but have corresponding improvements on the finance cost. So all in all, it should not cost us anything, but on an EBITDA level, it will cost us something. But cash wise is neutral.

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

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Okay. Then lastly on -- this is mainly related to logistics and some of the contracts that you had last year the -- with Volvo, the V60 and I think also you had something with V90, if I recall it correctly. You said at some point that you will have a new contract this year, but which is just smaller and maybe less comprehensive compared to the old ones. Can you give us any sort of education about what is sort of the magnitude or the difference there?

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

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No, but we -- the loss in -- the reduction in Nordics in Q1, last part of that relates to this reduction. But you are right, we have a new contract and that has a longer duration. So we're still very pleased and it's good levels, say, with just an unusual, strong last year Q1 and soft Q2.

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

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So is it fair to assume that the difference between the EBIT you made in Q1 last year in Nordic and what you made this year is mainly attributed to the change in that contract?

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

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That is also impact from the paper stuff in Norway.

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

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So the answer is no?

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

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Well, the majority is from the automotive contract.

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Operator [29]

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

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Finn Bjarke Petersen, Danske Bank Markets Equity Research - Analyst [30]

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Congratulations with your new contract. I was just wondering how do you see that influence the competition picture on -- from Sweden to [Japan looks] this contract? And how do you see your potential optimizing the operation going forward, how that affect earnings? And I can see that you are buying 2 very small and very old vessels, which does not fit into your operation. What do you intend to do with those a couple of quarters down the road -- down the line? So that is the sort of question about the new contracts, the new routes and competition in the North Sea?

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Torben Carlsen, DFDS A/S - CEO & Member of Executive Board [31]

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Let's start with the vessels. Those vessels we have bought are actually a perfect match for what we need with the Stora Enso paper. Because it's not -- no, they don't need the speed and they're very fuel efficient for this speed and trade. And I note that it is the same vessels that Stora Enso -- sorry, the Swedish Orient Line operated on this trade. So you can say, given that now [Wagenbach], who is the owner of the vessels, have sold these vessels to us, we do suspect that Swedish Orient Line is considering stopping their operation. And that, I guess, answer is maybe your next -- your question about the competition situation, as this would imply that there would be only -- there would be [Coverfreight] operating and they would be us operating from Gothenburg to Zeebrugge. And what we do to optimize this is that we take 1 vessel that currently operate to Ghent and put that on the Zeebrugge route instead. Through this, we will have very, very attractive frequency to offer to the market. And also we will be able to optimize utilization of the ferries we believe, given where the demand from the market is on the 2 ports in Belgium. So we are extremely pleased with this agreement, with Stora Enso and they also have an option to extend it further 3 years, so we think that this is very sound basis for starting this new route.

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Finn Bjarke Petersen, Danske Bank Markets Equity Research - Analyst [32]

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Just a follow-up question. Today, you're saying that you expect Swedish Orient Line to stop. How many vessels are they operating today?

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Torben Carlsen, DFDS A/S - CEO & Member of Executive Board [33]

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We don't know in detail. But they operated these 2 vessels, plus we understand, they operate 1 more vessel on the line as well, which may not be fully utilized on this line. But we don't have any insight, we don't have any specific insight to their operation.

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Finn Bjarke Petersen, Danske Bank Markets Equity Research - Analyst [34]

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So broadly speaking, the capacity on the -- on Gothenburg-Ghent-Zeebrugge sort of corridor, we call that, is basically unchanged, it's just changing hands from 3 to 2?

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Torben Carlsen, DFDS A/S - CEO & Member of Executive Board [35]

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Yes. I think you may see a slight reduction as well if they operate 2.5, 3 vessels and we only operate -- well, we operate the same, but then we reduce 1 to Ghent.

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Finn Bjarke Petersen, Danske Bank Markets Equity Research - Analyst [36]

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But anyway, it's more vessels, so it's -- yes. But the potential, I'm just -- what I'm trying to find out, how does this fit into your fleet, renewal of your fleet, your investments and you receiving bigger vessels going forward in this year and next year, which you have to employ somewhere?

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

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Gothenburg-Ghent is still a candidate for deploying one of the large yielding vessels.

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Operator [38]

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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 [39]

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My first question relates to your U.K. volumes. You mentioned some stockpiling towards the end of the quarter. How has the U.K. been impacted in April, the start of Q2? And secondly -- or we can take them one at a time perhaps.

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Torben Carlsen, DFDS A/S - CEO & Member of Executive Board [40]

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No, go ahead, go ahead, go ahead.

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Ruairi Cullinane, RBC Capital Markets, LLC, Research Division - Associate [41]

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Okay. Secondly, the Baltic Sea. I just wanted to confirm that the issues, dockings and deferred maintenance, that's something that only impacted Q1 and we shouldn't expect that in Q2? And then, finally, on the Mediterranean, can you remind us what happened to market volumes between Turkey and Europe in H2 2018? And whether simply the fact that you're lapping those comps gives you some confidence to deliver growth into H2 2019?

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Torben Carlsen, DFDS A/S - CEO & Member of Executive Board [42]

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Let's start with the U.K. Yes, there was some stockpiling and also subsequently or consequently maybe, in the beginning of April, there were very low demand, which of course, then was accentuated by Easter. So April has been slow in the U.K. What then happens going forward, I guess, depends on what politically happens on Brexit. On Turkey, the H2 volumes started to decline. My guess is they were down 10%, 12% versus the year before and that status is still the case in beginning of the year. So when it comes to comp in H2 or at least the last quarter, my guess is that we may see a stabilization of the market volumes. Then of course, our volumes will be higher due to the changed situation with Ekol. Sorry, yes. Baltics. Baltic was again, there was cost related to maintaining the capacity during dockings, so it was an experiment where we moved one of our large ro-pax vessels, or almost passenger vessels from Amsterdam Newcastle to the Baltics that has had cost implications and then, we've had a BAF coverage issue that should not be repeated and then thirdly, we have had this deferred maintenance. I cannot promise that there will not still be some deferred maintenance, but the other element should be ongoing forward.

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Operator [43]

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Our next question comes from the line of Marcus Bellander from Nordea. (Operator Instructions)

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Marcus Bellander, Nordea Markets, Research Division - Senior Analyst [44]

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Just wondering if there will be any ramp-up costs associated with the Gothenburg-Zeebrugge route? And if you perhaps could indicate whether or not you expect it to turn profit in 2019?

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Torben Carlsen, DFDS A/S - CEO & Member of Executive Board [45]

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I'm sure there will be some ramp-up. We, of course, have now one customer and we need other customers to make this route profitable. Our expectations are that when seen combined because, of course, if we move 1 vessel from the Ghent route, as [Ethro] is, you cannot see just the finances in isolation. But combined, we will slightly improve our financial result in 2019 already from this initiative. And then in 2020, we will hopefully start seeing close to a full impact.

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Marcus Bellander, Nordea Markets, Research Division - Senior Analyst [46]

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Okay. But I imagine that the effect is small, so we shouldn't view the fact that you've entered or signed a new partnership agreement, but that you don't upgrade your full year guidance, that shouldn't be interpreted as a sort of downgrade over the underlying earnings, so to speak?

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Torben Carlsen, DFDS A/S - CEO & Member of Executive Board [47]

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No. This would not be an impact in any case that would have changed our guidance.

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Marcus Bellander, Nordea Markets, Research Division - Senior Analyst [48]

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Okay. And second question, staying on this Gothenburg-Zeebrugge route. Do you know why SOL is stopping or closing down its operations? Is that because you sort of stole, if you will, the Stora Enso contract from them? Or have they decided on shutting down the route anyway and you are just sort of picking up the pieces?

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Torben Carlsen, DFDS A/S - CEO & Member of Executive Board [49]

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We do not know. We have not had any contact with SOL at any time. We have discussed this contract with Stora Enso exclusively. And then of course, when we start looking for vessels and could see that the vessels that are best suited for this trade were available, we imagined that maybe they will stop operating. But we don't know. You will have to ask them.

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Operator [50]

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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 [51]

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Yes, sorry to be back. Just a follow-up question. The cost that you talk about in the Baltics to dry docking and the system maintenance. I'm just curious to find out was this something which is extraordinary? Or was this something that was planned for already when you came out with your guidance in connection with the Q4 report?

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

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Some of it. We knew about the deferred maintenance. We did not -- we were not able to estimate what this change of vessel would mean and then this BAF issue was a surprise.

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Operator [53]

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And as we do not have any more questions registered, I now hand back to our speakers for any closing comments.

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Torben Carlsen, DFDS A/S - CEO & Member of Executive Board [54]

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Thank you very much, and thank you for the good questions and the underlying interest for DFDS. We look forward to continuing our growth journey and speak to you again after Q2. Have a good day.

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Operator [55]

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