AS Tallink Grupp (TAL1T) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to Tallink Grupp's quarterly webinar. My name is Joonas Joost, and I'm in charge of Investor Relations at Tallink Grupp. And today, we have here our CEO, Paavo Nõgene; and Harri Hanschmidt who is a member of the Management Board; and our Financial Director, Veiko Haavapuu who is actually joining us from abroad. Many thanks to all the participants who have already submitted the questions prior to the webinar, and we'll be addressing those during and/or at the end of the presentation in the Q&A part of the webinar. [Operator Instructions] So that actually concludes the householding information. And now I would like to pass on the microphone to our CEO, Paavo Nõgene.

Good afternoon. My name is Paavo Nõgene, and I'm happy to join this webinar today. I will give you overview from our latest or current doings and quarter 4 highlights and key facts. But first of all, Tallink Grupp stays the same as it has been also last time, we're operating 14 vessels in 7 ferry routes, operating 4 hotels. And our revenue in 2019 was approximately same as year before, EUR 949 million, EUR 600,000 less compared with 2018. But due to the fact that during the first quarter, 7 vessels were in dry-dock and some of them very long -- for a very long period, example, Baltic Queen for 44 days, in that case, to achieve the same amount of -- same revenues as 2018, we see this actually quite good result for 2019. Our asset base is EUR 1.5 billion. We had average 7,200 employees during the 2019 and served 9.8 million passengers, which was slightly over the 2018 result, around 7,000 passengers more. And again, if you take into account the fact that the 7 vessels were in dock, in that case, reaching the same number of passengers were quite good achievement. And our loyalty program, Club One, have now already 2.7 million clients or members. And we transported to around 380,000 cargo units last year. Some key facts. We did new full year passenger record in 2019. And we are happy also about that, during the summer, for the first time in history, 3 months in row where we transported more than 1 million passengers each month. We had some impact from the different strikes in Finland for quarter 4 result. Example, there was long government post office workers' strike, which had negative impact to us in December because long periods. Some Club One members -- our loyalty program discount coupons and advertising were in post office longer than expected, and the people didn't get them on time. But we have seen that yes, quarter 4, December, we saw some negative impact, but actually this turned, this positive impact moved to the beginning of 2020. We did in the quarter 4 still the highest net profit in the last 5 years. We signed EUR 60 million revolving credit facility with floating rate and 4-year maturity, and we did a capital reduction payment of EUR 47 million to our investors, which was EUR 0.07 per share. We established our new subsidiaries for Burger King operations in Lithuania and Latvia and we renamed our new LNG-powered fast ferry, which is -- which will be ready beginning of 2022 with name as MyStar. And now I will give over to Harri and later on, I'm also giving some more information.

Thank you, Paavo. Hello from my side. My name is Harri Hanschmidt, I'm a Board member for Tallink Grupp, and I will talk a little bit more in detail about the Q4 results of our financial year. So as Paavo mentioned, we had a pretty good quarter. We also, I would like to highlight, managed to increase our passenger number by 0.9%, bringing the number nearly to 3 million passengers transported in the Q4 of 2019. At the same time, though, we saw a continuing trend of drop of cargo units. The passenger car numbers were up by 0.4%. The revenue was, despite the decline in cargo, on the same level as last year. And we saw improvement in profitability, starting from the gross profit level down to the net profit level, and this is -- we can see this strong improvement in operating results, and this is due to a lower fuel cost. General lower fuel prices are also at favorable level of hedging or fixing the fuel price. Also, strong cost control provide centralized procurement activities, business optimization projects and automation of certain activities. On the next slide, we can see our quarterly seasonality breakdown. Last year was quite regular in that way that we managed to increase our passenger number slightly but ended up pretty much in the same level as last year with 9.8 million passengers. The revenue was also on the same level with EUR 949 million and a slight drop in cargo units. EBITDA level, we are up. And total EBITDA was EUR 171 million, but there was also some IFRS 16 effects, increased due to the IFRS 16 but the comparable levels still in the fourth quarter, up over 20%. So on Page 7, we can see on the net profit level. We had a very good year, EUR 50 million net profit. Right now we are reporting not a high quarter.

It seems we are having some technical difficulties with sound. Okay, do we have our sound back? Okay, Veiko, if you would take over maybe from the revenue development side now.

Yes. Thank you, Joonas. So my name is Veiko Haavapuu, I'm the Financial Director of Tallink Grupp, and will give you overview of financials for the Q4 and also for some 2019 numbers. So on Slide 8, we have the revenue overview by the operating segments. And here, we see that the revenue for the Q4 2019 is on quite comparable level to the last year same period. At the same time, we see some fluctuations in specific operating segments, naming the restaurant and shop sales, revenue is up close to EUR 4 million, and that is following the increase of the passenger number in Q4. And also here, we see some positive effect year-on-year on the shops on land, specifically the preorder sales related to the ships. And also the port area discounters revenue increase. The ticket sales is slightly down from Q4 last year. Yes, just to comment here there's continuously strong pressure on the ticket prices, and that's the level we have to cope with. Also, the cargo transportation is down by EUR 3.1 million, and that is following the downturn of the cargo volumes close to 5% in Q4 this year. Accommodation sales slightly down, mostly related to the absence of 1 hotel compared to last year until November. The revenue from the charters is slightly up as we have a slight change in the charter contract with better revenue generation. Going to the next slide. Here, we see the overview of the geographical segments, mainly corresponding to specific routes. So the Estonia-Finland, yes, challenging ticket prices, let's say, but a very nice development on the onboard revenue, mainly from the shops. And of course, at the same time, we see a downturn of the cargo revenue. Then Estonia-Sweden. Again, in general, quite a good development on the passenger-related revenues. But again, here, we see a minus coming from the cargo revenue. Latvia-Sweden, quite comparable level to the last year Q4. Here, again, a slightly lower ticket and, of course, cargo revenue as well. But the onboard, again, is developing quite well, specifically on the restaurant and bar side following the change in the passenger mix, so more cruise passengers on Latvian route. Finland-Sweden, so here, we see some effect on the passenger side from the strikes in December so, therefore, a slightly weaker revenue than we expected. But also here, we see, especially from Turku-Stockholm route, some lower revenue from the cargo as well. The other segment is basically all other operations, except the shipping operations, and this corresponds to the increase of more than EUR 2 million, mostly corresponds to the revenue from the land shops in the port area. Consolidated income statement. So the revenue is quite comparable to the last year. Cost of sales is lower, and we'll come to the costs later on a little bit as well. The marketing and general costs on the same level as last year. The EBITDA is nicely up, but the comparable EBITDA for the 2019 is EUR 153.7 million, which is EUR 11 million up from last year. And the comparable EBITDA margin is up from last year 15% to 16.2% this year so, therefore, also a net profit improvement of around EUR 10 million. Let's move to next slide, please, consolidated cash flow statement. So here, again, I would focus on the 2019 numbers. So the capital expenditure amounted to EUR 61 million. So that involves dockings of 7 vessels mentioned earlier and then other renovation and development works, also on IT systems and onshore. And this number includes also the first prepayment for the new LNG vessel, MyStar, an amount of EUR 12.4 million. The debt financing totaled EUR 52 million, and that includes regular debt repayments in amount of EUR 80 million per year, which is quite normal for our company. Then part of the new EUR 60 million revolving credit facility was taken into use, the additions from loans amounted to EUR 45 million. And also, there were EUR 15 million lease payments. Then interest is nicely down from last year as the average financing cost has gone down over time and also the debt levels have come down. The distributions to the shareholders all in all amounted to EUR 80 million last year. So this is EUR 0.05 or EUR 33.5 million from the dividend and EUR 0.07 per share, totaling close to EUR 47 million, which we can see also in the Q4 dividends, in reductions of share capital row. The income tax is higher as the dividends paid out were in a higher amount, and the change of cash during the year amounted to EUR 43 million. Next slide, please. The balance sheet. So at the end of the financial year, the total assets amounted to EUR 1.5 billion, out of which most of that, of course, are the fixed assets, around EUR 1.2 billion are the ships. Also here, we have to mention that the IFRS 16 effect on the year-end numbers. So the fixed assets include, from the right-of-use assets adoption, EUR 98 million. And also on the liability side, the interest-bearing liabilities include the right-of-use assets liability side in amount of EUR 102 million. Net debt-to-EBITDA at the year-end, very solid, 3.1x. The net debt at the end of year is EUR 539 million. And again, here, we have to consider that this amount includes EUR 102 million, the IFRS 16 effect. The equity assets ratio is above 50%, which is very solid for the company, and the book value per share at the end of the year was EUR 1.23. Let's move to next slide, please. The interest-bearing liabilities amounted to EUR 578 million, which includes the IFRS 16 effect in amount of EUR 102 million, as mentioned. At the same -- yes, the long-term bank loans amount to EUR 476 million, and that includes 6 loan agreements. All the debt is denominated in euro and Euribor base rate fixed and floating. The average financing cost on the Slide 13 is -- for last year was 2.19% on the Euribor. Really shortly on the IFRS 16 leases. We have been through these numbers already in previous webinars as well. But again, this is important information to know to compare to 2018 numbers. So going forward from 2020 Q1 reporting, the numbers are comparable. The cost breakdown for last year. So cost of goods sold, slightly up, and that relates to the very nice improvement on the restaurant and shop sales. Then now the staff cost is slightly up and is according to our projections, the general salary increases in all the operations. The marketing and administration cost is slightly down. The port and stevedoring cost, again, is slightly down, and that is mainly related to the lower than -- the lower cargo volumes. Fuel cost savings is close to EUR 13 million. And here, we benefited from the lower price levels on the global level but also from the fuel fixings with our main suppliers. Ship operating expenses, again, slightly lower. And here, I would refer to very strong cost control and more efficient operations during the last year. On some of the rows, as referred on the footnotes as well, there are comparability reasons that brought some details of the IFRS effects on specific growth. Yes, thank you.

And my name is, again, Paavo Nõgene. I will give you some more information at distributions to shareholders. We have the dividend policy already more than a year right now where we stated that we're paying out at least EUR 0.05 per share if the economic performance enables it. We are proposing this year to pay out EUR 0.06 per share to the shareholders. And this is actually the biggest dividend ever. And from today's share price -- of course, there are, today and some days, already impact from this corona effect in the share prices, but it will be around EUR 0.06 or EUR 0.07 -- 6% or 7% from the share price probably. But to compare it with the last year, I'd just like to state that last year, the EUR 0.07 was a capital reduction, which wasn't paid from the previous year result. Dividend is paid from the previous year result. And comparing with last year, last year, we paid out EUR 0.05. This year, our proposal is EUR 0.06. And even after the reporting period and the outlook, we have agreement with fuel suppliers, and we fixed some amount of portion of our purchasing volumes for 2020 in very -- with a very reasonable price, but we will give more information about this in our first quarter report. We talked in first quarter 5 vessels. We made works on our vessel Seawind, Megastar, Romantika, Silja Europa and Silja Symphony. We're making -- we made prepayments for MyStar, EUR 61.8 million, to be made in 2020. And subject to the coronavirus outbreak could lead some lower demand for passengers from Asia. We have seen so far around 20,000 bookings are canceled for periods February till April. But we all know that high season from May to September, we have travelers from Asian region around 0.5 million passengers. We don't know when this virus case will be ending and for sure, we are working right now with different markets to cover this possible risk if Asian market is this year lower than previous. And we see that during the virus period, we can see some increase from our local home markets because the people most probably will travel more to the neighbor countries and more closer from home. So this can also cover possible decrease from Asia.

Yes. Okay. We have received some questions on the Burger King. And actually, we have a slide about this, and Harri will give a brief overview of the state with the Burger King.

Yes. So last quarter, we talked a little bit about Burger King and then we promised to give more information how we are proceeding. So in -- remember, in 2019 September, we signed agreement with Burger King to acquire the franchise. We have said we are aiming to build around 50 restaurants across the Baltics in the next 5 years. And right now, we also have created subsidiaries in Estonia, Latvia and Lithuania. The current activity release preparation to open the first restaurants, including securing the locations, establishing supply lines, logistics, recruiting and so forth. And today, we can say that the first restaurants will be planned to open in Tallinn, in April in Rocca al Mare and May in Ülemiste. Previously, we said that we strive to open the first restaurants during the winter time. But unfortunately, it took a little bit longer to secure the locations, and it takes a little bit longer to build the restaurants. After that, we will open multiple restaurants in Estonia and also in Latvia and Lithuania. And in this year, we can say that we are aiming to open 8 restaurants. And for the next years, we will disclose more information already during the next quarters. But now I will give back the microphone to Paavo who will tell a little bit about the developments regarding Linnahall.

Yes. Actually, very fresh news. Just yesterday, we signed memorandum of understanding with City of Tallinn and Infortar. Tallinn City Center building, which is built 1918 for Olympic Games. And actually, we have seen from our main office windows already 10 years that it's closed. Government of Estonia and City of Tallinn have tried to form a working vision, how to renovate this cultural heritage building -- or under the protection of cultural heritage, and how you turn it back to life because it's just a very attractive place, City of Tallinn, and standing one building, which are not in use, is not very practical. We got, end of last year, an invitation from City of Tallinn, and they asked are we ready to make a vision and try to find a way how to renovate the Tallinn City Hall to become the conference and concert center. We found a lot synergy between -- with Tallink, and we made them a proposal that we are ready to renovate Tallinn City Hall only if we can work with all this quarter and also with the areas next to the Tallinn City Hall. Our aim is to build up to 5,000 seats conference and concert center with hotel, shopping and business facilities, restaurants and cafeterias. And with our own Tallink harbor for Tallinn-Helsinki line vessels, Silja Europa, Megastar, in future MyStar. And we don't know yet what we are going to do with MyStar, so -- but for Tallinn-Helsinki route passengers, which -- this gives us approximately, after 5 years when we hope this building is ready, around 6.5 million passengers from the vessels already to this new renovated quarter and center. Plus, of course, there are citizens of Tallinn who are very interested that this building is renovated because it is historically a very famous concert hall, and everyone looking or waiting the possibility to visit Tallinn City Hall again. So we -- our aim is that there will be more than 10 million visitors each year. We signed, as I said, a memorandum of understanding. This says that we will establish a joint venture company: 34%, City of Tallinn; 33%, Tallink Grupp; 33%, Infortar. City of Tallinn will give all these lands into this organization. And we will put altogether as starting capital, EUR 1 million: City of Tallinn, EUR 340,000; Tallink, EUR 330,000; Infortar, EUR 330,000. And we started to plan this project to make all the needed analysis. And after all preparations are done, and we have all necessary approvals for different authorities, in that moment, City of Tallinn will put into this company the land, and Tallink will put in the capital of EUR 10 million. We think and we are confident that this will produce and gain extra profit to our shareholders because if we do this project only because we see it is profitable for Tallink, and the investment is approximately EUR 300 million, which is actually in same size as building 1 vessel. And we used for this investment our equity and other financial instruments. Thank you.

So this concludes the official presentation part. And now we would address the questions that have been first in the order, which came before the presentation, and then the questions which have arrived during the webinar. We have actually already answered the fuel hedge questions, which there were many -- some more information on the details of the fuel price fixing will arrive later.

But I would now ask one of the questions which arrived prior to the webinar about the coronavirus. We discussed -- or Paavo explained a bit about how this could have an impact on our operations, but there is also a question of how are you prepared if there is an outbreak in one of your ships and what would it mean to your business.

Yes. Actually, as I said, of course, we will have impact from this virus, so far 20,000 of bookings, but we'll see what the future brings us. But we have already taken action onboard our vessels since January. Actually, this is something we're doing every year because there are different viruses around norovirus and some flu and some other things, so we are taking care of it each year. And of course, we take care right now even with more attention. But we're sending to our vessels guidance from different authorities with tighter health rules, more cleaning and disinfecting surfaces, monitoring passengers and crew with possible symptoms, et cetera, et cetera. And of course, we work closely with our Flag State authorities and follow their guidance. Our vessels have specific epidemic control plans, which we are ready to implement immediately should we need to and have a suspected coronavirus case onboard. So far, we haven't had any. And as I said before, I am confident that all the world has learned that it is important to isolate the one person who is infected from thousands, not to isolate thousands from one infected, which was done by government of Japan to put current in all the vessel -- actually they did get during this 2-week or 3-week period more than 700 infected persons. So if there are anybody with symptoms, we have our plans how to move on, and we have very good relations with all authorities in different countries we are operating.

Okay. Next question would concern the city hall development. And the first question is, why couldn't only Infortar invest at the city hall project? Does it make sense for a shipping company to expand its operations to new ventures instead of expanding its shipping operations?

Yes. I will answer for that. I think it's actually an ideal world where we can really see that a shipping company whose main hub is right now Tallinn can have its own harbor. It will be beneficial to us in many ways. And of course, we see that owning and operating the harbor where we usually need to pay a lot of harbor different fees, we can hopefully do it in a more efficient way. And all this money will be invested to our operations.

Thank you. Further -- more questions on the city hall. What kind of return on investment are you expecting? Should we even expect any return? Are you going to sell your stake or hold it? And are you going to stay as an owner and get rental income? Or what should we expect?

Right now, we can say that we know that the estimated investment is around EUR 300 million. This is a very new project to us. Now we're going to make -- we and the City of Tallinn are going to make some more deeper analysis, and we are going to establish a company who will go and run this new investment. We are not going to give today out any guidance what will be the return of investment. But for sure, to build the harbor which is our main interest, and this is investment for next 50 or 100 years, it's not investment for 5 years, so we, for sure, know that this return of investment period is -- investment is for a longer period, but we see that the profitability can come actually, if everything goes well, not in very far future. So this is calculated this way that it will be the benefit for the Tallink shareholders. Regarding the operations, current plan is to operate all these activities by Tallink Grupp. But of course, during the period, we're going more deeply into the different topics that can come up on some other versions as well.

Okay. Next question, what is driving the restaurant and shop sales, any particular route onboard or off-shore sales? How do you expect it to develop in 2020?

Yes. I will take this question. So we did quite a lot of investments during the past year. And many of these investments went directly to rebuilding restaurants, making the shops more efficient. And this is actually as a company who -- most of our revenue, over 50% of our revenue, comes from shops and restaurant sales, it's everyday work to improve the offering, to select the right products to give the best quality. So we do expect this to improve in the future as well. But obviously, every year, we also need to invest into these public areas and restaurants. Many of the big investments are done but, as usual, this year, I think we see 5 ships going to dockings. And then during destocking, also some of the public areas will get the necessary attention.

Thank you. What are the elements you expect to contribute positively and negatively to your profits in 2020?

Different aspects. Let's say that as we have talked already about this coronavirus, which is currently going around already in the Europe, we don't know what kind will be this impact for travel. But as I said, most probably we'll see increase from our home markets of people traveling more in the Baltic Sea region and not going maybe way far away from their homes. So we hope that this will cover possible decrease from other regions. Positively, as we said, we have -- we fixed some amount of fuel for 2020 in very reasonable price. And this most probably will give us a good positive impact. But all the other factors as last year also, the cargo market is kind of tricky. It's staying, between Estonia and Finland, kind of flat. So there are no increase in the amounts of cargo units, but all the competitors are fighting to get cargo units to their vessels. There are some slight decrease in Finland-Sweden route due to different strikes in Finland. So we can't see any more very big impacts right now. But of course, we are ready for different challenges. And as we can see also from the result of 2019 that even with the same revenue, we can improve our profitability, and we do our best to keep it that way.

There's a question, you mentioned that your earnings in 2019 were burdened by a nonrecurring cost of EUR 2.4 million. When did this cost take place?

Q1.

Thank you. Next question, which has not been answered yet, is what kind of maintenance CapEx should we expect in 2020, down from 2019?

Most probably, yes. But yes, we have 5 docks. Last year, we had 7. Yes, it will be most probably slightly down. But it all differs on what kind of work you need to do on these exact vessels because we all -- due to the regulations, each vessel need to go to dock twice during the 5-year period and the different works are planned to do in different periods. So it's -- but it will be -- it's not higher. It will be slightly lower. So we don't see an increase there.

And talking about docks, there's a question about what will be the total number of days of dockings in 2020 by route?

Front the top of my head, I don't know the exact number. We have the docking plan, and it's, I mean, business as usual. We have set a number of dockings, and we have the docking calendar, but I guess we will try to be prepared in the next quarter for the earnings.

But all the dockings are less than 14 days. So we don't have such kind of 44-day dock as we had last year with Baltic Queen except Seawind, which were in dock 3 weeks in January because there were some more work to do because Seawind is our legend, and the lady is getting already, soon, 50 years old. So there were some extra works to be done to operate in the next 5 years, at least.