AS Tallink Grupp (TAL1T) Earnings Call Transcript & Summary

Good afternoon, everyone. My name is Joonas Joost. And I'd like to welcome you all to Tallink Grupp's Third Quarter Results Webinar. Today, there are -- here with me are the Chairman of the Management Board, Mr. Paavo Nõgene; and Member of the Management Board, Mr. Harri Hanschmidt. We will first give an overview of the quarterly results. And after the presentation, we will address the questions. It is possible to ask questions also during the webinar via writing in the right-hand box, but we'll start answering the questions from the ones which we received prior to the webinar. I'd now give the word over to Paavo and Harri.

Good afternoon. My name is Paavo Nõgene. Thank you for joining our webinar today. I'll just give short overview, introduction before Harri will continue with the quarter 3 overview. We had a very busy quarter. We started the quarter with hope, beginning of July, that world is getting back more normal because we saw some positive predictions during the June. We also, end of the June, opened the Helsinki-Riga route and so on. During the July, we were quite happy about the -- example, the Tallinn-Helsinki route recovering. It covered almost on the shuttle to 70% from previous 2019 July. But sadly, as we all know, beginning of August, everything turned again more negative, and we started to close down, again, some departures, rerouted some vessels. And during this whole quarter 3, we worked hard to save the costs, not only during this third quarter but for long term. We started different redundancy processes, example, in Sweden, beginning of July, and worked with unions in all our countries to find the common understanding about the possible future of the Tallink Grupp in all our different countries. We can say right now that we are stronger than we were at beginning of quarter 3 because we have made different changes in our company, but we will see the financial impact from these changes from January, February 2021, because different processes and redundancy processes in different countries taking their time. And as the regulations in countries are very different, we strictly follow the different regulations to make everything correct way that we do not have any negative impact in the future from these things we have done now, and we'll work with quarter 4 as well. But happily, we'll answer questions later on after Harri have given overview about the numbers in Q3, firstly. Thank you.

Thank you, Paavo, and good afternoon from my side. My name is Harri Hanschmidt. I'm the Board Member for Tallink Grupp. I will give you a brief overview of the events in the third quarter, and Joonas will continue later with segments, and then other information. So first, on the Slide 3. On a regular year, we are the leading European provider of leisure and business travel and sea transportation services in the Baltic Sea region, but this indeed is not quite a regular year. So -- we own and operate a fleet of 15 vessels. And due to COVID pandemic and the travel restrictions, unfortunately, 5 of these vessels are suspended, so -- out of daily operations. And 1 vessel is docked for maintenance works. Out of the vessels that are suspended, for example, Silja, Europe is doing a new product for us, the floating shopping center; and Silja Symphony, for example, will be back in December for some special cruises to Visby. We also -- we operate 7 ferry routes. Currently, 3 of these are also suspended for daily operations: Tallinn-Stockholm, Riga-Stockholm and Helsinki-Stockholm, although we have some travel products available between Tallinn-Stockholm and Riga-Stockholm as ship Victoria is doing cargo and commuting and travel operations there. We also operate 4 hotels, out of which 2 are closed until 2021 high season. City Hotel is going through major renovation and will be opened in the -- early in the high season. And Riga Hotel is right now closed down due to not enough traffic and then tourism because of the COVID crisis. On a normal year, in 2019, our revenues were EUR 949 million with 1.8 billion (sic) [ 9.8 million ] passengers served and 300,000 cargo units. And with a EUR 1.5 billion asset base, this is mainly the vessels. Currently, in end of Q3, we can see that our employee number is 5,726 employees. This is 20% down from the past year's Q3. And then effectively, if you look at the full-time employee or workload, it's down by about 40% because we don't only do, right now, redundancies, we also have layoffs in Finland and Sweden, and also have workload reduction on various positions to weather this crisis as well as possible. Our Club One loyalty program consists of 2.7 million loyalty members. The highlights for the 2020 Q3 are, obviously, the extensive impact of COVID-19 and the restrictions -- travel restrictions also -- or willingness to travel less because of different uncertainties. Shareholders agreed on the 2019 Annual Shareholder Meeting not to pay out dividends. We are employing currently assets flexibly. Many of the regular routes are out of the operation, but the ships will do -- work as and when they can. Here, it's good to mention, I think, though, that regular operations are always more profitable, and these initiatives are very good, but are not a long-term substitute. We have activities toward long-term sustainability. We engaged in cost-cutting and have initiated extensive reorganization to align the cost base with the recovery cycle of the travel industry. We have sought liquidity and have increased the liquidity buffer by adding EUR 20 million overdraft in the third quarter, and we also added, in the second quarter, EUR 40 million to the overdraft. We have drawn out first of the KredEx EUR 100 million loan, and the first EUR 40 million of it is now drawn out for working capital reasons. We opened the first Burger King in -- outside of Tallinn, in Tartu. It got a very warm welcome and is operating right now in Tartu. In the third quarter, we also paid out EUR 73 million for MyStar, and now we have one -- sorry, EUR 37 million for MyStar, and we have one payment now left in Q4. And as mentioned before, full-scale renovation of Tallink City Hotel has commenced. On Page 5, we can see the impact on the transport of passengers, and it's about 50% down overall. We can see in Q3, we saw passenger demand, but because of reduced capacity and travel restrictions, obviously, the passenger numbers were much lower. And we, right now, don't also benefit from different holiday travels that much. For example, Easter was a lockdown period. And right now, school holidays are also -- people are not able to travel as much. But we do see interest in shopping, and obviously, work trips and commuting. Cargo transportation continues between the countries here. Well, seasonality breakdown, typically, summer is the strongest season, and we can see that the passenger numbers, obviously, have gone down a bit from 3 million to 1.3 million. Cargo units transported are more or less in the previous year level. Revenue is down EUR 288 million to EUR 144 million, and EBITDA, slightly positive at EUR 6 million compared to EUR 83 million in third quarter this year (sic) [ last year ]. Page 7, we can see the effect of the COVID-19 and travel restrictions. The number of passengers went down by 55.8%, and this is the result of the COVID-19 and this -- related travel restrictions, more limited impact on cargo operations. We had 7% less departures compared to Q3 2019. The dynamic here is that we actually had 20%-plus cruise or long-cruise departures. And we added even additional vessel for the short departures. Vessel Victoria helped out Megastar and Star in transporting cargo and commuters so that there will be a safe environment to travel and enough room for the passengers onboard. We are engaged in strong cost reduction and are seeking support when possible. Cost of sales reduced by 27% or EUR 54 million. Marketing and administrative costs reduced by 24% or EUR 7 million. And we received direct financial support of EUR 3.8 million in the third quarter of 2020. The support received in Q2 was much higher. The capital expenditure is mostly related to the MyStar down payment. And on Page 8, we can see the seasonality. Regular seasonality is that: in the first quarter, we earned a negative profit; second and third quarter, are the most profitable; and fourth quarter, somewhat profitable. This year, we can see that we do not earn profit, and all the quarters have a negative result. Hopefully, next year will be better, I think, all the -- everyone in the world looks for a more normal year. So this is about it. I think I will maybe mention that we are seeking to ensure a safe traveler's environment and experience for the passengers, and we are able to provide this. I will give now word to Joonas Joost, who will continue with the presentation. Thank you very much.

Thank you, Harri. Perhaps, we'll look slightly more -- in more detail into the results in Q3. So looking at the development of the revenues by the operating segments, and then as explained earlier, the COVID situation and various travel restrictions combined with the lower volume in passengers, which have significantly affected our operations, which is also very much seen in the restaurant and shop sales and also in the ticket sales, which were the 2 biggest operating segments in terms of year-over-year decline in revenues. We did have also some decrease in the cargo revenues, but as can be seen on this graph, to a much less extent compared to the passenger operations. When looking at the accommodation sales, and this part of our operations also as well impacted by the COVID situation, and in general, lower number of passengers, but I would also highlight here that during this quarter, we operated one less hotel compared to last year as the Tallink City Hotel in Tallinn was closed down. And the only segment where we saw a positive development compared to last year was the chartering of the vessels or the change in the charter agreement came to effect in the fourth quarter of 2019. When looking in terms of the geographical segments, then all the routes have been affected significantly with the Finland-Sweden route seeing the largest negative development. And it is important to realize here that the routes are not fully comparable to the operations that they were a year ago, arising from the fact that, as explained earlier, we used the vessels flexibly on other new operations. So when we're looking at, for example, Estonia-Finland route, then this year's operations include also the operations of Victoria I on the route as well as operations of Tallinn-Turku and Tallinn-Mariehamn routes, which were not there last year, which have not been there normally. Estonia-Sweden reflects mainly the Paldiski-Kapellskär cargo operations, and it does not include the Tallinn -- effectively, does not include the Tallinn-Stockholm business, which was there last summer. Between Latvia-Sweden, there were no daily operations. There were some limited operations in terms of Riga-Stockholm route and also special cruises from Riga to Helsinki and Mariehamn performed by the vessel Romantika. And on the Finland-Sweden route, the Helsinki-Riga operations of Silja Serenade as well as Symphony operations from Stockholm to Visby and Härnösand are included in the segment results. And these are the new routes, which were not there last year. As explained earlier, the revenues overall declined quite a lot by half. And unfortunately, we were not able to reduce all the costs in the same pace. So we managed only slightly positive EBITDA of EUR 6 million in this third quarter. And it's also important to highlight here that during the quarter, we received EUR 3.8 million direct financial support, which reflects here on the other operating items line. But if you remember from Q2 and during that period, we received EUR 16 million direct financial support, and also salary support measures were in effect during the quarter. Therefore, the EBITDA of Q3 is largely from purely our own operations and without much financial support. And due to relatively high depreciation costs, the net result was negative EUR 24 million this quarter. There aren't that many changes in the cash flows as the operating result was neutral this quarter. The capital expenditure of EUR 41 million reflects mostly the installments paid for the new vessel MyStar, and looking a bit down a few lines below the debt financing reflects largely the EUR 40 million addition of KredEx loan, EUR 40 million, and some increase in the used overdraft facilities. Overall, due to the external financing, the change in cash was positive this quarter. And the financial position, at the end of September, the changes reflect largely some increase in the assets, which related to the addition of MyStar in the financial position, and also, you can see the increased level of interest-bearing liabilities reflecting the increased loans. And obviously, as the business environment has been really deteriorated, the ratios, particularly the net debt-to-EBITDA ratio is looking not too normal, at nearly 16x. At the same time, if you look at the equity asset ratio, then this ratio has remained on a more reasonable level. And continuing with the debt structure, it's perhaps to highlight the changes from last quarter is that with us now drawing the first tranche of the KredEx loan, we have 6 loan agreements outstanding with the total interest-bearing liability from long-term bank loans amounting to EUR 517 million. In addition, I'd highlight that we have -- at the end of September, we had EUR 51 million as used overdraft and an additional EUR 84 million still unused overdraft. And lastly, I'd also highlight that although we drew the EUR 40 million tranche of KredEx loan, still EUR 60 million are undrawn of the total amount. And what has happened after the end of the quarter, so basically in October, and after that, we still have the very last installment, EUR 12.4 million for MyStar to be paid this quarter. As discussed earlier, we are carrying out the collective redundancy processes, which were initiated. And also the group's Finnish and Swedish subsidiaries initiated negotiations with the employee union representatives. The hotel in Riga was closed in October. And we look to open the first Burger King restaurants in Latvia, Lithuania, also in the fourth quarter. And in terms of perhaps current and even slightly more longer-term outlook, it is largely uncertain and mostly dependent on the external factors, such as the situation with the COVID virus, states' decisions regarding the timing of the lifting of the travel restrictions or imposing travel restrictions and such other similar developments. So this overview concludes our introduction of the third quarter results, and we would now proceed with the questions.

And we would start with the questions that we received in writing prior to the webinar. The first question goes, how does the company plan to survive the next 4 to 5 months? Where does the money come from?

Thank you for the question. We have -- first of all, we have made a very tough cost saving control in-house the company. We have secured our liquidity quite significantly. At the end of September, our liquidity position, as Joonas also mentioned, was EUR 115 million. And on top of that, we still have EUR 60 million on KredEx working capital loan to draw. Yes, from this all, we need to make the last payment of the MyStar, as Joonas mentioned. But we -- as we have seen, beginning of fourth quarter, we have been successful with our cost savings so far. So yes, EBITDA is a bit negative, but we don't see right now the -- any significant liquidity problems in the near coming months because still Tallinn-Helsinki route is operating also for -- Stockholm for commuter traffic and cargo services. Plus, still, we see some onboard income from these routes as well from the people who're traveling or need to travel because of the work.

Yes. And I would add that -- just to highlight that we have the grace period for the principal payments of the loans agreed with our financing banks earlier this year, which lasts until the end of this year. And we will definitely keep a close eye on the development in the market and our operations and also ready on our side to explore similar options for the future, if there should be any need for such negotiations. Next question, did the increase of cargo prices affect the volumes and segment income?

I need to clarify that we didn't increase the cargo prices during the quarter 3. So we are going to comment it in quarter 4 report.

Okay. Thank you. How and at what terms is the renovation of Tallink City Hotel financed? [Technical Difficulty] We seem to have some technical problems with the microphone.

Okay. Yes. Our investment is for fixture and furniture, but majority of the total investment burden will fall on the owners, that is what concerns investment into the building as well as actually a substantial portion of -- for the fixture and furniture as well. So we're going to continue our operations under the oriented facility basis.

Thank you. And what costs do not allow for the company to earn gross profits? Are those discounts on the goods, personnel expenses or something else?

Actually, our EBITDA in the quarter 3 were positive. So the -- if the aim was to ask about the net profit, then it was deprecation (sic) [ depreciation ] and amortization costs. But of course, if you go and talk about the EBITDA, why in some months in the beginning of year, and most probably, end of the year, EBITDA is negative, it is due to the ongoing redundancy processes where the personnel expenses are higher, but also impact this because we don't have enough passengers on board, and who knows very well our business structure than more than half of incomes coming normally from the onboard services. So it's having the impact. We haven't done any big discounts of the goods. And so this -- impact from this is not significant.

Thank you. Next question. Cash flow-wise, how success -- this will have the so-called floating mall event spin?

It's not the big business for us, but it has enabled us to offer some value for our customers, have some outlets for our staff, but also allowed us to reduce signatory at reasonable terms. Overall, the financial impact is positive when compared to simply having the ship standing in the port. And as we have still 2 months to go until the redundancy process in Estonia are fully end, then we have also employees who we can use on our vessels for such kind of activities right now.

Thank you. A question about the Burger King restaurants. How is the Burger King performing?

I will maybe take this question. We're quite happy with the revenues, but maybe it's good to remember that this is the first year we started a working chain. And also, there was a slight delay because of the lockdown period. Most of the Burger King restaurants are in shopping centers. So we are a little bit reliable of how the shopping centers are open and how many people are there, but the top line is looking pretty good. But we also have the opening costs, some development costs, and each restaurant is training employees for the new restaurants. So next year, we will see positive numbers.

Thank you. About the costs, is there any way to get some kind of cost guidance for coming quarters?

Yes. Thank you. We are not generally giving any specific financial guidance, but there are a lot of variable expenses. So a lot depends on the extent of our operations. For example, how many ships are operating and under what schedule. Also how much sales we have in our shops and restaurants. What we can say is that we have made efforts to reduce the cost base for the coming period and look to spend, in general, less money on all activities. The largest component are the personnel expenses. And we expect to see impact of reduced costs starting coming in the last quarter of this year. And from the redundancy process we made in Sweden from the second part of first quarter next year, this year has been exceptional in terms of having reduced operations, but also salary support measures mainly in quarter 2. So that has distorted the result quite a bit, and it's difficult to refer to you a good comparison period right now.

Thank you. The next question is, can you please quantify the expected cost savings from redundancies made so far, 900 employees? Will the full effect already be seen in Q4 or only Q1? But I think this is something that we just largely addressed in the previous question. So the next question is can you please quantify the expected cost savings from the new possible redundancies of 1,500? When will the effect be seen?

Actually, it's the same. We will -- 1,500 is mostly the redundancy process we have done in Estonia during all this year, and we see full impact from it beginning of next year.

Why are you not specifying your 2020 results guidance at this point? Assuming passenger numbers will remain broadly on October levels, what would be the cost base in Q4?

We are -- as we said that we are not giving out the guidances. And so we continue this right now.

Thank you. What is your total liquidity buffer? Is it EUR 115 million plus the undrawn part of the working capital loan of EUR 60 million?

As I answered, that we -- our liquidity buffer is -- was EUR 115 million plus EUR 60 million, which is not drawn from the KredEx yet. So this is with -- what we're working right now.