AS Tallink Grupp (TAL1T) Earnings Call Transcript & Summary

Thank you very much, Joonas. Thank you for tuning in. My name is Harri Hanschmidt. I'm a member of the management Board for Tallink Grupp. We will go over the first quarter results of 2022. Tallink Grupp is the leading European provider of leisure and business travel and sea transportation services in the Baltic Sea region. We own and operate a fleet of 14 vessels and typically operate also 7 ferry routes. Currently 1 is suspended, and we will not open it this year. We are talking about the Tallinn -- Riga-Stockholm route. We also operate for hotels and the Riga Hotel this year is closed. The effects -- our revenues in 2021 were EUR 477 million. We keep a reference to the pre-pandemic 2019 year. And at that time, the pre-pandemic revenues were about EUR 950 million. This reference is getting maybe a little bit less relevant to the times as the business is changing. We have different number of ships, routes and trips. But I think it's important still because compared to a regular normal year despite different environmental factors, we also have different restrictions and some of these were in effect in the first quarter as well. We will talk more about that. We, last year, served 3 million passengers, pre-pandemic it was about 10 million passengers. We transported about 370,000 cargo units and they have a EUR 1.6 billion asset base. This is mainly the vessels. The group in the end of the first quarter had about 4,700 employees. Our Club One loyalty program has nearly 3 million Royal members. We are publicly traded on Tallinn and Helsinki, NASDAQ stock exchanges and have nearly 40,000 shareholders through the Tallinn Exchange and FDR through our listing program in Helsinki, we operate 2 strong brands, the Tallinn and the Silja brand. And on the next page, we can see the first quarter key facts and developments. Basically, we can look at the first quarter, that is our low season, had 2 major external factors. We saw new travel restrictions and weariness to travel because of the wide spread of the COVID Omicron variation and that was affecting the first half of our first quarter. The second half was affected by the very unfortunate war in Ukraine that turned into geopolitical crisis and has a multitude of effects to the region and our business as well. The first effect that can be felt is higher fuel price, among other input prices. Also, we historically have transported passengers from Ukraine, Belarus and Russia, especially groups. And these passengers will not be most likely traveling right now, at least, did not travel in the first quarter. Fortunately, many of the -- or all of the corona restrictions have been lifted in the second half of the first quarter. And we can see a positive trend of bookings coming in and people starting to travel much more. We had a temporary scale back of operations, and this affected especially the Cruise ferry, Silja Europa, Silja Serenade and Baltic Queen, and that was also regarding to a slower first quarter with higher fuel price and passengers not yet traveling. So we did everything we could to optimize the cost and earnings ratio. We have been seeking long-term charters or charters for vessels with the goal in mind that all our assets would be working for us at all times. And we're happy that Romantika went on a long-term charter between Norway and Netherlands and is already operating there. Most of our dockings are done in the first quarter as it is our low season every year, but this year, it was definitely more challenging and we were able to plan the dockings for 8 vessels into the first quarter. And this means we are in a very good shape for this year's high season. We opened one new Burger King restaurant in Riga in Latvia. There was a compromise reached in the dispute between the Port of Tallinn and Tallink Grupp regarding port fees, and we feel it's a positive outcome for both parties. Also, regarding the geopolitical crises, one of our vessels Isabelle is on a charter contract offering war refugees housing in it for up to 2,100 people. And during the first quarter, we have offered humanitarian transportation together with different Finnish humanitarian organizations for refugees and for refugee-related cargo free of charge so far from Estonia to Finland over 8,600 people. So the events after the reporting period and outlook, I already a little bit jumped ahead and told you about the short-term charter of the cruise ferry Isabelle as a refugee center, and this charter is done together with Estonian Social Insurance Board. And the duration is a minimum of 4 months and the maximum of 8 months. Therefore, Isabelle is not available for the Riga-Stockholm route. And Romantika is also chartered out, and this is one of the reasons we are not opening Riga-Stockholm route this year. The cargo vessel Sea Wind, our oldest vessel, nearly 50 years old, 49 years old, was sold for a little bit more than the book value of the vessel. So there is -- it's a positive deal and there is not a significant profit regarding that vessel. The cargo routes have been made a little bit different schedule and have a higher frequency right now. The new dual fuel LNG marine gas oil, shuttle vessel MyStar is being built in Rauma, but unfortunately, there is a delay with the vessel. And currently, we have received information from the factory that we can expect the vessel in the third quarter of 2022. The vessel will go to the Tallinn-Helsinki route that is one of -- that is our most important route. And until that time, we have sufficient capacity available on this route. And despite the uncertainties in the outlook of the economic environment, the management does expect a quicker recovery in the passenger traffic from the second quarter of 2022. A little bit about the Burger King operations. We opened the first restaurant in May 2020. Since then, we have built 15 restaurants, 6 of them are in Estonia, 4 in Latvia, 5 restaurants in Lithuania. In the beginning, we opened about 8 restaurants per year. Right now, because of the turbulent environment, we have scaled this tempo a little bit down. We are opening about 4 restaurants, but now most of the restaurants that we open are drive-in restaurants and take a little bit longer to build as well. So we can see that the initial plan was to build about 40 restaurants. We will reach the half mark maybe next year, having built 20 restaurants, and then we do a thorough evaluation of how the business is and hopefully can give more information. Why it's hard to give very exact information is because the whole Burger King chain opened just in the start of the pandemic. And although we have 15 restaurants, we can see that on an average, we only operated 10 restaurants because of the different restrictions of shopping centers being closed of different reasons, all cities being empty, but this right now looks like it's turning around nicely. We employed 223 employees across the Baltic countries. To summarize everything, there was still, again, the impact of COVID-19 on the first quarter results, but we did manage to double the revenue. Cargo units were up about 20%. We had 720,000 passengers. So compared to the last year, the numbers are positive, and we see a positive trend. On the negative side, we saw a new crisis and a significant cost of fuel and input prices. The fuel cost increased by 153% or EUR 17.1 million. And unfortunately, our net result was slightly weaker than last year with negative EUR 40 million. There was capital expenditure, and this is mostly regarding the ships maintenance and Burger King restaurant. I will give now word to Joonas Joost, who will continue with the presentation. Thank you very much.

Thank you, Harri. Looking a bit more detail into the sales development now. And as discussed earlier that there was quite a heavy impact from the COVID on the first quarter than a year ago, in the comparative base, the impact of COVID and restrictions was even greater. So this quarter -- in this quarter, we operated a couple of routes, which we did not operate a year ago. So we had Baltic Queen operating not fully the entire quarter, but partially on the Tallinn-Stockholm route. A year ago, we did not operate Tallinn-Stockholm route. And similarly, on the Helsinki-Stockholm route, which was not operated a year ago, we had Silja Symphony operating throughout the quarter and Silja Serenade operating in the beginning and in the end of the quarter. So for that reason, we can see that we -- this quarter benefited from increased volumes of passenger and passenger-related business. So this is evident both from the revenue structure, but also in the comparison of the changes in the revenues. Mostly, the biggest impact came from the restaurant and shop sales on board and onshore, which contributed compared to last year, nearly EUR 30 million higher sales. And also the ticket sales being the second largest contributor to the increase in sales. On the cargo side, although the cargo market and price competition, in particular, remained tough. The volumes were quite okay for us and also benefited from adding the routes that we did not operate a year ago. And in addition to that also, we saw increased sales from the routes, which we operated last year. And the smaller additions also from accommodation and chartering activities. In terms of accommodation, this year we operated 3 hotels, last year we only operated 2 hotels. And also the COVID restrictions weighted much more heavily on last year's results. And in terms of chartering then the addition of long-term charter of Romantika quite in the end of the quarter had also a positive impact. And the general increase in the number of passengers and activities also affected the other sales. Geographical segments, Estonia, Finland routes, both in the first quarter of this year and first quarter of last year, we were operating the 2 shuttle vessels and did not operate the cruise Silja Europa. So basically, on this route, the increase is quite comparable and comes mostly from the larger number of passengers. As explained earlier, Estonia and Sweden, we did not operate the Tallinn-Stockholm route a year ago. So the addition of the operations added also to the revenues. And Finland, Sweden route reflects the addition of Helsinki-Stockholm routes in a year-over-year comparison, but also higher volumes on the Turku-Stockholm route. And the other segment, as mentioned, reflects also the accommodation and chartering increases as well as other retail activities. A quick snapshot on a broader and historic context, we're still very seasonal. And right now, this COVID pandemic has amplified even a bit further the seasonality of the business. But as you can see on the top left chart that we are still in some ways away from normal good years result in terms of passengers, but we already managed a very similar level of passengers that we transported last year in the first 2 quarters. The cargo volumes have been much less impacted. So these overall remained fairly stable. And yes, when talking about the revenues, then these reflect, to a large extent, the developments with the passengers. And on the bottom right, the EBITDA view is negative results in this quarter. However, as you can see, also in 2019, the EBITDA in the first quarter, in the -- yes, the low season quarter was very small. And the same dynamics also apply on the net result level. And here is also quite well visible that even in the pre-COVID normally, the first quarter result is typically in a quite extensive red territory. And very briefly, although Harri mentioned also already the financial items, I briefly mentioned some of the items as well. On the right-hand column is represented the currently ended quarter. Although we increased significantly the revenues, also the cost of sales increased quite significantly, and the fuel cost here being one of the main components driven mostly by the hike in the prices year-over-year. But overall, since the scale of operations was greater than last year and then the sales also in the restaurant and shops, then other expenses were also to higher. So naturally, the cost of goods sold, but also other cost items. In the marketing and administrative costs, the year-over-year EUR 3 million increase mostly attributed to higher marketing activities, which were done ahead of the start of the high season. The other operating items reflects the aid received from the governments. And this year, the aid was smaller than it was a year ago. As last year, then also this year during the low season quarter, the operating cash flows remained in the negative territory. Capital expenditure this year, EUR 9 million, somewhat higher than the EUR 4 million last year. This increase attributes mainly to the higher number of docks, but that said the fact that we had altogether 8 docks and only EUR 9 million CapEx also reflects the fact that only the limited works were done and focus on the mostly critical items. In Q3, there were yet no asset disposals. So this figure 0 in this quarter. The debt financing impact this quarter on the cash flows came mainly from the use of overdraft. Just as a reminder that as we had agreed grace period for the principal repayments of the debt with our lenders, then we did not have any principal repayments this quarter, and the grace period was in effect until the end of the first quarter. So at the end of the day, the first quarter resulted typically to a low season quarter in net cash outflows. And a snapshot of the financial position. The assets remain close to EUR 1.6 billion with the fixed assets being close to [ EUR 1.4 million ]. The current assets, of which over half is cash, remains high and particularly when we compared to the balances a year ago. And the high cash balance continues to be supported by the amount of debt financing with the balance of interest-bearing liabilities, just EUR 11 million shy of EUR 800 million overall. But the ratios, the net debt and EBITDA ratio remains still high for now. But as we are moving towards the high-season quarters, then we expect this figure to improve over the coming period. And the same applies also for the equity asset ratio, which at the end of the quarter stood at 42%. And lastly, our debt structure also remains much unchanged. As I said, there were no principal repayments during this quarter. And the total amount of interest-bearing loans, together with the overdraft loans amounted to EUR 675 million with a long-term bank loans contributing the majority of the outstanding balance. We still have -- are waiting for the delivery of the vessel MyStar. And upon the delivery, we will draw the loan, which we have signed agreement with the KfW IPEX-Bank. So this concludes the presentation part of today's webinar. And we will now proceed to the questions and answers section. And we will start with the questions that were sent to us prior to the webinar.

Is it possible to have any comments about the value from the sale of the ships Sea Wind?

Good afternoon also from my side. My name is Paavo Nogene, I'm CEO. As Harri Hanschmidt mentioned the Sea Wind was sold a bit above of the book value. So we didn't make a loss with selling the Sea Wind. I think this is the most important.

Is it possible to have any comments about the value of the short-term charters that Isabelle to the state of Estonia?

We have answered to the media questions, which are public that government of Estonia pays EUR 25 for night per bed and the government of Estonia pays, EUR 10 per person per day for food services. And this is actually all what we can say.

Thank you. If there is any plan for the Riga-Stockholm route -- sorry, is there any plan for the Riga-Stockholm route for this summer? And also if the ship Victoria can replace these routes? And if not, then what are the plans from the company for the ship Victoria?

We are not planning to open the Riga-Stockholm route to this year. There are many reasons. Harri Hanschmidt already explained a bit the situation general. But we must understand that some markets this summer almost closed or totally closed. And we're talking about the Belarus, Ukraine and Russia from where during the normal years, Riga-Stockholm route had quite many passengers. As we don't see this summer, it can happen, then the risk to open Riga-Stockholm route is too high, and we decided not to open this year. We are very happy that we were able to charter out Isabelle for the Ukraine refugees and we really can help with vessel Ukrainians who are in really difficult situation and at the same time, to lower the risks on that route. What what's happening with Victoria in the coming months, I can't say exactly right now, but we -- as we have told before, we're working to find alternative works for our vessels. And as you probably know, last year, Victoria was operating all over the summer. So we are expecting some news for the good Victoria in near future, but early to say.

Thank you. As the vessel Regal Star replaces Sea Wind in the route Muuga-Vuosaari, there's only one ship in the Paldiski-Kapellskär route, Sailor. I think there is only one ship in this route from Tallink company these days. Are there any plans for one more ship in this route as it was before?

Currently low, but we're definitely looking at how the market works. And we can always change our plans. But right now, we continue operating with one vessel on Paldiski-Kapellskär route.

And there is another question concerning the Riga-Stockholm route. It's similar to the previous one, but about the outlook in the coming years, are we going to restart Riga-Stockholm in the coming years?

Early to answer. Who knows what happens tomorrow, after 1 week, after 1 month for next year. I think the geopolitical situation is quite uncertain, and we need first to see how this develops, and then we can also make the decisions. We haven't made a decision that we are not going to open Riga-Stockholm route ever again. But we have made decision that we are not operating at least 12 months from now from the Riga-Stockholm route.

Thank you. How does the quarterly debt repayment schedule look at this point from Q2 onwards?

Actually, altogether, we're planning this year around EUR 80 million out of which EUR 20 million is already paid. So we will -- we can publish this more detailed way during the next quarter if the right is for that. But yes, we paying back the loans from very beginning of second quarter this year and also working with the refinancing loan agreement, which are going to end during end of this year.

Thank you. Next question, is my star coming in early or late Q3? Is the delays somehow compensated by the builder?

Of course, there are, in the contract, different penalties and so on. First of all, we would like that shipyard will build the vessel ready and then we're going to discuss all these topics as well. Right now, we have information that MyStar is delivered middle of quarter 3, but we would like to say that it's during the quarter 3, and we don't have exact date right now. There are different technical works, important technical works taking place this week and next week. And after that most probably will have a more clear view from the shipyard as well about the possible delivery dates.

Thank you. Apart from fuel and staff costs, what other factors depressed the gross profitability?

I would like to say this way that the Tallink Grupp was prepared for the first quarter in context of COVID. We really made different works to be ready for the time when the COVID is going to disappear. 24th of February started the war in Europe, and this means that we need to adapt now our business to the war situation. We're working with it. It's not easy task. It's not quick, but we will manage it. And our aim is to finish this year with net profit. What was the -- what were the factors? Of course, there were also a factor that passengers who may be planned to have the cruise crews in March and late February, made new decisions because uncertainty during the geopolitical situation, affected also the bookings pick up. But now we can say that in our main market, which is Finland, market actually recovers quite well. And we definitely will see good increase in the passenger numbers during the second quarter. But mainly, the main issue was, of course, fuel. Staff wasn't -- [ Romantika ] staff costs are actually a much lower level compared with the normal year 2019. So the Tallink became slim-fit, but war was something we wasn't ready for. And now we start up some period where we just need to adapt all our business for the war situation as well.

Maybe I also add that although we had 720,000 passengers, this is quite far from a regular year where we, in 2019, had almost 2 million passengers in the first quarter. And our business is volume business and has a fixed cost point and above that, it gets more profitable because ships are still very modern and then have amortization level and so forth, the cost of operating them. Also, Q1 can be looked at a little bit of a kick-start of the operations again and could be ready for the summer, but the costs always come first and clients come later.

Thank you. Tallink's market share on Tallinn-Helsinki route has been declining since the first quarter of '21 from 57% to 53%. Is something to be worried about?

We are not worried. We need to also take a deeper look to the -- into the numbers who are traveling during the first quarter last year, there were a lot of restrictions. Even the commuter traffic was regulated. So these numbers are not actually well comparable right now. But we keep our market share, historically Tallinn-Helsinki, it has been together with Silja Europa, which didn't operate during the first quarter this year, around 55, 56 routes. And if you take the passenger car market share, they are up to 57%, 58%. So that are right now not to be worried. I think more important is that we're asking also money for the tickets. And we're doing this much better than our good competitors.

Thank you. Next question. Numbers indicate that the onboard sales per passenger was lower than last year. Can you say how has it developed?

I think it's more like a question of the passenger mix, how big is the share of the shuttle service and what is the share of the long cruises because if the shuttle -- picking up shuttle onboard spending is lower than the long cruises, and last year, just passenger mix between the routes were different. But onboard spending this right now, I should say, in quite historical high level, if you talk, for example, the loan route. So onboard spending is definitely much better than it has been before.

Next question, what are your expectations for the second quarter compared to previous COVID-19 years?

Well, that depends what's happening again in geopolitical situation, how it affects the fuel prices, what will be the inflation in our home markets, how this affects people ability to travel. Are they going to travel more or far or they stay here, we believe that people who want to travel and who have maybe a bit less money or are not very ready to go during the war situation far away, they possibly will make more trips here with us to the neighbor countries. So we're expecting for sure, that we have significantly more passengers than compared with quarter 1 this year. And as I said, we work to get to net profit by end of the year. And this is the target we work for. But again, war was something for what nobody wasn't ready, and we do our best right now to adapt into this war business model as fast as possible. We have launched fuel surcharge for some routes, we're working even harder with the costs, we try to raise some other prices as well onboard. So there are a lot actually going -- ongoing. At the same time, with the vessels. As we know, Romantika is already now chartered out. So Romantika is not making any more loss for the company but earning profit. And we work with other vessels as well, as I said before, the Victoria and Isabelle is chartered out, which also not generating any more loss, but generating some small profit.

Thank you. It seems that we have now answered to all the questions that we have been asked. So I would like to thank Paavo and Harri as well as all the listeners and meet you again after the results of the second quarter.