AS Tallink Grupp (TAL1T) Earnings Call Transcript & Summary

Good day, everyone, and welcome to Tallink Group's webinar of the second quarter results of 2022. As customary, we will firstly present the results of the quarter and thereafter, we will proceed to the questions and answers. And we will initially address the questions that were sent to us prior to the webinar. But it is also possible to ask questions during the webinar by writing in the question-and-answers box. And although it is possible to join the webinar and ask the questions anonymously, we kindly ask you to identify yourself by your name before asking the question. And now I would give the floor to Margus Schults.

Good afternoon also from my side. So I would like to present you the results of Tallink Group from the second quarter of 2022 and also highlights key business events. So on this slide, we have our key figures in a nutshell, not much changed since last time. We have, since Q1 sold 1 vessel, Sea Wind, our cargo vessel. And this means that we have now 1 vessel left. . The route to operate and hotels, we operate, nothing has changed since Q1. We have still 1 suspended route. It's Riga-Stockholm and also closed hotel in Riga. And on Tallink-Stockholm, we cooperated in Q2 with 1 vessel, so 50% of normal capacity. Otherwise, the information is very much the same, unchanged. Maybe what I would like to highlight is that in spite of crisis and all kind of turbulence, we have a pleasure to see such a number of loyalty program, Club 1, has continued to increase. So now we reached 33 million loyalty members. And also, we started to hire the employees. When pre-COVID time, we had over 7,000 people in our group, and the lowest number was below 4,000. Since we started to operate several new vessels, again, we started to hire also people. And currently, we are around 5,600 people on board. The operating environment continued to be very complicated also in Q2. Of course, COVID was replaced by other challenges in business environment by very high inflation and fuel prices, also other purchase is what we do increase the prices. And of course, last but not least, geopolitical complicated situation, and war in Ukraine has decreased the confidence of customers. And therefore, we have looked already different opportunities to have charters for our vessel instead of operating on normal routes with a very risky environment. Romantika, we already announced that this was chartered to Holland to operate between Holland and Norway. And now this operation has taken place already the entire quarter. So these are reflected already in our results. Then also we -- in April, we hired a short-term time charter for cruise ferry, Isabelle, which is normally operated on Riga-Stockholm. And now our vessel is laid up in Tallink and used as a commendation vessel for refugees. Also, we had 3 vessels in our dock during the quarter, which has some impact on our results. And as I mentioned, we sold our cargo vessel Sea Wind, but the impact on our balance sheet and profit and loss statement was really, really minor. During the quarter, we also opened a new Burger King restaurant in Tartu. So by end of June, we have totally 16 restaurants opened. And also in June, we amended the terms of EUR 100 million loan agreement with KredEx, which was originally planned to be paid in June 2023. And now by amendment, the agreement was prolonged until 2026. And from original date in '23, we start also scheduled payments and then we have a bullet in June 2026. The number of key numbers are for Q2 on this slide. You can see that the number of passengers is more than 3x higher than in 2021, but of course, it's reflecting very low base in 2021 due to COVID restrictions. The number of cargo units has been quite stable during the whole COVID crisis period. And in Q2, we managed to increase the cargo by 19%. And the number of cars also -- and passenger cars also increased as the number of passengers increased by almost double. But of course, since the cars have been affected less during the crisis, people prefer to use own car instead of using public transport, then ferry cruise has been almost 80%. Revenues in Q2, EUR 206 million, which is EUR 120 million higher than a year ago during the same period. We had, of course, more departures also, but also, we can see that there are strong passenger volumes and also average purchase of onboard and average ticket price have remained quite solid during the whole quarter. On cost side, we have, of course, increased the cost of sales because of the higher volumes, but most impact on our quarterly result has been fuel cost, which has increased more than 200%. And on quarterly level, it's increase of almost EUR 30 million. Government support basically has been ended in all our home markets, and we received only EUR 600,000 versus EUR 6 million during Q2 2021. And the EBITDA as a result of the above, increase of revenues and increase of cost was almost EUR 29 million, which is EUR 24 million better than Q2 in last year. And net loss, we were almost on breakeven, so very small net loss EUR 0.7 million, which is significant improvement from the EUR 24 million loss a year ago. And as I said, total assets, total equity, almost not changed. And the interest-bearing liabilities, it has decreased by EUR 43 million as a result of the debt payment, which we restarted since -- until Q1, say, were sized by our creditors. On this slide, you can see the comparison of our volumes and also results comparing the normal year. On the left side, we can -- we indicate a number of passengers on different routes comparing our last normal year 2019. And you can see that Finland-Sweden is doing quite well. The volumes exceed already 70% of normal volumes and continue to increase. On Estonia-Finland, also volumes have been quite high since after Q1 low levels due to COVID and have reached around 65% of the normal volumes. And also Tallink-Stockholm, Estonia-Sweden is doing well. The volumes have increased since -- during Q1 and reached 55% of the volumes. And I remind everyone that this route is now operated with 1 vessel, 50% capacity versus 2 vessels in 2019. On right side, on the numbers, you can see the comparison of 3 last year, '19, 2020 and 2021. And then finally, also a sliding window last 12 months, Q3 2021 until Q2 2022. And basically, if you compare 2019 with the last 12 months result, a number of passengers have reached almost half of the numbers in 2019. Of course, 2019, we had, like I mentioned, several vessels more in operations comparing this year. Number of cargo units has continued to improve. And comparing '19, it is plus 6%. But since I mentioned that the average purchase has been quite high and the number of cars has decreased less comparing to the decrease of number of passengers. Then our revenues have reached EUR 650 million in last 12 months period comparing EUR 950 million in 2019. And comparing to volume the reduction, which is minus 53%, it's minus 32%. EBITDA has continued to improve from year-to-year during the crisis and now the sliding 12 months period showing EBITDA EUR 78 million and net result minus EUR 38 million. And this EBITDA and net profit, of course, are mostly affected during last 12 months by Q1 this year, which -- where we had more than EUR 40 million loss due to strict core restrictions. There are also several events what happened after the reporting period, we see that the war in ukraine, a high negative high inflation and also high prices of fuel will affect us in a short-term technique further. And therefore, we continue to explore different options for chartering out of vessels. So after reporting period, we were able to charter out Victoria for -- to Scotland as an accommodation vessel for 6 months period with option to prolong it 3 months. And today, 1 hour ago, we announced also chartering out of Silja Europa and Galaxy as accommodation vessels for -- to Poland and both vessels will stay there for 7 months period as accommodation vessels and Vera also option for both of them to prolong it by 3 months. So totally, now we have 6 vessels chartered out, as I mentioned earlier. We have also Isabelle chartered out for short term. We have Romantika Chartered out long term. And then we have already, many years, Atlantic Vision in Charter in Canada. We expect also during Q3 in September, new vessel to our fleet. MyStar is in the final stage of constructing in Roma, and we expect such a delivery and operations will start in September this year. But now I give back to Joonas Joost, and he will go through the numbers in more detail. Thank you.

Thank you, Margus. And just let's take a quick a bit more detail look into the figures, starting with the sales by operating segments in the second quarter. As Margus mentioned, in the year-over-year comparison in '21, second quarter operational environment was very much defined by higher restrictions and extremely limited operations. Therefore, this year when the Covid restrictions have been lifted. We have had much more overnight trips routes and cruise service. Therefore, the restaurant and shop sales on boarded onshore has increased very significantly compared to last year and also ticket sales. And the revenue structure overall resembles a typical structure that we have had in the previous years. And also the split between the revenue and ticket sales increase compared to last year is adhering to the same dynamics. The sales of cargo transportation has been a bit higher than last year, EUR 4 million. And this is also partly by the fact that we have had more ships in operation in more routes. Accommodation sales is up by EUR 2.8 million, which in itself does not perhaps see too significant in the greater scale of things. However, last year, we had only 1 hotel effectively open and the sales was only a negligible EUR 100,000. This year, we have had 3 hotels in operation and a much more significant turnover. And as mentioned, we have had more vessels in Charter. So in addition to trade equation also Romantika throughout the quarter and Isabelle starting from mid-April. So this is the change there. And in terms of the routes we operate, then all of the routes have been affected by the fact of the development that last year there were high restrictions, which were not there this year. So there has been definitely increase in passenger demand. Estonia-Finland decrease over last year is EUR 37 million. And compared to last year, the only addition here is the cruise service between Tallink and Helsinki. The 2 shuttle vessels and 1 cargo vessel was operated a year ago as well. However, yes, due to the restrictions, the passenger flows have been much greater than last year. On Estonia-Sweden route, the difference attributes most to the fact that last year, only 2 cargo vessels will operate between Paldiski-Kapellskar. This year, there has been also 1 cruise ferry operating between Tallinn-Stockholm. However, there has been only 1 cargo vessel this year compared to 2 versus last year. Finland-Sweden, we did operate Turku-Stockholm a year ago. But due to the Covid restrictions, travel restrictions, the demand was rather limited. And this year, Helsinki-Stockholm route is also operated by 2 ferries, and it has been very well received by the passengers. And as Margus showed earlier, they recovery in the number of passengers has so far been the best around the Finland-Sweden routes. And in the other segment, the change mostly attributes to the chartering of the vessels and wholesale sales and to a smaller extent also various retail activities. And perhaps a quick snapshot of on the quarter, the seasonality breakdown. So in terms of the passengers we are, again, resembling more normal volumes, even better results than in the 2020 summer months in the third quarter. And overall, the result is 2.3 million passengers in the first 6 months, which is already 1/4 of the result that we achieved in the entire '21 cargo volumes have been robust throughout the COVID crisis and have been also quite good in both the first quarters of this year. In terms of sales, the second quarter result, EUR 206 million is 80% of the volume we did in the second quarter of 2019. In the first quarter, it was 60%. And yes, we can see clearly that this quarter, the sales has been the highest since the start of the COVID. It's definitely on a good track here. And EBITDA, despite the overall increase in efficiency, still has some room to improve relative to the pre-Covid levels. And yes, high fuel price is a key factor here, having negative impacts on the results. And the same dynamics are also unvisible on the net result level. However, the almost breakeven result is very significant improvements over the second quarter results we had both last year and 2 years ago. And actually, in terms of midpoint, we are closer to the results in 2019 than we are to the result of '21. And although Margus also touched the dynamics of the earnings this quarter, I would add perhaps here on this slide that the marketing and administrative expenses also have expanded in line with the expanded volume of operations and more ships in routes and also more passenger demand and a majority of the year-over-year increase is coming from marketing activities and other operating items, which are significantly less than last year, attribute mostly to the government assistance support paid to us. So the EBITDA margin in Q2 was nearly 14%. Just as a reminder, in 2019, it was 20%. So we are looking to move closer to that obviously in the coming periods. In terms of cash flows, the operating cash flow was positive EUR 45 million in this quarter, and this was supported both from the operational result, but also the favorable working capital dynamics ahead of the high season months in the summer. Investments, EUR 9 million, a bit above the result last year. But still, the investments have remained fairly low, doing only the most critical items needed. These attribute mostly the maintenance of the ships and also to a lesser extent, also some investments related to MyStar. And here, it is also quite very visible that we restarted the debt financing and principal payments in second quarter of this year, and the net impact of the financing moves is EUR 44 million cash outflows. So overall, the change in cash during the quarter was negative EUR 10 million. And indeed, in financial position, no big moves aside from the fact that we started reducing the visit loads again in this quarter. The cash balance stands at EUR 91 million at the end of the quarter, equity at EUR 652 million and net debt at EUR 656 million. Compared to the beginning of the quarter, the equity ratio improved slightly to 42%, and the book value of the share standards EUR 0.88. And also not insignificant, the fact that combined with the unused of draft amounts, the cash and the overdrafts combined to EUR 277 million in total liquid funds available to us. And very lastly, a look at the financial debt which totaled together long-term bank loans and used overdrafts at EUR 636 million at the end of June. Altogether, we continue to have 7 loan agreements, and the long term debt balance is EUR 618 million. The maturities of the debt fall in the range of this year and in the next 7 years, and we have interest rates of this launch, both fixed and floating agreements. And lastly, as we still have not taken delivery of MyStar, then the EUR 198 million loan from the KfW IPEX-Bank remains yet undrawn. So this concludes the presentation of the webinar. And we would now proceed the questions and answers. And starting with the questions that were sent to us prior to the webinar.

Good afternoon also from my side. My name is Paavo Nogene, the CEO of the company. Before we go into the questions, I just want to highlight that we living in the challenging times, we have had 2 years of COVID, now we're adapting our company with the impacts, which is coming from the war. So if I would comment the quarter 2, then actually, if it -- yes, I know that we can't take out of the fuel cost. But if you eliminate the fuel cost and compare the numbers with the 2019, then actually the company is much more efficient and understand the beliefs that to adapt with all the business with such quite high fuel prices takes some time because we can't adjust forward all the costs to the customers without losing the market share or changing the business. So we have worked hard since the work started and the energy prices hiked. And definitely also these news is we just released today a bit more than 1 hour ago that we chartered out some vessels for the low season period helps us to improve, especially the fourth quarter and the next year first quarter results, which helped us to cruise through these challenging times and hopefully show positive results in coming years. But now we can go to the questions, and Joonas, please.

Thank you, Paavo. And the first question actually has been already answered during the presentation. The question was when will MyStar come? And as high noted before, we expect to take delivery of the vessel in September this year. The next question is what are the main determinants when making the decision and whether to start with the second ship on the Tallink-Stockholm route?

First of all, of course, the business outlook both from the sales and cost side demand, as Margus Schults just mentioned, we're operating right now with 1 vessel only, but we reached around -- close to 60% passenger levels, which shows that we have enough capacity still to sell the tickets with 1 vessel only. And as we really need to carefully calculate, which is better to operate with 1 or 2 vessels, we have done it through this crisis and continuing it. We are not planning to put second vessel to Tallink-Stockholm route before the next early summer. And also then we -- before making the calculations and will analyze how we continue, but is not before the next early summer or the second esters not expected to start in Tallink-Stockholm route.

Next question. Could you give a feel for if the fuel cost has come down in July compared to Q2 2022? You mentioned that June was most profitable on the bottom line. Was this mainly due to the price of fuel coming on?

The second quarter, the fuel prices were the highest in the June. So profitability in June despite high fuel prices is mostly due to increase in sales volumes and also the company's efficiency. In July, the global fuel prices have been a bit lower, but still relatively high. But yes, they are more comparable to may.

Given that the second quarter was almost breakeven at the net profit line and the third quarter is usually stronger than the second quarter, is it fair to assume that the third quarter should be profitable?

Yes. We definitely work on it that the third quarter should be the profitable third quarter just started. We will announce our July passenger numbers in coming weeks. But as we all know, we don't know what's happening in August and September. But so far is, of course, we expect that historically, the strongest quarter for Tallink Group will be the strongest also this year.

Next question. How is the development of tax-free sales on board? Are there bigger price adjustments than usual on board regarding inflation, compensation of other costs or market adjustments?

We monitor all the prices on land and also on competitors. Of course, due to the inflation and different price changes also to us. So we need to adapt the prices and have done it. And also, historically, we have changed the onboard menus and assortment in spring in May. So there were also some changes, but they are not very big ones. So as we see from the onboard sales, people are quite spending quite a lot and so the pricing seems to be correct and good for the customers.

And the last question, which was sent to us prior to webinar. On Holland, there is a rising public opinion against the tax exemption because of the new customer regulations and administration. Even if it is not likely that Holland will become a part of the EU fiscal territory, again, have ever discussed how it would affect your business if the tax exemption was removed or reduced, for example, regarding routes, all Holland traffic ticket prices and ships?

Of course, if the tax system will be changed for Holland, there are less motivation for the shipping companies to go to Holland. So I think that it's biggest program is for the Holland, then if something will change. But in 1 hand, it would negatively affect both the pricing and the margins. But on the other hand, it would also allow to sell greater volumes as tax rate would have the limitations and so on. But once more, I think if this system will be changed the biggest program for land. And we hope that everything stays like it has been since joining the opinion.

Next question. In Q1, you indicated that aims to finish 2022 with a small net profit or to be breakeven. Considering the half year progress and expectations for the second half of the year, do you still believe you're able to achieve that?

We work for it. And of course, we don't have this magic crystal ball, what's happening in August, September, October, November, December. But we believe that today, it's still achievable. But of course, we have seen so many unexpected things during the last 2 and 12 years. So we do our best to do that. And let's hope that we can really end this year, at least on 0. But as said, different challenges all the time, but we try to find the best solution for the company and also these charters, already 6 vessels chartered out, out of our 14, helps definitely to achieve this milestone.

How will chartering out of vessels affect your need for employees? Will you need to reduce the crew or rather will there be less trouble with hiring?

Together, we've announced that Galaxy will be chartered out. We started today the redundancy process in Sweden, which will affect up to 265 employees. What's happened in Tallink and Estonia, we currently don't need to change the amount of employees because the new building my start is coming, and we can let's say that employees can have the work on other vessels. So right now, the biggest change will be in Sweden.

Maybe you can also comment on the passenger mix in the second quarter, share of international tourists, for example.

International tourists, of course, smaller than our home markets fins traveling well storage and also suits waking up. But yes, we haven't seen a big number of tourists from the United States or Germany. But of course, yes, we have also customers from Germany and the United States. And as 2019 or pre-COVID period, we have had many passengers from Asia. Then right now, the majority is, of course, from Finland Estonia and Sweden.

Will Galaxy be replaced on the Stockholm-Turku route?

Right now, we don't have such plan.

Please comment why you choose to charter 1 Turku-Stockholm vessel, market conditions, increased competition? Will you go with just 1 chip or move any other verses to this route?

We decided that for we want to lower the capacity on Turku-Stockholm route. And as we got request for the Galaxy and we decided to take this charter and the charter Galaxy out Holland.

Thank you. So this has concluded all the questions there have been today for us. So I would like thank you, all the participants and investors. And we will meet again in 3 months' time. Thank you, and goodbye.