AS Tallink Grupp (TAL1T) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to Tallink's Q3 2022 Financial Results Webinar. My name is Anneli Simm, and I'm an Investor Relations Coordinator for Tallink. We have today 3 presenters, Paavo Nogene, the Chairman of the Management Board; Harri Hanschmidt and Margus Schults, both members of the Management Board. We will first give an overview of the quarter and then proceed with the Q&A. We will initially address the questions that were sent to us prior to this webinar. It is, however, possible to ask questions during the webinar by writing to Q&A section in the slide meeting. And we will try to address these as well. And I also kindly ask those who will ask questions to identify themselves, even though it is possible to stay anonymous. I will now give the floor to Harri Hanschmidt.

Thank you very much, Anneli. My name is Harri Hanschmidt, I'm Board member for Tallink Grupp. Thank you for joining in to the third quarter webinar. First, I will go over the key information for Tallink Grupp, should there be any new listeners and then we will take a closer look of the third quarter results. Tallink Grupp is the leading European provider of leisure and business travel and sea transportation services in the Baltic Sea region. We offer in the northern Baltic Sea region area, business travel on shuttle vessels and leisure and cruise products as well. And all of our ships are equipped with ro-ro cargo capacity. We own a fleet of 14 vessels. Typically, we operate 7 ferry routes. Currently, we have the Riga-Stockholm route suspended since the corona period. We also operate 4 hotels, 3 of them in Tallinn, one in Riga, and this one is suspended as well. Last year, we made a revenue or turnover of EUR 477 million. We transported 3 million passengers and also 370,000 cargo units. We own and operate vessels that are -- the majority of the EUR 1.6 billion asset base that the company has. In Q3, we had about 5,000 employees. And our Club One loyalty program has 3 million members. We are publicly traded on the NASDAQ OMX and Tallinn and Helsinki Stock Exchanges and combined have about 40,000 investors. We have 2 strong brands, the Tallink and Silja brand. Moving to the next slide. Our Q3 developments and key facts. The geopolitical situation is challenging. When we came out of pandemic since February this year, a new crisis started, the war in Ukraine. And this has, of course, a very big effect to our company as well. But firstly, we have different client groups missing and also the energy prices and fuel prices have been affected and have been quite high. This has led us to work big changes in our business. We have chartered out vessels, many of these vessels helped to accommodate refugees in different countries, in Scotland, in Netherlands and in Estonia. We can see high inflation in the region and also high input prices as cost of goods and [indiscernible] et cetera, for us. The inflation has direct effect as well as we have most of our loans, floating and tied to the 6-month EURIBOR. So the interest cost has gone up somewhat as well. We have generally seen lower consumer index in the Nordic countries, especially. But despite of that, we still had a quite successful summer. However, the client behavior has changed in the last years and we see very many last-minute bookings. As I mentioned, there are 6 vessels chartered out. So there are additional charters, short-term charters that end next year of Victoria I, Silja Europa and Galaxy. And we have extended the Atlantic Vision Canada charter for 18 months with an option for another 12 months. We are expecting our new shuttle vessel, MyStar to be ready in November, and it will start operating between Tallinn and Helsinki and we'll switch out Star and come close to our new-generation shuttle vessels loop as a sister ship to Megastar. Moving to the next slide, we can see also the results for the third quarter. These are, of course, much better than the last year where we had a very big effect from the COVID restrictions. So number of passengers has gone up by 65.5% and was almost 1.9 million passengers transported in June, July, August, our high season. The number of cargo units stayed around the same level, increased a little bit by 13% to 102,000 cargo units and the passenger cars also increased by 21% to 277,000 passenger cars. So the revenues went up compared to last year by 50%. And we are not yet on the 2019 level that there is a lot of comparison done. But our business right now is quite different as well as we have this record number of charters and to quite a bit of cost restriction. Charter revenues have gone up by 115%. There is a recovery in tourism and hotel business. And of course, cost of sales have gone up as well as there is more business going on. Fuel cost remains very high and is quite a big factor in our business. As you can see, it's really twice the cost of last year. We are affected by a little bit less because of the successful chartering of the vessels. EBITDA was EUR 67.7 million, and we ended up with a net profit of EUR 37.9 million for the third quarter. First and second quarter, we did a loss, but the 9 quarters combined, we have EUR 2.8 million negative result and are working hard to end up in a positive result. But of course, the times are very uncertain and we don't know how the war is escalating or are there going to be any more COVID rules and restrictions, hopefully not. On the next slide, we can also see a comparison to the pre-pandemic levels. So we can see that in the summer months, we could say we were about 60% to 70% on the pre-pandemic performance level and even in July on the Finland, Sweden routes on 90%, so almost on the pre-pandemic level. But obviously, the capacity on the routes has changed and if looking at the company's numbers, this has to be taken into account for and some of the vessels are chartered out until we enter into a more normal business environment again. When we look at the rolling numbers in the last 12 months, we can see right now about 5.3 million passengers and revenue of EUR 734 million and EBITDA EUR 110 million. So this gives sort of a feeling of how the business is recovering compared to the pandemic levels because as we can see, the 2020 and 2021 numbers don't really give a very good idea of how the business should be doing. On the next slide, we can see also some events. Well, after the reporting period and the outlook, we continue to look for the different chartering options. We have very good vessels, very good assets that can be used in many parts of the world, either as hotels or as regular shipping routes. And most of the chartering contracts today are of short-term. So when these end next year, we will need to either bring the vessels back to the route or we find new chartering contracts depending what is more feasible. I already mentioned MyStar, we are expecting to the route very shortly, and we are very excited about this complicated project, especially during corona times when the factories were closed and then there was a lot of extra effort to get this ship ready. And unfortunately, we did see quite a bit of delay. We also did change in the cruise concept between Turku and Stockholm. The ship, Baltic Princess is now doing a little bit different schedule as in the winter season or low season. She will operate between Turku and Kapellskar instead and enjoy a little bit better time schedule for the clients as well and so far has been successful. But in the summer, we will most likely go back to the original schedule. Now I would like to give over to Margus Schults, who will continue with the presentation. Thank you very much.

Thank you, Harri. And yes, I'm Margus Schults and good afternoon from everyone. I'm the Group CFO, and would like to provide the details about the development of Q3 results. So if we first look on the development by operating segments, and you can see that Q3 last year, the biggest contribution in revenues came EUR 35 million from onboard sales. Of course, we need to remember that there is a cost of goods and services related to that. So this is not -- which is affecting in full scale bottom line. But what is very positive for us is ticket revenue contributed almost the same amount in revenue growth, EUR 32 million. And of course, since there is no cost of goods and services, it will be -- it impacts our revenue -- sorry, net profit directly, and we are happy to see that pricing power, what we have used in more brave way in pricing of our services has been successful, and we have been also able to keep our market share. Then as it has been several times mentioned, the new mix in our business is that we are chartering part of our vessels and chartering of vessels is becoming now third largest contributor in growth of the revenue. This last quarter, it was more than EUR 11 million. And growth of cargo and accommodation was a little bit lower. Cargo and of course, the growth is lower because it has been on a good healthy level whole pandemic time. And accommodation is, of course, a little bit smaller -- much smaller part of our business comparing operating vessels. And what is also changing quite a lot is revenue structure. So you can see that now the onboard sales is contributing 47% of our revenues, tickets 30%, cargo 10% and now charters 8%. But if we look at for instance what was structure even 3 months, earlier at the end of Q2, then you can see that this is where the charters were much lower, ticket was much lower and other revenues were higher. So when we used to have small changes in our revenue structures and now in a changing environment and changing business model, it is changing also quite substantially from quarter-to-quarter. And if you look on next slide, development by geographical segments, and you can see that the same development Q3 last year versus Q3 this year revenue, then you can see that the biggest contribution comes from Estonia-Finland traffic and Finland-Sweden traffic, which is also our key routes. And then the other almost EUR 19 million is reflecting both our onshore businesses, but mostly revenues derived from our charters. And then Estonia-Sweden, the growth has been more modest, EUR 5 million, but we have to remember that we have been sailing with lower capacity only with 1 vessel whole Q3 on that route. And also, it's good to remember that in Q3, we have had some changes between the geographical segments, for instance, from mid-August Silja Europa, which normally serves on Estonia-Finland route, became charters and therefore half of revenue is reflected on Estonia-Finland segment and half on the other segment and the same applies to vessel Galaxy, which changed from Finland-Sweden route to charter in mid of September. So if we look on next slide, the revenues results by quarters, bottom boxes first quarter and the second, third and fourth quarter in terms of number of passengers, cargo units, revenues and EBITDA. Then we can see that normally, these trends on passenger side that Q3 is our best quarter, of course, it continues. It was so before pandemic, it was so during pandemic and it is also so now in 2022. And it means, of course, many of our costs are fixed. It means that, of course, on EBITDA level, the impact to our results is quite big. And in third quarter, we earned EBITDA EUR 68 million. Cargo side is more stable throughout the year, and it's still a very good positive stable addition to our business. And like it has been mentioned several times, then of course now a second leg for providing extra stability is our short-term charters. And if you look at net profit level on next slide, then of course, it is even more dramatic or the impact of Q3. You can see that in 2019, we earned EUR 55 million in Q3. Then of course, we had first COVID year with losses throughout the year. Then we had second COVID year, where we were able to, in spite of all these restrictions, we were able to increase or to have a small profit in Q3. And now since the beginning of pandemic, we made EUR 38 million in Q3 this year. And this is basically a reflection of the improved revenues, but also, of course, a reflection of higher -- lower cost level, except, of course, fuel costs. If we go to income statement, like already Harri mentioned '20 and '21 are not very good comparison because environment changed really, not monthly even, but weekly, the restrictions came and were taken off, therefore, maybe a little bit more relevant is to compare on the right side, Q3 '21 and '22. And you can see that, of course, our sales was increasing due to the improved number of passengers, but also, of course, the costs were increased, EUR 50 million cost of sales from -- derived from the volumes, but also we activated more our marketing activities and had a couple of million, EUR 2 million higher marketing costs. But as a combination of these 2, improved sales and less increased costs, we were almost able to double our EBITDA from Q3 last year, so from EUR 35 million to EUR 68 million, and of course, also to improve EBITDA margin. And like it was mentioned already, net profit and EUR 38 million and also earnings per share is now after a year being negative has turned into positive, so EUR 0.051 per share. And on cash flow statement, you can see that, of course, cash flow from operations is significantly stronger because of the improved volumes. We have some small capital expenditures during Q3, mostly related to docking of some vessels, but also opening of some Burger King restaurants and also some investments which were done to our new vessel, MyStar. And free cash flow basically was EUR 55 million. Since Q2 this year, we have started repayment of principals, which were stopped during COVID years, and this reflects that we have paid down -- net effect of financing was minus EUR 36 million. And also, it's good to remember that in September last year, in Q3 last year, we completed our increase of share capital by EUR 35 million. And obviously, in this year, we don't have need to increase share capital. And if we look at our financial position and balance sheet, there are no major changes. We have still our assets, our vessels mostly. One major change is, like I mentioned already, paying down the principals of loans. So the interest-bearing liabilities have decreased quite significantly from end of last year and shareholders' equity has been, of course, stable. And combination of net debt reduction and EBITDA improvement has also reflected in net debt-to-EBITDA ratio, which is now much healthier than in the previous quarter, and it's on the level of 5.5x. And equity ratio and equity/asset ratio and book value per share fees have been stable also in COVID years, but level of respectively 45% and EUR 0.93. Liquidity-wise we are very much on a stable position. Our liquidity at the end of quarter was EUR 226 million. And also, debt structure is quite stable. No major changes done during the previous quarter. So we have our long-term bank loans. It's the amount of almost EUR 600 million. Some of them are floating rate, some of them are fixed rate and maturities are different. And then we have also overdraft facilities in the amount of total EUR 135 million. But as you can see, at the end of quarter, most of these overdrafts were not used. And then which is happening most likely in Q4 is that financing of MyStar financing from KfW IPEX-Bank will be withdrawn, and this means additional loan to us in the amount of EUR 198 million. This is more details, and thank you.

Thank you. It's now time for the Q&A session. And we have received quite a number of questions. I will read them out loud. And we'll have Paavo, Harri and Margus to answer those questions. How do you see the future of the Turku-Stockholm routes? And are you satisfied with the current passenger and cargo numbers on that route?

Yes. My name is Paavo Nogene, I'm the CEO of Tallink Grupp. And firstly, I would like to highlight that we had a good summer. We have adapted during the last 2 years, firstly, our business with COVID. Now we have worked hard to adapt it with the war and outcome from the third quarter shows that the combination right now operating our routes, some of them with lower capacity and chartering out the vessels generates good combination for upcoming low season. So I appreciate all the Tallink Silja workers who have worked hard during these hard, difficult times now already 2.5 years. But answering the question, we have made a decision to continue to operate from Turku to Kapellskar rather than Stockholm until at least April and again from September next year we're still ongoing with that decision when and how many months we plan to operate to Stockholm from Turku. We want to see first the October results, because October has been the first month when Baltic Princess operating alone on that route and also the real impact, Kapellskar instead Stockholm. So we are going to make the decision during the last quarter of the year.

The next question is, are you committed to continue on the Turku-Stockholm route?

Yes. Yes, we will continue with 1 vessel. We haven't made any decisions regarding to add capacity since we decided to operate only 1 vessel. So our near future plans operate only with Baltic Princess.

What will happen to Star when MyStar starts operating in November?

Yes. Will it be moved to Turku-Stockholm route to replace MS Galaxy? I was sorry I interrupted you. That was the question. We have plans for Star, but we will announce, then we know exactly the delivery date of the MyStar. We expect MyStar will be delivered in coming weeks and starts to operate in November, but we will come back to the question of the Star in the near future.

Are you satisfied with the passenger and cargo numbers on Helsinki-Stockholm routes?

Yes. Actually, Helsinki-Stockholm were very good during the summer. In July, we reached almost highest passenger number for Silja Serenade and Silja Symphony. So the route recovered very well. At the same time, we need to take into account that some markets are closed. So in normal years, if we say that the normal years were before the COVID, we had many passengers from Asia. So at the moment, we are satisfied. There has been also a change in the market as we are only operator who operates daily departures from Helsinki to Stockholm and Stockholm to Helsinki. So we believe that -- this benefits us as well. And at the moment, we see quite good demand for that route and for the both vessels. So we plan to operate Helsinki-Stockholm throughout the year with 2 vessels.

So what are the outlooks for the winter right now in terms of reservations?

All the reservations coming in very late as we have mentioned also during last time when we had webinar that it has been changed quite a lot because people making the decisions in the last moment. It's a question of the geopolitical situation. It's, of course, a question of the inflation. But we believe that high inflation can be benefit for Tallink because people want to travel still, but many of them can't go any more maybe somewhere far. So they are coming to travel to closer countries. And actually, this has been the case during the last big economic rise 2008 to 2009 when the Tallink passenger numbers increased and Tallink launched during that time, the shuttle service. So of course, the passenger numbers generally will be much lower than 2019, but we need to also take into account that we operating less vessels in our own routes. So the comparison as the Margus and Harri also have said with the previous years doesn't make any sense right now. We should compare vessel by vessel basis only. But at the moment, we believe that fourth quarter, if there are not coming NAV, geopolitical changes more or some other political decisions which can restrict free traveling, then we don't see any major problems for the upcoming winter season.

Next question is, what is the financial headroom after new loan for MyStar? Will the covenants be triggered and how much losses company can bear before new equity is needed?

Yes, we believe we will not have problems with covenants also after MyStar new loan. And as we announced today, profit tell us, and we also not looking right now the new equity. So we are on our way to recover. We have started to pay back all the loans. So yes, at the moment, we believe we will meet all the governance which needed and not planning to find the new equity. [

What is the expected interest cost level in 2023?

It definitely will be higher compared to 2022. Also the big part of it is MyStar loan will join the company. But we don't want to predict at the moment the exact cost because EURIBOR changing quite quickly the political decisions, which kind of like -- kind of like how the impact to the central banks as well, they can be changed very quickly. So I think it's not very good yet to start to predict which will be exact interest cost for 2023.

Are there any fuel hedges currently?

No. We don't use the hedge right now. We have ongoing tender right now for the next year fuel suppliers. But currently, we haven't hedged, but definitely we will have a possibility to hedge when we think that it's a good time. But at the moment, we're working on the market price.

I believe the next question was already addressed, but I still read it out. How does consumer demand look like for Q4?