AS Tallink Grupp (TAL1T) Earnings Call Transcript & Summary

Good afternoon, dear listeners and participants, and welcome to the Tallink Grupp Investor Webinar, introducing the Results of the Fourth Quarter of 2022 and Full Year 2022. My name is Katri Link, I'm the Communications Director of Tallink Grupp and the moderator for the webinar today. Here with me to share with you the most recent financial results and updates from AS Tallink Grupp are Tallink Grupp CEO, Mr. Paavo Nogene; Member of the Management Board of Tallink Grupp, Mr. Margus Schults; and member of the Management Board of Tallink Grupp, Mr. Harri Hanschmidt. As usual, we will first go through the presentation. We have prepared for you on the key financials and updates, and after that, we will also answer your questions. Some of them you have sent to us ahead of the webinar, but you are, of course, also welcome to ask questions in the chat function of this webinar during the webinar as well. Since everyone's time is precious, I hand the microphone over to Mr. Harri Hanschmidt.

Thank you so much, Katri. Hello from my side. My name is Harri Hanschmidt. I'm a Management Board Member for Tallink Group, and as Katri has said, I will give you an overview about the Fourth Quarter and the 12-month unaudited results of the 2022 Financial Year for Tallink Grupp. First of all, a bit of a reminder, 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 15 vessels on 6 ferry routes. Currently, one of the ferry routes, the Riga-Stockholm route is suspended. We also operate 4 hotels and one of the hotels is currently closed since the COVID pandemic, the Tallink Hotel Riga. Last year, we saw a recovery from the pandemic and we achieved a result of EUR 771.4 million in revenues. We transferred 5.5 million passengers and also 410,000 cargo units. We are operating a EUR 1.7 billion asset base, and this is mostly the ships we owned and operate. In the end of 2022, we had about 4,900 employees. Our Club One Loyalty Program has 3 million loyal members throughout mostly the home markets. We are primarily listed on the Nasdaq Tallin Stock Exchange and have a secondary listing on the Helsinki Stock Exchange and altogether have nearly 40,000 shareholders. We operate 2 strong brands, the Tallink Brand and the Silja Line Brand. Key developments in the fourth quarter were as follows. The geopolitical situation and war in Ukraine that started in February continues to affect our business and our results in many ways. One of them is that we do not have passengers from Russia, from Ukraine, and Belarus, and there are many other factors as well. We have seen high inflation and high global fuel and energy prices. Basically, all the input prices have gone up, so have the wooden material costs. We have also seen an increasing interest rate as Euribor has risen multiple times. Consumer and business confidence has improved. It had an all-time low in September 2022, especially in Finland and Sweden. So basically, still all our home markets, but has now rebounded. The activities and events in Q4 were as follows. We amended in the restated EUR 280 million loan from December 2016. There was an extension of 2 short-term charter agreements, one with Estonian Social Insurance Board and the other with the Scottish government. And we finished MyStar, the new shuttle vessel, the new generation dual LNG or dual-fuel vessel was finally finished. We are very happy about it. MyStar started operating straight away in mid-December and right now, it is operating between Tallinn and Helsinki together with Megastar and Star. In fourth quarter, we saw a recovery and the year-on-year results, the percentages are obviously quite high because we are talking about a period where we had many restrictions and the pandemic was still full ongoing. It was just a year ago. Coming out from the pandemic, we see passengers have returned. We have 1.3 million passengers, 96,000 cargo units, and 175,000 passengers or cars transported. We had to be flexible in the pandemic and so we have had a chance to charter out altogether 6 vessels and the charter revenues grew accordingly and have increased by 156%. There was also a strong recovery in hotel shops and store restaurant segments. The costs have gone up. The cost of sale by 10.4% and fuel increased by 13% compared to the fourth quarter last year. In the fourth quarter, EBITDA was EUR 50.4 million and net profit was EUR 16.7 million. We had a capital expenditure of about EUR 180 million. This is mainly the loan that was thrown out when MyStar was delivered in December. We also have a bridge of the fourth quarter operating result by segments. We can see most of the increase of the revenues came from charter of the vessels; from restaurants to shop sales, and ticket sales, also some from accommodation sales. Revenue development by the geographical segments, we can see other revenues, EUR 24.5 million. This includes the charters as well, and we saw a revenue increase from Estonia-Finland, Finland-Sweden, and Estonia-Sweden, so all the routes that we operate on. We have a quarterly seasonality breakdown. Currently, we are comparing ourselves to the last year, 2021. Typically, I don't like to compare anymore to the 2019, but maybe the last comparison is that the seasonality has not really changed. We still earn most of our profits in the third quarter, in the summer months but because of the charters and a little bit more flexible business model. As we know, charters and cargo revenues are more stable throughout the year. We can also see on the EBITDA level that the third quarter and fourth quarter EBITDA was much more similar than, for example, in 2019, where the third quarter was much stronger than the fourth quarter. All in all, we are happy that we are back after 2 years of lossmaking in a profitable zone where we, for the whole financial year, earned a net profit of EUR 14 million. And the fourth quarter profit was about EUR 17 million. Thank you from my side. I would like to give it now over to Margus Schults, who will continue with the presentation.

Thank you, Harri. And yes, please to the next slide. So good afternoon also from my side. I would like to now maybe, first, to summarize 2022 figures and compare a little bit to '21. Of course, comparison to '21 or 2019 is very tricky. First of all, because of COVID in both years had a lot of ups and down and secondly, also because of the charters now in 2022. In the second half and fourth quarter, especially, we have quite a different situation with capacity, which of course, affects the number of passengers and number of cargo units. But yes, just to summarize, a year, 5.5 million passengers, which is almost double the number from 2021. Then we have a very strong increase in chartering revenue, 117%. Overall, we had a very good year in terms of income passengers for ticket as well as on board. We can see that people have willingness to travel and once they travel, they also willing to spend money. Of course, also, our costs have increased due to the increased volumes. So, the cost of sales increased by 45% and especially high is increase in the cost of fuel. Basically, the cost of fuel doubled since 2021. Of course, part of that is also a bigger number of vessels in operations. But on the other hand, like I mentioned already at the end of 2022, we have some vessel charter, which means, let's say, consume less fuel. Like it was already mentioned, the whole year EBITDA was EUR 136 million, which is more than double from 2021. And if you compare it to the last, so to say normal year 2019; in 2019, EBITDA was EUR 171 million. So you can see that we are very close to 2019 level in terms of profitability. And of course, we had last year quite a low first quarter and also relatively low second quarter. So if you take just the numbers from second half of 2022 and 2019, then basically 2022 level was only 10% below 2019 profitability levels. And like Harri already mentioned, we had delivery of MyStar in December 2022. The total cost of vessel was EUR 152 million. And of course, it means that the big part of the capital expenditure was done last year. So, it was totaling EUR 203 million. And as a result of delivery, our total assets increased to EUR 1.7 billion, and also our interest-bearing liabilities increased to EUR 850 million, and we have a net debt on a level of EUR 740 million. On income statement, on the left side, you can see the full year results. And on the right side, Q4 results, you can see that in Q4, income sales was totaling EUR 200 million, and for full year, EUR 771 million. Cost of sales, of course, increased accordingly with the volumes, but marketing costs and administrative costs, we kept under control. So, you can see that in Q4, basically marketing and administrative costs increased only by EUR 2 million comparing the year before. And yes, EBITDA, mentioned already, EUR 136 million, out of which EUR 50 million, so quite a substantial part came from Q4 2022. You can see EBITDA margin below. So basically the full year, a little bit lower result 18% margin was affected by the first half, but in Q4, we reached already 25% margin. Next please. We also published now our full year cost breakdown. You can see the cost basically different items of the cost and of course, increase in percentages reflects to the number of increased operations and higher number of passengers and cargo. But maybe highlighting 2 numbers. One is, again, administrative costs, the marketing costs, which increased significantly less than the other costs, only 20% to EUR 75 million full year, EUR 74 million. And then on the other side, flipside of the coin, is fuel cost, which basically doubled since last year and also in 2019, our fuel cost was EUR 90 million. So even we had more vessels in operations. So you can see that the high fuel cost is really what we have to deal with, but we have done probably good result and the bottom line, we have not been so much affected by high fuel costs. Depreciation and finance costs, of course, indicates that we have now MyStar in our balance sheet, which means higher depreciation and also bigger loan volumes. But of course, during the second half of the year, our interest rates also went up, Euribor and as we have part of our loan portfolio is floating rate, then, of course, our costs were also higher. Next, please. Our cash flow is positive basically in Q4. OE doubled the operating cash flow to EUR 57 million, which is about 1/3 of the full year operating cash flow, EUR 144 million. Capital expense sheet, again mentioned was related to delivery of MyStar. So in December last year, most of capital expenditure was done and the rest of capital expenditure was related to different dockings of our existing fleet and also development of Burger King restaurant as well as some IT-related projects. And basically, the change in cash has been positive for Q4 plus EUR 12 million. So we didn't have any share changes in share capital like we had in 2021. So share capital was on the same level as year before. Next, please. Our balance sheet is here. Our assets have increased now to the level of EUR 1.7 billion. These are mostly the vessels, what we have, and we have also quite healthy situation is liquidity and cash. So, we have a strong position to go forward. You can see that equity to asset ratio is also healthy. At the end of last day, it was on 42% level. So basically, you can say that our low portfolio and equity are almost on equal level. Net debt to EBITDA, which was very high on the COVID years has now improved significantly. Now the figure for year-end was 5.4%. But since it includes also very weak Q1 from 2022, then it's probably most likely that the ratio will be decreasing quite sharply. Next, please. Our loan portfolio as of the end is here, EUR 746 million of long-term loans. We have 7 different loan agreements, syndicated loan, and amortizing projects and working capital loans, and maturity is from 1 year to the 12 years extension for MyStar loan. All loans are euro-denominated, and some of them are fixed and some of them are floating-based loans. On top of that, we have all overdrafts in the amount of EUR 135 million, which was not used at the end of last year. Next, please. There are some events also which have been happening after the 31st of December. First, we are continuing to explore different options for chartering out of vessels, like Harri mentioned, the mix of key routes where we operate and chartered vessels have produced positive results. Therefore, we are willing to continue exploring different chartering opportunities. One of these examples is that recently, the current charter agreement for Silja Europa was extended by 3 months until mid-June this year. We also reached agreement to student trade unions regarding salary. There was some turbulence on the labor market but now we have reached an agreement and it means that for the next 4 years period, we should have peace with them and the ability to work in normal conditions. And then since we got the delivery of MyStar, we had to find new options also for Star vessel, and we see good opportunities on the Tallinn-Helsinki route where the volumes as the largest. We missed, so to say, light concept on that route and now Star started in the beginning of January to operate with a light concept, which means that we have a somewhat longer sailing time, which save fast fuel, of course. We have a limited number of services on board, which means lower cost of labor on board. But on the flip side, which is positive for clients, we have also lower-priced ticket. So once it started and we will see how to develop it further. It's too strong now with 6 weeks from the start of concept to make any thorough conclusions. So thank you. It's the summary from right side.

Thank you very much, Margus and Harri for this overview. Now, we have received some questions ahead of the webinar, and we will go through these questions. So first question, how does Tallink Management Board plan to make investing into and the acquisition of Tallink shares more attractive in the near future?

Yes. From my side. My name is Paavo Nogene, and I'm the CEO of the company. First of all, I would like to say that I'm very proud of my team, all 4,900 colleagues who have managed to sale back Tallink-Silja to the net profit after 3 years of very difficult crisis. It has been challenged, but we are back in the profit and we hope to keep it like this, and we are confident that we can do it if the world is not changing dramatically again. But our team is very flexible now and can find a way out from different crisis. Thank you all also for the question and answer would be that, as I said, we have had been in different crisis already 3 years, and we have adopted the business during the last 3 years, at least 2 times, Firstly, with COVID, which was survival course for Tallink-Silja, and last year, that business before, share price depends on results, and we believe achieving the positive net result last year shows good potential for company's future. So we hope better and better results will attract also more of our shareholders. And who will take a deep look into the Quarter 4 results, I understand probably how important is to have 6 vessels chartered out during the low season. And the low season in our company is fourth quarter, first quarter, and part of second quarter. So this combination helps us also during this year's first 2 quarters.

Another question we have received is when could we, the investors, expect to see the dividends that Paavo Nogene was talking about a year ago saying Tallink will be a dividend share in the future.

We haven't changed our dividend policy. The correct answer is that we would like to start paying the dividends as soon as possible. But first, it's important to pay back most of loans we took during the crisis period. We paid back last year more than EUR 110 million loans, and we will continue paying back the loans also this year. And on the other hand, when the Euribor is increasing, it's also important to lower our loan portfolio. So as soon we feel it's comfortable to start paying the dividends, we will do it, but we are not going to do it this year. Let's see how this year goes and then we can come back to this question next year.

Thank you. The third question, why doesn't Tallink send all stock exchange announcement to the Finnish Media immediately, in the Finnish as well, but at the same time, pay the Helsinki Stock Exchange for the listing.

According to our disclosure policy published on the company website, we currently publish stock exchange announcements in Estonian and English. All the media releases are always also shared to Finnish media and Finnish.

The fourth question, what has been the net profit from the chartering of the vessels? Rental profit compared to minimum vessel management upkeep costs such as salaries, fuel, port fees, et cetera.

All charter agreements are different and it depends what kind of service we deliver on board of the vessels. Is it just a technical crew and vessel or there is something more? And all contracts are also confidential. But what we can say is that all chartered out vessels earns profit.

Okay. Moving on. Could Tallink launch a new experimental route between Helsinki and Saaremaa, either in the summer or autumn if vessel returns from chartering.

We don't have such plan. As it has been calculated, it will not be profitable. We can't take at the moment such risk. And more one problem is actually report in Saaremaa, the location is not good for food passengers. So we are not planning to do such kind of experiments during the time of crisis.

Thank you. What is the Management Board's view of the share price by the end of the year 2023. Does the management board feel the share price is undervalued for no reason?

We believe that the Tallink share price is too low but as I said, we hope that with positive improvements we also launched today about the last year and the next reports about the coming quarters will have a positive impact also for the share price. But everyone can and must do their decisions themselves.

Thank you. The next question again about charters. 16% of the fourth quarter sales revenue came from charters, and 6 vessels out of 15 are chartered out at present. In case of charters, does the charter cover all the running costs? If not, then which of the costs are covered by Tallink?

As I said, all charters are different and all charters are profitable cost depends of services we give on board on the vessels.

Okay. Thank you. Please, can you bring out or state the end of term for the various charter contracts at present?

Yes. Currently, all the charters charter agreements like; the Superfast IX until May 2024, possible to extend; Romantika until March 25, possible to extend; Isabelle, June this year, possible to extend; Silja Europa, until June this year, possible to extend; Galaxy until April this year, possible to extend; and Victoria I, June this year and possibility to extend.

Thank you. Please, can you also bring out the various loan sums that the company currently has and their repayment deadlines?

We haven't delivered such information in very detail as we're always working to find the best solutions for refinancing also loans as soon as we think it's the best time. We have announced all loan agreements via the stock exchange report, and we do the same also in the future.

Thank you. And next question. What has the expected utilization rate been in terms of number of passengers, the total passenger capacity on a vessel being ordered for it to be better to move it from charter to traffic.

Actually, it's not depending only on the passenger number because it changes every month. It depends for example how expensive is the fuel and how much of the fuel expense we can forward to the customers. So this pax number, where is the breakeven level is changing daily basis, actually. We would like to keep -- if possible, we would like to keep at the moment for this year, this balance we have right now, which means that at least 6 vessels chartered out and the other vessels we operate ourselves. But this can change and we're making the decisions in a very flexible way if you really feel that some route need extra capacity, and we are confident that we reach a profitable level, then we can start routes. But otherwise, we try to find new charter agreements for vessels.

From a profitability standpoint, have you considered if it is better to keep the current mix of on-route and charter?

Yes, actually, I answered this just a moment ago. If possible, we would like to keep the balance at least 6 vessels chartered out.

Okay. The next question, what is the current level of fuel hedging?

We haven't hedged the fuel since 2021. The market is very volatile and in our thinking there hasn't been enough good levels to hedge. Of course, we look carefully what happens in the market. We have seen last weeks' quite good developments with gas price. We follow it very carefully. And definitely, if during next months, they're coming up some good possibilities to fix some prices, we will discuss it, but currently, we don't have any fuel amounts hedged.

Thank you. We have one last question that we have received, and this is how much will Tallink interest expense increase, if Euribor increases by 100 basis points.

Yes, we're not giving out this information. Yes, this is shorter the answer.

I can maybe a -- we will publish these numbers in our annual report when it will be available. In '21, this number was EUR 5.3 million, 1 percentage increase, but it will be published later. Thank you.

Okay. Well, thank you, Margus, for this explanation. Thank you, Paavo, for answering all the questions. This was all the questions that we received in advance. And just as a reminder, of course, you are always welcome to e-mail Tallink directly with your questions as well, and we will be more than happy to answer them also when it's not webinar time. So feel free to send your questions and we will answer them. But I think now we have covered all the questions. I hope that you have received all the information and answers you were hoping to get from this webinar today. The webinar presentation and the recording links will be shared later this afternoon. Also via the stock exchange so you are welcome to revisit the webinar if you want to do so. So thank you to Mr. Nogene, Mr. Schults, and Mr. Hanschmidt for the presentations and answers, and thank you to all our listeners for joining us today. Have a good rest of the day and join us again next time. Thank you.