AS Tallink Grupp (TAL1T) Earnings Call Transcript & Summary

Good afternoon, dear listeners. Welcome to Tallink Grupp Investor Webinar introducing the financial results of the first quarter 2023. My name is Anneli Simm, and I'm the Investor Relations Coordinator for Tallink, and I will be moderating today's webinar. Today, we have 2 presenters, Chairman of the Board of Tallink, Mr. Paavo Nogene and the Member of the Management Board, Mr. Harri Hanschmidt. First, we will start with an overview of the first quarter and then proceed with the Q&A. We have not received any questions prior to this webinar. So in case you did sent the questions, and we have not received them, please post the questions on the Q&A section of the slide event. I will now give the microphone -- I will now hand over the microphone to Mr. Harri Hanschmidt, who will give an overview of the first quarter results of 2023. Thank you.

Thank you so much, Anneli. My name is Harri Hanschmidt, I'm a Board member for Tallink Grupp. And I will introduce you the first quarter results for this year. But first, a little bit for the new listeners and reminder, Tallink Grupp is the leading European provider of leisure and business travel and sea transportation services in the Baltic Sea region. We offer passenger transportation and cargo transportation as well as leisure cruises on the Baltic Sea between Estonia, Finland and Sweden. Tallink Grupp owns and operates fleet of 15 vessels. Today or in the first quarter, 6 of these vessels were chartered out. We operate on 6 ferry routes. Currently, we have one of these suspended Riga-Stockholm route. We also operate 4 hotels in the first quarter, the Tallink Hotel Riga was still closed because of the COVID pandemic effects. And then -- but now in April, reopened the hotel. Last year, our revenues were over EUR 770 million. We transported 5.5 million passengers over for 100,000 cargo units with the EUR 1.7 billion asset base, mainly the vessels. We had about 5,000 employees in the end of first quarter and our loyalty program, Club One had over 3 million loyal program members, and it is one of the largest loyalty programs in the region. We have almost 40,000 shareholders and are listed on Tallinn and Helsinki Stock Exchanges. We operate 2 strong brands, the Tallink and the Silja Line front. In the first quarter, the key developments we saw were that consumer and business confidence in home markets has started to improve compared to the all-time low that it was in September for basically the whole region or the 3 countries. There has been a slowdown of increase in global fuel and energy prices, although the levels remain quite high compared to the pre-pandemic. Right now, we have seen stability and even some decrease in fuel prices as well as food products and materials. We are in a rising interest rate environment, and this means a direct effect to the costs for our floating loan portion that is tied to the EURIBOR. The geopolitical situation and ongoing war in Ukraine has a direct effect on our business. We are missing different passenger groups and Asian passengers have not returned yet as well. The main events in the first quarter were the extension of 2 short-term charter agreements, one with government of -- or the authorities of Netherlands for Silja Europa. That is extended until June 2023 and the vessel is chartered out. And as well for the Cruise vessel Galaxy until October 2023. We signed a new collective agreement with Estonian Seamen's Independent Union for the next 4 years. And this means there was rise in salaries, at least 13.5% for the servicing personnel and 16.1% for the technical personnel that was already implemented in 1st of February this year in the first quarter. Numbers for the first quarter are as follows. We transported 44 -- 5.7% more passengers. So in the first quarter, we transported over 1 million passengers, 86,000 almost 87,000 cargo units, that was slightly down, but we have also less capacity on the routes for the like-for-like period. And the number of passenger cars was up 12.3%. And this is with the recovery. And in the last year, we still had COVID effect. So now we see an increase of demand and obviously, no restrictions anymore. Cargo -- the charter revenues increased by EUR 27.5 million and are due to the 6 vessels that were chartered out. Cost of sales also increased by 16.2% to EUR 20.4 million and fuel costs decreased by 6% or by EUR 1.7 million. This is not only the effect of lower fuel price, but also we consumed less fuel because of the vessels chartered out. We had a capital expenditure of EUR 11.5 million. This was mainly for the 3 vessels, Silja Serenade, Silja Symphony and Baltic Princess that are altogether chartered and the repair works for 45 days. Also, we had some investments into the IT systems and shore power systems of Megastar. The bridge chart shows that there was an increase from EUR 106 million to EUR 171.2 million. Majority of the recovery gain from the income from chartered vessels and restaurants and shop sales on board, also ticket sales and accommodation sales showed a positive increase. And cargo was slightly negative. Restaurant and shop sales increased because of a higher number of passengers, but also due to a good level of spending on board. The ticket sales, we have dynamic pricing in place, and also, there was higher demand. We also received MyStar and ship has started operating between Tallinn-Helsinki together with Megastar. And in the first quarter, Star also was in the operation. The cargo environment is always highly competitive. The revenue development for the geographical segments, we can see also others, mostly the chartered-out vessels, EUR 32.5 million. The biggest operational revenue came from Estonia-Finland, EUR 16.1 million and from Finland-Sweden EUR 10 million and Estonia-Sweden increased by EUR 7.1 million. Regard seasonality breakdown, we can see that now since 2020, we have -- when the crisis started, we have been gradually recovering on the passenger level. In 2020, we had 1.6 million passengers, but this quarter was already affected by COVID in 2019, we had, I believe, almost 2 million passengers in the first quarter. Today, the level is just above 1 million. Cargo units 87, quite the same level. But on the revenue level, we have already reached the 2019 level. It was EUR 179 million in 2019. And this quarter, we already had EUR 171 million in the first quarter revenues. And EBITDA, EUR 27 million is already a better result than in 2019 and a very solid start to the first quarter. The seasonality level, first quarter is our low season. We have the most servicing days of the vessels. And this time, we can see because of the supporting effect of the charters, quite strong first quarter with a net loss of only minus EUR 5 million. Typically, the net loss has been much higher past year minus EUR 40 million, for -- in 2020, it was minus EUR 30 million. So I think it is a very nice start to the year. The EBITDA was EUR 27 million in the first quarter, and this means that the EBITDA margin was 15.8%. We had a positive operating cash flow of EUR 26 million. The capital expenditure was EUR 12 million. So we ended up with a free cash flow of EUR 15 million and paid back debt about EUR 25 million. This is a net effect of the financing and interest rose as there is a higher interest rates from EUR 6 million to EUR 8 million on a year-to-year basis. So in the first quarter, we ended up with a negative EUR 18 million cash flow. Our net debt-to-EBITDA is today 4.2x. And today, our CEO, Paavo Nogene has said that comfort level starts from 4. So I'm happy to announce that we are quite close to the comfortable level of the balance of the earnings and net debt. So all together, net debt is EUR 735 million, equity/asset ratio of 42%, and the book value was EUR 0.94. Altogether, the interest-bearing liabilities amounted to EUR 831.8 million. We have EUR 726 million today, long-term debt and have not used the overdraft. Our debt is structured into 7 loan agreements and outstanding syndicated loans, amortizing project loans, this is basically the new vessels and working capital loans with maturities ranging from 6 months to 12 years. The loans are in euros. And some of them are fixed and some are EURIBOR floating, amortizing or the new vessel loans tend to be fixed loans. Overdrafts, we have EUR 135 million available, but these are not used. The events after the reporting period and outlook, well, we have done a long-term bareboat charter agreement with the Canadian entity, Bridgemans Floatel/Bridgemans Services Group. We have had positive chartering experience with Bridgemans before when Silja Europa was chartered out and passed through Australia. The long-term bareboat charter agreement with the Irish Continental Group signed chartering the shuttle vessel Star. And here are also the date Isabelle is -- will be chartered from 1st of July to a multiyear charter agreement includes a purchase option. And the vessel Star charter agreement was signed for 20 months with the possibility then to extend it by 2 years plus another 2 years. The charter agreement for the cruise vessel Victoria was extended until 15th of July 2023. Tallink Hotel Riga was opened after 2.5 years, suspended operations for the end of April. And we changed a flag of the vessel Galaxy and now it's called also Galaxy I. The change from the Swedish flag to Latvian flag will give us more flexibility in the future. Due to the -- altogether 6 charters, we have started a collective redundancy process of up to 400 crew members in Estonia and up to 100 crew members in Latvia. Thank you from my side. I will give word to Paavo Nogene, who will maybe say something as we see today, there are no questions yet.

Yes, good afternoon also from my side. Harri Hanschmidt gave a good overview, but I just want to add that Tallink's first quarter has ended and we are -- we have every reason to be satisfied with the results for that quarter. Historically, the first quarter has always been the low season for Tallink and to achieve the best first quarter ever after 3 crisis years is a good outcome both for us as well as our shareholders. We have laid a strong foundation for the next quarters of this year, and we achieved this result, thanks to strong cost control. The changes we implemented during the crisis, resulting in a slim fit Tallink, good ticket and onboard sale revenues. Very importantly also by having the most optimum number of vessels on the routes, most suitable for them and the profitable chartering -- profitable chartering of 6 of our vessels to carry out various projects across Europe. All these factors have helped us achieve the best quarter 1 results in our company history. And I thank all my 5,000 colleagues who has been part to sail Tallink through the different crises and helped us to reach now this kind of like historical result of the company. And I see that we have also now some questions. So, Anneli, we'll present the question, and I'm going to answer them.

The first question is how significantly lower is the profitability for long-term chartered vessels compared to short term?

Long-term charter vessels having the long-term impact to our results and also a positive result for our results overall. Short term are always short term, and they can be -- of course, their profitability is better, but it's always more difficult to bring vessels back to the core routes to start hiring again the crew and all other implementation costs. So let's say that by end of the day, the result can be kind of similar with the long-term bareboat compared with the short term time charter.

How big will be interest cost for 2023, if EURIBOR would remain at current level?

You have seen our first quarter results now about the increase of the interest rates, and you can calculate this yourself.

Next question is actually includes 4 questions, but let's start with the first one. Any indications of extending the short-term charter agreements post-summer periods?

Yes. Sorry, I had some technical issue. We are in negotiations. And our partners have certain dates when they need to declare prolonging the contracts or not, we will let all our investors informed after the -- after we have more information. But at the moment, currently, as already mentioned, Victoria is extended till 15th of July, Galaxy till October and Silja Europa till mid-June. But in coming weeks, we have most probably more information.

It looks like you have lost some market share on the Tallinn-Helsinki routes. Could you elaborate on that, please?

Yes. We don't operate Silja Europa at the moment. This is also the reason why the market share is a bit down. If you add -- just to give some numbers, Tallinn-Helsinki route was in first quarter, all operators together in level around 79% from 2019 levels. If we had -- this is actually if we use the similar vessels operating now and operated then, Silja Europa carried first quarter 2019, 266,000 passengers, which have a big impact to the market share. But we don't feel at the moment that it's possible to operate the Silja Europa in profitable basis at the moment. It can be profitable only during the summer time. And most probably maybe 1 or 2 months in autumn. But if we can, we would like to keep the Silja Europa still in charter at least until next year. But as I said, we are very flexible if they're coming up some news in coming weeks or months.

What's the planned CapEx for this year?

We have limitations in our loans we took during the crisis period. So we can't invest more than EUR 30 million. So all our CapEx investments are planned with this rule. And actually, the most significant CapEx has already done as we had several docks in the first quarter. So there are not many big CapEx investments coming up later. But yes, one vessel still actually maybe 2 vessels going to dock second half of this year. It depends again also how the charter agreements will go into end or prolonged.

Any plans for fuel fixing?

The fuel market is very volatile. We haven't fixed any fuel prices at the moment. We're monitoring the situation on a daily basis. We see that there can come some good momentum to fix some LNG price, but we are not there yet. And what has been changed quite significantly at the moment compared with the pre-crisis or pre-COVID times is that logistic cost for the bunkering the fuel has increased almost 2x, which means that we need to take this into account also when going to fix the prices. This is also maybe the question we're receiving quite often that market price for fuel has gone down and why you still have the fuel surcharge for the tickets. But the reason behind that is that logistic cost for the fuel bunkering has increased because the fuel coming from other destinations compare the pre-COVID period. So fuel cost is high for the maritime sector this year, and mostly will also next year. But if they're coming, some good momentum to fix in the reasonable level, we are ready to do that, but we haven't done it yet.

Do you see that due to chartering of several ships, the cyclicality of results of Tallink is much smaller going forward, Q1 and Q4 are not so weak, but Q2 and Q3 will not be as strong as in good years.

Definitely. There are a bit -- yes, small differences this year because our results most probably more stable throughout the year. And we don't have maybe still be hike in July. But most probably, it will affect only the month of July because not the June or August. But yes, let's see how the second quarter and summer comes, but there are some impact for sure. And if we are able to extend contracts longer, then we -- most probably we'll see also a very strong fourth quarter compared to the previous periods. But as with the previous question, we are not there yet.

How would redundancy of 500 employees impact costs in 2023 and 2024?

Difficult to say. It depends with what -- with which level capacity we are going to operate. Actually, this 400-plus crew members is size of Silja Europa size vessel crew. So definitely, the redundancy have a short-term impact for the results. But long term, it depends, are we going to add capacity to some routes and with what kind of level of profitability this will be. I have said somewhere that we take it very carefully to add the capacity because tourist sector hasn't recovered yet for the levels we hope. And example, we operate in at the moment, the Tallinn-Stockholm route just with one vessel only. If we would add second vessel today for that route, both vessels will make loss instead profitable one vessel at the moment on that route. So also the redundancy impact for the costs long term depends actually how much we have with the capacity we operating ourselves.

Can you comment on how bookings look for the Q2 spring season? And how is the load factor in yield versus 2019?

Bookings looks good. Definitely, we are not going to give today the information about April, May and June. But recovery is still ongoing. We definitely will not see this year the numbers of passengers we saw in 2019, but this is not also the goal to us. Our goal is to have all the vessels we're operating, operate in profitable basis. At the moment, we are happy to say that all our vessels operating or are chartered out are profitable. This is the most important to keep the business sustainable. And yes, it's bookings coming in very last moment still. And for shuttle service, we can sell 1,000 tickets for tomorrow, example, or 500 tickets for today. So it's -- it depends about different factors. But let's say that if we were a bit worried a few months ago regarding the very high inflation rate in Estonia, example for our big home market Finland for traveling to Estonia, then Estonia and Sweden have higher inflation rate as well. Estonia is already again cheaper. So it depends on different aspects, and it's quite difficult to predict. But our main goal is to have all the vessels profitable and this is what for what we are working.

With traveling activity recovering, why the marketing expenses are approximately 50% lower compared to pre-pandemic level compared to Q1 2019?

Because our team making much more efficient work and better work. And this is the result. We have very tight cost control. We try to -- that we have achieved a much better marketing results already second part of last year, and this is ongoing. So we get back from every euro we spend in marketing more than before.

I believe this question was partly at least addressed before, but what are the estimated savings from the planned layoffs on an annual basis? And when will they start to kick in?

Yes. I already answered this. But if the -- if we operate in the autumn, same number of vessels we are doing now, in that case, the redundancy effect will come from results of month of September. But before because we use majority of these people during the high season and the redundancy process we started will end by end of August.

You mentioned that leverage at 4x is your new comfort level. What implications will this have on capital allocation once that level is reached?

Yes, we have said that comfort zone is 4x, but of course, we hope that we can be -- we can achieve also the better result. Our priority is at the moment to pay back the loans because the interest rates are reasonably high. So we have paid already, if you take a look to net debt by end of the first quarter this year and net debt by end of the quarter last year, and we have actually delivered MyStar. And we are below the net debt level compared to last year first quarter, it should show to all the investors that we try and pay back as much loans as possible, and we plan to do it also this year. So [ 4.0 ] is just comfort, but it's not the best we can achieve and we work for better achievement.

Any comments on how do you view the impact of changes in Estonian taxation on international and Finnish tourists in long term?

Let's wait until they implement the decisions. It's just started the discussions. Government hasn't sent any document yet to Parliament. Parliament hasn't started the discussions. It's hard to predict. And it's also a question, what kind of changes are going to implement new government of Finland. So we always need to look these kind of like together because both government new ideas having the possible impact -- positive or negative impact to our business model.

And a follow-up question regarding marketing cost. Is such a decrease in marketing costs sustainable? And what is the outlook for next quarter marketing costs?

Next quarters, of course, are a bit higher because we expect also more passengers, and we need a bit more invest into marketing as well. But I believe that the marketing cost per packs will be kind of same level or even lower. But let's see how it goes.

That was the last question we had. Hopefully, we addressed all of them. Thank you, everybody, for attending the quarterly call. We will hold another one for second quarter 2023 on the 27th of July. Thank you, and have a nice day.