AS Tallink Grupp (TAL1T) Earnings Call Transcript & Summary

Good afternoon to all of those who have joined us today. Welcome to Tallink Grupp Investor Webinar introducing the Financial Results for the Second Quarter of 2023. My name is Anneli Simm, and I'm the Investor Relations Manager at Tallink and will be moderating today's webinar. Today, we have 3 presenters, the CEO of Tallink Grupp, Mr. Paavo Nogene; and 2 Management Board members, Mr. Harri Hanschmidt; and Margus Schults. We will start this webinar by giving an overview of the second quarter results and then move on with the Q&A session. We have already received a number of questions prior to this webinar. However, it is possible to ask questions also during the webinar. We would kindly ask you to send an e-mail to investors at tallink.ee for those questions. Unfortunately, our chat function at the moment is not operating on this webinar. I will now hand the microphone over to Mr. Harri Hanschmidt.

Thank you, Anneli. Hello. My name is Harri Hanschmidt. I am Management Board member for Tallink Grupp, and I will give you the short overview about the second quarter results. After which, I will give over to Margus Schults, who will continue with the presentation. So we have a little bit -- changed the first slide. We will talk about the latest numbers and also the year-to-date facts before we also used to give a view to the last year, but I think this information is available for everyone, and we will not repeat ourselves that much. So Tallink is the leading European provider of leisure and business travel and sea transportation services in the Baltic Sea region. We own and operate the fleet of 15 vessels out of which 7 are currently chartered out. These vessels we operate on 6 ferry routes. We have one suspended ferry route, the Riga-Stockholm route. We also operate 4 hotels, 3 in Tallinn and one in Riga. We have strong brands, the Tallink brand, the Silja Line brand and also our ClubOne loyalty program. In the first 2 quarters, we had a revenue of over EUR 400 million and transported altogether, 2.6 million passengers, also 172,000 cargo units. We have a EUR 1.6 billion asset base, and this is mainly the vessels. We have over 5,000 employees and 3.1 million loyalty program members -- ClubOne program members, and this program is constantly growing. We have about 39,000 shareholders, 30,000 on the Tallinn Stock Exchange and about 9,000 on the Helsinki Stock Exchange. So the key takeaways from the second quarter are as follows: The volume of cargo and passenger transportation was definitely impacted by the different charters that we have done. All together, 7 vessels were chartered out. And we had about 18% less trips and this needs to be taken into account when looking at the volumes for the second quarter. In the second quarter, out of these 7 vessels, 3 were on the long-term charter and 4 had a short-term charter contract. All 4 hotels are now operating. We opened again the Riga Hotel and we had an EBITDA of EUR 68.5 million, and this is a very strong result and good recovery from the previous year or compared to the previous year. We also paid back EUR 105 million of loans, and this is not the scheduled amortizing loans, but rather repayment of the postponed loans from the COVID time, and that was possible because of good cash flow generation from the company. The fuel prices have gone down, but unfortunately, some of this is set off by higher logistics costs. And as we can see, still we are in high interest rate environment and in an inflation environment and this inflation, we feel all around. We opened 6 Burger King restaurant in Riga, and now we have 19 restaurants together in the Baltics. The Tallink Spa and Conference Hotel, Tallink City Hotel were certified with the International eco-label Green Key. As we have quite many charters and these contracts are as well changing. So in the second quarter, we had 3 long-term charters now starting from first of July, the vessel Isabelle is also on the long-term charter. So now we have altogether 4 long-term charter contracts and 3 short-term charter contracts. Overall, here are the 6 routes. Tallinn-Helsinki, we have MyStar and Megastar, this is our shuttle route, all the other routes are the cruise ferries that are operating on the Baltic Sea, and we have the Baltic Sea Kapellskär cargo route. The second quarter overview, we can see a slight drop in the passenger numbers. So basically, this level remain the same. But here, I would like to remind that we had 18% less trips. So we can see that the utilization of the vessels definitely improved. The number of cargo units went down by 22%, and the number of passenger cars rose by 5%. We ended up in about -- with about EUR 230 million revenue that is 11.5% higher than in the second quarter last year. EBITDA went from EUR 28.7 million to EUR 68.5 million and from minus EUR 0.7 million net result we went to the profit of EUR 33.4 million. The total assets were EUR 1.6 billion and net debt was EUR 664.9 million. As mentioned, the fuel cost decreased. And here, we have it also in a number, the fuel cost decreased to 47.9% or EUR 20.6 million versus last year same time. We had EUR 4.7 million capital expenditure. Typically, these are the investments to the maintenance of the vessels, IT investments and also we opened this one Burger King restaurant. So generally, we see a good demand for tickets and this is driving the ticket revenue and also the charters increased by EUR 19.6 million and also a strong recovery in the hotel segment. Cost of sales decreased by 9.6%. From a different perspective, the revenue development by the operating segments, we can look at as a bridge view. And we can see that higher demand for tickets and traveling has driven the ticket sales by and then we generated EUR 9.6 million more revenue. Restaurants and shop sales went down by 2.9% and sale of cargo -- EUR 2.9 million and sale of cargo EUR 2.7 million. Accommodation sales went up by EUR 1.1 million and the income from charter vessels went up by EUR 19.6 million, ending up with about around EUR 230 million. The revenue development by geographical segments, we can see that from the operational side, Estonia-Sweden route at the highest increased by EUR 5.1 million, followed based on Estonia-Finland, EUR 1.9 billion. And Finland-Sweden saw a decrease of EUR 6.3 million. And the other segment that is basically the charters, saw an increase EUR 23.6 million. Well, this is everything from my side, and I will give over to Margus Schults, who will continue with the dynamics of the seasonality. Thank you very much.

Good afternoon also from my side. My name is Margus Schults, and I'm Group CFO. Yes, on this slide and on the next slide, you can basically see 3 things. You see the normal year -- last normal year 2019 volumes, revenue and EBITDA. And then, of course, the results of 3 crisis years and then with a blue ones '23 half results. And the blocks in each year indicate quarters. So you can see very clearly that we have had in Q1 the lowest season, we also have scheduled all the dockings to Q1 normally and therefore, the volumes in terms of passengers are lowest during the whole year. From Q2, of course, the number of passengers are starting to increase and this year, we are very happy to see that Q2 passenger numbers were almost on the same level than last year, although we have much less capacity operating on Baltic Sea. Cargo revenues are about 20% down reflecting 2 things, about first, it's, of course, a reflection of reduced capacity, where we have chartered out different vessels, but we can also see that the whole market have been shrinking a little bit, not much. And it, of course, is a reflection of the economic slowdown for instance, constructing materials transport to Sweden has been reduced quite a lot because a constructing sector in Sweden is almost sized. And then the second thing, of course, what you can see from this is that we have a lot of fixed costs. So the number of passengers and revenue are correlating very much with each other, but when it comes to EBITDA level and on next slide, the net profit level, you can see that the results are done when the passengers numbers are high. And from a certain level, the result becomes negative as fixed costs are there. So yes, as it has been said, we have now cumulatively revenue over EUR 400 million, which is almost the same as the whole year during the crisis and EBITDA, EUR 96 million already after two 1st quarters. And if you come to net profit levels, then you can see the dynamics even more dramatic between the quarters. So typically, we made before COVID first quarter negative result. As I said, it's dependent are on to low seasonality where passenger demand is lower and also due to the docking, so many vessels are normally docked during the first quarter. And then we made a small profit in 2019 on second quarter and then the most of the results are done during third quarter. Now as you can see, the cash flow and the results are much more stable due to chartered vessels. So we don't have the burden of some of the routes, which may be enduring low season make weaker result comparing some other routes, which are stronger. So basically, we have ended the first half of year with a negative result. As you can see, cumulatively, it was minus EUR 10 million in 2019. And now after many, many years, we have ended the first half of the year, cumulatively, with a positive result, plus EUR 28 million. And on income statement, several things already are mentioned. So we have increased sales comparing last year, the same period, about 11%, and EBITDA has been increasing from last year already 2.4x. So it means that also EBITDA margin has improved more than twice. And like I said, a negative result in Q2 last year, but this year's result was EUR 33 million for Q2. On cash flow, maybe it has -- good to mention that or highlight that on operating cash flow, we had very good strong result, EUR 84 million. Capital expenditure is minor, the normal capital expenditure during these years has been related to the repayment of vessels, but also some IT costs and opening of Burger King restaurant. And as Harri already mentioned, then we have paid back during Q2, quite a substantial amount of deferred loans. So the total debt financing on net level was minus EUR 110 million. And also the cost of our funding has been increasing during this year. So the interest cost has been around EUR 9 million. And financial position on asset side, we have our -- mostly our vessels assets. And I just remind you that during December 2022, we got MyStar's delivery, which means that we increased our asset base, but also we got and withdraw the loan related to MyStar. So from June '22 until December '22 this is a major reason of the change. And then from December '22 until end of June '23, we have started normal depreciation of all vessels, including MyStar and paid back as interest-bearing liabilities. And improved -- as a result of improved EBITDA and also decreased net debt, we have now reduced the equity to -- sorry, net debt-to-EBITDA ratio from 5.4% at the end of last year to 3.1%. And also our liquidity has remaining strong. So we can -- in spite of paying back deferrals quite extensively during Q2, we had total liquidity, which includes the cash and unused overdraft EUR 193 million. And our current loan portfolio basically is that we have EUR 620 million of different long-term loans and unused overdrafts in the amount of EUR 135 million. Total number of loan agreements is currently 7 and these are including the working capital amortizing projects and syndicated loans to maturity is different some smaller loans we lend this year, but the maximum amount of maturity is 11 years related to MyStar and these loans include both fixed rate loans and Euribor-related loans. And on the right side, as I said, you can see it's a dramatic move of net debt-to-EBITDA ratio. So due to very weak EBITDA, it was very high during crisis year, but now basically with 3.1% after Q2, it has been reaching the level which we had before COVID crisis. This is all from my side.

Thank you, Harri, and Margus. We will now move on with the Q&A session. Again, those who would want to ask questions now, please send an e-mail to Investor tallink.ee. I will read out the questions we have received so far. And Mr. Paavo Nogene will be addressing the questions. The first 1 is, does Tallink consider investing in online sales in a similar way as Amazon [indiscernible] or other similar entities?

Good afternoon also from my side before answering the question. I would like to state that this we had a very strong second quarter, and I'm grateful for all more than 5,000 employees who are working in Tallink and Silja line to helping bring Tallink back to the profitable side, since we have had actually 3 years quite a tough period because of different crises. And the answer is that, yes, we have had discussions -- different discussions how to develop our Webshop, but currently, we will use our own version and focusing for other businesses more like our core routes and profitable and efficient operations at the sea. So we are not planning to make changes at the moment in our Webshop.

Is Tallink considering opening drive-in Burger King restaurants or opening any new Burger King restaurants in 2023 or 2024?

Yes, actually, we have already some drive-in Burger King, but at the moment, our focus is to get the Burger King gain profitable. So we're focusing for profitability. And we're opening new restaurants only when we see that it's profitable, and we see potential in different locations. So we are not going to focus especially for the drive-in versions because sometimes these are not enough profitable compared to others.

Why are the shipping companies concerned about the safety of electric car batteries?

Yes. Actually, we have special attention for the electric cars over the years. So our crews are trained. We look carefully where we park the electric vehicles. And of course, this is the future kind of big amount of cars are already the electric cars. But as I said, this is already years for us, a regular day basis work to make everything possible to have car deck as safe as possible.

Any indication of what the restaurant and shop sales Q2 growth rate was adjusted for Silja Europa or perhaps you have a like-for-like restaurant and shop sales growth for Q2?

We don't share so detailed information, and I just want to state that the difference is not only the Silja Europa difference is also Galaxy, which operated a year ago in Q2.

Any indication of what the [ pack ] Q2 growth rate was adjusted for Silja Europa, I guess it's already answered, but...

Yes. I can say that in Q2 last year, the Silja Europa and Galaxy transported more than 250,000 packages. This is what we have said already and this is what we can say now as well.

In terms of seasonality, shall we expect Q2 and Q3 to be roughly the same? Or is Q3 is still significantly better than Q2?

Dear investor, this we will share 26th of October.

Given that the net debt-to-EBITDA is 3.1%. What are your thoughts on dividends this year?

As said, we focus now to start to pay the dividends next year if everything goes right direction. I will find. At the moment, we can say that the situation is very stable and we are recovering. But of course, to make dividend -- to pay dividends or not to pay, we need to make the decision next year when the time is there, we can also say that. At the moment, we don't have plans to pay out any dividends this year. We are more focusing to lower our debt to not pay too much interest rates, so to be the sustainable dividend player -- payer in the future.

What is the progress of the redundancy program announced in last quarter? When will it be implemented? And what are the expected annual savings?

Redundancy will end when the low season starts. So it's in September. And the exact number we can't give out. It depends of different factors.

Has there been any improvement in the flow of passengers from Asia?

Yes, there have been some improvement compared to last year, but we need to also understand that the last year base was very low. So of course, it takes several years to get back to the passengers numbers from Asia, we had before the COVID started. So yes, we see Asians on board of our vessels, but it's quite a small number still, and this needs actually more flight connections between Asia and Europe to have also more passengers on board of our vessels.

Could you comment on the status of fuel price hedging?

We have hedged some part of LNG, and this is what we can say.

Could you please provide an update on the current charter status of Galaxy 1? Is the chart expected to be extended until the end of the year? Or are there plans for the vessel to return to the Baltic Sea. Additionally, is there a decision on whether the Silja Line text on the side will be restored to display Tallink crews or Tallink branding?

Currently the Galaxy is charted out until mid of October. And when they're coming up some new news, we will also share with our investors. And no we haven't discussed change the branding on the vessels at the moment. It depends also where and what kind of work Galaxy are going to do after charter or after extended charter or, et cetera, et cetera, et cetera.

Is there any official information regarding the speculation among Baltic Queens workers about potential cancellations of all Stockholm cruises from September and the complete closure of the routes?

No. Actually, Baltic Queen is going to dry dock for 2 weeks in September to improve the efficiency of the vessel before the emission rating system will be applied to the maritime sector. So the Baltic Queen will return to Tallinn-Stockholm route on 15th of October and as I have personally tickets for that departure. So definitely, the vessel need to be back and start operations between the Stockholm again.

Thank you. Well, for using the Dutch news, I came across information stating that Silja Europa will be charted away until 2025. Would it be possible to provide insights into the reasons behind this decision if it's real.

Currently, Silja Europa is chartered until end of December when there are some new news, we will let all the investors now.