Hapag-Lloyd Kreuzfahrten GmbH (TUI1) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to TUI Group's update conference call. [Operator Instructions] Let me now turn the floor over to your hosts, Friedrich Joussen and Birgit Conix.

So good morning, everybody, from Hamburg. It has been a busy night. And tonight, and I can say that it was anyhow, I think, a very successful night because we could sign our agreement with TUI Cruises and Royal Caribbean this morning. And therefore, I'm very happy to have you on the call. So short term, and thank you for being present just in before our results announcement in next week. So a couple of thoughts, after a couple of slides, and then we are open for your questions. First slide, it highlights our strategy again, which you all know, it is the same slide we showed in December. Just to recap, we want to defend our market shares and grow our markets in the market and airline business. So we will talk about that when we talk about the results. Then we have the bottom 2 boxes, GDN-OTA, Destination Experiences, our new digitalization opportunity. We are in the midst of digital transformation. We will become a digital platform company in the next years. And then we have what is today the core of the business, holiday experiences benefiting from vertical integration. You can recall, we always have vertical integrations, content-centric. We deliver premium returns and the contents will be scaled in the market. That is the strategy. Now historically, we have actually been going through assets and we have actually reinvested proceeds from actually our disposals and assets. We also have said, in the future, we'll be more asset-right. Asset-right means we invest when it's necessary on our balance sheet. And if it's possible, we will actually not invest, but be more asset-light. And the first step -- big step we are doing right now is in that direction is actually the disposal of Hapag-Lloyd into our joint venture, TUI Cruises. So it is in line with the strategy. What is the deal? We sell Hapag-Lloyd, which we operate 100% into the TUI Cruises joint venture for enterprise value of EUR 1.2 billion. When you think about Hapag-Lloyd, just 5 years ago, it was making losses. We try to find a buyer who would pay the book value. Unfortunately, we didn't find a buyer at that point in time. We have restructured the business. Now it's EUR 1.2 billion. The nice thing on top of that is not only we get the proceeds and deleverage the company through the deconsolidation of debt account to that. But also, we retain the profit pool of 50% for the future growth and synergies. We assume that this will be another EUR 300 million-plus value. So that will come on top of EUR 1.2 billion. The whole transaction is roughly debt-financed to be -- do a little bit of equity injection of EUR 75 million. Our piece here, and EUR 75 million, of course, of Royal Caribbean. Everything else is debt-financed in the company of TUI Cruises. The tax facilities of the company is strong enough to do that and to retain the dividends, which we have envisaged and looked. So therefore, that is very good and closing anticipated for mid-summer. Now when I look at the strategic and financial benefits, let's look at the strategic benefits first. TUI Cruises has been at extreme success. We, obviously, is the most profitable cruise company in the world, at least in the world, Caribbean world because they have comparisons. And of course, vertical integration is important because our sales power is very strong. The problem and the challenge and also, let's say, the positives on TUI Cruises not growing fast enough because their capacity is limited. That actually generates -- it's also part of the premium returns, but it's also limiting growth. At the same time, we had Hapag-Lloyd. Hapag-Lloyd was a German-focused luxury brand or German luxury and expedition brand. International expansion was always something we wanted to do, but it was a little bit risky because we don't have this international footprint and also the question of financing -- on balance sheet financing would have been initial. So the idea now is we put both companies together. The TUI Cruises will be growing because it can grow through Hapag-Lloyd and Hapag-Lloyd can grow because it has access to the international footprint of Royal Caribbean and that facility is which we have in free in Royal Caribbean. So it's a win-win and strategic. Both companies couldn't have been more for different reasons now grow. So the benefits we are leveraging here is that, let me clear that we keep the brand, product, marketing and sales. That is what our specialty is, and we use RCL shipbuilding know-how and global footprint. And because we get EUR 1.2 billion, we get access to the additional value, we keep our powder dry for digital expansion because we don't have to finance the growth in TUI Cruises, Hapag-Lloyd Cruise because that will be done in TUI Cruises joint venture. Now on the financial side, and it's also very attractive because EUR 1.2 billion is a very attractive size. Particularly, when you think about, we put EUR 75 million equity, and we get EUR 1.2 billion. This is very attractive. On top of that, we get the EUR 300 million plus synergy value plus growth. For Royal Caribbean is also a very good deal because they put EUR 75 million, also achieved with EUR 300 million plus, and they have the strategic benefit to get access to the best cruise brand in the world. And therefore, I think it's a win-win for both of us. And as you know, I'm very excited with my partnership with Royal Caribbean because they are good partners. We have a long experience and a very serious and good partnership in that respect. We -- on the financial side, as I said, TUI Cruises is very cash-generative. It has a good debt facilities. We are well within covenants, particularly when it comes to all the ECA financing, as you know, is very important in that business. And we will see no reduction of dividends to TUI. And particularly I'm very pleased because we will be strengthening our balance sheet. We have said that we will do -- put money into digital expansion. And this year, we talked about high double-digit. Of course, we anticipated already earlier in the year that we -- the likelihood of having a deal like this. Something like this would be possible. So a lot of this will be actually now -- we will put into the deleveraging of the company. And when you look on the next slide, you'll see the enterprise value is EUR 1.2 billion. The net proceeds will be around EUR 700 million. The other thing -- the other -- the remainder is actually the equity injections and the deleveraging. The deleveraging will create something like 0.2 or close to 0.2 gross debt. The leverage improvement in the gross debt area, of course, the additional cash is available, and therefore, you could take that also into account. So it is something which is good for our balance sheet. And when you look at our capital -- new capital allocation frame, what we always have said, organic asset-right growth. That's what we do. This digitalization, we -- again, it's largely organic. And we also have said we will look that we have a healthy balance sheet as well. And therefore, you might be pleased that we get here to there, and we are conservative in that respect. That said, I think it's a great deal for both of us, for RCL as well as for us. It is a great deal for TUI Cruises and Hapag-Lloyd because it unleashes growth potential, asset-right and potential, which at the end of the day, it wouldn't have been possible. We envisage that 3 years from now, 50% of what actually we bring into TUI Cruises of Hapag-Lloyd, 50% will be at least the value of the 100% today. So that's what the deal will be doing for us. So we believe it's something which is a no-brainer and a very good thing to do, and we are very happy that we pulled it over this morning. Thank you very much for listening in, and now we are open for your questions.

[Operator Instructions] The first question for today comes from Ms. (sic) [ Mr. ] Jamie Rollo calling from Morgan Stanley.

Yes, 3 questions, please. First of all, I'm just wondering, would you have done this transaction, if you have lost -- if the company have lost about EUR 700 million from the MAX grounding last year and this year and being so close to the leverage target? In other words, is this -- is there any sort of industrial logic behind this? Or is it just to shore up the balance sheet? Secondly, it looks like essentially leverage on Hapag-Lloyd is going to be about EUR 1 billion, albeit, I guess, shareholder loans, but it looks like the combined TUI Cruise and since it's going to have pretty high leverage. So can you talk a bit about the -- first of all, the leverage on that joint venture? I agree it's off-balance sheet, but just trying to understand that. And the final question is, where does it leave Marella in the U.K., could that be another option to sell into the JV in the future?

Okay, Jamie, I mean, I tried to explain the logic. I mean you get EUR 1.2 billion, your EBITDA -- your EBIT contribution in 3 years will be what it would have been on 100%. When you look at valuations, when you look at everything, we are 2 companies which couldn't have grown, now grow. The industrial logic is so compelling and that actually -- that is something which I think is an absolute no-brainer. The leverage in the company is around 4, which is for a cruise company is not big, yes. I mean not at all. The cash capabilities of that business is -- and the cash flows are enormous. And Marella, yes, I mean we are -- we have set in our strategy that it will be asset-right. And when I say we are asset-right, then I mean we are asset-right. We will look at things and if things are compelling, we will do it. And I think I don't know. But I mean, particularly, many people would have said, maybe you know, this is the core of the business, will they do it and so on and so on. We have said we will become a digital platform company. When I say we want to become a digital platform company, that's what it will be. And if we find good deals but it must be always good deals. We can -- we will not do deals just for making deals, but we only will make compelling deals. And if this is not compelling, I would not -- I will not understand it. Birgit?

Yes. So maybe I can add to what Fritz said. So the deal makes both strategic and financial sense. And of course, as Fritz already alluded to, together with Royal Caribbean, we will be able to accelerate growth significantly. And we will treat this if you will look at our new capital allocation policy, and indeed, we do have a Boeing MAX issues. So in light of that, in the short run, we will use the proceeds according to this new capital allocation policy taking into account leverage, et cetera. But on the longer run, that is what we see with the increased earnings that we will generate from Hapag-Lloyd. We will also further invest into our new strategy with digitalization and everything we communicated.

The next question comes from James Ainley, calling from Citi.

I've got 3, please. First is, can you tell us what the book value of business is? Second, could you quantify the synergies? I mean you said those EUR 300 million synergy value, but what do you think the annual run rate could be? And then third, how do you plan to internationalize the business? Because I guess they're both TUI Cruises and Hapag-Lloyd freight German-focused brands at the moment. So how do you plan to internationalize? And would you need to invest some of the synergies to do that?

So the synergies are duly published synergies. I mean I think we might not even do that. But on the -- what I said is in 3 years, we will make up for actually 50%, which we give up. So therefore, this is partly synergy, this is partly growth. Of course, then this is only a snapshot. It will grow over time. I say, the net asset value quantification, I said is at least EUR 300 million, might be even more. On the internationalization, this will mainly focus on the expedition and not so much on -- initially on the expedition and not so much on the -- initially on the ultra luxury. I mean the expedition is a no-brainer. When you look at the demand increase of expedition cruising in the world, it's enormous. And I have seen a lot of new tonnage coming up, and we have the other one of the oldest expedition and most experienced and, by the way, the most luxurious expedition company in the world with outclass quality ships everywhere, which means we are one of the few who really go at Antarctica. We are one of the few who really go at very extreme conditions. And that is something which is very compelling to customers. And here, of course, the international footprint of Royal Caribbean is also very important when it comes to the whole harbor management and route management and network and so on. And so that's also very important. So it will be the luxury cruise, luxury expedition, which we will initially focus to. Now on the last one?

Yes, on the book gains. So we said considerable book gain and this means mid-triple-digit millions.

The next question for today comes from Richard Clarke calling from Bernstein.

Yes, just 3 questions for me. Just want to make sure I completely understand the bridge from the EUR 1.2 billion to the EUR 700 million proceeds because presumably, some of that is lease debt and maybe just the terms of this earnout, the EUR 63 million earnout. Is that a 1-year earnout or is that over multiple years? And second question, the impact on the JV income. You said no reduction in dividends. But does that mean dividend is probably flat? And what will be the impact on the actual JV income given the higher debt within TUI Cruises JV? And you talked about the ability to accelerate growth, how does that actually come about given these restrictions and the ability to get new ships? Does Royal Caribbean give access to new expedition ships to put into the JV? How do they get better access to that growth?

Okay. So -- yes, so on the last one, and maybe I'd say that at least Birgit has the 2 first. I mean the last one, the restriction of the yard capacity is focused on the big ships, right? The small ships, the yard capacity is not a problem, right? So that is what we always said, and we have actually now also -- we have [ 2 ] new ships. So -- but again, with our -- if you look at our yield, our yields are all above 600. If we want to expand in ultra luxury, it will be dangerous to expand too much in Germany because the enemy of high yields is actually volume. And we believe that international is the right way to go. And they are -- the restriction of the yard is not an issue but added to the new ships. So we are not in any -- in used ships with that kind of brand, which is the highest-rated luxury brand in the world when it comes to the Berlitz Cruise Guide. So we always need to be #1. So the used ships are not an option here. Maybe on the 2 other things, Birgit?

Yes. So in terms of valuation and proceeds, you asked about the bridge. So clearly, the EUR 43 million EBITA for the full year '19 times the -- 20 -- 8x multiple, it gets us to the EUR 1.2 billion, but I'm very much sure that you count that. And from that, if you deduct the net debt and the equity contribution, you get to the EUR 700 million proceeds. And as we are seating here with the deal team and Peter Krueger who actually closed the deal, I'm going to hand over to you. So maybe you can also comment on the earnout and how we structure.

Yes, sure. So as Birgit said, there will be another north of EUR 62.5 million and that is linked to the financial performance of the company of Hapag-Lloyd until September year-end. So you can see we're already halfway through the earnout, which effectively gives good visibility on the achievement level of the earnout.

Okay. So the proceeds could be EUR 762.5 million?

The 700...

Yes. No, it's already included there. Yes, yes, yes. It's in there. Yes.

Okay. So the upfront cash is 600 -- and whatever that would be, EUR 36 million and there's a variable component on top of that.

Yes, yes. Absolutely.