Havila Kystruten AS (HKY) Earnings Call Transcript & Summary

Warm welcome to today's earnings call of the Havila Kystruten AS following the publication of the Q1 figures of 2024. With me today is CEO, Bent Martini and CFO, Aleksander Roynesdal. So the gentlemen will speak shortly and guide us through the presentation and the results. Following the presentation, we will move over to a Q&A session, in which you will be allowed to place your questions directly to them. So having said this, Bent, I hand over to you.

Thanks a lot, and welcome to this presentation. Next slide, please. This is a statement from our majority owner and the founder of the company, Per Sævik, which we take as our vision, namely to secure and environmentally friendly and sustainable operation. That is extremely important for us. Next slide, please. Some historical facts. We are operating in the Norwegian coastal route or the Kystruten Route. And Havila Kystruten is listed on the Euronext Growth under the ticker HKY. We operate between Bergen and Kirkenes. It's 34 ports northwards and 33 ports southwards. The route is operated under a concession with the Norwegian Ministry of Transportation, where the Norwegian ministry is kind of buying services related to the port to port travelers and also goods transportation. This contract or the concession is and duration of the concession is from 2021 until end of 2030 and the Norwegian government have the option to extend the contract with 1 year. We at Havila Kystruten is 1 of 2 operators, and we have 4 vessels out of 11 operating in this route. And as mentioned, the majority owner, which is the Havila Group, is a family-owned enterprise founded by Per Sævik in Fosnavåg back in the '80s. Next slide, please. We do have the, I guess what we feel is world's most environmentally friendly cruise fleet. The vessels is operated in a hybrid mode, natural gas operations with a huge battery package where we are able to reduce the CO2 footprint by 35% to 40%. We have also fitted to operate with biogas, meaning that we can reduce the CO2 emission by 90% going from a neutral. We do have one of the world's largest battery package in the world, which enable us to sail emission-free for at least 4 hours, which we also have done into the world heritage fjord since June 2022. We also reduced the NOX and the SOX emissions by plus 90%, which is much higher than the requirements in the contract. Of course, having totally new vessels, we have been able to both optimize the hull performance. We have already thought about going zero emission in the future. So the vessels are hydrogen ready or ammonia ready. We are having a focus on the total environmental footprint, also focus on food waste and all food are kind of sourced locally. And we also have full recovery of kind of heat on board, reducing the energy consumption as much as possible with the present technology available. Next, please. Of course, when we are looking into first quarter 2024, we have defined 2024 as year zero for this company. We have overcome significant challenges since the start-up. We will not kind of go into the details on those challenges. I guess most have heard about those. But for us, 2024 is kind of a fresh start. We are methodically building the organization with a clear aim of providing good working environment for the employees, where the employees can both thrive and succeed. And focus has been on occupancy, enhancing the brand and achieving exceptional customers satisfaction. Of course, the financial results reflect the challenging start-up and ongoing investment in the operational growth. We can highlight that we have been able to have a high production also in the first quarter, 99.5% ship uptime. We have been able to reduce the CO2 by 36%. We have a net promoter score of customers satisfaction above 70, which is extremely high in this segment. And we are seeing that we have a positive trend and good development, though still a negative EBITDA. Next, please. Beautiful picture of two of the sisters meeting in the Lofoten area, and then I will give the word to Aleksander to take us through more of the details of the financial figures. Please, Aleksander.

Thank you, Bent. So on the -- looking at the figures on the operational side, the positive trend continues. We continue to grow revenues quite rapidly. Some of this is, of course, due to the fact that the last 2 ships was delivered in second half of last year, but we are also growing occupancy quarter-by-quarter, just the first seasonal changes, and we are growing the rate -- the cabin rate that we are realizing. So revenues is up about 17% compared to the fourth quarter of last year. We're almost 3x the revenue compared to first quarter last year. And this is a pretty rapid growth in earnings, and it's taking a bit of a toll on the organization. We're experiencing what you would call a difficult growth pace. But I think from even group perspective, that's positive. And that is what we want. But now that we've been able to build up a solid occupancy and contract backlog, the focus now is on improving margins and improving the EBITDA generation. And I think this is a bit of a twofold thing. First of all, there's a good potential to increase the cabin rate going forward. The cabin rate for the first quarter and also for previous quarter are impacted by -- partly by previous year's cancellations. I think everyone who has followed the company knows that we had a lot of cancellations last year because of late delivery of the ships. And for the clients that wanted to travel with us despite all the cancellations, we have offered these clients to travel at a later date at the same price. And this is impacting the pricing in the first quarter. We see that its effect is reduced quarter-by-quarter now. We've also had quite a number of bookings for larger groups through agents, which is also done historically at a bit of a lower level than what we are doing now. So the bookings we are making at the moment are substantially higher than what has been booked in the past and especially in the last 2 years. The second side of that is costs. With such higher revenue growth, there's naturally inefficiencies in how we work and how the organization functions. So as revenue growth stabilizes and the organization matures, I think there's a lot of potential for cost optimization throughout the organization. And last but not least, we've taken a hit on the fuel costs compared to the market levels for the last quarter, and this is related to hedging of the fuel costs. We are implementing a hedging strategy for LNG. And this really relates to the fact that we have a lot of forward booking 1 year ahead, 2 year ahead. And it's a little bit about protecting the margins on the tickets that we sell for. Next slide. So if you look at the booking status, and I also want to touch upon the channel mix. Now that we have a solid booking backlog, for the year, we have 66% already booked. For 2025, we have 21% booked and the estimate for the full year based on the pace that we see now for bookings is just below 80%. And just to elaborate a bit on that. Just below 80% means somewhere between 76% up to 80%. So it's within that range that we see the full year, I think. And with a good booking backlog, we are now able to focus more on the pricing and selling the quality of the product, we believe we have a premium product for the coastal route. And it's all about getting up the pricing for us now. A part of this is tied into the booking channels. This is -- in which channel does our client book the travels that they perform with us. And historically, the cost of route has been booked through the agencies, tour groups. And this was how we started off, and we started off this way to build up the occupancy rate, but we have been very focused on -- with limited marketing budgets, we have been focused on digital marketing being always on. And through this, we have been able to really grow the sales through our own channels. And this is positive from our perspective, we can own the customer journey and then it also enables us to get some more on the margins instead of the agents and then also the clients will benefit from direct booking. Next slide, please. A few words on the financials and especially the liability side of the balance sheet. We completed a refinancing in April. It was concluded end of the month. And we really strengthened the balance sheet and improved the liquidity situation by replacing secured debt, which was the tranche B of the secured loan that we have with unsecured shareholder loans, which are cheaper and very flexible in terms of repayments. So we can repay these shareholder loans without any call premiums at any time that we want. In addition, we established an overdraft facility with the majority shareholder. It's quite normal in this business to have an overdraft because of the seasonal -- seasonality in the revenues. And this allows us to, in the summer months, in the high season, we build up cash and then in the low season, businesses like us often need an RCF to get through the low season. So with this refinancing, we feel confident about the liquidity situation for the next 12 months. So in terms of final thing. I think the next -- the next up is the maturity in July 2026. We have about EUR 255 million in nominal figures that matures in July '26. This is, of course, it's a loan that we have a high interest rate on, and it's really reflective of the past and the issues of the past with the sanctioned financing and the late delivery. But the discussions we are having now on a potential refinancing is positive. We have very solid underlying asset values. If you look at the broker values of the ship fleet, it's all close to NOK 700 million. We have checked the new building cost, which is similar or even higher. So there's a lot of upside or what you could say the value-adjusted equity in the company because of the asset values. And if you look at the loan-to-value basis, we are just around 50%, which is pretty conservative for a business like this. So in terms of the refinancing discussions, the key now is to build operational track record. We have the asset values. We have contract with the government and the foundation. And now it's about building a track record that showcases debt service capability. And I think through the discussions with potential financiers, the sort of positive feedback on the ESG profile of the ships, which Bent mentioned earlier, there's not a lot of ships in this segment that has such a good ESG profile. And people, banks and financiers, they like the contract with the Norwegian government and the fact that there's a long track record on the coastal route. In terms of timing, I think we need to build operational track record. And so timing for refinancing is slightly more likely within 2025. Next slide, please. Just a few words on the KPIs that we have started reporting. Of course, on the vessel side, we are now fully operational with all 4 ships, which was phased in the second half of last year. Occupancy, we have a higher occupancy of 68% compared to the fourth quarter, were higher than first quarter last year. And we see that this occupancy rate in the remaining of the year will be higher, achieving close to 80% occupancy. The cabin factor is stable or slightly increasing, which is also good in terms of we have additional group passengers on board of it, so we have strength onboard. And the cabin rate is a lot higher than fourth quarter last year and also compared to the first quarter of 2023. And going forward, we are positive and see that the cabin rate will likely exceed those of the high season year. So it's a pretty positive outlook on the pricing going forward. Next slide, please. Okay. So a few words to end this before we start with the Q&A. Without forgetting the hardship and the challenges that has been overcome, I think, just as Bent mentioned, 2024 is really year zero for us. It's about proving the operating model, it's about achieving the revenue targets and start trimming and improving the margins for the business and under a normalized scenario. We will continue to be a leader in ESG. We support stricter regulations on the routes. Today, the requirement is 25% reduction in CO2 emissions compared to the reference year. We are delivering 25% or higher. As Bent mentioned, we can -- by blending in biogas, we can go climate-neutral tomorrow. So it's about making the fuel available. So we support stricter regulations in this concession period and also in the next concession period. We will facilitate the refinancing in 2025 and reduce the interest rate levels and subsequently the costs that we are incurring on -- which is really not reflective of the assets, the value of the assets and the underlying business with a solid contract with the Norwegian state. The high interest rate that we're paying is really reflective of the issues of the past. And lastly, at least, we are focusing on the coastal route and delivering in this concession period, and we will also participate in the next concession period with our ships. And I think we're quite positive with regards to that, having ships that can go carbon-neutral tomorrow, and that are being still at substantial discount to what new building prices are today for similar type of ships. I think that concludes the presentation from the company. And I guess it's now up for Q&A.

Absolutely. Thank you so much, Aleksander and Bent for your presentation and guiding us through the results. So we will move over to our Q&A session. [Operator Instructions] And this is what [ Alexander ] already has done. So he has a question. Can you quantify how much revenue you have lost due to the fact that previously booked trips that were canceled were executed now in Q1? How much more revenue would we have generated if these trips were booked regularly?

I think we have not recorded this in such detail that we can give an exact figure on it. What we know is that we have multiple cancellations last year. And these trips were rebooked in this year, also done in the early part of the year. So this is reducing quarter-by-quarter. But we don't have a specific figure that we can give at this point in time. But it's included as it is a substantial deviation compared to what we would have expected.

All right. So another question in the chat box is, can you please elaborate more on the potential refining options for the remaining, I guess, it should be bond changes.

Yes. For this type of ships and this type of business, there is ship financing available, traditional bank financing potentially combined with the bond market. If you look at similar cruise or ferry companies in the Nordics, many of them are financed with bank debt that is secured in the ships, supported by unsecured bonds, which is often issued at the Nordic Exchange. And then with the contract with the Norwegian government, there's a bit of an infrastructure element to the business. So there is interest among pension funds, institutional investors that look upon this type of exposure. And then last but not least, leasing is an active segment within ship financing. And I think we will consider all these options. And then once we have a solution in place, we will be able to execute the refinancing. I hope that answered it.

Thank you so much. So in the meantime, we received 2 further questions which are, yes, in theme, the same. So I guess it would be enough just to read one of them out. Given to the positive trend in your operating performance, would it be fair to assume that you will breakeven at EBITDA level in the second quarter of 2024?

Yes. I think we can say that we will.

That's absolutely the target probably that we will, yes.

All right. Thank you. And then if you were to refinance today, what would be the level of interest expenses? If I remember correctly, the current is around 13.5%, including PIK.

Yes, the current interest rate is slightly reduced. The Euribor is down and the Euribor curve is a little bit -- it's falling. So the current interest rate is around 12.5%. There's also a margin reduction of 0.75% after the repayment of tranche fee and if you look at the refinancing, bank debt, it's Euribor plus 2%, 2.5%. Color Line, which is a ferry company in the Scandinavians recently issued -- it's a big company, but they recently issued an unsecured bond at 3% plus 3 months LIBOR. So I mean there's a substantial potential for lower interest rate costs once the refinancing is completed. Then, I mean, we need to take into account the financiers, they need to see a track record of positive EBITDA or positive cash generation that can service the debt. The loan-to-values are very good. So for us, it's about proving the operating cash flow to enable the refinancing.

All right. Thank you so much. And then we'll move over the virtual hand from Tim Kruse. So you should be able to speak now. It's not working by now. So maybe, Tim, you can submit your questions in our chat box. So -- and then we will just wait a couple of seconds for further questions. So as it seems by now, everything is answered so far. So at this point, just a quick reminder to every one of you, if there are still open topics you would like to discuss, just let us know. So I guess, at least Tim has a question, so we will wait a few more couples but at the meantime, we received another question in the chat box from [ Stefan ]. So what is the composition of customers, so especially for the U.S. and for Great Britain?

Yes. What we see is that we have been growing in the -- especially in the U.S. this first quarter. So that's a very positive development. We still have, of course, a high composition of German speaking, both from Germany and Austria and Switzerland. So that's about 45% to 50% of the customers are coming from those countries. But also growing in the U.K. And we also do see that there is a positive trend of growing in the Nordic countries. The Asian market is coming back, but not that much yet and 5%, 6% of the total kind of customers are from the Asian markets. So we believe that during the year and coming year also the Asian market will come back.

All right. Thank you so much. So now we received further question. Is the contractual revenue effect in Q1 also for the next quarters?