Havila Kystruten AS (HKY) Earnings Call Transcript & Summary

[Audio Gap] and CFO, Aleksander Røynesdal, so the gentleman will speak shortly and guide us through the Q2 and first half year figures of 2024. After their presentation, we will move over to our Q&A session [Operator Instructions] So having said this, Bent, I hand over to you.

Thank you very much, Sarah, and welcome to our quarterly second quarter presentation for 2024. Next slide, please. We will repeat some background. This is kind of our in a way mission. We have a mission from the majority owner to focus on the sustainable operation. Environmental operation is extremely important for us and whatever we are doing should be sustainable. And that, for us, makes a lot of sense going forward. Next, please. The historical Norwegian coastal routes, I guess, most of you know it, quite good. We operate 4 out of 11 vessels in this route. The competitor have 7, and we have 4. Starts in Bergen up to Kirkenes in the north and then southbound back to Bergen. The voyage takes 11 days. This is a concession by the Norwegian government and the contract ends in 2030. The government has an option to extend the contract with 1 year. For your information, the Norwegian government have initiated the process now for the next concession from 2030 to 2040, and we are in dialogue with the consultants that are supporting the government and looking into the different needs and demands and of course, future requirements, especially related to the environmental side of the operations. The company is the majority owners -- the family Sævik, Havila Holding is the majority owner of the company. Next, please. We are still very proud to say that we do operate and have the most environmentally friendly fleet, cruise fleet still in the world. We have done a lot of investments in the initial phase of designing the vessels and have ability to deliver on both climate neutral operations today and also future zero emissions if that is a requirement going forward. Next, please. I'm also proud to say that we do operate and have the most environmentally friendly fleet, cruise fleet still in the world. We have done a lot of investments in initial phase of designing the vessels and have the ability to deliver on both climate-neutral operations today and also future zero emissions if that is a requirement going forward. Next, please. Also proud to show you that we actually this summer was appointed from the Time Magazine as one of 100 places you really should visit and experience, which is a quite important part of our, of course, targets, also as cruise operators to really attract and be a preferred place to go. So this is extremely good for us to have such kind of recognition. Next, please. The highlights of second quarter. We have had some down -- one of the vessels was out of operation to round trips in May due to technical issues, but overall the performance has been very good. We still deliver on the Net Promoter Score. The customers are very satisfied with the operation and to sail with us, the product and the concepts. We continue to deliver on the kind of reducing the CO2 emissions. Second quarter, 36% reduction compared to the 2017 figures. And we still continue to deliver on food waste, which is, of course, a part of the food concept on board to reduce the food waste. So extremely important for us in the high season to still be able to do that. We have a lean operation still and more than 50% of all sales is through our own channels. This is good for us. Still have kind of a very good relationship with agents and operators out in the market. But converting more and more of the business through our own channels is important for us. And lastly, this is the first quarter, we have been able to deliver a positive EBITDA and, certainly, we'll continue doing that going forward. We are quite pleased to at least being able to transfer the business now from a negative to partly positive. Next, please. Aleksander, please?

Okay. Thank you, Bent. So going into a bit more details on the operational performance that Bent mentioned. This is the first quarter in the company's history with a positive EBITDA, which is -- we are celebrating. This is driven by a continuous increase in revenues. So we are growing revenues quarter-by-quarter. And we're growing revenues first half this year compared to last year -- first half last year. And this is also positive on a per ship basis. So I mean, adjusting for the number of ships growing from 2 to 4, we are still growing 7% to 15% top line compared to last year. And this growth in revenues is driven by both pricing. So we are realizing higher revenues per cabin night compared to last year. And we are experiencing a higher occupancy. So we are kind of building the book -- underlying book of occupancy quarter-by-quarter. I think going forward, the focus is really on continuing to build the top line. Our cost base is quite stable over the past few quarters. And the focus is really to grow the top line and improve the margins, and I'll explain a little bit about that on this slide. So we see quite a high potential for price increases for next year compared to this year. We've had -- and we mentioned this the last time as well, we've had a lot of cancellations over the past few years, mainly because of the sanction issues. And these travelers have been -- we offered to rebook at the same price and a lot of them have traveled this year. So that's -- we're estimating that effect to be close to NOK 60 million. So we see that next year we'll see a positive effect on pricing, just from that. If you look at the route historically, it's still very focused on round trips, sailing all the way from Bergen up to Kirkenes and down again, 11 days round trip. Havila is offering the clients to take shorter trips. I mean we are offering, for example, Bergen to Trondheim, we're offering Trondheim to Tromso and vice versa. So we are offering shorter trips. And over time, we believe that that will attract a different audience, higher paying travelers compared to the round trip. And that, over time, will have a broader audience and have a different segment to target. And it takes time to build the products, and we see that we have a bit of an imbalance in the occupancy on the routes. I mean we're very -- the ships are full going out to Bergen and then we have gaps during the voyage where we have a lower occupancy. And to kind of fill those gaps and develop the shorter travels in terms of a product is the key focus going forward. And that -- any additional travelers that we will have onboard the ships during the route is net positive. So I mean we're traveling with a crew tailored to the highest occupancy under -- it's quite difficult to change the crew on the ships and on both the operations and on the hotel. We do expect this growth in top line to continue. And we do expect next quarter also to be a positive quarter in terms of EBITDA. Next slide, please. Looking at the booking status and sales channel mix. We are currently 70% sold for the year. For next year, we have sold about 30% of the capacity. And for the year in total, we are guiding around 75% occupancy, which is slightly down compared to the guiding in the last quarter. And part of this is if we want, we can fill the ships, but it is partner pricing issue. And second, we've had quite a few allocations that were canceled prior to the high season, which has been difficult to resell in kind of a short window. So we have -- for next year, we have a better underlying occupancy, which means we can move into a situation where we overbook. And we've also tightened in the terms and conditions for these group allocations, which means that we think this is going to be less of a problem next year. In terms of booking channels, we have successfully managed to grow sales through our own channels, and a lot of this is digital through our webpage. And going forward, we are looking at different ways to package -- to be able to offer packaged deals to our clients, offering both hotel and flights in a modern way, so through digital tools. So that is something which is on the agenda for the company, which is part of the product development of shorter trips throughout the routes. Next slide, please. Going back over to the financing and the balance sheet, we established an overdraw facility in April in the second quarter of NOK 200 million. This facility is there to weather the seasonality in cash flows on the route. We have drawn NOK 150 million of the NOK 200 million at the end of the second quarter. And this was really to weather the last year's low season. If you look at the asset values, the ship value of the 4 ships, the book value is about NOK 4.2 billion. And what we see is that there's a significant positive value adjusted equity in the company based on market values for these ships. The average broker value is the present at EUR 700 million in total for the 4 ships. And we've seen shipbuilding indications, not far from that, which is reflective of the massive increase in the shipbuilding prices that we have seen since these ships were contracted back in 2018. So if you look at the value adjusted equity of the company, it's significantly positive. We still have high interest rates on our loans, which is really reflective of the sanction issues, and it's kind of unintended sanctions effects on the company. We are looking to refinance that debt in probably -- most likely next year. On one hand, we're working to grow the operational results to grow the top line, and on the second hand, there are call protection mechanisms in the existing loan agreement that favors a refinancing in 2025 compared to 2024. But I think we have quite good interest from potential lenders. They like the asset, they see that there's a lot of room on the asset values. They like the infrastructure elements of our operations. The contract with -- which is the contract with the Norwegian government, it's the kind of ferry business that we do transporting port-to-port passengers. And also, we have also a bit of cargo operations which kind of falls under this infrastructure element. Next slide, please. Yes, a few words on the key performance indicators. This is really for you to have a look at your own. But what we can see is that compared to the last -- same period last year, the key metrics are improving. Pricing is improving, the occupancy is improving. And it's very positive to see that the cabin factor has increased from below 1.7 and now in the second quarter, we are close to 1.8. And if you look at the rest of the year, it's looking to end above 1.8, which is very positive because every person in addition that we have on board is the person that spends. So from a margin perspective, that's very positive. Next slide, please. Okay. So to sum up, the focus going forward for the management and the company, it's really to grow the top line, to develop the products and develop the concept of offering shorter trips throughout the route, while at the same time, keeping a focus on costs and maintaining a very lean organization and a lower cost base. We will continue to be very focused on sustainability, and we support stricter environmental requirements on the route, both in this period and also in the next concession period. We can today reduce emissions further, both by developing the charging grid along the routes, but also by blending in biogas. So we are having discussions with vendors on biogas and also with the regulators and the government in terms of the economics of it. Our refinancing is definitely a key milestone for the company, which will kind of mark the end of the issues that we've had with sanctions. So to achieve that in 2025 is a key goal, and it will be a game-changer for the share. And in terms of growth and the next concession period, I think that's also a very important milestone to achieve that refinancing and position ourselves for the next concession period. These ships are well suited for the route. They've been built at a low cost compared to what you can build these type of ships for -- in the future. And we do believe that environmental requirements will be tightened in the next concession round. I think that marks the end of our presentation, and then we'll open up for questions, Sarah.

All right. Thank you so much for your presentation and the dive into your first half year. So we will now move over to our Q&A session. [Operator Instructions] We already received the first virtual hand by Tim, so you should be able to ask your questions.

Yes. I have a few questions actually. The first and the most pressing one is in terms of occupancy. You said you have an improvement, but it's only a slight improvement compared to Q1. And actually, your cabin nights and passenger cabin nights went down from Q1, which is a bit sort of contradictory to the normal seasonality. So it would be great if you could comment on that. And in your report, you mentioned these group allotments. Yes, can you maybe just shed some light on how those normally function and how those cancellations affected the Q2 and what we can expect for Q3?

The occupancy in the first quarter was quite good to begin with. I mean it was quite high compared to historical levels for the first quarter. And then if we go into the second quarter, pricing-wise, it's a lot higher. So I mean we have focused on pricing as well in kind of the start of the high season. But then we also had the Havila Pollux out for 2 round trips in May, which gave us an upside of 94%. So that kind of explains I think the number of cruise miles compared to the first quarter.

Okay. So those weren't excluded. And can you also -- and maybe in that respect, comment on how your loss of hire insurance actually covered -- financially covered this effect in Q2.

Yes. So we have a loss of hire insurance that covers the revenue shortfall in case of forgoing the off-hire periods. There's a deductible period, which is kind of normal for these types of insurances. But the off-hire insurance kind of covers the revenue loss on these cancellations.

Okay. But it does affect your cabin nights KPI? And then it also compensates for onboard revenue? Or is it only the cabin fees that the insurance covers?

I mean the amount is fixed based on expectations for our overall revenue, but there's not like designated part for onboard or contractual or operational revenue.

I think certainly it does not cover everything, Tim. But if you look at the government contract and kind of an average of normal cruise revenue will be covered except from the kind of grace period of the insurance. But it gave us a quite okay coverage, but certainly it doesn't cover everything. So it is a loss for the company.

Okay. Okay. Understood. Aleksander, could you maybe comment on LNG hedging costs in Q2 and how that affected your other operating expenses and maybe give an outlook for the second half? What your expectations there are?

Yes. So we secured 70% of the LNG fuel consumption in the first half of this year and it was secured at a level around EUR 60 per megawatt hour, which is almost double of the spot price. So -- but I mean that doesn't mean that we've had doubled the LNG cost because it's comprised of our margins and CO2 taxes, et cetera, and VAT. But in the second half, we have not fixed the LNG price. So we are now in the second half paying spot price. At present, I think it's high EUR 30s. If you look at historical average for LNG prices in North Europe, it's been close to EUR 20, so it's still quite high. We are looking actively at ways to hedge and diversify the LNG purchase and the way we bunker the ships. But I think you'll see an effect in the second half of the year compared to the first half of the year. Based on current pricing, I think it's about NOK 20 million in difference.

Okay. Maybe looking at your competition, they increased capacity on the route, which is obviously not the contractual routes, but there are 2 more ships sailing now on the route in general I gather from their presentation. And I also see that selling very heavily for 2025. So can you comment on that and how that affects your pricing and occupancy expectations for next year? I mean I gather they're still in quite financial distress. So every euro they can get in this year probably helps them. But yes, can you maybe comment on how you see that?

I think if we are kind of looking at ourselves, we are quite ahead of -- on the sales side compared to last year for 2025, if you look at the timing and the pace of bookings. So we still are selling quite good into 2025 and are ahead of the kind of pace we need. So still quite positive for us. Certainly, there are kind of questions out in the market, whether -- why are we not dropping the prices when the competitor is doing that. But still, we are focused on ourselves and the product we deliver. And certainly, people are willing to pay the price also for our products.

Okay. Then maybe one final question, and I'll jump into the queue again. In your refinancing presentation, you had like a midterm outlook of 35% to 40% EBITDA margin. We are now at 16% in Q2. Obviously, there were some headwinds in the quarter, but what do you -- what's your expectation sort of going forward? What is needed to reach these kind of profitability levels from your point, looking at yourself? And what is sort of your expectation and when we -- when you can run into a normal -- completely normal sort of operation status?

We have not changed kind of the target of the margins we have indicated. So that's still the ambitions and I think what we also said in the Q1 is that this is the first year of full operation. We are still kind of working a lot with the automization of all aspects of the operation. Building the brand will take time, like also Aleksander mentioned on the concepts, different products. We do see that we attract other kind of travelers, younger, more active travelers. So that is kind of the focus of developing the product and get more activities into the kind of UPS side of the operations. So it will take this year to kind of optimize and develop kind of the business further. But we are quite optimistic for next year also.

In the meantime, we received a couple of questions in the chat box, so we will read them one by one. The first is from Jan. Can you indicate the rate differential that you aim to achieve in refinancing? How much lower interest rates you expect to achieve through refinancing?

I think what you see at present in the banking market for similar type of transactions you see Euribor or LIBOR plus 2%, plus/minus, depending on how the type of security package and the kind of contract profile of the ships. So that's where the banking market is, the mortgage lending. And the unsecured bond market is also quite active and affordable at the moment. We see ferry companies in the Scandinavia issuing unsecured bonds at -- that's of Norwegian Krone, but Norwegian 3 months interest rate plus 3% unsecured. So I think there's certainly a lot of room between where debt could be sourced at compared to what we are paying. And as I mentioned earlier, the debt that we have and the rate that we are paying is really reflective of the situation last year and especially the sanction issue, where the company was kind of cornered by the situation. It's not reflective of the ships or the quality of the ships or the earnings potential on the cost of goods.

We have further questions concerning the interest rate and it's a bit longer. So what is the current interest rate you are paying on the loans? And what do you have to pay to the lenders at the end of the long period? You have paid NOK 165.7 million in interest during the first half year, which indicated an interest rate of 8.11%, but that must be far from the real cost. Can you please clarify?

I mean in the annual report, in the notes, we have listed the interest rate that we have on different bonds. On the mortgage debt, we are paying around 12.5% interest. Part of that there's a peak element that we can select to pay or pay as payment in kind. And on the shareholder loans, the interest rate is around 13%. And all that is payment in kind interest. So it's accumulating on the outstanding loan. And then on the maturity of the mortgage loan, there is a core premium at 6%, which is also published and available information.

The next 2 questions are about EBITDA. Is there any indication on EBITDA growth in the next 2 quarters that you can provide?

The third quarter is really the best quarter of the year. If you look at seasonality, you have July, August, which are very high season of months, and then you have September. So historically and also for this year, third quarter is looking to be the best quarter. And -- but we do see that we have a quite good booking situation for the last quarter of this year as well. And at least looking at historically, the seasonality is not what it used to be. There are a lot of international travelers that are attracted to the winter season, especially February, March where you can experience the Northern Lights. So if you look at the tourism in Northern Norway, it's really February and March are the high season, which we are trying to tap into.

So the second EBITDA question is, is there a target EBITDA level that you would aim to achieve in the near future?

I mean I think as Bent mentioned, the target EBITDA margin still stands, and that's what we are working towards. We believe we can grow the top line significantly next year compared to this year. I am not going to give a definite figure, but we see costs stabilizing, and we see, of course, potential efficiencies on cost. And especially this north-south imbalance is kind of a key for us to achieve these margins because if we manage to get a more even occupancy throughout the routes that is going to contribute on the margin -- on the EBITDA margin.

So the next question, having the trades on retail flows, retail trades on news flow. There has not been much news flow. So a little press releases and not much on social media. How do you plan to improve your visibility for the investors?

I think we have a very large majority shareholder. And compared to a lot of companies, we have a small free flow. So of course, there's a limited number of shares out there trading. I mean we are looking at how to increase activity. We have started with quarterly webcasts. We plan on participating on different forums. And we're also in the process of reviewing what to guide on, what type of KPIs do we present and when do we present them. So I don't know Bent if you have anything.

No.

So with close to 0 in booked equity, how are the Board of Directors planning to address this and improve the equity level? Do you think it will be necessary to raise new equity in order to improve the balance sheet?

As I mentioned during the presentation, if you look at the market value of the ships, there's a substantial positive value adjusted equity. It's not -- it's by billions of NOK. So I think that the Board is comfortable with the asset values -- underlying asset values compared to the liabilities. We have a positive cash flow outlook for the next 12 months. So there's no capital -- immediate capital need given the projections that we currently have for the operations. So I think at present, the Board and the company is comfortable with the values and the liabilities that we have. It's, of course, something that we are monitoring and keeping an eye on. But at present, we don't see it as an issue.

[Operator Instructions] So the next question is, can you comment on the split of the source countries of your customers? And has that changed over the last 12 months and for bookings going forward? Is there any source countries that you're focused on for the future?

We have had quite a good increase. If you look at the U.S. -- America in general, and that is an area where we will focus more. Still, German-speaking countries like Germany, Austria, Switzerland is representing just below 50% of the total volume of the travelers or our guests. So -- but we have a very good increase from the U.S. market and Australia and New Zealand. That's very good. And Central Europe, in general, is coming. We also have seen an increase from the Asian market this year. So yes, I think from 2022 into 2023 and into 2024 is quite -- has been a decrease from the German market from 50% to about 32% and an increase in the -- especially from the U.S. market.

So the last question so far, could you confirm that the missed revenue from cancellations spillover from 2023 was approximately NOK 60 million?

That's correct.

Okay. So just a quick answer for a quick question. So dear participants, by now, we did not receive any further questions. So we, therefore, come to the end of today's earnings call. So thank you, everyone, for your showing interest in Havila and all your questions. And of course, a big thank you to you, Bent and Aleksander, for the time you took today. So from my side, I wish you all a lovely remaining week and the happy weekend and hand back for some final remarks, which concludes our call for today. And just let me quickly switch around because we received the last question. So -- and we will cover it for sure. Are you seeing any softness from customers coming from German-speaking countries, given the cost of the living crisis and softness in the German macro?

No, we haven't seen any effect related to that. Still a lot of Germans, high interest from the German market also.

Okay. Thank you. So -- but let me quickly check, so now all the questions are covered. So thank you again. And I hand back to Bent and Aleksander for some final remarks, which concludes our call for today.

Okay. Thank you, Sarah, and thank you for everyone for joining this earnings call. Thank you.

Thank you very much.