Novaturas AB (NTU1L.VS) Earnings Call Transcript & Summary

Dear ladies and gentlemen, good morning, everyone, and welcome to quarterly webinar for Novaturas. Today, our guest host, CEO of the company, Audrone Keinyte, will be joined by CFO of the company, Tomas Staskunas. Firstly, Audrone Keinyte will comment Novatura's unaudited financial results of the 12 months of 2019 and to inform about current events of the company. All questions will be addressed after the presentation. Mrs. Keinyte, the floor is yours.

Good morning, everyone, investors, members of financial community and other participants of today's presentation. This morning, we will be presenting results of business activity of Novaturas group during 2019 financial year and the first quarter -- fourth quarter of 2019. Thank you for your interest in our company. The presentation is being held by me, Audrone Keinyte, the General Director of Novaturas group. Our Financial Director, Mr. Tomas Staskunas, is also present today and will assist in answering your questions at the end of the presentation. During today's presentation, we will present our business activity and will review key financial and key performance indicators of 2019. As well, we will provide forward-looking statements, which from 2020 will be more detailed and more exact. In order to provide current and potential investors with more clear indications, the Management Board has decided to change slightly the investors communication and to give certain forecast figures under the conditions of the disclaimer indicated here. Later in my presentation, I will provide the future guidance and will also explain the assumptions those predictions and forecasts are made on. Before we start a review of 2019, I would like to give a quick highlight and overview of what Novaturas group is about. Novaturas has been established in 1999 in Lithuania and has moved to Latvia market in 2001 and then Estonia market in 2004. Since then, since 2004, Novaturas group has become the largest outbound tour operator in the Baltic markets and has maintained its position all those years. With the headquarters in Lithuania and companies in Latvia and Estonia, Novaturas group mainly focuses on organizing holiday package tours by flights to certified destinations in 2019, for example, beach, ski destinations by charter flights as well as long-haul destinations by scheduled flights. So we are in the business for 20 years already. And the key factors of our success throughout those years are the diversity and variety of our products, product types, travel destinations, also focus on the Baltic market needs and also the asset-light business that allows us to master the changes very fast. In the last years, Baltic markets are recording an increasing number of travelers. And together with favorable macro-economical indicators such as GDP growth rates, which is between 3% and 4% annually; and inflation up to 3%, decrease in unemployment ratio and increasing salaries, it's of course -- considering all those indicators, it translates into increasing spending on outbound package holidays in the Baltics by approximately 7% yearly. There have been a lot of developments in the travel sector in the Baltics and worldwide in the last decade. And traveling offer has increased not only from traditional tour operators, but also the airlines, including the low-cost airlines and different hotel booking platforms. However, the tour operators offer has always been valued and is valued by clients by being the most time and money efficient traveling option, especially taking into account that the traveler that books tour operators package has a well-selected product with a transparent and full holiday package price, which includes usual flight, transfer, hotel and reps assistance on the destination. While, on the other hand, the other options very often require extra costs on add-ons. And moreover, the hotels and flight prices that are contracted by tour operator, by us, on a high volume are mostly or mainly more attractive than the ones the clients can book separately. And on top of this, the travelers do value the reliability and security provided by tour operator, which, considering now this worldwide happening, is one of the very, I would say, strong advantages and selling points. The tour operator holds responsibility for the whole travel package, which is not valid in the case the client books the services separately from the service providers. So let's move now to the review of key financial indicators of Novaturas group business activity in 2019. During 2019, we have served almost 295,000 clients, which accounts to 3.9% lower capacity compared to 2018. But our revenue is very similar to the one of previous year and reached to almost EUR 180 million. EBITDA of 2019 is reaching to EUR 4.4 million, which is around 44% lower year-to-year. However, there is solid growth of the EBITDA on the last quarter. EBITDA of the fourth quarter of 2019 reached to EUR 1.4 million, which is 160% higher than the same period of 2018. Consolidated net profit during 2019 amounted to EUR 2.3 million, while during the last quarter of 2019, it has amounted to EUR 1 million. In short, 2019 has been a challenging year for tourism industry players due to intensified competition, also slightly changing customer habits due to shift in climate and, finally, aviation crisis that Novaturas has faced in the end of 2018. And those consequences of that have continued for the first half year of 2019. Despite this, the challenges have been coped and the results of the last quarter of 2019 do show and indicate that. In the next slides of the presentation, we will have a more detailed analysis of key performance indicators of 2019. But before we go to that, I would like to also mention as well some several initiatives, events and business activities that we, as a tour operator, joined in 2019. First of all, in 2019, as early as never before, we started the early booking sales for both seasons, winter '19-'20 and also summer '20. And this has proven to be the right decision, as we see the strengthening early booking sales. And also, the clients are benefiting from all the early booking campaign benefits. Second, in the beginning of 2019 and also in the beginning of this year, 2020, we have actively participated in the largest tourist exhibitions in the Baltic markets that are most important events, tourism events. And those are the events that help us to boost the sales, increase our brand awareness and strengthen our position within the tourism sector. Last year, 2019, we have also made certain improvements of the -- on the flight service together with our main airline partners in Lithuania, Latvia and Estonia. We have developed online check-in and extra services platform that enables the clients to check in online and book additional flight services. In 2019, we have also signed an agreement with Olympic Committee and launched the ticket sales for Tokyo Olympics as authorized reseller. Last year has also been marked by social initiatives. The largest and the one that we would like to highlight is the partnership with Lithuanian sea museum and the initiative to build and to help for them to build the first Baltic Sea Animal Rehabilitation Center. We, as Novaturas, contribute to the preservation of wildlife by ourselves and invite our clients to join this initiative. In 2019, we have also celebrated the 20th anniversary of Lithuanian company. This is a huge anniversary and relatively young Baltic tourist markets. And our celebration event connected tourism professionals from Baltic markets as well as partners from all around the world. 2019 has been also rich in awards. The Estonian Chamber of Commerce and Industry, which promotes a strong and business-friendly environment in the country, has ranked us as the most competitive company in the tourism industry in Estonia. So now let's come back to the figures. And during 2019, as you can see from the charts, the number of passengers carried decreased by 3.9%, but the revenue has decreased by 1% only. We have also carried less passengers in the last quarter of 2019 if compared year-to-year. However, the revenues in the fourth quarter of 2019 reached to EUR 40.3 million, while in 2018, the last quarter was just slightly higher, EUR 41.8 million. This shows that the travelers are booking more expensive products, and the average package price is increasing year-to-year. The decrease in the revenue and PAX numbers compared to previous year is mainly related to our strategy to recover the profitability and to focus on profitability instead of capacity growth for 2019 particularly. It is also linked to initially planned lower seat capacity during the months of decrease in demand such as June, July, August and also November, December. On the other hand, the capacities have been increased for the months with increasing demand for outbound traveling such as April, May, September and October. Even though the summer season is the main -- the high season in the travel sector, the Baltic markets are identified by very long high season continuing from April to October, with strong shoulder seasons, which are from April to June and from September to October. And recently, this trend is being even more intensified, and therefore, the capacity planning of Novaturas group is being adjusted as per changing market seasonality. Due to strong and even becoming stronger shoulder seasons, monthly and quarterly revenues distribution is becoming even more balanced throughout the year. Apart from the seasonality changes, we are also observing change in client needs and habits. And if we look into the sales by product category, we see slight changes on those figures. The travelers are more and more looking for new experiences and activities, and this translates into increased demand for sightseeing tours. Based on this, for 2019, we have prepared a very extensive offer of sightseeing tours and expanded it to other Baltic markets, not only Lithuania, which was still 2019, the sightseeing tours product was sold only in Lithuania. From 2019, we have -- we are selling it also in the Latvian and Estonian markets. Therefore, the revenue of the sightseeing tours by plane increased and -- by plane and also by coach, increased by significant numbers by around -- from -- depending on the products from 12% to 20%. Sightseeing tours by flights are also done for travelers. And especially, we are noticing and observing and increase in demand on the short trips option, weekend trips options. Despite this, the flight package tours remain being the key product in terms of revenues for all years, and 2019 is not an exception. Flight package tours revenue share reached to 86.7% amongst our product, which is by 0.1 percentage points less than previous year. Other products, which is mainly flight tickets sold for charter flights -- flight tickets with charter flights sold via travel agencies and GDS channels have 10.5% of the share. Looking into the capacity distribution between the markets. It does not change significantly. As usual, the highest number in 2019, it was 51% of the clients were served from Lithuanian markets. But compared to previous year, the number of travelers from Lithuania and Estonia has slightly decreased. From Lithuania, it has decreased by 3.9%. From Estonia, it has decreased by 1.5%. On the other hand, in Latvia, the number of travelers has increased by 6%. No increase in Lithuanian and Estonian markets is justified by the fact that in 2018 and '19, the latter markets recorded the highest growth, while Latvian market had more gradual growth. Therefore, the growth stabilization in Lithuanian and Estonian markets is expected. And also talking about the Baltic markets, in 2019, the outbound tour operators market has faced very intensive dynamics. There have been companies that entered the market. There have been companies that stopped their activity. 3 smaller tour operators in Latvia and also 2 companies in Estonia have suspended their business activity. One of the companies in Estonia is Aurinkomatkat, which is the subsidiary company of Finnair Group. So Aurinkomatkat decided to stop their activity from the summer 2020. But in this case, Novaturas group has agreed with Aurinko to carry out its operations in Estonia starting from the beginning 2020 until the end of the season. And in this way, we have fulfilled the obligations for the tourist, travel agencies and airlines for the destinations that Aurinkomatkat had on offer such as United Arab Emirates and Tenerife. And those operations included the period from January to April 2020. Despite this, we have to note that the Baltic outbound travel market remains highly competitive and certainly requires a very solid base, long-term experience, very good know-how of the market and huge flexibility and proactiveness in order to maintain the market position. Now talking about the destinations. So again, no significant changes are observed in the sales distributions among the destinations, or those changes are continuing on the latest trends. Main and increasingly demanded destinations are Turkey in the summer season and Egypt in the winter season. Share of those destinations in the charter travel revenue has been increasing since 2018. During 2019, as we can see from the chart, revenue of both destinations, Egypt and Turkey, composed a percent of the total charter capacity revenue. Accordingly, revenue share of Greece, Bulgaria and Spain decreases. On the other hand, observing the latest sales indicators of the summer 2020, we do notice that demand of Greek, Bulgarian and other destinations is recovering. And those destinations are well demanded among our travelers together with the Turkish destinations. As Novaturas group, we put -- we constantly put much effort to strengthen our contracting power and expand our product portfolio in all destinations. But the main destinations such as Turkey, Egypt, Greece, Bulgaria and others are our focus destinations. Also, our asset-light business model allows us to have flexibility with the suppliers. We independently choose our suppliers on the destinations, and we can choose the best local destination services provider in each destination. And by having operational agreements with carefully chosen, the most suitable, the strongest and the most reliable local partners, we managed to build a very attractive commercial and also quality-wise destination product and also the offer of the services based on the Baltic market needs. Demand on long-haul destinations is also increasing in the last years. During 2019, it has reached to 3.7% of our revenue, which is by 0.7 percentage points more than previous year, while on the last quarter, if you look into the chart alone, on the last quarter of 2019, it has reached to 5.6% of the revenue share while -- which is 1.3 percentage points higher year-to-year. Therefore, the last quarter results of revenue share of long-haul destinations, once again, indicates an increase in demand on those destinations. In 2019, we have expanded our product portfolio by 3 new long-haul destinations, Mexico, Seychelles and Bali in Indonesia. And this is a very attractive add-on of our already well-known long-haul product such as Cuba, Thailand, Vietnam. And all those destinations are -- or the demand for those destinations is increasing. And due to this, we have also decided to expand the offer of certain long-haul destinations to the summer 2020. And as well, apart from those already mentioned, Mediterranean destinations and also the long-haul destinations, apart from the main destinations that Novaturas offers, we are also always focusing on offering -- or discovering and offering a number of other destinations, which are indicated on the right side on both charts. A big part of those destinations are unique and not of or any other tour operator in the market, such as, let's say, destinations in Tunisia, Costa del Sol in Spain, Split in Croatia, Montenegro coast line. We are constantly looking for possibilities to expand our destination portfolio and to refresh it by new destinations. Therefore, for the summer 2020, we are offering a very attractive and very diverse destination product where -- which includes also some additional new undiscovered destinations for the Baltic markets, such as Kefalonia in Greece, Istria region in Croatia and Slovenia Riviera. At this moment, specifically, we are already intensively preparing for 2020 and '21 season, whereas again, we are planning to expand our product portfolio by new destinations that we believe will gain the popularity in our markets. Distribution. Well, the diversified distribution maintains and diversification continues to be maintained within the distribution channels. Novaturas group is using various channels to sell its product. It has travel agents, the retailers, direct sales offices, website and also global distribution systems, where we are selling our flight tickets. The main distribution channel is travel agencies whose share in 2019 remains exactly the same as previous year, 72.7%. In the current market environment and competitive situation, we consider that importance of this distribution channel is increasing. And therefore, we are focusing strongly on this distribution market. We have done many different actions such as marketing campaigns, target-oriented commercial activities and many others to improve our cooperation and sales via our partners travel agencies. And those initiatives certainly will continue for 2020 in order to intensify this distribution channel, which consists of more than 400 long-term business partners, travel agencies among all Baltic markets. As well, we are focusing strongly on e-commerce sales channel. During 2019, we generated EUR 27.1 million of revenues, which is almost $0.5 million more compared to 2018. Revenue share from e-commerce reaches to 16.2% in 2019, while in 2018 it was 15.9%. In 2020, we will be aiming to improve the service standard level of our own sales channels by implementing efficient sales and service technology and implementing a clear target-driven standard of the service and sales. Now talking about profitability. As mentioned earlier, due to increased competition and the weather factor, which resulted in the oversupply for the first half of the year, profitability of the sector has been negatively affected. Our profitability, especially over the first half year, has also been affected by the change of our aviation partner. Therefore, during the year 2019, our profitability results are lower than in 2018. But the last quarter indicates a positive change year-to-year. EBITDA of the last quarter reached to EUR 1.4 million, while in 2018 same period, it was EUR 0.5 million. The efficiency and productivity ratios indicate similar trends. The profit per PAX on the last quarter of 2019 is EUR 65 per PAX, while in 2018, it was EUR 57 per PAX. Profit per PAX of whole 2019 is EUR 42 per PAX, while in 2018, it was EUR 54 per PAX. During 12 months of 2019, we have managed to increase the average selling prices compared to corresponding periods of the previous year up to EUR 638 per PAX, which is EUR 22 per PAX higher compared to previous year. And in the last quarter, the increase of the package price is even more significant. It has reached -- the price increase, it has reached to almost EUR 50. We have also managed to keep a high load factor, which shows effectiveness of our sales and good balance between the supply and demand. Operating expense is under control. So during 2019, in order to balance our financial results, we have also taken very, I would say, serious actions and measures to increase our efficiency and control our -- and control of the operating costs. In 2019, our general and administrative expenses, excluding one-off items and commission expenses, decreased by 1.4% year-to-year, while in the fourth quarter, it decreased by 13.4%. Group's total operating expenses decreased by 3.5% year-to-year. Hence, we will continue further optimizing our processes and increasing our operational efficiency. And now we would like to move to the future guidance after reviewing the 2019, the past year results and activities. So as mentioned in the beginning of the presentation from the year 2020, we are giving more detailed forecast, which is based on current macroeconomic tendencies, considering that no any force majeure situations are faced and competition level remains similar to 2019. We will continue on announcing yearly forecast with financials of 12 months. And also, we will adjust the forecast according to the actual situation, the half year and 9 months reports. So first of all, talking about our capacities and sales forecast. For the year 2020, we are intending to come back to the growth vector and are planning around 3% growth in the number of clients and around 5% growth in turnover accordingly. The growth plan is based on the plans to expand the product, to strengthen our contracting power, especially in the main destinations. Also, it is based on our active dealer net cost and pricing yield, our sales and marketing activities and many more initiatives. Additionally to that, we will aim to start the early bookings of winter '20 and '21 and also summer 2021 early and, if possible and if we see it beneficial, earlier than last year. In order to educate the market to book early or earlier and earlier and also gain all benefits of the early booking sales, we have built a very solid and early bookings target content and sales strategy. Internally, we will continue increasing the efficiency while also maintaining a high level standard of our services. Majority of the actions and measures towards efficiency increase are based on technology developments and also processes improvements. Also, we will look for the opportunities to increase qualification and engagement of our team, majority of which are competent, experienced and very professional employees. And that would help us to move towards the efficiency increase of our business.activity. Certainly, the figures here and in this 2020 guidance is based on the current, let's say, circumstances and market conditions. Definitely, any kind of global factors, even the recent ones such as coronavirus is very much very well monitored. Currently, it does not have any kind of effect on our operations, especially considering that the biggest share of our revenues are from short-haul destinations, which are out of this region. But we have to monitor very carefully further developments of this global issue and to be ready with any kind of other options. So I would like to thank you for your attention today. We will be ready now to answer your questions.

Mrs. Keinyte, thank you very much for your presentation. So indeed, we can open up for a Q&A session. And before that, I would like to remind you that you can still send your questions in the section on the right side of the screen. Okay. We are starting with the first question. How decreasing number of travelers will affect contracts with suppliers, airlines in particular?

So talking about the airline contracts, they are quite flexible. They, of course, include a certain commitment from both sides, but it gives also the space to react to the market situation and to decrease or increase the number of flying hours. In 2019, when the number of passengers had slightly decreased, it did not affect our contracts and it did not -- and it does not affect for the future. Some of the airline contracts are even long or few years contracts. So that's why neither for 2020, it would not affect neither commercially nor in any other ways, let's say.

Next question. How are you prepared to mitigate the negative impact of coronavirus if it spreads to Europe? And what is the real effect, if any?

So first of all, as already mentioned, since our destinations offer is based mainly on the short-haul destinations, Europe, Mediterranean, Middle East, North Africa regions, currently, we do not see any significant effect. There are certain reactions or certain questions from the market, but still it -- commercially or operationally, it did not affect our business activity. Talking about long-haul destinations, there is more significant reaction from the clients or more questions raised from the clients that are traveling to Asian destinations. But since the flights are all those destinations except China are still open, currently, no even, let's say, a significant number of cancellations is received. Or even a few cancellations that we got, they are under the conditions indicated in the agreements. Now considering a further possible scenarios of this global issue, if it spreads to Europe, it would not be just an issue or really serious issue to tourism or aviation, it would be most probably a global issue, which will affect a lot of different industries. And also it's not only the business, not only the economy. So that's why all of us have to be in one or another way ready for this scenario. But that would be, I would say, a really -- very strong impact on economy and many different sectors.

Next question is what is the reason of own retail decrease.

So considering the distribution share, our revenue share from online or web sales has increased, and our also revenue or sales share via the retail agencies, travel agencies has remained. So that's most probably the explanation of this change of the percentage share of this particular own retail distribution channel.

We received one more question. Revenue increase for 2020 is higher than passengers, means higher margins. What is the assumptions that will let the company to sustain such a high margins in arising competition conditions?

I will answer this question. So first of all, we are basing our assumptions for 2020 on a high proportion of early booking sales, which we are constantly achieving year-after-year. Another reason for average selling price increase is increasing seat supply for sightseeing tours, which we are usually selling at a higher average price, and also our long-haul destinations supply increase, which we are also selling at a higher price.

One more question arrived. One largest tour operator, TUI, increased their capacity 2x in all Baltic market for 2020. How it will affect Novaturas' package price?

The price of the package -- of the travel package is composed by a lot of different components. It depends on a lot of different factors. Majority of them are global, not only local. So that's aviation, that's fuel, that's currency ratio fluctuations, that's hotel prices, which are also very much influenced by different global factors and the situation in different markets and destinations. It also depends on the time to sell the package and many different factors. So definitely, that's -- the competition is not the only factor defining the travel package price. On the other hand, the success of the tour operator depends a lot on also such things like distribution channels, how well developed they are, what is the, let's say, professionalism and know-how of the company, also the reliability of the company, because there have been different scenarios in the travel industry as well where the clients were not provided with the services they booked, so also the service standard and the quality of the services. Definitely that we will follow our own path, and our aim is not only to increase the capacity, but also to work profitably and to deliver the results that we have -- are forecasting for 2020.

The following question is this. What is your split between economy and luxury clients or revenues and the average revenue per PAX for the luxury segment versus the economy segment?

So first of all, luxury segment for us is mainly -- it's not only people who are buying very expensive hotels, but also people who are buying more expensive product like sightseeing tours by planes, also long-haul destinations, which is on average selling prices is significantly higher. So the difference, of course, is quite significant between the selling price, but also the product is very different. And this part of customers buying more expensive product is increasing. And together with long-hauls for sightseeing and more expensive hotels, we can maybe have about 5% of our total revenue, while very cheap product is not very popular with our customers. Our customers usually are choosing high-quality product at a reasonable price, so mainly 4-, 5-star hotels, maybe not the luxury ones, but good value ones. So I would say the real economy makes quite a small part in our sales.

Next question. Has Novaturas got a strategy to reduce its carbon footprint with its airline partners?

First, very important thing is that we have main partners, main aviation partners in Lithuania, also in Latvia, in Estonia, with whom we are working for a long time. And we are constantly pushing them to increase quality of service, including pushing them to have newer aircraft, which are consuming less fuel comparing to old ones. And with having a long-term cooperation, we believe that we have possibility to search for ways to improve our -- to reduce our carbon footprint in the future.

What is your involvement with a maritime wildlife rehabilitation center and how do you support the project?

So first of all, we are inviting each client who is booking our package to contribute to the construction of this or development of this rehabilitation center by donating a certain amount. There are several options. And in this way, we are spreading this initiative to our -- among our clients. On the one hand, as a company, we are also contributing to this by organizing different campaigns and different activities. And we are also helping with certain specific donations on this project. So that's, I would say, our own contribution and also spreading this initiative among our clients.

And the last question so far. At this moment, goodwill of Novaturas group is EUR 30 million. Novaturas earned only EUR 2.2 million net profit. How much goodwill Novaturas is going to write off this year? How auditors look at this very sensitive question for Novaturas group?

The goodwill of the company is audited each year by international auditors for impairment. This audit is, like, named impairment testing, and we are doing it each and every year. I do not -- we -- as a company, we do not expect that we are going to need to make any write-offs this year, because this goodwill is -- this impairment test is based on the future results of the company, not of -- it's not based on the 1-year results. It's based on the future -- long-term future results of the company, and we strongly believe in the successful long-term future of the company.

Thank you very much. All questions are answered. Currently, we are waiting for more questions. So on this note, I would like to thank everybody for participation today. And dear guests, thank you very much for the presentation and for answers given. And participants, thank you for joining. See you next time.