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

Good morning, dear listeners. Welcome to Novaturas meeting with investors. I'm Emilija from Nasdaq Vilnius and I'll be moderating today's event. We will start with the presentation from the management, which will be followed by the Q&A session. Please be informed that this webinar is being recorded. As always, I encourage every one of you to ask questions during or after the presentation in the Q&A session. With that said, I'm pleased to introduce today's presenter, Chief Executive Officer, Vitalij Rakovski. Mr. Rakovski, please, the floor is yours, and good luck.

Thanks a lot. Hello, dear investors, and thanks a lot for joining. So we will start the overview of financial results of year 2022 first quarter. So to begin with, after the unprecedented drop in year 2020 and '21, this year, Novaturas continues its gradual recovery when our sales in the first quarter reached slightly more than EUR 29 million. And this is more than 4x higher than the revenue level we had in the first quarter in '21. And this is even slightly higher than in year 2019 on a prepandemic year. Also, in terms of clients served, we served more than 36,000 tourists. And again, it's more than 3x more than we had in year '21. So basically, I would say that this is a quite strong start, a strong start of the beginning of the year. What relates to the profitability of the business, so our EBITDA in the first quarter was slightly negative, minus EUR 100,000. And basically, there are 2 main reasons behind that, 2 equally important reasons behind that. So first is the fuel price increases, which was quite significant from the beginning of the year and especially high growth we experienced in March. And due to the fact that quite high proportion of our sales were already made in year '21. Meanwhile, our clients traveled when the fuel prices were already increased. It gave us a negative impact towards our profitability. Based on our estimation, it's slightly more than EUR 200,000 so quite significant impact. And the second main reason for quite low profitability in the first quarter is that we experienced quite intensive competition in certain intent destinations. So prices were quite low, which also gave us some negative impact. And despite that, it's probably worth to outline that in general, first quarter for tourism sector is a low period and actually sales or volumes compared to total annual sales are quite low. So it typically accounts for some 15% of total annual sales. Sometimes it could be even up to 20%, but still it is a low season. So basically, what I want to say is that upcoming quarters and the performance in upcoming quarters, which would much more contribute towards total annual performance of Novaturas. Despite that, it is very important to outline that at the beginning of April, we introduced a fuel surcharge for all existing already made bookings in order to manage the fuel price risk going forward. So by doing that, we have basically eliminated the impact of the risk we had for the first quarter and going forward, this risk, I would say, is managed or controlled. We did it by using derivatives. And secondly, it's also important to say that in order to create additional security for our clients, we introduced fuel price change protection service, which basically implies that when buying the package from Novaturas for year 2022, going forward, the prices for clients wouldn't increase due to the fuel price increases going forward, if such increases would happen. And last thing to be said is that our Q1 profitability is also positively impacted by accounting impact, which comes from implementation of IFRS 16 -- IFRS 15 standard, However, on this, more information would be provided in the audited financial statements of year 2021. So there will be some movements and changes to the year 2021. And some part of that result is moved to year 2022 and we plan to announce audited financial statements for '21 this week. Gently, to the uncertainties in the market which I mentioned before, so probably a few things need to be set. So I would be concentrating on the impact, which we had from the Russians' war against Ukraine. And so first of all, the Ukraine and Russian airspaces were shut down. This is one important development. Another important development is that Russian carriers were banned by many European countries. It also gave certain developments. So regarding the first one, the shutdown of airspace, so the flight times for quite a few destinations actually increased. The increase is not so significant. However, the increase is there. And also, it gives impact for our aviation cost as the distance is getting longer. So fuel costs are getting up and also the aviation part is increasing. However, on the other side, the ban of Russian carriers increased hotels availability now in destinations, not only in European destinations, but also in Egypt and Turkey. And it gives, of course, a positive impact as it gives us additionally more selection and more availability to be offered to our clients. Also, it gives positive impact on prices. So prices are -- were getting lower. Not significantly, however, still they were getting lower. Moving on due to the breakdown of Russian war, the number of reservations has temporarily dropped, I would say by almost half in the first few weeks after the war started. However, probably looking from today's perspective, I would say that the effect was temporary. And that towards we have experienced a gradual recovery of the bookings. And currently, I would say that we are -- our weekly bookings are back to normal levels. Moving on, also important development happened related to the EU in both sanctions on various Russian-related businesses and individuals. And one of the impacted persons was Alexey Mordashov, who was the majority owner of TUI Baltics tour operator. And as a result of that, basically, TUI Baltics are currently not operating, and has stopped their other operations in the Baltics. What would happen going forward, probably nobody knows. However, currently, our view is that at least for short and midterm, this tour operator wouldn't be operating in the Baltics. And last thing to be said regarding our contribution towards help for Ukrainian citizens. So we also had opportunity, at least partially, to contribute and help. So once the war started, there were quite a number of Ukrainian tourists in various destinations. And some of them were willing to travel to the Baltic states and to stay temporarily here. So basically, we have allowed them to come back with our planes, free of charge. And up until now, there were almost, I would say, full 2 planes of Ukrainians, which came back to the Baltic states from holiday destinations, and we did it all free of charge. Moving on, what to expect from Q2. So a few things to be said. The first is that we generally expect that our PAXes sold and revenue levels should be close to the prepandemic levels. So to the year 2019, whether we would exceed or we would be close to both levels, now it's hard to predict as the uncertainty in the market still exist, but we want to be close to those levels. Secondly, we want to put additional attention on profitability and develop the action plan of how to recover our profitability. Thirdly, we already announced our early booking sales for key destinations for winter season, which starts at the end of this year. So for key destinations, the sales are already open. Meanwhile, in May, we will introduce to the market full program for winter holidays. And together with this introduction, we want to offer some additional new destination holidays to our clients. Also, recently, in April, we signed a letter of intent with Kidy Tour, another tour operator, with the intention to fulfill the obligations to the travelers from Lithuania and Estonia, who have booked trips from Kidy Tour. So basically, now we are in a negotiation stage. But there is a high likelihood that such agreement will move forward. And we would take over all Kidy Tour reservations. So currently, it is up to 5,000 travelers. And the reasoning behind that is that our again, of course, opinion that Kidy Tour is planning to also stop their operations temporarily or permanently in the Baltic states. And last things to be said regarding the development of competitive landscape. So actually, partially already mentioned, but to sum up, everything -- can put everything into one place. So actually, probably we can say that 2 tour operators, TUI Baltics and Kidy Tour would not be operating in the Baltic markets for at least year 2022. However, a new competitor has entered the market or recently announced their entrance to the market, the Ukrainian tour operator, Join Up. Of course, it's very early now to assess the impact of new competitor's entrance, as basically their flights are starting only this weekend. However, we would be monitoring the situation and also reacting towards that. So this is what relates our forward-looking statements for the first -- for the second quarter in year '22. Also regarding our product mix, here, I would say there are no significant changes. Still the majority of our products are flight package tours and flights only. So this accounts to almost 100% of our total services besides seeing tours by couch and by plane, insignificant at the moment. And still the recovery of this product is not yet there. Also, what needs to be said probably is that despite the fact that our PAXes are 3x higher versus year '21. So but to compare it to the year 2019, we are still minus approximately 10%. However, the first month this year in March, our PAX volumes basically exceeded 2019 levels, which is a quite good development, and let's hope that this is -- that such tendency would continue going forward. In terms of top destinations, again, as Q1 is a low season and that is a winter season, so the destinations remained very similar to what they were historically. So the main ones were Egypt, Tenerife Islands and skiing resorts. Totally, they account of some 85% of our total sales and total selection. In terms of our distribution channel, so here, I would say that the main one distribution channel remains the same, which is travel agencies, around 70%. And it is quite stable during the years. Another thing which needs to be mentioned is that our web sales are increasing. So our e-commerce share from total sales was approximately 20% this year and there to compare the absolute growth of e-commerce sales in the last 2 years. So during the last 2 years, it increased by 20%, so quite high growth, and it is quite promising going forward. So slightly, we go deeper into the profitability performance, I would basically say that the comparison of year -- with year '21, EBITDA comparison and net profit comparison, wouldn't be 100% accurate, as probably Q1 last year was exceptionally good due to the few reasons behind. So first is that there was still subsidy received from Latvian government, which was used for pandemic measures. And secondly is that last year, we were the first ones that took the leadership to reopen our flights to Egypt in February '21, and it actually gave some indeed positive -- exceptionally positive result towards the profitability last year. And secondly, the difference between the EBITDA and net profit, as you see, is also quite high. So main line behind that is our interest expenses. So basically, we have to serve quite a huge amount of loans, which were taken to cover the pandemic impacts in year 2020 and '21. So this is the main difference between EBITDA and net profit. What relates to our operational performance, I would say that our load factor in the first quarter was okay. So it is on those levels which we treat good, 95% load factor. Secondly, our sales profit per PAX and sales profit per PAX is our gross profit less commissions paid, was approximately EUR 40. So yes, it's lower than '21, which I explained to you before, but it is also slightly lower than 2019. And the reasons behind that are the same reasons which were mentioned regarding capital profitability, which is the fuel price differences and in terms of competition in winter destinations in the first quarter, especially in the beginning of first quarter, I would say. Last thing to be said is the average package tours. So they are increasing, so additional EUR 80. As you see versus '21, package tours increased. Of course, the significant part of this increase comes from fuel prices as fuel in total, I would say, sales composition accounts for some up to 10% and the fuel prices went up quite significantly. So huge impact comes from that. But in general, also there are increases coming from the services increases, hotels are increasing prices as well in general. And last thing to be said about our operational excellence. So our operating expenses in the first quarter this year were EUR 1.6 million. And I would say that they were managed quite okay. Sales and marketing costs as a percentage from sales were 3.2%, and it is the lowest rate in the last 3, 4 years. It's still very close to year 2019. However, the biggest, how to say, efficiency comes from our general and administrative expenses. So we were slightly more than EUR 600,000. Meanwhile, I'd like to compare it to the prepandemic levels, it was EUR 1.1 million. So the biggest difference on still savings are coming from here. So we are currently operating quite efficiently in terms of operating expenses. And at this point, I would stop and leave you the time for questions. Thank you.

Thank you very much for the presentation. And indeed, we will switch to the Q&A session. [Operator Instructions] So let's start. And the first question that we received is as following: Company Enlight Research did a report about Novaturas. On this report, it's marked that Novaturas occupies over 40% of tour operator market in Lithuania. According to the law of competition of the Republic of Lithuania, a company which is occupying more than 40% of the market is recognized as a dominant in the market. Do you acknowledge that Novaturas is a dominant company in the market?

Thanks a lot for the question. So first of all, is that Enlight Research is a purely independent analyst company, and this is -- it needs to be said that this is their opinion, their calculations and their conclusions coming from there. But commenting on this, how to say, compliance, so probably it would be better to ask the question for competition for it, but I would say so that typically, it's a very huge question on the definition of the market. So how the market is defined and how we look internally and not only on the market of tour operators, but in general, tourism market overall because we are, for sure, competing with regular flights. We are sure obviously, know that the market also includes people who travel by themselves and they are not using their organized tourism. So I would say so that actually the market in which we are competing is much, much higher than only tour operator market. But this is the -- probably I'm not the one who is the most competent person to answer what would be the treatment of competition of tourism.

Thank you very much for your comment. We received one more question, which is as following: could you please expand on the reasons why Kidy Tours could not manage the trips for summer destinations?

I would say so that, again, they would be the better -- better answer to this question. But basically, they came to us with, how to say, offer or idea that they would like to how to say, give these reservations to some other tour operators, maybe they were even communicating with other tour operators, I don't know that. But basically, I think in the publicly, it was commented that in general, the owners of Kidy Tour reshifting their strategy. They don't want to operate in tour operator business and want to concentrate towards the aviation, which is their main business. So I would just presume that this is probably the main reason.

Another question would be why the good practice of reporting financial results timely before the webinar has changed?

Probably this is more, I'd say, one-off event, I would say. So this year, we spend a lot of time with our financial statements of year 2021 related to this new format of reporting and all related audit procedures behind that. So I would say that going forward, we would be following the good practice.

Thank you for your answer. Let's go to another question, which would be gross profitability, notably lower compared to 2019. If in this case that the company cannot pass full cost increase to customer and is lower profitability than new normal for the next periods?

So partially, we were not able to pass the fuel price increase, which I mentioned in the beginning. So quite a significant effect came from that. But going forward, as we introduced the fuel surcharge for all existing, meaning already made bookings from April. So we would have been able to pass this increase to the client shoulders. Also probably it needs to be said that actually, when we introduced this fuel surcharge, the dropdown rate was not so high. So basically, clients accepted this increase of majority, the absolute majority accepted this increase. And by the way, it was allowed by EU directive and EU regulations to increase the prices due to the fuel price changes up to 8%, and we basically followed this directive. And answering the second part of the question, I would say definitely not. So we want to be close to the profitability levels which we had on the prepandemic levels. Again, we can't may be very, very equally compare those periods as competition is changing. So it all depends on the competition and how the market develops and, of course, on our action plans to react to that. But definitely, we want to guarantee ourselves more towards prepandemic level profitability.

Thank you very much. As Novaturas conducts the fuel price hedging, hasn't that helped to keep the fuel prices lower?

I would say it helped to manage the risk for them not to go higher to basically, how to say, fix the price once we do the sale. Once we did the sale, we know how -- what is the price and we are, I have to say, sure that we wouldn't have any negative effects coming from that, once the client would be traveling, which could be, as you know, 1 month, 2 months, 3 months or even 6 months after the sale happens.

Thank you very much for your comment. Another question would be what proportion of flights are affected by extended flight around Russia and Ukraine? Is profitability lower for those trips or the cost increase is passed to clients?

So partially, this best clients as the fuel cost increased due to the longer flight times, longer dispenses due to the overfly, this overfly by the way, is regulated in such a way that we should keep 200 kilometers from Ukrainian borders, so not only just close to Ukrainian borders but 200 kilometers from Ukrainian borders. So partially, this effect is transferred, I would say, biggest portion of this effect is transferred to the final price.

So let's continue. And another question would be one of the low profitability reasons was increased competition. With TUI and Kidy Tours out, who are bringing the tough competition now?

So I would say the risk or uncertainty is behind the Join Up. So it is now very hard to assess their -- what would be their strategy, how aggressive they will be. There are opinions that they were quite aggressive in the markets in which they operated before. However, we really lack of information of what is their financial spend and how they would manage with operations. So very early to assess. I would say 2 possible, I'd say, scenarios is one that their operations wouldn't be so aggressive, let's say, moderate, which would be probably one way to go and another is that they could go very, very aggressively and that could definitely disturb the market. So too early to assess at the moment.

Another question would be what is the final decision about Megaturas. You lost -- your loss was EUR 300,000 from this company. Did you ask about law solution?

On that, probably, I would say, we would follow up separately with the up-to-date answer.

Another question would be Novaturas, on 2020, were ask from travel agencies to refund commission. It was not illegal according Lithuanian laws. When you plan to refund this commission for travel agencies?

Can you once again read the question?

Of course, sorry. So Novaturas, on 2020 ask -- so I'm reading as it's written, ask from travel agencies to refund commission, it was not illegal according with Lithuanian laws. When you plan refund this commission for travel agencies?

Again, we can follow up separately, but probably short answer would be that we are not planning to refund.

So let's continue then. And another question would be travel agencies do a lot of job for changes of bookings on 2020 and 2021. They do it for free. Did you plan to offer compensation for this job for travel agencies?

Today, we have a lot of travel agencies participating probably in the call. Thanks for showing such a big interest for us. But I would say so that probably, this is the commercial relationships between the travel agencies and tour operators and probably wouldn't be, I'd say, here for me now to comment publicly on how such commercial relationships are managed between different travel agencies because just to remind everyone that there are a number of travel agencies with whom we work. And probably shortly reacting to that, I wouldn't say that this is fair to say, but this is free of charge. So every business basically, assessing where risk when working with one or another counterpart. So I would say that everybody should consider their risks and some early bookings are definitely happening, and this is part of the probably, tour industry practice, let's put it like this. So it happens. We wouldn't be probably -- we can't say that this is just something unusual, especially in the current uncertain environment.

Thank you very much for your comment. Another question refers to your previous reply about the competition. So the question is what about the current competition? And who are your main competitors now reducing the profitability?

So main competitors remain the same, which is [ Tez tour ] and [ Korow Travel ]. The main one is Tez tour. And I wouldn't say that any of both is reducing profitability. So the profitability is probably impacted by the general competitive landscape in the market. So it's not only one competitor who is doing the impact, it's general market situation.

And it seems that we have the last question for today, which would be when do you plan to start working on profitability levels again?

So as I said in the presentation, basically, is that we want to work on the action plan for upcoming periods to recover the profitability in the coming future.

Thank you very much. So as all the questions are answered, on behalf of Novaturas and Nasdaq Vilnius, thank you, everyone, for joining us today. The recording of the presentation will be available in the company's website and Nasdaq Baltic YouTube channel. Dear Mr. Rakovski, thank you very much. Have a good day, everyone, and goodbye.