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

Good afternoon, 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. [Operator Instructions] With that said, I am pleased to introduce today's presenter, CEO Vitalij Rakovski; and CFO, Arunas Zilys. Gentlemen, please, the floor is yours, and good luck.

Thanks a lot. So good morning, dear investors. It's a pleasure to have all of you here. And today, we will have our investor call where we will discuss our financial results of the first half of this year. Together with me, I have our new CFO, Arunas Zilys, who also joined the company quite recently in the second quarter of this year. So to begin with, very shortly about Novaturas in general. So we are, at the moment, the #1 tour operator in the Baltics with more than 20 years of experience in tourism sector. Also, we are traveling to more than 30 destinations worldwide. And on top of that, we're organizing more than 100 round trips in Europe. Also during this half, first half of the year, it allowed us to serve approximately 130,000 travelers, and we generated approximately EUR 90 million of sales. And all of that is done by 200 employees who are at the moment working in 3 different countries in Lithuania, Estonia and Latvia. To begin with, so our second quarter continued gradual recovery. And during this period, our sales reached EUR 62 million, which is almost 3x more compared to the same period in year '21. And also, it even exceeded 2019 levels by approximately 15%. Moreover, we served more than 92,000 travelers, which is 2.5x more versus the same period last year and is very close and in line with our guideline, which we provided for the second quarter, and our guideline was that we were aiming to be close to 2019 levels. And as you see in 2019, we served 96,000 passengers. However, soaring jet fuel prices has complicated our recovery from the pandemic. And it basically resulted loss-making result in EBITDA line where we generated minus EUR 650,000 loss. And our net profit was also negative by EUR 1.2 million approximately. We effectively applied a fuel hedge strategy in the second quarter using derivatives. And this basically resulted a positive result of EUR 100,000 from hedging activities. However, not all volumes were hedged during the second quarter, and according to our estimates, we believe that jet fuel price spikes has resulted a loss of more than EUR 2 million during the second quarter, which corresponds to some EUR 24 per passenger. Going forward, we expect interacting to this jet fuel price spikes. We expect to increase our fuel hedge ratio, first of all. Second of all, we want to diversify our hedging instruments and hedging sources, having in mind that volatility in the market is still high. And moreover, the booking window after the pandemic has shortened. Second of all, some of the jet fuel price increase is already calculated into the purchased trips. And all of that allows us to assume and to think that jet fuel price impact on profitability was more of the short-term pain point for us. Additionally, in the first half of this year, almost half of this negative EBITDA result was generated by various one-off expenses meaning of roughly EUR 300,000 related to various legal expenses, layoff compensations and additional remunerations. What concerns our product mix, so here, the distribution is quite stable. Approximately 90% of our sales are generated from leisure package tours and the remaining 10% are distributed among flights only, sightseeing tours and other minor products. In terms of the situation in the market, the competition and outperformance in different markets, I would like to outline a few things. So first is that it was quite huge changes in the competitive environment during second quarter of this year and during the whole half year. So 2 tour operators exited the Baltic markets, which is TUI Baltic and Kidy Tour. TUI Baltic was basically terminated their activities due to the sanctions applied to this business, and Kidy Tour exited the market due to the strategic decision of the shareholders. However, on the other side, another tour operator from Ukraine, Join UP!, has entered the Baltic markets in April this year. And as we believe we are still in the market entrance mode, with quite aggressive pricing strategy. Based on our public -- based on publicly available information, Join UP! targets to reach annual volumes of up to 50,000 passengers during this year. And as per our estimation, it should account to some 7% to 10% of total tour operators' market share. And second of all, another newcomer is also operating in the market, which is called Coral Travel. This operator is in the market since year '21 and is currently operating in 3 destinations, which is Turkey, Egypt and Greece. What concerns our performance by markets, I would say the following that we did quite good in Lithuania and in Latvia, where our gain versus 2019 levels is in terms of passengers served is quite small. It's only 2%. Meanwhile, total group volumes versus 2019 are some minus 6%. And in Latvia, we are gradually strengthening our market position, and we estimate that in the first half of this year, Novaturas Latvia is likely to be the market leader in tour operator segment in terms of travelers served. However, we did experience some temporary challenges in the Estonian market, whereas you see our recovery versus 2019 is not as strong as in Lithuania and Latvia. And this is mainly related to constant airline delays we had in Estonia. We're currently better proactively working and trying to solve the situation by introducing additional air carriers to certain destinations, which is first thing. And second of all, improving the quality of services of existing carrier and with the aim to increase the functionality and to decrease the late flights volumes. In terms of the destinations where we were traveling. So as you see, we were traveling from more than 30 destinations during the year. And currently, Novaturas has the widest destination portfolio compared to the second largest market player who has slightly above 20 destinations, and the third largest market player service only in 3 destinations. And we believe that this diversified destination portfolio allows us to be very well positioned to withstand any changes in demand of various destinations and also to adapt to consumer preferences. In terms of most popular destinations, so here, the situation is more or less stable, I would say so. Turkey keeps its popularity and accounts for almost 40% of our total sales. And the reason behind that, that at the moment, it is best value for money destination among all our selection. Also, Greek Islands continue to show increase in demand. It was partially influenced by the dropping sales in our Bulgarian destination. As in Bulgaria, the prices of hotel rates increased much more versus other European destinations. And also on top of that, there was much more significant impact on aviation costs flying to Bulgaria and due to the overflying of Ukrainian air space, which is currently closed for traveling. And last but not least, demand for Montenegro is gradually increasing, and this destination is among our top destinations. We still are the exclusive tour operator who is traveling to this destination. Montenegro accounts of some 3% of total our sales. And as it is indeed a successful destination, we even this year extended the flights to this destination. Originally, it was planned to be finished in some point in September. Meanwhile, we extended flights till the end of October in some of our markets. Jumping to the distribution network. So here, we do continue to have very well-diversified distribution channels. Our main distribution channel for a long time remains the travel agencies with whom we believe we have very long-term relationships, especially with the biggest agencies in all 3 Baltic markets. And we believe that it is based on professional analysis and our mutual trust, as we have acquired a lot for quite many years in the market and quite trustworthy tour operator which is quite important in tourism sector in general. Also, we have dedicated resources to maintain our relationships with travel agencies. And on top of that, we are developing quite actively IT systems, which are used by travel agencies by introducing new functionalities and also by improving the existing ones in order to have more convenient usage for travel agencies. In parallel, of course, our own sales channel is also growing. And versus the same period last year, our own sales share increased by up to 2% versus 2019. It's up by slightly more than 4%. Shortly, about our e-commerce platform. So based on the publicly available information and from the independent sources, our web traffic share among the biggest tour operators is quite high. So in Pan Baltic, among the biggest tour operators, we have a web traffic share of almost 60%. And as you see, it's almost 2x higher versus the closest tour operator, closest competitor, and it's even 6x higher than compared to the first largest tour operator in the Baltic market. So we indeed have quite strong presence on e-commerce. And all of that basically allows us to generate a compounded annual growth rate in e-commerce sales of roughly 10%, if to compare this year 2022 versus 2019. In terms of efficiency and productivity ratios in the second quarter this year, we managed to reach a load factor of 95%. This is very close to our targeted load factor. It's much better than we had last year. However, it's slightly less versus 2019. Meanwhile, in 2019, the load factor was indeed exceptionally good. In terms of sales profit per pax, sales profit per pax is gross profit less commissions paid to the agencies. So unfortunately, in the second quarter of this year, it was quite low, only EUR 14 per pax. Meanwhile, last year, it was almost EUR 60. And in 2019, it was almost EUR 40. The main effect of such a low profitability came from the jet fuel price increases, which, as I mentioned before, gave us a negative effect of minus EUR 24 per passenger. Average package tour price is increasing, and it's probably not a surprise to all of you. Basically, it comes from 2 streams, I would say so. So first is the aviation part where jet fuel prices, of course, increased. This is first. Second of all, we need to overfly the Ukrainian air space. It adds additional fuel consumption and additional time spent on year. And second of all, hotel rates are also increasing as general global inflation is quite high. Energy prices are increasing. Workforce is also increasing. So if to compare with 2019 levels, average package tour price is up by some 20%. Operating expenses in the second quarter and in full half year were under control and were well managed. Operating expenses totaled to some EUR 3.6 million for the first 6 months. And it was by 11% lower versus 2019 levels. So despite the fact that we indeed had struggles with the sales profit and we have a huge pressure coming from inflation, but operating expenses are still well managed. Meanwhile, our sales and marketing activities are back to pre-pandemic level with approximately EUR 2 million of expenses for the 6 months of this year. And last, but not least, is our forward-looking view for the third quarter and year to go. So first is that we are targeting to have average monthly volumes exceeding 25,000 pax for Q3, which for the full quarter should account for more than 75,000. On top of that, I would like to outline the fact that, in general, we reviewed our capacity levels for the second quarter, considering the competition in the market, and also considering our intention to improve our profitability. Also, reacting to high jet fuel prices, we would going forward, improve our annual capacity planning process and also, we would improve our capacity discipline during the year, aiming to have us less fluctuations and as less changes as possible during the year. On top of that, we intend to maintain the market leader position in all 3 markets despite some short-term struggles in Estonian market. Meanwhile, considering uncertainties in the market, which, as we believe, quite a few, like potential risk of economic slowdown, potential travel limitations due to COVID-19 come back and war in Ukraine, we believe that in year '23, the company would not expect and we do not expect higher seat capacity, significantly higher seat capacity than in year '22. And also, we believe that our view of balanced supply program should stimulate profitability. So coming back to profitability and guidelines. So we are targeting on gross profit level significantly higher gross profitability in the second half of this year versus first half of this year. On top of that, we are targeting significantly positive EBITDA for the second half of the year. Unfortunately, we will not give any further estimations, more precise estimations due to still high uncertainty in the market. So to sum up, I would say the following, that we did have, indeed, a good second quarter in terms of volumes and sales, where we met the guidelines where we exceeded 2019 levels. We did have challenges, short-term challenges with jet fuel prices, and it significantly affected our profitability. However, the remaining fundamentals are still strong. So we still have a wide destination selection. We have very well-diversified distribution channels. We have strong e-commerce platform, operating expenses are under control, and the demand for traveling is there. That's why we look quite positive for the second half of the year and aiming to improve our results quite significantly. At this point, I will stop and leave time for questions. Thank you very much.

Thank you very much indeed for the presentation. And now we will proceed with the questions. [Operator Instructions] And at the moment, I see that we have no questions. So let's take a minute to wait. And it seems that we have quite a few questions incoming. So the first question would be: In order to improve profitability and achieve positive profits, the travel prices will have to increase. Will consumers be able to bear such an increase?

At the moment, travel package -- tour prices already are higher. And we believe that the demand is there. It's still very strong despite the increased prices. And for now in the short midterm, we believe so, yes, that consumers will be able to pay such prices.

Could you please comment on what is the fuel insurance price?

Not sure whether I understood the question correctly about the fuel insurance, but if it's meant on the hedging itself. So we do hedge using various instruments. So maybe, Arunas can help me with this.

Yes, sure. As it has mentioned that we have already used various instruments of -- various hedging instruments. And we would like to maintain the balance between the cost and the benefit and the risk of those instruments. And we -- but the bottom line is that the average price should be around EUR 5 to EUR 10. Depends on the instrument, depends on the volumes of insured fuel for pax, et cetera. At this moment, as Vitalij mentioned earlier, we are discovering new instruments. It could be -- which could allow us better to secure the fuel price, but still be on the safe side for the cost of those instruments.

And another question would be: Any rough indicators on EBITDA in 2022, please? Similar to 2021, way higher or way lower? And will it be still positive?

Probably, I would just repeat the guideline. I said before that we aim to have significantly higher profitability -- positive profitability in the second half of the year, which for the full year, definitely should give us a positive EBITDA. On what level, as I said before, difficult now to estimate as there are still a few uncertainties -- macro uncertainties in the market.

[Operator Instructions] And the next question would be: What is the reason for not hedging all of the fuel volumes in such volatile environment?

It's part of the hedging strategy. So the hedging strategies differ among various aviation companies and between various tour operators. So Novaturas historically, and at the moment was not using any excessive, let's say, hedging strategies versus the market average. If you look on the other listed companies and other companies, Innovation, which are providing their information on how they hedge. And as was said before, probably nobody could have expected that the prices would hike so much. That's why going forward, we would probably, as I said before, we'll adjust our hedge ratio and definitely would increase it.

Could you please comment on what is the percentage of hedge fuel travels was in the first half and plans for the second half?

Maybe I can answer that. Based on our hedging policy, it is different between the periods, but it was around 30% to 40% of travelers. And at this moment, we are strongly reviewing the hedging policy in order to maintain the more secure level for the fuels and maybe increase, as Vitalij mentioned, the ratio of insured travelers in terms of the fuel prices.

And it seems that we have the last question for today, which would be as following. How much did the fuel surcharge contributed to the profitability?

It allowed to diminish the loss, I would say so. So in fact, we mentioned this net of fuel surcharge already.

We are now waiting for more questions.

I see one more question on hedge fuel price. What is the average hedge fuel price? So we are hedging fuel month by months depending on the problem of the pax for each month. So we cannot see the exact number of the price for exact months, but it's hedge fuel market price for agreements.

So it seems that we covered all the questions for today. On behalf of Novaturas and Nasdaq, thank you all for joining us today. Dear management, thank you very much for the informative session. And the recording of the webinar, as always, will be available in the Nasdaq Baltic YouTube channel and company's announcements. Have a good day, everyone, and goodbye.

Thank you very much. Goodbye.