Published: 2020-04-20 08:30:00 CEST
Tallink Grupp
Annual Financial Report

AS Tallink Grupp Audited Annual Report of the 2019 Financial Year


Letter to shareholders


Dear shareholders

Despite tight competition, slowing cargo market and a high number of dockings at the beginning of the year, Tallink Grupp had nonetheless a very successful financial year in 2019. We transported a record number of passengers, achieved a net profit just short of EUR 50 million and managed to acquire the franchise rights of Burger King restaurants for the Baltics. We also made good progress with the development of the new LNG Shuttle ferry MyStar as well as with shifting our corporate culture even further towards operational efficiency, customer service and environmental and social responsibility. In addition to strengthening our core business, we started actively looking for opportunities to expand Tallink Grupp’s reach by employing our existing skills and knowledge in new areas.

The prospects looked promising also in early 2020. The traffic volumes in the first two months were good, preparations for opening the first Burger King restaurants were under way and, lastly, we signed a Memorandum of Understanding with the City of Tallinn and AS Infortar for the development of an international conference and concert centre with our own port in Tallinn. However, as we are all acutely aware, the global escalation of Covid-19 into a pandemic and the resulting restrictions on movements in March 2020 have altered the operating conditions for most companies and forced us to shift our focus away from exciting growth prospects to ensuring the sustainability of our core business.

Tallink Grupp, together with many other tourism, transportation and service companies, is among those hit financially the hardest by this global health crisis and the travel and movement restrictions imposed by governments worldwide. We fully understand and respect the necessity of the restrictions in order to ensure public health and the safety of our societies. Yet the consequent economic side effects are painful nonetheless.

Uncertainty is one of the challenges of the current situation and there is much that is simply beyond our control. But I would like to assure you that we have decisively focused, and will continue to focus, on the matters that we can control and are taking decisive action to limit the impacts of this global crisis on Tallink Grupp.

To minimise the costs and losses in the face of significantly lower demand, we have temporarily scaled down our operations - some routes have been suspended and only one hotel is open. As the focus has shifted to the health of our core business, we are reducing other activities with more limited future prospects. The cutbacks will help lower our direct variable costs: cost of goods, port fees as well as fuel cost.

We are also looking to scale down on our ship operating and maintenance costs as well as other costs of sales and overheads by postponing all the non-critical investments and purchases. Of course, there cannot be any compromise on the safety and technical condition of our assets. I would hereby like to commend our business partners who have already shown initiative by reducing the costs of their services and relaxing payment terms.

On the one hand, there is less flexibility with staff costs, one of our highest costs. On the other hand, we are seeking to do everything in our power to save the jobs of our full-time employees. With many ships suspended in ports there is less work to offer. Thus, we have been negotiating with maritime labour unions in our different markets and, in agreement with them, sent our staff on paid leave where possible and on unpaid leave in some other cases. For the onshore office and support staff in Estonia, for example, the workload and remuneration, including the remuneration of the Management Board, have been reduced by 30%. Our Supervisory Board has unanimously decided to waive their remuneration for the coming months and I have personally asked for my salary to be halved for the foreseeable future. While making our own efforts to maintain jobs, we are deeply grateful for the salary compensation and other support provided by our home markets’ authorities. However, above all, I would like to thank all of our more than 7000 employees for their commitment and professionalism in securing the future of our company in these hard times - we are all in this together.

The uncertainty surrounding the timing and form of a solution to the Covid-19 situation remains high. The longer it takes, the greater the impact on the economy, which in turn will affect the pace of recovery. We are not under the illusion that we will be back to business as usual in just a few months. It is likely that once the most acute crisis is over, incomes, public confidence and spending power around the globe will remain under pressure and return to the pre-crisis levels of demand will be gradual. Therefore, we are monitoring the situation carefully and evaluating the best course of action for returning to our scheduled services once the situation normalises.

Although the global nature of the situation poses its challenges, we are also actively looking for new business opportunities and revenue sources. So far, we have secured some short-term work by providing critical links for cargo flows between Estonia and Germany, Finland and Sweden, and Estonia and Finland. As the recovery of our core business may take time, we are also more active in chartering out our vessels and services.

I am also grateful that our lending banks have been understanding in this situation. We have been in active discussions with our lenders on the topics of loan covenants and payment schedules. However, even with initial support measures from governments, and our own cost-cutting and cash flow management efforts, we are not going to be able to fully offset the temporary absence of the majority of our business. Thus, we will continue to evaluate and pursue options to ensure the necessary liquidity in the short term and to support recovery and growth in the next few years.

In addition to the above, we have been in active consultations with the governments of our home markets regarding the necessary support measures for mitigating economic damage, including guarantees for liquidity loans and measures aimed at lowering the risk of accruing losses during the market recovery period when borders are re-opened. I am very grateful to the Estonian government for the constructive approach and for the supplementary budget, to be approved by the parliament, which contains measures supporting the Estonian economy, the tourism sector and Tallink Grupp. In addition to the abovementioned temporary salary compensation, the measures include a new salary compensation regulation for the maritime workers of Estonian-flagged vessels - something that has been in place for a long time in all our other home markets.

I am aware that only as recently as February did we tell you that we were planning to share the profits of the successful 2019 with our shareholders and increase dividends. However, in the changed conditions and in the long-term interest of the company, our employees and shareholders, the only prudent course of action is to leave the profit distributions to the future and focus on weathering the current storm.

In summary, our current strategic focus is on managing costs and cash flows with the aim of bringing Tallink Grupp through the current global crisis to continue offering a great service and green, frequent and comfortable transportation links, both for passengers and cargo, in the northern part of the Baltic Sea. My personal promise to all our customers, employees and shareholders is – we will cruise again!


Yours sincerely,

Paavo Nõgene
Chairman of the Management Board



AS Tallink Grupp Audited Annual Report of the 2019 Financial Year

The Group carried a record number of 9 763 210 passengers in 2019, 6 599 passengers more than in 2018. The number of cargo units transported decreased by 1.4% compared to 2018. The Group’s revenue amounted to EUR 949.1 million (EUR 949.7 million in 2018). EBITDA was EUR 171.1 million (EUR 142.8 million in 2018) and net profit EUR 49.7 million or EUR 0.07 per share (EUR 40.0 million or EUR 0.06 per share in 2018).

In 2019, the Group’s total revenue decreased by EUR 0.6 million to EUR 949.1 million. Total revenue for 2018 and 2017 amounted to EUR 949.7 million and EUR 967.0 million, respectively. Revenue from route operations (core business) decreased by EUR 0.6 million to EUR 883.2 million.

The core business was strongly affected by a weaker-than-expected cargo market, caused mainly by the uncertainty surrounding the UK’s withdrawal from the EU, labour strikes in Finland in the fourth quarter of 2019, and added capacity, which increased competition.

In 2019, the Group’s ships carried a total of 5.1 million passengers on the Estonia-Finland routes, a 0.7% increase compared to 2018, but the number of cargo units transported on the routes decreased by 1.5%. Due to pressure on ticket and cargo prices, resulting from increased competition, Estonia-Finland routes’ revenue decreased by EUR 2.0 million to EUR 354.0 million. However, the segment result, which was supported by strong cost control, improved operational efficiency and lower fuel costs, grew by EUR 0.1 million to EUR 80.4 million.

The Finland-Sweden routes’ revenue increased by EUR 6.9 million to EUR 344.4 million. The segment result improved by EUR 10.6 million, rising to EUR 26.8 million. The positive development was supported by the absence of lengthy maintenance and repair works of the kind the cruise ferry Baltic Princess had in the first quarter of 2018, lower fuel costs and tight cost control.

The Estonia-Sweden routes’ revenue decreased by EUR 6.7 million to EUR 112.3 million. The routes’ carriage volumes and financial result were affected by maintenance and repair works on the cruise ferry Baltic Queen in the first quarter of 2019.

The Latvia-Sweden route’s revenue increased by EUR 1.2 million compared to 2018. Growth was driven by a 0.5% higher passenger number and a 3.4% increase in the number of transported cargo units. Supported by lower fuel costs and tight cost control, the segment result increased by EUR 1.6 million, which exceeded the route’s revenue growth.

Revenue from the segment other decreased by a total of EUR 1.1 million and amounted to EUR 73.7 million. The main reason for the decrease was lower revenue from hotels, as Tallink Pirita Spa Hotel in Tallinn ceased operations from November 2018 due to sale of the hotel property by the owner. Unlike accommodation sales, there was an increase in sales at onshore shops, which was supported by a lower excise duty rate effective in Estonia from 1 July 2019 and new brand shops.

In 2019, the Group’s revenue and operating results were impacted by the following operational factors:

  • The number of passengers travelling on the Group’s ships increased in almost all geographical segments (Estonia-Finland, Finland-Sweden and Latvia-Sweden).
  • Planned dockings of seven ships. Among them, the maintenance and repair of the cruise ferry Baltic Queen lasted for 42 days, which affected the Estonia-Sweden segment’s first quarter carriage volumes and financial result.
  • Competition in maritime traffic between Estonia and Finland put pressure on ticket and cargo prices.
  • Alcohol excise duty rate in Estonia was lowered, effective from 1 July 2019.
  • Lower bunkering prices, which were attributable to lower global prices, and fuel price agreements.
  • Tight cost control, investments in vessels’ energy efficiency and automation projects.


Key figures

For the year ended 31 December201920182017
Revenue (million euros)949.1949.7967.0
Gross profit (million euros)196.9183.8194.6
EBITDA¹ ² (million euros)171.1142.8158.3
EBIT¹ (million euros)74.963.572.0
Net profit for the period (million euros)49.740.046.5
    
Depreciation and amortisation³ (million euros)96.279.386.4
Capital expenditures¹ ⁵(million euros)60.936.4219.3
Weighted average number of ordinary shares outstanding669 881 045669 859 148669 882 040
Earnings per share¹0.070.060.07
    
Number of passengers¹9 763 2109 756 6119 755 720
Number of cargo units¹379 634384 958364 296
Average number of employees¹7 2707 4307 406
    
As at 31 December201920182017
Total assets³ (million euros)1 533.01 500.91 558.6
Total liabilities (million euros)710.1644.0722.3
Interest-bearing liabilities⁴ (million euros)577.9510.1560.9
Net debt¹ (million euros)539.0428.0472.0
Net debt to EBITDA¹3.13.03.0
Total equity (million euros)822.8856.9836.3
Equity ratio¹ (%)53.7%57.1%53.7%
    
Number of ordinary shares outstanding669 882 040669 865 540669 882 040
Equity per share¹1.231.281.25
    
Ratios¹201920182017
Gross margin (%)20.7%19.4%20.1%
EBITDA margin (%)18.0%15.0%16.4%
EBIT margin (%)7.9%6.7%7.4%
Net profit margin (%)5.2%4.2%4.8%
    
ROA (%)4.8%4.1%4.3%
ROE (%)6.0%4.8%5.6%
ROCE (%)5.7%5.2%5.3%
Current ratio0.50.80.6

1 Alternative performance measures based on ESMA guidelines are disclosed in the “Alternative performance measures” section of the report.
2 EBITDA adjusted for 2019 without the IFRS 16 adoption effect was EUR 153.7 million.
3 Please see note 14 for the IFRS 16 adoption effect on assets.
4 Please see note 16 for the IFRS 16 adoption effect on interest-bearing liabilities.
5 Does not include additions to right-of-use assets.


Sales

The Group’s revenue amounted to EUR 949.1 million in 2019 (949.7 million in 2018). Restaurant and shop sales on board and on shore in the total amount of EUR 536.6 million (524.4 million in 2018) contributed more than a half of total revenue. Ticket sales amounted to EUR 240.7 million (243.8 million in 2018) and sales of cargo transport to EUR 119.1 million (124.9 million in 2018).

Geographically, 37.3% or EUR 354.0 million of revenue was generated by the Estonia-Finland routes and 36.3% or EUR 344.4 million by the Finland-Sweden routes. Revenue from the Estonia-Sweden routes was EUR 112.3 million or 11.8% and from the Latvia-Sweden route EUR 72.5 million or 7.6%. The share of revenue generated by other geographical segments decreased to 7.8% or EUR 73.7 million.


Earnings

Gross profit for 2019 amounted to EUR 196.9 million (EUR 183.8 million in 2018) and EBITDA to EUR 171.1 million (EUR 142.8 million in 2018). Net profit for 2019 was EUR 49.7 million (EUR 40.0 million in 2018). Net profit per share was EUR 0.07 (EUR 0.06 in 2018).

The Group’s profitability was influenced mainly by the following factors:

  • A total of EUR 12.9 million lower fuel costs. The fuel cost saving resulted from agreements with fuel suppliers, which fixed the price for 41% of the Group’s total fuel purchasing volume for 2019, and savings on total fuel consumption, achieved through various energy efficiency initiatives. Fuel costs were also positively affected by lower global bunkering prices.
  • Higher income tax due to an increase in dividends compared to 2018.
  • Larger revenue from onshore shops (in the port area) due to a lower alcohol excise duty rate in Estonia, effective from 1 July 2019.
  • Nonrecurring costs of EUR 2.4 million including tax related to the termination benefits of managerial personnel.

The cost of goods sold at shops and restaurants, which is the largest operating cost item, amounted to EUR 221.1 million (EUR 217.2 million in 2018).

Fuel costs for 2019 amounted to EUR 89.6 million (EUR 102.5 million in 2018). Fuel costs were impacted by lower bunkering prices, which were attributable to lower global prices, and fuel price agreements. As a result, annual fuel costs decreased by 12.6%. The Group makes continuous efforts to improve and optimise its day-to-day operations and lower the fleet’s fuel costs.

The Group’s personnel expenses amounted to EUR 223.5 million (EUR 218.1 million in 2018). The average number of employees in 2019 was 7 270 (7 430 in 2018).

Administrative expenses for the period amounted to EUR 56.8 million and sales and marketing expenses to EUR 67.7 million (EUR 55.2 million and 69.3 million, respectively, in 2018).

Depreciation and amortisation of the Group’s assets totalled EUR 96.2 million (EUR 79.3 million in 2018). There were no impairment losses related to the Group’s property, plant and equipment and intangible assets.

Net finance costs decreased by EUR 1.2 million compared to 2018. The change includes a decrease of EUR 4.5 million in interest expense and EUR 0.9 million less gain on foreign exchange differences and the revaluation of cross currency and interest rate derivatives. In addition, in 2019 there was interest expense of EUR 2.3 million from liabilities related to right-of-use assets (IFRS 16 adoption effect).

The Group’s exposure to credit risk, liquidity risk and market risks, and its financial risk management activities are described in the notes to the financial statements.


Liquidity and cash flow

The Group’s net operating cash flow for 2019 was EUR 174.6 million (EUR 156.8 million in 2018).

The Group’s cash used in investing activities was EUR 60.7 million (EUR 35.7 million in 2018). A number of investments were made to upgrade the ships’ restaurants, shops and cabins. Investments were also made in the development of the online booking and sales systems. In addition, in the second quarter of 2019 the Group made a prepayment of EUR 12.4 million for a new LNG shuttle vessel, MyStar.

In 2019, the Group’s loan repayments totalled EUR 79.8 million (EUR 190.0 million in 2018).

Interest payments were EUR 16.7 million (EUR 19.4 million in 2018).

At 31 December 2019, the Group’s cash and cash equivalents totalled EUR 38.9 million (EUR 82.2 million at 31 December 2018). In addition, available unused overdraft credit lines amounted to EUR 90.0 million (EUR 75.0 million in 2018).

The Covid-19 crisis related deterioration of the operating environment subsequent to the end of the reporting period and activities to ensure the sustainability of operations are described in more detail in Note 24.

In management’s opinion, the Group has sufficient liquidity to support its operations.


Consolidated statement of profit or loss and other comprehensive income

For the year ended 31 December, in thousands of EUR20192018
Revenue (Note 4)949 119949 723
Cost of sales (Note 5)-752 234-765 892
Gross profit196 885183 831
   
Sales and marketing expenses (Note 5)-67 727-69 315
Administrative expenses (Note 5)-56 555-55 223
Impairment loss on receivables (Note 23)-228-272
Other operating income2 5994 633
Other operating expenses-106-153
Result from operating activities74 86863 501
   
Finance income (Note 5)9958 631
Finance costs (Note 5)-18 674-27 552
Share of loss/profit of equity-accounted investees (Note 12)-44
Profit before income tax57 18544 584
   
Income tax  (Note 6)-7 467-4 535
   
Net profit49 71840 049
Net profit attributable to equity holders of the Parent49 71840 049
   
Other compherensive income  
Items that may be reclassified to profit or loss  
Exchange differences on translating foreign operations161267
Other comprehensive income161267
   
Total comprehensive income49 87940 316
Total comprehensive income attributable to equity holders of the Parent49 87940 316
   
Basic and diluted earnings per share (in EUR, Note 7)0.0740.060


Consolidated statement of financial position

As at 31 December, in thousands of EUR20192018
ASSETS  
Cash and cash equivalents (Note 8)38 87782 175
Trade and other receivables (Note 9)37 60643 805
Prepayments (Note 10)6 8056 084
Prepaid income tax6746
Inventories (Note 11)37 25535 741
Current assets120 610167 851
   
Investments in equity-accounted investees (Note 12)403407
Other financial assets and prepayments(Note 13)1 619320
Deferred income tax assets (Note 6)18 67417 934
Investment property300300
Property, plant and equipment (Note 14)1 347 0931 267 928
Intangible assets (Note 15)44 26446 164
Non-current assets1 412 3531 333 053
TOTAL ASSETS1 532 9631 500 904
   
LIABILITIES AND EQUITY  
Interest-bearing loans and borrowings (Note 16)89 19878 658
Trade and other payables (Note 17)98 926100 682
Derivatives (Note 23)0918
Payables to owners62
Income tax liability0116
Deferred income (Note 18)33 31432 113
Current liabilities221 444212 489
   
Interest-bearing loans and borrowings (Note 16)488 682431 477
Other liabilities022
Non-current liabilities488 682431 499
Total liabilities710 126643 988
   
Share capital (Note 19)314 844361 736
Share premium (Note 19)663662
Reserves (Note 19)69 60869 474
Retained earnings437 722425 044
Equity attributable to equity holders of the Parent822 837856 916
Total equity822 837856 916
TOTAL LIABILITIES AND EQUITY1 532 9631 500 904


Consolidated statement of cash flows

For the year ended 31 December, in thousands of EUR20192018
   
CASH FLOWS FROM OPERATING ACTIVITIES  
Net profit for the period49 71840 049
Adjustments for:  
Depreciation and amortisation (Notes 14, 15)96 24979 280
Net loss on disposals of property, plant and equipment-80-104
Net interest expense (Note 5)17 64419 806
Net income/expense from derivatives (Note 5)111-5 055
Loss/profit from equity-accounted investees (Note 12)4-4
Net unrealised foreign exchange loss1074 294
Treasury shares186
Income tax (Note 6)8 2074 535
Adjustments122 260102 758
Changes in:  
Receivables and prepayments related to operating activities4 7402 407
Inventories-1 5144 934
Liabilities related to operating activities-3116 723
Changes in assets and liabilities2 91514 064
Cash generated from operating activities174 893156 871
Income tax paid-317-87
NET CASH FROM OPERATING ACTIVITIES174 576156 784
   
CASH FLOWS FROM INVESTING ACTIVITIES  
Purchase of property, plant, equipment and intangible assets-60 887-36 037
Proceeds from disposals of property, plant, equipment192368
Interest received17
NET CASH USED IN INVESTING ACTIVITIES-60 694-35 662
   
CASH FLOWS FROM FINANCING ACTIVITIES  
Proceeds from loans received45 000110 000
Repayment of loans received-79 750-69 666
Repayment of bonds (Note 16)0-120 303
Payments for settlement of derivatives-1 029-3 569
Payment of lease liabilities-14 822-108
Interest paid-16 717-19 440
Payment of transaction costs related to loans-1 431-1 113
Dividends paid (Note 19)-33 443-20 096
Reduction of share capital-46 888-1
Income tax on dividends paid (Note 19)-8 100-3 562
NET CASH USED IN FINANCING ACTIVITIES-157 180-127 858
   
TOTAL NET CASH FLOW-43 298-6 736
   
Cash and cash equivalents at the beginning of period82 17588 911
Change in cash and cash equivalents (Note 8)-43 298-6 736
Cash and cash equivalents at the end of period38 87782 175


Veiko Haavapuu
Financial Director

AS Tallink Grupp
Sadama 5
10111 Tallinn, Estonia
E-mail veiko.haavapuu@tallink.ee

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