Sharp deterioration in Viking Line’s results due to the impact of COVID-19

Viking Line Abp          Half-year Financial Report          20.08.2020    9.00 AM

Sharp deterioration in Viking Line’s results due to the impact of COVID-19

January–June 2020 (compared to January–June 2019)

• Sales amounted to EUR 97.5 M (227.0).
• Other operating revenue was EUR 16.1 M (0.2).
• Operating income totalled EUR -27.4 M (-8.8).
• Net financial items were EUR -2.1 M (-2.2).
• Income before taxes amounted to EUR -29.5 M (-11.0).
• Income after taxes totalled EUR -23.7 M (-8.7).
• Change in prospects: The impact of COVID-19 pandemic has continued to cause a deterioration in the Group’s consolidated results and financial position during the peak season as well. Results for the third quarter, when the most of the Group’s income for the year is generated, will be significantly worse than in previous years due to the COVID-19 pandemic. The earnings outlook for the financial year 2020 has therefore been revised. Income for the full financial year will be negative. In the earnings outlook published earlier, Viking Line considered it unlikely that we would achieve positive income for the financial year 2020.

Second quarter 2020 (compared to second quarter 2019)

• Sales amounted to EUR 22.6 M (131.1).
• Operating income totalled EUR 5.9 M (5.4).

The ongoing COVID-19 pandemic has caused a serious deterioration in the Group’s operating conditions. Viking Line reacted quickly to the crisis and adjusted operations to the changed market. Salary and other employment benefit expenses decreased during the second quarter. A large percentage of the staff in Finland was furloughed. In Sweden and Estonia, government-funded furloughs were also made use of. Expenses for goods and services as well as other operating expenses also decreased.

During the period March 19-June 18, the group received aid from Finland’s National Emergency Supply Agency for cargo traffic to ensure the security of supply for four of the Group’s vessels serving the Turku – Långnäs – Stockholm, Mariehamn - Kapellskär and Helsinki – Tallinn routes. The Group’s three other vessels were not in service at times during the period March – June. Although cargo traffic generated revenue to cover variable costs and a small percentage of fixed costs for each vessel during the second quarter, it did not generate positive operating income for the vessels in service that received aid.

Comments from President and CEO Jan Hanses

“Interim results were affected by unforeseen external factors in the form of a global pandemic. The COVID-19 pandemic’s impact on society was increasingly apparent during the second quarter, and the virus has continued to affect individuals, companies and markets. The second quarter of the year was completely dominated by the travel restrictions introduced in March and gradually eased starting in mid-May. At the end of the quarter, in the middle of Viking Line’s peak season, the restrictions on travel between Finland and Sweden were still in place. As restrictions were gradually eased, with travel restrictions applying only to Sweden at the end of June, all of the company’s vessels resumes service, although the vessels that usually sail between Helsinki and Stockholm operated on partly new routes. Despite restrictions on operations, we have maintained uninterrupted passenger and cargo service between our countries and thus ensured a traffic pattern that has been in effect for more than 50 years and will continue.

During the second quarter, our measures were focused on securing the company’s liquidity by adjusting costs and on making different financial arrangements with our lenders. Employees have shouldered a heavy burden with the furloughs carried out in all the countries we operate in. Some furloughs were part-time but most were full-time.  Our employees’ engagement as these jobs were being organized has been admirable. I really appreciate their considerable efforts during these tough times.

During the period March 19 – June 18, 2020, the company received aid from Finland’s National Emergency Supply Agency to maintain cargo service between Finland and Sweden, Åland and Sweden, and Finland and Estonia. The payments covered variable traffic costs and some fixed costs but were reduced by revenue from cargo traffic and the contribution from passenger traffic. The payments were thus effective and self-regulating. We also received aid from the Åland provincial government. Our liquidity at the end of the second quarter was satisfactory and was subsequently further strengthened to some extent. Negotiations with our financiers are ongoing and are expected to be completed during the third quarter.

To ensure safe procedures in these exceptional times and to bolster our passengers’ faith in our service during the COVID-19 pandemic as well, Viking Line was the first shipping company in the world to be verified by the accredited classification society Det Norske Veritas Germanischer Lloyd. DNV GL’s verification, which covers all seven of Viking Line’s vessels and operations in six terminals, validates our ability to manage and mitigate infection risks, including for COVID-19.

These steps to prevent infection have worked effectively, and our measurements show that customers view them positively. However, it will still take time before demand in our markets gradually builds. Viking Line and our employees are prepared to shoulder the responsibility required in order to re-establish our customers’ faith. In this respect too, our employees’ engagement has built an enormous amount of trust.

I am pleased that we have quickly reacted to the crisis and adjusted operations to a changed market situation. Despite some signs of optimism, it is still difficult to determine the market trend going forward. We intend to continue focusing on what we can affect in these challenging times: selling travel experiences and cargo services, serving our customers, safeguarding our employees’ health, running our operations as efficiently as possible, ensuring our financial sustainability and moving forward with our newbuild.”

Sales and earnings

Consolidated sales of the Viking Line Group decreased by 57.0 per cent for the period January 1 – June 30, 2020 to 97.5 million euros (EUR 227.0 M for the period January 1 – June 30, 2019). Operating income totalled EUR -27.4 M (-8.8).

Passenger-related revenue decreased by 62.3 per cent to EUR 76.0 M (201.7), while cargo revenue amounted to EUR 20.7 M (24.0). Net sales revenue was EUR 73.5 M (165.8). Consolidated operating expenses decreased by 35.4 per cent to EUR 104.9 M (162.3).

During the second quarter, April 1–June 30, consolidated sales of the Viking Line Group were EUR 22.6 M (EUR 131.1 M for the period January 1 – June 30, 2019). Operating income totalled EUR -5.9 M (-5.4).

Passenger-related revenue decreased by 89.2 per cent during the second quarter to EUR 12.8 M (118.8), while cargo revenue amounted to EUR 9.4 M (11.7). Net sales revenue was EUR 18.6 M (95.6). Consolidated operating expenses decreased by 60.4 per cent to EUR 33.4 M (84.2).

Service and market

The Viking Line Group provides passenger and cargo carrier services using seven vessels on the northern Baltic Sea. The vessels served the same routes as in 2019, although the vessels that normally sail between Helsinki and Stockholm operated on partly new routes with limited sailings. During the second quarter, a number of the company’s vessels were taken out of service in full or in part due to the COVID-19 pandemic. Because of decisions made by authorities, in general only cargo traffic operated during the period March 19 – June 18. Passenger traffic has had limited capacity since it resumed.

The number of passengers on Viking Line’s vessels during the report period amounted to 998,483 (2,772,427). The Group had a total market share in its service area of 27.0 per cent (31.4).

Viking Line’s cargo volume was 62,409 cargo units (69,030). The Group achieved a cargo market share of 17.1 per cent (19.0). The market share for passenger cars was 24.1 per cent (30.6).

Investments and financing

The Group’s investments amounted to EUR 9.3 M (27.0), of which EUR 3.9 M (22.2) primarily pertains to an advance payment for vessels under construction. The Group’s total investments represent 9.5 per cent of sales (11.9).

Construction on our new vessel, Viking Glory, is progressing in China. The vessel is expected to be delivered during the second half of 2021.

On June 30, 2020, the Group’s non-current interest-bearing liabilities totalled EUR 88.3 M (111.8). The equity/assets ratio was 49.3 per cent, compared to 46.3 per cent a year earlier.

At the end of June 2020, the Group’s cash and cash equivalents amounted to EUR 30.7 M (51.3). Unutilized credit lines in the Group totalled EUR 10.4 M on June 30, 2020 (15.1), with EUR 5.0 M in a new credit line obtained during the second quarter. Net cash flow from operating activities amounted to EUR -20.2 M (9.4).

Net cash flow from investing activities was EUR -8.8 M (-25.0) and net cash flow from financing activities amounted to EUR -3.0 M (5.1).

Viking Line has a strong balance sheet and low leverage, but the Group’s liquidity must be strengthened given present circumstances. To bolster liquidity and safeguard the future of the company if the coronavirus pandemic lasts for a while, Viking Line has continued to negotiate for additional funding. The intention is to make use of State guarantees laid out in the supplementary budget approved by the Finnish parliament and placed at the disposal of the shipping industry in the Finnish government’s second supplementary budget for 2020. Liquidity could also be strengthened by a capital contribution from shareholders or through a sale of assets.

Viking Line Abp has reached an agreement with Finnvera Abp and Finlands Exportkredit Ab on a loan payment deferral for the period July 1, 2020 – February 1, 2021 totalling EUR 14.9 M. Payments fall due by January 10, 2025 at the latest – in other words, at the time final payment is due. The deferred loan payments may be paid in advance, and the interest rate and maturity of the loan remain unchanged. The payment of dividends during the maturity of the loan is conditional upon payment of the loan payments for which a deferral has been granted.

Some of the Group’s loan agreements include loan covenants according to market terms. The terms and conditions in these agreements were met during the report period. The company has negotiated over the application of terms and agreements in the covenants with its current financiers. The Group has been granted a time-limited exemption from the terms and conditions that will most likely be violated during the third quarter for those loans already drawn.

Viking Line has a binding loan commitment of EUR 152.0 M to fund its vessel order, for which the time when the loan will be drawn has been postponed. Negotiations are under way concerning the application of the covenant terms and conditions that will most likely be violated during the third quarter. In the event the vessel construction contract should be terminated, the company has a bank guarantee of EUR 38.8 M plus interest as security for the advance payment made.

Organization and personnel

The average number of Group employees was 1,802 (2,572), of whom 1,249 (1,943) worked for the parent company. Land-based personnel totalled 444 (592) and shipboard personnel totalled 1,358 (1,980).

In addition to the Group’s own employees, Viking XPRS was crewed by an average of 158 (238) people employed by a staffing company.

The number of employees for 2020 is considerably lower than in 2019 since a large number of staff were furloughed during the second quarter.

Risk factors

The COVID-19 pandemic affected Viking Line’s results and liquidity significantly during the first half of the year, and its negative impact will continue for a considerable time.

Uncertainty about authority requirements and restrictions in passenger traffic and market demand will affect Viking Line’s operations, results and financial position.

One essential requirement for operations is that Viking Line succeeds in strengthening the company’s liquidity through, for example, bank loans, a new share issue or the sale of fixed assets.

The Group’s loans are tied to loan terms and conditions that include profitability, liquidity and leverage requirements. If these terms and conditions are not met, financiers can demand early repayment or cancellation of the loans. All terms and conditions were met on the balance sheet date.

The Group has signed fixed price agreements for parts of the Group’s bunker (vessel fuel) consumption for 2020, which means that Viking Line is obliged to buy a given quantity even if vessels were to be taken out of service.

Outlook for the full financial year 2020

The impact of COVID-19 pandemic has continued to cause a deterioration in the Group’s results and financial position during the peak season as well. Results for the third quarter, during which most of the income for the year is generated, will be significantly worse than in previous years due to the COVID-19 pandemic. The earnings outlook for the financial year 2020 has thus been adjusted. Income for the full financial year will be negative. In the earnings outlook published earlier, Viking Line considered it unlikely that we would achieve positive income for the financial year 2020.