Viking Line: Year-End Report for the period January - December 2020

Viking Line Abp       YEAR-END REPORT           18.2.2021, 9.30 AM

2020 – a difficult, challenging year

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

• Sales amounted to EUR 188.8 M (496.4).
• Other operating revenue was EUR 26.9 M (0.4).
• Operating income totalled EUR -49.3 M (17.4).
• Net financial items were EUR -3.6 M (-3.8).
• Income before taxes amounted to EUR -52.9 M (13.6).
• Income after taxes totalled EUR -42.3 M (10.8).

Fourth quarter 2020 (compared to fourth quarter 2019)

• Sales amounted to EUR 34.6 M (115.6).
• Operating income totalled EUR -14.1 M (-0.1).

Outlook for the full financial year 2021

The COVID-19 pandemic had a significant impact on Viking Line’s earnings and liquidity in 2020 and will continue to have a negative impact. Uncertainty about regulatory requirements, state aid, the impact of vaccination programs and related restrictions on passenger traffic as well as market demand will affect Viking Line’s operations, earnings and financial position. 

It is too soon to quantify the impact on earnings since there is great uncertainty about the trend. As a result, no earnings forecast is provided for 2021.

Comments from President and CEO Jan Hanses

“Because of the global COVID-19 pandemic, the Group was forced to report a loss in 2020.

Since the end of the first quarter, the operating environment has been extremely unfavourable to passenger shipping companies and as a result the economic consequences have been drastic. The challenge in 2020 was to run operations when demand evaporated due to various restrictions. Passenger volume collapsed in March 2020, and at year-end we recorded a loss of four million passengers. In a short period of time, we noted that essentially all sales revenue had disappeared while a large share of costs was still incurred. Of our four operating areas – cargo, passenger cars, cruise passengers and passengers in scheduled service – only cargo functioned normally.

Consequently, our efforts during the year were focused on cutting costs to the greatest extent possible. Furlough measures were carried out in early April and had a quick impact in Finland since shorter periods for announcing and negotiating furloughs could be applied. In Sweden and Estonia, the impact was slower and more limited. Cost control generally also dominated our operations.

State aid measures, primarily Finnish measures carried out through Finland’s National Emergency Supply Agency and the Finnish Transport and Communication Agency (Traficom), have helped to limit losses. State aid measures from Sweden, in the form of aid for short-term furloughs, and from Estonia in various forms have also provided support.Liquidity during the winter of 2020–2021 was secured through liquidity loans totalling EUR 38.7 M, which are backed by State guarantees. A deferral of loan repayments was also obtained from Finnvera and Finlands Exportkredit Ab. 

In the autumn of 2020, the Group experienced two accidents, when Amorella ran aground in the Åland archipelago in September and Viking Grace ran aground close to Mariehamn in November. The groundings only caused damage to the vessels, mainly Amorella. While undergoing repair, the vessels were replaced by Gabriella, so the impact on earnings was limited. It was possible to carry out planned annual dry-dockings at the same time. The crew’s handling of the incidents was exemplary.

During the year, the focus was on passenger safety issues. The safety of passengers and staff is Viking Line’s top priority, and that has also been the case during the ongoing pandemic. We have long worked at the company with infection prevention measures. During the spring, we decided to have the company assessed by a third party to quality-assure our infection prevention work. The accredited classification society Det Norske Veritas Germanischer Lloyd (DNV GL) was contacted, and we became the first shipping company in the world to be verified in accordance with DNV GL’s My Care methodology.”

Sales and earnings

Consolidated sales of the Viking Line Group totalled EUR 188.8 M during the period January 1–December 31, 2020 (496.4 January 1–December 31, 2019). Other operating revenue was EUR 26.9 M (0.4). Operating income totalled EUR -49.3 M (17.4). Net financial items were EUR -3.6 M (-3.8). Consolidated income before taxes amounted to EUR
-52.9 M (13.6). Income after taxes was EUR -42.3 M (10.8).

Passenger-related revenue totalled EUR 148.2 M (448.4), while cargo revenue amounted to EUR 38.8 M (45.6). Net sales revenue was EUR 137.9 M (363.3).

Consolidated operating expenses decreased by 41.1% to EUR 189.4 M (321.7). Bunker (vessel fuel) costs decreased by 33.7% to EUR 31.2 M (47.0).

During the fourth quarter, October 1–December 31, 2020, consolidated revenue totalled EUR 34.6 M (115.6 for October 1–December 31, 2019). Operating income was EUR -14.1 M
(-0.1).

Passenger-related revenue during the fourth quarter decreased by 75.9% to EUR 25.0 M (103.8), while cargo revenue amounted to EUR 9.1 M (11.3). Net sales revenue was EUR 23.1 M (83.7). Consolidated operating expenses decreased by 47.7% to EUR 40.7 M (77.8).

The Group’s operating conditions have deteriorated significantly due to the ongoing COVID-19 pandemic. Income for the third quarter, when the bulk of income for the year is generated, was negative and thus substantially worse in 2020 than in previous years because of the COVID-19 pandemic. The pandemic has affected individuals, companies and markets. Viking Line reacted quickly to the crisis, adapting operations to a changed market situation.

Salary and other employment benefit expenses decreased during the period. A large percentage of the staff in Finland was furloughed. In Sweden and Estonia, short-term furloughs were used. In October, cooperation negotiations were concluded concerning the Group’s land-based organization and shipboard employees on Viking Cinderella. The negotiations resulted in a shift to part-time work, furloughs or redundancies, which affected some 120 land-based employees and some 80 shipboard employees.

Costs of goods and services as well as other operating costs decreased.

During the financial year, the Group obtained liquidity aid and cargo traffic aid for security of supply purposes and for its public service obligations. The Swedish subsidiaries obtained restructuring aid. The aid is recognized as State aid under other operating revenue. To secure Viking Line’s liquidity, the company was granted State guarantees for liquidity loans of up to EUR 38.7 M. In addition to the State guarantees, commercial banks have guaranteed EUR 4.3 M.

Service and market

The Viking Line Group provides passenger and cargo carrier services using seven vessels on the northern Baltic Sea and in the Gulf of Finland. 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 period, a number of the vessels were taken out of service in full or in part due to the COVID-19 pandemic.

On September 20, Amorella ran aground in the Åland archipelago and was out of service until November 3. The grounding resulted in no injuries. Gabriella replaced the vessel on the Turku–Mariehamn/Långnäs–Stockholm route during the period September 21–November 3. On November 21, 2020, Viking Grace hit ground near the port of Mariehamn and was out of service until November 29. The grounding resulted in no injuries. Gabriella served as its replacement on the Turku–Mariehamn/Långnäs–Stockholm route during the period November 23–November 29.

The total number of passengers on Viking Line’s vessels during the financial year was 1,927,302 (6,300,480). The Group had a total market share in its service area of approximately 26.6% (31.9).

Viking Line’s cargo volume was 125,693 cargo units (133,940). The Group achieved a cargo market share of approximately 17.1% (18.4). The market share for passenger cars was approximately 27.0% (31.9).

Financing and cash flow

The Group’s liquidity was stretched during the year. On December 31, 2020, the Group’s non-current interest-bearing liabilities totalled EUR 108.2 M (100.0). The equity/assets ratio was 46.4% compared to 50.7% a year earlier.

At the end of December, the Group’s cash and cash equivalents amounted to EUR 29.7 M (62.8). Unutilized credit lines in the Group totalled EUR 7.1 M on December 31, 2020 (15.1). Net cash flow from operating activities amounted to EUR -42.3 M (38.0). Net cash flow from investing activities was EUR -12.3 M (-29.5) and net cash flow from financing activities amounted to EUR 21.5 M (-7.6).On July 14, 2020 and December 23, 2020, Viking Line Abp reached an agreement with Finnvera Abp and Finlands Exportkredit Ab on a loan payment deferral for payments during the period July 1, 2020 – July 31, 2021 totalling EUR 22.4 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.

On October 15, the Finnish Government approved the Finnish State’s guarantees on Viking Line’s liquidity loans up to EUR 38.7 M. Using the liquidity loans, Viking Line planned to improve the company’s liquidity position and thus ensure continued financially stable operations in the situation that has arisen as a result of the coronavirus crisis. In addition to the Finnish State guarantees, commercial banks have guaranteed EUR 4.3 M. The Group had drawn EUR 31.5 M of the liquidity loans on December 31, 2020.

Viking Line undertakes not to pay a dividend or pay out any funds until its obligations related to the guarantees and loans have been met in full.

Most of the Group’s loan agreements include loan covenants according to market terms. Covenant terms entail minimum requirements for liquidity and solvency (equity-assets ratio) as well as a maximum net debt to EBITDA ratio. The Group has been granted a time-limited exemption from the covenant terms and conditions that were breached in 2020 for those loans already drawn.

Liquidity can also be strengthened through a shareholder contribution or through the sale of assets.

Investments

The Group’s investments amounted to EUR 15.0 M (29.9), of which EUR 7.4 M (23.6) pertains to the capitalization of costs and prepayments for vessels under construction. The Group’s total investments constitute 7.9% of revenue (6.0%).

Construction of the vessel Viking Glory is progressing in China. The vessel is expected to be delivered in late 2021. Delivery will thus be later than the agreed delivery time.

Risks and risk management

Viking Line’s operations are exposed to different kinds of risks, which vary in their scope and impact on operations, financial results and the company’s ability to meet certain social and environmental objectives. The relevant risks have been classified into four categories: strategic, operational, damage and financial risks.

Strategic risks

Changes in the general economic situation, maritime policy, regulations and other laws, and climate change as well as the competition situation and market trend could have a negative and significant impact on demand for the Group’s products and services and on the Group’s earnings, cash flow and financial position.

Seasonal fluctuations during the year affect Viking Line’s business operations. Third quarter earnings usually account for the largest share of earnings for the year. The market for cruises and ferry service on the Baltic Sea in 2021 will be affected by the travel restrictions imposed by authorities due to the COVID-19 pandemic and by uncertainties about consumer buying behaviour.

Political decisions could change Viking Line’s operating conditions with potentially negative consequences for business operations. However, Åland’s tax exemption, which enables duty-free sales on board vessels in service to and from the Åland Islands , is permanent. The EU Commission’s guidelines to promote maritime transport, which enable the net salary system for seafarers, are in effect until further notice.

Finnish maritime transport is governed by environmental regulations in the International Maritime Organization (IMO)’s rules, EU directives, HELCOM recommendations and national laws. We actively monitor the drafting of environmental regulations, advances in environmental technology and the solutions that research provides for compliance with ever more stringent environmental regulations.

The EU Sulphur Directive entered into force on January 1, 2015, for the Baltic Sea and stipulates a switch to fuel with a 0.1% maximum sulphur content. The IMO also decided to designate the Baltic Sea as a so-called nitrogen oxide emission control area (NECA) with more stringent emissions requirements for newbuild vessels beginning January 1, 2021. Furthermore, the EU has introduced requirements for the monitoring, reporting and verification (MRV) of carbon dioxide emissions from large vessels (more than 5,000 gross tonnes) that serve EU ports.

Operational risks

The Group’s business operations are dependent on functioning logistics and IT systems both for external communication and for the day-to-day management of operations. Cyber intrusion, malfunctions and disruptions could cause interruptions in operations and lead to potential consequences. Cyberattacks are a growing and ever-changing global problem. Disruptions in service or IT communication could have a negative impact on the Group’s earnings. Viking Line endeavours to minimize the risk of lengthy unplanned service interruptions by means of continuous vessel maintenance, a well-developed safety and security system, training and regular exercises. Risks in information management are minimized by developing appropriate security systems and alternative working methods as well as efforts to ensure the reliability of computer systems.

Hiring, retaining and developing a skilled labour force are critical to success. During the Covid-19 pandemic, Viking Line has furloughed and laid off employees, and the increased risk of a loss of key employees and inability to attract new employees could harm the Group’s operations.

Damage risks

Maritime safety and security is guided by our safety and security policy, which has top priority in Viking Line’s operations. Through our International Safety Management Code (ISMC) and International Ship & Port Facility Security Code (ISPS) management systems, we work systematically to identify potential risk situations and consequently prevent accidents. Our goals is to continuously improve safety and security.

Viking Line has a zero vision when it comes to different kinds of crime, harassment and disorderly conduct on board. We work on a continuous basis to realize this vision. A group that has worked with these issues meets regularly, while a team of external experts has also been hired.

Viking Line maintains a crisis preparedness plan to prevent and mitigate the consequences of adverse events and crises with serious consequences for passengers, staff, traffic, property, the environment, operations and trust in the Company. The crisis preparedness plan is characterized by an effective alert system that quickly establishes the central crisis management organization in the company. In crisis situations, this central crisis management organization works in close cooperation with the relevant government agencies.

Various organizations, companies and specialists are hired as needed to provide support and assistance in the crisis work. Communication, information and crisis support are key aspects of the crisis management organization’s work. In order to be effective and maintain stamina despite the physical and mental pressure, the organization undergoes training on a continuous basis. The work of the crisis management organization is aimed at saving lives, avoiding injuries and damage to the environment and property, and ensuring that rescue measures are so effective that operations can return to a normal situation as soon as possible without damaging the company’s brand.

The Group’s vessels are recognized in the balance sheet at a carrying amount of EUR 254.1 M (266.0). The vessels have hull and machinery insurance plus increased value insurance totalling EUR 598.0 M (598.0). In addition, all vessels have strike/delay insurance, protection and indemnity (P&I) and Passenger Liability Regulation (PLR) insurance.

Financial risks

The Group is also exposed to various financial risks, among them fluctuations in currency exchange rates. The COVID-19 pandemic has had a significant impact on Viking Line’s earnings and liquidity.

Sales revenue is generated in euros and Swedish kronor. Most of the operating inflow of cash and cash equivalents consists of euros. Purchase prices of goods for sale and bunker are affected by other currencies, especially the US dollar.

Fluctuations in bunker prices have a direct effect on consolidated earnings.The Group is exposed to price risk related to shares that are classified as financial assets recognized at fair value through other comprehensive income. The value of the Group’s shareholding in the insurance company Försäkringsaktiebolaget Alandia Abp is established on the basis of the present value of future cash flows. The cash flow projection is based on a number of estimates and judgements that have a substantial impact on present value.

Advance payments are related to vessels under construction and totalled EUR 54.2 M as of December 31, 2020 after a deduction of EUR 4.9 M related to EU aid. These consist of advance payments in compliance with vessel construction (newbuilding) contracts, planning and monitoring expenses, and capitalized borrowing expenses. 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. Other capitalized planning, monitoring and borrowing expenses of EUR 20.4 M would in that case be charged to income.

Sustainability report

The Sustainability Report for 2020 will be published separately. Information about Viking Line’s sustainability work is also available on Vikingline.com.

Organization and personnel

The average number of full-time employees in the Group was1,640 (2,632), of whom 1,113 (1,986) worked for the parent company. Land-based personnel totalled 397 (594) and shipboard personnel totalled 1,243 (2,038).

In addition to the Group’s own employees, Viking XPRS was crewed by an average of 157 (245) people employed by a staffing company.

At the end of 2020, the total number of Group employees was 2,156 (2,810), of which 1,693 (2,198) resided in Finland. The number residing in Sweden was 354 (507). There were 100 (91) employees residing in Estonia and 9 (14) in other countries.

Men were 55.9% (55.2) of employees and women 44.1% (44.8). Women held 28.3% (27.1) of foremen positions. The average age of staff was 46.5 (45).

The number of employees for 2020 is substantially lower than for 2019 since a large percentage of staff in Finland were furloughed during the financial year. In Sweden and Estonia, State-subsidized short-term furloughs were utilized. The furloughs were carried out in the form of part-time furloughs and on board the vessels largely in the form of full-time furloughs.

In September, cooperation negotiations concerning the Group’s land-based organization and shipboard employees on Viking Cinderella were launched. The negotiations led to a shift to part-time work, furloughs or redundancies and affected some 120 land-based employees and some 80 shipboard employees

Corporate Governance Statement

Viking Line applies the Finnish Corporate Governance Code, which was approved by the Securities Market Association. The Code is available on the Securities Market Association’s website, Cgfinland.fi. Viking Line complies with the Code in full. The Corporate Governance Statement for 2020 is published separately. Information about Viking Line’s corporate governance is available on Vikingline.com.

Events after the balance sheet date

The authorities in our service area reintroduced stringent travel restrictions after the balance sheet date. The furloughs begun in 2020 will be extended into 2021. Otherwise the Board knows of no other important events after the balance sheet date that could affect the Year-End Report.

The Board’s proposal on distribution of earnings

According to the balance sheet of Viking Line Abp on December 31, 2020, unrestricted equity totalled EUR 32,656,664.46.

The Board of Directors proposes to the Annual General Meeting that:No dividend will be paid for the financial year 2020, and there remains a total of 32,656,664.46 euros in unrestricted equity.