Viking Line Abp: Business Review for January - September 2021

Viking Line Abp              BUSINESS REVIEW                        29.10.2021, 9.00 AM

GRADUAL RECOVERY

January– September 2021 (compared to January–September 2020)

• Sales amounted to EUR 169.0 M (EUR 154.2 M). 
• Other operating revenue was EUR 44.6 M (EUR 16.7 M). 
• Operating income totalled EUR 30.5 M (EUR -35.2 M). 
• Net financial items were EUR -3.4 M (EUR -3.1 M). 
• Income before taxes amounted to EUR 27.1 M (EUR -38.3 M). 
• Income after taxes totalled EUR 22.7 M (EUR -30.8 M).
• The outlook for the financial year 2021 is unchanged compared to the Half-Year Report as of June 30, 2021, which means positive operating income for the full-year 2021.

Third quarter 2021 (compared to third quarter 2020)

• Sales amounted to EUR 97.5 M (EUR 56.6 M).
• Operating income totalled EUR 26.0 M (EUR -7.8 M).

The third quarter brought increased demand for our services in traffic between Åland, Finland and Sweden. The focus for traffic between Finland and Estonia has been to give customers as good a service as possible combined with cost control.

Since the end of the first quarter of 2020, the company’s opportunities to carry out its regular operations have been limited by the still ongoing COVID-19 pandemic.

Sales and earnings

Consolidated sales increased 9.6 % till EUR 169.0 M during the period January 1– September 30, 2021 (EUR 154.2 M January 1–September 30, 2020). Operating income totalled EUR 30.5 M (EUR -35.2 M).

Passenger-related revenue increased 11.7 % to EUR 137.6 M (EUR 123.2 M), while cargo revenue was EUR 29.9 M (EUR 29.7 M). The sales contribution was EUR 128.6 M (EUR 114.9 M). Operating costs decreased 14.0 % to EUR 127.9 M (EUR 148.7 M).

Results for the third quarter were characterized by a steady increase in demand in the passenger segment and continued stable demand for cargo transport.

Sales increased 72.3 % to EUR 97.5 M during the period July 1-September 30, 2021 (EUR 56.6 M July 1–September 30, 2020). Operating income totalled EUR 26.0 M (EUR -7.8 M).

During the first three quarters, the Group received aid for its public service obligations from Traficom for the Group’s vessels on the Turku–Mariehamn/Långnäs–Stockholm, Mariehamn-Kapellskär and Helsinki–Tallinn routes, with the bulk of the aid received during the first two quarters. We also received aid from the Development and Management Centre of Finland’s Centres for Economic Development, Transport and the Environment (known as ELY centres) and from Finland’s Local Employment and Economic Development Offices. The aid is recognized as State aid under other operating revenue.

Service and market

The Viking Line Group provides passenger and cargo carrier services using six vessels on the northern Baltic Sea and in the Gulf of Finland. During the second quarter, a bareboat hire/purchase agreement was entered into for M/S Mariella. The Group’s remaining vessels served the same routes as in 2020, although the vessels that normally sail between Helsinki and Stockholm and between Stockholm and Mariehamn have been taken out of service to some extent due to the COVID-19 pandemic. On June 12, Gabriella resumed service on the Helsinki–Stockholm route and was also used for special cruises. During the third quarter, all of the vessels were in service.

The total number of passengers on Viking Line’s vessels during the report period was 1,484,398 (1,642,179). The Group had a total market share in its service area of approximately 34.1% (26.4%).

Viking Line’s cargo volume was 95,955 cargo units (93,040). Viking Line’s share of the cargo market was approximately 16.4% (17.0%). The market share for passenger cars was approximately 33.8% (26.4%).

Due to the ongoing pandemic, travel has been limited. The implementation of the EU’s Digital COVID certificate has worked well, and member countries have gradually adapted and also partly phased out national regulations established earlier during the pandemic. We can note that market demand for travel has increased, which is in line with our previous forecast described in the Half-Year Report.

Investments and financing

The Group’s investments amounted to EUR 11.4 M (EUR 11.7 M), of which EUR 6.2 M (EUR 5.3 M) is investments in vessels under construction. The Group’s total investments constitute 6.7% of revenue (7.6%).

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

On September 30, 2021, the Group’s non-current interest-bearing liabilities totalled EUR 104.5 M (EUR 75.7 M). The equity/assets ratio was 49.1% compared to 48.9% a year earlier.

At the end of September, the Group’s cash and cash equivalents amounted to EUR 65.1 M (EUR 28.6 M). Unutilized credit lines in the Group totalled EUR 15.1 M on September 30, 2021 (EUR 0.8 M). Net cash flow from investing activities was EUR 25.2 M (EUR -24.1 M). Net cash flow from investing activities was EUR 24.6 M (EUR -11.2 M) and net cash flow from financing activities amounted to EUR -14.4 M (EUR 1.1 M).

Most of the Group’s loan agreements include loan covenants according to market terms. The covenant terms entail minimum requirements for liquidity and solvency and a maximum net financial debt-to-EBITDA ratio. The Group has been granted a time-limited exemption from the covenant terms that were breached during the first three quarters of 2021 for those loans already drawn. As of September 30, all covenant terms were met.

In accordance with the terms in State guarantees for liquidity loans taken out in the autumn of 2020 and with requirements in the waiver of covenant terms and loan payment deferrals granted by Finnvera, Viking Line Abp has further undertaken not to pay a dividend or pay out any funds until its obligations related to the guarantees and loans have been repaid in full.

In May, Viking Line Abp entered a bareboat hire/purchase agreement for Mariella. The total sale price was EUR 19.6 M. The vessel’s book value was EUR 5.6 M. The sale had a EUR 13.1 M effect on income, and liquidity was strengthened by EUR 13.5 M. The remainder of the purchase price is to be paid on a monthly basis over four years beginning June 1, 2022. The present value is calculated by discounting future payments at a 3% interest rate.

During the period, the City of Turku redeemed the terminal buildings and related fixtures and fittings in Turku owned by Viking Line. The redemption entailed a book profit under IFRS of EUR 10.7 M. At the same time, the company signed a lease for the terminal and related facilities which runs until December 31, 2025, and the company will thus continue to use the current terminal and related facilities in Turku. After that, the plan is to place the new terminal building in Turku in service, with the company using the terminal and other related buildings. The company has also entered a 10-year traffic agreement with the Port of Turku on market terms.

Liquidity can also be strengthened by a shareholder contribution.

Organization and personnel

The average number of full-time employees in the Group was 1,452 (1,767), of whom 994 (1,228) worked for the parent company. Land-based personnel totalled 362 (418) and shipboard personnel totalled 1,090 (1,349).

In addition to the Group’s own employees, Viking XPRS was crewed by an average of 149 (161) people employed by a staffing company.

The number of employees in 2021 is far lower than in 2020, since a large percentage of staff were furloughed during the period. Along with the furloughs, redundancies in the land-based organization and on Viking Cinderella affected the number of employees.

Risk factors

The COVID-19 pandemic has had a significant impact on Viking Line’s earnings and liquidity and will continue to have a negative impact.

Uncertainty about regulatory requirements and related restrictions to passenger traffic as well as about market demand will affect Viking Line’s operations, results and financial position.

The Group’s loans are tied to loan covenants that include profitability, liquidity and solvency requirements. If the terms in these covenants are not met, financiers can demand early repayment or cancellation of the loans.

The recent surge in energy prices will have a negative effect on income.

Quarterly consolidated income statement

 Quarterly consolidated statement of comprehensive income

Financial ratios and statistics

Equity/assets ratio, % = (Equity including minority interest) / (Total assets – advances received)

When rounding off items to the nearest EUR 1,000,000, rounding-off differences of EUR +/– 0.1 M may occur.  

The above figures from the financial statements have not been audited.

Outlook for the full financial year 2021

The outlook for the financial year 2021 is unchanged compared to the Half-Year Report as of June 30, 2021, which means a positive operating profit for the full-year 2021.

The Group’s Year-End Report 2021 will be published on February 18, 2022.

Mariehamn, October 28, 2021

VIKING LINE ABP

Jan Hanses
President and CEO
 

1.      Accounting principlesNotes to the Business Review for the period January-September 2021

This Business Review has been prepared in accordance with IFRS and consists of a summary of the financial statements for the period in accordance with IAS 34.

The Business Review has been prepared in accordance with the same accounting principles, estimates and valuations as in the most recent annual accounts, unless otherwise indicated below.

Depending on its nature, public aid received is recognized as other operating revenue, compensation to employees or as a decrease in advance payments for vessels under construction.

The redemption of the Turku terminal buildings and related fixtures and fittings is classified as a sale and leaseback transaction. The transfer of the asset is recognized as a sale under IFRS 15. The Group measures the right of use as the proportion of the asset’s previous carrying amount that relates to the right of use retained by the company. The gain on the sale only relates to the rights transferred to the buyer. The lease liability and right of use related to the redemption are recognized under IFRS 16 in the balance sheet, which gives rise to a larger increase in lease liabilities as of September 30, 2021.

An associate company is a company over which the investor can exert a significant influence. An investment in an associate company shall be accounted for using the equity method in the balance sheet as an investment accounted for using the equity method. The equity method is an accounting method that entails accounting for the investment in a company initially at cost and subsequently adjusting it by the investor company’s proportional share of the change in the investee’s net assets. The investor company’s income subsequently includes the investor company’s proportional share of the investee’s income, and the investor company’s other comprehensive income includes its share of the investee’s other comprehensive income. Viking Line owns 18.3% of the shares in Alandia Holding Ab, a company formed during the second quarter of 2021 for the acquisition of shares in Alandia Försäkring Abp. The Group accounts for the investment as an associate company. In conjunction with the transaction, the Group reclassified its previous holding of 19.5% in Alandia Försäkring Abp as an associate company. The reclassification had no effect on income. See Note 12.

The Group’s non-current receivables consist of a receivable related to Mariella’s sale to Corsica Ferries SAS. The receivable is to be paid on a monthly basis over four years beginning June 1, 2022. The present value is calculated by discounting future payments by an interest rate of 3%. For cash and cash equivalents with a short maturity, the carrying amount is considered equal to fair value. The carrying amount of trade receivables and other receivables as well as of trade payables and other liabilities is considered equal to fair value based on the short-term nature of the items. The carrying amount of interest-bearing liabilities is equal to fair value.

A non-current asset shall be classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. To meet this requirement, the asset must be available for immediate sale in its present condition and subject only to terms that are usual and customary for sales of such assets, and its sale must be highly probable. Depreciation of an asset ceases from the time it is classified as an asset held for sale. The asset is to be measured at the lower of carrying amount and fair value less costs to sell. See Note 14.

The Business Review has not been subject to an audit.

When rounding off items to the nearest EUR 1,000,000, rounding-off differences of EUR+/- 0.1 M may occur.

2.      Estimates and judgements

In preparing the consolidated financial statements in compliance with IFRSs, the company’s management must make judgements and estimates about the future that affect the reported amounts for assets and liabilities, revenue and expenses as well as other information. The judgements and estimates contained in the financial statements are based on the best assessment of management on the date the Business Review was published.

The COVID-19 pandemic has caused a deterioration in the Group’s operating conditions and has affected both the income statement and balance sheet. An account of the biggest changes is given in the notes below. It is difficult at present to estimate how long the pandemic will last and what impact it will have on Viking Line’s future earnings, financial position and cash flow. The actual outcome may deviate from the estimates and judgements made.

The most important area that entails judgements is the valuation of the Group’s vessels. The vessels’ residual values and estimated periods of use are examined yearly and adjusted if they deviate significantly from earlier values. The depreciation period for the vessels’ hull, machinery and other long-term components has been extended from 25 years to 30 years as of January 1, 2021, since the period of use for the vessels is considered to be longer than 25 years. Residual values have remained unchanged; see Notes 7 and 11.

The Group’s shareholdings were recognised under financial assets at fair value through other comprehensive income until June 30, 2021, when Alandia Försäkring Abp’s ownership structure changed. After that, Viking Line’s significant influence in the company increased, and the investment is accounted for as an associate company using the equity method.

In valuing the Group’s leases, judgements are made as to how the Group will capitalize on any opportunity to extend the lease period or terminate the lease. Judgements are also made as to what discount rate is to be used in calculating the present value of the Group’s lease liability. The size of the Group’s lease liabilities and right-of-use assets, as well as payments on its lease liabilities and depreciation of right-of-use assets, is affected by those judgements.

The Group’s management regularly makes judgements on sales inventory values due to slower turnover and reduced demand as a direct result of COVID-19. Based on the management’s judgements in 2021, no significant impairment losses were recognized in the income statement during the first three quarters.

3.      Going concern, risks and liquidity

The COVID-19 pandemic is an uncertainty factor that, should related risks be realized in full, could lead to uncertainty about the company’s ability to continue operations.

This Business Review has been prepared in accordance with the going concern principle since in the view of Viking Line’s Board of Directors the company can continue its operations and meet its obligations over the foreseeable future, at least 12 months from the date of approval of this report. This view is based on the business plan approved by the Board of Directors, which takes COVID-19 into account, and on additional financing.

In 2020, the Finnish Government approved the State’s guarantees on Viking Line’s liquidity loans up to EUR 38.7 M. 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.

The Group’s cash and cash equivalents at the end of September totalled EUR 65.1 M (EUR 28.6 M). Unutilized credit lines in the Group totalled EUR 15.1 M as of September 30, 2021 (EUR 0.8 M). The net cash flow from operating activities was EUR 25.2 M (EUR -24.1 M). Net cash flow from investing activities was EUR 24.6 M (EUR -11.2 M) and net cash flow from financing activities amounted to EUR -14.4 M (EUR 1.1 M).

In May, Viking Line Abp entered a bareboat hire/purchase agreement for Mariella. The total sale price was EUR 19.6 M. The vessel’s book value was EUR 5.6 M. The sale had a EUR 13.1 M effect on income, and liquidity was strengthened by EUR 13.5 M. The remainder of the purchase price is to be paid on a monthly basis over four years beginning June 1, 2022. The present value is calculated by discounting future payments at a 3% interest rate.

During the period, the City of Turku redeemed the terminal buildings and related fixtures and fittings owned by Viking Line. The redemption entailed a book profit under IFRS of EUR 10.7 M. At the same time, the company signed a lease for the terminal and related facilities which runs until December 31, 2025, and the company will thus continue to use the current terminal and related facilities in Turku. After that, the plan is to place the new terminal building in Turku in service, with the company using the terminal and other related buildings. The company has also entered a 10-year traffic agreement with the Port of Turku on market terms

Liquidity can also be strengthened by a shareholder contribution.

In 2020-21, Viking Line Abp signed an agreement with Finnvera Abp and Finlands Exportkredit Ab on a loan payment deferral for payments during the period July 1, 2020–January 31, 2022 totalling EUR 29.8 M. Three of the four loan payments fall due by January 10, 2025 at the latest – in other words, at the time final payment is due, while the fourth loan payment is divided up so that it falls due in conjunction with the other payments. This is shown in the table below for future cash flows related to financial liabilities on September 30, 2021. 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 term of the loan is conditional upon payment of the loan payments for which a deferral has been granted.

Most of the Group’s loan agreements include loan covenants according to market terms. The financial covenants in the loan agreement consist of a minimum liquidity requirement and a maximum total net debt-to-EBITDA ratio for the Group. The Group has been granted a time-limited exemption from the covenant terms that were breached during the third quarter of 2021 for those loans already drawn. In the Half-Year Financial Report, the company reported that there were loans of EUR 15.0 M for which certain covenant terms were waived until December 31, 2021. These loans can be reclassified as long-term loans since the covenant terms were met as of September 30. The covenant terms for the other loans were also met as of September 30, 2021.

In the event the pandemic continues for longer than the Board of Directors has anticipated and should the measures to strengthen the company’s finances mentioned above not have a positive outcome, there is considerable uncertainty that could lead to significant doubt about the company’s ability to continue operations.

Future cash flows related to financial liabilities on September 30, 2021:

Financing of vessel construction

Advance payments are related to vessels under construction and totalled EUR 60.4 M on September 30, 2021, 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 as security for advance payments made of EUR 38.8 M plus interest. Other capitalized planning, monitoring and borrowing expenses of EUR 26.6 M would in that case be charged to income. Liquidity could be affected if some of the EU aid must be repaid.

A total of 78.4% of the contract price is financed by a consortium of commercial banks; 90.0% of the credit amount is guaranteed by China Export & Credit Insurance Corporation. The binding loan commitment of EUR 152.0 M shall be used when final payment is made upon delivery of the vessel. The loan commitment includes financial covenants according to market terms.

The covenant terms include (i) a minimum requirement for cash and cash holdings, whereby the company shall ensure that minimum liquidity is always greater than the higher of EUR 20 M or 5% of total net debt and (ii) a maximum net debt/EBITDA ratio for the Group. The net debt/EBITDA ratio covenant was breached during the first and second quarter of 2021. The Group was granted a time-limited exemption until June 30, 2021. The covenant terms were met as of September 30. Negotiations are under way to extend the exemption from the covenant terms agreed. These negotiations could result in amendments in covenant and loan terms.

4.      Segment information

Consolidated revenue increased 9.6% and passenger-related revenue increased 11.7%.

5.      Other operating revenue

During the financial year, the Group received aid for public service obligations from Traficom for the Group’s vessels on the Turku–Långnäs–Stockholm, Mariehamn-Kapellskär and Helsinki–Tallinn routes. We also received aid from the Development and Management Centre of Finland’s Centres for Economic Development, Transport and the Environment (known as ELY centres) and from Finland’s Local Employment and Economic Development Offices as well as aid for costs from the State Treasury of Finland. The aid is recognized as public aid under other operating revenue.

In May, Viking Line Abp entered a bareboat hire/purchase agreement for Mariella. The total sale price was EUR 19.6 M. The vessel’s book value was EUR 5.6 M. The sale had a EUR 13.1 M effect on income, and liquidity was strengthened by EUR 13.5 M. The remainder of the purchase price is to be paid on a monthly basis over four years beginning June 1, 2022. The present value is calculated by discounting future payments at a 3% interest rate

During the period, the City of Turku redeemed the terminal buildings and related fixtures and fittings owned by Viking Line. The redemption entailed a book profit under IFRS of EUR 10.7 M. At the same time, the company signed a lease for the terminal and related facilities which runs until December 31, 2025, and the company will thus continue to use the current terminal and facilities in Turku. After that, the plan is to place the new terminal building in Turku in service, with the company using the terminal and other related buildings. The company has also entered a 10-year traffic agreement with the Port of Turku on market terms

Viking Line Abp received a dividend from Alandia Försäkring Abp prior to its reclassification as an associate company. The dividend is recognized under other operating revenue.

6.      Compensation to employees

A large percentage of staff in Finland has been furloughed. In Sweden and Estonia, State-subsidized short-term furlough programmes have been used. Furloughs have been carried out as part-time furloughs and on the vessels to a large extent as full-time furloughs. In addition to the furloughs, redundancies in the land-based organization and on Viking Cinderella contributed to the decrease in expenses.

The Group receives government restitution from Finland and Sweden related to taxes and social security contributions for shipboard employees in keeping with European Union guidelines. The Group has received short-term aid in Sweden and Estonia for short-term furloughs utilized. Restitution received and short-term aid for furloughs have been recognized in the income statement under salary and other employment benefit expenses for the period in which the basis for the restitution and aid arose.

7.      Depreciation and amortization

The depreciation period for the vessels’ hull, machinery and other long-term components was extended from 25 years to 30 years as of January 1, 2021, since the period of use for the vessels is considered to be longer than 25 years. The residual values have remained unchanged. The change compared to last year is mostly due to a change in depreciation periods.

8.      Other operating expenses

Other operating expenses decreased by 11.8% since the Group’s operations and expenses were adjusted to the changed market situation as a result of the COVID-19 pandemic.