Tallink Grupp
Quarterly report

AS Tallink Grupp Unaudited Consolidated Interim Report Q4 2018

In the 2018 financial year (1 January – 31 December), Tallink Grupp AS and its subsidiaries (the Group) carried a record number, a total of 9 756 611 passengers, which is 891 passengers more compared to the 2017 financial year. The number of cargo units transported increased by 5.7% compared to the previous financial year. The Group’s unaudited consolidated revenue amounted to EUR 949.7 million (EUR 967.0 million, 2017). Unaudited EBITDA was EUR 142.8 million (EUR 158.3 million, 2017) and unaudited net profit for the financial year was EUR 40.0 million or EUR 0.06 per share (EUR 46.5 million or EUR 0.07 per share, 2017).

In the 2018 financial year, the Group’s revenue and operating result 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, Estonia-Sweden and Latvia-Sweden).
• The number of cargo units transported on the Group’s ships increased in all geographical segments.
• The maintenance and repair of the cruise ferry Baltic Princess in the first quarter affected the Finland-Sweden segment’s carriage volumes and financial result.
• Charter revenue decreased compared to the same period last year as fewer ships are chartered out.
• Higher fuel cost due to increase in bunker prices.

Sales and segments

In 2018, the Group’s total revenue decreased by EUR 17.3 million and amounted to EUR 949.7 million.

• The total revenue from the route operations (core business) increased by EUR 0.7 million to EUR 883.7 million, despite the EUR 7.4 million decrease of the Finland-Sweden segment revenue mainly from cruise ferry Baltic Princess 68 days maintenance.
• The revenue from the other segment decreased by total of EUR 19.4 million and amounted to EUR 74.8 million. The largest decrease in the other segment was from charter revenue in amount of EUR 10.8 million, as fewer ships are chartered out. There was also lower revenue from shops on land (in Tallinn Old Harbour area) as the price level of products sold in land shops in Estonia is less competitive after excise increases over recent years. In addition, there is lower revenue from hotels, Tallink Pirita Spa Hotel in Tallinn ceased operations from November 2018 due to sale of the hotel property by its owner.

The positive development of the cargo business continued in 2018 financial year, the transported cargo volumes increased in total by 5.7%, the cargo revenues increased by 6.1% or EUR 7.1 million and amounted to EUR 124.9 million in 2018. The growth was driven by the increase of number of transported cargo units in all geographical segments following positive economic developments in the Group’s main markets.

In 2018, The Group’s ships carried a total of 5.1 million passengers on the Estonia – Finland routes, which is 0.3% increase compared to last year and the number of transported cargo units on the routes increased by 5.4%. On the Tallinn – Helsinki route there was increased competition from added capacity by competitors, which put pressure on ticket prices. The new Shuttle vessel Megastar improved the efficiency of the Shuttle operations and the Group was able to increase the segment result in continuously challenging competitive environment. The segment revenue increased by EUR 1.5 million and amounted to EUR 356.0 million, the segment result increased by EUR 2.4 million and amounted to EUR 80.3 million.

The Finland-Sweden routes’ revenue decreased by EUR 7.4 million and amounted to EUR 337.5 million, the segment’s result decreased by EUR 2.3 million, compared to the previous year and amounted to EUR 16.2 million. The maintenance and repair of the cruise ferry Baltic Princess in the first quarter (lasted for 68 days) affected the Finland-Sweden segment’s carriage volumes and financial result, the segment’s result was also impacted by the higher fuel cost due to increase in bunker prices.

The Estonia-Sweden routes’ revenue increased by EUR 1.7 million, compared to the previous year. Growth was supported by a 0.4% higher passenger number and by a 10.9% increase in the number of transported cargo units. The segment’s result decreased compared to the previous year due to higher fuel cost from increase in bunker prices.

The Latvia-Sweden route’s revenue increased by EUR 4.8 million, compared to the previous year. Growth was supported by a 7.0% higher passenger number and by a 24.5% increase in the number of transported cargo units. The positive development of the route’s carriage volumes and revenue continued in 2018 financial year, however due to higher fuel cost from increase in bunker prices, the segment result improved EUR 0.2 million and amounted to EUR -1.0 million.

Earnings

In 2018, the Group’s EBITDA decreased by EUR 15.5 million and amounted to EUR 142.8 million. The Group’s profitability was impacted mainly by the following factors:

• Total EUR 16.6 million higher fuel cost due to the increase in bunker prices. At the same time, the Group achieved savings on total fuel consumption, through various energy efficiency initiatives the ships average fuel consumption per nautical mile has decreased by 3.2% in 2018 financial year.
• Negative impact to EBITDA from decrease of charter revenue, as fewer ships are chartered out compared to the same period last year.
• Negative impact to EBITDA from decrease of revenue from shops on land (in port area) as the price level of products sold on land shops is less competitive after excise increases over recent years in Estonia.
• Impact to EBITDA from nonrecurring costs and proceeds in 2018 are as follows:
  • Costs EUR 1.5 million related to the listing of shares in Nasdaq Helsinki stock exchange.
  • Cost EUR 0.9 million accrued according to the old fuel tank rental agreement termination.
  • Other proceeds EUR 1.0 million received from the compensation agreement with former Superfast vessels owner.

Net finance costs decreased by EUR 2.3 million compared to the previous year mainly from EUR 3.9 million lower interest expenses. Total gains from exchange rate differences and the revaluation of cross currency and interest rate derivatives decreased by EUR 1.6 million.

The Group’s unaudited net profit for the financial year 2018 was EUR 40.0 million or EUR 0.06 per share compared to a net profit of EUR 46.5 million or EUR 0.07 per share last year.

Investments

In the 2018 financial year the Group’s investments amounted to EUR 36.4 million. A number of investments were made to upgrade the ships restaurants, shops and other public areas. On cruise ferry Silja Serenade there was restaurant Bon Vivant renewed, nightclub Starlight, restaurant Grill House and Sea Pub built. On cruise ferry Baltic Queen there was Grande Buffet renewed, new Fastlane restaurant and new Silja Land built. On cruise ferry Silja Europa there was Theatre Europa with 528 seats fully renewed.

Investments were also made to ship’s technical maintenance to keep the ships in good technical working condition and innovative energy efficiency solutions like upgrade of HVAC systems, fuel monitoring systems, preparations for high voltage shore power connections and hybrid battery solutions.

Investments were made also to the development of the online booking and sales systems.

Dividends

In June 2018 the shareholders’ annual general meeting decided to pay a dividend of EUR 0.03 per share from the net profit for 2017. The announced dividends in the total amount of EUR 20.1 million were paid out on 5 July 2018.

To the shareholders’ annual general meeting in 2019 the management board will propose a dividend of EUR 0.05 per share from the financial year 2018 net profit. In addition, the supervisory board of Tallink Grupp AS proposed to the management board for the purpose of improving the company’s capital structure to prepare a proposal for the 2019 shareholders’ annual general meeting to reduce the company’s share capital by 7 cents per share.

Results of the Q4 of 2018

In the fourth quarter (1 October – 31 December) of 2018, the Group’s revenue decreased by EUR 6.3 million compared to same period last year and amounted to EUR 226.6 million. The decrease was driven by 3.0% lower passenger number in the fourth quarter, decrease in hotel revenues and chartering revenues.

The fourth quarter EBITDA decreased by EUR 4.9 million to EUR 24.0 million and net result for the period was EUR -1.8 million. The lower profitability resulted from decrease in revenue and nonrecurring cost recorded in fourth quarter from the cost accrual related to termination of fuel tank rental agreement and costs related to the listing of Group’s shares in Nasdaq Helsinki stock exchange.

Financial position

In the fourth quarter, the Group’s net debt increased by EUR 5.7 million to EUR 428.0 million (EUR 472.0 million at 31 December 2017) and the net debt to EBITDA ratio was 3.0 at the reporting date (3.0 at 31 December 2017).

At the end of the fourth quarter, total liquidity (cash, cash equivalents and unused credit facilities) amounted to EUR 157.2 million (EUR 163.9 million at 31 December 2017) providing a strong financial position for sustainable operations.

The Group had EUR 82.2 million (EUR 88.9 million at 31 December 2017) in cash and cash equivalents and EUR 75.0 million (EUR 75.0 million at 31 December 2017) in unused credit lines.

Events in Q4

Change in loan obligations
In July 2018, Tallink Grupp AS signed a loan agreement in the amount of EUR 110 million. The final maturity of the floating interest rate Euribor based loan is six years. The financing was arranged by Nordea Bank AB (publ), Finnish Branch, Danske Bank A/S, Finland Branch and HSH Nordbank AG.

The loan was drawn in October 2018 and was used to repay the NOK 900 million bonds issued in June 2013 and to terminate the related hedge transactions. The new loan is guaranteed by Tallink Fast Ltd., a subsidiary of Tallink Grupp AS and is secured by the mortgage on the vessel Baltic Princess belonging to the same subsidiary.

Termination of operation of Pirita Spa Hotel
On 15 November 2018, the Group’s subsidiary OÜ TLG Hotell ceased to operate the Pirita Spa Hotel due to the sale of the property by the Group’s major shareholder Infortar AS. The transaction has no significant impact on the consolidated financial results of Tallink Grupp AS.

Preparations for new ship order
In October 2018, Tallink Grupp AS and Rauma Marine Constructions signed a Letter of Intent for the construction of a new LNG powered shuttle ferry for the Tallinn-Helsinki route. The estimated cost of the project is approximately 250 million euros and the new vessel will be built at the Rauma shipyard in Finland. The construction of the new ship is expected to be completed by the end of 2021.

Capital reduction and dividend policy
In October 2018, the supervisory board of Tallink Grupp AS proposed to the management board for the purpose of improving the company’s capital structure to prepare a proposal for the 2019 general shareholders’ meeting to reduce the company’s share capital by at least 7 cents per share.

In October 2018, the management board of Tallink Grupp AS decided to supplement the company’s dividend policy, according to which if the economic performance enables it, dividends would be paid in the minimum amount of 5 cents per share.

Secondary listing on Nasdaq Helsinki stock exchange
On 23 November 2018 Nasdaq Helsinki approved the listing application of Tallink Grupp AS and trading in the Finnish share depositary receipts “FDRs” of the Tallink Grupp AS on Nasdaq Helsinki commenced on 3 December 2018.

Events after the reporting period and outlook

Changes in the Management Board
On 4 February 2019, it was announced that the Tallink Grupp AS Supervisory Board has appointed Mrs Kadri Land and Mr Harri Hanschmidt as Members of the Management Board and has recalled from the Management Board Mr Janek Stalmeister following his resignation. The mandate of Mr Janek Stalmeister ended on 2 February 2019. The mandate of Mrs Kadri Land and Mr Harri Hanschmidt started on 4 February 2019 and lasts for a period of three years.

On 22 February 2019, it was announced that the Supervisory Board has appointed Mrs Piret Mürk-Dubout as a Member of the Management Board and has recalled from the Management Board Mr Andres Hunt following his resignation. The mandate of Mr Andres Hunt ended on 26 February 2019, the mandate of Mrs Mürk-Dubout begins on 15 April 2019 and lasts for a period of three years.

From 15 April, the Management Board of Tallink Grupp will operate with five members under the leadership of Mr Paavo Nõgene and will include Mr Lembit Kitter, Mrs Kadri Land, Mr Harri Hanschmidt and Mrs Piret Mürk-Dubout.

Fuel price risk management
In December 2018, it was agreed with the main fuel supplier to fix the price of approximately 40% of the total fuel purchasing volume for the period from February to December 2019.

Ship dockings
The modernisation of the Group’s fleet continues in 2019 and in the first half there are planned dockings of seven vessels: Regal Star, Baltic Queen, Star, Silja Symphony, Galaxy, Victoria I and Isabelle.

The investments will be made to ship’s technical maintenance, upgrades to public areas and number of energy efficiency projects: electrical high voltage shore connections, HVAC systems, heat recovery systems and battery packs for hybrid solution. The planned service breaks of seven vessels will total to 126 days in 2019.

Earnings
The Group’s earnings are not generated evenly throughout the year. The summer period is the high season in the Group’s operations. In management’s opinion and based on prior experience most of the Group’s earnings are generated during the summer (June-August).

Research and development projects
Tallink Grupp AS does not have any substantial on-going research and development projects. The Group is engaged continuously to find various opportunities for expanding the Group’s operations, in order to improve the results.

We are looking for innovative ways to upgrade our ships and passenger area technology to improve the overall performance of our company through modern solutions. A collaboration with the Tallinn University of Technology (TalTech) was started to develop so-called „Smart Car Deck“ solutions for the Group’s vessels over the next two years.

Risks
The Group’s business, financial position and operating results could be materially affected by various risks. These risks are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently believe are immaterial or unlikely, could also impair our business. The order of presentation of the risk factors below is not intended to be an indication of the probability of their occurrence or of their potential effect on our business.

• Accidents, disasters
• Macroeconomic developments
• Changes in laws and regulations
• Relations with trade unions
• Increase in the fuel prices and interest rates
• Market and customer behaviour

Key figures

¹ Alternative performance measures based on ESMA guidelines are disclosed in the Alternative Performance Measures section of this Interim Report.

EBITDA: result from operating activities before net financial items, share of profit of equity-accounted investees, taxes, depreciation and amortization

EBIT: result from operating activities

Earnings per share: net profit / weighted average number of shares outstanding

Equity ratio: total equity / total assets

Shareholder’s equity per share: shareholder’s equity / number of shares outstanding

Gross margin: gross profit / net sales

EBITDA margin: EBITDA / net sales

EBIT margin: EBIT / net sales

Net profit margin: net profit / net sales

Capital expenditure: additions to property, plant and equipment + additions to intangible assets

ROA: earnings before net financial items, taxes 12-months trailing / average total assets

ROE: net profit 12-months trailing / average shareholders’ equity

ROCE: earnings before net financial items, taxes 12-months trailing / (total assets – current liabilities (average for the period))

Net debt: interest-bearing liabilities less cash and cash equivalents

Net debt to EBITDA: net debt / EBITDA 12-months trailing

Consolidated statement of profit or loss and other comprehensive income

Consolidated statement of financial position

Consolidated statement of cash flows

Veiko Haavapuu
Financial Director

AS Tallink Grupp
Sadama 5/7
10111 Tallinn, Estonia
E-mail veiko.haavapuu@tallink.ee

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• Tallink Grupp 2018 Q4 ENG