Good morning, ladies and gentlemen, and welcome to TUI Group's update conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions following the presentation. The call today will last for 30 minutes. Let me now turn the floor over to your hosts, Friedrich Joussen and Birgit Conix.
Good morning everybody from Hamburg. It has been a busy night, and tonight, and I can say that it was anyhow, I think, a very successful night because we could sign our agreement with TUI Cruises and Royal Caribbean this morning. Therefore, I'm very happy to have you on the call so short term, and thank you for being present just in before our results announcement in next week. A couple of thoughts, just a couple of slides, and then we are open for your questions. First slide, it highlights our strategy again, which you all know. It is the same slide we showed in December. Just to recap, we want to defend our market shares and grow our markets in the market and airline business. We will talk about that when we talk about the results.
We have the bottom two boxes, GDA and OTA destination experience, our new digitalization opportunity. We are in the midst of digital transformation. We will become a digital platform company in the next years. We have what is today the core of the business holiday experiences. When it came to vertical integration, you can recall we always said vertical integration is content-centric. We deliver premium returns in the content through the scale in the markets. That is the strategy. Now, historically, we have actually been growing through assets, and we have actually reinvested proceeds from actually our disposals in assets. We also have said in the future we'll be more asset-light. Asset-light means we invest when it's necessary on our balance sheet, and if it's possible, we will actually not invest but be more asset-light.
The first big step we are doing right now in that direction is actually the disposal of Hapag-Lloyd into our joint venture, TUI Cruises. It is in line with the strategy. What is the deal? We sell Hapag-Lloyd, which we operate on over 100%, into the TUI Cruises joint venture for enterprise value of EUR 1.2 billion. When you think about Hapag-Lloyd, just five years ago, it was making losses.
We tried to find a buyer who would pay the book value. Unfortunately, we didn't find a buyer at that point in time. We restructured the business. Now it's EUR 1.2 billion. The nice thing on top of that is not only we get the proceeds and deleverage the company through the deconsolidation of debt, I come to that, but also we retain the profit pool 50% for the future growth and synergies.
We assume that this will be another EUR 300 million+ value. That will come on top of EUR 1.2 billion. The whole transaction is largely debt-financed. We do a little bit of equity injection of EUR 75 million our piece, yeah, and EUR 75 million, of course, of Royal Caribbean. Everything else is debt-financed in the company TUI Cruises. The debt facilities of that company is strong enough to do that and retain the dividends which we have envisaged.
Therefore, that is very good and closing anticipated for midsummer. When I look at the strategic and financial benefits, let's look at the strategic benefits first. TUI Cruises has been an extreme success. We always say it's the most profitable cruise company in the world, at least in the Royal Caribbean world because there we have comparisons. Of course, vertical integration is important because our sales power is very strong. The problem and the challenge also, let's say, the positives on TUI Cruises are growing fast enough because yard capacity is limited. That actually generates, it's also part of the premium returns, but it's also limiting growth.
At the same time, we had Hapag-Lloyd. Hapag-Lloyd was a German-focused luxury brand or is a German luxury and expedition brand. International expansion was always something we wanted to do, but was a little bit risky because we don't have this international footprint, and also the question of financing on balance sheet financing would have been an issue. The idea now is we put both companies together. With that, TUI Cruises will be growing because it can grow through Hapag-Lloyd, and Hapag-Lloyd can be growing because it has access to the international footprint of Royal Caribbean and debt facilities which we have in free in Royal Caribbean.
It's a win-win in strategic. Both companies couldn't have grown for different reasons, now grow. The benefit we are leveraging here is very clear that we keep the brand product marketing and sales. That is what our specialty is, and we RCL shipbuilding know-how and global footprint. Because we get EUR 1.2 billion, we get access to the additional value.
We keep our powder dry for digital expansion because we don't have to finance the growth in TUI Cruises and Hapag-Lloyd Cruises, because that will be done in TUI Cruises joint venture. On the financial side, it's also very attractive because EUR 1.2 billion is a very attractive size. Particularly when you think about, we put EUR 75 billion equity, and we get EUR 1.2 billion. This is very attractive. On top of that, we get the EUR 300 million+ synergy value plus growth.
For Royal Caribbean, it is also a very good deal because they put EUR 75 million, also achieve the EUR 300 million+, and they have the strategic benefit to get access to the best cruise brand in the world. Therefore, I think it is a win-win for both of us. As you know, I am very excited with my partnership with Royal Caribbean because they are good partners.
We have a long experience and a very serious and good partnership in that respect. On the financial side, as I said, TUI Cruises is very cash generative. It has good debt facilities. We are well within governance, particularly when it comes to all the ESG financing. As you know, it is very important in that business, and we will see no reduction of dividends to TUI. Particularly, Birgit is pleased because we will be strengthening our balance sheet.
We have said that we will put money into digital expansion, and this year we talked about high double digits. Of course, we anticipated already, early the year, that the likelihood of having a deal like this or something like this would be possible. A lot of this will be actually now will be put into the deleveraging of the company. When you look on the next slide, you'll see the enterprise value is EUR 1.2.
The net proceeds will be around EUR 700. The other thing, the remainder is actually the equity injection and the deleveraging. The deleveraging will create something like close to 0.2 gross debt leverage improvement in the gross debt area. Of course, the additional cash is available, and therefore you could take that also into account. It is something which is good for our balance sheet.
When you look at our new capital allocation framework, we always have said organic asset right growth. That's what we do. This digitalization, again, it's largely organic. We also have said we will look that we have a healthy balance sheet as well, and therefore you might be pleased that we adhere to that, and we are conservative in that respect. That said, I think it's a great deal for both of us, for RCL as well as for us. It is a great deal for TUI Cruises and Hapag-Lloyd because it unleashes growth potential, asset right and potential, which at the end of the day wouldn't have been possible.
We envisage that three years from now, 50% of what actually we bring into TUI Cruises of Hapag-Lloyd, 50% will be at least the value of the 100% today. That's what the deal will be doing for us. We believe it's something which is a no-brainer and a very good thing to do, and we are very happy that we pulled it over this morning. Thank you very much for listening in, and now we are open for your questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, please press nine followed by the star key on your telephone keypad. If you would like to withdraw your question, please press nine followed by the star key again. Please note that this is only for participants in the phone conference. I see we have some questions here already. We can start the call. The first question for today comes from Miss Jamie Rollo, calling from Morgan Stanley. Over to you.
Yeah, I think that's me. Hello. Morning, everyone.
Yes.
Three questions, please. First of all, I'm just wondering, would you have done this transaction if the company hadn't lost about EUR 700 million from the MAX grounding last year and this year and being so close to the leverage target? In other words, is there any sort of industrial logic behind this, or is it just to shore up the balance sheet? Secondly, it looks like essentially leverage on Hapag-Lloyd is going to be about EUR 1 billion, albeit, I guess, shareholder loans.
It looks like the combined TUI Cruises entity is going to have pretty high leverage. Could you talk a bit about the pro forma leverage on that joint venture? I agree it's off balance sheet, but just trying to understand that. The final question is, where does it leave Marella in the U.K.? Could that be another option to sell into the JV, in future?
Thank you.
Okay, Jamie. I tried to explain the logic. You get EUR 1.2 billion. Your EBIT contribution in three years will be what it would have been on 100%. When you look at valuations, when you look at everything, you have two companies which couldn't have grown, now grow. The industrial logic is so compelling, that actually that is something which I think is an absolute no-brainer. Yeah.
The leverage in the company is around four, which is for a cruise company is not big. Yeah. I mean, not at all. The cash capabilities of that business and the cash flows are enormous. Yes. Marella, yes. We have set in our strategy that we will be asset right. When I say we are asset right, then I mean we are asset right. We will look at things, and if things are compelling, we will do it.
I think, I don't know, but particularly many people would have said maybe, "Oh, this is the core of the business. Will they do it?" So on and so on. We have said we will become a digital platform company. When I say we want to become a digital platform company, that's what it will be. If we find good deals, but it must be always good deals. We will not do deals just for making deals. We only will make compelling deals. If this deal is not compelling, I will not understand it. Yes. Okay.
Yes. Maybe I can add also to what Fried said. The deal makes both strategic and financial sense. Of course, as Fried already alluded to, together with Royal Caribbean, we will be able to accelerate growth significantly. How we will treat this is we will look at our new capital allocation policy, and, indeed, we do have a Boeing MAX issues. In light of that, in the short run, we will use the proceeds according to this new capital allocation policy, taking into account leverage, et cetera. On the longer run, that is what we see with the increased earnings that we will generate from Hapag-Lloyd. We will also further invest into our new strategy with digitalization and everything we communicated.
Okay, thanks.
Thank you. The next question comes from James Ainley, calling from Citi. Please go ahead.
Good morning, everybody. Thanks for taking my questions. I've got three, please. First is, can you tell us what the book value of the business is? Second, could you quantify the synergies? I know you said there was EUR 300 million of synergy value, but what do you think the annual run rate could be? Third, how do you plan to internationalize the business? I guess both TUI Cruises and Hapag-Lloyd are very German-focused brands at the moment. How do you plan to internationalize and will you need to invest some of the synergies to do that? Thank you.
Okay. The synergies, do we publish synergies? I think we might not even do that. What I said is in three years, we will have made up for actually 50%, which we give up. Therefore, this is partly synergies and partly growth. Of course, then, this is only a snapshot. It will grow over time. I say the net present value quantification I said, is at least EUR 300 million, might see even more. On the internationalization, this mainly focus on the expedition and not so much initially on the ultra-luxury. The expedition is a no-brainer. When you look at the demand increase of expedition cruising in the world, it's enormous. I have seen a lot of new tonnage coming up.
We are one of the oldest expedition and most experienced, and by the way, the most luxurious expedition company in the world with ice-class quality ships everywhere. We are one of the few who really go Antarctica. We are one of the few who really go very extreme conditions, and that is something which is very compelling to customers. Here, of course, the international footprint of Royal Caribbean is also very important when it comes to the whole harbor management and route management and network and so on. That's also very important. It will be the luxury expedition, which we will initially focus to. On the last one-
Yeah, on the book gain. We said a considerable book gain, and this means mid triple-digit millions.
Okay. Thank you very much.
Thank you. The next question for today comes from Richard Clarke, calling from Bernstein. Please go ahead.
Hi, Richard.
Good morning. I think that was me. Yeah, just three questions from me. Just want to make sure I completely understand the bridge from the EUR 1.2 billion to the EUR 700 million proceeds. Presumably, some of that is lease debt, but maybe just the terms of this earn-out, the EUR 63 million earn-out. Is that a one-year earn-out or is that over multiple years? Second question, the impact on the JV income.
You said no reduction in dividends, but does that mean dividends probably flat? What would be the impact on the actual JV income given the higher debt within TUI Cruises JV? You talked about the ability to accelerate growth. How does that actually come about given the restrictions in the ability to get new ships? Does Royal Caribbean give access to new expedition ships to put into the JV?
How do they get better access to that growth?
Okay. On the last one, maybe I say lease brokerage with TUI first. I mean, the last one. The restriction of the berth capacity is focused on the big ships. The small ships, the berth capacity is not a problem. That is what we always said, and we have actually now also delivered two new ships. Again, look at our yields. Our yields are all above EUR 600. If we want to expand in ultra-luxury, it would be dangerous to expand too much in Germany because the enemy of high yields is actually volume.
We believe that international is the right way to go. There, the restriction of the berth is not an issue. It will be new ships. We are not any in used ships with that kind of brand, which is the highest rated luxury brand in the world when it comes to the Berlitz Cruise Guide. We always need to be number one. Used ships are not an option here. Maybe on the 12, I think.
In terms of valuation and proceeds, you asked about the bridge. Clearly the EUR 43 million EBIT for the full year 2019 times the 28x multiple, it gets us to EUR 1.2 billion. I'm very much sure that you got that. From that, if you deduct the net debt and the equity contribution, you get to the EUR 700 million proceeds. As we are sitting here with the deal team and Peter Krueger, who actually closed the deal, I'm going to hand over to you. Maybe you can also comment on the earn-out and how we structured that.
Yeah, sure. As Birgit said, there will be an earn-out of EUR 62.5 million. That is linked to the financial performance of the company, of Hapag-Lloyd, until September year-end. You can see we're already halfway through the earn-out, which effectively gives good visibility on the achievement level of the earn-out.
Okay. The proceeds could be EUR 762.5 million?
The 700 is included.
Yeah. No, it's already included.
Oh, that's already in, okay.
Yeah. It's in there.
The upfront cash is EUR 600 and, whatever that would be, EUR 36 million.
Yes.
There's a variable component on top of that that would take it to seven.
Yeah, absolutely.
At the end of September.
Yes.
Yes.
The financial year, our financial year end.
Just to comment on no reduction of dividends, can we interpret that to mean that the dividend will probably stay relatively flat while the company de-leverages? Or can it still grow?
Actually, a very simple way to explain it is that the future synergies will compensate the additional financing cost.
That will go up. That will not be flat. That will be according to our numbers in the existing plan. Yeah. You can see, the EBITDA, which we also had in our announcement for 2020, is already EUR 90. Yeah.
Thank you.
Okay.
Thank you. We have another question from Mark Fortescue, calling from Stifel. Please go ahead.
Hi. Good morning. My questions have been answered, actually, so thank you.
Okay. Thank you. We'll move on to the next one then. The next question is from James Rowland Clark, who's calling from Barclays. Please go ahead.
Good morning. Thank you for taking my questions. I've got two, please. The cash from the transaction, roughly EUR 700 million in net cash, how much of that is going to de-leveraging the business and how much is going into the digital platform investment? You're also sticking to that EUR 50 million-EUR 90 million spend for this year. How should we think about that for next year, given the cash you're going to have in the summer once that's completed? Secondly, could you help split out where the synergies are coming from in the JV once you've acquired Hapag-Lloyd? Also finally, I presume you're going to not report Hapag-Lloyd and the JV separately once it's completed.
The synergy is very clear. We sit in the building here, and both sit in the same building. One is a very big company, one is a very small company. We will synergize whatever is possible except the brand. Meaning the brand product proposition, that stays. It's a little bit like Bugatti and Volkswagen. Bugatti and Audi. It's part of the same family. There are synergies, but at the same time, the brand needs to be queuing very separately. What was your first question again?
Yeah, I can do that. The first question is the cash.
Yeah.
The EUR 700 million includes the earn-out, as we just discussed during the previous question. As I said when I answered the first question, we will look at our new capital allocation policy. Given the situation where we're in just now, we will balance everything and we will prioritize now the balance sheet. We do have the situation of Boeing MAX, although it doesn't have to do with the transaction, of course, as we also explained. You always have to look at your capital allocation policy given the situation where we're in. In the short run, we will use the proceeds to delever.
You asked a question about the digitalization expenses that we made, the double digits, million expenses. That just doesn't relate now to the proceeds because we already had included that in all of our plans. We will talk more about that during the Q1 results, as you will hear next week. On the JVs, you were asking about transparency, that is something that we clearly said that we will be working also with the IR team, et cetera, so that we can provide enough transparency on all of our JV structures going forward. That is a work in progress.
The important point is, we have very clearly looked at that and as said, powered right. The point is we have a high double-digit investment in; I think that is for this year perfectly fine. For this year, you will see a full deleverage. If this is successful, and we are very convinced it will be successful, the transformation will be going on, and it will be not the last deal we do, and it will be not the last proceeds we get.
When you look at trading, we are not talking today about trading. The world will go on and we will become a different platform company five years from now. That's what we have said. With that, I think it's important that we have asset-right and asset structures in place. With the transaction it is faster growth and deleveraging, and access to significant funds. That for us it's a good deal in all respects.
Thank you.
Thank you. The next question comes from Stuart Gordon calling from Berenberg. Please go ahead.
Yeah, good morning. Just could you chat through, you talk about the internationalization of the business. TUI Cruises, what proportion of their bookings come via RCL only channels that we could get a flavor for perhaps how they could help here? Secondly, just again on the synergies. Could you explain why these synergies couldn't have been extracted without Hapag-Lloyd being part of the joint venture? Finally, and I'm sure there's a very simple answer to this that I'm just missing. The net proceeds of EUR 700 million in slide five, but it looks as if you talk about pro forma going from EUR 910 million of net debt to EUR 80 million. That looks like EUR 1 billion of a shift in net debt. Can you just confirm to me what the EUR 300 million gap is there? Thank you.
I'll start with the bridge from the EUR 910 and the billion that you are referring to getting us to the EUR +80 million. That is, let's say, the EUR 700 million we said it's including earn out. Deduct from the EUR 700 million the earn out, let's say roughly EUR 630 million as was mentioned on the call. From that, you would deduct the debt facilities in comparison with 2019. That gets us to the EUR +80 million, the pro forma.
Okay. Sales via RCL, zero. This is a German sales. All the sales are done by us. Yeah. Synergies is actually, couldn't we have done the synergies before? I think no. When you look at, we have a detailed bottom-up plan of the synergies. This comes to, do you need one CFO or two CFOs? Do you need one office or two offices? Do you need one customer care or two customer cares? Do you need one accounting or two accounting? When you have two companies, you need two accounting, you need two CFOs. Long term, there are synergies where we do things together.
Sales, how many sales people do we have in the field, and so on. Today is always two. The important point anyhow is the brands must not dilute, and that is very clear. I come from the brand industry and know how to run multi-brand. Also, I see the marketing guys here, they have a full understanding how important the value of the brand is. That is where the product, where the brand, where the customer care, and these are the things where we need to be separated, and we want to be separated. Yeah. Because it's a difference if you have EUR 170, EUR 180 per diem or if you have a EUR 640 per diem, right? That's something which is also very clear.
Okay, thank you.
Thank you. The last question for today comes from Jürgen Kolb, calling from Kepler Cheuvreux. Over to you.
Thank you very much. Hi there. Just two questions from my side, please. First of all, again, coming back on the Marella topic. Would the deal have not been possible if you would have added Marella into this whole structure? Just getting your thoughts on why you did not include Marella because it would have probably cleaned the whole division, maybe also from the outside modeling point of view, a little bit in a clearer setup.
Secondly, when do you think you can really add value from that transaction? Thinking about you give away 50% of the business that is doing about a 16.5% EBIT margin or so. You put a lot of money into debt reduction, which is not very value creative. You're saying you're generating additional growth. When do you think this deal will be really value creative on your side? Thank you.
Okay, I try to make the point. We cash in EUR 1.2 billion and we will have EBITDA neutral after three years. How much better can you create value? I don't know many transactions of that quality. By the way, EUR 1.2 billion, as I said, we would have had difficulties to sell to the book value of the company at that point in time, which was more or less EUR 100 million four years or five years ago.
I would say in the last four years, five years, value accretive, and I think value accretive also in the future. If it was just for ease of reporting and for ease of your models, we would have included Marella immediately. Unfortunately, that's not the prime target of our M&A strategies. There are many different points which need to be considered that with all of our asset structures.
When you look at our balance sheets, we have said that we will SBE asset right. That said, we look at each and every asset on that balance sheet. It is under continuous evaluation how much it is critical to our business, how we actually finance growth best, what we can do to push the business forward. Marella will be part of it as well as other assets as well.
Therefore, for the time being I would say the Hapag-Lloyd is something we say in Germany, Genuss ohne Reue. It's a slam dunk. It's easy. It's growth, it's cash, it's value accretive without any. It was so obvious, not only for us, but also for Oetker. I mean, it was so obvious that we were the right partners in that business as well for all our other JVs or asset companies or asset holdings.
We have similar thoughts and thought processes. Peter, you heard of this, our M&A boss is also our head of strategy, and I think he is thinking about many things. It's not the end of our transactions. It's also not the start. That's also clear. Whenever things make sense, we will do things and maybe that's the only thing I can say to that. Okay. Thank you very much for all of you to be on the call. I wish you a splendid Friday and a great weekend.
Thank you for your participation. You may now disconnect.