Finnlines Poised for Profit Boost as Rivals Suffer From EU Rules

Oyj (FLG1S) is geared to boost next year’s profits as rivals stand to suffer under tighter environmental rules, while its modern ships will sail unhindered through the English Channel and Baltic Sea.

“This is a highly competitive business,” Chief Financial Officer Tom Pippingskoeld said in an interview Finnlines’ headquarters at Helsinki’s Vuosaari port. “Considering our competitors with an older fleet, it may not be economical to install scrubbers on older vessels, since they are expensive. That may improve the market at the start of next year.”

Finland’s only publicly traded shipping company accumulated debt over the past decade, investing more than 1 billion euros ($1.32 billion) in modernizing its flotilla of more than 20 vessels. This “young, energy-efficient fleet” is fitted for success as competitors may flinch to adjust to new European Union regulation, Pippingskoeld said. Vessels breaching rules limiting the sulfur content of exhaust gases can’t sail in the Baltic Sea, the North Sea or the English Channel after Jan. 1.

After taking four years to gain just 9.9 percent, Finnlines’ stock has risen 73 percent this year to 13.50 euros as the shipping company restored profitability through the sale of vessels, optimizing routes, cutting staff and reducing debt. Finnlines, controlled by the Grimaldi Group of Naples, Italy, last month reported second-quarter net income of 14.7 million euros, the highest since the third quarter of 2006.

Profits Again

The group is now once again rewarding its owners, the executive said.

“Improving our operative profitability — our capacity utilization rate — boosts our cash flow and that’s helped us pay down debt significantly” and “bring the company back to profit,” Pippingskoeld said. “That shows in the significant stock gain that’s brought value to our holders.”

Finnlines scrapped its dividends in 2008 after a court battle with Ilmarinen Mutual Insurance Company. The insurer has an 11 percent stake, compared with Grimaldi’s 78 percent, and sued Finnlines over 2007 dividends paid in 2008 it says should have matched the prior year’s total of about 17.2 million euros. The case is being heard by Finland’s Supreme Court. Ilmarinen said it has a policy of not commenting on individual investments.

Finnlines, which transports much of Finland’s seaborne trade, has now begun reducing interest-bearing debt. Borrowings fell to about 643 million euros at the end of the last quarter, bringing down the debt-to-equity ratio to 138 percent from 188 percent a year earlier. A company has to have a healthy balance sheet and be profitable in order to pay dividends, Pippingskoeld said.

Optimizing Routes

In 2006 and 2007 Finnlines took delivery of four Star-class cargo and passenger ships and in January 2013 it ended an investment program consisting of six ro-ro vessels, which carry wheeled cargo such as trucks.

“By reducing excess capacity, optimizing routes, monitoring the profitability of each vessel in addition to each route, we’ll see the trouble spots more easily,” Pippingskoeld said. The company is looking at “what cargo, what routes need what kind of ship. It may sound like a simple issue, but discovering these has required improved reporting,” he said.

Measures haven’t ended here, according to Pippingskoeld. “We want to improve profitability all the time,” he said. “That means we may consider selling vessels also in the future.”
Source: Bloomberg