AS Tallinna Sadam (TSM1T.TL) Earnings Call Transcript & Summary

Good morning, dear investors. My name is Valdo Kalm, I'm in charge of the Port of Tallinn Group. And with me, our CFO, Andrus Ait.

Good morning.

Let's start with the most important events from Q1 -- Q2, sorry. And then, of course, we will address 6 months results also. Q2 was quite a good month in terms of cargo volumes, plus 8%, I will come back to that where it comes. Also on passenger numbers, we have seen quite a good and strong June, especially June, but all quarter 2 was good, got a lot of help from cruise passengers also. For us, it's very important to have more vessels both on Cargo side and on Passenger business. And our Ferry business also showed growth in terms of passengers and vehicles. In Q2, we signed additional trips agreement for Regula and we had shareholders meeting. We approved our dividend as we promised on our dividend policy level and even more. There was election of new supervisory board members and auditor. And we celebrated 35th anniversary of Tallinn-Stockholm route. Also for us, it's important to support and move on with Rail Baltica terminal. And in Q2, there was a signing of contract for design of Muuga terminal to the business areas more precisely. On Passenger side, as I mentioned, we had an increase of 4%. And it came from regular lines, but also Q2 was very good for the passengers coming from the cruise, the increase was 25%, but we got also very good vessel calls number almost doubled as last year and also July continued the same trend. All in all, revenue increase of 8%. On Cargo, there was also an increase of volumes revenue. The biggest growth came from liquid bulk, dry bulk and general cargo also on containers, but small degrees in ro-ro. Ferry business shows stable numbers, increase of number of vehicles and passengers, stable revenues. But on Botnica, there is a decrease of charter days compared to the last year due to the longer discussions and postponing one contract with one Canadian operator and therefore, we see also a decrease in revenues, influencing our group figures also. As I mentioned about the Passenger numbers, the increase of passengers are important, but on other side, very important is the number of vessel calls, but also shows increase from last year. And same in Cargo, increase of different bulks, but 5% increase in vessels also is quite interesting for us. Our Ferry business shows stable development. There are also numbers from 6 months. And as we mentioned on Botnica, there is less utilization rate and charter date than last year in Q2 and also on 6 months. And we will comment on the cost side also that we are -- didn't lost on profits, but on revenues, there is a decrease. About the future, basically, the same trends as we commented last quarter, we see the recovery of passenger numbers. As I mentioned, July also shows quite a good development in terms of regular international passengers and also cruise passengers. For us, it's very important to find new ro-ro and container lines. In Q1, we added one container line. We have a couple of negotiations with different companies because we have enough capacity in Muuga. Yes, it's quite tough now in Paldiski but we're building the new multifunctional key. I guess, we have excellent conditions for the future also to add some new shipping line also in Paldiski. We're working on our industrial parks in Muuga and Paldiski. Hopefully, from a practical point of view in Muuga, JetGas will start building their terminal even this year. We signed the contract in Q4 last year. There are some developments also in Paldiski. And for us, that's a strategic approach to have new operators, new manufacturing companies in our industrial park. And multifunctional key in Paldiski under development, everything goes as we planned. The key is ready. The ramp is ready. Now we're working with this 10 hectares of the land. And hopefully, we are ready in Q2 next year as we planned. And then we're preparing for the real estate business. As we promised, we try to start this year. If everything goes well, then we have in our plans and with negotiation with the city government to fix 2 detailed plans from 5 of them, and we are ready to really start with real estate in longer-term perspective. And of course, efficiency, efficiency, efficiency, that's important. All the time, we, I guess, manage quite well our maintenance cost this year. We have certain plans for maintenance also on second quarter. And I guess we're keeping under control the personnel cost. Now I would like to give floor to Andrus to explain the numbers from Q2 and 6 months.

Thank you, Valdo. So these are the financial results for the second quarter and 6-month period. The financials were strongly impacted positively by increase in volumes. There was growth in vessel calls, also cargo volumes increased and also the passenger numbers. In addition to that, there was a positive effect on profitability from the sale of land in Muuga Harbour for the freight station construction for Rail Baltica. Also receivables classified unlikely were recovered. So due to that, we had lower costs. But on the other hand, on negative side, the charter days of Botnica were lower and also the dividend -- the income tax and dividends increased so there were also negative impacts on profitability. Revenue in second quarter decreased by almost 7%, and the main reason behind that is the decline of the charter days of Botnica. Last year, in the second quarter, the so-called summer charter project started already in May. This year, May and June, we're awaiting for Botnica. So from that, we had a negative impact on revenues. All the other main revenue streams like vessel dues, cargo charges and passenger fees increased. Only revenue item which decreased in addition to the charter fees was sale of electricity, but it was because of lower consumption, mainly in Cargo harbours. So there were also lower costs on both side and profitability wasn't impacted by the sale of electricity. Adjusted EBITDA, despite of the decline on revenue, the adjusted EBITDA increased by 7% and amounted to EUR 15.9 million. The increase was a bit more than EUR 1 million. To explain that the positive effect came from lower operating costs. Operating costs decreased by EUR 1.6 million and EUR 1.1 million of that was attributable to Botnica activities last year when Botnica was chartered out, then the ship had also higher costs. For example, we had to rent special equipment for the icebreaker, also fuel costs were higher, and we had to make more repair. Of course, this year, we didn't have these kind of costs for Botnica. And in addition, we also made less repair works in Cargo harbours and in Passenger harbours, in the amount of EUR 500,000. So this also was as a result of efficiency measures. We also had a positive effect from the sale of land in Muuga Harbour. We sold 8 premises and the effect on EBITDA level was plus EUR 900,000. And we managed to -- the receivables, which classified -- which we had classified unlikely were recovered due to that. The impairment of financial assets was positive and the positive effect on EBITDA level was plus EUR 700,000. Personnel expenses in the second quarter remained flat. There was a decrease in segment other because of lower charter days of Botnica and some increase in Ferry segment and in harbours. But all in all, personnel expenses were flat. Adjusted EBITDA margin was almost 54%. The growth here was plus 6.8 percentage points, and this is quite high level for Port of Tallinn Group. And even when we take out the one-off effects from the sale of assets and from positive impairment of financial assets, so the level then is still about 50%. So let's say, the core business showed good profitability. Operating profit increased by 12% and amounted to EUR 10 million. Growth here was also EUR 1 million, which is similar than on EBITDA level. Income tax on dividends increased by EUR 2.3 million because of changes in tax law. Last year, we had a lower dividend -- tax rate for dividends, which was paid out regularly every year. This year, this lower rate was abolished and therefore, the income tax costs on dividends increased. The dividend payout itself was equal than last year, EUR 19.2 million. And net financial costs decreased by EUR 700,000 due to the lower Euribor rates. And profit for the period decreased by 15% and amounted to EUR 3.5 million and profitability was strongly impacted by higher income tax. And in the second quarter, we invested EUR 8.4 million. The majority of that was made in Paldiski South Harbour, where we proceeded the deconstruction. The deconstruction investment was about EUR 5.3 million. In addition to that, we had regular docking works for one of our ferries and also for Botnica, and also we improved one key in Muuga Harbour, where we serve the container ships. On a 6-month period, the pattern of the results is quite similar. Revenue decreased, adjusted EBITDA increased. Revenue decreased because of lower number of charter days of Botnica, other revenue streams increased. Adjusted EBITDA increased by 8% in the first quarter. We got the indemnity payment from endurance in amount of EUR 900,000 for Botnica repair works, which we made last year. So this was additional positive effect on 6-month period. And in Ferry segment, we had lower fuel costs because of milder ice conditions in the first quarter this year. Adjusted EBITDA margin was over 51%. Operating profit increased by almost 15% and amounted to EUR 18.2 million and profit for the period increased by 11% and amounted to EUR 10.2 million. And on 6-month period, we invested EUR 12 million like in the second quarter, the main project was the key construction in Paldiski, EUR 7.3 million. And in first quarter, we had also the second regular docking work for the ferry. So these were the main investments. And last year, on 6-month period, there was elevated investment level due to the start of construction of the Paldiski key and due to the investment cycle there, there was kind of elevated investment level. And these are the results of the business segments. In the second quarter, Passenger harbours and Cargo harbours showed very good growth, both on revenue and EBIT level. Passenger harbours, the revenue increased by 8% or by EUR 800,000, and this was mainly because of higher number of vessel calls and higher number of passengers. But also, in some extent, it was impacted by higher tariffs because we increased tariffs in the second quarter this year. And in the Cargo harbours, the revenue increased by 9% because of higher number of vessel calls and also the cargo volumes increased. And here also, like in Passenger harbours, the tariff rates or charges were increased. So they are partially impacted by this. And on EBITDA level, the strong growth was attributable to sale of land. We received payments from clients for the invoices, which were classified unlikely and the impact from that was EUR 700,000, so -- and also the cost cuts and lower costs impacted the EBIT positively. In Ferry segment, revenue increased a bit due to the indexation. EBITDA in the second quarter decreased a bit because of higher costs, mainly personnel expenses. And in the segment Other, revenue decreased because of lower number of charter days. But at the same time, the costs were also lower by EUR 1.5 million. So the drop on EBIT level was significantly lower than on revenues. And on 6-month period, same explanations goes here as well. In Ferry segment, we had minor ice conditions due to that, the costs in the first quarter were lower, so the EBIT on the 6 months period also increased. And in Ferry segment, we received the indemnity payment in the first quarter. So this was also the extra positive effect on EBIT level in the segment Other. But in Cargo harbours and Passenger harbours, there were higher volumes and higher number of vessel calls and lower costs. So therefore, the profitability and revenue increased. On the cash flow side, cash from operating activities increased by EUR 1 million. Sale of goods and services increased and payments to the suppliers decreased, and negative effect came from higher income tax payment on dividends. But all in all, in this item, the growth was plus EUR 1 million. Cash used in investing activities was plus EUR 20 million compared to the minus EUR 22 million last year in the same period. To explain that in the end of last year, we placed more than EUR 20 million to bank deposits with the term more than 3 months. And during the first half of this year, we received -- those deposits were terminated and we received the money. So there was a positive effect. In addition to that, the sale of land in Muuga impacted this role and investments itself were also lower than last year. And last year, we had elevated level of investments due to that, there was a negative number in 6-month period 2024. And free cash flow was almost plus EUR 47 million and cash used in financing activities was minus EUR 23 million. It was impacted by dividend payout and interest on loans. Last year, we took new loan -- draw the new loan, and therefore, the cash flow here was less negative. Net cash flow at the end of the period was plus EUR 23 million almost. Net debt at the end of the period decreased by EUR 20 million because we had more cash on bank accounts, and we have made bank loan repayments. And on financial position, we don't see any significant change here. Other current assets decreased as the noncurrent assets held for the sale decreased as we sold the premises in Muuga Harbour. So therefore, this item decreased, but all other figures in balance sheet were quite stable. Equity decreased because of dividend payout and was positively impacted by the profit of the period. So like always, we have some extra slides about revenue generation and EBITDA generation, but those we will comment, the presentation is uploaded on our website, you can browse it later. And now we will make a short break. And we have received some questions upfront and those questions we address first, and please submit your question to Teams, and we will back in a couple of minutes. Thank you.

All right. We are back. Let's start with the questions what we had advanced from previous Estonian language webinar. What is the perspective for the south port development now? And when will Tallinna Sadam find an operator and will be the first revenue from the key? As we mentioned, we're building multifunctional key and also 10 hectares special backyard to the key. And still, we hope that it will be ready Q2 next year. And our main purpose is to find operator who building the wind -- offshore wind farms in all Baltic Sea. We are not concentrating to Estonian projects. And we see still interest, especially coming, for example, from Finland, Poland, Lithuania. Therefore, that's the main purpose. In other hand, we have a lack of ro-ro resources. That means we need additional key for ro-ro and to general cargo, what we can handle better with this new key. With all that, we hope that if the execution of the key will be on Q2 next year, then basically on the second half of the year, we would like to see revenues coming from this new key. Next question, can and where could we see increase of Tallinna Sadam sales volumes in coming years? On passenger business, we still believe, if you have a perspective 1 year from now, that there will be the recovery in passenger business. The Q2 shows the trends and also July was quite strong in terms of regular lines and cruise business. On Cargo, we believe that export, import will increase in Scandinavia. We see a good development just now from Sweden, recovery from Finland that drives hopefully, container and ro-ro. Then, of course, it's very difficult to comment on liquid bulk. That's very project-oriented business. But still, we believe recovery also in volumes in the coming 12 months. Next question. Is there a plan to build a sister ship to Botnica? The short answer, yes. The plan is still valid. We now study the market. And also, we try to understand what is the multifunctionality for offshore ship. And that's all what we do by the end of this year. And hopefully, then we will have certain type of decision. And about Botnica, next question, what is the outlook for Botnica's work volume for the second half of this year? And here, we can comment that we have just now negotiations with 2 companies, one in Canada, one in North Sea. We hope that we will have, let's call, summer, autumn job as we had last year, but it really depends on negotiations, but they are ongoing, and we have concrete companies behind that. Andrus will -- okay. All right. There is also one question advanced what we have to -- and we would like to answer. Looking ahead to the next 18 months, what would be the biggest risk for Tallinna Sadam Group apart from the macroeconomical environment? Are there any significant bottlenecks in terms of growth projects? The biggest risk, as I just explained, the shipping and Botnica case, then we see that's the biggest risk to have a summer job to be very competitive, although there is still offshore market very active, and we just have to be also very proactive and find the projects. That's maybe the biggest risk, and I don't see any significant bottlenecks in terms of other projects.

Thank you. I take the next question. Regarding liquid cargo, liquid cargo volumes have started to recover strongly. What is driving this? And how sustainable is the current level or trend? The liquid bulk volumes were supported mainly by project-based volumes. And currently, those volumes have been quite stable, but it is quite difficult to forecast the future about the project-based volumes. So usually, we don't give any forecast out, but I can say that it's -- currently, those volumes are stable, but it's hard to forecast the future. But we hope that at least those volumes, which we already have will be stable. Regarding ro-ro volumes, are there trends in the current quarter better compared to the previous quarter? And can we expect ro-ro volumes to be stronger in the second half of the year? We actually don't see any significant changes in ro-ro volumes and any trends there. So it's also very difficult to predict or forecast the future. So it's more like depend on macroeconomics and the growth in Nordic states. So where there will be stronger financial results, then we hope that ro-ro also kind of shows the correlation of the macroeconomic of Nordic states. You have previously indicated that this year's investment level will be approximately EUR 35 million. Is this still expected level? We can say that due to the lower investment needs in Maritime segments, there will be some decline, but the overall investment level for this year should be somewhere in between EUR 30 million and EUR 35 million. There will be some decrease probably, but a couple of millions. And key construction in Paldiski, this is going by the plans, and there, we don't see any decline there. And what is the Port of Tallinn long-term net debt-to-EBITDA target or maximum upper limit? Let's say, the limit is 4.5%. So currently, the level is lower. So we have we have ability to take a new loans and invest to the growth projects and to the necessary investments. So there is plenty of room to invest in the future as well. So we take the questions which we received through the Teams during the presentation.