AS Tallinna Sadam (TSM1T) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for taking the time to join the webinar of Tallinna Sadam. Today, the Chairman of the Management Board, Valdo Kalm and the Chief Financial Officer, Marko Raid will introduce the financial results for the fourth quarter and 12 months of 2019. [Operator Instructions]

Good morning. My name is Valdo Kalm. I would like to start and then I will give the floor to Marko. And first of all, Q4 and highlights from Q4 are there. On Passenger business, we had record and we finalized the year with a new record for total passenger number, 10.64 million. And then we signed the agreement for building the new cruise terminal with a company called and construction is ongoing. Then we also opened the first stage of passenger Terminal D that will be completed spring this year. Totally -- also icebreaker Botnica got the confirmation for the summer work for this year. That's definitely the good news. Also, we managed, together with the city government, start with all the detailed plans for the -- all the area in Old City Harbour. That means we are in a process of detailed planning. Just how -- then we signed agreement with Estonian Academy of Arts for investigation and research how to spread better the cruising passenger and passengers in Old City Tallinn and even why them, how to find the new routes and how to have the better cooperation with the city government. And also we made the agreement with the Estonian Maritime Academy for their very specific projects but I will come back to that later then. Then on Q4 also, we signed and we invest for onshore power supply in 3 quays. They are ready. And this year, we will add another 2 and we would like to see all the operators, 3 operators to use it during this year. Trends in Q4 by the segments. On Passenger side, as we already mentioned, total growth was 1.2% in Q4 and we made also cruise record for last year. On Cargo side, we had quite a strong quarter, thanks to liquid bulk and dry bulk. As you know, the liquid is still fluctuating up and down. On dry bulk, we see the more stable development due to the new terminals in Muuga and to the good therefore, hopefully that will continue. On Ferry business, we've had increase in revenue due to the indexation. And under the other segment, Botnica had more charter days than we prognosed. Therefore, also we made the growth from there from Botnica. Next slide tells you about the main influences in 2019. Very briefly, if you start from the Passenger business than despite of the docks, what we had in Q1, we made another record on Passenger business helped by Greece. But what is good news that even on Italian-Helsinki route, we had tiny growth or flat figures but this is definitely a good result. On Cargo side, Muuga-Vuosaari made a good development. Of course, new vessel online by But still, we see the clear segment of passenger cars who are interested to use Muuga-Vuosaari line. Then on Cargo side, volatility on liquid bulk will continue. That's definitely, as we already mentioned earlier, quite a project-oriented business nowadays. As you remember then, Q4 was very good. We see good developments in Q1 also, but honestly, visibility is not good for us. Dry bulk shows good growth in last quarter, also this quarter, and we see the positive trend will continue. Icebreaker Botnica longer charter period in Canada and additional ferry for summer period on route. These main influences to our business here. Next slide shows volumes what we reported already in January but still on Q4 was a strong quarter. The growth is 12% came from liquid bulk and dry bulk. Although on 12 months, due to the liquid bulk, we have a small decrease, 3%. And on Passenger side, Q4 was good with growth. And then we managed also have a small growth in 12 months' period. Right, and then to the financials. Please, Marko, take over.

Thank you, Valdo. With regards to the financial results of the group, we are very happy to have the good and positive results, both in revenue and adjusted EBITDA. For the last quarter of the year, revenue growth was 1.5% and EBITDA growth was a little bit above 1%, and this contributed to the, we would say, strong results for the full year, where we basically ended up with the same levels as in 2019. But here, we have to keep in mind that 2018 was, at least for us, an unexpectedly good year. So to come with the same result actually was a strong achievement, at least in our opinion. And if you look at the adjusted EBITDA margin, then we were able to maintain it despite of the pressure on the cargo volumes but more even on the pricing of cargo handling and we'll talk about this a little bit later as well. This all helped us to achieve the highest profit figure annually over all times, so EUR 44.4 million of net profit. Largely, of course, if we compare to 2018, it comes from the income tax change but also the other financials were very, very positive. So basically, this net profit figure is the record number of all times for us. On investments, which is shown at the bottom line, as we already estimated, we had double growth compared to 2018, so 2x the figure, almost EUR 30 million. And this is mainly because in 2018, a lot of investments were delayed due to delays in the procurement processes and other issues. So we are happy to witness that we are now in good track of actually living up to our promises. The investments are mostly, as Valdo already told about, electricity, onshore electricity investments. Also we have -- or we are in progress of installing the automated mooring systems in the Old City Harbour, renovating the Terminal T, starting with the cruise terminal. So these are mostly Passenger business-related investments that we see here. On the next slide, we have the cash flow and financial position. Starting from the cash flows, we're happy to see that cash from operating activities has grown. That is due to the smaller dividend income tax that we experienced in 2019. Cash used for investing activities has also grown because the investments have picked up. And if you look at cash from -- or used by financing activities, it's minus EUR 42 million. That's due to the dividend payment, which we had a little bit more than EUR 35 million. Then also we paid back loans at volume of about EUR 16 million, and we also took 1 additional new loan which was EUR 10 million. So this altogether, more or less, gives this minus EUR 42 million. And at the bottom here, we have indicated net debt, which is basically at a little bit higher but almost at the same level as a year ago. And on the right-hand side, you can see that the financial position, no major changes there. Maybe just to outline that gross debt has little bit decreased because we paid back EUR 16 million and took new loans of EUR 10 million. So EUR 6 million is a decrease there and a little bit less of a cash buffer as at the year-end, and that's normal because of the pickup in investment activities. But all in all, we would emphasize that we are in a very healthy financial position. And we are definitely up to keeping our dividend promise, which we have in the dividend policy and also probably surprising positively. On the next slide, we have results by segment, both on the last quarter and full year. Due to increase in the overall passenger numbers, passenger harbor's revenues and EBITDA increased in the fourth quarter. In cargo harbors, maybe it's helpful to explain a little bit why even though we had increase in volumes, we had a decrease in revenues. That's due to the pricing pressure that we have. So we have a lot of project-based deals, some of them with quite high discounts. So the average revenue per ton was lower definitely in 2019 fourth quarter compared to 2018 fourth quarter. So that's the reason for the slight decline in revenues. And also, we had about EUR 200,000 more repairs and maintenance cost in the segment in the fourth quarter. This is just a question of how it's timed around the year, nothing extraordinary in that respect. So basically, cargo harbor segment was the only one to show a decline both in revenues and EBITDA. Other segments, if we continue with Ferry, there we have both increase in revenues and increase in EBITDA, revenues mostly due to indexation. EBITDA also grew due to cost efficiency or increase in cost efficiency. And the other segment where Botnica, there, we had an increase in revenue because we had additional charter days in the last quarter. And when coming to the full year results, as we had almost the same level of passengers, the total revenue in the passenger harbor segment was the same as last year. EBITDA increased somewhat. This was due to the onetime cost we had in 2018 due to the start and development of the Smart Port system in the Old City Harbour, which is the electronic traffic management system. So these expenses did not occur in 2019 and this leads to a bit of an increase in EBITDA. On cargo harbors, we had a decline in revenue, which also resulted in a decline of EBITDA. Of course, the total volumes for cargo as well decreased. In addition, we saw increasing cost competition, which for us means the revenue per ton is still a question mark how sustainable the current levels are. In Ferry segment, we had increased revenues mainly due to indexation because otherwise, the year was quite comparable to 2018. But we had a higher increase in EBITDA and that's due to increased efficiency, especially in fuel costs. And from additional charter days, the full year result for Botnica was also better in terms of both revenues and EBITDA when compared to 2018. Then we have a few slides just to -- about the seasonalities and quarters if someone wants to do a comparison. But I think now we will turn to the elephant in the room, which we have expected and which we have promised to discuss is the question of how we comment the announcement by Tallinn, which concerns the development of Tallinn City Hall, which is situated next to our passenger harbor and especially the information which concerns the possible construction of passenger quays and terminal there. And here, I would give back the floor to Valdo to continue.

Thank you, Marko. As we already had some questions in advance, therefore, we made some overall slide to show our attitude. And to start with the comments, there are basically 2 aspects. One is positive. Of course, we said already in comments that restoring the City Hall is positive and definitely adds value also to the future real estate development in our area, no doubt about that. Therefore, definitely from city government point of view, it's a good, good new move. But then, of course, we have to consider that, that was only the MOU or yes, memorandum of understanding, not the agreement that will last maybe the year, the investigation and understanding what is possible and what is not to reach the agreement. Therefore, there are a lot of question marks if we are moving towards the second aspect, that's the quays. What -- and terminal plans to build. And honestly here, we see some question -- huge question marks. And the largest risk for this concept is the traffic management in this area. And such port area because we are very well familiar with the traffic situation. And we, I guess, solved it quite well with Smart Port application But just now to handle these traffic, especially the trucks, I mean, on this area, that's a huge challenge, huge challenge. The only way is to really do it -- to build the tunnel and underground plot. But there is a huge question about this investment. We went through this tunnel issue with also and we saw the huge numbers. And therefore, at that time, it wasn't possible to invest such a sum of money. And therefore, I would say that's the largest risk. And that's, of course, turns the time horizon for this development at least 5 but we're talking more than a 10-year period. Therefore, in short term, we don't see any impact for our business. But longer term, I mean, 7, 10 years probably, but it's really all about the traffic management in this area in the very city of Tallinn. And of course, the attitude from our side is to -- preparing for the competition, and of course, we're already thinking about that. We are not going to wait in these 5 years or 7 years. Definitely, we like the competition. We have experiences on our Cargo side. Therefore, we definitely see possibilities and new opportunities on this passenger business because we're talking about EUR 11 million, and hopefully, we will see future growth also. Therefore, definitely, that gives to our existing operators, but maybe for the new operators, possibilities on this market. And as we have excellent infrastructure in place in terms of traffic solution in this terminal area, Smart Port application plus therefore, I guess, that's not so complicated. It defined a new usage of this area. Therefore, we already started to plan. And definitely, we will have certain action and plan B on our side. That's generally our attitude and we are ready for the competition if that will happen. But again, first, we really have to see this agreement between Tallinn and city government.

Maybe just to add on Valdo's comment shortly, we have had lot of questions with respect to -- or how large do we see the impact of this decision being for the port of Tallinn. And here, we would like to emphasize that given the information available at the moment, we are really unable to give any qualified assessment on this regard because as Valdo said, the current agreement is just a memorandum of understanding to start the investigations about what actually can be done at this city hall property. So we do not know to what extent port business, if at all, would be available there. And therefore, we are not able to estimate to what extent and which vessels it might concern. I only think that Tallinn has said is that they are not themselves already -- they are not planning to move all the vessels there, which is unrealistic because the size of the port does not allow that. But the question is that how much, if at all, the port area there would allow for the current vessels. So until we have more information about that, it's quite hard to say what kind of impact that would be. And if there would be impact, then we are talking about definitely more than 5-year period, which gives us plenty of time to prepare for that. We have a lot of alternative ways, either it's additional operators, either it's alternative use for the land and et cetera, et cetera. So our plan is definitely not to wait until this 5- or 10-year period is actually passed and then start cutting costs. Our plan is to come up with a plan how to maintain and grow on the current revenues. So in this 5- and 10-year perspective, we are not talking about cutting costs. We are more talking about sustaining the revenues and growing the revenues and new ways to do that. So that's basically our position in terms of financial impact from this development.

So now we are taking a few minutes so you can ask the questions. [Operator Instructions]

Okay, we are back. You can still write additional questions. We already have, I think, record number for us so we'll start answering them one by one. Few of questions we have already received upfront, so we will start with them and maybe we'll answer a few questions with 1 answer as well. Let's see when we come to that. So first, we have received questions about the dividend proposal and the timing of the dividend. We are going to publish our dividend proposal in the beginning of April when the annual report is going to be published. But we can say at the current stage that it definitely will be not less than it was last year. Will it be higher? That, we'll have to wait and see. And the dividend payment itself is expected also to take place in the beginning of June as we had last year, so the timing is about the same. And the general meeting is also in May, so that -- in that respect, it's close to the last year's timing.

Then second question about the earnings drivers and uncertainties for this year and liquid bulk outlook for 2020. Earning drivers on the Passenger business is definitely the coronavirus is one of the risks and it's really difficult to predict. So far, we don't see any changes or changes in costs and then cruise ship costs. Therefore, Passenger is now very stable but definitely, it's one of the uncertainties. On the Cargo side, as we already mentioned, for liquid bulk, visibility is not very good. The beginning of the year looks quite okay and hopefully, we'll see this good development. For the dry bulk, we see the continuous growth also for containers for more flat figures for this year. That's very briefly. Third question, do you expect -- what do you expect on EBITDA development versus last year? Basically, our scenario says at least flat EBITDA for this year. Okay, Marko then.

Yes, we have a question regarding the Tallink plants. And the first of them is to what extent can Tallink use the announced [indiscernible] city hall project as a leverage in negotiations about the port fees with us. Well, of course, we don't know but -- what the intentions are, but our understanding is that it's not just for negotiations with us. They can, of course, use it as leverage to some extent, but it's more likely that they are indeed investigating this opportunity. And as we are currently servicing all the international passenger traffic, we cannot anyway do more favorable terms for than for the other operators. So we need to treat everyone equally and we cannot give any special treatment to Tallink on that respect. And at the moment, we don't have any plans to change our pricing.

Right. Next question about real estate opportunity, where we are and will Tallink's plan change any of our plans in real estate business. As we mentioned, I guess we made quite a good move with the detailed planning in Q4. All the detailed plans, they are plants around the Old City Harbour are in detailed planning process. That means they are -- they started in December. And now it's really up to discussions with -- about the infrastructure of these areas and, of course, step-by-step involving the investors also. Therefore, about the real estate, everything goes as we planned. And honestly, we don't see any change from the Tallink's move. Even opposite, we see a positive of that, that there will be restructuring of city hall but definitely brings tourists and especially conference tourists to the area.

Okay. Then we have a question, what activity are we seeing so far in this year in both liquid bulk and dry bulk? As Valdo already explained, the year has -- start has been quite good. So we don't see looking back from where we are at the moment. We don't see any direct impact on the cargo flows coming from the coronavirus or any other developments. The year has been quite stable, even a bit positive. Of course, the fluctuations in liquid bulk, we expect to continue. And in terms of passengers as well, there's a question how the outbreak in China globally has affected passenger business and especially cruise segment. So we have not had any cancellation -- cancellations, at least so far. But we don't know about the future. We don't have the crystal ball to say what will happen next month or the month after and how the situation will develop. But so far, we can say that it's been without any major direct impact as much as we see and we hope that this will continue to be the case.

Then again, a couple of questions about Tallink plants. Marko already described the influence or impact, financial impact, what we can't measure yet. But then another question about how realistic is it technically to expand the old Linda Line Harbor in the city hall area. I already mentioned that the biggest -- that's really technical risk is for this project, how to handle the traffic, especially the trucks, not only the small vehicles but big trucks because there is no room for the area, loading/unloading area. That means they have to have an underground plot for that. That will cost a lot and I don't know technically how reasonable is to do that, plus the tunnel. And of course, as we know quite well, how long time it takes to build the quay and you have necessary approved project from authorities. Then definitely, technically, it takes time for the approvement. Especially in this area, there are some very specific historical issues. They need new detailed planning definitely for that. But there are other state authorities who will give the permission for such a project. That takes time, years. I'm talking about then, because the investment is quite huge to build this quay or 2 quays. Therefore, you have technically 2 aspects, truck traffic and the project and detailed planning for investment to the sea area. And are you prepared to cut your fees to Tallink? Also, we have to treat all the operators equally. Therefore, no big plans, let's say.