AS Tallinna Sadam (TSM1T) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for joining our webinar today. Now the Chairman of the Management Board, Valdo Kalm; and the Chief Financial Officer, Marko Raid, will introduce the financial results for the first quarter of 2020. [Operator Instructions]. The presenters will answer your questions after the presentation, starting with the questions sent beforehand by e-mail. The floor is yours, Valdo.

Good morning, everybody, and I would like to start with highlights from Q1. Of course, the pandemic COVID-19 affected also -- us also, and mainly, passenger business, although cargo flows continued. And all in all, as you know, from our 4 business areas, the passenger business is only affected by the virus. We saw continuous increase of liquid bulk. That mean the main increase in cargo business, a bit supported by ro-ro also. But yes, the biggest player was still liquid. Then, we had one extra profit from sales of Paljassaare Harbour assets. If you remember, we already had, some years ago, exit strategy from Paljassaare. Now it's sold. But there are some tiny properties left, but we got quite a good deal. Then, we have such a positive negotiation to acquire a new ferry for Virtsu-Kuivastu route by 2023. Probably, you've noticed also announcement about that, that we have agreement with government or road administration to build this new ferry by the 2023. Then, we finished one important investment to dredging Paldiski Harbour for water, that's completed. And we already had first quite a huge vessel there. And there are waiting list of other big vessels to come. I guess now we're having a very -- we have a very good position in terms of competition in Paldiski. And we're continuing our main investment despite of a slowdown. That means all the biggest projects are ongoing as we planned. And a detailed planning is also ongoing for the Old City Harbour even despite the coronavirus, we're working and cooperating with city government. Trends in Q1. Of course, passenger numbers got in March declined, some -- all together 13%. On cargo, we still see the liquid bulk growth, also some 2% growth in ro-ro, but containers declining. Ferry business, we saw increase in revenue due to the indexation. The Botnica also got the indexation, and then preparing for the summer job, everything is as we planned. They are ready for the summer season. And then briefly, the volumes. All in all, Q1 was quite okay with small increase, 2%. Again, thanks to liquid bulk. But on passengers numbers, we saw decrease, and that's, of course, due to the Helsinki and Stockholm route. Then please, Marko, take the financials.

Good day from my side as well. In terms of the financial results of the group, we are very happy to see that our revenues have been quite resistant in -- despite of the pandemic rolling out, mainly impacting us from March. So first 2 months were very positive. Actually, we were ahead of last year's comparative figures. So we only managed to end with a 2% decline in revenues and a 4% decline in adjusted EBITDA. All together, the profit for the period was about EUR 1 million less than in the comparative period and amounting to about EUR 10 million. And that's really a positive result from our point of view. On the bottom line, we have highlighted investments which have more than doubled compared to the comparative period last year. And that is, as Valdo said, we are continuing with our main investments that are ongoing, mainly it means we are finishing the reconstruction of Terminal D. Construction of the cruise terminal is ongoing. We are building a parking house next to the Terminal D. So the investments planned into the passenger harbours are all still undergoing. And we will not alter our investment plans significantly that we had for this year. And of course, to some extent, we have made adjustments. But nevertheless, it tends to turn out quite an investment-heavy year for us at this time. If we look on the right-hand side, in terms of segments for the results, then of course, you can see that passenger harbours was the segment that got the biggest hit, not maybe so much in revenues but in EBITDA, the drop was even bigger. That's mainly due to the opening and additional cost of the first stage of the Terminal B, where we had a lot of low-value items that we bought, and of course, the revenue declined as well. Cargo harbours actually saw a decline in revenues. However, adjusted EBITDA increased. That's due to the onetime effect or impact from sale of Paljassaare Harbour assets. Some of the assets are still with us and will be so hopefully at the second half of the year, but the main port service-related assets have now been sold already. So that's -- the EBITDA is a little bit impacted by that onetime effect. On ferry and other segments, results are quite stable. The revenue growth comes mainly from indexation of tariffs due to inflation and fuel price changes. And the adjusted EBITDA is also at almost last year's levels. In Botnica's case, we had one repair work that was started last year and finished in the beginning of this year, which a little bit impacted the profitability for the first quarter. But otherwise -- and cost-wise, we are in a quite good track also there. On the next slide, left-hand side, we have cash flow. Cash from operating activities actually has increased by about EUR 3 million. That's mainly due to the income tax -- dividend income tax that in 2019 was paid in the first quarter. And we did not have a comparable tax cost for this year. So this is the main reason for the increase from operating activities. In investing activities, as said, these are almost doubled. So also the cash used in investments has increased. Nevertheless, free cash flow has a little bit increased and amounted to EUR 13 million. Cash used for financing activities is about the same. That has been mainly used for repayments of debt and interest payments. So at the bottom, we also have net debt, which has basically stayed at the same level with the gross debt a little bit decreasing and the balance of cash also a little bit decreasing if you compare the situation at the end of first quarter last year to the situation at the end of the first quarter of this year. And on the right-hand side, a snapshot of our financial position where maybe just to highlight that we have as at the end of the first quarter, a cash balance of EUR 45 million. That's also one of the reasons why we have decided that we will act according to our dividend promise this year and are making the proposal to pay out at least -- not at least, but exactly EUR 30.2 million of dividends to the shareholders. Of course, that's ultimately their decision. But we see that our cash reserves and liquidity position is sufficient to support that action. At the end, we have a few slides just if you want to compare different periods and quarters to the last year for revenue and EBITDA generation. And from here, we will now move on to questions. And as Valdo said, we will start with the ones that presented upfront, and then you also have a possibility to write questions into question box on the screen. So Valdo, let's start with answering.

Thank you, Marko. Let's start with questions then. Do you have a specific prognosis, how much the income from passenger fees is going to drop in the next few quarters? Honestly saying, it's still difficult to say. We have 3 scenarios, of course, in our -- on our tables. And what is, is, of course, positive that yesterday, there was a restart of our passenger business between Helsinki and Tallinn. And very positive that both government bodies in Finland and Estonia took decision to start with workers, and then step-by-step open that for tourists. We, as a Board, we are very well prepared. Yesterday went very well. We started preparation already many weeks ago together with operators. And yesterday, showed a very -- I would call smooth move of passengers. Therefore, I hope that if we will show such a responsible way to do the business, then we can open Tallinn-Helsinki and also Tallinn-Stockholm link together with operators, of course, for tourism in the middle of June. That helps a lot because we already see that there are additional lines already from our operators. And I personally think that we will see this recovery between Tallinn and Helsinki even fast. It's difficult to say about the Stockholm and the cruising, but we're preparing for that also. Second question. In the first quarter, the investments sum was EUR 8.8 million. How far are the different developments by now? How is the construction of the cruising terminal going? Marko already mentioned that we're moving on with our main investment projects. That means cruising terminal, then the terminal renovation and parking house. All these projects are on time. Honestly, it's excellent timing for -- to build the cruising terminal. Therefore, everything goes as planned. Moving on with our own questions. We've got them quite a lot, and I will continue there. What is your take on Tallink's proposal to limit passenger volume to 50% on -- of ship's capacity in the first month? Do you see this as a necessary step? I think that's a relevant step. And I guess we all -- I mean, operators plus we as a Board had consultancies with government and crisis committee in Estonia. And I guess, it's relevant. It's a good start. And then if we will manage well and in responsible way, then definitely operators will increase the volumes. What was the cargo situation in April? And how has it been in May, especially in dry and liquid bulk? I have, of course, numbers from April. And I would say it's flat, if you compare with last year April, and still, liquid bulk is growing and drives EBITDA -- dry bulk's EBITDA. Do you have a view into authorities who process regarding the reopening the borders with Finland and Sweden? What sort of checks would Sadam -- Tallinna Sadam need to perform as borders reopen? Yes. We -- as I mentioned, we started to prepare already. I guess 2 weeks ago, we had action plan, and we, of course, sent the questions to our regulatory body, [ Riigi Teataja ]. And we fulfilled them. We even -- we are ready to use the cameras again, that was the option still if there will be the need. Then, if you know then, we together with Medicum and SYNLAB opened fast track test sites in our port area that works also. Therefore, we're ready still to use some other technical equipment if there is a need. Marko, take the next one.

Yes. The next one asks about, could you please remind us how Tallinna Sadam earns revenue and profit in the Ferry segment? In particular, how is state compensation linked to the fuel prices? Is there a lag between indexation, where this year, you might post bumper profits in ferry due to low fuel prices and unchanged state compensation, but next year, you could see that, of course, it's happening? So in the Ferry segment, if we talk about fuel, then fuel price actually is indexed to a voyage fee, which we have agreed, and this indexation is done quarterly. So yes, there is a little bit of lag, but this lag is not 1 year, it's 1 quarter. And from there, we have a little bit of variation in the numbers, but that's much shorter-term impact. And I don't estimate that to be, on the annual figures, anything major. Then we have a question about the status of cruise vessel calls booked for next year. And what is the purpose of cruise terminal in absence of significant tax volume in 2021? So there are 2 reasons, actually, or 2 answers to this question. First, we would like to point out that building the cruise terminal also has a longer-term goal, which is related to real estate and opening of the port area to the general public. So it's not just a terminal for cruise passengers but also kind of a landmark building and a means for opening up the port area. And we will have also rental fees connected to the anticipated cafes and et cetera at the cruise terminal. And second side of the question, we actually currently see an increased activity in the cruise business for next year. Of course, no one knows how ultimately that will turn out. But as this year's bookings are canceled and returns are offered to cruise passengers, then a lot of them are rebooking or taking next year's vouchers. How that situation will actually roll out will depend on what the situation with the virus will be and will -- what the new normal there will be. But we will see. But at least so far, this means that we are quite optimistic, not for this year but for next year so far at least. Then the next question, have we noticed any of our cargo harbours' lessees experiencing payment difficulties? What is the size of rental payment deferral requests you have processed, if any, relative to the total yearly rental income? Yes, we have had, but not too many. As we said, the situation in the cargo volumes is much better in comparison to passengers. So that's where most of the hit has been taken. The cargo terminals are still operating quite okay. We see some smaller companies having difficulties, but that mainly means it's more warehousing business, businesses related to container and ro-ro traffic going to Russia and neighboring countries. There -- definitely, there is decreased demand due to Russian shutdown of production for 1 month, for example, and things like that do impact. But that goes to smaller customers. So in terms of percentage, maybe from the rental fees, that's 10% or less of the cargo harbour segment rental fees that we are talking about at the moment. Then there's a question about CapEx guidance for this year. And there are any -- are there any opportunistic acquisition opportunities you might be seeing in real estate or ferries? We already discussed the CapEx. So I think despite of the decrease we have made in the investment plans, we still might have a record year of investments this year. We'll see how the ongoing projects proceed. And about opportunistic acquisition opportunities, we don't have anything major on our tables at the moment, but who knows where this crisis might lead us. That, we will have to see. Not likely that we will invest into real estate because we already have ongoing projects at the Old City Harbour, but in other businesses that we might consider if the opportunities are suitable for us. Valdo, maybe you can take next ones.

Yes. In March, you mentioned several potential responses to Tallink's plan to build its own terminal or harbour. Now that this plan is postponed, are you still willing to follow through with responses? Yes. That's, I guess, already noticed that even the members of cabinet or ministers said that there will be definitely certain restriction in agreement with Tallink that they can't build another port close to strategic asset, Tallink port, at least during the period the state will have the agreement with Tallink. I guess that's very relevant. And then government will avoid a conflict of interest. That's really a good news. Although, of course, as Tallink made this announcement and as we feel that we have excellent infrastructure in the terminal area with smart port and all the red street, and if Tallink doesn't value that, then, of course, we have to find some other customers. Therefore, honestly saying, yes, we will move on with these alternatives. Second question, are you seeing or anticipating any tangible effect from economic fallout of the pandemic of the execution for your real estate plans, but -- yes, plans? Honestly, not. As I mentioned, even during the virus, we had the meetings with city government. We are in a phase to introduce a quays project for all the area. That means it's a very important stage of detailed planning. And if everything goes okay, then even before the summer, we will introduce over these 5 areas, a quays planning, the first phase of detailed planning. Therefore, we will move on. And we already mentioned that if we're talking about the investment and starting the business, it's really up to timing, and it's not the -- this crisis issue to start with that. We have excellent period now, year -- to prepare all that. Next question, have you had any communication with HHLA with regards to anticipated drop in container volume? What's their thinking on the future of Muuga port? Yes, I had, just in the morning, meeting with new and very active CEO of HHLA Estonia. Honestly, we have 6 projects for the future with -- a German company thinking very, very long-term perspective. And we have a lot of interesting growth possibilities in front of us. And honestly, their drop of containers is around 10%, nothing drastically. Therefore, we'll work in the future. And as I mentioned, there are 6 projects on a track, and one of these is rail Baltic, of course. They are very interested in and preparing for that.

Yes, I will take one question now. Do you anticipate if banking covenants may be in breach due to the reduced cash flows. And if so, have you started any discussions with the banks? According to our scenarios for this year, we do not anticipate any breach of the covenants. And therefore, until so far, we have not started discussions on that respect. Then I will take next question. Please specify what assets were sold at Paljassaare Harbour? And which properties are left for potential sale? What is the book value of properties for sale? As I said, we have by now sold all the assets that were related to port services, meaning the quays that we used in Paljassaare Harbour, these have been sold. What is still left to be sold is the utilities. That means electricity and water networks. These, we hope to finalize for sale during this year. And for the quays and some railway-related areas as well, we actually got quite good deals in -- during the tender process, and their profits compared to the book value were quite considerable. Of course, the size of the sales was a little more than EUR 1 million. So it's not any huge income that we received. But for the utilities, we expect that the sales will be much closer to their book value, which is somewhere in a few million euros. So Paljassaare Harbour is not a big share for us, and it's more cost efficiency-related projects getting out from there. And then we have a question that the Board signed an annex to the ferry contract for additional trips, including this summer in the beginning of May, and then few days later, additional trips for this year already were canceled. What made the government to reconsider so quickly? So maybe yes, it's a good opportunity to explain that the first announcement actually was concerning a longer-term agreement and was related to the decision that the government would like us to tender for new additional vessel for the Saaremaa route that could also be used for Hiiumaa in difficult water levels. So it would have a smaller drought. And the kind of a story there was more related to the past summer trips and anticipated trips in the coming years, not so much for the current year. But we, of course, saw that government anticipates that also in the future, the levels will recover and continue to grow. But for this year, then there already was a question mark that due to the virus situation and people's movement habits, and of course, due to the fact that all the major events, also including on the islands for this summer are prohibited. So we probably will see at big times, much lower demand. Will that be so remains to be seen. But at least due to those factors, the government decided that for this year, at least, they are not ordering an additional vessel. They might order additional trips with the current 4 vessels. But of course, at peak times, we soon will reach a limit on how much the existing vessels can help. But we'll see. So that's the background for those 2 announcements. One is more future oriented and goes for the additional vessel, and then the second one we had yesterday concerns the situation more specifically this year. This then covers all the questions that we have received by e-mail. And Marju, do you have any closing words to say?

Well, thank you, Valdo and Marko for the presentations and answering the questions. The link to the reporting of the webinar together with the presentation will be made available in today's investor event announcement and on our company's web page. Thank you for listening, and have a nice day.