AS Tallinna Sadam (TSM1T) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Thank you for joining our webinar. My name is Marju Zirel, I am the Head of Investor Relations of Port of Tallinn. And today, our CEO, Valdo Kalm; and CFO, Marko Raid, will introduce you the Port of Tallinn financial results of the second quarter and 6 months of 2020. After the presentation, Marko and Valdo will be glad to answer your questions. [Operator Instructions]. So please, Valdo.

Good morning. I would like to start with highlights from Q2, and of course, starting with Passenger business. And due to the pandemic, we got the biggest influence to the passenger numbers starting from mid-March. What can we say about the trends that June -- we already saw some recovery, of course, from Finland side. And now, if we're talking about July, then we see the things coming low on a level of 60% compared to the July last year. But all in all, we are on a level 50% because of cruise business and Stockholm line. Maybe on passenger side, the positive thing is that we didn't expect so many ship calls. That means that we're doing a bit better than we prognosed, and our operators all keeping the positions. And there are more ships, vessels on a route than we estimated. On cargo flows, we see quite a good development. And we have growth on Cargo business due to the increased liquid bulk. Ro-ro is stable. And if we're talking about the trends, then, also, we see quite stable development. Then we had Annual General Meeting and Supervisory Board election. Maybe I would like to point out that, also, we see quite a good growth of investors during Q2. We now have 14,500 investors on our stock. Then we signed agreement for our daughter company, signed agreement to acquire new ferry for the Virtsu-Kuivastu route. And we had additional trips with motor vessel Regula during the summer time. In Q2, we solved Coal Terminal dispute with compromise. That's quite important action step for us. And we continue to build investments despite a slowdown. And all the biggest projects are in line with our plans. Then trends and continuous trends in business segments. I already touched the Passenger business, and we see development on Q3. But let's see how that will end by the end of the year. In Cargo side, we hope that we will see growth in liquid bulk. And what is positive, I consider that ro-ro is quite stable, and we hope that we continue due to the many vessels on our line. In Ferry business, we have agreement. And our -- there are orders by the end of the summer, with additional trips for the Saaremaa. And under the Other segment, Botnica increased revenue due to the indexation and a little bit early start on Baffinland charter. Botnica is doing well and doing a good job in Canada. Volumes, first of all, cargo. As I mentioned, both Q2 and 6 months, we see growth, and that's thanks to the liquid bulk. Our operators doing a very good job, not only in Muuga, but also in Paldiski Harbour. All the operators doing really good -- liquid operators doing a very good job. And due to that, we even have very good position if you compare with other big ports in Baltic Sea. We increased our market share if you compare us with mainly with Baltic ports, but also with the Scandinavian ports. Therefore, that, we consider as a positive trend. And on Passenger volumes, yes, in Q2, we saw a heavy decline. And from the mid-June, we see the positive development. And as I mentioned, on July, we are on a level 60%, if we're talking about the main route, Tallinn-Helsinki. In 6 months, we still are 50% behind from last year. Now to the financials, please, Marko.

So first, we'll start with the results of the group, and then we look more in detail into the segments as well. As Valdo already said, second quarter was shadowed for us by the decline in the Passenger business, which meant that, for almost 2 months and 2-plus months, the passenger traffic was almost totally halted. So no passengers, aside from cargo drivers, were allowed. And this has had the most significant impact on the group level for us as well. We can see in the second quarter that our revenues dropped 32% and adjusted EBITDA, 46%. And these changes all mostly come from the Passenger harbour business. As we also declared that -- or decided the dividend payment at the end of the second quarter, at the end of July in Annual General Meeting, so also the income tax cost is then reflected in that quarter, meaning, in the second quarter, being a little bit smaller for this year than was in the previous year due to a bit smaller dividend amount. And combining those 2 impacts, income tax from the dividend payment plus the negative development on the Passenger segment, we had a loss for the quarter, EUR 800,000 compared to EUR 7.2 million profit in the last year. But despite of the loss and challenges in the overall environment, we still continued our investments because, in the longer run, we don't see a big change for us. And as you can see, investments have grown more than by half compared to the first quarter last year. So the biggest projects being the reconstruction of terminal D, we started the construction of a cruise terminal. We started the construction of a passenger bridge in the old City Harbour. All those investments also support our plans for the real estate development in the coming years. So we did not see reason to stop these despite the challenges in the economic environment. On the 6-month figures, we have revenue decline of 18% and EBITDA decline of 26%, all this coming from the second quarter. And profit for first half year was EUR 9.2 million compared to EUR 18.2 million, and this as well has been impacted by the second quarter. Looking at the cash flow statement, on the left-hand side. We have a little bit less cash from operating activities due to the decline in revenue, more cash used in investments because we continued and there was growth in investments, but then less cash were used for financing activities due to the fact that, last year, dividend payment was made in the second quarter. This year, dividend payment and also income tax will be paid in the third quarter. So that the net cash flow for 6 months this year was positive by EUR 9 million, and for comparable period, it was EUR 18 million negative. Net debt has decreased and mainly also due to the fact that the dividend has not been paid out. So the level of cash was actually higher at the end of second quarter compared to the same period last year. On the right-hand side, just as -- there is a snapshot of our financial position and balance sheet. Our asset base has a little bit increased due to the continued investments. And cash balance is also quite good, and this was used for the dividend payment in the beginning of third quarter. Gross debt has also decreased because we have paid back existing loans, and this balance is at EUR 204 million as at the end of second quarter. Looking at the results by segments. Here, we can see, on the left-hand side, the second quarter where the first Passenger harbour business is the one hit mostly. And even though we had sharp decrease in revenues, we still managed to generate a positive EBITDA of EUR 1.8 million. But the decline in EBITDA on the Passenger harbours was altogether EUR 8 million, and this reflects also in the group total figures. Cargo harbours had a little bit drop in the revenues despite of increase in volumes. This is explained by several factors, one of them being that the liquid bulk where we have increased in volume, this mostly comes from cargo that is transported into the port by vessels and not by railway. So product cargo coming into the port by vessels, they have lower tariffs. And this is why we have increase in volume, but a little bit decrease in revenue or turnover that we generate, 1 million or 1 unit of tonnes. Second reason being that the Muuga-Vuosaari line, which is a ro-ro line, during the pandemic period for almost 2 months, was retired to Old City Harbour. And these revenues are included in the Passenger harbours segment temporarily. So this has decreased also Cargo harbours revenue. And we also had a little bit lower sales of electricity as well. So these being the reasons behind the slight decrease in Cargo harbours revenue. Ferry business for the domestic connection between Estonian Mainland and the bigger islands, we also have a revenue drop because the number, of course, was a little bit decreased. Also, fuel price was lower in the second quarter. But as you can see, the adjusted EBITDA is almost flat and at the same level as last year. And the same goes for the Other segment, which is mainly icebreaker Botnica, which is doing quite well, on the same track as the year before. But we have some negative impact from our investment into Green Marine, which is the waste handling-associated company, where we have a 51% stake holding, but no control. So from there, there is a little bit negative impact into the Other segment due to the decline in the volume of vessel calls. And if you look on the right-hand side, on the 6-month figures, then, basically, all the other segments, except Passenger harbours, are quite well on the same level as a year before. And Passenger harbours has suffered a decline due to the drop, mainly, from the second quarter. And then we have, for comparison purposes, included some quarterly numbers by segments on revenue generation and EBITDA generation, which you can browse through, and then we'll go into Q&A session. And we'll take a short break so you can write your questions, and we'll then start answering them one by one. [Break]

Okay. We are starting now answering the questions in the sequence we receive them. You can add additional questions as well as we answer the first ones, and we will take this at the end then. Starting from the first question, please explain the sharp drop in passenger vessel dues, which declined well ahead of the drop in passenger ship calls. Did you offer some discounts? Starting from the end, we did not offer any additional discounts. Our due system is such that, if a vessel makes a call or port visit, then they have to pay. We don't have any fixed fees for vessels. So if any operator stop their vessels, so the cost from our side went to 0, basically. But we did not change any pricing. The drop in the average revenue where vessel call comes from, the -- from the impact that smaller vessels continued their visits or travels. So for example, in Tallinn-Helsinki line, the bigger vessels, such as Star and also the bigger Baltic Queen for Swedish line, were stopped. However, smaller vessels, which are also carrying cargo and also in the Sweden line, continued their voyages. So the number of vessel calls declined for bigger vessels, and this has led to a drop in the average income per vessel call, but there were no changes in the pricing. Next question goes for Valdo on the Cargo.

All right. What is your outlook on Cargo volumes, including dry bulk, ro-ro, liquid bulk? How is it trending in Q3? Yes. As I already mentioned, we see quite a good development also in Q3 on liquid bulk. We hope that will continue. The market situation is good for such a business. Then we hope that ro-ro will be stable, but of course, it depends on total export-import situation in Q3. On dry bulk, we also hope some increase from Q2. Because in Q3, there will be start of grain carry. We'll have quite a good year for grain here in Estonia, plus there is quite a good competition between dry bulk operators in Muuga. Therefore, we hope that we will see some increase from Q2. Next question. Sorry? Increase. Right. Are you seeing any booked calls from the cruise for summer 2021? Yes, we have. We have quite many bookings, but it's -- that really depends on a situation. We are ready to take them, as we will have next year our cruise terminal ready. That means that we can also check the passengers, whether if there is need for the certain test, corona test or whatever. Therefore, we have very good possibilities next year to take the cruise.

Outlook, actually, on booking is quite well.

Quite well, but yes.

Almost on a regular level.

All right.

And the question is, will they be canceled? Or what will actually happen? That was for this year.

Yes. How will the -- next question, how will the future dividend payments be affected by the result of 2020? We have our dividend policy in place and valid. That means, next year, we would like to pay out 70% from the profits. And we would like to keep the promise. That's very briefly. How many of the staff we have furloughed during Q2? Right. We made such a hybrid approach. That means we lowered a bit the salaries, then we also sent out some 5% of staff. That's the situation.

Then there's a question about the operating capacity of our domestic ferries. Are these at reduced capacity like the international passenger vessels? We can say that the volume of cars actually has reached last year's figures. So the recovery in the domestic traffic has been much more quicker than for international traffic. And last month, for example, Hiiumaa line also had a new record number of passengers. Saaremaa has not fully recovered, but the number of vehicles has fully recovered. So people travel more by cars and less by bus. So it's close to the same level as it was before. But having said that, I need to remind that the Ferry segment's business model is such that the occupancy of the vessel or the utilization is not a key factor for us in terms of profitability. We get fixed income there despite the capacity utilization.

There is a question about the plans about the construction of the buildings in the Port of Tallinn, but I guess it's more about our real estate development. And exactly -- and we are in a detailed planning phase that's moving, as we planned together with the city government. And I would like to repeat again that we are not going to invest to the buildings. We're acting as a landlord, and we're renting land for the developers, and there will be the tenders for developers. Therefore, it's open tender, and we are not going to invest in the buildings. And then, we're planning now on our master plan to have some 30% residential and some 70% offices, but that's very approximate.

Then we have questions, when do you expect the cruise boats coming to terminal again? This year, probably, it will not happen, at least for international cruise. Maybe it will, but it does not look good. So we are currently preparing for the next season next year. But will they come or not? That depends on the situation with the coronavirus and how that is developing over the winter.

Then when you think to start the construction, and the cost, how do you think you cover? Again, I guess, next year takes definitely for detailed planning.

Yes, we are discussing the real estate developments here again.

Yes. That's, again, real estate. And at least, next year takes for the detailed planning, but then, step-by-step, we're involving investors. And hopefully, we are ready for the tenders after 2 years.

And our plan is not to invest into the buildings and construction ourselves, but to rent out the land on our long-term leases. So there's also a question with respect to will it be rental agreements? Or are we going to sell the land? So currently, our plan is to give on a long-term rent. We are talking about 50, even up to 99 years. That can be done under the Estonian legislation. So we are not planning to invest heavily ourselves into the development, but then rent out and then rental income, and then the third parties are responsible for investing into the construction themselves.

Okay. Then we got the question, will you slow down investments in order to safeguard the dividend due to the pandemic? This year, as we mentioned, we stopped some investments. But in main projects, we see that we need to continue. For next year, I guess, there will be definitely lower level on investments anyway because, this year, we have some bigger project sharing in Old City Harbour. Therefore, of course, we follow -- try to follow our dividend policy and a have a good correlation with investments to secure cash flow.

You can say that our aim is to do both. So the dividend should not suffer at the cost of investments. But as the investments are future-oriented, we -- the most important of the investments, we also want to continue. So we try to come to the solution where we can do both and, hopefully, that is doable. Of course, that means we also want to increase probably the leverage, depending on the terms offered by the financial institutions. So -- and our debt level, at least, should not go significantly down, stay at where we are, or a bit increase. So we try to cover the gap by external financing and keep our promise for dividends and continue with more -- most important investments as well.

Again, about real estate, what happens during the summer with your real estate plans? As I mentioned, we worked heavily on detailed planning. And if to be more concrete, then we are happy to fix with city government the tramline going through the port area. That's one very concrete result that gives us possibility to plan more the other accesses and roads to the new development areas. And secondly, we introduced such an open introduction of all the areas, what we have here for the detailed planning. That means we presented all the plans to the city, and we did it in the end of July already. That means, also, city government and the Department of Planning works with us very heavily. And we hope that we will have already some decisions by the -- on detailed planning by the end of the year.

It seems, at the moment, this concludes the part of the questions. We don't have anything to add at the moment, no more questions. And Marju will have the last words.

Thank you for joining us. And recording of webinar will be published soon with the stock exchange release and also at our web page. Have a nice day.

All the best. Thank you.

Thank you.