AS Tallinna Sadam (TSM1T) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Today, we are presenting our results for the third quarter and 9 months for 2020 and our Chairman of the Board, Valdo Kalm; and CFO, Marko Raid, will introduce the results. [Operator Instructions] So I will give word to Valdo and Marko now. Thank you.

Good morning, everybody. My name is Valdo Kalm, and I would like to start the Q3 highlights. We have had quite a busy quarter. Although, the pandemic influence continues. We will come back to that later on about the impact of pandemic. Then we paid out dividend. And to follow our cash flow possibilities, we're still on a track with dividend policy and we really see the possibility to pay out at least 70% from net profit next year also, that means we are keeping our promise. Then we had quite many events, just a couple of most important of these [indiscernible] and passenger -- renovated passenger Terminal D. Then we installed onshore power supply equipment on 5 keys and first ship is connected, hopefully, followed by others by the end of the year. Then the hybrid very started for service. We have seen already first positive effects of that hybrid version of the Ferry. And hopefully, we will continue with this project with other Ferries. Also, for us, it's very important, Rail Baltica terminal design and, of course, execution of the terminal 2025, '26. Therefore, signing the contract for all the terminal most important step also for Muuga terminal. As you know, it opens possibilities for the -- for the future, we will see excellent multimodality in Muuga. That means all the transportation areas be interconnected in Muuga Harbour, and we will have definitely a competitive advantage in coming years. Force also was important than the new [indiscernible] terminal opened second stage in Muuga, that means new stores, facilities in a backyard of the keys and they're growing quite well. That shows also Q3. Also, there was a decision for prolonging or extending the contracts for 3 years for Marko and me starting from spring next year. And we had a change in test live management just recently we announced that [indiscernible] will be the new CEO for the [indiscernible] with good experience from sales technology and even international business. The trends in business segments. As we all know, the biggest influence affects us on passenger business, although we had in Q3 less restrictions and let's call it slight recovering from Q2, but we didn't have any cruises in this season. Although, cargo doing [indiscernible], as in Q2, then in Q3 also, we see the growth of liquid bulk supported also in growth of ro-ro, that is very important, I guess, for a sterling economy as such and dry bulk is doing well. Hopefully, that will continue. We see quite a positive trends here. And with this cargo, we actually are the biggest -- we have the biggest growth in Baltic Sea among cargo ports. Competition heavy, and therefore, the margins are a little bit lower, especially on liquid bulk. Ferry business did quite [indiscernible], although we didn't have additional Ferry this year, due to the pandemic, therefore, decline in trips but in August, again, we got additional orders from the state. Therefore, all in all, Ferry business show good development, especially on EBITDA level that was quite a remarkable EBITDA growth in Ferry business. Under the other segment, we have [indiscernible], what did a good job in Canada, we did stable revenue. And decline from this other segment came from Green Marine, our joint venture to the impact from COVID virus. On passenger side, a strong downturn from March already, as we mentioned, no cost calls at all. And at the same time, on the raw side, we kept the volumes even in Q3, we had 5% growth. That means that the vessels moving just there are very low level of passengers. On cargo side, we have growth in Q3 and over 9 months. On Ferry and other business, basically no impact. At the same time, we invested -- we believe the future of passenger business, therefore, we continued with investments to the -- mainly to the [indiscernible] but also to the regular lines. Therefore, we preparing for the next high season, I'm talking about the next spring and summer. Definitely, there will be a recovery. The question is about the timing. Then we hold back cost in repairs and personnel costs. And on Q3, we saw already quite a good effect of that. Passenger volumes, we reported them already earlier, but there is a decline of 55%. Same applies for 9 months. On cargo, we already mentioned that Q3 was very successful, 24% growth from last year, and we had growth mainly in liquid bulk, but also in ro-ro and the dry bulk, even in containers. That makes a quite nice picture for the 9 months also showing almost 9% growth totally. We are now reporting also the shipping volumes on Ferries. We had due to the pandemic, less passengers and vehicles. Due to the good cost cutting efficiency and fuel price we made quite a good improvement of profits and EBITDA. [indiscernible] did basically as the same result as last year. Now, Marko, you're welcome to continue.

Yes. Thank you, Valdo. As Valdo already mentioned, the third quarter was given the circumstances, I would say, very successful because we could, in the third quarter, already see in the numbers the impact from the cost saving measures that we started to implement in the second quarter due to changes in the number of employees. In the second quarter, we had some onetime costs as well, so third quarter quite nicely have shown that we are on the right track. And maybe just to point out that even though we had revenue decrease of almost 19% in third quarter, adjusted EBITDA declined by 16%, thus EBITDA margin actually increased, meaning that the relative impact of cost savings and some income elements was bigger than the decline in revenue. So -- but nevertheless, the decline in revenue was -- or continued also in the third quarter. And due to the pandemic, we see this also coming in the next quarter or the fourth quarter as well. So altogether, by the year-end, we will have total drop in revenues, that's for certain. But where this problem comes from, we'll look later on when we talk about segmentation. Also, Valdo mentioned on the bottom line, you can see that despite of the decline in revenue, we have quite heavily continued investments. We do see that the pandemic is a short-term phenomena, and are quite confident that in next year's passenger volumes, which are hit most by the pandemic will recover and the investments that we have planned for this year, more specifically, reconstruction of Terminal D, building of a new cruise terminal, we have continued this and they will be finished as well. So what we see in the third quarter that investments have increased almost by half and the same for 9 months altogether as well. The cash flow statement basically reflects the same change as we already discussed, due to revenue decline cash from operating activity has decreased and cash used in investing activities has increased due to a larger volume of investment. And due to that free cash flow has decreased as well. At the bottom, we also have reported net debt. This has also increased by about EUR 15 million. That's mainly due to the decrease in cash balance following the dividend payout. Gross debt has basically stayed on the same level as a year ago. And on the right-hand side, a snapshot of our financial position, which shows that there is no significant change in the elements or the total volume of assets, maybe just the fact that the cash balance is a little bit lower than it was at the year-end. Probably most important is to look at the results by segments. And here, we are happy to show and see that basically throughout this year, also in the third quarter, but this implies also for the 9 months altogether. We have 1 segment that has suffered the most due to the pandemic that is clearly Passenger Harbours business. You can see that the revenue decrease is quite substantial, little bit less than half of the revenue we earned. And of course, due to the large share of fixed cost. Also, revenue drop has largely transformed into a drop in adjusted EBITDA as well. So Passenger Harbour segments, that is the 1 where we are suffering the most. We are happy that still service between Estonia and Finland is, I would say, quite active. Unfortunately, passenger traffic to Sweden has stopped, and we did not have any cruise vessel calls. This year, hopefully, we'll manage to get that started next year. but many of the routes are closed as well. But the main 1 between Estonia and Finland, that's luckily is still active. And all 3 main operators continue trips on Tallinn-Helsinki route. For other segments, you can see that there are a little bit changes in Cargo Harbours Q3, for example, there's quite a big increase in adjusted EBITDA. That's due to combined impact from the cost savings, and we are selling still some of the [indiscernible] Harbour assets, and we also had 1 sale of land plot in Muuga Harbour to our good customer [indiscernible] who already is operating in Muuga port and extending their services. So third quarter for Cargo Harbours was very good and 9 months altogether, we can see that their revenue is quite stable, and we have a quite healthy growth in adjusted EBITDA. Ferry business has had a little bit less revenue. That's because on the third quarter for the summer period, which started at the end of second quarter, we did not charter an additional Ferry and did not have so much revenue from additional Ferry trips, but we were able to employ our backup vessel Regula and still provide with the backup vessel additional trips in the summertime. And thus, even though revenue declined, we were able to maintain the EBITDA and operational efficiency and even increase our -- further our fuel efficiency partly, as Valdo said, due to the introduction of the hybrid Ferry, which is clearly targeted at increasing the operational efficiency and due to also some other measures. So despite of the decline in revenue, we have, in the Ferry segment, also been able to increase adjusted EBITDA. And in the other segment, Botnica is doing quite well on the same level as the year before. The reason -- main reason we have a decrease in adjusted EBITDA is because our joint venture, Green Marine, which is the company handling vessel generated waste among other things at the ports has for this year, reported loss compared to profits last year. And the loss is largely due to the decreased volume of vessel calls. And secondly, due to the decrease of oil prices because 1 of the components from vessel handling is a oil product that we sell on an open market and the prices for that product have fallen together with the general price decrease of fuel. So altogether, as I said, we are very happy that we have 3 different major segments. And due to this segregation of risks, COVID has hit only 1 of our 3 pillars and 2 others, Cargo Harbours and Ferry service are doing still very well, and we hope that this will continue for the next quarters to come until the pandemic situation is ultimately getting better, hopefully sometime next year. We have just a few slides, which you can look at later on where there is revenue generation and EBITDA by quarter. But basically, with this, we will end our presentation of the results, and now you have possibility to continue with questions. And as Marju said, the questions can be presented from the task bar. There is a icon with a question mark, and you can take your questions in there. And you can also see what other participants have asked. So we'll have a short break and then start answering the questions. [Break]

Okay. We will start answering the questions, but while we answer them, you can still ask additional ones. So we'll start from the beginning. Just for the sake of clarity, we will also read the questions. So and then you know what we answer and you can view also on the Q&A part the questions by ourselves as well. So the first question relates to the reasons behind the increase of liquid cargo. Is this temporary or you see long-term increase? Maybe Valdo, you want to take this.

Yes. So far, we see the visibility is better, and we believe that, that will continue. It's difficult to say what will be the percentage-wise growth. But it's mainly due to that, that our operators, especially 1 of these got new customers, new contracts and let's say, that's the main reason. And the second reason is that in our terminals that are quite many possibilities, not only the store, but to make a mixed product. That means that we have flexibility, very good flexibility for the niche products and we see there is need for such products on a market. And we and our operators dealing with that very well handling. Therefore, visibility is a little bit better and we'll hopefully see the continuous growth.

Okay. Thank you, Valdo. Next question what are the hints and announcements or expectations about the return of cruises?

Yes. As we mentioned, we're preparing for the next season and that means we're not only the building a cruise terminal that will be ready for the season. But also, we made a special marketing and advertising that we will be the safest cruise port in a region because we can take many cruises and passengers. Therefore, we were making such marketing activities, and we will also activate more than trivialize agencies and whole shape. That's from our side. If we're listening to the international information, and we also member of European Cruise Association. Then there are already some companies who are testing a new model of cruising. That's valid for Europe, but that's right also for U.S. Therefore, we will see the cruises here next year, hopefully, if we have the vaccine, if we have a very safe treatment in place, the question is now what will be the number of vessels. It's a little bit [indiscernible] to say. We have, of course, certain prognosis, but it's too early to, yes, talk about that. But we believe that next year, we will see the cruises in Italian Bay.

Okay. Next question concerns cargo volumes and trends. Are there any changes in -- that have happened very recently or the -- I assume that the question concerns that is the trend that we saw in the third quarter continuing also in this fourth quarter?

Right. I leave this current situation in liquid bulk. We hope that we will continue. Then I guess that on ro-ro, there will be also quite a stable picture because of that, that Estonian and Finnish government definitely will support the flow of cargo between the countries and hopefully support the operators because that's really important for the whole economy. And then also, we believe that there will be quite a stable and even growth on dry dock, because there are new players [Technical Difficulty] was very good year for the grade that will continue next year. And there will be quite a huge need for the dry bulk different products for the road and railway investments. Therefore, we believe at least quite a stable picture for the next year.

Okay. Next question is about competition. How is it shaping up between the ports in the Baltic Sea? Was the recent jump in volumes attributed to decreased prices? And if so, do you expect any responses? I assume from other ports. And what is our long-term thinking on pricing and competition in the region?

Right. We already see having competition and reaction from other ports. Last time when we met, there was question about can we gain from Belarus and honestly saying we got. And of course, that made Hungary our competitors in Latvia. Therefore, we already are competing with Latvian and Lithuanian ports to get Russian -- Belarus Russian bulk. Although due to the flexible pricing, in both flexible pricing in railway. That means all the chain and of course, the operator must be very flexible to have such a complex offer in place. We got Belarus cargo. Therefore, it's ordinary life and competition is already there that was already in Q3, that will continue.

What's your view on pricing?