AS Tallinna Sadam (TSM1T) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, dear investors, welcome to our webinar. My name is Valdo Kalm, I'm the CEO of Port of Tallinn, and Andrus Ait is our CFO. As usual, we will start with main events from last quarter. And I would start -- I would like to start with continuous growth and, let's say, rapid recovery of Passenger business. I will come back to the numbers later, but Q3 was quite successful and also 9-month recovery is better than we prognosed. Then we closed operations finally in Paljassaare Harbour. Before we sold out our piece; after that, the infrastructure. And now, in Q3, we also stopped the administration of the Port. Therefore, Paljassaare is totally closed. Just to remind you that it wasn't possible to do business there as cargo, therefore, I guess, it was very reasonable to sell the assets and close the cost. Also important for us for the quarter is that the competition authority terminated supervision proceeding regarding the penalties of Worldwide Cargo Establishment. And before that, we had the court case also for us, that was successful for us. And the court case also -- competition authority made a reaction and terminated the supervision. Very important for our group is that the state will not exercise the option to purchase the ferries. In our agreement that was the option and the government decided not to use that. I guess that sets quite a good platform for the next tender, but will be in force next year. Therefore, we'll be preparing for that. Also, we got a new -- a renewed Supervisory Board. But in Q3, there was some changes in Audit Committee and Remuneration Committee. The Head of Audit Committee is Marek Helm and the Head of Remuneration Committee is Veiko Sepp. Both gentlemen are very experienced in business, and therefore, already both Committees started in action. Then some changes in Supervisory Boards in our total companies. That means our Commercial Officer, Member of Management Board, Margus Vihman, became the Supervisory Board Member in TS Laevad, then Green Marine, and Ahti Kuningas left as he got the new position. Also, we had quite an interesting Investor Day. It's already such a tradition, but this time, we really talked about the future and about the growth possibilities for the group. And importantly is that there are projects on pipeline and possibilities for growth. Trends in our business segments. As I already mentioned in Passengers business, we see the continuing strong growth in Passenger numbers and also in revenue. Also, we increased -- or we got the growth in rental fees because of cruise terminal because it works also for the events. That's such additional revenue. Then parking house, what wasn't last year yet in our budget. And then last year, we decreased some rental fees for our operators. Therefore, a nice growth in rental fees also. On Cargo side, we see a continuous decline in volumes. I will come to the numbers, but it comes mainly from the fertilizers and liquid bulk due to the war. And what is positive, that in Q3 also have seen continuous growth of ro-ro and containers. That's very important, because we consider the ro-ro and containers as our growth potential for the coming years. We're working on that quite heavily. And we're further developing South-North corridor and how better serve the Finland and Swedish import-export. About the sanctions, I will have a separate slide. Our Ferry business shows also quite strong growth, and it comes from additional trips ordered by the state plus indexation. Under the Other segment, Botnica did also a nice summer job in Canada, plus we also, by the contract, have the indexation included. Therefore, good growth from Botnica side also. Here are the -- volumes, as we said, numbers on absolute terms are also quite high. Biggest growth coming definitely from Helsinki, more than the million new visitors; also, from cruise Stockholm; altogether then some 87%. On the left side of the slide, you see that we are recovering from the COVID. In 2019, we had a record year. And now with this 9 months, we showed a quite good growth from last periods -- I mean, from the COVID period. And important is also that we have quite stable ships visits in Passenger business, and same is valid for this year. On Cargo side, the liquid bulk made the biggest drop and dry bulk shows also due to fertilizers. As you remember, our one terminal is closed from Q2 already. Therefore, these are the numbers. As I already mentioned, good news is that ro-ro and containers showing also in Q3 the growth, in 9 months also. And here from the other part of the slide, I would like to again show that ships visit show stable numbers. And that's very important for the port, because more than 50% from our revenues and profits coming from the port dues. Therefore, the visits are extremely important, and that shows quite a stable trend. And hopefully, we will have the stable numbers for the last quarter and then cumulatively also. Our shipping business volumes. The local operations from ferries recovered quite quickly also from pandemic. And in 9 months, we have a record number again from Passenger side. And hopefully, by the end of the year, we will have a bigger number than last year. On Botnica, we count the charter days, and hopefully, there will be also quite a stable and flat result by the end of the year. About the future. We believe that Passenger business recovery continues. There are many elements showing that if there will be now a new wave of pandemic, then we're preparing quite heavily. Our operators are preparing for the last quarter, for the Christmas campaigns, but also for next year. We made investments. We have Greece terminal for cruises. We just recently opened D-terminal plots or area. That means that we really have a good cooperation with our operators to prepare the recovery and growth. Impact on sanctions to Russia. We now know the final sanctions and we can calculate quite precisely what is that. In the beginning of the year, immediately after the war, we announced that estimated impact is around EUR 6 million for us yearly basis. Now it shows smaller numbers, it's EUR 5 million. And for this year, the negative impact is EUR 2.5 million. Of course, we see a rising input of the cost: it's energy, labor and the services. We're working quite heavily on efficiency plans. This year, we established such a process management in our group. That means we renewed our processes. And we not follow only the functional costs, but we have a quite good view to our main process. And via that, we definitely see still possibilities for cost savings. That means that we have to react with cost also. And about the future development, I would just -- for the next year, point out that we're working heavily for new business area, that's offshore wind farms. And we are going to build next year a base harbor in Paldiski. The international tender for construction will open in this coming weeks. And we have to start. And we believe that this business is a good growth possibility for us as a group. And then, of course, we're preparing for new contracts in shipping and the new tender in our Ferry business. And as I already mentioned, we are quite well-prepared. We have new ships. We have possibilities and knowledgement (sic) [ knowledge ] how to rebuild it to electrical or hybrid. Therefore, we're preparing for the tender also. Yes, that's it. And then Andrus will continue.

Yes. Thank you, Valdo. And I will proceed with the financial results. These are the results for third quarter and 9-month period. It's visible here that the growth we see in almost all main figures. The revenue growth for the third quarter was more than 12%, and it was mainly supported by the Passenger harbour segment. We had 87% more passengers than last year at the same period. And also the Cruise sector has also supported the revenue growth in Passenger harbour segment. We had 110 cruise ship calls compared to the 39 last year in the third quarter. But also we had good results in Ferry segment and in the segment Other. However, the Cargo segment is showing a down trend because of the lower cargo volumes. But still the positive effect from other sectors was higher than the negative impact from Cargo harbour segment, and therefore, we see the growth in revenue in the third quarter. Adjusted EBITDA also grew by 5.4%, almost more than EUR 900,000. Adjusted EBITDA margin lowered a bit from 53% to 49.6%. And it's mainly due to the higher costs, especially electricity costs. Part of them we can intermediate -- or book in our service prices, but part of them, I mean, bear ourselves. Operating profit grew by 11%, and also profit for the period was EUR 1.2 million higher than in the third quarter last year. We didn't pay any income tax in the third quarter. And investments, we invested almost EUR 3.5 million, which is more than 50% higher than last year. The main project was made in Old City Harbour, where we renovated or reconstructed all the surrounding area of D-terminal. And the project is completed for now and the area is open. And we hope that the port area is more attractive for citizens and for travelers. And it's a good foundation for the continuous growth in Passenger harbour segment. We also improved the ro-ro capacity in Muuga Harbour, where we are building the new 2-story ramp for ro-ro ships to serve them better and to support higher cargo volumes in ro-ro. And also, we made some maintenance investments. For example, in Old City Harbour, we reconstructed the shoreline reinforcement. On 9-month period, the pattern is quite similar as in third quarter, but the growth rates are a bit higher. And to explain that, I can bring out mainly 2 reasons. Firstly, the third quarter -- in Passenger harbour segment, last year, we saw already the growth. And therefore, the first half of the year, the growth rate in Passenger numbers was higher, and therefore, also the financial numbers -- or the growth of financial numbers in Passenger harbour segment. And secondly, the sanctions, which the EU and the government has imposed after the outbreak of the war in Ukraine, the government has imposed them progressively during the year. And therefore, the impact from there has been lower in the first half of the year than in the third quarter. And therefore, we see a bit higher numbers on a 9-month period. The revenue grew by 15%. Adjusted EBITDA margin remained at the same level as in 2021. But operating profit and profit for the period has increased more than 20%. The profit for the period even -- the growth was 25% and was more than -- was almost EUR 5 million. And investments for investment projects were basically the same, and we invested 21% more than last year. Income tax. We paid dividends in the second quarter, and the dividend payment was EUR 5 million higher than last year. And therefore, we see growth also in income tax on a 9-month period. When we look at the revenue and profitability over the years, since 2017, we see that adjusted EBITDA margin has been quite stable. Despite of the crisis -- Corona crisis starting from 2020, we have managed to keep the level quite stable. And this trend has continued also this year. And adjusted EBITDA in this year, we see already the number of EUR 47 million, which is almost a level which is last year for the whole year. So the growth in adjusted EBITDA has been quite significant this year. Here are the results by segment-wise. Like I already mentioned, this year has been very successful for the Passenger harbor segment. It's a decent recovery there. In the third quarter, there was more cruise ships calls than last year and the Passenger harbour supported, therefore, mostly -- most of our results. But we see growth also in segment Ferry and in the Other segment. The Ferry segment, we have made more trips this year due to the higher demand. And last year -- or 9-month period, we had also more repairment costs, some dock works for the ferries. And therefore, the EBITDA margin -- EBITDA and EBIT margin in this segment has also increased. And also, the segment Other has supported the growth. Botnica -- the revenue for Botnica has been indexed, and also, we had a good result from our joint venture company, Green Marine, where the results have also improved compared to the last year. In Cargo harbour segment, we have seen a downturn in volumes and also in revenue. And this is also the segment where the -- what is mostly or the most impacted by higher energy prices. But the decrease has been lower in financial numbers than in volumes because of the growth in ro-ro and container cargo, and these are the cargo flights where the cargo charges are higher. Cash flow and financial position. On cash flow statement, we see that cash from operating activities has improved, has increased by more than almost EUR 4 million due to the higher revenue. And the revenue growth has exceeded the growth in costs. Cash used in investing activities is a bit lower despite the fact that we invested more than last year on a 9-month period. On the second quarter, we received the grant payment from EU from (sic) [ for ] TWIN-PORT II project, and therefore, the cash used in investing activities has decreased compared to last year. Free cash flow has improved and amounted to EUR 35 million and cash used in financing activities has increased by almost EUR 5 million. And to explain that, we paid out more dividends this year, EUR 25 million. Last year, it was a bit more than EUR 20 million. And this reflects in these numbers. And net cash flow as a result of previous growth has increased by EUR 2.5 million. And net debt has decreased by almost EUR 90 million due to the loan repayments. And on financial position, we don't see any strong change here. Cash on accounts has a bit increased due to the cash flow and, debts are a bit lower due to the loan repayments. And our current assets have decreased due to the deprecation. But with that, I will conclude the presentation. We have some extra slides about revenue generation and EBITDA generation. For information, if somebody has more interest, we uploaded the presentation and you can browse it later. But with that, we will make a short break and we will be back in 5 minutes and are ready to answer your questions. Thank you.

So we are back. Thank you for the questions. We have here more than 5 questions. And I'll try to answer with him. The first question, how do raising interest rates impact your cash flow in the next 3 years? Definitely, there will be impact -- a negative impact on our cash flow. But in our investment projects, we haven't take into account such a low interest rate as it has been in previous years. So therefore, we can manage the increasing costs there. And there is an impact, but it's -- let's say, we have -- in our business plans, we have taken it into account in advance, and this is not a problem in the future for us.

Next question. Under your opinion, is it realistic that 2019 Passenger numbers could be reached in 2023 or 2024? It looks that -- and we hope -- that the recovery, 100% recovery in Passenger number, what we had before, reaching probably 2024. And next question. At what stage now is real estate development project? Yes. We have had, again, good developments. And I don't want to comment or promise nothing just now. Maybe we will have in Q4 good news. If you remember then, we worked with a detailed planning, design, and hopefully, there will be some important decision and event by the end of this year. It's better, then, to comment on the next press conference.

Price -- sanctions impact minus EUR 5 million. Is it the revenue or profit? I already -- in the second quarter, I said that the impact of sanctions is almost the same for revenue and EBITDA. Maybe it's a bit lower on EBITDA level. But yes, it's -- we have, let's say, mostly the fixed costs, and therefore, it impacts both revenue and EBITDA in the same amount. EBITDA margin decreased below 50% in third quarter. And what is your long-term target? Actually, we haven't set such a long-term target, but we definitely try to keep this level. And the historical data supported that, in even tough times, the company has managed to keep the level. And we take some steps and put our effort there, that, the margin level will be in the future also around 50%.

May I add that we consider 50% is very high because we try to benchmark it with other listed ports. There are very few ports, unfortunately, in Europe, but there are some airports. Then with this 50% margin, we are in the very top, honestly. And we really try to keep that magic number. The next question. Do we expect PAX growth or Passenger growth next year will mainly come from Es-Finn or other countries? Yes, the main source is Finland. We have seen a positive trend. There are new segments: youth, families, that means younger segments coming to Estonia. That's very positive. Secondly, we believe that there are some growth possibilities in Sweden also, because just now Tallinn operates with only one vessel. Let's see. We are planning some marketing activities together. That means that there are some potential in Swedes also and then the cruise. Just recently, for example, yesterday, today, there is an important event in Tallinn, Cruise Europe Conference. That means all the main players, ship owners, also cruise companies are there. And it seems that Tallinn is very attractive. That means we were working, of course, to market better our Tallinn and medieval city and our port. Therefore, all these 3 segments are promising. Yes. Is the drop in ro-ro cargo volumes related to the seasonality matters? Or are you seeing less activity in this cargo group due to the macro-environment? Or some other factors impacting Q3? That's true with us. In Q2, we had stronger growth. Although on Q3, we had, yes, 6.4% growth. There are many factors. It's not so easy to say. But definitely there are some macro impact, that means export, import decrease. And therefore -- maybe that's the biggest. Otherwise -- we're supporting as a port. It's very strong, stevedore company in Muuga, HHLA. In Paldiski, we have ESTEVE. That means the conditions are very good to support the growth. But yes, I guess, macro plays the most important role.

Will a Russian embargo be fully implemented in the beginning of next year? If yes, what is the estimated impact in euros? Actually, the impact which we said, minus EUR 5 million, is the total impact when we compare to the full year before sanctions and the full year after the sanctions, which will be the 2023. And the drop has already -- let's say, here, we don't see any significant additional drop in the future. It's according to our terminal operators. And as we mentioned, they are looking for new cargo. And therefore, there won't be any additional drop in the future. Or there is impact. This is due to the fact that this year we -- the sanctions were imposed during the year progressively, but in the future it will influence the full year.

Right. And next question, will the Russian oil price cap have any impact on liquid bulk? The answer is no. Because as already Andrus described, basically by the end of this year, the Russian oil transit will stop, therefore, no impact from price cap. Please -- next question. Please explain what does it mean for you when government decided not to use the option to buy ferries? Any financial expression? For us, the government decision is very positive, because we then have a clear message that we will own the assets or ships. They are brand-new ships still. And with this fleet or ships, it's easier to compete or to go to the next tender. That's definitely positive. And it shows that government or as a service agreement holder is satisfied also with our service. And there is any financial expression on that chart recently?

I can add that directly there isn't any financial expression. Just that this decision puts us in a good position to participate on the tender. And so to that -- it gives us a possibility to be -- or to continue after 2026 in ferry business. And the impact will be there. But nothing in near future.

Correct. All right. Then -- okay. Sorry, one question more. Is it possible to give some indication on cruise booking for some -- next year? Honestly -- I don't have a precise figure, to be honest. We have the bookings. It's really too early to say what will be the trend. And therefore, we're working hard, as I already mentioned. And even big decision makers all are here in Tallinn yesterday, today. We do what we can to support the recovery. But still, I don't have just now here on the table the bookings or the number.

So it seems that there is no more questions -- there are no more questions. And thank you for watching and thank you for your interest, and see you next time.

Thank you [ for ] listening and all the best.