AS Tallinna Sadam (TSM1T) Earnings Call Transcript & Summary

Good afternoon, dear investors. My name is Valdo Kalm. I am in charge of the Group of Port of Tallinn; and Andrus Ait is our CFO. And we would like to present results from Q4, but also yearly based results, and I would like to start with main events from last year. Although we had quite a tough year, we managed to increase the revenue and EBITDA level, and that's very much because of growth of passenger volumes. The volumes doubled and reached 7 million, and we had quite a good trend or doubling from Helsinki route, from Stockholm route, and also from Cruise. The increase of passenger volumes helped us a lot to compensate degrees of Cargo business due to the sanctions to Russia and Belarus. Here, we had degrees of revenues of around 20%, but I will come back to that. Then in the beginning of summer, our Supervisory Board made the decision to invest to Paldiski Harbour windfarm quay. That's important decision. That's decision for the future growth. And we see really that we enter into the new business areas that is serving the windfarms, the installment and maintenance of windfarms. And we just got the proposal from the tender for the construction of the quay and everything goes as planned, we have to start quite soon because we have to be ready in summer 2025, then we will see the first revenues also. Then we closed -- completed Paljassaare Harbour that was sold already a couple of years ago and now we really closed the operations at [indiscernible]. We moved on last year with planned investments and one of the biggest was terminal D area. We finished it, we completed it, it's under operation, everything is as we planned, basically. Also, very important step was our designs of Old City Harbour detail plans that was public in the end of the year. That's, of course, in cooperation with city government and that gives us good platform to move on with detailed plans and to really fix and confirm the detailed plans for the Old City Harbour area. And then it's possible to start real estate business and start with the tenders. There was a launch of a new ship MyStar from Tallinn, quite important step for us also in terms of volumes, in terms of new product, and definitely, that's increasing usually the interest and volume of passengers. Then we prolonged Botnica's agreement with Baffinland for the summer season. And also, our government made important decision not to exercise the option to purchase the ferries from us. That gives us very good position in new tender, very important decision, and positive, of course, for the Port of Tallinn. And then we closed 2 disputes last year with Tallink and Worldwide Cargo. And from the June last year, there is a new Supervisory Board in action with good cooperation with Management Board. Now to the Q4, as usual, we describe the trends and then we will show the figures. And starting with passenger business, we have seen continued growth in the passenger numbers, although there was a decline in revenues due to the less ship calls mainly, plus some lower port fees. On Cargo side, decline was minus 17%, although in revenues, minus 5%. But all in all, the trends were the same, decline came from liquid bulk and from fertilizers due to the sanctions. And there was some additional sanctions also from December. Therefore, that was in our prognosis and the decline was smaller than we expected actually. Ferry business revenue growth was 12% from additional trips and bigger number of passengers, but also from the indexation. And the Other segment, Botnica did little bit less charter days than last year. Here are the volumes from Q4 and year. As I mentioned, we reached 7 million. We doubled the number, and maybe important for us is also that we see the quite stable ship calls over the crisis. That's maybe the most important from this slide. On cargo volumes on Q3, minus 17%, if you take yearly basis, then we lost around 20%, and the decrease came from liquid bulk and dry bulk. These are fertilizers, but positive is that all the other cargo types show the increase, especially ro-ro and containers. And again, quite stable number of cargo vessel calls. That's important, although we lost transit from Russia. Shipping volumes are there on the ferry side. Passenger on the increase to the level of previous crisis period, and on Botnica side, a little bit smaller charter days than last year. But both business models shows quite a stable development. Future outlook. We believe that passenger business recovery continues from the discussion from operators, and we see the same that there are new segments traveling from Finland to Estonia. There are more younger people plus families. Therefore, we see such a positive shift in a segment. Therefore, we believe that there is interest for travelers. And we believe that there will be continuous growth. But visibility is not very good, honestly. Therefore, that's just the prognosis. As I mentioned, the impact of sanctions against Russia and Belarus was smaller than we estimated, but it's also valid for this year because the impact is split between last year and this year. And in this situation, it's extremely important to find a new growth. Therefore, we're working very heavily to find new ro-ro and container lines plus customers. And here, we see certain positive developments together with our operators. For example, in January, there was a new line from CDMA established in Muuga Harbour. We're negotiating with shipowners about the new ro-ro lines. Therefore, it's really important to find new growth there. And historically, we already built such a strategically South-North corridor to serve more and more Scandinavia countries. Not only Finland but more and more Sweden also. Therefore, that's under the focus. As we already mentioned, then offshore windfarms, the old business model is also in our focus, and we see the growth possibility and long-term business to build the harbour for installment and maintenance, but also maybe invest to the maintenance vessels. We're just now analyzing that. Therefore, there are quite positive possibilities for us as a Board. And then we're preparing for the new contracts, and probably we will have this year new tender for the next period in our ferry business. And also, we see the increase of offshore business globally. Therefore, there are new possibilities for also our offshore ship Botnica. And this year, we prepared a real estate business model. If everything goes well and we're moving on with detailed planning, then we have to be ready with business models with the communication marketing to start really the real estate and announce the tenders in this Old City Port area. All right. Then Andrus will continue with numbers.

Thank you, Valdo. Good afternoon from my side as well. I will continue with the financial results. As Valdo described, the year 2022 was quite successful -- actually very successful for passenger harbours where the number of passengers doubled, and it also impacted the financial results. It was also a good year for our ferry services. Very stable year for segment other where mainly the operations of Botnica are. And at the same time, for cargo harbours the year was quite challenging. But all in all, we can say that despite of the sanctions and drop in cargo volumes, the negative impact was lower than we expected. As we look at the results of fourth quarter, we see a decrease in revenue. Here, we can bring out mainly 2 reasons. Firstly, revenue drop was caused by sanctions and lower amount of cargo. Due to that, we have less vessel calls in cargo harbours and the revenue decreased. But at the same time, in the Q4 this year, the number of vessel calls decreased also in passenger harbour segment. And to explain that, on ship, which we are operating Tallinn-Helsinki route was chartered out. This impacted the revenue and also the impact of the compromise which we made in the first quarter of 2022 that we lowered the port fees for [indiscernible] ships, which are visiting our Old City Port regularly. So this impacts [indiscernible] on the fourth quarter. In the second and third quarter, we had some -- quite good number of vessel calls from cruise ships, and this helped to offset it. But in the fourth quarter, we didn't have cruise ship calls and the impact came -- obviously that's impacting in revenue. And the second impact was elevated revenue level in 2021 as we sold the assets in Paljassaare Harbour where we sold electricity distribution network or grid. So from there, we received EUR 0.4 million additional revenue. And when we take this out, then the revenue would be in 2021 in the Q4 lower. The profitability and profit figures in the fourth quarter showed a drop or a decrease, mainly due to a higher cost level and the costs were mainly impacted by 3 cost items: first, the electricity and fuel costs, which have been higher throughout the whole year; second impact is related to personnel costs and the impact we can separate it or split it to the 2 parts. The cost pressure is quite high in shipping sector in terms of wages and salaries, so we made some changes there, and also we adjusted provision for performance-linked bonuses based on the financial results of 2022, and this has also impacted the labor costs; And the third impact on costs is related to one-off impact from credit losses on trade receivables. We estimated that some receivables are uncollectible in the future due to the overall economic situation and the drop in cargo volumes, which impact also our clients. So from there, we had also extra impact, minus EUR 500,000. And in 2021, we had on this cost item opposite impact. It means we collected some receivables, which we had already estimated as uncollectible. So all in all, the impact was around EUR 3 million to EUR 4 million, and those are those factors which impacted the profitability. Operating profit was EUR 2.6 million, and decreased by 60%. In the fourth quarter of 2022, we had also EUR 82,000 income tax as we expected income tax from dividends of our joint venture company, Green Marine according to the accounting rules. And profit for the period decreased by 75%. In addition to overall cost level and the cost pressure, it was also impacted by higher interest payments in the second half of the year. And we invested EUR 1.4 million in the fourth quarter, which is almost 70% lower than in Q4 2021. But it was totally by our plans and main investments were already completed by the end of the third quarter. There was some maintenance investment in the fourth quarter. As we look at the results for full year, then we see that -- we see growth in basically all main figures, the revenue growth was 11% or more than EUR 11 million. And the main support to the crude came from passenger harbour segment from passenger fees. Also, the revenue from ferry business increased by EUR 3.8 million, or 13%. The rental revenue grew by 12%, EUR 1.2 million. So these were the revenue items, which grew the most. Adjusted EBITDA increased by 3.3%. And percentage wise, the growth was significantly lower than in revenue. But here, also, like in the fourth quarter, we can say that the cost per share was higher. And therefore, the growth here has been lower than in revenue. Adjusted EBITDA margin lowered a bit from 49% to 46%. Operating profit grew by EUR 3.5 million and amounted to EUR 30.8 million. Income tax was 28% higher than 2021. We paid out more dividends. In 2022, the dividend payout was EUR 25 million. In 2021, it was a bit more than EUR 20 million. And this reflects also in income tax. Profit for the period was basically the same as in 2021 which we consider a good result and investments decreased by 6%, but it was according to our budget and the main projects we're involved with the Old City Harbour, like Valdo mentioned, we opened the new surrounding area for terminal D, we upgraded some [indiscernible], which connect the terminals to the ship and also made some repairments or building works for shoreline reinstalment. And in Muuga Harbour, we improved the ro-ro traffic equipment as we built a new 2-story ramp for ro-ro ships. When we look at the revenue over the years and also profitability, we see that the revenue before the years of crisis was quite stable on the level of EUR 74 million. And during the years of crisis, the level has been around EUR 55 million. And here, we can say that we have managed to keep the EBIT level monetary wise, which we also consider a good result, taking into account all the circumstances. Now here are the results by segment wise. In the fourth quarter, the ferry segment was the one where we see the growth. The revenue grew by 12% and EBITDA 28%. And the revenue growth is mainly attributable to indexation. We indexed -- we can index the revenue regularly on a quarterly basis and therefore the revenue has increased. And the EBITDA growth is partly attributable to the elevated cost level in 2021 where we made a bigger dock works for our ferries. In passenger harbour segment, in the fourth quarter, we see a drop in revenue and also in EBITDA. Revenue side in passenger harbour segment, there was increase in passenger fees, but the offsetting or negative impact from vessel dues was higher and, therefore, the revenue fell. The cargo harbour has been impacted by the sanctions throughout the year. The revenue decreased by 5%, which is less than the drop in cargo volumes, and also due to cost pressure, the adjusted EBITDA has decreased. In the second quarter, revenue decreased, and this reflects or corresponds to the lower number of charter days. We had 19 days lower charter period in summer. And this is nothing extraordinary. We can say that it was -- the number of charter days is same as in 2020, and we can say that it was exceptionally high in 2021. And therefore, we see a drop here. But on 12 months level, 3 segments out of 4 showed increase both in revenue. And EBITDA [indiscernible] growth was in passenger harbour segment where the revenue increased more than 35% and the growth in EBITDA was about 30%, and it is mainly related to passenger fees -- higher number of passengers and also a higher number of cruise calls. In cargo harbour segment, there has been decline throughout the year. And by the end of the year, the drop was less -- about EUR 2 million in revenue and a bit more in EBITDA. And this is mainly affected by sanctions. And in the fourth quarter, there was additional impact from the sanctions, which were imposed from the beginning of December where the Estonian Government imposed sanctions for total embargo, basically, to the crude oil and oil products from Russia, and this had also extra impact to the Q4 results. Ferry segment showed good results. We made 6% more trips due to the indexation, and we have managed to keep the costs here on a normal level or [indiscernible] we see also good growth here. And in segment Other, which contains mainly the operations of Botnica, despite of the drop in charter days, we see growth here. And on EBITDA level, there was also -- the growth was also supported by good results from our joint venture company, Green Marine. So moving on with cash flow and financial position. Cash from operating activities increased by almost EUR 2 million due to the fact that proceeds from sale increased more than payments to the suppliers. Under this row, we have also EUR 1 million higher income tax from dividends. And when we take this out, that cash from operating activities would be even higher -- more positive. Cash used in investing activities was minus EUR 114,000, although we invested almost in same amount in 2021. To explain that, we received 3 different grant payments from EU funds. About EUR 5 million we got from TWIN-PORT 2 project. Those project investments we already completed in 2021. The payment was in 2022. Then we received grant payment from TWIN-PORT 3, which covers most of the biggest investment project for 2022, and we also received one upfront or prepayment from EstMilMob -- Military Mobility Fund, and [indiscernible]. This is in connection with our new investment project as we are building a new quay in Paldiski South Harbour. Cash used in financing activities is EUR 12.6 million, higher than in 2021. Here, we paid more dividends. This impact is EUR 5 million. And we also reimbursed bonds in the amount of EUR 7 million. This reimbursement we didn't have in 2021. And therefore, from there, we got the extra impact to the cash used in financing activities. So the net cash flow was EUR 9.5 million, which is EUR 1.4 million higher than 2021. Net debt decreased by EUR 25.5 million due to the loan repayment and reimbursement payments for bonds. And on the financial position, we see that cash from bank accounts has increased. At the same time, the gross debt has decreased. And this gave us a good position to keep our dividend promise. And from Management Board side we make a proposal that we pay out at least 70% of our net profit to dividends. And with that, we will finish our presentation, and we have some extra slides about revenue generation for just information. And we will make a short break. You can submit questions by typing them in, and we will be back in 5 minutes' time. So see you soon. Thank you.

Welcome back. We have some questions sent by webinar, but also we have one question sent upfront. These questions, we will answer. The question was [ bigger ] rise in operating expenses and personnel expenses in Q4 compared to the 2022 and 2021, can you give some color on what is causing this and if they are temporary or permanent. Thank you for the question. As I already explained, on operating costs, there was 2 cost items which impacted the results. One was the price of electricity and fuel, which was around EUR 1 million higher than the Q4 in 2021. And you can say that electricity prices have lowered a bit in the beginning of 2023. So this impact is not permanent. But here, we are dependent on the overall cost level. So this is the cost which we can't impact much but or influence much. But the second influence came to operating costs from credit losses on trade receivables. This cost item is a one-off or temporary, and the impact was about EUR 1 million. So this was a one-off impact. And personnel expenses were about EUR 1.1 million higher than a year before in the Q4, and about 50% of the rise was impacted or was as a result of changes in personnel costs. This part is permanent and half of it is related to performance-based bonuses, which is temporary or depends mainly on the economic results of the company.

The next question we got also via e-mail. Are you planning to develop and operate windfarms? Or are you just providing port facilities to development? The question is about the positioning in our windfarm business. We position us to really provide port facilities. And as I mentioned, maybe -- we are analyzing that, maybe we will also invest to the maintenance vessels. But we are not going to develop or operator windfarms.

Our next question, Valdo, could you please give your view why Q4 was rather weak for Tallinna Sadam but very strong for largest -- your client and partner Tallink Grupp. Here we can comment our results and our results were affected or impacted by also by sanctions and by cargo harbours where the share of Tallink is very minor or to 0. And we had also some one-off costs, as I described, due to the bonus system and due to the credit losses, which are one-off costs. So I think the main impact came from there.

Next question, what is your feeling about the new tariff agreement with Tallink. Very generally saying, we feel it as a balanced agreement. And therefore, it's in our prognosis already, and that's very briefly. What increase in ro-ro and container costs do you expect in 2023? As I mentioned, we're really working on it, but we heard in Q1 already or in January, one additional line. Therefore, we expect some 5% to 10% increase of ro-ro.

How much of the increased personnel costs in Q4 was due to the performance compensation? Does this happen every quarter or only in the end of third quarter? The sum or the amount of cost is about EUR 500,000. And this covers the whole year, and this happens only in the fourth quarter. So the impact decision is only in the fourth quarter.

All right. Then thank you for the questions. Thank you for the attention and for the trust. And all the best for the year.

All the best.