AS Tallinna Sadam (TSM1T) Earnings Call Transcript & Summary

Hello, ladies and gentlemen. Welcome to the Port of Tallinn webinar. Thank you for joining. My name is Andrus Ait. I'm the CFO of Port of Tallinn. Together with me is, today, Mr. Margus Vihman, who is Chief Commercial Officer and Member of the Management Board, and we will introduce the results of 2023 for second quarter and 6 months period. [Operator Instructions] We will answer the questions after the presentation as we have made a short break. But with that, I will give the word to Margus, who will continue with main events and operating volumes, please?

Thank you, Andrus. Good morning, everybody. We traditionally start with main events in the second quarter of 2023. And the first one is that we signed an agreement to build a new quay in Paldiski South Harbour for constructing offshore wind farms. The contract was signed with Akciju Sabiedriba BMGS Estonian branch and Insenerehituse Limited. The contract amount to EUR 53.2 million. And together with the indexation, it can be up to EUR 55.9 million. The construction has already started and should be ready in July 2025. Secondly, icebreaker Botnica, additional summer charter contract with Equinor. We managed to get additional contracts. Unfortunately, it was a bit smaller or wasn't enough days that we prognosed, but still quite a good addition to the summer works. And additionally, we are now negotiating already a new deal and getting ready for the offshore works in the North Sea. So the amount of today's charters should be the same as last year. Additional trips for ferry Regula in summer 2023, we signed a contract with Estonian transport administration for the additional trips. And they can order up to 536 trips and until the mid-September. Of course, we had the Annual General Meeting of the Shareholders, and the most important decision was the dividend payment. So dividend payment for this year was EUR 19.2 million, and this is 75% of the last year's net profit. We changed the Supervisory Board in TS Laevad, and we asked to come back the Ministry of Economic Affairs and Communications representative, Johann Peetre. So currently, the Board of TS Laevad consists of 3 persons: Valdo Kalm, Andrus Ait and our business development manager, Rene Pärt. Also, Port of Tallinn was part of establishing Hydrogen Valley of Estonia. This was signed in April. And together with us, there was this Estonian energy company, Alexela, Eesti Energia, Tartu University, signing the contract. And the reason for Port of Tallinn being in there is that we see big opportunities, firstly, on transportation vehicles inside the port, but also the cranes using hydrogen. But in the longer run, this could also be a ferry or ship fuel and could be also helping us to move from traditional fuels and traditional fuel terminals to the new renewable energy sources. Also, there was a transportation sector, Green Forum, where we participated. And this year, we discussed on the topics how to build infrastructure in a greener way. Besides us, there was also Tallinn Airport, Estonian Railways and Rail Baltic Estonia involved. And we received the Gold Label from the Estonian Responsible Business Forum. We've been in touch with this forum from 2014. I personally have been involved from 2016. And every year, we have received the Silver Label. So this is the first time that we managed to get the highest possible recognition and Gold Label. Moving forward with the trends in second quarter, we had, of course, passenger continuing growth. And the growth number in second quarter was 13%, mainly feeded by the Tallinn-Helsinki and Tallinn-Stockholm lines. Also, if you compare it with the growth in the first quarter, then it has slowed a little bit down. But we have to remember that the COVID restrictions were not there last year in the second quarter. So the relevant base that we compare to is higher. Also, we had -- or unfortunately, we had a decrease in PAX vessels calls, 7%. This is mainly coming from Silja Europa, which was moving between Tallinn and Helsinki, but yes, has been chartered to Netherlands by Tallink from the last year's August and will stay there, at least, until the end of this year. And second reason is that, although the cruise passenger numbers were growing. The cruise vessel calls were decreasing in the second quarter. And from the positive side, we managed to get more revenues from the parking business in the Old Town port. And we managed to get additional revenues from renting out the cruise terminal for the events. Coming to the cargo. Decline in cargo volumes were 31% in the second quarter. And the main reason for that is, of course, sanctions for the Russian transit goods, which mainly then our liquid bulk and fertilizers. The second quarter amount of the goods in tonnes were 3.3 million tonnes, which is 31% less than the last year. If to find something positive in here, then we have prognosed exactly the same decline in connection with the sanctions. So it's not bigger, and we see stability here now. And secondly, when we look at the ro-ro amounts then the decrease was quite high in tonnage, but we get the money for the [ pieces ], so for every truck or every trailer. And the decrease in pieces was only 5%. And if we compare 6 months, then actually there was a small increase. So we see that this ro-ro business is still quite active and slowly growing. Also, the ship calls were 8% smaller because of the reasons that I just mentioned, and the revenue then 22% lower. Ferry revenue growth was 6%, and this is coming from additional trips, but also, we had the right to the indexation because of the fuel Estonian consumer index and also labor cost indexation. So this is where the revenue growth is coming from. By other segments, Botnica revenue increased by 81%. This is due to the higher charter fee on the icebreaking contract, but also with the earlier start of the summer works with Equinor. But on the negative side, we also had some additional costs, which were actually planned docks, and it just made sense to do them all together now. And also, we had some investments that we had to do preparements for the new charter agreement from which we will get revenues in the third quarter. Some charts, like I said, tax numbers are up, and 13% of that is coming from Tallinn-Helsinki line. Tallinn-Stockholm line, the pax numbers increased 22%. And like I said, even the cruise calls were decreasing, then the passenger number in cruise was growing by 28%. And you can see that the passenger ship calls were decreasing by 7.5%. And in the 6 months, the trend is basically the same. We have most growth coming from Tallinn-Helsinki and Tallinn-Stockholm, and the gross growth is 28%. Moving to the cargo volumes. You can see the biggest decrease coming from the liquid bulk, 68%. The general cargo is going down by 10%. And maybe another interesting fact that the ro-ro part from the total cargo revenues is now 52%. When earlier, the biggest one was liquid bulk, which is now only 14%. And looking at the 6 months, the trends are the same. The only changes may be that the 6 months ro-ro decline is bigger, and we see a small recovery in the second quarter in ro-ro. At ferries, even though that they don't influence our revenues, it is important to show that the passenger and the vehicle numbers are growing. And this shows that this service is needed and most probably also that the service is in high quality and the passengers are happy with the quality. So in the second quarter, passenger numbers increased by 6.2% and vehicle numbers by 4.1%. And in 6 months, it is passenger number, 6.9% increase, and vehicle number is 3.1% growth. If I speak of Botnica, 20% growth in charter days in second quarter and 4.4% in 6 months. And also, the utilization rate is growing. Now some comments about the future outlook. We see that the passenger business recovery will continue. It is very important what will happen with the shipping lines in November, December when the Christmas season is starting. But we have positive hopes on that, looking at the trends that are going on right now. The impact of the results from sanctions against Russia and Belarus will definitely continue. We don't see any changes there in the second half of the year. But again, if we want to see something positive in there is that we have prognosed exactly the amount that we have now. And of course, it has been stabilizing. So there will be no further increase because of these sanctions. There are new possibilities in ro-ro and container lines. We have been negotiating for quite a long time with many big shipping lines. And we see that we would have some positive news, maybe already in the second half of the year, but most definitely next year. Another good thing is that we are mainly promoting Muuga here. And Port of Muuga doesn't need any investments to receive these ships. We have the quays ready. We have the ramps ready. So there will be no additional costs with that. In Paldiski, we can also receive, let's say, one more line without any investments. But then the utilization of the port is already on the [ edge ]. Definitely, offshore wind farm-based harbor development will go on. And we have a lot of communications with potential users of that and builders and the investors for the offshore wind farms. Secondly, we are looking into the building the maintenance fleet. There are no decisions yet. But maybe we will -- or we are planning to see what would be the possibilities of building CTVs or SOV ships for maintenance and operation. And preparation of the real estate business model is going on. We hope to finish the detailed planning process in the end of 2024. And if that would be the fact, then we will see the first revenues coming from the real estate business in 2025. And like we have said before, mainly, this will still be the landlord model. But maybe in some cases, we will also be investing into this and taking a more active role in development. And here, I give word to Andrus.

Thank you, Margus. I will go on with the financial results. In the second quarter, the revenue decreased by 5.2% and amounted to EUR 28.8 million. And the decline here is mainly attributable to the Cargo harbour segment. As the cargo volumes decreased, we had less cargo ship calls. And also, revenue from cargo charges decreased. In addition to that, in Passenger harbour segment, the number of cruise calls also decreased. This year, we had, in second quarter, 44 calls compared to the 68 calls in the same period last year. And due to that, revenue also decreased. And when it comes to the regular lines, then we had also less ships operating on a regular line between Tallinn and Helsinki. And due to that, the revenue also decreased. And thirdly, the sale of electricity decreased because of lower market price, but also the consumption has decreased, mainly because of lower cargo volumes. There was also a positive offsetting effect from passenger fees as the passenger number increased by 13%. And also, the revenue from the operation of our icebreaker Botnica increased, but the decreasing effect was higher than the positive effect. So when we [ talk a lot ], then it was minus 5.2% in revenue. Adjusted EBITDA decreased by 24% and amounted to EUR 11.7 million. In addition to the decrease in revenue, EBITDA was also impacted by higher costs. The main impact is related to maintenance costs, especially in shipping segments. In the segment Other, or where we show the results of Botnica, we had higher maintenance costs. Because Botnica was, in May, docked in Naantali. And we renewed or upgrade the ice class of the vessel. And those costs, we capitalized. But at the same time, it was reasonable to do some costs also for more current repairment, and therefore, also the cost level increased. And in Ferry segment, last year, we received indemnity payment from insurance company because of the Tõll incidence in 2021, and this decreased the reference base. And this impact was about EUR 300,000, and the increase for Botnica maintenance was about EUR 1.2 million. We also had elevated costs on gaining and upkeep of port infrastructure. And also, labor costs increased. And due to that, the adjusted EBITDA margin decreased by 10 percentage points and lower from 51% to 41%. Operating profit decreased by EUR 3.7 million and amounted to EUR 5.8 million. And this is considering our number in euros as on EBITDA level. Income tax was EUR 2.9 million compared to the EUR 4.1 million last year. We paid out less dividends. The dividend payout this year was EUR 19.2 million. Last year, it was EUR 25.5 million. And due to that, the income tax and dividends decreased. Profit for the period was EUR 1.4 million and decreased by EUR 3.7 million or 73%, as we had offsetting effect from income tax. At the same time, we paid out more interests because of higher Euribor level. And due to that, the decrease on profit level was also EUR 3.7 million. In the second quarter, we invested EUR 4.6 million, which is 8% more than last year. The main investments remained -- were made for Botnica. We also started the new quay construction in Paldiski South Harbour. And also, we reconstructed some quays in the post area in the Old City Harbour. On 6 months level, we see that the negative impact or negative side is a bit lower due to the stronger first quarter. And also, the first quarter in 2022 was quite low because there were still impacts from COVID restrictions. And also, the one-off effects from the Q2, especially in maintenance costs, didn't impact as much. And so the revenue increase or basically remained at the same level and amounted to EUR 57.2 million. Adjusted EBITDA decreased by 12% and amounted to EUR 25.3 million. Adjusted EBITDA margin was 44.2% and was 6.3 percentage points lower than last year at the same period. And profit for the period decreased by 42.3% and amounted to EUR 7.1 million. In the first half of the year, we invested EUR 6.1 million. This means the main investment -- investments were mainly made in the second quarter. In the first quarter, we invested to build a new 2-story ramp in Muuga and also completed the surrounding area of quay terminal. And last year, we had more ongoing projects for the -- in the first half of the year. The investment level was higher. And it is lower during the second half last year, but this year, we see that the investment level will increase in the second half of the year. Looking at the results by segment-wise. We see that the Ferry segment was one where the revenue and EBITDA increased. Both revenue increase was 6%. And as Margus already mentioned, it was mainly due to the indexation. The decline -- the growth in euros was, on revenue level, higher than on EBITDA level. And to explain that, here is an important role from the -- important impact from the indemnity payment, which we got last year, in the second quarter, and this lowered cost level last year. When we take this out, the increase on EBITDA level would be similar as on revenue level. In the Passenger harbour segment, due to a lower number of cruise ship calls and less ships operating regularly between Helsinki and Tallinn, the revenue increased, and also, this impacted the EBITDA level. In Cargo harbours, cargo volumes decreased. So there was a drop, 22% on revenue, and also the EBITDA decreased in similar amount in euros. And in segment Other, the revenue increased because of some -- because of the additional summer work of Botnica, which started earlier. And this were last -- plus 5 days more than last year, so therefore, the revenue increased. And EBITDA decreased due to the one-off -- mainly one-off maintenance costs, which we have to make, let's say, after every 5 years. But this year, it was reasonable to do it, typically, with the dock works. And some of the costs were also related to the additional summer works as we make preparation for that work. On a 6-month level, revenue increased in Passenger harbour segment and Ferry segment. And this was also per segment -- for EBITDA in both those segments. Ferry segment remained a bit more, 2%, and the indexation played a big part. And in the Passenger harbour segment, we had a stronger first quarter. Also, the reference base was lower last year in the first quarter. And therefore, perhaps at the 6-month level, the revenue increased and also the EBITDA. In Cargo harbour segment, the decrease was quite similar as in the second quarter that the impact of sanctions and lower cargo volumes due to that continues. And in the segment Other, revenue increased partly due to the summer work and partly due to the new contract for icebreaking services for Estonian Transportation Administration, which started in December last year. So we had payer revenue from that as well when we compare to the 6-month period or for the last year same period. On cash flow side, we see that cash from operating activities decreased. The receipts from the sale of goods and services decreased. At the same time, the payments to the employees and to the [ general ] partners increased. And because of that, the cash from operating activities decreased by EUR 7.6 million. Cash used in investing activities was minus EUR 4.1 million, which is quite similar level as last year. But last year, we invested EUR 3 million more, but we also received more current payments, and therefore, the cash flow impact is quite similar compared to the years. Free cash flow for the period was EUR 18.3 million and decreased by EUR 7.1 million, mainly due to the lower cash flow from operating activities. And cash used in financing activities was minus EUR 24.9 million, which is EUR 4.3 million more positive than last year. We paid less dividends, and at the same time, we paid more interest costs. And the other impact comes from loan repayments, which was similar between the years. And net cash flow for the period is minus EUR 6.5 million. And net debt at the end of the period has decreased due to the loan repayments and reimbursement of bonds. And on financial position, the cash on bank accounts has a bit decreased because of investments, because of dividend payments, because of negative net cash flow. At the same time, gross debt of the outstanding debtors has decreased by EUR 3 million due to loan repayments. And on the equity side, the impacts are related to the dividend payments and also profit for the period. But with that, we will conclude our presentation. And we will make a short break. We'll be back in a few minutes to answer your questions. Thank you. [Break]

So welcome back, and we are starting to answer the questions. The first one is, how are the corporation partners doing in -- cargo operators of the Port of Tallinn? And is anyone leaving or are new operators joining? No, nobody is leaving. And we're constantly working to get new operators, and we see potential in the production companies for Muuga, mainly because of the trend of nearshoring. But also, both in Muuga and in Paldiski, we see that renewable energy is something where the companies are starting to invest. And this could be also one of the commodities that we would start to move later stage of next year. The most difficult situation, of course, is for the liquid bulk operators, who have been concentrating on the transit volumes. But then again, they also have some of the volumes that are meant for the local market. So these will remain. And they're also slowly growing. So nobody is, at the moment, leaving. So the volume of -- the volumes are falling. Why is the number of employees not really reduced? Andrus, would you mind to...

Actually, we are conducting analysis and describing our processes. And actually, we have also decreased in some position. But the number of employees is also seasonal for us. For example, when we have more passengers in our harbors, then we leave extra employees. But generally, we can say that we are working on it and the plan is definitely to reduce the number of employees. It's important to also mention that in shipping segments, this is not the plan because there are certain rules, and those, we have to follow. So -- but generally, this is what we are working on.

Yes. Maybe just to add. It's quite a large number of these employees are in the 2 shipping companies that we have. And the results, as you can see, at the shipping companies are good.

Yes, exactly. How do you justify the very fast wage growth by 16% compared to the last year as the economic indicators are decreasing? We made the price with the salary increases over the last year. We don't plan it to do this year. But here, we can bring out 2 main reasons. First, the average salary is, compared to the market, quite low. And we have quite many employees whose salary is below the average and below the market level. So in this situation, when we had very high inflation in Estonia last year, we had to react on that. And also, let's say, see that we ensure that service level -- high service level, which we provide to our clients. But in the shipping segment, the reason is that this segment is open to international competition. And therefore, we have to follow the trends there, and partly, the increase is due to that. The next question. As of the end of June 2023, there are planned future investment commitments in the amount of EUR 71 million. What are the investments behind it? The main investment project behind it is a new quay in Paldiski South Harbour, which, this project we started in June. So this is the main project behind that. And we also have some contracts signed to reconstruct the quays in other ports. So those are the main projects behind that number. Next question. What was Botnica investment? And how large are the periodic maintenance costs? And how often are they scheduled? The investment in the second quarter this year was about EUR 2.4 million for Botnica. This was this upgrade of ice class and capitalized the dock works. And periodic maintenance cost was about EUR 1.2 million. Part of it, in a smaller extent, were preparations for additional summer works and bigger part was involved with periodic maintenance, which was reasonable to do it together with dock works. And often, are the scheduled -- those periodic works, we will make every year, but the amount of maintenance costs can vary. But the investment is involved also with the new 10-year contract with the transportation administration for icebreaking services. So the payback time there is 10 years.

If you allow, I will take the next one. Is the decline in the attractiveness of the region in cruise related to stopping the visits to St. Petersburg? Yes, this is one of the reasons. And obviously, there are no cruises now going to St. Petersburg and St. Petersburg in North America and maybe also in Germany, where a lot of our clients used to come from. This is much better known than the Tallinn Old City, for example. But also, as a lot of our clients are coming from outside of the Europe and mostly from North America, they don't feel that the area is so secure because of the Ukrainian war. We, here, feel very safe. But looking at it from the other side of the ocean, it seems that the war is very close to the Baltic Sea. And thirdly, the reason -- the economical situation in the world is not stable right now. So this cruise product is more close to the -- or more related to the luxury, and people are not maybe using so many luxury products right now as they used to. So these are the 3 reasons.

Then the next one, what is the forecast for this year's interest costs? Based on our main scenario, then we would say that the interest cost level is about EUR 7 million for this year or a bit less.

Do see that the second half of the year, the volumes of liquid bulk and dry bulk cargo could recover somehow or somewhat. What is the ro-ro outlook for the second half of the year? If we talk about the sanctioned goods and the transit goods that used to come from Belarus or Russia, then we see no change there. The only positive news, as I mentioned in the presentation, is that we have prognosed the decrease quite well, and it is exactly in the volumes that we forecasted. So there will be no further influence from there. When we talk about maybe dry bulk, then we see maybe a small increase in the second half because of the Estonian exports and imports. If we talk about the ro-ro, then we see a positive trend here and basically because of the North-West -- or North-South corridor increasement and also the nearshoring. So we are looking positive at the second half of the year, and maybe there will be, overall, a small increase in 12 months' results. I will take another one. Why is the port joining the Hydrogen Union? Isn't it all still the experimental level and there are no working solutions? Isn't it too early to enter such a field when the core business is not even functioning at the moment and costs need to be controlled? No, it's not too early. And partly, the question is correct that, for example, for the large ships, there is still no hydrogen engine. But there is -- there were hydrogen cars already available, trucks available, equipment for the port like cranes or reach tractors available. Also, there is small ferries that can use hydrogen. And we are not so much, at the moment, investing into this, but we are promoting that this should be the way to go. Plus we expect to get, if we start to invest, we expect to get high levels of EU funding also there. So you have to be a forerunner here, unless all these funds and solutions will be taken by somebody else. I would also like to point out that one of the biggest decreases that we have is in the liquid bulk. And the new green energy solutions like ammonia, hydrogen or green methanol could be the ones that will partly replace the decrease that we have in traditional fuels.

There is one question, which we missed. Yes, about the investments in the second half of the year, do you see that in the second half of the year, the volume of -- sorry, the amount of investments in the second half of the year is similar to the first half of the year? Or is an increase expected due to the construction of the Paldiski quay? Yes, in investments, we see increase in the second half of the year. And the total amount of investments, which we forecast. Is about EUR 26 million or more. But I have to add a remark that this quay construction is very complicated, and it depends on conditions on weather. So -- but the [ transmission ] is approximately EUR 26 million.

Then our volumes in cargo segment going to decline further in quarter 3 or quarter 4? Or has the situation already stabilized in quarter 2? I would say that the situation is stable now, especially, like I mentioned, the transit volumes, they cannot decrease anymore. And we have prognosed the correct amount of decrease. Of course, there is chance that there will be a small decrease because of the economic situation in Estonia, which is also not favorable for the cargo. But then again, we still see that, for example, the ro-ro is growing. And like I also said in my presentation that we are working very hard to get a new container lines and new ro-ro, ro-pax lines into the Port of Muuga and Port of Paldiski.

I assume this price is still indexed with inflation. And why did Tallink kept a very favorable deal here in this January situation? Some of the prices are indexed based on consumer price index, for example, rents and building-type revenues. But also our prices -- some of our prices are -- we have to follow the overall market situation and make changes based on that. So not all the prices are not indexed based on inflation. And the second half of the question, why Tallink got a very favorable deal? This deal, I would say, we concentrated on the long run. And we see that, for us, it's very important that many, as much as possible, ships are operating on regular routes. And this was a good foundation to build the situation that, for Tallink, there is a certainty and for us as well. What was the main reason for weak EBITDA in the Other segment? Is the situation going to improve in the third quarter? Yes, the main reason for that was the one-off maintenance costs and also preparation costs for additional summer works. And we expect that the situation is going to improve in the third quarter. Currently, we are negotiating about new summer work in August this year in the North Sea region. We hope that we can give a good news in coming days. But yes, we see that the results will improve in the first quarter. What is the net effect from raising costs and from price increases you have made? Is the net effect from inflation positive or negative in Passenger and in Cargo segments? All in all, the inflation has impacted us negatively. We can't put the increase of prices directly to our services and quotes and as a higher price. But inflation was, in large scale, based on electricity prices as well. Here is their situation and vice versa. That higher electricity price actually -- the lower electricity price is, is good for us in this situation. So there are -- the answer is that, directly, we can't increase our service prices. But for some services, it's doable, for example, rents and then building titles.

Yes. How are you going to finance building of maintenance fleets for offshore wind power parks? What would be the total investment needed? I would like to point out, only looking into it right now, so it's very early stage to say. And the decision, the investment decision, has not been made yet. So as soon as we get into some point with that, we will give you more information. And finally, do you now say that your main target in the property development projects is going to be a landlord model? Actually, we have communicated this before. And yes, the main target would be the landlord model, but there could be a lot of exceptions in there. So if we see that there is a profitable, very secure projects, we would definitely be ready also to be more than the landlord in there.

We have one question.

Okay.

Sanctions for Russia has started since end of Q1 2022. However, the decline continues and is more than expected. Why? Actually, the sanctions started in the first quarter, but they were imposed gradually during the year. And due to that, the comparison base or reference base last year is still quite high in the second quarter. So the impact from sanctions should level out by the end of this year, I would say, and the decline was more than expected. Like Margus mentioned, actually, decline was like we forecasted. There was positive pickup on that. So it seems that there are no more questions. Thank you for participating, and see you next time.

Thank you.