AS Tallinna Sadam (TSM1T) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. My name is Valdo Kalm. I'm in charge of Tallinna Sadam Group; and Andrus Ait is our CFO. We would like to present results from Q4 and 12 months. And I would like to start with main events, and then we will -- from last year, and then we will move to the Q4. Last year, we have seen quite a good recovery of our passenger business. We reached 8 million by the end of the year with help of good cooperation with operators and Victoria I, the ship from Tallink also started Finnish route, which is a bit different business model but very, very helpful for us. And of course, we're aiming to reach the pre-COVID level after certain period, that was 10 million. Then we signed agreement and we started construction of Paldiski offshore wind farm quay. That's very important growth project for the future. We're basically entering with that to the new business area or to the value chain of green energy transaction and everything is moving as planned. The construction is ongoing and -- construction, sorry, and the quay must be ready by the end of next year. And then, of course, we would like to see immediately the new revenues coming from that. Then we signed the contract with Estonia Stockpiling Agency for operation in LNG quay in Pakrineeme Harbour. That's an interesting project in terms of business because we're gaining certain fixed revenues every month, but also it's a good test and experience how to remotely -- totally remotely operate the harbour because it's totally -- fully based on technology and digitalization. And then in Q1, we completed construction of double-ramp in Muuga for ro-ro, that gave us extra cargo, one ship called Verde. It's also very well received from the customers. Therefore, we are happy with this project. Botnica, our icebreaker, made such a special summer charters. We had possibility to serve Equinor and British Petroleum, new customer for us, and then Baffinland in Canada. And in our ferry business, we had a record year in terms of passengers, in terms of ship calls and vehicles. Of course, state also announced new procurement tender for the next period, and we're preparing for that. Also important that we had a competition for architectural design for our Terminal A in Old City Harbour. We got quite a heavy competition. We named the winner. And now we already signed the contract for design. This e-terminal is as such a last investment to the Old City Harbour. With this terminal, we're serving our important customers, Viking Line and Eckero Line. And we signed Finnish Estonian Green Corridor agreement, and that's quite important conception or concept to really have green traveling to gain new customers to really make this corridor climate-neutral, and we signed it with 2 port or 3 operators and 2 cities. We had Crevex evacuation exercise in Muuga that was first such a live, huge exercise that went well. And we got a Responsible Business Index gold label as a port and also as our shipping company, TS Laevad. And we got nomination in Top Tourist Developer. And then we had Closing Bell ceremony in New York because in 2021, Tallinna Sadam got the best Investor Relationship Award in Baltics. Now to the Q4, what are the main trends here. And generally speaking, our Q4 was quite good due to the efficiency program but also we've got quite a good support from passenger business. The number of passengers show the growth. Then there was extra vessel calls. And due to that, the revenue made 8% growth in Q4. On cargo side, decline in cargo volumes continued, of course, a little bit in a lower level than total year, and that's mainly due to the assumptions on liquid bulk. Ferry business, as I mentioned, had a record year and also Q4 was good, and we had a growth in revenues. And same for Botnica, more charter days and higher charter fee rate. Altogether we had quite a good quarter. Here, you see the concrete figures for Q4. And then as we already mentioned, we reached almost 8 million last year. Very important on this slide is that our vessel calls number is very stable because here we're getting the biggest part of our revenues. On cargo side decline in Q4. And as we already mentioned, due to the sanctions we had decreased almost 30% last year totally coming from -- mainly from liquid bulk. Ferry business showed a good result last year, a record year in terms of trips and passengers. And Botnica also made a good Q4, although the charter days, they are on a little bit lower level than last year but basically also quite stable rate. Future outlook. Definitely, we will continue with our cost efficiency programs. As we mentioned, we lowered the maintenance costs and personnel costs in Q4. We have still ongoing audit in our infrastructure maintenance operations. Therefore, there are -- always find efficiency, and we will focus on that. We believe also this year the passenger business continues to grow. We expect then certain growth in terms of passengers in regular lines in cruise. Very important to find new ro-ro or container lines. We have capacity in Muuga and in Paldiski. And definitely, it's important to mention that there is quite a big increase of interest in offshore wind farms based harbour. That means we investing to the quay and to the backyard, it will come such a hub to install and maintenance the wind farms. And it's definitely not only for the Estonian wind farms, but also for all the Baltic sea -- states around the Baltic sea, thinking about installing the new wind farms. And I guess, Paldiski is an excellent harbour to serve these new farms in coming years. Therefore, that's definitely one of our growth projects with hopefully concrete revenues and profits in nearest future. Also, we see that offshore market is growing quite well. Therefore, we see demand on that also for Botnica, and we now design the second offshore ship. No investment decision yet made but we're really designing it. And of course, we were making the business plan. At least the market shows due to the new energy -- green energy demand and due to the green agenda, definitely the growth potential. And if we are ready with our business plan, then probably the investment decision will be made in the second half of the year. And then we're also working with different alternatives or scenarios for our Ferry business. And it's still ongoing preparation, our real estate business model, and we hope that we can open the first tender end of this year. As we know we have quite a huge plot here and the capacity is big, therefore, we have to move to this market step by step. And again, we see this Pakrineeme LNG quay as a test site for the future business. Also maybe we can expand this remotely controlled port operation even outside of Estonia because technology allows that. And therefore, this Pakrineeme quay is very interesting to operate. That's very briefly. I would like to give floor to Andrus.

Thank you, Valdo, and hello from myself as well, and I go on with the financial results for the fourth quarter and full year period 2023. In fourth quarter, revenue was basically at the same level as in 2022. In the fourth quarter, revenue was strongly supported by the activities of our icebreaker Botnica, which was chartered out for extra 19 days in the fourth quarter in Canada. And this contributed in large scale positively to revenue. Also, it was quite a good quarter for Passenger Harbour segment. The new ship -- Tallink ship Victoria I, started to operate the Tallinn-Helsinki route and this gave also good extra revenue. And the number of passengers continually recovered and passenger fees also increased. At the same time, there was offsetting effect from sale of electricity. Electricity prices were lower. And due to that, this lowered the revenue. But the effect on EBITDA level actually was positive from the lower electricity prices as the costs decreased more. Adjusted EBITDA decreased -- increased by 16% and amounted to EUR 10.4 million. And the increase is here caused by -- or driven by lower operating costs. We were able to decrease the maintenance costs of non-current assets in the fourth quarter. And like I already mentioned, the electricity costs decreased. And this gave a good support to the growth of EBITDA. Personnel expenses remained flat, thanks to our efficiency plans. We were able to reduce the number of employees by 4.5%, and this enabled us to keep the personnel expenses at the same level as in the fourth quarter of 2022. Operating profit increased by 77% and amounted to EUR 4.6 million. Here, the growth is in euros higher than on EBITDA level. To explain that, in the fourth quarter of 2022, we wrote off and wrote down some non-current assets and the impact from that was about EUR 500,000. And this explains why the operating profit increased more than EBITDA. We didn't pay any dividends in the fourth quarter. Therefore, we didn't have any income tax. Profit for the period increased by 75% and amounted to EUR 2.9 million. And the growth here was EUR 1.2 million. And profit for the period was impacted also higher interest in the amount of EUR 900,000 because the Euribor rates has increased. We invested almost EUR 10 million in the fourth quarter of last year, which is one of the highest investment level during one quarter over last year. The main investment were made in Paldiski South Harbour as we restarted the construction of the quay, which we will use to serve the offshore wind farms. On a full year period, the group ended the year with revenue of EUR 116.6 million, which is 4.2% less than a year before or a year earlier, and this was mainly attributable to lower cargo volumes and lower number of cargo ship calls. Also, there were a strong impact from lower electricity prices and the sale of electricity, therefore decreased. But it was a good year for our icebreaker Botnica in terms of revenue. Also Ferry segment showed good results and passenger harbour also recovered. So all in all, the revenue decrease was -- decline was about EUR 5 million. Adjusted EBITDA decreased by 12% and amounted to EUR 49.2 million. Here, the result was impacted by lower revenue. Operating costs actually decreased due to the lower electricity prices, but maintenance costs at the same time increased. But here, it's important to point out that the increase was mainly attributable to shipping segments in our cargo harbours and passenger harbours. The maintenance costs actually decreased and there is a clear connection with our efficiency plan. And personnel expenses increased by 9%, mainly due to the salary corrections in shipping segments, which are open to international competition. Adjusted EBITDA lowered a bit. Operating profit increased -- decreased by 20% and amounted to EUR 24.6 million. Income tax was lower in 2023 compared to the year-earlier period. We paid in 2022 EUR 25.5 million dividends. Last year, it was EUR 19.2 million. And profit for the period was almost EUR 16 million and decreased by 38% and here is also impacted by higher Euribor rates. And we invested almost EUR 21 million last year, EUR 16.6 million of that was made in harbours and harbour infrastructures. For Botnica, we invested EUR 3 million, which were mainly dock works, and in Ferry segment the investment level was EUR 1 million. Here are the results by segment-wise. In the fourth quarter, the revenue increased in 3 segments out of 4. The Passenger harbour segment, like I already mentioned, the growth was supported by the Victoria I, which started to operate and a higher number of passengers. On EBITDA level, in Passenger harbour segment, the growth was even higher than on revenue. We managed to decrease the maintenance costs and at the same time, the electricity price was lower and consumption was also lower, so it helped us to achieve the results on EBITDA. In Cargo harbour segment, revenue decreased because of less cargo ship calls and also sale of electricity decreased. And in connection with that the EBITDA decreased but in euros less than the revenue level. And here also, the impact -- positive impact came from electricity prices. Ferry segment showed growth on EBITDA -- on revenue, but there was a decline in EBITDA because of bonuses in this segment in the end of last year. In the second quarter the revenue was supported by the longer charter period in the Q4 last year and also the EBITDA increase. On a per month period, revenue in the Passenger harbour segment decreased by less than 1%. There was negative impact from less cruise ship calls in our ports but it was offset by a higher number of passengers and better results from vessels which are calling our harbours on a regular basis, and EBITDA also increased in this segment. In cargo Harbours, due to the same reasons as in Q4, the revenue decreased and also EBITDA decreased. In the Ferry segment, last year, it was a very good year. Revenue increased by 5% and also EBITDA increased by 5%. We made a bit more trips but also give us the impact of indexation to fees. And the segment Other, the revenue increased despite we had less charter days, but charter fee per day was higher. But due to the higher maintenance costs and preparation costs for the summer works, EBITDA decreased but we see that this was more like one-off thing in 2024 -- 2023. And this year we see that we have opportunity or potential to improve the results in this segment. Shortly about cash flows. Cash from operating activities decreased by EUR 8 million and amounted to almost EUR 44 million. The decrease is attributable to lower revenue mainly. Cash used in investing activities was minus EUR 17 million, which reflects the higher investment level. In 2022, the impact from investing activities was very low as we received current payments from EU funds in the amount of EUR 15 million. So this made the 2022 extraordinary. And cash used in financing activities was quite stable minus EUR 41.4 million. We paid back loans in the same amount. At the same time, finance costs were higher, and the dividend payments were lower. Net cash flow at the end of the period was minus EUR 14.6 million. And net debt at end of period EUR 142 million, which is quite similar as year earlier. We paid back EUR 16 million loans, but at the same time, cash and cash equivalents decreased. On financial position, cash on bank accounts decreased. It reflects the impacts of cash flow statement. Non-current assets decreased due to depreciation and CapEx -- from CapEx was the increase in CapEx, but the depreciation was higher a bit. We paid back loans and reimbursed points in the amount of EUR 16 million. Due to that debt decreased and equity decreased as we paid out dividends, EUR 19 million. At the same time, profit for the period was EUR 16 million. And we have also made a proposal to our Supervisory Board to pay our dividends in amount of EUR 19.2 million, which is EUR 0.073 per stock. And this is the same level as in 2023. This decision or proposal is made by our forecast and to support our dividend promise. So of course, the decision must be approved by a general meeting but from Management Board side we have made the proposal. With that, we will conclude our presentation. And you can send us questions, and we will be back in a couple of minutes. See you soon. Thank you. [Break]

We are back, and we got some questions in advance. And first one, what new business concepts or strategic directions the company is considering? Basically, 3 concepts or projects. The first one, I would like to repeat that, entering to the green energy production value chain, and that's the Paldiski new quay construction to serve special ships in the future. That's definitely one of our growth projects. The second one is new SOV vessel or new offshore ship, but which has designing -- and as I already mentioned, probably we will have investment decision in the half year -- in the second half of this year. And the third one is real estate development, and we would like to start with the first tender also in Q4 this year. Which business segments currently hold central position within the company's operations? We believe, to our diversified business model, that means that we try to keep it quite similar for the future also. And we see basically the growth potential in all 4 business areas. I just mentioned this. Entering to the green energy production is definitely the new direction but we consider it under the Cargo business. But yes, we would like to give this diversity that helped us through the crisis. What role does the company envision for itself within Rail Baltica project? We always supported the Rail Baltica project, and we believe that, that helps us to better serve Scandinavia import-export because Rail Baltica starts from Muuga Harbour. And now that is quite clear that the railway main route must be in operation in 2030. And from this period, we expect additional 5 million tonnes of cargo is mainly then containers as well. Therefore, very important project for us for the future development.

Yes. Now we move on to questions, which we got through Teams. First question. The volume of urea dropped by 97%, even though fertilizers is not a sanctioned product. Is it because Russian -- Russia is diverting traffic to its own ports? Our main fertilizer operator is under sanctions. And therefore, we see the impact from that. There is no other reasons that this urea is not replaced. Is this 3,000 tonnes a sustainable cargo level for coming quarters? Yes, we believe that 300,000 or 3 million tonnes is quite sustainable for coming quarters. Of course, we would like to hope some improvements there but the 300,000 is quite sustainable. What could be the amount of annual investments in 2024? We expect the investment level in between EUR 45 million to EUR 50 million. The main investment is, of course, the Paldiski South Harbour construction and the final amount depends how the project is developing during the year. Just a reminder, the whole investment for the project is a bit more than EUR 60 million. How high can net debt-per-EBITDA go with new growth investments? We see that it can go somewhere near by 4 or a bit higher, but definitely lower than 4.5.

Next question. What could be the different scenarios for Ferry operations? As we mentioned, really, we're preparing for the new tender. We would like to win it. That's our main target. But yes, we have different scenarios. And the first one is to charter the vessels because the vessels are quite new. They are in a very good condition, and there is a market definitely for chartering. Secondly, we have studied the possibility to operate them as a full service in some other countries, that's also scenario. But our main target or aim is to win the tender. Is the contract to operate the LNG terminal based on the fixed fee? Or is it going to depend on the volume? Yes, it's based on fixed fee. We're getting a fixed price every month. But if there will be the tanker or vessel, then we're getting additional fees from the mooring. Every mooring is priced separated.

It seems that we are done with the questions. Thank you for asking. Thank you for participating, and see you soon already in the next quarters.

Thank you for your interest. See you soon.