Taaleri Oyj (TAALA) Earnings Call Transcript & Summary

Good morning, and a warm welcome to all of you -- with you over the web and those who are present here today to Taaleri's third quarter presentation. My name is Peter Ramsay. I am the CEO of Taaleri. We had a strong quarter, and it was exceptionally good, and it was quite broad-based, actually. The highlights for the quarter was that the continuing earnings increased and operating profit more than tripled. Our Bioindustry Fund #1, which is a -- well, first of its kind and a forerunner in Europe, had a second close, and I'm very happy to say that it went over EUR 100 million at this stage. Our real estate business had an active quarter, both the Aktia special investment funds as well as our Taaleri Housing Fund #8, and our Rental Home fund made several transactions. On the renewable energy side, we continued preparing the launch of our SolarWind III fund, which we actually launched yesterday. And then we continue to advance the projects within our SolarWind II fund, which are going into both preparation and construction. And finally, we continue to build out our project development portfolio in preparation for SolarWind III. And finally, Garantia had an extremely good quarter in the form of a combined ratio of 29%. And the net income rose by 14% within the guarantee insurance business and reached EUR 4.4 million, partly also helped by the fact that their investment incomes gave back a little bit of lost ground from the previous quarter. Looking at the numbers for the third quarter, our continuing earnings rose 14.2% to EUR 10.5 million compared to the corresponding quarter last year. And our Private Asset Management segment, which is our private equity business, the continuing earnings rose 2.1% there to EUR 5.3 million. And what we call our Strategic Investments, which is Garantia, rose by 13.7% to EUR 4.4 million. We booked performance fees of EUR 6.5 million during the quarter. They were related to Ficolo, a datacenter that we finalized the sale of in July. And -- so the net income from our investments that we booked were EUR 9.9 million compared to EUR 3.1 million in the corresponding quarter the year before. So all in all, our income doubled to EUR 26.9 million, and our operating profit rose to EUR 18.5 million, which is -- gives us the operating margin of 68.6%. Our assets under management grew by roughly 11% to EUR 2.5 billion. And for the quarter, we booked an earnings per share of EUR 0.43. Now, looking at our rolling 12-month income and operating profit. And I think why we want to look at the 12 months is that we have a very long tail business. The private equity business is very long tailed, and our insurance guarantee business is also very long-tailed. So 12 months rolling is much more representative of what we do, as we can see that each quarter can be quite volatile. So if we look at the left-hand side, we have the dark blue pillars. That's our continuing earnings. And typically, if -- there's a level shift here if we launch a sizable new fund or if we exit a sizable fund. And -- so that's fairly stable. And then we can see the other then continuing earnings in the light blue pillar, and that's our investment income, and the performance fees that we then book over our profit and loss account. And so, for the last 12 months, we can see that our continuing earnings are at roughly EUR 41 million and the investment and performance fee is EUR 34.5 million. And then on the right-hand side, we can see our operating profit margin, which stands at 46.4% for the last 12 months and totals EUR 34.9 million. Here, we see our various income sources, and this shows the third quarter, but perhaps I'll just move over to the rolling 12 months. But as you can see, it adds up to our operating profit of EUR 18.5 million. But if we look at it in a slightly more detailed manner over the 12 months rolling period, and we start in the low left-hand corner, we have the continuing earnings, which stands at about EUR 14 million. Then we have our net performance fees, EUR 15 million. And then we have the insurance business. The net income, i.e., premiums written, stands at EUR 18 million. And then we have the net investment operations, i.e., that's our -- both the Garantia's portfolio and then our own investment activities. So fairly evenly distributed these various pillars. And then as previously noted, we have our operating profit, which stands at EUR 34.9 million. If we move over to our business units, our private -- starting with our Private Asset Management business and with the renewables, we can see here that we have had -- well, first and foremost, of course, we launched the SolarWind III fund. I'll come back to that later. But during the quarter, the SolarWind II fund was really in the epicenter here, and they had continued to advance the projects that they're involved in, and the construction of them. So mainly in Spain, Lithuania, Finland and Croatia. And then we also added 3 new projects to our project development portfolio, and this is sort of in advance for our coming SolarWind III fund. We're building the pipeline for that. Then we also refinanced a Serbian wind farm called Cibuk. This wind farm is part of our SolarWind I fund. All in all, if we look at the earnings, so continuing earnings increased by 3.8% to EUR 3.7 million, and the total income rose by 26% to EUR 4.5 million, mainly driven by currency effects, as we also have dollar-based investments here. So the operating profit was EUR 1.5 million, which is about 33% as an operating margin. Moving over to our other private equity businesses. I'd say that we're especially happy over the EUR 100 million sort of threshold that we reached in our Bioindustry Fund. You have to remember, it's a first-time fund. The team has done a great job in sort of promoting this and helping investors to understand what they do. I'd also say that Aktia's sales team has done an equally great job in making this possible. And particularly proud we are of the fact that the Finnish Climate Fund increased their investment from EUR 10 million to EUR 15 million, and they are really a great anchor investor to have in this fund. In the real estate business, as I said earlier, we did several acquisitions in the third quarter, both in this Aktia's special investment fund that we manage for them. and our Taaleri Housing Fund #8 did a sizable transaction of EUR 85 million during the quarter. That was 3 different residential projects. And then the Rental Home fund acquired 2 properties during the quarter. Continuing earnings within this segment was EUR 1.6 million. That's an increase of 27%. And we booked Ficolo performance fee within this segment, EUR6.5 million. So the EUR 1.6 million plus EUR 6.5 million, we had an income of EUR 8.1 million, and the EBIT within the other Private Asset Management, i.e., the operating profit stands at EUR 5.5 million for the quarter. The assets under management are now at EUR 1.1 million here. Here, we have the same chart with this rolling 12 months, but this is for the Private Asset Management business. And as you can see, the dark blue pillar on the right -- left-hand side, it's fairly even. And as previously said, if there's a sizable new fund that we raised or exit, then mainly that impacts the dark-blue pillar. And then, of course, the light-blue one shows the performance fees, which now stand at EUR 19.4 million for the last 12 months. Here we have a list of all the private equity funds that we manage, but without going sort of through each and one of them, I'd concentrate on the right-hand side. There's a pillar that shows how -- the various funds, from what business units they come. And renewable energy is 55% of our assets under management today. Real estate is 32%. And the Bioindustry coming from basically 0 is slowly but surely making itself seen here with 6%. And then we have these other old legacy funds. They are now 7% of our assets under management. Moving over to our strategic investments, which in our case is Garantia, our credits insurance business. They had extraordinary good combined ratio of 29%. I think that's a new record for them. Net income was EUR 4.4 million. That's an increase of 13.5%. And premiums from the underwriting rose by 15% to EUR 4.6 million. And then the investment income, it was positive EUR 1.1 million. And they had a really tough second quarter. So rates rose, and in particular, spreads widened. Now their portfolio, the duration is quite short. It's under 3%. It's, should I say, a very defensive portfolio. But what really hit them in the second quarter, which didn't impact that much was that they had a lot of investment-grade bonds and the spreads actually didn't widen in the third quarter, in the bonds that they held. So over 90% is fixed income in this portfolio. So that was really the background. But it's been a tough investment environment, of course. But in this case, we, at least managed to hold back any losses. And then the gross insurance exposure, it rose by 6.1% to EUR 1.8 billion, and it's split so that consumers, i.e., mainly mortgages, is 70% and then 30% is corporate. And the solvency ratio is very high. It's 246% and you can compare that to the level they had at the end of last year, which was around 220%. Now, I'd just say one other thing of the returns for the investment portfolio. So you can see here in the right-hand side, it says 0%, and that is that, some of these investments that they have are booked over the P&L and some directly against equity. So this is the total gross return on investments that was 0 for the quarter. Okay. Moving over to what we deem as other activities. For us, it's mainly non-strategic investments. And within this segment, we had continuing earnings of EUR 0.7 million. And then we had an investment income of EUR 7.5 million, and that comes from Ficolo, the datacenter that we sold and recognized the profit in the third quarter. We only did small disposals during the third quarter here. And if we look at the table on the right-hand side, we can see that the last day of September, our non-strategic investments book value was EUR 30 million. That is an increase from year-end, which was EUR 23.7 million. And there are really 2 main reasons for that. One is that we took part in a rights issue at Fellow Bank. That was EUR 2.5 million for us. And then we also reclassified assets for EUR 8.2 million to the non-strategic segment. Thus -- and then there's some currency gains actually also. But for practical reasons, one can say that, yes, we have been selling it down although the sort of balance sheet value of this has increased. So all in all, the other group operating profit was EUR 6.6 million. And now I'll hand over to our CFO, Minna Smedsten, and she'll tell you about our results in more detail and the balance sheet. Go ahead, Minna.

Thank you. Thank you, Peter. So my name is Minna Smedsten, and I'm the CFO of Taaleri. I thought that we'd compare the business units. I'll leave it to each other. Then we take a look at our key financial figures, our quarterly development, and also a few words about our balance sheet. Let's start with the business units. And when you take a look at our businesses and start from the left and top row, so half of our continuing earnings come from Private Asset Management where renewable energy contributes 70% of the continuing earnings. When we reach the return targets and investors' expectations, we can receive performance fees. We more than doubled the capital that the investors had put into datacenter, and that was the reason why we were able to record a performance fee of EUR 6.5 million from the other Private Asset Management business. The investment income in renewable energy, that is, as Peter pointed out, changed from the foreign currency. Now moving to right -- and a few comments also about Garantia and group other. So Garantia's continuing earnings grew 14% to EUR 4.4 million and corresponded 42% of the group's income with an excellent profit of 80%. The other half of that datacenter exit income came from the investment that the group had put in. And thereby, we recorded investment income in the group other, and that you can see on the third row. The operating profit for all business units were excellent. The operating profit was 56% for Private Asset Management and 80% both for Strategic Investments and group other, and therefore, 69% for the whole group, totaling EUR 18.5 million. And now moving forward, and a few words about our quarterly development. So the continuing earnings grew 14% to EUR 10.5 million. We recorded performance fee that we didn't record last year, and our investment income actually tripled to EUR 10 million. Our total income doubled from last quarter to EUR 27 million. When you then take a closer look at our cost side, you can see that our fee expenses rose, and that is mainly due to the datacenter exit. So we had small expenses related to that. And our personnel expenses grew basically due to the better performance that we had. Other admin costs were flat compared to last year, and our cost-income ratio was actually 32% for the quarter and 57% for the whole year. A few words also about our key financial figures, and now basically about the figures on the bottom. So you can see that our continuing earnings were flat to last year, but our income increased 14% from the year -- from the start of the year to EUR 46 million, and our operating profit increased 27% -- 25% to EUR 20 million. We also saw a nice growth of 11% in our assets under management from the beginning of the year. Now let's take a deeper look at our balance sheet. Taaleri has a strong balance sheet, and we have investments in different forms. Our total assets were EUR 288 million and our equity was EUR 195 million, giving an equity ratio of 68%. We have made strategic investments to base up our private asset management, and we have invested basically EUR 90 million in renewable energy, and the market value in Bioindustry was at EUR 8 million to EUR 9 million. Garantia, they have a conservative investment portfolio. As Peter pointed out, it totaled EUR 146 million and 88% was invested in fixed income instruments. Now, I'll give back to Peter.

Thank you, Minna. Thank you. So as a summary, I'd say that we had a great quarter in a somewhat difficult market, but we're not going to lay on our laurels. I'd say that it's perhaps better to look ahead. So what are we going to do this quarter? Well, I told you about the SolarWind III launch of the new fund, which is kind of -- it feels great to launch it. We need more renewable energy for the right reason in the world. So that's a great thing. SolarWind II will, of course, continue to advance. And basically, they're at the end of their sort of investment period, but then they continue to work on the projects that they have at hand, because they have to, of course, eventually erect the windmills and the solar panels to get them operational. And then we will continue to increase the project development portfolio as well. The Bioindustry team, now at this stage, they will start also the investment activities in the Bioindustry 1 fund. And then we have this biomass - sorry -- yes the torrefied biomass plant in Joensuu and we're advancing that so that it goes ahead. And also, our associate company, Fintoil has started its production. It's now operational. I was actually there together with our Board and management team visiting the site. It's quite something extraordinary. It's a tall building, 44 meters high, and a lot of pipes right, left and center. But it's great to see it's operational and now it's sort of in the ramp-up phase. And I think within the real estate business in Garantia, it's really business as usual as such. So therefore, I guess we have a Q&A session coming up, and I will hand over to Siri Markula, our Head of IR. Go ahead, Siri. And Minna, we need you on the stage as well if there are any tricky questions on the finances.

Thank you, Peter and Minna. We have some time for our questions now, and you can ask those also over the webcast platform. But let's start with some questions from the floor here.

Daniel Lepistö from Danske Bank. I guess my first question is about Garantia. And operationally, it was once again excellent, but it is clear that the economy is heading towards more difficult times. I guess my question is that, does this new sort of changing market sentiment impact your timelines regarding the [ sort of ] of Nordic plants for Garantia or expanding into the operations to other Nordic countries? So is there any threat of postponing and timelines here?

No, not really. I mean, we're exploring the opportunity. And of course, we always have to be humble to the market and the opportunities that they eventually present. But no, it doesn't -- from a sort of strategic point of view, it doesn't change the ambition there. But on the timing, again, we will tell you when it's -- when something materializes.

All right. I guess the second question is about the -- again, referring to the difficult market sentiment here. Do you see any potential headwinds for your sort of relatively new Bioindustry segment, be it making these investments at now or fundraising in the future, maybe comparing this to the renewables segment, which is quite sort of market-tested concept already?

Yes, it's a good question. And of course, looking at the opportunity set and what they see out in the market, I would say that there's an ample amount of situations that could be interesting for them. So I think turning the tables and more looking at the sort of opportunity set, it looks like there's even more available. But of course, they have return targets. So each and every project will be evaluated from sort of a normal -- or in a normal manner so that they eventually hit their return targets. But as such, I don't really see -- And maybe if you even turn it -- that you have a fund around that can do these investments, might be sort of something that the market really needs, because maybe other financing will be tougher. So in that sense. But we don't know that. But the only thing we know is that there's an ample amount of situations that are being presented to us. And of course, those are the ones --that's the raw material for the business.

More questions from the floor.

Joni Sandvall from Nordea. Maybe I could ask something about the new SolarWind III about the timeline. You are now saying that you are expecting the first close to happen early '23. So what is the target size for the first close?

I think, honestly, if you ask me, eventually, what is important is sort of the size of the fund. So we're saying we're going to at least double the former vehicle. Some of these due diligence processes tend to take time. So when we look at when do we do the first close, if something material seems to be drawn out, we might do the close earlier, and then it might be smaller. But then again, if some people advance, their due diligence is quicker. So I'd just stick to what we're looking as a sort of final size rather than look at each and every close because they now sort of anchor something that isn't perhaps very relevant.

And what about demand for the fund? I think you have been doing soft launch for [indiscernible] now. So how the investor sentiment has been for the fund?

Yes, I think it's very timely. I mean we all know the geopolitical situation. So that should sort of support this. I think what's really important in our case is that we built this development portfolio. So we sort of know what's on the menu, which is very important because there's sort of a -- well, the demand for every project has increased since the war in Ukraine. But by and foremost, it's the track record of the former funds that will then eventually constitute the success. And -- but we do see demand, but we really want to see that materialize in real sort of commitments eventually, but it should be good.

And actually, Energia is hosting a seminar now in Spain as we are speaking. So there we already have some potential investors in place.

Maybe last one from me. You said that you have refinanced the Cibuk . So what kind of financial impacts these have for the funds?

So that's in SolarWind fund - that -- the -- Normally, these do have -- I mean, maybe you have more detail on that. But of course, normally, there's a reason for why we refinance and it should be financially positive.

But if you're asking, do we see the same impact that we did for Wind 2, no, we don't see that impact. It's one project in the SolarWind fund.

Sauli Vilen from Inderes. A couple of questions about -- more of housekeeping types. You said that you sold some minor assets from your investment -- group's investment portfolio. Can you tell us what did you sell?

Well, there are really small -- I mean there are some holdings that some of them actually are listed that we've just disposed some shares. So it's nothing material. We tend to inform when it is material. So in this case, it doesn't really shake -- rock the boat in any direction.

Originally, you have said that -- well, not you or your predecessor -- and you at Taaleri, I guess, any strategy that you are planning to divest all of the holdings or at least majority of them during the strategy period, considering then the situation in the financial markets at the moment, and do you still see this as a realistic timetable for the divestments or --?

Well, my take is really you don't want to force any sale. We don't have to do that. We have a fairly strong balance sheet as we speak. But yes, it is our ambition. And then there are some things that are sort of time dependent. So when they are -- let's put it this way, when sort of the cash comes in, it has to do with the project or something else that then eventually has to be completed. But some of these sales that we have done in the recent years has maybe also been a testament to the fact that if you sort of take care of your asset and in a good manner, and then you don't force the sale, then the outcome is actually the best, and I still believe that's the case.

Then about the renewable energy, there was 6 more people on the payroll at the end of the quarter versus Q2. That's kind of a large increase considering that previously you have said that the team is like fully in place, et cetera. So is that like -- is this temporary thing or is --?

Yes. What happened was that there were some people who left, so we had a drop. And before the recruitments came, they were split between 2 quarters. So I don't know -- I think the net addition this year is 2.

Yes, something like that.

Yes. So it's 5% is sort of the net addition.

It was the summer vacation more than anything.

Yes. So unfortunately, it looks a bit weird, but I'm glad that you're nimble and you find these specific details out of there. But I'm sorry, we should probably put an asterisk there.

Then about the other funds like the legacy funds, I think in Q2, they were EUR 200 million. Now they are EUR 261 million. I at least haven't seen that you would have a raise in new capital to those funds. So why the uptick on the AUM there?

Maybe Minna knows better than I.

Did it actually rise or…

Yes, at least on your presentation, it says EUR 261 million and that Q2 says EUR 200 million.

Okay. Could -- that's a really good question. I don't have an answer to you. I'll have to get back to that, Or we will get back to that. Sorry.

Then finally, about the bond, you have EUR 250 million bond out obviously. But previously, it hasn't made sense to buy it out. But now -- and the interest rates have skyrocketed. And you obviously have the cash, or would it make sense to buy it out? Obviously, it's still -- I think it runs like 12 more months or give or take?

Yes, it was October 24, I think.

24, yes. But then it -- so it -- would it make sense?

Well, now it's fixed at 5%, so…

Joni Sandvall from Nordea. Maybe one more additional to renewable energy. Can you give any comments on impact from now higher interest rates? And on the other hand, also increasing costs on building side and when we put on the other side there, probably higher PPA, contracts and also spot prices. So how does this play out net-net?

Yes. I mean, there are quite a number of moving things when you do the -- sort of the financial modeling here. But yes, interest rates are one. That's for sure. PPAs are another. But of course, with this volatility in the market, maybe the willingness to do long-term PPAs hasn't increased because you're kind of -- what's your view on where the price is going to be. So that is one thing. But of course, the way we see it, actually, the high prices do sort of more than compensate for that. But then the question about the procurement chain -- and that's, of course, something that when we then do the construction phase and finance them. So at that stage, you basically sort of -- you try to lock them in. But still our view is that if we look at our net IRR targets in the project that we're now doing, there hasn't really been a change in those. So it's more a function. There are a lot of moving parts, but eventually, you have to get them sort of aligned so that you get the right numbers. But as such, I think sort of the net IRRs in this sector haven't really changed that much. Maybe a little bit higher more as a function of -- as you have base rate coming up, but no huge change. So it's really balancing out each other right now. But these are long-tailed things. But then from the moment that you get your permit then to build, that's -- I don't know, Minna knows better, but it's 1.5 to 2 years max. So then you have sort of already -- or you're sort of placed in the chain from the -- your counterparties.

Yes, one more from my side. The co-investments in the SolarWind III -- I mean, in SolarWind II, you did like one co-investment fund, and it was roughly 20% of the size of the fund. So how we should look at the co-investment AUM on this one?

Yes, so -- yes, this is more that -- as we're moving more sort of to Tier 1 type clients, there, it's very typical that you offer co-investments. So you don't really make -- there's no fee on the co-investments. But investors come into the fund as they require co-investments. So then they get more capacity. So you invest in the fund, and as a fund investor, you are then allowed to do co-investments. And some of these projects that we do, they are very sizable. So actually, from a fund perspective, we get better diversification as we have co-investors, because we can still process on our own with a bigger project, and it doesn't jeopardize the whole funds sort of diversification. It's not tilted too much somewhere. But this is very normal within the private equity space, that when you sort of have Tier 1 clients, a prerequisite to have them as investors is that they also get co-investments. Now for us, it's really also a mitigating thing because then we have people who carry on their own balance sheet, part of those bigger investments. So for -- actually, that's a very good way for us to sort of not only attract investors, but also then to mitigate risk.

Are you planning to do like a similar like Wind Fund 5 or something like that? Like I think it was more of the retail side back then. Do you see any idea doing that kind of things? So obviously, you get fees from those then?

Yes, then we get fees. So that would be then sort of -- we call that -- that will be a top-up fund to this. And -- but that's not in the cards now. That would be then later down the road when we see how the portfolio builds if we sort of -- yes.

And the Aktia would naturally do their [indiscernible].

Yes, obviously. But like there is not any requirements to the fund, which wouldn't allow you to do that kind of things?

Not that I know now, but that is a need that only arises down the road, if so needed. But then again, if we have Tier 1 investors that want co-investments, so sort of we have that, then you already. So we'll see that. I think the important thing is SolarWind III as a fund, they have the pipeline. We get it up and running and sort of raise it to the size we want it to be, and then we just execute that. That's really the core essence of that business right now.

Thank you. Any more questions? No. And there are no questions from the webcast. So I think that's all.

Okay. Well, thank you very much for your attention.