AS Tallinna Sadam (TSM1T) Earnings Call Transcript & Summary

Hello, dear ladies and gentlemen. Thank you for joining Port of Tallinn webinar, where we present the results for 2021, Q2 and 6 months. My name is Marko Raid. I'm the CFO of Port of Tallinn. Aside me is Valdo Kalm. He is the Chairman of the Management Board. [Operator Instructions] And with this, I will give the floor to Valdo to continue with the presentation.

Good morning [Foreign Language]. And I would like to start with my presentation.

[Foreign Language]

[Foreign Language] And of course, with the main events from Q2. We had a record volume from ro-ro and bulk cargo, that's really a nice surprise. Ro-ro is real record and shows the good situation in Estonia and import export that means we've got some 25% increase from last year. And with bulk cargo, we got the record over the 10 years. We saw the growth of more than 30%. That's definitely a good news and supports our main business. Also, our state decided to change the financing model for the construction of a new ferry, that means that they will use oil money to order and build the fifth, from our perspective sixth, vessel. And then we will operate that. We got additional trips for Regula this summer, and that's almost on the same level as last year reports of our ferry business. And we had annual meeting this time again electronically and also we -- our stakeholders decided the dividend and we paid it out as we promised and important is to it that we fulfilled our dividend policy. Also, there was decision by our Supervisory Board to prolong Margus Vihman's authorities as a management board member and commercial officer for another 3 years. Then we've got silver medal for responsible business, same valid for our daughter company TS Laevad. There are more and more environmental actions, and there are new rules in our old city per se, how to clean the vessels and also important milestone that TS Laevad served 10 million passengers since 2016. The main trends in Q2. We saw the growth on passengers numbers, that's 12%. But honestly, these numbers are lower than we expected due to the restrictions from governments, I mean, mainly from Finland. Although we got the revenue growth and maybe more important is that it's still a number of vessels growing visiting our port in Q2. There are 14% more vessels than last year. And in 6 months, 10% more. It's all about ro-ro growth. That means the passenger vessels carrying the ro-ro and also there are -- we see quite nice numbers on cargo side. As we mentioned on cargo, we see the continuous growth, 9% in Q2 and 9% over 6 months. this half year, we see the growth from -- coming from mainly from dry bulk and ro-ro, but also on containers, we see 12% growth this time on liquid bulk, we see decrease. But it's really fluctuating as we always said, and it's very project oriented. Ferry business is stable by the revenues and profits. And also on the daughter segment, we follow Botnica's actions and Botnica doing well. Botnica serving steel Canada, icebreaking plus additional offshore jobs. And we see the stable revenue and profits from Botnica. COVID impact, as we already mentioned, there is strong downturn from March last year, although we have seen the growth on Q2. And what we are saying that we're doing what we can to support the passenger business. We opened a new cruise terminal, then there are very strict rules how to serve the customers in a cruising model, but also on ordinary passenger business. The question is all about the restrictions and willingness to travel. Therefore, to be honest, we are not very optimistic on second -- on next half of the year due to that, that third wave of COVID is coming. Cargo side, we see the continuous growth. And we see that, that will continue. On Ferry business, no significant impact, very stable business, same valid for Botnica. And we see the recovery of our daughter company Green Marine profitability shows also positive signs due to the growth on passenger and then cruise business. We will continue with our investments. There is a good cooperation with institutions with our partners, operators and maybe you noticed that we try to promote and motivate the vaccination of passengers together with our operators. Then to the [indiscernible]. Back on passenger side, as I mentioned, yes, we see the growth on Q2, but still 50% down on a 6-month period, and we are not along [indiscernible] on the second half of the year. On Cargo, Q2 shows good growth, same for 6 months. We already said that in our case, our portfolio is very, very mixed. We can serve very different cargo. Our operators are very active. Therefore, we are quite positive on the future trends also. Shipping volumes. Ferries doing well. On Q2, our local ferries, domestic ferries did very well, passenger numbers up 55%. And the vehicles also 50%. But last year, Q2 was very low level. But still, we see the demand of the service. Estonians traveling a lot to the Saaremaa when they want and also there are more and more tourists. Botnica shows stable charter numbers. All right, but then to the financials.

Thank you, Valdo. Here are the results for the group, both for the second quarter and 6 months. As Valdo already said, second quarter turned out to be very successful for us. However, mainly due to the fact that last year second quarter was the one most impacted by the COVID restrictions. So we saw growth of almost all the indicators or main figures. We had growth in revenue. Also, adjusted EBITDA grew almost by 9%. And last year, second quarter, we had a loss. So this year, we managed to earn a profit partially. That's due to the lower income tax costs due to the fact that the dividends that were paid out this year were smaller than the dividends paid out last year. And as a reminder, in Estonia, dividends are taxed when they are declared. So there is no, so to say, classical corporate income tax. The tax is applied when the dividend payment is actually being made, and this has impacted the income tax cost. Also, investments are down. Last year, we had a very heavy period of investment. This year, it's about half the last year's level. However, when we now look at the 6 months number, these are more on the negative side, we still have a slight decrease in revenue due to the fall of revenues in the first quarter. That's mainly because last year, first quarter was still mainly a normal period, only at the second half of March did the restrictions started to kick in and therefore, also adjusted EBITDA has declined. And last year, we also had one -- another event impacting the EBITDA level that was the sale of Paljassaare harbor assets, where we earned about EUR 1.6 million of income, which was included in the EBITDA number. So those 2 components are still the main ones impacting this year's figure compared to last year's. Otherwise, on the investment level, the same as second quarter, we had almost half of the last year's volume, and we are 7% behind also on the profit and loss figure. Looking at the results by business segments. The first item passenger harbors is the one where we are most concerned. Second quarter was successful. We achieved better results almost in all the segments, better or almost at the same level as last year. Passenger harbor revenues and EBITDA increased. Cargo harbors revenue increased as well. Adjusted EBITDA a little bit declined due to the onetime factors, mainly. And Ferry segment and others were on a same level as second quarter last year. On 6 months, still on the passenger harbors, we can see that the impact of the first quarter and the restrictions has been greater than the positive impact of the second quarter. So on the 6-month level, we have both declined in revenues and adjusted EBITDA. Cargo Harbor's revenue has increased. Adjusted EBITDA decreased due to the onetime profit from the sale of assets. So if you take that out, we have increased also the Cargo harbor's EBITDA and Ferry segment has shown a little bit increase in revenues, however, due to increased costs, and we have said before this year, we already have started, and these are still ongoing. There's a maintenance of main engines on all of the ferries. So we will have a little bit elevated costs for this year as compared to the previous periods. Other segments where we mainly have Botnica our Green Marine, a total company, there's a slight improvement in profitability, both coming from better result of Botnica and Green Marine. So mainly, we are concerned about passenger harbor segment, and this is impacting our total results as well. On cash flow side, we have had an increase on the cash from operating activities, due to the lower volume of investments less capital is being invested. So cash used for investing activities has decreased. And those 2 combined have had a positive effect of EUR 4.6 million free cash flow. Cash used in financing activities has increased. This is due to the fact that this year, we paid out a dividend on the second quarter. Last year, the dividend payment was made in third quarter. So it is not included in the 2020 figure. And also, we have not taken any loan capital this year. And therefore, the net cash flow for 6 months is negative by EUR 6 million whereas last year, it was positive by EUR 9 million and due to the decrease of cash balance mainly also the net debt has increased this year compared to the 6 months last year. On balance sheet side, we don't have much changes when we compare to the situation at the end of last year, basically, we are on the same levels. Then we have 2 slides where we have laid out the revenue generation and EBITDA generation by all 4 quarters. So you can follow the development by segments and quarters, and I will not go deeper in detail at the moment. So this concludes our explanation on the financial side of the results. Now we go into Q&A session. [Operator Instructions]. [break]

We'll start answering the first questions that we have received. So the first one was submitted upfront, and I will read the question. So you can follow maybe more easily. So the question is that last week, the press reported that the Ministry of Economic Affairs and Communications plans to buy 4 ferries between the mainland and islands that are currently owned by the Port of Tallinn's subsidiary TS Laevad for EUR 106 million. How can such a potential transaction financially impact both of Tallinn revenues in the long run? Is there a risk that after expiry of the current Mainland island ferric connection agreement, the state will not look for a new operator which could theoretically be the TS Laevad again, but will set up a new state-owned company to operate a ferry service? This is a good question. Yes, a few weeks ago, there was information in the newspapers that the state is discussing and they should discuss this question, the current contract that we have with the state, there is an option for the state to buy out the current vessels. They can either exercise that option or not. So this is the basis for the discussion. But the state has not decided. They need to inform us at least 4 years before the end of the contract. This means by September next year, So basically, the state has 1 year to decide whether they want to exercise or not this buyout option. And this buyout, the amount or the cost of the vessel, this is fixed. This was already presented during the tender for the contract. So basically, the only thing that the state needs to decide is whether they use the option or not. If, of course, they decide to use the option, that will mean that the -- at the end of the contract period in 2026, Port of Tallinn will receive this EUR 106 million for the vessels and then it's up to us how we will continue with this money, how can we invest that. But if the state buys out the vessels, then of course, the service model for the next period will be different. There is no capital component. It will probably only be operational tender. But as the question went, that is there a hypothetical possibility that the state will operate themselves? Hypothetically, yes, there is an opportunity, but I personally, and this is truly my view. I don't think that they will start operating that. Probably it will still be a new tender, but with, then state-owned, vessels. So it will be at a lower margins definitely and how that will impact Port of Tallinn business, that's mainly, of course, it's separately reported as a Ferry segment today. And I would say that a large share of the revenue would be impacted if the capital component is not present next year. But on the other hand, then we have, at least, 4 years time to think what to do with this capital and how to -- how and where to put it at work. So the impact could be big depending on what the state ultimately decides. But this decision has not been made, and we are also active in terms of communicating the consequences of one or the other way to go forward. And of course, we are interested and willing to continue with the current model, but the decision is for the state.

Next question, can you please confirm that there are no decreases confirmed for 2021? We can confirm that there are, already [ called ] this year around 20 cruise ships entered our port, and it's still some 40 50 confirms for the next coming months. Therefore, the final results, of course, will be clear after the closing the Q3 results. Next question. Please comment on the process of the real estate development in Tallinn. Just remind you that we are on a detailing process of 5 plots or 5 areas. And now we are very close to publish design of first plot. It's, of course, up to city government, but we're working with all 5 areas, but now we are -- first block will open for the comments for the public.