Taaleri Oyj

OMXH:TAALA

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Peter Ramsay, executive]

Good early afternoon, and welcome to Taaleri's interim statement presentation. And as you can see under the headline, it's going to mean myself, Peter Ramsay, presenting; and our new CFO, Ilkka Laurila, for the first time.Taaleri had a good and profitable quarter. So let's start with some key figures. The continuing earnings were EUR 10.3 million and that is compared with EUR 9.8 million a year ago in the first quarter. Our total income was EUR 70 million, also to be compared to EUR 9.3 million a year ago. And our operating profit was EUR 9.6 million and that's -- corresponding number was EUR 1.6 million a year ago. So very marketable increase.Our AUM is EUR 2.6 billion. That is the same as it was at the end of last year. And if we look at the growth on the lower side of this slide, we can see that our continuing earnings have grown by 4.3% during the last 12 months. And worthwhile noting is that our sustainable fund products are 85% of our AUM today and that means that these are fund products in accordance with the EU SFDR regulation and that is the Article 8 and 9 funds that we refer to then.Moving over to the highlights for the quarter. And as I said earlier, the group net income developed positively in the first quarter. The renewable energy continued the fundraising for SolarWind III. And of course, as always, the renewable energy is active in developing projects that they are pulling forward for the SolarWind III fund, but also operating both wind and solar farms in the previous funds that we have launched.In the bioindustry, I would say that it was very much business as usual, which means that they're advancing the investments in Bio Fund I and also looking for new investments. But they are also now in discussion with potential anchor investors for the venture capital fund. Then we launched a new strategy for our real estate business. The focus is more on investment activities and creating new products as compared to earlier more a asset management leaning strategy.Garantia had a good quarter with a low combined ratio and a healthy amount of investment income. Investment income amounted to EUR 4.8 million for the quarter. And finally, I'd say that the stabilization of interest rates and the generally good development of capital markets is a good sign for a stronger fundraising market going forward.If we move over to our private asset management business and start with the renewables, as I said earlier, focus is very much on the fundraise for SolarWind III and forwarding the projects that they have in the portfolio. They are also doing preparations to exit Taaleri Wind Fund II and III during this year.And if we look at the numbers for the quarter, perhaps they're a bit small to see, but I can say that the continuing earnings rose by 16% to EUR 4.6 million in the first quarter and total income was EUR 5.3 million. There was a income of EUR 800,000 in the investment operations.So the EBIT or operating profit for the first quarter was EUR 1.4 million compared to a loss last year of EUR 300,000. Full-time employees is 48 currently. That's an increase of 2 from last year and the AUM increased from last year's corresponding quarter with EUR 200 million to EUR 1.6 billion.If we move over to the other private equity business, as I said, we launched a new strategy for the real estate business, but we also managed to sell a very small fund called Taaleri Housing Fund IV, so that was concluded during the quarter. And apart from what I mentioned earlier about the bioindustry, it's also important to note that they continued the construction of the torrefied biomass plant in Joensuu and that should be completed by the end of the year.And if we look at the numbers, we can see that the continuing earnings were EUR 1.3 billion, which is a decline of 17.5% to a year ago. There are really 2 reasons driving this decline. One was that we had a mandate within the real estate business that was discontinued last summer. And the other thing is that we invested in a company called WasteWise last summer and it's an associated company and their part of the profit is consolidated to the continuing earnings. The company is doing a rather sizable investment currently. So that burdens them until they are operational and the production starts.The operating profit was negative EUR 900,000 and that's compared to a loss of EUR 0.5 million a year ago. Full-time employees is 38 and we've seen an increase, in particular, in the bioindustry space, which is one of our focus points and we're growing the personnel there. AUM is EUR 1 billion compared to a year ago, EUR 1.2 billion.And now we go to our strategic investments and that means Garantia in our case. So the insurance result increased to EUR 4 million from EUR 3.8 million a year ago and the good results were supported by a decrease in insurance expenses and the combined ratio improved almost 21.5%. That is a very good number for an insurance company. Net income from investments was, as I said, EUR 4.8 million. And this was really due to the fact that rates stabilized, credit spreads tightened. And also, there was an increase in the equity portfolio.Right now the portfolio of Garantia consist to 78% of fixed income investments and basically the shift from 86 has more or less been done to increasing the equity allocation. So operating profit for the first quarter in Garantia was EUR 8.5 million. That's compared to EUR 4.4 million a year ago. And the Garantia insurance exposure was unchanged to a year ago at EUR 1.7 billion.And then we move over to the other group income and let's start with looking at the size of the portfolio that we have in what we call the nonstrategic investments. That's the box on the right-hand side, we can see that the balance sheet was EUR 26.4 million at the end of last year. It has now decreased substantially to EUR 18.9 million. And that's really as a result of disposals. So the EUR 8.6 million came from a payment of a receivable that we had from a real estate project in Canada. This actually didn't have a P&L effect as such.On the other hand, Turun Toriparkki, we made a positive change in the fair value and that was EUR 0.7 million. That is, of course, shown up in the balance sheet here as well as in the income of investments. So the income totaled EUR 1.1 million here with a 0 result on a EBIT level and that's compared to a loss last year of EUR 1.4 million in the other group's income.And now I'll hand over to Ilkka Laurila, our CFO. He'll take you through the numbers. And I think you have your own.

[Ilkka Laurila, executive]

So good afternoon on my behalf as well. And before we go a bit deeper on the numbers, maybe I should shortly introduce myself because as Peter mentioned, it's my first time as CFO of Taaleri. I have a bit more than 20 years of relevant working experience, started my career in forest industry, then spent 7, 8 years in M&A advisory, financial advisory and restructuring advisory services. Then joined TervasTalo 2012. First head of treasury, then procurement, then CFO since the end of 2014 and left TervaTalo '22 after 10 years period there. Last 2 years, I've been working as a different interim and short-term CFO periods.Well, that's about me and then we can go to the more interesting piece and Taaleri's financial development during the first quarter '24. Peter already mentioned that the revenue or the income achieved at EUR 17 million during the first quarter and with a nice operating profit level of EUR 56.2 million. But maybe highlighting on this slide that even though that the number of FTEs has increased, the personnel expenses or the personnel cost has decreased versus a year ago. And the reasoning for that is that we have accrued less on different variable pieces of the personnel expenses and that's why we have a lower level of personnel cost during the first quarter.On the other hand then the direct costs have increased somewhat from EUR 1.8 million to EUR 3.2 million roughly. And the key drivers, there's actually 2 drivers. The first one is that we have had a more traveling-related expenses mainly deriving from those fundraising activities. And secondly, we have had a more advisory and consulting service-related expenses, again, mainly relating to developing new services and new products to the market.Then if we take a look at our -- these 4 sources of revenue, which we have communicated earlier, the biggest proportion of the income during this quarter actually came from the investment operations, EUR 6.8 million, following next by continuing earnings from the private asset management, EUR 5.9 million. And then current insurance operations generated at EUR 3.9 million. And as already mentioned, we did not recognize any performance fee during the first quarter of this year.And as you can see, on a quarterly basis, these income sources actually fluctuate quite a bit. But then if you take a look at the longer period of time, this is now 24 months, so 2 years period. And as you can see, the picture is actually much more stable when it comes to these 4 different revenue sources. The biggest piece has been this continued earnings from the private asset management business followed by next by the investment operations with EUR 37.2 million and then nice stable income also from the current insurance operations as well as the performance fees.So as you can see, on a quarterly basis, it fluctuates quite a bit. But in a longer term, you can see much more stable development of these different income sources. That also applies on a quarterly level, especially for the profitability. As you can see on this slide, when we take a look at the group level continuing and as you can see on the left-hand side that it has had a quite stable, nice development from EUR 9.8 million up to EUR 10.3 million during the last quarter.On the other hand, this other revenue sources or income sources have fluctuated quite a bit during the quarters and was now at EUR 6.8 million. And that directly is reflected to operating profit development. And as you can see, we are facing to the second quarter. This year, we are facing quite tough comparison period as there were some bigger revenue recognitions during the second quarter '23. Biggest one was related actually to energy business in which we kind of -- the portfolio development portfolio was sold and the revenue recognized during the second quarter.Then if you take a look at the private asset management business, the picture is pretty much the same. The underlying continuing earnings is developing quite nicely from EUR 5.5 million to EUR 5.9 million, even though that there is a slight downward trend from EUR 6.7 million to EUR 5.9 million during the last 2 quarters.But that is actually deriving from certain fund-related accruals which came in related to SolarWind II and Bio Fund, which were kind of recognized during the last quarter last year and also some of those in the third quarter. And that was the reason why the level during those 2 quarters was actually higher. But the same reflection you can see for the operating profit, it fluctuates quite a bit based on how these other revenue and income sources are developing during the financial year.But then if we take a look at, again, a bit more longer horizon and take a look at versus -- the LTM versus the LTM year ago, you can see that on a group level, the continuing earnings has increased by 4.3% and operating profit has increased nice 33.4% level versus LTM a year ago.On the other hand, if you take a look at the private asset management business, you can see that the continuing earnings has increased 15.7% versus LTM a year ago. Then on the other hand, operating profit has slightly declined 9.2%. And the key rationale for tariffs that we -- the SolarWind II and III revenue of those exits were some -- part of those were recognized already back in '22 and that can be seen in the LTM period from Q1 '23 and that has an impact -- a positive impact for that period, but not anymore for the LTM period Q1 '24.Then finally, we will continue for rest of the '24 year with a strong balance sheet. Maybe highlighting first that on the left-hand side, as you can see and as Taaleri has communicated earlier, the nonstrategic investments are exit phase and you can see that it has declined quite a bit already from EUR 26 million to almost EUR 19 million. Then on the other hand, we are investing more in strategic and direct investments, which has increased from EUR 32 million to EUR 34 million.Another piece maybe worth noting is that Garantia's investment portfolio is at EUR 152 million, down from EUR 160 million. And the reasoning for that was that the EUR 15 million dividend for the PLC was paid before the quarter ended.The cash and cash equivalent was still on a strong level at the end of the first quarter, but maybe worth noting is that after that, we have paid that EUR 28 million dividend for our shareholders.And we are continuing with strong equity ratio EUR 215.8 million out of EUR 312.2 million is 69.1%. So our equity ratio continues to be strong and that is a good basis for further development at the further investments that we are aiming to do.And then I think it's time to invite back Peter for the summary of first quarter.

[Peter Ramsay, executive]

Thank you, Ilkka. Let's take the summary. So here is a repetition of the highlights for the quarter, which was -- showed a good profit as a whole. And I'm not going to repeat myself too much. And I think instead, we try to look ahead. And what we can say is that there are some positive trends in our operating environment. And as I said, it's really stabilizing interest rate environment and then the capital markets have been quite strong and encouraging. And so finally, one could say that also the global economy has been stronger than we perhaps foresaw late last year.This brings us to the last slide and the outlook for 2024 in our various business lines. And what we say is that the continuing earnings from the renewable energy business is expected to develop positively during the rest of the year. The operating profit for 2024 will depend on what the final performance fee would be for Wind II and III funds. So this is, of course, something that just as a repetition, we have recognized EUR 14 million in performance fees in earlier years. And then once the fund comes to the end and it's sold, then of course, we know what the final performance fee was.And according to our updated strategy, we're looking to have a strong international growth in Taaleri Bioindustry as well as in the real estate business. And just as a repetition, I'll say that we aim to have 50% of our limited partners, i.e., investors in our new funds coming from abroad.We are increasing costs in the other private asset management business. We're doing it upfront in order to be able to launch new products. And that means that the operating profit for the other private asset management business will be negative this year.And for Garantia's parts of view, we could say that the continuing earnings are expected to fall slightly from the level from last year and this is due to the development of the Finnish housing market and in particular, the mortgage uptake. But in the current economic operating environment, Garantia's net income from investment operations is actually expected to develop positively compared to the corresponding period last year.And finally, within the other group, as previously said, this is really a function of if we are able to dispose assets and at what profit once we dispose them, that will then determine the profitability in the other group.So that leaves us to the Q&A session. Thanks for listening. And maybe I'll hand over to the floor if there are any questions. And we have a microphone circulating for any potential questions. Here we go.

[Joni Sandvall, analyst]

Joni Sandvall from Nordea. Maybe starting still with the Wind II and III carry potential, I think you have a pretty good visibility in the valuation in the field currently. So how have you -- how would you say how the carry potential has evolved now during past year?

[Peter Ramsay, executive]

Well, there are, of course, several moving variables here when you look at the valuation of a wind farm. One is, of course, the price of electricity. So what has happened there is that it has sort of stabilized at a higher level than before the war. The other thing is interest rates. So interest rates have gone higher. But of course, we don't need to look at construction costs when it's an operation -- these funds are operational.So I'd say that from when we look at the valuation, these 2 forces have sort of mitigated each other. And when we do the assessment of the performance fees, we've always said that we have to be conservative there from pure simple reason that these variables can move over time. Now it will, of course, in the end, it will be shown how conservative were we, if at all. But I would emphasize that we have been conservative when we book these estimated performance fees.

[Ilkka Laurila, executive]

Maybe adding on that one note. If you haven't recognized that we actually made a small change in our accounting principles during the first quarter. So earlier, so during the last year, we kind of accrued those revenues biannually and now we are doing on a quarterly basis. But still, we didn't recognize any performance fee during the first quarter. But now we take a look at it on a quarterly basis, not anymore biannual as it was 2023.

[Joni Sandvall, analyst]

And on possible exit, then you are still aiming for taking mandates of these wind farms?

[Peter Ramsay, executive]

Well, that's, of course, up to the buyer. So that's something that we cannot steer. But naturally, if the buyer is such a party that needs an operator, then we're very happy to offer our services, that's for sure.

[Joni Sandvall, analyst]

Yes. Then maybe a question about real estate strategy renewal. And as you said, you are aiming for new products. So any time line for these products?

[Peter Ramsay, executive]

Yes. Well, let's stick to what I said at the Capital Markets Day. I think we have a window sort of right where we are now 12 months, maybe a little bit more. So I think this is an opportune time to sort of get new products to the market, but you have to talk to investors first.You sort of have to be sure that you have the demand and that the positioning of your product is right. So I think that's sort of an interaction that takes place and those interactions have, of course, started. But on the timing, I still would say that that is sort of the cycle you have here.And we've already seen, I mean, some money coming to the market. It's been assets that have had sort of trouble for one reason or another that they have actually transacted and then you get some price points of where the market is. And I think that's kind of encouraging also for new investors looking to enter the market.

[Joni Sandvall, analyst]

Yes. Then maybe a follow-up on the fundraising. You said that there might be, let's say, improved outlook now when the interest rates have stabilized. So have you seen yet any real changes on the investor appetite in the market?

[Peter Ramsay, executive]

I think they're very, very early green shoots, but I would say that takes time. So the important thing is that the market sort of stabilizes and then you've had this denominator effect as well that when the public markets went down, people felt that they were perhaps a bit overexposed to private markets. So that denominator effect has partly also been sort of mitigated. But the important thing for private equity investments is that you can recycle the money. And so you also need for this sort of to come back full scale, you need to see capital returns and that hasn't yet started.

[Joni Sandvall, analyst]

Okay. And I suppose there is no real changes on appetite on strategies, allocation on different strategies while we were going through, for example, during the CMD?

[Peter Ramsay, executive]

On our behalf, no. I mean, the market is always, of course, out there and you can look at whatever when publishers, they come a little bit late, but I think that in this situation, I'd say that the infrastructure side is quite stable. So there wasn't -- it also came down, but I think we actually outperformed the market if you look at just pure numbers on our recent fund compared to the older one.But I think the recycling of the money is really the key and then the rebalancing of the sort of what you call the denominator effect. But so I don't think our strategy is as such that there hasn't been sort of a change in attitude towards them. We don't see that.

[Joni Sandvall, analyst]

The one question to Ilkka about employer benefits for the full year. Now it was down a bit from last year. So if you are performing in line with your expectations, should we expect similar process during the latter part of the year?

[Ilkka Laurila, executive]

Not really. As the head count increases, it should kind of follow the pattern of the head count changes in the coming quarters.

[Joni Sandvall, analyst]

Okay. And last question, Garantia's insurance revenues. I know that you are speaking about continuing earnings, but insurance revenues were up 1% now in Q1. So are you expecting a softer market conditions for Garantia during the rest of the year?

[Peter Ramsay, executive]

So I think if we just look at the biggest sort of product group, which is mortgages, they have come down and the mortgage formation hasn't really sort of picked up. So we're at a very low level. In the medium term, we do think that this is sort of a normalize. But for the full year, one has to remember that the revenue recognition of Garantia also there's a tail to it. So therefore, if there's not a significant pickup, we can just see what that tail sort of tells us. And therefore, that's the effect, but it's not as dramatic as the market seems to be.Any further questions? Yes.

[Unknown Analyst]

[ Henri Lausal ], [indiscernible]. I have maybe 2 questions. One is that part of your strategy is investments in bioindustrial investments, both companies and funds. How can you describe that development?

[Peter Ramsay, executive]

So the funds that we invest in they are our own. So that's sort of we support our own funds. So we don't invest in third-party funds. The direct investments there, we increased now by EUR 2 million, our investments in what we call the strategic sort of investment or those that are within our business lines.What we do there is we have a normal process. We have a separate strategy that we've sort of implemented for that and our own team who look at that and we are sort of, it's quite broad. The bioindustry definition for us is non-fossil or recycled materials.And this means that, of course, we look at a lot of different situations, a lot of different companies, but we will be very selective in the investments we do there. We'd rather do fewer and larger investments than the opposite. So therefore, it means that there is a lot of activity going on, but it also means that there's not going to be anything as such to be announced on a quarterly basis.

[Unknown Analyst]

Was it so that there are some companies already in production or are you building up them or like [indiscernible] what were they...

[Peter Ramsay, executive]

Fintoil is in operations already. The biocoal or the torrefied biomass plant in Joensuu that is being built, hopefully, will be ready by the end of the year. WasteWise is another company. I mean, there are numerous companies, but that all has one line operating, but they are now investing for the second line and that is a recycling chemically plastics. So there are those that are in sort of construction phase and those that are already operational and those that are sort of scaling.

[Unknown Analyst]

And those were direct investments, were they?

[Peter Ramsay, executive]

These are direct investments, yes.

[Unknown Analyst]

Okay. And then another question. One part of your strategy is also internalization. So how can you describe that when you are going to [ up road ] or be more international?

[Peter Ramsay, executive]

So twofold. One is, of course, when we look at our funds, our ambition is really to have 50% of investors in the new funds, but they are non-Finnish investors. And of course, that work is done. We have to get our name out there. People outside of Finland don't know Taaleri.So it means a lot of footwork. We take part in seminars. We go to these capital introduction events. There are numerous events. I mean, there's every month 1 or 2 event where a Taaleri salesperson goes and they speak or present the fund.Then we use capital introduction companies. So we have third-party distributors and they work as a sort of prolonged arm of our sales force. And it's basically the same there. We arrange together with them events, can be in Asia. In some cases, we've arranged events at the local embassy. So the local embassy has hosted us and then our capital introduction partner has invited investors there and then we take it from there on.So there's a lot of footwork and there's really no shortcut here. Competition is hard. There are a lot of funds out there. I think it's really important that you get to tell Taaleri story and then to present these funds for the right audience. And it's really all about getting in front of the right audience and that takes time.

[Unknown Analyst]

Was it so that you have also people from abroad or can you say, but you're now [indiscernible] that kind of skills and research is?

[Peter Ramsay, executive]

Yes, we have -- I mean, we have offices abroad within the renewable energy and we have offices in Madrid. We have one in Hungary. Of course, they are not their salespersons primarily, but they are taking care of the product development and the construction and the operation of these assets.But then the other side of your question is on sort of this is on the fund business, the internationalization. And we also said that we want to partner up with industrial players in our bioindustry efforts. And most often, these are international players.The point of partnering up is that we get credibility and then we also are able to integrate into the whole value chain. This means that eventually we will then establish sort of offices abroad for any new venture because you cannot be sort of -- I think that you have to be local. You have to have local presence if you have local operations. So that's another dimension to our internationalization.Any more questions? No? I had some questions here that have come. It says what is the geographical distribution of stocks in Garantia's investment portfolio? And although it's not a large allocation, it's increased a little bit, but I'd say that there's an overweight to the U.S. I won't go into more detail there. Do we know more precisely when the exit from Wind II Fund and Wind III Fund will take place?And we do not know. So we will know the process will start sort of in a very short, hopefully, short time frame and it's a process that takes time because you send out an investment memorandum, then you get responses and then you select people for the next round. So I would say this is something that most likely will take another 6 to 8 months or so. So it's a process.TT Canada loan was sold paid. What was the cash flow, no profit or loss? So yes, there was an interest rate that we received during the years that we borrowed the money to the project. But when they repaid the principal, there was no profit sort of recognized from that event as such.There were no other questions here that had come online. If there are no further questions, I thank you for your -- for all the questions and for your attention. Thank you.

[Ilkka Laurila, executive]

Thank you.