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Edited Transcript of GLPR.L earnings conference call or presentation 20-Sep-19 12:00pm GMT

Half Year 2019 Global Ports Investments PLC Earnings Call

LIMASSOL Sep 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Global Ports Investments PLC earnings conference call or presentation Friday, September 20, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexander Iodchin

Global Ports Investments Plc - GM & Secretary of the Board

* Alexander Roslavtsev

Global Ports Investments Plc - CFO of Global Ports Management LLC

* Brian Bitsch

Global Ports Investments Plc - Chief Commercial Officer of Global Parts Management LLC

* Mikhail Grigoriev

Global Ports Investments Plc - Head of IR

* Vladimir Bychkov

Global Ports Investments Plc - CEO

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Conference Call Participants

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* Aleksey Ryabushko

Sberbank CIB Investment Research - Junior Analyst

* Denis Vorchik

URALSIB Capital LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Hello, and welcome to the Global Ports Investments Plc conference call. (Operator Instructions)

The Global Ports Investments call will now begin. Thank you.

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Mikhail Grigoriev, Global Ports Investments Plc - Head of IR [2]

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Hello, everybody. This is Mikhail Grigoriev. I'm the Head of Capital Markets and Investor Relations for Global Ports. Thank you for joining the webcast today to review our results for the first 6 months of 2019.

The call will be hosted by Vladimir Bychkov, the -- our Chief Executive Officer.

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Vladimir Bychkov, Global Ports Investments Plc - CEO [3]

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Hello.

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Mikhail Grigoriev, Global Ports Investments Plc - Head of IR [4]

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And he is joined by Alexander Roslavtsev, CFO of Global Ports Management.

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Alexander Roslavtsev, Global Ports Investments Plc - CFO of Global Ports Management LLC [5]

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Hello.

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Mikhail Grigoriev, Global Ports Investments Plc - Head of IR [6]

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Brian Bitsch, Chief Commercial Officer of Global Ports Management.

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Brian Bitsch, Global Ports Investments Plc - Chief Commercial Officer of Global Parts Management LLC [7]

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Good afternoon.

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Mikhail Grigoriev, Global Ports Investments Plc - Head of IR [8]

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Alexander Iodchin, General Manager of Global Ports Investments Plc.

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Alexander Iodchin, Global Ports Investments Plc - GM & Secretary of the Board [9]

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Hello.

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Mikhail Grigoriev, Global Ports Investments Plc - Head of IR [10]

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Yes. And Dirk Van Assendelft, General Manager for Multi-Link Terminals, our Finnish Ports segment.

We would like to remind you that the press release -- yes. Sorry. We would like to remind you that the press release and financial presentation can be downloaded from our website, and that the replay of this webcast will be available on our website immediately after the call.

So our management team will now take you through the key highlights of the results, and then we will open the call for your questions.

So now I would like to hand over to our CEO. Vladimir, please.

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Vladimir Bychkov, Global Ports Investments Plc - CEO [11]

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Thank you. Good afternoon, everyone. Thank you for joining us today. And let's start on Slide 5 with an overview of the results. We have delivered a solid performance in the first half with 5% growth in container volumes, which was broadly in line with the market. We have seen continued good growth in containerized export in the big port of Saint-Petersburg. Our full dry container export exceeded full dry container import by 13%, an exceptional result in a market that was completely input-driven only a few years ago.

Our non-container business continued to deliver excellent throughput growth with an increase of 23%, driven by coal at ULCT and growth of bulk at PLP. The share of this segment is now 28% of group revenue.

Strong operational performances in container and bulk dropped 6% growth in like-for-like revenue to $181 million. Our continued focus on strict cost control ensured total operating cash costs fell by 2%. This had a beneficial impact on our profitability, with EBITDA margin expansion of over 200 basis points to 62% and EBITDA growth of 7%.

We continued to generate healthy free cash flow and continued to deliver -- to deleverage, reducing our leverage ratio down to 3.5. Overall, we have focused on offering our clients excellent productivity at our terminal and unrivaled customer service. And this has served us well internally.

Now I would like to hand you over to Brian to take you through market development as well as some operational highlights.

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Brian Bitsch, Global Ports Investments Plc - Chief Commercial Officer of Global Parts Management LLC [12]

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Thank you, Vladimir. So if we look at Slide 6, then as mentioned, Russian container market continues to grow, reaching 5% growth in first quarter 2019 compared to same period in 2018. And as you can see on the graph, climbing just above 2.5 million TEU.

We continued to see certain patterns in the growth of the Russian container market, where the highest container growth is still seen via Russian Far East in terms of percentage followed by Northwest and then Black Sea that actually had a decline for the first half.

Also, the container segments are continuing the trends from second half of last year. Full export containers increased by 8%, being the result of steady growing containerization in Russia, improved efficiency within the supply chains and high level of competitiveness of Russian goods on international markets.

Export of empty containers continue to decline and is down by 15,000 TEU in this period. And instead, we see a very large growth in import of empty containers to support this export growth that I just explained.

Lower container growth and container mix now seen, meaning higher overall share of full containers is therefore naturally also driving the increase of capacity utilizations across Russia, reaching actually 75% in this period.

If we take a quick look at July and August, as is mentioned, then this growth has actually continued over the summer for the combined 5.4% growth for the 2 months. As mentioned in previous presentations, then it's worthwhile highlighting still that containerization in Russia remains fundamentally low compared to global and regional markets as seen here on the bottom right corner of the slide.

If we turn to Slide 7, then as also mentioned in previous calls, the Russian container market is undergoing a fundamental change rapidly and steadily moving towards a balanced import/export flow.

In first half, as Vladimir mentioned, full export grew another 8% and added to past year growth. This means a staggering increase of 76% since 2013. If we, for a second, consider Saint-Petersburg market and the full containers, then again, dry exports actually exceeded the dry imports by 13% in the first half. The market has become export-driven already, and the same trend is seen in other gateways. So this gap is rapidly narrowing across the whole Russian market.

The main commodities behind this containerized export growth are timber, timber products, pulp, paper, cellulose, plywood, nonferrous metals and fertilizers. These market trends and dynamics have very explicit implications for container terminals here.

Let's consider some of them on the next slide, if we go to Slide 8. Full export growth has, in general, several tangible business impacts on terminals, and let me go through some of them. Firstly, full export containers are heavier than imports, and they mostly arrive at terminals by rail and large parcels. For a number of valid reasons, these containers will often stay at the terminals for longer period, putting yard, berth demand on the terminal.

Secondly, recently, a steady container growth has driven a remarkable growth also in the size and capacity of container vessels now called in Russian terminals. And with so-called fixed berthing plans in the key Central European and Asian hot holds, other terminals like ours now tend to receive more vessels at a regular basis and during shorter period of time, meaning our terminals need to have spare capacity to service the clients during these peak periods.

Thirdly, these large vessels require increased productivity or said in another way, a minimum time spent in the terminal in order to run at these fixed schedules and avoid berth constraints. As you can see in the top-right corner, then the number of TEU handled per vessel in our main terminal, FCT, has actually increased by 33% since 2013 only. To me, these ever-changing requirements, terminals must therefore ensure they possess all necessary equipment and well maintained and developed rail infrastructure. Shipping lines are becoming very demanding about these operational parameters.

So to put it in a few words, to probably service customers in today's container terminal market, it is critical to have sufficient railway infrastructure and berth and yard capacities. Only large, well-equipped and efficient terminals will grow in this rapidly changing environment, and we believe Global Ports is very well positioned to benefit from exactly these market developments.

As also mentioned on this slide, then the share of big 3 players in Saint-Petersburg market, meaning FCT and PLP combined, CTSP and also Bronka have grown their combined share of container volumes from 77% in 2016 to now 88% in first half of '19. This is a clear and tangible demonstration of these listed points and trends as I just explained. Briefly returning to July and August also, then capacity utilization in Saint-Petersburg market exceeded actually 80% during these 2 months.

Turning to the next slide, Slide 9. How are we responding to this changing environment? We highly prioritize our clients' needs, and the operational speed, meaning number of containers handled per hour for each vessel, has become a key operational KPI. We have enhanced our customer service by creating a centralized call center as well as a portal via the Internet.

We have also worked to improve the effectiveness of customs inspections and the efficiency of our railway operations. We recently participated in the joint launch of the new and very interesting transportation model, being the Modul of Asia to Europe transit route via Russian inland. Productivities, efficiencies and level of services are our key priorities related to CapEx plan in 2019 and '20.

We have throughout '19 and '20 planned CapEx projects that include investments in railway capacity, expansion at PLP and a new interesting cross-dock facility also at PLP that will be inaugurated just 1 month from now. We have also improved equipment and shore cranes at FCT, whilst creating an additional area for empty storage space at FCT also.

We have conducted an extensive review of our portfolio to establish a deeper integration of our terminals, FCT, PLP and also inland container depot, Yanino, including also a merger of FCT and PLP management teams. We are moving towards a one-window concept directly benefiting our customers.

Moving to next slide, Slide 10. Then we delivered, as mentioned, a solid operational performance in the first half. Our container volumes grew 4.9% versus Russian container market that grew 4.7%. Our bulk throughput has grown 4x in just 4 years, up by 23% in the first half of '19 compared to '18. This is driven by our new coal handling facility at Ust-Luga with ULCT and driven by bulk growth at PLP.

On a consolidated level, the share of revenue of non-containerized segment has increased from 16% in 2014 to now double, 28% in the first half of 2019. This sizable growth in bulk throughout -- throughput at PLP combined with also larger volumes handled at PLP this year means that the group is now conducting prioritizing of the commodity segments. Reason is that we want to sustain the operational performance and deliverables to our customers.

With this note, I will pass on the word to Alexander Roslavtsev to take us through the financial figures.

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Alexander Roslavtsev, Global Ports Investments Plc - CFO of Global Ports Management LLC [13]

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Okay. Thank you, Brian. We are on Slide #11. Now let's look at the revenue performance. On a reported basis, revenue increased by 3% to $181 million. However, after adjusting for the sale of our logistical terminal in 2018, like-for-like revenue grew by a healthy 6%. An increase in non-container revenue of 17% was driven by the start of coal handling at ULCT and growth of bulk cargo handling at PLP. 5% growth in container volumes was partially offset by 2% decline in revenue per TEU.

Moving on to the next slide, Slide #12. In terms of group-wide performance, the supportive market conditions and now ongoing operational execution has led us to strong financial results. EBITDA grew by 7% and our EBITDA margin improved by over 200 basis points to 64%. We have continued to focus on strict controls, cost controls and delivered 2% reduction in dollar cash costs. And free cash flow has remained strong, growing by 3% to $74 million.

CapEx was relatively low at $5.7 million, and this was mainly as a result of completion of the majority of the investment in ULCT, which commenced operation in December last year. CapEx for the full 2019 is expected to be within the planned range of $30 million to $35 million.

Moving on to Slide #13. Our strong cash generation has enabled us to continue to deleverage, and our net debt-to-EBITDA fell to 3.5x despite the impact of IFRS 16 and foreign exchange movements. Overall, adoption of IFRS 16 added $22 million to the net debt in the first half of 2019. In addition, strengthening of the ruble resulted in $25 million increase of debt in our dollar-nominated results. Adjusted for IFRS 16, net debt-to-EBITDA would be around 3.3x or 0.3 decrease since the end of last year.

Deleveraging remains our priority. And accordingly, we took the following debt management actions in the period. Proceeds from the sale of VEOS were directed to further deleveraging. In order to reflect the change in FX breakdown of our revenue, we have changed the composition of our debt, so that over 40% of our debt is now ruble-denominated. In August this year, we also purchased about $53 million of our Eurobonds of 2022.

With that, I would like to pass the floor back to Vladimir to conclude the presentation.

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Vladimir Bychkov, Global Ports Investments Plc - CEO [14]

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Thank you, Alexander. Slide 14. To conclude, I'm pleased to report to you that Global Ports has delivered a solid set of financial results in the period. The Russian market remains fundamentally undercontainerized, and containerization of exports will continue to be an important driver of the market. And we are very excited to see this trend as it reduces volatility in the market, improves capacity utilization and opens up additional opportunities for a well-equipped, large, specialized terminal with good railway infrastructure, just like Global Ports. And while we see some cooling down in the growth rates of imports, we expect to see further growth in full container export, which will provide further support to the market.

Our strategy is serving us well. We will continue to deliver improvements for our customers while also maintaining strict cost control. We will also maintain a very disciplined approach to capital management. We expect CapEx for the full year to be in our stated range, and we will prioritize our free cash flow for further deleveraging.

And now I would like to hand over to you for questions. Thank you.

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Mikhail Grigoriev, Global Ports Investments Plc - Head of IR [15]

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Yes. Thank you very much, Vladimir, and thank you very much management team. So operator, could you please open the floor for questions for the company?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We do have some questions coming through. The first question comes from the line of Denis Vorchik from URALSIB Bank.

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Denis Vorchik, URALSIB Capital LLC, Research Division - Analyst [2]

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So let me ask a couple of questions. First one is regarding the performance at Far East where your VSC terminal underperformed and actually -- Vladivostok terminal. And we also recognize that there's management reshuffle at VSC terminal recently. So how do you see the situation going forward? And yes, any comment on this, please.

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Brian Bitsch, Global Ports Investments Plc - Chief Commercial Officer of Global Parts Management LLC [3]

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Yes. It's a correct observation. And we have -- let's say, we have been through an exercise from our side to look at our strength and weaknesses identified specifically in this market. Our strengths are that we have continued the -- improved our productivities. We know for a fact that we have a solid and market-winning rail infrastructure in this market. And the customers we, obviously, are knowing very well.

But that being said, we also know that there are some weak spots that where we not -- let's say, do not have this market-leading position that we want to have. And these things are related to some of the back-office functions that we obviously also carry out when servicing our customers.

So looking ahead, and as you're asking, these are key priorities within our group right now. We have detailed plans in place. We know we have to improve here and we see some things coming through already. So combined with what you also mentioned in terms of a change of management team in our terminal, then we see and expect positive expectations from the actions we'll take over the coming months.

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Denis Vorchik, URALSIB Capital LLC, Research Division - Analyst [4]

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Okay. And continuing with your portfolio of terminals. So with regards to Baltics, Moby Dik terminal, which is not consolidated, actually staying almost idle in terms of the profile and in the third quarter this year. So is it the result of competition, maybe some strategic consideration? Yes -- and then could you maybe divest it in the future? Please comment.

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Brian Bitsch, Global Ports Investments Plc - Chief Commercial Officer of Global Parts Management LLC [5]

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Well, you're right. And again, as explained in this presentation and what we have also said over the last presentation in general, well, our forces that we are -- let's say, we are equipped in general as a group with growing vessels, with the speed required, with the rail infrastructure, these being the winning parameters going forward. So we know for a fact, and this is not a secret, that Moby Dik is here lacking in terms of infrastructure and the rail infrastructure is also lacking. So we have to -- let's say, we have to realize that Moby Dik's future as a winning terminal -- container terminal going forward, those days are counted. But it doesn't mean that we can't find or will not find and have found opportunities for Moby Dik going forward. So here, we are working on various projects and specialized projects in general cargo to exactly find the niche -- the new niche markets for Moby Dik to also financially -- to sustain healthy.

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Denis Vorchik, URALSIB Capital LLC, Research Division - Analyst [6]

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Okay. And the third one, if I may. Last one. So it looks like dividends is not on the agenda maybe this year. But is there any specific target in mind for -- target for leverage for human dividend payments in the future?

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Alexander Roslavtsev, Global Ports Investments Plc - CFO of Global Ports Management LLC [7]

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Yes. This is Alexander. Thank you for your question. So we -- the company always said that our internal target is 2 point net debt-to-EBITDA. So this is the target when the company is planning to start paying dividends. So right now, we have 3.5. Or if you adjust for various IFRS 16 adjustments, I said that we are 3.3 and now our target is to continue deleveraging, and the company continues to deleverage. And you can calculate using this information when the company will reach 2 point times net debt-to-EBITDA.

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Operator [8]

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(Operator Instructions) Our next question comes from the line of Aleksey Ryabushko from Sberbank.

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Aleksey Ryabushko, Sberbank CIB Investment Research - Junior Analyst [9]

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Congratulations with the results. And probably, I want to thank you for creating that book. Very helpful now for the analysts. So I have 2 questions. First one is about your mix of containers. So you mentioned that now export is already dominating in Saint-Petersburg basin. So should we expect period-over-period further decline in revenue per TEU because earlier you mentioned that this is basically on the back of the mix? So your mix is changing and usually, your import containers are -- cost more to handle. So this was the reason for the decline.

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Brian Bitsch, Global Ports Investments Plc - Chief Commercial Officer of Global Parts Management LLC [10]

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Thank you for the question. And as you can see here from the presentation, then we have had a 1.9% decline in average revenue per TEU for this first half. It's also correct observation around the full length split, as we have also discussed in previous meetings, previous conference calls. What we have to keep in mind here is that yes, we are seeing empty evacuation decrease. But at the same time, we're also seeing empty positioning increase. So you can say overall, you are still seeing, let's say, the segment of empty containers handled at our facilities that are paying and contributing significantly less than compared to a full container.

In terms of how we see the split and the trend going forward, then we will probably still see with a very solid, continuous growth on full export. We still see it to increase more than the full import business. Overall, it will probably come to -- for full 2019 and maybe also in '20 if nothing dramatic happens around the macroeconomic indicators. We are looking at something around a mid-single-digit growth rate for the remaining of '19 and also for 2020. So export probably overperforming around this level, and import could be eventually slowly -- slightly below this average number. Empty evacuation into Russia, we see this trend to continue because again, this imbalances that we are seeing specifically unfold for units for sustaining the full export business. Does that answer your question?

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Aleksey Ryabushko, Sberbank CIB Investment Research - Junior Analyst [11]

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Yes. Am I correct that you are probably assessing the situation that the mix of import split possibly should become balanced, let's say, end of '20?

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Brian Bitsch, Global Ports Investments Plc - Chief Commercial Officer of Global Parts Management LLC [12]

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Well, of course, that will be a guess, but we're at least moving towards that situation. Still, you have to keep in mind that the gateways are different. So we still -- we see something for Northwest, we see another scenario for Far East and potentially, a third scenario for Black Sea. So when looking at Russia overall, this will be probably the trend and we'll be continuing to see, but it can be different gateway by gateway. Time will show.

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Aleksey Ryabushko, Sberbank CIB Investment Research - Junior Analyst [13]

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Okay. And then second question on your bulk operations. As usual, the very successful execution in Ust-Luga. So I'm just wondering maybe some color on further projects on Ust-Luga, maybe some mineral -- some projects regarding minerals. As far as I know, some other players are handling minerals in Ust-Luga or maybe some bulk handling in Moby Dik as we now know you've tried to find some new niches. So maybe some color on bulk operations.

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Brian Bitsch, Global Ports Investments Plc - Chief Commercial Officer of Global Parts Management LLC [14]

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Yes. Well, in terms of Ust-Luga, we are very happy with the first year of operation with coal. It has high utilization, 85% for first half, which we believe, objectively speaking, that this is a very good rate for, again, first 6 months of operation. We do not necessarily have any -- let's say, any plans or projects around what you mentioned here for Ust-Luga.

Moby Dik, I believe, I mentioned already. Again here, we see ourselves with -- let's say, a strong asset. It has, through years, proven itself to deliver a very high level of customer service and deliverables to specific customers. So here, we clearly see opportunities to fill utilization by selectively going after certain projects and businesses.

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Aleksey Ryabushko, Sberbank CIB Investment Research - Junior Analyst [15]

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Okay. And then one more question, now precisely on coal in Ust-Luga as well as we've seen in the first half of 2019 coal prices dropped dramatically across the globe. So have you seen some squeeze from -- on the part of your partners who export coal? So have the country you're asking for maybe some discounts because of this price decline?

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Brian Bitsch, Global Ports Investments Plc - Chief Commercial Officer of Global Parts Management LLC [16]

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Well, we have to understand that handling coal compared to containers is obviously a much more volatile market. So we have -- in this particular scenario, we have -- we -- again, we have seen strong interest in our facility being established in Ust-Luga. But it goes without saying that to -- let's say, to assist and facilitate our customers with their plans for production and trading, then we have, in fact, helped our clients with the handling rate. But again, overall, still filling our facility to an extent of 85%. So quite successful despite this volatility in the pricing.

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Operator [17]

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(Operator Instructions) Our next question comes from the line of Ivan Postevoy from VTB Capital.

Apologies, I believe that Ivan is unable to talk into the call. So at this point, we have no further questions.

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Mikhail Grigoriev, Global Ports Investments Plc - Head of IR [18]

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Okay, then. Unless we have more questions, so -- but that's good. But anyway, we're always open for your questions going forward. And thank you very much for joining the call today. We wish you all a good weekend. And thank you, once again, for joining us. Goodbye.

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Operator [19]

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Thank you very much for joining today's Global Ports investment call.