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Edited Transcript of GPH.L earnings conference call or presentation 11-Dec-19 6:30pm GMT

Q3 2019 Global Ports Holding PLC Earnings Call

ISTANBUL Jan 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Global Ports Holding PLC earnings conference call or presentation Wednesday, December 11, 2019 at 6:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Emre Sayin

Global Ports Holding Plc - CEO

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Conference Call Participants

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* Greg Johnson

Shore Capital Group Ltd., Research Division - Research Analyst

* Konstantin Chinarov

Aptior Capital - Credit Product Analyst

* Rahul Ullal Bhat

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Global Ports Holding Third Quarter 2019 Results Presentation.

I now hand over to Emre Sayin, CEO of Global Ports Holding. Please, sir, go ahead.

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Emre Sayin, Global Ports Holding Plc - CEO [2]

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Thank you. Good morning, everyone. Thank you for taking time to join us for today's Q3 trading call. I would like to give you a brief overview of our performance in Q3 and year-to-date, and then we will open it up to questions.

Year-to-date and in Q3, I'm happy with the performance of our Cruise business, which, once again, has delivered to our expectations and has reported the highest results to date. However, the most important developments in Cruise have been the recent commencement of cruise ports -- port operations in both the Bahamas and Antigua. It's not an exaggeration to say that the addition of these ports marks a truly transformational moment for the group. Our cruise passenger numbers will now increase by close to 100% in 2020, and Cruise will now be our largest business in EBITDA terms.

In fact, I was just looking at the numbers right now. When we listed, our Cruise portion of the business was 45% versus 55% Commercial. Then with Turkish cruise ports numbers going down, this number went down to 40%. Right now, with the Commercial business having difficulties due to the trade wars, the number is 50-50. And starting with last year, in the future, we want -- we expected the cruise numbers to go up to 60%, and the Commercial business to remain at 40% of our business, and this trend will continue, I think.

It's fair to say that what happened in the Caribbean is proof that GPH is firmly delivering on the plans we set out at the time of the IPO, and the business is now entering a very exciting stage of its development.

There is a growing recognition across the world that GPH can offer cruise port stakeholders the type of services that we highlighted during the IPO. And our growth opportunities are driven by -- instead of our growth opportunities being driven by us knocking on the doors of authorities, we are now being approached by authorities and other stakeholders, such as port authorities, governments and potential investments -- investors in port assets.

In contrast to the continued strong performance on the Cruise side, our Commercial business has continued to suffer from falling volumes. At the time of our interim results, we stated that we hoped volumes would start to stabilize in Q4. But unfortunately, trading in Q3 and Q4, to date, suggests that volumes will be down in Q4 year-on-year. And I'm sure you will have noticed our brief update on the strategic review in this morning's statement. I can't really add much beyond what we have said, but we hope to complete the review and deliver on any outcomes of that review during Q1 2020.

So going over to the numbers, to the financials. I obviously don't intend to read every number that you can see in the statement. But before I pick up -- pick out some of the highlights, it's worth noting that the negative impact on currency on our EBITDA due to translational currency impact is almost exactly offset by the positive impact of IFRS 16. So the reported numbers, in fact, give a very good guidance to the underlying EBITDA performance.

So as you can see, Cruise EBITDA grew 13.9% to $32.6 million or 17.4% growth in constant currency, and our Commercial EBITDA fell 19.5%. While the growth in Cruise was not enough to offset the decline in Commercial, I believe it is testament to the growth of our Cruise business in 2018 and so far in 2019, that this business, before the addition of Nassau and Antigua, has reached the point that is -- it is almost able to offset such a sharp decline in EBITDA from the commercial ports.

Segmental EBITDA and adjusted EBITDA are both falling circa 6% due to the weak performance in Commercial. And you will note that central costs, which come in at the adjusted EBITDA level, have indeed moderated, as we said they would with this moderation, driven by the fact that we are now annualizing some of the investments we made into the group functions in 2018.

The movement from adjusted EBITDA of $61 million down to operating profit of $10.3 million versus the $21 million in the first 9 months of 2018 is primarily due to adjusted EBITDA being $4.4 million lower in -- than in 2018; and an increase in ports rights amortization and the right-of-use asset depreciation of $1.2 million to $25.3 million; and an increase of $800,000 in EBITDA contribution of our share of equity associates to $4.4 million, which is stripped out when calculating operating profit.

And we have a $4.4 million increase in one-off adjustments to $11.4 million. The majority of our one-off adjustments are project costs, which totaled $6.5 million in the period, with our latest 2 new ports expected to generate an EBITDA in the vicinity of $30 million by 2022. I would say that these project expenses are expenses that can be considered as money well spent, and that is if we just consider the ports we have recently added, ignoring the existing pipeline of opportunities, which basically stem from the project expenses and these related efforts by the team.

I won't go through the detail of the movement from operating profit to loss after tax as I think we explained the majority of this movement in the RNS. But please bear in mind that the largest movement from EBITDA down through operating profit to profit before and after tax is the noncash impact of port operating rights.

I would now like to talk about our Cruise business in a little bit more detail. Total Cruise revenue for the 9 months rose to 11.2% year-on-year to $46.1 million or $47.9 million and 15.6% increase in constant currency, while in Q3, Cruise revenue rose 16.5% to $22.2 million.

Passenger volumes in the 9 months rose 11% year-on-year to 3.9 million visits. Q3 passenger volumes actually fell 4%. However, if we exclude the impact of Cuba and the U.S. tourists not visiting Cuba anymore, the passenger volumes actually rose 6.6% in Q3.

The deviation in Cruise revenue versus passenger growth in Q3 is due to the mix during the period. And by mix, I mean both the mix within our cruise port portfolio as some ports generate higher revenues per passenger than others, but also, the cruise -- also, the passenger mix within each port with turnaround passengers nearly always generating higher revenues than transit.

Cruise EBITDA grew 13.9% to $32.6 million or 19.9% growth in constant currency to $34.3 million, with Q3 growth around 13%. Most ports experienced similar trends to H1, and all ports performed in line with our expectations.

Now turning to commercial ports. Our total commercial ports revenues for the first 9 months fell by 14.4% year-on-year to $45.4 million for the period and $45.8 million in constant currency, with Q3 Commercial revenue falling by 22%. Container volumes fell by almost 15% for the 9-month period, with Q3 volumes, again, falling 15%, while General & Bulk cargo fell 50% in the first 9 months and 67% in Q3.

In terms of containers, the continuation of trade barriers and tariffs continues to impact marble product exports from China, which clearly has a knock-on effect to marble exports volumes to China from Port Akdeniz, while ongoing restrictions on working capital financing for Chinese marble importers and the high inventory levels of marble in China are having a negative impact on demand.

In General & Bulk cargo, having seen the rate of decline slightly in Q2, the decline, unfortunately, accelerated again in Q3. And this is mainly due to cement volumes and the related coal imports.

You will have noticed that having performed quite well in the first half, Port of Adria suffered declines in volumes and EBITDA in Q3. The volumes were negatively impacted by a change in shipping line scheduling, which means a shipping line is no longer calling off at Port of Adria. However, the gap that has -- that this has created is now slowly being filled by another global shipping line. So we don't expect future volumes to be impacted as negatively as they were in Q3. It's also worth noting that, excluding last year's project cargo, Port of Adria's EBITDA is still going up 25% in the 9-month period.

Overall, Commercial EBITDA fell 19.5% in the 9 months. However, the decline in Q3 was more severe, down to 30%. This weaker performance is partially explained by the weaker Q3 volume performance, but it is also due to the contribution of oil-drilling ships, ship contracts. This contract is offset -- has helped us offset some of the EBITDA impact of volume declines in both the first half of this year and the second half of 2018.

I would highlight that although volumes are weak over the period, our low fixed-cost operating model meant that the EBITDA margin for the first 9 months was still an impressive 74.2% in our Commercial business.

Turning now to the balance sheet, the cash flow and our balance sheet. In terms of cash flow, net cash flow of $1.2 million for the 9-month period is very similar to the $1.1 million achieved in the same period in 2018.

However, I would like to just highlight a number of specific areas within the Q3 and 9-month cash flow as we work our way down from the adjusted EBITDA. Q3 working capital of $22.1 million is primarily driven by the reversal of the $18.2 million outflow of -- at the end of -- at the half year related to the bid bond for Tunisia, which is $12.4 million; the change in port agent in Barcelona, which was $4.5 million; and the oil services contract, which is $1.5 million.

There was also the positive $12 million benefit of the early repayment of the Dreamlines loan, which was not scheduled to be fully repaid until May 2021. These early payments moved to short-term investments in the period as it was repaid shortly after the period, hence why it comes through in working capital.

These positives were partially offset by an outflow of $3.3 million of related bid bonds, expenditure to new -- for new ports and other working capital movements.

The 2 largest components under other are the -- of $16.1 million for the first 9 months are the $6.5 million of the project costs and the minus $4.4 million related to equity associate ports, which takes us down to operating cash flow of $42.6 million for the period.

Increased interest expense at $13.9 million is driven by the impact of IFRS lease expense and the cash tax of $4.4 million, which is higher than the $2.8 million of the previous periods.

And finally, CapEx -- the CapEx of $5.9 million for the 9-month period was lower than the $8.8 million incurred in the same period last year, with no meaningful CapEx incurred since the half year-end.

In terms of our balance sheet, on a comparable basis, net debt was $272.9 million compared to the $267.9 million at the end of 2018. Net debt-to-EBITDA of 3.4x at the end of the period, which compares to 3.0x at the end of 2018 and 3.2x at the end of the 9-month period in 2018. Post the impact of IFRS 16, net debt was $332.5 million, and the net debt-to-EBITDA becomes 4.2x.

Gross debt was $351.6 million, and the leverage ratio as per the Eurobond rose to 4.4x compared to the 4.0x at the end of 2018 versus the restrictive covenant requirements of 5.0x, with the increase here being primarily driven by the reduced profitability of the commercial ports and the interest accruals.

So overall, the trends highlighted at the interim results have continued into Q3. Our Cruise business continued to perform well, and it continues to perform well into Q4. And looking into 2020 and 2021, the organic growth is expected to be strong, driven by significant growth in passenger volumes at Ege and Bodrum cruise ports in Turkey.

On an inorganic basis, the addition of Nassau and Antigua cruise ports will mean we will deliver very strong growth in Cruise EBITDA in 2020, 2021 and 2022. Cruise passenger volumes for 2020 will increase by nearly 100%. And by 2022, we expect to deliver close to $80 million of EBITDA from just Cruise. And this would represent more than doubling our Cruise EBITDA in 4 years, and that is before we consider the impact of any further new port wins on the Cruise side.

Trading in Commercial business remains challenging, and it will remain challenging so long as the trade wars between Asia -- between China and the U.S. continue. And while we are now lapping the start of this period of weakness, the current trading suggests Q4 will be weak, probably weaker than last year. And looking into 2020, the current weakness looks set to persist so long as there is no agreement between the 2 biggest economies in the world.

And looking at our Commercial business, which does not have either the strong structural growth drivers or the strong visibility that our Cruise business benefits from, we will work hard to try and mitigate these trends, but relief from these trends seems unlikely in the near term.

I would like to conclude by saying that despite the near-term challenges in Commercial, our continued growth in Cruise and the delivery of new port projects during the year gives us continued confidence in the prospects for the group as we look into '22 -- '20 and beyond.

So with that, I would like to open it up to the questions and answers.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Konstantin Chinarov from Aptior Capital.

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Konstantin Chinarov, Aptior Capital - Credit Product Analyst [2]

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I think earlier this year, the company was sort of planning to announce the results of the strategic review by the year-end. Sort of understandably, given the performance of the commercial operations, which is responsible for most of EBITDA and the bond groups perimeter, you put caveats on the outcome of the strategic review.

And then from memory, the proceeds from the sale of commercial operations was supposed to be used to take out Eurobonds that is coming due in November 2021. So as far as I understand, the sale of commercial ports operations is still plan A for taking out the Eurobond. But if it doesn't succeed, could you please comment on plan B for the Eurobond? Would you try to come to the market to refinance it in, say, 2020? Or it would be sort of 2021 operation? So any color on that would be very helpful for bondholders.

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Emre Sayin, Global Ports Holding Plc - CEO [3]

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Sure. I think you're right in -- your memory serves you well, other than one thing that I would add is that we said that the strategic review, in fact, could go on into the first half of 2020. And in fact, we are still working on this.

But again, you're right in saying that one of the possible scenarios was the sales of the 2 commercial ports and using that to take our leverage down to turn this business into a more cruise-focused business, and that is still on the table. But if that doesn't realize, and the reason why it wouldn't realize is, obviously, because we would not have the right price for it, we don't want to do it at any cost, of course, then we would go down the route of refinancing the Eurobond. And for that, we are thinking that we would start looking into that in 2020, not wait until the last minute, the 11th hour. So you can expect us to actually, if plan A doesn't pan out, start with plan B as early as the second quarter of 2020.

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Konstantin Chinarov, Aptior Capital - Credit Product Analyst [4]

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Got it. Got it. And then on Commercial business, so I guess the factors that contributed to the slowdown of this business, they kind of seem beyond the management's control, i.e., they're kind of mostly driven by macro and sort of trade disputes. So the company is doing everything under their control to kind of turn around the operations. And you mentioned that kind of Q4 trading is quite weak. Maybe if you could comment on what should happen in 2020 and beyond for these operations to kind of turn around.

Because the slowdown that we see kind of through this year is pretty significant in the historical context. I think last time Commercial volumes fell by 15% was in 2008, 2009, and since then, the business was kind of like mostly growing. So this slowdown is quite, quite substantial. And the question is, like, what should we see in the underlying environment for these trends to reverse, from your perspective?

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Emre Sayin, Global Ports Holding Plc - CEO [5]

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Correct. I mean you're right. This is due to macro events. And it's clearly due to the trade war that's going on. There is 25% tariff now on marble exports from China to the U.S., and we have always highlighted the fact that China almost certainly buys the marble that it buys from Turkey and other countries not just for internal use. Chinese construction companies are active all around the world. And this tariff is affecting the marble -- the exports of China. And in fact, that, combined with the slowdown of the economy in China and the construction sector in China, is having a combined effect. And we are hearing that the inventory levels of marble in China are up. We already highlighted the fact that the Chinese government is not so keen to support financially or credit-wise the marble importers in China. And all of this is having an effect.

What would have to change? Obviously, an agreement between China and U.S. would immediately reverse this trend. There would probably be some months for the inventory levels to start going down in China, but we would almost immediately see a positive impact in -- at Port Akdeniz.

Let me just remind you again that Turkey is the #1 exporter of marble in the world, and Port Akdeniz is the #1 marble export port in Turkey. So the impact will be almost immediate.

Another macro factor that's affecting us, which kind of helped us in the second half of 2018 and the beginning of 2019, was revenues coming from the services to oil-drilling ships in Turkey. And this is again a macro event which has to do with oil-drilling, let's say, negotiations going down in East Med. And there are news that there are some agreements taking place, and Turkey may actually be getting a third oil-drilling ship, and the old oil-drilling ships may be moving west again towards Antalya. In which case, we would realize again additional revenues from that, but we are treating that as a project cargo type of event, which is, again, not under the control of management.

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Konstantin Chinarov, Aptior Capital - Credit Product Analyst [6]

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That's very helpful. And my final question is about Cruise business. So you mentioned, I think, that you're targeting $85 million of EBITDA by 2022. I guess to achieve that EBITDA would require sort of financing for the sort of -- for the cruise operations. So maybe if you could comment on the sort of financing requirements underlying the $85 million EBITDA target. And do you have like any color around the status of those financing requirements, i.e., where you are in sort of -- in the process of attracting that financing to achieve Cruise business EBITDA targets?

Because they are quite substantial -- I mean that's a massive improvement versus historical levels, and that is very sort of -- that is very impressive. I guess the question is like, yes, how much money you need to get there and where you are in that process.

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Emre Sayin, Global Ports Holding Plc - CEO [7]

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Sure. So before going into financing, we have to realize the fact that we have actually started operating these 2 ports in discussion, namely Nassau in the Bahamas and Antigua. But you are right in saying that both these businesses need financing to complete the projects that we have in place for both of these ports.

Nassau, it will take around 2 years to finish this project, and we are in the process of working on the master plan of both making improvements on the pier side and the waterfront side. And half of this investment will be financed by us, and half of it will, in fact, be financed by our local partners. And in fact, a wide base of Bahamians will invest in the project, very similar to what happened in the airport of Nassau previously. So in fact, the same company, CFAL, is organizing this for the Nassau cruise port project as well.

In Antigua, the financing is more straightforward. It's a new pier construction, which will enable Antigua to receive the largest of the cruise ships built in the world today. There is actually already plans and reservations for those calls to Antigua. So I would say the investment and the financing for that project is almost done.

So I don't see big question marks around either of these projects and the financing of these projects. And what we shared before, the plans and the amounts remain intact.

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Operator [8]

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(Operator Instructions) The next question comes from Rahul Bhat from JPMorgan.

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Rahul Ullal Bhat, JP Morgan Chase & Co, Research Division - Analyst [9]

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I just had a few questions. Firstly, probably on dividend and leverage. Considering leverage is going higher because of the weaker profitability at the commercial operations, is there -- and then are you planning to review your dividend policy?

And concurrently, on leverage, what is the kind of leverage range that you would be more comfortable in?

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Emre Sayin, Global Ports Holding Plc - CEO [10]

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Let me start with the leverage first. We have always said that 3 to 3.5x net debt-to-EBITDA ratio was a zone that we felt comfortable in. We also highlighted the fact that this ratio may increase temporarily when we actually acquired big ports, such as Nassau, but it would eventually fall down. And in fact, with the addition of Nassau to the portfolio, we said that we expect our normal level to actually fall down even further because of, basically, the balance -- the play out between EBITDA, cash generation and our debt, but that will take time.

So at the moment, we are approaching the higher limits of that zone where we feel comfortable. And we are looking at, obviously, how we can either refinance the debt or pay out our debt, selling -- by selling the commercial ports to take down our leverage. And the Board will now -- I'm tying the dividend side to -- of your question to this. The Board will definitely take a very careful look at the dividend payments going forward. But I can't speak for the Board in terms of what the dividend payout will be for the long -- for the short term.

I just want to remind you that in the previous call, I believe, or the call before that, our Chairman actually said that if need be, we will temporarily cease paying dividends for the sake of continued growth for the company. We obviously don't want to miss opportunities there.

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Rahul Ullal Bhat, JP Morgan Chase & Co, Research Division - Analyst [11]

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Understood. And in terms of the commercial ports and its performance that has been weaker, is that one of the reasons that has led to the delay in completion of the strategic review? And do you think that could affect the sale price at all for these ports?

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Emre Sayin, Global Ports Holding Plc - CEO [12]

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Well, yes and no -- oh, sorry. No and yes. So that was the reason why we considered this. The reason, clearly -- in fact, we stated this even during the IPO, that there would come a time when we would feel comfortable with the size and the prospects of our Cruise business, and then we would consider divesting our assets on the Commercial side and focusing solely on growing on the Cruise side. So we knew this day was coming, and this was the right timing.

The bad timing was the trade wars and the impact of that on our Commercial business. And obviously, this will affect, of course, the valuation of the business. But I'm hoping that potential buyers will look at it from a more long-term view and understand that this is a temporary thing. And the minute the tariff structures change and the trade wars are over, the performance of the Antalya cruise ports will be coming back online, just like it happened with the Turkish cruise ports. We were discussing this, again, I believe, 2 years ago or 3 years ago. That was the main discussion. Will the cruise ports come back? And we said, yes, and now they're coming back big time.

So in summary, no to your first question and yes to your second question.

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Rahul Ullal Bhat, JP Morgan Chase & Co, Research Division - Analyst [13]

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And I just wanted to confirm: you started the strategic review because you had some inbound inquiries on these ports, correct?

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Emre Sayin, Global Ports Holding Plc - CEO [14]

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Sorry, can you repeat that again? We started it because?

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Rahul Ullal Bhat, JP Morgan Chase & Co, Research Division - Analyst [15]

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The strategic review, because you had some inquiries for someone wanted to purchase these ports. You had some inbound inquiries.

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Emre Sayin, Global Ports Holding Plc - CEO [16]

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To be fair, there were always discussions around how we could restructure the business in that sense. There were some interest. There was some interest before for Antalya port. But after the strategic review, there were more solid and more numerous parties interested. So the strategic review actually helped, in that sense, identifying potential interested parties.

Having said that, I want to repeat again: we will only realize the sale if it makes sense in terms of the price and the future impact to the company. Like I said, this business is still delivering a 74% EBITDA margin. And although the volumes are down, it's due to macroeconomic factors, not due to the weakness of the business or something done wrong by the management or anything like that.

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Rahul Ullal Bhat, JP Morgan Chase & Co, Research Division - Analyst [17]

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Understood. And my last question is on the Akdeniz port and the 2 court cases. So first, on the license extension, has there been any more hearings on that court case? And secondly, on the competition commission, that case, is there any update on that?

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Emre Sayin, Global Ports Holding Plc - CEO [18]

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No developments on either case, either the extension or the competition case. We have shared with you that the Competition Board wanted to extend the time frame by at least 6 months to a year. And we kind of saw that as proof that they don't have a ready case against us. And hopefully, that's good news. But no developments on either front.

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Rahul Ullal Bhat, JP Morgan Chase & Co, Research Division - Analyst [19]

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Understood. And on the Akdeniz port, so the license, is it valid for another -- just for 9 years? Is that -- would that be a condition precedent that it is extended in order for a new buyer to come in?

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Emre Sayin, Global Ports Holding Plc - CEO [20]

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I don't think it would be a condition precedent. I think it would be an upside for the buyer. And hopefully, it will be an upside for us as well according to the deal that we strike. But obviously, the plans and the valuation is not being based solely on an extension. The port itself generates enough profits and enough cash to actually have a meaningful view as is.

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Operator [21]

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(Operator Instructions) The next question comes from Greg Johnson from Shore Capital.

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Greg Johnson, Shore Capital Group Ltd., Research Division - Research Analyst [22]

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Just one question in terms of sort of the Cruise side. Since you last spoke, could you sort of give an update on potential opportunities out there, how they're progressing and anything else sort of appearing on the radar?

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Emre Sayin, Global Ports Holding Plc - CEO [23]

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Sure, Greg. Look, the potential opportunities are plentiful. In fact, like I mentioned before, it's not just in the Med or in the Caribbean, we are actually seeing interest from other parts of the world as well and trying to use our experience to come up with the right type of models for different parts of the world for different ports.

Unfortunately, I can't really share anything with you at this point in time as there is nothing that is public for the time being. But there are sizable opportunities in the Caribbean, in Americas in general. And there are some interesting prospects in Asia. And we still continue to look at ports in the Med. And one port specifically in South Med, we'll probably close very soon, so we'll share news of that with you, I'm hoping, in a short time frame.

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Operator [24]

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(Operator Instructions) Ladies and gentlemen, there are no further questions in the conference call. I now give back the floor to the company. Thank you.

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Emre Sayin, Global Ports Holding Plc - CEO [25]

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Well, thank you very much. I think Q3 was, though the numbers are not to our liking because of the weakness on the Commercial side, in terms of the strategic initiatives and the direction of the company, was actually a good quarter, which showed that our cruise strategy is being executed, and we're clearly on the right path to growth and to transforming this company. And with that, I want to -- I hope to give you better news about the prospects for the future at the end of the year and the closing remarks in March, I believe.

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Unidentified Company Representative, [26]

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The [middle] of March.

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Emre Sayin, Global Ports Holding Plc - CEO [27]

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So until then, farewell, and thank you very much for listening to us.

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Operator [28]

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Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect your lines.