Channel Infrastructure NZ Limited (CHI) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Channel Infrastructure Half Year Results 2026 Call. [Operator Instructions] I would now like to hand the conference over to Mr. Rob Buchanan, Chief Executive. Please go ahead.

Good morning, everyone, and thank you for joining us. I'm here today with our Chief Financial Officer, Alexa Preston, will speak to the presentation disclosed on NZX and ASX earlier this morning. There's a lot of detail in the presentation pack, a channel story is actually pretty straightforward. Our business continues to perform well. We're delivering the projects we said we would exactly on time and on budget. And we're finding new ways for the infrastructure we already own to work. That is delivering growth for channel and increasingly helping strengthen New Zealand's fuel supply chain resilience. The past 6 months have been another fantastic demonstration of what this business can do. If you have the presentation pack in front of you, I'll start on Slide 3. I'm not going to take you through every line on the slide. There are really 3 things I'd like you to take away. First, we continue to see strong performance from the business. We continue to operate our assets at world-class levels. Fuel volumes have held up well despite global fuel supply disruptions. And financially, we've delivered another strong result. Second, we continue to execute with Exxon. We delivered 93 million liters of diesel storage for the government in just 9 weeks. We completed [indiscernible] Energy's jet fuel storage project 6 months ahead of the original schedule and within budget. The Higgins bitumen and terminal is on track to complete late in the fourth quarter of this year. And just this morning, we announced a significant new debt and diesel storage project with our valued customer BP, that will generate a further $130 million of revenue over 15 years. Third, the delivery of projects is now translating into earnings growth. We've created good commercial outcomes for shareholders while solving a genuine infrastructure need for the country. That's a combination we like. and we'll keep doing as we move forward. Moving to Slide 4. You'll see the key financial highlights for the half. Alexa will take you through the numbers in detail, I will just highlight, revenue is up, EBITDA is up. And the Board has declared a $0.0725 per share interim dividend. This is up an impressive 16%, reflecting our strong free cash flow generation and successful execution of growth. Normalized free cash flow and free cash flow conversion are down slightly, a reflection of the phasing of maintenance CapEx. And we're investing considerably more into growth. That is growth with a contracted revenue stream and above WACC returns, which is exactly how we want to grow this business. Disciplined capital contracted earnings and assets we know how to operate at world-class levels. On Slide 5, we turn to safety and operational performance. We have a lot more activity happen at [indiscernible] than right now. More projects, more contractors and a lot more moving parts. So maintaining our operating standards through that increased level of activity is massively important to our world-class aspiration. It's also critically important at a time when fuel supply chains are under future that New Zealanders know they can rely on us to keep our facilities working safely and reliably. Pipeline and tank availability remained at 99% in the period. We handled 30 ships during the half with a larger number reflecting smaller fuel parcels coming in during the fuel crisis. We also continued our strong process safety track record with no Tier 1 or Tier 2 process safety events. We did have 2 recordable injuries, and we're not satisfied with that, noting the significant construction activity on our site. Our expectation remains very simple to get every home safely every day. But overall, the team has done an excellent job managing a very high standard of operational performance, while delivering a much larger program of work. Turning to Slide 6. This looks specifically at Jet volumes where we saw some good growth across Q1 prior to the start of the Middle East conflict. First half through was broadly where we expected and a strong quarter of growth of international services at [indiscernible]. As you would expect, Q2 was affected by higher fuel prices and reduced schedules, particularly from some Middle Eastern carriers. But those services were already beginning to return towards the end of the quarter. As you know, New Zealand has had a number of the aircraft grounded over the past few years due to engine availability issues, which has impacted Jet volumes over this period. So it's pleasing to see the early return to service of New Zealand's full wide-body fleet in June. This will support international capacity and growth in jet demand going forward. And finally, for now, Slide 7 covers petrol and diesel volumes, which have remained stable. This was broadly in line with the Advisory outlook. Given where fuel prices have been, that's worth highlighting, as it reflects the resilience and cost efficiencies associated with our Master import terminal supply chain system. Clearly, transport will change over time, but the transition won't happen overnight and New Zealand will continue to require reliable fuels infrastructure for a very, very long time yet, as demonstrated by the fact that diesel and petrol fleets have remained stable since 2017. Our advantage is that the assets we have in operation today can continue to evolve as that demand changes, and we are focused on building out contracted revenues that are independent of fuel throughput. That is exactly what we are doing with the Marsden Point Energy Precinct, which I'll touch on a little bit later on. I'll now hand over to Alexa to take you through the financials before we come back to the precise growth plan.

Thanks, Rob, and good morning, everyone. As Rob has outlined, this has been another strong half for Channel. Starting on Slide 9 with the profit and loss. Revenue for the half was $72.9 million up 4% on the prior period. EBITDA was $48.8 million, up 1% on HY '25, and our EBITDA margin was 67%. I -- on an underlying basis, excluding the impact of the legacy we release, revenue was up 5% and EBITDA up 3% on HY '25. So overall, another strong and stable result that provides a good base for the additional contracted revenue coming through in the second half from the Z Energy jet storage project and government diesel storage. Turning to Slide 10 and looking more closely at revenue. Variable terminal fees increased 5%, reflecting PPI indexation and higher Warfidge revenue with 30 import vessels received during pass. Contracted storage revenue increased 15% due to PPI indexation and the first revenue contribution from the government diesel storage contract. Other operating revenue increased and includes the revenue contribution from the Summerson Pipeline joint venture. These increases more than offset the loss of the legacy were released and the contracted reduction in fixed terminal fees. We are seeing the benefit of the investment we've been making in building out new contracted revenue streams. Moving to Slide 11. Operating costs increased 11% to $24.1 million. However, excluding the addition of the Somerton on joint venture expenses, underlying costs increased by around 6%. That reflects cost inflation across the board with efficiencies in admin and the in the admin and other cost line, offset by significant increases in energy and utility costs, an increase in materials and labor expenses where we fill vacancies and added capability to deliver world-class resilient operations. We remain very focused on cost discipline across our controllable cost base as the business grows, whilst ensuring a resilient supply chain in New Zealand, which includes world-class asset availability and reliability. On Slide 12, you can see the increased level of investment going into the business. Total capital expenditure was $41.5 million for the half compared with $19.1 million in HY '25. Maintenance CapEx includes investment in terminal control systems, hedge and duty and pipeline upgrades and statutory tank inspections. For the full year, we remain on track for maintenance CapEx of between 8% and 10% of revenue. Growth CapEx includes Z Energy jet storage project, the government diesel storage conversion and the Higgins bitumen terminal. We are investing in the resilience of the existing asset base while also investing in projects that grow contracted revenue. Turning to Slide 13. The business continues to generate strong operating cash flow, supporting stable and growing dividends. Normalized free cash flow from operations was $33.6 million, representing an EBITDA to free cash flow conversion of 59%. That was slightly below HY '25, largely reflecting the phasing of maintenance CapEx during the half. The Board is pleased to have declared an interim dividend of $0.0725 per share, a significant increase of 16% on HY 25, reflecting [indiscernible] to a stable and growing dividend for shareholders. Moving to Slide 14. Our balance sheet remains strong. Net debt at the end of June was $346 million, with $93 million of liquidity headroom. Leverage was 3.8x net debt to EBITDA, which remains within our target credit metrics consistent with the shadow in BBB set to BBB+ credit rating and comfortably within our bank and bond covenant requirements. Interest cover remains strong at 5.7x. We are also reviewing options for refinancing the $100 million retail bond ahead of its maturity in May 2027. We retain balance sheet capacity to fund the growth opportunities ahead of us while remaining disciplined around our target credit metrics. Finally, on Slide 15. As you will recall, we upgraded our guidance in May at the Annual Shareholders Meeting to $97 million to $105 million of EBITDA. With the benefit of 8 months of trading behind us and greater certainty around fuel throughput volumes, we have further upgraded that guidance today to $103 million to $108 million of EBITDA. In addition to greater certainty around fuel volumes, the upgraded results also reflects the successful on-time delivery of the government diesel storage contract and the earlier than planned completion of the Z Energy jet storage project. Maintenance CapEx and normalized free cash flow conversion guidance remain unchanged. In wrapping up, we've delivered another strong result, continued to generate good cash flow and maintained a strong balance sheet while increasing our investment in contracted growth. Importantly, a number of our investments are now moving from capital spend into revenue. 2027 will benefit from a full year contribution from the Z Energy jet storage and Higgins bitumen contract as well as a full year contribution from the government diesel storage contract. Inflation continues to be a feature of the New Zealand economy, and this will likely be reflected in the PPI indexation sector that applies to our revenues next year. Over the last 3 months, Channel has increased the in-service contracted storage volume at Marsden Point by 40%. Reflecting the significant expansion, the material new BP contract we have just announced and acknowledging the significant pipeline of potential growth opportunities ahead of the business. Channel will invest an additional $700,000 to $900,000 per annum in operating expenditure to support resilient terminal operations and the execution of our growth pipeline. I'll now hand back to Rob to take you through the growth opportunities in more detail.

Thanks, Alexa. I want to spend the next few minutes talking about growth. You see in Slide 17 before, but let me remind you of the 3 key areas of growth we're focused on. The first is marked on point with the energy precinct. With the BP deal today, another great example of what we can do there. The second is opportunities along our existing supply chain, particularly around Auckland Airport. And the third is selective acquisitions in New Zealand and Australia. We're very focused on growth, but selective and disciplined growth. It needs the right customer proposition, the right risk allocation and the right return for our shareholders. where we have an advantage that we bring genuine operating capability to the table. We understand high-hazard fuels infrastructure. We know our customers, and we have a demonstrated ability to get projects delivered. That gives us a strong platform to grow from. The next slide is probably my favorite slide in the deck because it shows just how much optionality and opportunity there is at Marsden Point. Here is operating structure here today the assets being repurposed right now, and there are projects under construction. There is land available for even more new development, opportunities in fuel security fuels and other energy infrastructure. The deepwater port access pipeline, tanks, land and operating and development expertise already exists. This is very difficult to replicate, and it provides significant opportunity for us to create further value for shareholders and New Zealand. I'll just take a moment to point out some of the key changes to this slide since you saw it last. Firstly, you can see how much room we will create from the sale and removal of the CCR platform, which forms critical enabling works for the biorefinery. Secondly, you can see we have identified 45 million hectares of land available for greenfields fuel storage. We've now completed a scoping study into the feasibility of conversion of existing tanks and construction of new greenfield tanks, reflecting increased opportunity for strategic storage in New Zealand. Thirdly, we have added 123 million liters of diesel and jet storage in just the last 3 months, significantly increasing the total loan service capacity of our site. And just today, we announced another new and material contract with BP to deliver significant new jet and diesel storage. Slide 19 is probably the best evidence of what 6 months of delivery looks like for our business. Z Energy identified supply chain efficiencies and improving the volume of jet storage on our site. To meet this need, we converted existing infrastructure and delivered it for them 6 months ahead of schedule. The government needed additional diesel storage at incredibly short notice following the outbreak of the Middle East conflict. We identified a solution in 3 weeks and delivered 93 million liters of storage 9 days of New Zealand's diesel demand just 9 weeks later. This was the only option in New Zealand that could be provided at such short time frame due to Marsden Point's existing assets and capabilities in our connection with the existing fuel supply chain. This project highlighted our proven infrastructure turnaround capability and how we are well positioned to respond quickly to unplanned conversion opportunities. Our team has some unique [indiscernible] capabilities for delivering complex projects at pace, and I'm incredibly proud of the way they rallied together to provide this resilience to New Zealand at a critical time of need. In relation to [indiscernible], I needed a more resilient bitumen import terminal solution. That project is on track and in fact has been expanded. Taken together, these projects show the progress we have made towards the Marsden Point Energy Precept. Find the customer problem, use our infrastructure advantage, contracted revenue and deliver the solution. That has become a formula for what we do best here at Channel. And importantly, we still have plenty more to come, as you can see on Slide 20. There remains more than 350 million liters of existing storage capacity potentially available for repurposing. We have also identified 45 hectares of land available for new greenfield storage development. There are opportunities around SAF and biofuels. One exciting development is the memorandum of understanding we have signed with landed jet for a U.S.-based sustainable fuels technology company focused on producing sustainable aviation fuel from ethanol. They are at very early stages of considering an alcohol to Jet facility at Marsden Point. Then there are better energy security opportunities and potentially other structure uses. I often get asked for every one of these things happen, and the short answer is no, and they don't need to One of the benefits of having a large opportunity set like we do is that we can choose the project that makes sense strategically and commercially at the right time for us and our shareholders, and that discipline is important to us. Moving to Slide 21 and the potential biorefinery. At over $1 billion of proposed investment, this would be a significant project for Northland and for New Zealand, producing 400 million liters of biofuels annually. The proposed project has been expanded and is now expected to include biodiesel, sustainable aviation fuel and fertilizer production. Channel's role remains to provide the consortium with the sites and the infrastructure operating as a landlord and infrastructure services provider. The sale of the decommissioned CCR platform enables the redevelopment of that part of the site. You would have seen that indicated on the earlier precinct image slide. The consortium's equity process has taken longer than originally anticipated. It's an incredibly complex process, but credible potential equity providers remain actively engaged and due diligence is very well progressed. At this stage, we continue to see the proposed biorefinery as the highest and best use of the decommissioned hydrocracker assets. That said, the equity raise is a key commission precedent to the [indiscernible] investment decision and the current assessment of the completion of that process will likely to pay the final investment decision into 2027. But if it proceeds, the benefits [indiscernible] well beyond channel. It has the potential to bring substantial investment into Northland, creates employment opportunities, support lower carbon fuels and importantly, strengthen domestic supply chains. And in times of crisis for a constrained fuel supply, it will provide an important backup source of fuel for the domestic market. And of course, it will provide another productive long-term use for Marsden Point's infrastructure. By any measure that would be a fantastic outcome. Slide 22 is about accountability. We set ourselves targets at the beginning of each year, and this is how we're tracking against them in 2026. I won't read the table out, but there are 2 numbers that are important. We've added around $22 million of incremental contracted revenue from the government diesel storage announced in the first half of this year and today announced the new BP contract. And we have upgraded FY '26 EBITDA guidance again. Those are good outcomes for shareholders. So let me finish with some closing remarks on Slide 23. We've delivered a strong operational and financial performance in the first half, alongside continued progress on project development and delivery. The contracted revenue associated with the Jet and Diesel storage projects were now completed will support revenue growth in the second half of '26 and into '27. At the same time, we're continuing to monitor the impact of higher fuel prices on demand. The broader backdrop remains one of geopolitical uncertainty and pressure on global supply chains, which continues to highlight the importance of the infrastructure we operate. We're seeing renewable fuels projects, including the Marsden Point biorefinery, increasingly viewed through a security of supply lens as well as a sustainability lens. And we continue to evaluate both organic and acquisition opportunities in New Zealand and Australia. We believe Channel is really well positioned for continued growth, while playing an important role in strengthening New Zealand's energy resilience. And with that, we'll take some questions that you may have. Thank you.

[Operator Instructions] Your first question today comes from Andrew Harvey-Green with Forsyth Barr.

Great result in no good to see another contract being signed. A couple of questions from me. I guess I'm quite sure how to phrase this tons, but it is probably around the biorefinery. And I guess just given your past to sort of experiences, Rob, with these sorts of processes, -- is there anything in there we should be getting concerned about what the equity raise process? Or is it -- do you think it's just function very -- much a function of, I guess, the increased scope and complexity, and we shouldn't be particularly concerned about the financial side of the project.

Yes, very much the latter, Andrew. So look, again, having seen the returns on offer, it's a financially attractive proposition for folks to invest in. I can't speak to [indiscernible], but there are some very large and significant international investors that are building a comprehensive diligence on that project. So far, that's validated everything that we've seen in it, which is great. But we don't control the timing of when they get there on that. So ultimately, we still are signaling that risk that the FID moves into '27 on the basis that those guys will need to take the time they take to get to close.

Yes. Okay. That's good. Next can I just heard us, I guess, following on from the Iran conflict and there is particularly seeing what's happened in Australia and expectations to guest so obligations may step up. Is there anything going on, any sort of initial discussions around that? Or should call expect this to be parked until post election?

Look, I think we've all seen what the Australian government has done around fuel security and fuel resilience and that significantly left minimum stockholding obligations as well as looking to put in place a strategic reserve. I think we've maintained a watching brief on that here in New Zealand. We are going into an election. I know it's something that's on the mind of ministers and the government. But I probably won't speak to it much more than that.

Okay. Good. Next can I just had was the CapEx side of things, stand business CapEx and are comfortable with what's going on there. Growth CapEx, I guess, was a little bit lower than what I was expecting in the first half. Is there more to come, I guess, is that going to be weighted more second half? Or I'm just sort of wondering if you can give us a little bit more color about what we should expect on the growth CapEx side of things.

So Andrew, the growth CapEx actually includes the conclusion of the Z Energy growth CapEx. So all of that is in the first half bitumens progressing as planned. And so that should all conclude in the second half. And otherwise, it's largely government diesel storage. So -- from our perspective has signaled.

Yes. Okay. Okay. And last question I just had was just thinking about sort of OpEx going forward. You just signed a little bit of an increase coming through. It kind of looks like if we think about probably FY '27 new contracts coming in, circa $50 million. Is that a reasonable sort of ballpark to be working with as sort of underlying OpEx going forward?

I've probably got 3 things -- 3 pieces of color to add to the OpEx. One is we're continuing to see those cost lines where we don't have any control like our transmission and distribution charges experienced significant inflationary pressure. The cost increases that we've signaled today is really the magic of the model that we're running here. We've added $130 million today of contracted revenue over the contracted term and increased the storage capacity of the site by 40% in the last 3 months, and that's a very modest increase in our cost base that we've signaled today. And you'll recall also that when we announced the bitumen terminal, we indicated that would come with some direct OpEx as well a $200,000 again, very modest. So those are sort of the 3 trends that we're seeing that add to the cost base. We do continue to be incredibly disciplined on the cost lines that we do have control over those.

Probably just the other element I'd add to that in terms of color, Andrew, you'll see we completed a scoping study this year or this half would syndicate 500 million to 700 million liters of greenfield courage capacity on the site. And obviously, we've got the existing brownfield conversion opportunity. And as you've seen with the BP contract today and the government contracts, which, frankly, we didn't expect to be doing when we started this year. There is a pretty significant opportunity ahead of us, and we need to make sure that we've got the ability to execute on that. And so we've got a -- we're running the total business with around a little over 100 hits and we're seeing significant growth come at us in delivering projects really well, but we need to be able to continue to do that.

That's all from me.

Your next question comes from Wade Gardiner with Craigs Investment Partners.

Just a few questions first up on the BP contract. What's the split between jet and diesel -- and is the diesel essentially we should view that as that lift in the MSO from 21 to 28 days? And how many days would that add?

Yes. Look, I think one of the things that's important that we do, given we've got 3 highly competitive customers is that we protect their confidential information. So that information is, frankly, sensitive to them. It's a combination of jet and diesel. My suspicion is as a portion of it to help that customers' MSO requirements. But ultimately, that's a matter for them.

So you'd still expect potential MSO deals to be done, this doesn't necessarily change that outlook?

Well, I think every 6 months, at the results I get the question about whether there's going to be MSO deals, and we talked to the fact that actually the commercial opportunity is a significant SDMSO opportunity. And we've kind of highlighted it again actually on the last page of our investor presentation, where we've said in writing, we continue to see a strong pipeline of storage opportunities. So yes, the MSO opportunity, but there's also a commercial and strategic opportunity. And I think it's important to not lose the context of the other 2 because if you think about the jet storage we've delivered for Z and obviously, the BP deal includes jet storage as well. That's a commercial opportunity.

Yes. Are there any rights of extension on this beyond the 15 years?

Yes. Yes, there are.

Can you provide color on that?

No, no further color on that. But on the same terms.

Okay. And I noticed on your CapEx numbers on page 12? Was it where your guidance was that you didn't have anything in there for the BP contract, I don't think.

No, that's right. So -- in terms of outlook for CapEx, is that your question?

Yes. Yes. You say growth CapEx includes Z new government diesel and [indiscernible] but I assume there is some -- given that you're kicking it off in September, there will be some in the BP as well.

There will -- going forward, that's right, the growth CapEx that we've reported year-to-date doesn't include costs associated with the...

No, no, I'm more talking second half.

Second half, yes, we're kicking that project off straight away. Absolutely. Yes.