Dalrymple Bay Infrastructure Limited (DBI) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Dalrymple Bay Infrastructure Limited 2023 Half Year Results Briefing. [Operator Instructions] I would now like to hand the conference over to Anthony Timbrell, CEO. Please go ahead.

Thank you, operator, and good morning, everyone. Welcome to Dalrymple Bay Infrastructure's First Half 2023 Financial Results. I'm joined today by Stephanie Commons, our CFO. Today we will be providing an update on our financial performance, detailing our organic growth opportunities by non-expansionary capital expenditure as well as providing an update on our strategic priorities. I'll start on Slide 4. Our first half 2023 EBITDA was $125.7 million, up 34% on the prior period, reflecting the uplift in our Terminal Infrastructure Charge, which was agreed through negotiations with our customers. We delivered $70.9 million in funds from operations, up 27% versus first half 2022. The uplift in our revenue and cash flow allowed DBI to pay a first half '23 distribution of $0.105 per security, with the Q2 distribution franked at 38.5%. Our distribution guidance for the coming 12 months of $0.215 per security represents a yield of approximately 8% on our current share price. Importantly, we continue to invest in our future growth and announced $280 million of non-expansionary capital projects, which we otherwise refer to as NECAP. In first half 2023, which will drive revenue increases as these projects are commissioned over the coming years. And finally, the inflation-linked nature of the commercial agreement reached with our customers, coupled with our regular NECAP program, will deliver a material uplift in our TIC for the period July '23 to June 2024. Moving to Slide 6. A Terminal Infrastructure Charge or TIC, applies to each tonne of contracted capacity at DBT with the terminal fully contract on a 100% take-or-pay basis at 84.2 million tonnes per annum to 30 June 2028 with evergreen renewal options for customers. Under the current agreement with customers, the base TIC indexed annually in line with the Australian Consumer Price Index. The TIC for July '23 to June '24 has been set at $3.44 per tonne of capacity, representing an 8.4% increase on the prior year. NECAP projects once again contributed meaningfully to the growth in the TIC. As non-expansionary capital projects are commissioned, a NECAP increment representing a return on and of capital is added to the TIC each 1 July. With operating and maintenance cost of the terminal are passed through by the handling charges, DBI is effectively benefiting from current inflationary pressures. Moving to Slide 7. The nature of take-or-pay contracts at DBT provide for a predictable and growing revenue stream. The chart here illustrates the positive impact inflation has on our base TIC and how our investment in NECAP projects leads to growth in the TIC over the time. The Shiploader 1A and reclaimer 4 replacement projects are expected to have a particularly significant impact on the TIC when they are commissioned in the latter part of the decade. To Slide 8. The predictability of our cash flows allows us to ensure that we maintain our investment-grade balance sheet, invest in growth and execute on our distribution policy of paying out between 60% to 80% of funds from operations. Furthermore, that certainty has seen the Board target EPS growth of 3% to 7% per annum for the foreseeable future, subject to business developments and market conditions. DBI, today announces our Q2 distribution of [ 5.025 cents ] per security, franked at 38.5%, which is the company's first franked distribution. The company today also reaffirms the guidance that we set at the AGM for distributions for the year commencing July 1, 2023, totaling 21.5 cents per security to be paid in distributions of -- sorry, [ 5.375 cents ] per security per quarter. That distribution guidance represents growth of approximately 7% on the prior corresponding period. I'll now hand over to our CFO, Stephanie Commons, to talk through the financial results.

Thanks, Anthony, and good morning, everyone. Turning to Slide 10, the profit and loss for the period. For the first half of 2023, W reported a TIC revenue of $133.8 million and a net operating profit after tax of $34 million, both up on the prior comparative period. Note, the prior comparative period does not reflect the negotiated light-hand position as the negotiation of access charges wasn't completed until October last year. Therefore, $22.9 million of prior period revenue wasn't brought to account until the second half of '22. Nevertheless, even after adjusting for that, TIC revenue is up over [ 7% ] on the comparative period. EBITDA of $125.7 million was up 29% on the prior comparative period, noting again, the prior period didn't reflect the negotiated price and also not in the prior period included an IPO transaction cost adjustments. After adjustments, EBITDA was still up 7.6% on prior period, demonstrating the benefit of the pass-through mechanism we have on the OpEx and maintenance costs at the terminal. Net finance costs for the period of $54.4 million, which is down 12% on the prior comparative period. However, this line item includes a number of noncash items, and these are the primary drivers of that reduction during the period. Interest expense on external borrowings, net of interest revenue increased by $5 million compared to the prior period, which was largely as a result of increases in the benchmark rates on DBI's floating rate debt. Moving to Slide 11, cash flow statement. Funds from operations were $70.9 million for the first half of 2023, up 26% compared to the prior comparative period. The uplift in FFO was predominantly due to the increase in the TIC revenue but was offset by higher cash interest and current tax. DBI has been in a structural tax payable position since last year. An increase in time tax for the current period is partly due to the higher TIC revenue, but predominantly due to a taxable gain arising on repayment of the 2011 U.S. private placement notes in March of 2023. These notes were assumed at IPO as part of the acquisition of the DBT Entities DBI. Distributions in the prior comparative period was paid as a combination of unfranked dividends and partial repayment of the loan notes, which form part of DBI's staple securities. Distribution in the current period of being paid in the form of dividend franked at 0% for the first quarter of '23, and 38% for the second quarter of '23. Distributions for the current half year represents 70% of FFO. The next slide, the balance sheet. Majority of the cash on hand at the end of last year of $192 million was held on term deposits until it was used to repay the 2011 USPP notes, which matured in March of '23. Note that the most recent U.S. Private Placement notes we raised during the period did not fund until after the 30th of June and, in fact, funded on the 6th of July. Current borrowings at the end of last year included those 2011 USPP notes which were repaid in March and the current borrowings at the current reporting date represents $16 million drawn on our liquidity facility. Net assets at the end of the current period are broadly in line with the comparative period at $1.15 billion. Moving on to Slide 13, debt and hedging. A 30 June, DBI had $2.2 billion in total facility limits of which $1.8 billion was drawn leaving the business with headroom of $400 million. The weighted average tenor of the drawn debt portfolio was 6.7 years, which is an improvement from 6.4 years at 31 December. We repaid the $300 million of U.S. Private Placement notes in March this year via a combination of cash that we held on the balance sheet and a draw on our main facilities. DBI was again very well supported by the U.S. Private Placement investors during the current period, raising AUD 530 million equivalent and 10-, 12- and 15-year tranches in both U.S. dollars and Australian dollars. The tenor of these notes demonstrates the support the fixed debt market continues to show for the DBI's business, with DBI's longest debt maturity now at 2038. As a result, the weighted average tenor of DBI's debt book is now over 8 years, which is an excellent result. Please note [indiscernible] funded until after the 30 June reporting date on 6th of July, and the proceeds were used to repay the drawn bank facilities with the remaining funds partly being held on term deposits until they are used to repay U.S. Private Placement notes maturing next year. As can be seen on the chart at the bottom of the slide, the next maturity for DBI is up $338 million of U.S. Private Placement notes in 2024. The funds that we've raised will ensure that DBI has sufficient liquidity to repay those notes at maturity. Note that DBI takes no FX risk with all U.S. dollar debt raised swapped back to AUD dollars, maintaining a 100% foreign exchange hedge for those principal and interest. DBI was hedged at 70% during the period with the interest rates swaps set back in May 2021. The most recent U.S. Private Placement notes were kept fixed, which has now increased the fixed hedge rate of our debt book to around 90%, and this level will remain until 2026 when the hedge rate partly reduces to the [ 2016, 70% ]. Moving on to Slide 14, credit rating overview. DBI continues to maintain an investment-grade balance sheet. DBI maintains 2 investment-grade credit ratings with S&P and Fitch, and both ratings were reaffirmed during the current period at BBB and BBB-, respectively. Our ratios are stable and well within the bounds of the criteria set by both S&P and Fitch. I will now hand back to Anthony to talk through our growth plans and strategic parties.

Thanks, Steph. And moving on to Slide 16. As a business, we continue to assess organic growth options at DBT via our NECAP program and the potential implementation of the 8X expansionary project. We are also continuing to progress our investigations into the potential diversification of the asset through our hydrogen consortium. High-level concept studies are progressing, and we look forward to building on this work over the remainder of the year. Further, we are keenly focused on using the core competencies that reside within the existing team to acquire a portfolio of assets across multiple market centers. While we remain extremely confident of the long-term resilience of the demand for Queensland high-quality coking coal, we plan to deploy DBI's predictable cash flow, project management skills and asset management expertise to grow DBI beyond the boundaries of the existing terminal. DBI continues to monitor the market for appropriate opportunities, and we'll work with partners to explore growth options that add value for all security holders. Moving to Slide 17. DBI expects to invest over $500 million in NECAP over the period to 2031. The proposed NECAP spend includes both regular and major machine replacement expenditure. In the first half of 2023, we announced $280 million of NECAP for the construction of initiate level 1A and a new reclaimer are informed to replace existing machinery. It is important to remember that under the terms of our negotiated agreement with customers, we can recover the investment we make in NECAP in the form of a TIC uplift in future years with TIC revenue from invested NECAP earned from the 1 July following commissioning of the relevant project. Our NECAP program is developed in cooperation with the user-owned operator of the terminal and will be funded from a mixture of FFO and debt. Moving to Slide 18. DBT retained significant expansion optionality to accommodate growth in metallurgical coal exports from the Bowen Basin. The 8X project is expected to deliver up to 14.9 million tonnes per annum of additional capacity and is supported by Access Seekers comprised of both existing and new customers seeking in excess of 30 million tonnes of additional capacity. We have secured all primary environmental approvals with the QCA concerning that the costs of 8X may be socialized across existing users. Technical aspects of the FEL3 feasibility study have been completed with our attention now directed towards the development of a commercial framework to support the project. We anticipate commencing negotiations with Access Seekers with regard to Access pricing terms for 8X in the next couple of months. To Slide 19. DBT is ideally positioned from an infrastructure perspective for the export of new energy products given the port of Hay Point’s deep-water nature, abundantly by land to support further development, proximity to Asian customers, and location within one of Queensland's defined renewable energy zones. Aurecon, the engineering company, is currently undertaking concept studies on behalf of our hydrogen consortium with the aim of developing high-level layouts for an ammonia synthesis storage and loading facility at DBT. Further analysis of the potential siting and transmission options for large-scale renewable energy projects within the proximity of the terminal and are also included in the study. However, while DBI is keen to understand the potential role DBT could play in the global energy transition. Any material capital investment and diversification of DBT will need to be underwritten by long-term agreements with producers of these new energy products. Slide 21. I won't read all of these, but just quickly, with our secure take-or-pay contracts and predictable future earnings profile, we are well positioned to execute on our strategic priorities. Our key focus over the medium term will be the timely and efficient implementation of approved NECAP projects, progressing negotiations with Access Seekers aimed at developing a commercial framework for the 8X project and pursuing opportunities to grow DBI beyond the boundaries of the existing terminal. That concludes our prepared remarks. I will now hand back to the operator to take questions.

[Operator Instructions] The first question today comes from Owen Birrell from RBC.

I just -- I guess my first question is just around the net coal market and what you're seeing in terms of current volumes and your expectations for the 6 months. We had Horizon reporting earlier this month, and they're talking to sort of a 10% increase in volumes on their network for the coming 12 months. I'm just wondering if -- what you're seeing given you've had a very strong period to date.

Yes, probably something similar, Owen. I think for the period to the end of June, we did about 58 million, 59 million tonnes of annualized throughput compared to about 53, 54 for the prior corresponding period. June was very strong, up over 60, which is typical given that you tend to see an acceleration in activity towards the end of the financial year. July was relatively quiet, but September -- August, sorry, has picked up again. And I think August to date, we're running at about a 64 million tonne annualized rate. So we're seeing similar trends.

Okay. That's excellent. And just a question for Stephanie. I just wanted to know what the other income line was representing, I think it was $1.8 million in the half. I always presume that's interest revenue, but is there anything else in there?

No, you're exactly correct, and it's interest revenue, nothing else in there.

And that was actually quite a large step-up from prior periods. And I'm just wondering, is that expected to continue? Or again, is there anything [indiscernible] in there.

No, it is a step-up because we are -- that we are holding cash on the balance sheet as a result of going to market and raising debt earlier. So in fact, you'll probably see that number going up in future. So that represents that cash we had on hand at 31 December that we didn't use until we repaid those notes in March. And again, we're now going to be holding some of the funds from the most recent U.S. Private Placement on deposits. So that will come through. There's nothing else that goes through that line.

Excellent. Sorry, just one final question for me. Just looking forward in terms of growth opportunities, you sort of highlighted the NECAP spend out to 2021, I think, just over $500 million committed. Should we think that there are any other opportunities to achieve NECAP growth or NECAP spend out through the end of the decade? Or is additional NECAP spend likely to be beyond sort of 2031 onwards.

100% sure what you mean by the question, Owen, but we will continue to see a mixture of machine replacements and what we call regular NECAP spend. So historically, our annual spend has been in the order of about $20 million to $30 million, and that's just your run of the mill small-scale projects needed to make sure that the terminal continues to comply with good operating and maintenance practice. But now that the terminal is 4 years old, some of the original machinery requires replacement, which is what's happening with Shiploader 1 and the new RL4. There are potentially other options for machine replacements. When they take place, though, is open for discussion between the operator and ourselves and will depend on a range of factors, including the reliability, et cetera.

Yes. I...

I guess my question was -- sorry, around that in terms of replaceability of equipment, is there much more that needs to be replaced before 2030? Or are they kind of in a position where you'd probably be able to run them through to the end of the decade?

There's a very good chance we'll be doing Shiploader 2 before the end of -- before 2031 as well. Beyond that, again, it's not always 100% -- it's not obvious when you should necessarily replace a particular piece of kit. You can always keep maintain the so structurally sound, which all of the equipment is, and you can continue to maintain it effectively indefinitely. The decision that to when to replace largely comes down to when does the amount of time it required to maintain the gear start to have an impact on throughput. And that's usually what drives the replacement decision. But there's a reasonably good chance that Shiploader 2 will also be done in that period.

The next question comes from Sam Seow from Citi.

Just a quick question on interest. Any color on the cost of debt there going forward, both from the newer refinancing. And then that noncash component seems a big swing factor. So then any thoughts there?

Yes, sure. Thanks, Sam. Look, the cost of debt for DBI is going up. We -- the cost of what we are replacing some of the older facilities that we raised back in 2011, 2012, that are maturing are being replaced with debt that we're raising over the last couple of years and the margins for that are higher. And obviously, the base rates that we're seeing are also higher. Now we have hedged a fair portion of our debt up to '26, but we are leaving some of the debt fixed at the moment. So that will obviously flow through, but at least give us predictability over the next sort of the term of that debt. So that cost of debt we will see going up. But we have that in all of our modeling in terms of sort of the cash flows that we have coming through and that we don't have any problems in terms of how we're seeing that in terms of our ability to return funds through our distribution forecast. So that's the first part at all. So just remind me the second question again?

Just noncash component...

Oh, the noncash. Yes, yes, yes. That is to do with fair value adjustments and also to do with gain the losses on the derivatives that we have in the book. It also includes the interest -- the deemed interest on the loan notes, the [indiscernible ] stapled securities because they are noninterest bearing, we do have to bring them back to a fair value and deem an interest rate on them. And so that interest, as we are repaying those loan at that interest does get released through the profit/loss as well.

Sure. And maybe just quickly on the hedging that you mentioned, 90% hedged. Is that lower than you would normally hedge to and was that a conscious decision?

Yes. It is a conscious decision, and it's not lower. We usually hedge between sort of 60% to 80%, generally around at 70% to 80%, but we are hedged at closer to 90% between now and '26 as a result of leaving the most recent U.S. Private Placement notes at fixed rate. Because of the volume model, we did actually implement some reverse swaps to bring that back under the 100% level between now and '26. So that's probably just gives us a lot more view as to where those base rates are going and just give us a much better blended rate between now and '26. So yes, that sort of 80% to 90% is a good view for us. And for the period beyond '26 where we hedge from 60% to 70%, we are undergoing a review at the moment of our hedging to assess what the appropriate level is between '26 and '31. And at what time we enter the market and what sorts of derivatives we use to maintain or increase that level.

[Operator Instructions] The next question comes from Nathan Lead from Morgans.

Anthony and Steph. The first one to you is when we look at the forecast TIC slide, I just wanted to ask a question about just the price competitiveness of the terminal versus Abbot Point and Gladstone once you've had those reasonable step-ups to do without the NECAP. Where do you think you're sitting versus those other 2 terminals now?

Nathan, firstly, anything we say is kind of a guesstimation, given that neither Gladstone or Abbot Point publishers information regarding our access charges. However, based on discussions with Access Seekers who have sought capacity at both [indiscernible] land Abbot point. We're fairly confident that we're still a reasonable margin cheaper than at a point. Gladstone, I suspect we're probably similar. My understanding is Watson has a differential pricing regime where access charges are a little bit different depending upon when you signed up for capacity. But given the rail costs [ RXE ] port costs and rail costs are largely a function of distance. We don't think any incremental increases to access charges as a result of our NECAP program is going to drive anyone. I not going to go close to driving anyone to consider switching terminals.

Great. Excellent. Second question, just wanted to sort of -- I suppose it wraps together tax and dividend franking. So it looks like your current tax expense now in the P&L is running about $12 million. Are we now into sort of a steady-state tax-paying status? Or was that USPP impact sort of like a one-off and then you'll go back to no tax. So that's, I suppose, the first part of the question. And then secondly, you've franked the dividend at 38.5%. If we are in sort of permanent tax paying status now, what's the sort of run rate going forward?

Thanks for the questions. So on the tax payable position, yes, we are in a structural tax payable position. So we do expect to be tax payable going forward. The tax payable amount -- this year is partly due to the uplift in the TIC rate, but predominantly, it's due to the taxable gain on repayment of those notes in March this year, and they related to the U.S. Private Placement notes that were bought into the group at the time of the IPO. There is another one of those next year. But after that, that might be reoccurring. So there is a structural tax payable that is in place, and we expect that to continue. But the one-off, which is the U.S. Private Placement notes, we expect that to just happen this year and next year. In terms of franking credits, we will continue to frank the distributions going forward to the extent we have franking credits available, and we can do so under the tax law. And we do expect to continue to be paying income tax. So we do expect to have franking credits available to attach to each of the distributions at least through '23, '24. In terms of the quantum that we expect to attach, we can't really give any prime on that, mainly because we don't know for sure what the amount of the franking balance will be but also we don't know for sure what the amount of -- we can't guarantee the amount of profits that will be delivered in any quarter. So we can't give guidance for the components for the amount of franking, but we do expect all of the distributions over the next sort the next 12 months to be franked.

Great. And then a final one, maybe it's a little bit cheeky, but I do take your comments about the inorganic methods of growth you're looking at. Is there any M&A that you are currently live involved with at the moment?

No, there's not. Nothing.

Okay. Great. That's Anthony, I just want to say best of luck with the next steps in your career.

Thanks very much, Nathan. I appreciate it.

[Operator Instructions] The next question comes from Paul Butler from Credit Suisse.

Anthony, I will ask your question, I guess, first off, congrats for your tenure with DBI. I just wanted to ask on the negotiation around the TIC. To what extent were you involved in that negotiation with customers? And the second question is when you sort of look at the upcoming discussions you have with customers on negotiations around the compensation for 8X. How do you see that negotiation compared to the one that you've successfully completed previously in relation to the TIC.

Paul. Firstly, the face-to-face component of the negotiations under the light-handed agreement was conducted by our General Manager of Commercial Regulation, Mr. Jonathan Blake. Obviously, myself and Stephanie, and the rest of the management team monitor that process very carefully, and we're all involved in the development of our position throughout that process, but please don't be concerned. But as I leave all the regulatory IP is going to be leading. It's certainly not the case. There's a highly competent and skilled team here who have played a key role during previous negotiations who will remain with the business. And Jonathan, the same gentleman who conducted the TIC negotiations is effectively developing the commercial framework projects that we proposed to put to access seekers in the next couple of months. So don't be concerned at all that there'd be any dislocation in that process. The team has that well, well in hand, and we're hoping to sort of push forward with those negotiations, as I suggested in the next couple of months.

Would it be fair to say that you're probably in a relatively stronger position with the 8X negotiation than perhaps you would have been in the previous TIC negotiations?

I guess we're in a strong position from the perspective that, firstly, the QCA has confirmed that we can socialize the expansion to the extent it goes ahead. So costs can be shared across the existing users. Secondly, the fact that we have the low handed regime. Those, I guess, give us some extra negotiating leverage. But I guess most importantly we won't proceed with the 8X development unless the commercial framework is sufficiently attractive to justify the time and the capital that will be required to implement it. And I guess, we've spent the best part of the last 3, 4 months getting our head around exactly what we would need to get out of that project to encourage us to commit the capital. We think we're getting very close to landing on an outcome. We haven't yet socialized that with the Board. And clearly, we need to do that before we start the process of negotiating [indiscernible]. But again, at the risk of repeating myself, we won't move forward unless, unless it's sufficiently commercially attractive. And hopefully, we'll be able to update you further on our thinking with that regard at the end of year.

And just one final thing. How do you manage the construction risk on the project? I mean I'm presuming you'll have a fixed price, fixed term construction contracts where you try and pass that risk off to your contractor, but just there's been a number of infrastructure projects where it hasn't quite worked out as riskless as originally thought?

Yes. Look, it's probably a bit early to be making comments around how we propose to manage each element of risk of the project, Paul. But obviously, managing construction cost risk is a key part of the process and needs to be something that we take into account in framing the commercial framework for the Board. So apologies, that's a bit of a no answer. But until such time as we've got a complete view as to how we would like to proceed it wouldn't be appropriate for me to make comments on the individual parts of the proposal.

Fair enough. Thanks very much and all the best for the future.

Thanks, Paul.

At this time, we're showing no further questions. That does conclude our conference for today. Thank you for participating. You may now disconnect.