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

Thank you for standing by, and welcome to the Dalrymple Bay Infrastructure Limited 2023 Financial Results. [Operator Instructions] I would now like to hand the conference over to Ms. Stephanie Commons, Interim CEO and CFO. Please go ahead.

Thank you, operator, and good morning, and welcome to Dalrymple Bay Infrastructure's results for the 2023 financial year. I'm Stephanie Commons, the Interim CEO and DBI's CFO; and with me today is Jonathan Blakey, who is our Chief Commercial and Sustainability Officer. Today, we will be providing you with an update on our financial performance for 2023, giving you further detail on our organic growth projects via our nonexpansionary capital program, setting out some of our sustainability progress, and providing an update on our strategic priorities and opportunities as we look ahead into 2024. Starting on Slide #4, our financial highlights. Our FY 2023 EBITDA was $261.3 million, which was down slightly on FY '22. The primary reason for the decrease was that in the FY '22 results, there was a one-off true-up payment of $22.9 million, which was associated with the completion of our user negotiations under the light-handed framework. Further footnote, if this true-up is excluded then EBITDA for FY '23 actually is up 8.3% per year. DBI has maintained an investment-grade balance sheet during 2023 with a debt tenor at the year-end of 7.7 years. Our distribution for financial year 2023 was $0.208 per security, up 8.4% on the previous year, and the distributions represent an approximate yield of 7.5% on our current share price. DBI is continuing to invest in future growth, and we announced $280 million worth of capital projects, which commenced in FY '23, which will drive future revenue. The inflation-linked nature of our contracts with our customers, coupled with our NECAP program, delivered an 8.4% uplift in our Terminal Infrastructure Charge, which took effect from the 1st of July 2023. And finally, I would like to take the opportunity to highlight that Mr. Michael Riches has been appointed as our new Chief Executive Officer, and Michael will be starting in the role next week, the 4th of March. Moving on to Slide 5, which provides some of the operational and ESG highlights for FY '23. In 2023, the terminal exported 61.1 million tonnes of coal to 23 different countries. A reminder, our terminal remains fully contracted via our take-or-pay contract at 84.2 million tonnes, and we receive our Terminal Infrastructure Charge and our other handling charges based on contracted capacity regardless of the actual volume movements through the terminal. In FY '23, 71% of our coal exports were metallurgical coal used by the global steel industry. Importantly, DBI continued to deliver on our whole of terminal approach to ESG. We had 0 environmental noncompliances and 0 fatalities. Unfortunately, our operator had 1 serious injury at the terminal relating to a broken finger that requires surgery. On an environmental front, the operator recycled 99% of water on site and 100% of the terminal's electricity consumption now has renewable energy benefits. Further detail on our ESG performance will be provided a little later this morning with further detail available in our 2023 sustainability report. I'll now hand over to Jonathan to talk to the next slide, which covers our revenue profile.

Thank you, Stephanie. The base component of our Terminal Infrastructure Charge, or TIC, is indexed annually in line with the Australian Consumer Price Index, CPI. This indexation occurs with effect from 1 July each year. The TIC is also positively impacted by the investment we make in non-expansionary capital projects. At our half year update, we advised of the 8.4% growth in the TIC that took effect on 1 July 2023, as compared to the prior TIC year. With the operating and maintenance cost of the terminal passed straight through to our customers, DBI is effectively benefiting from the regulatory -- from the current inflationary environment. The nature of the contracts we have with our customers provides a predictable and growing revenue stream. The chart on the slide illustrates the positive impact inflation has on our base TIC, and how our investment in NECAP will lead to future revenue growth. Thanks, Steph.

Okay, moving on to Slide 8. This growth in revenue leads to growth in distributions for our security holders. Our distributions for 2023 totaled $0.208 per security, which is an 8.4% uplift on 2022. The distribution to FFO payout ratio was 73% for 2023 and therefore, within our distribution policy of paying out between 60% and 80% of funds from operation. Predictability of our cash flows allows us to ensure that we can maintain our investment grade balance sheet, invest in growth and execute on our growth options. 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. The guidance that we set at the last AGM was in relation to distributions for the year commencing 1 July 2023. That distribution guidance, which was for $0.215 per security to be paid in quarterly installments of $0.05375 per security per quarter remains in place. Moving on now to the financial results, which is Slide 10. For the profit loss in FY 2023, DBI reported TIC revenue of $278.8 million, which is down slightly on FY '22. The FY '22 prior year TIC revenue was positively impacted by the $22.9 million true-up that occurred following the finalization of negotiations and access charges under our light-handed regulatory framework, which completed in October '22. After adjusting for that true-up, TIC revenue in FY '23 increased 7.7% year-on-year. Interest on external borrowings, which is net of interest revenue increased by $11.5 million during the year, largely due to increases in the benchmark rates on float rate debt and increases on margins on debt refinancing, particularly in H2 '23. Noncash finance costs increased by $19 million due to a decrease in interest accrued on the loan notes and a decrease in the amortization of fair value adjustments to debt at IPO partly offset by an increase in unrealized losses on financial instruments. Net profit after tax was $73.9 million, which was up on FY '22. In the cash flow statement on the next slide, cash finance costs increased again due to the higher benchmark rates on float rate debt and higher margins on the USPP refinancing when compared to the revolvers, which were repaid from the proceeds. Higher cash tax payable in respect of FY '23 profit was attributable to the full utilization of all our tax losses in 2022. And taxable gains, which arose in HY '23 on repaying of the USPP debt, which was assumed as part of the acquisition of the DBT entities at IPO. Funds raised in the U.S. Private Placement debt market during the year were used to repay drawn balances on revolving facilities, and the remaining $380 million was placed on term deposits, and these funds will be used to repay debt maturities in the forthcoming years. Moving on to the balance sheet. DBI continues to maintain an investment-grade balance sheet. The prior year FY '22 cash balance included funds raised in the previous USPP issue that we did, which funded in March '22, and these were held on term deposit until they were used to repay the USPP notes, which matured in March 2023. Statutory reported borrowings include external borrowings as well as fair value adjustments. The USPP notes that matured in 2023 were reported as current liabilities on the prior year balance sheet and the USPP notes that are maturing this year in September '24 are being reported as current liabilities as at 31 December '23. Moving on to Slide 13. We continue to maintain an investment-grade balance sheet. We have $2.17 billion of total facility limits of which $1.79 billion was drawn at year-end. The weighted average tenor of our drawn debt at year-end was 7.7 years, a significant improvement from an IPO when it was less than 3 years. USD 300 million, which was equivalent AUD 299 million notes were repaid during FY '23, and we raised USD 355 million, which was AUD equivalent $533 million of USPP notes in FY '23 with 10-, 12- and 15-year bullet maturities. These notes funded in July 2023, and the proceeds were partly used to clean down our revolving facility limits to allow us to free up capacity to fund our NECAP program, and the remaining funds will be used to pay the upcoming maturity in 2024. DBI continues to manage interest rate risk via a mix of fixed rate debt and interest rate swaps, and we are continuing to implement a longer-term hedging strategy to align with the move to light-handed regulation. On Slide 14, we give an overview of our credit ratings. We've continued to maintain 2 investment-grade credit ratings and both of them have stable outlooks. The investment-grade rating was reaffirmed by S&P in Q1 '23 at BBB/stable and with Fitch in -- just recently in Q1 of this year at BBB-/stable, and our ratings are well within the bounds of the criteria set by both S&P and Fitch. I'd like to move now on to our growth opportunities, which is Slide 16. The long-term resilience of DBT provides the opportunity to build on existing competencies to develop a portfolio of assets. The transition strategy that DBI developed and released as part of our 2022 sustainability report outlines our confidence for the long-term demand for coke coal exports through DBT beyond 2050. And given DBI's predictable cash flow, our project management skills and a solid understanding of the global energy transition, we are in a position to assess options to build resilience in our assets through strategic diversification. We are also continuing to explore organic growth opportunities, such as our ongoing NECAP program, the 8X project and other potential uses for DBT such as hydrogen. Moving on to Slide 17, which sets out where we are with our NECAP program. DBI plans to spend over $500 million in nonexpansionary capital over the decade to 2031. The proposed NECAP spend includes both regular and major project expenditure. Earlier in FY '23, we announced the commencement of $280 million of NECAP projects for the construction of a new Shiploader, SL1A; and a new reclaimer, RL4, to replace existing machinery. I must point out here that under the terms of our contracts, we can recover the investment we make in all NECAP projects in the form of a TIC uplift in future years. TIC revenue from NECAP spend is earned from the 1st of July following project commissioning. So the investment we make in NECAP will see an uplift in future TIC revenue, which will continue to grow our revenue and our cash flow base. And our NECAP program will continue to be funded from a mixture of FFO and debt. Moving on to Slide 18, the 8X Project. DBT retains significant expansion optionality to accommodate the metallurgical coal exports from the Bowen Basin. The potential 8X Project is expected to deliver up to 14.9 million tonnes of additional capacity, and we have strong demand for new capacity in our Access Queue. 50% of the access requests in our Access Queue were associated with existing mines, and the 8X Project will be underwritten by long-term take-or-pay contracts. We have secured all the primary environmental approvals and the Queensland Competition Authority have ruled that the costs of 8X are to be socialized across both expanding and existing users. The technical aspects of the FEL3 feasibility study completed in early 2023, and we have begun the commercial negotiations with our access seekers with regard to excess pricing terms for the 8X Project. Moving on to Slide 19, which provides an update on our hydrogen strategy. Dalrymple Bay is ideally positioned from an infrastructure perspective for the export of hydrogen given the deep water nature of the port, the abundant nearby land to support further development, our proximity to Asian consumers, and the location within one of Queensland's defined Renewable Energy Zones. We are progressing engineering concept studies focusing on the potential for liquid ammonia exports as a carrier for hydrogen. We will continue to update the market on the development of our hydrogen strategy and the progression of such activities. I'll now hand back to Jonathan, who will talk through our sustainability and ESG.

Thank you, Stephanie. Just moving on to Slide 21, our emissions reporting. Based on the operational control approach so used for the purposes of emission reporting and in accordance with the GHG Protocol guidelines, we developed our first emissions inventory for the years ending June '22 and June '23. The 2023 DBI Sustainability Report has further information as to the breakdown of these emissions. DBI Scope 1 and 2 emissions are CO2 edited total 74 tonnes of carbon dioxide equivalent with approximately 92% of our Scope 3 emissions derived from the Scope 1 and 2 emissions of DBT operations. We continue to make strategic commitments to reduce our emissions, including implementation of the terminals decarbonization road map, monitoring and planning for potential climate change risks, integrating transition risks and opportunities into our corporate decision-making and, of course, preparing for climate-related disclosures to be made in accordance with the draft ASRS requirements. Our actions are aligned with our stated target of achieving Net Zero Scope 1 and 2 greenhouse gas emissions from DBT by 2050. And moving on to Slide 22. Our sustainability actions extend beyond our commitments to the environment and emissions reduction. We continue to focus on health, safety and well-being of our people. And we've established a people and culture committee to promote progress in diversity and inclusion, including a reward and recognition programs based on our values. Importantly, we continue to conduct due diligence on suppliers and vendors to ensure that they comply with the relevant laws and regulations, including those relating to modern slavery, labor practices, health and safety and anti-bribery and corruption. Thank you, Stephanie.

Thanks, Jonathan. Turning now to Slide 24, which is the outlook and the strategic priorities. With our take-or-pay contracts and our future earnings profile, DBI is well positioned to execute on our strategic priorities, which include: delivering organic growth through the implementation of approved NECAP projects, progressing opportunities to capture long-term Bowen Basin metallurgical coal production via the 8X Project, identifying opportunities for diversification that align with DBI's transition strategy, delivering on our whole-of-terminal ESG and sustainability initiatives, retaining an investment-grade credit rating through optimization of the debt capital structure, completing internal concept studies for green hydrogen exports and working with partners to promote DBT as a potential third-party service provider. That concludes our presentation for today. And so I will now hand back to the operator to take questions.

[Operator Instructions] Your first question comes from Owen Birrell with RBC.

Just got a couple of questions for me. Firstly, just looking at the 8X Project. I think you mentioned $1.4 billion -- roughly $1 billion of investment. Just wondering if you can sort of clarify the return hurdle that you're looking at for that project? And what's the payback period you're expecting?

Thanks, Owen. So the return hurdles that we develop internally are in line with other projects, although it is a risk-adjusted return hurdle to ensure that we pick up on any additional construction risks and completion risks we have on the project. So the return hurdles are still effectively being developed, but we have set those at a reasonable level to reflect that project. In terms of the payback period, there is a well understood process for -- about the returns applied to our existing customers, and that was set out in the socialization decision that was made by the Queensland Competition Authority and the negotiations that we had with our customers. The actual payback period and returns that we get from our access seekers, that is currently being negotiated. But overall, it will be value accretive if we were to continue the project.

With the return hurdle, are you able to give us a range?

No. No, it depends ultimately on the risk that we take on the project once we actually do the negotiations of the -- do the completion of the pricing negotiations with customers. So it needs to be a risk-adjusted return hurdle. Obviously, more risk we take on, the higher the return hurdle. So once we've actually landed on those sort of commercial frameworks with the access seekers thing, that load feed into the sort of returns that we're looking for. But it has to be value accretive compared to our existing returns.

Okay. And just a second question for me. Just looking at the hydrogen studies. I think you said that the port can sustain a 3 million tonne per annum pilots without impacting the coal capacity. You also mentioned a bulk facility at 25 million tonnes per annum. Is it fair to say 25 million tonnes per annum would affect the existing export capacity?

Yes. So on the first question, that's the initial highlight, and we are doing further studies to assess whether or not the 3 million tonnes of export of hydrogen is confirmed. So that was an internal study we had done. Obviously, we need to do further modeling to assess how that sits. In terms of how that sits alongside a project like the 8X Project, I would expect that they would be mutually exclusive at this stage if we were to conduct the 8X Project.

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

Nathan, your questions aren't coming through, so I'm not sure -- your line.

Thank you. We're not receiving any audio from Nathan, and there are no further questions at this time. I'll now hand back to Ms. Commons for closing remarks.

Okay. Look, thank you very much, operator, and thank you, everyone, for joining the call. And we look forward to providing further updates in the future. I hope you all have a lovely day. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.