Napier Port Holdings Limited (NPH) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Napier Port Holdings Limited 2021 Nine Months Results Announcement. [Operator Instructions] I would now like to hand the conference over to Mr. Kristen Lie, CFO. Please go ahead.

Good morning, everybody, and thank you all for joining us this morning. My name is Kristen Lie, CFO at Napier Port. I'm joined on the call this morning with Todd Dawson, Chief Executive; and Alasdair MacLeod, Chairman of the Board of Directors. Earlier this morning, we released our interim third quarter and 9 months year-to-date results. In doing so, our intention is to provide a timely market update of our trading performance for the 9 months end of June, provide a current update and to provide an opportunity to address any questions you may have. As the third quarter largely includes our peak produce export season, this update enables us to talk about our trading with stakeholders and also allows our majority shareholder to use our June results for their own financial reporting requirements. In terms of the format for this call, as it is an update, we have not prepared a detailed presentation to talk to. So we will provide an introductory high-level overview of the results and current market and then open up the line for any questions. I'll now hand over to Alasdair to get things underway.

Thanks, Kristen, and good morning, everyone. The financial results for the third quarter and the 9 months to 30 June 2021 that we've reported today show a strong improvement on the results for the same period last year, which was affected by the April 2020 COVID-19 Level 4 lockdown period. Napier Port is benefiting from the strength of New Zealand's primary sector economy. Our region is proving resilient, and we're proud to play our part in connecting our customers to the world. In particular, strong offshore demand for logs, particularly from China, has resulted in improved revenue levels for both the quarter and the 9-month period. Our region's other main exports are also performing well. And for us, these are offsetting the effect of supply chain disruption and the absence of cruise ships due to the ongoing pandemic. We are very mindful of the challenges that the supply chain disruptions are causing our customers. Changing shipping schedules, difficulties securing shipping capacity and empty container supply, along with increased freight rates and shipping charges, are causing major disruptions to the smooth flow of cargo in and out of New Zealand. Before passing on to Todd, I would like to acknowledge our local cargo owners who've had an extremely challenging environment to deal with and to commend the Napier Port team and their commitment to our customers. Despite the challenges to containerized trade and the constraints on operational space due to the construction of 6 Wharf, our people have kept cargo flowing across our wharfs for the benefit of New Zealand. Todd will now take us through the highlights of the 9-month results.

Thank you, Alasdair, and good morning, everybody. As discussed in our half year results in May, our trade diversity and the relative resilience of their earnings has again resulted in a strong result for the 9 months to June 2021. Strong, sustained offshore demand for New Zealand wood is driving significant growth in the volume of logs exported by our customers. Log export volumes for the third quarter were the highest on record, and this has resulted in strong growth in bulk cargo revenues. The overall state of global and regional container shipping has not changed since our half year results update. Supply chain disruption is a significant challenge for our customers. And unfortunately, we do not see this improving in the near future. Amidst containership calls, 15 in the third quarter at Napier Port, and a lack of schedule integrity are now a feature of the New Zealand supply chain. The challenge before us is to work with our customers to minimize the impact on their businesses by utilizing the expertise of our team and strong relationships that we have forged. Financially, we have achieved third quarter revenue of $30.4 million and operating profit of $12.8 million, up from $24.3 million and $9.3 million in the third quarter of 2020. For the 9 months to 30 June 2021, we have achieved revenue of $83 million and operating profit of $34.1 million, up from $76.6 million and $31 million in 2020. The prior period figures include the effects of COVID-19 disruptions, where all but essential trade ceased during New Zealand's April 2020 before lockdown. We continue to progress our strategic initiatives and invest in building our capability and capacity for the future, including the development of our long-term infrastructure asset, 6 Wharf. Construction of the multigenerational asset continues to be on time and on budget. And as stated previously, we expect the new wharf to go live in late 2022, and operational planning for its use is well underway. Kristen will now provide more detail on our numbers.

Thank you, Todd. With our third quarter 2021 trade volume released in July, we reported a third quarter year-on-year volume increase of 61.8% for bulk cargo and 8.3% for containerized volumes. For the 9 months year-to-date to June, total container volumes increased 2.8% and bulk cargo increased by 29.7%, above the same period a year ago. Whilst the prior period was negatively impacted by COVID lockdowns, and we are experiencing further shipping and empty container supply disruptions in the current year, the main trade volume movements overall have been the lack of cruise and strong bulk volumes in the current year, led by the 36.1% increase in export log volumes to a record 2.24 million tonnes. Bulk cargo generated an additional $8.5 million of revenue, container services contributed an additional $2 million. And these amounts have offset $4.2 million of revenue recognized in the prior year relating to cruise. Within container services, in addition to the 2.8% volume increase, average revenue per TEU increased 1.2% to $233 per TEU as a result of longer dwell times of containers on port following shipping schedule disruptions. Additional revenue associated with storage and refrigeration of containers offset the loss of revenue from canceled container vessel calls in the period. For bulk, the 29.7% volume increase was supplemented by an increase in average revenue per tonne of 6.5% or $0.65 to $10.67 per tonne as a result of additional vessel calls and customer mix and rate changes. As noted during the half year results presentation earlier in the year, in the first half of the financial year, we recognized one-off cost recovery revenue, which in the 9-month result translates to $0.29 per tonne of the year-on-year increase. The result from operating activities for the 9 months to 30 June 2021 increased 9.8% to $34.1 million due to the 8.4% higher total revenue offset by a 7.5% increase in total operating expenses. The principal components of higher operating expenses were increased insurance and employee benefit expenses in support of our growth initiatives. The unwinding of some of our cost restriction measures adopted last year in response to the sudden emergence of COVID-19 and the Alert Level 4 lockdown contributed to the employee benefit expense increase. Operationally, our container services team have been working with a small footprint this year due to the space requirements of the 6 Wharf construction site. This, along with the missed container vessel calls and longer container dwell times, has resulted in additional expenses incurred to rehandle, store, power and move containers off port to maintain our operating capability during our extended peak produce season. This is largely reflected in our labor expense and plant and fuel and power expense categories. Fuel and power expenses increased 51% in the third quarter compared to the same quarter last year. Other cost increases include software and systems costs where due to accounting standard developments, we will see the majority of costs being expensed going forward. Underlying net profit after tax for the third quarter after adjusting for nonrecurring reported net gains, increased by 55.5% to $6.7 million from $4.3 million in the same period last year. For the 9 months, this increased by 11.7% to $17.2 million from $15.4 million. Reported net profit after tax for the 9 months increased 0.7% to $18.4 million. And current year result benefited from a $1.2 million revaluation of investment property. The prior year benefited from a one-off tax benefit of $1.5 million due to the reinstatement of tax depreciation on commercial buildings and the $2 million receipt of the government's COVID-19 wage subsidy, which was subsequently repaid in the fourth quarter of the 2020 financial year. In respect of the balance sheet at the end of June, we had drawn bank debt of $60 million with an additional undrawn amount of $120 million available. Our forecast 6 Wharf spend for the year remains consistent with that communicated at the half year of $90 million to $110 million for the full financial year, having incurred $73 million in the first 9 months of the year. I'll now hand back over to Todd to comment on the outlook.

Thanks, Kristen. As we noted in our market release statement earlier today, the reemergence of COVID-19 at New Zealand's community is an unwelcome development and a situation that is evolving daily. The impact on Napier Port will depend on how the situation develops, the government's response and the effect these factors have on the businesses of our cargo customers. During the current COVID lockdown period in New Zealand, Napier Port is deemed an essential business and remained open to support the flow of cargo into and out of New Zealand. We are pleased that the construction of 6 Wharf is permitted to continue under the current Level 4 and remains on track for completion in late 2022. Our region's producers continue to be resilient as evidenced by our apple exporters who have managed to export volumes only slightly behind last year's volumes at the same point in the season despite the labor shortages and other challenges. We are pleased that local growers are scheduled to have access to a larger pool of seasonal workers from some specific nations for the next season's harvest, and we expect the potential reduction of this constraint to flow through to volumes exported next year. Log export market pricing conditions remain relatively robust. However, we have seen some early market signals suggesting Chinese log market prices may be moderating. In addition, log exporters continue to experience higher shipping costs, which is negatively affecting the economics of this trade and which both have an influence on the volume of exported logs from New Zealand. China, as a general trade destination, is showing signs of slowing momentum in its own economy as it deals with the COVID Delta variant, lockdowns and port closures and supply chain constraints. Despite the global supply chain disruption, we remain confident in the trade fundamentals of our business and the continued long-term growth prospects of Hawke's Bay and the surrounding regions. We continue to invest to support that long-term growth and our customers. And as it has been signaled previously, cruise ship visits are unlikely to resume for the coming 2022 financial year. I'll now hand back over to Kristen.

That concludes our prepared presentation. As usual, we'd like to provide the opportunity for those on the call to ask questions related to our presentation and, therefore, hand back over to moderator to do so.

[Operator Instructions] Your first question comes from Wade Gardiner with Craigs Investment Partners.

Just 2 questions from me. Log prices moderating, are you saying -- does that mean flat, flattening out? And because they've been rising for a while, does that mean sort of coming off?

No. Indications are that, in the last months, that they've actually decreased or come down.

But about how much?

Well, I mean there are different reports basically based on different exporters and targeting different access points into the Chinese market. But for example, one report was around $30 a JAS.

Okay. It's quite a bit. The other question I had was just in terms of the apples. Do you have -- I mean you've talked about in the past about apples being in the cold stores, and therefore, being held over for the shoulder season and, therefore, affects your ability to forecast what the season is going to look like. I mean we're mostly through the season now, but do you have a view now of what is left in cold stores and what that fourth quarter might look like?

Wade, it's Todd here. I think most of the volume has shipped now, but still a small amount that we're expecting to come through over the next month or so. But as you say, we were a long way through the season now. So we have seen a bit of a shift as we sort of talked about last time towards the end of the season the volume, just due to some of the disruption in supply chains and things as well as the exporters taking advantage of different pricing as it's become available. But we're sort of expecting dribs and drabs now over the next month or so.