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

Thank you for standing by, and welcome to the Napier Port Holdings Limited Half Year Results Announcement. [Operator Instructions] I would now like to turn the conference over to Mr. Kristen Lie, Chief Financial Officer. Please go ahead.

Welcome, everybody, to the Napier Port Holdings 2022 Half Year Results Call. My name is Kristen Lie, Chief Financial Officer at Napier Port. I'm joined on the call this morning with Todd Dawson, Chief Executive; and Alasdair MacLeod, the Chair of the Board of Directors of Napier Port. During this presentation, we will be referencing the investor presentation included within the suite of information released earlier today on the NZX reporting platform and also available in the Investor Center section of our website. Our intention this morning is to walk through our presentation to report on the highlights of the first half of our financial year, including some more detailed analysis of our financial results, and then at the end of the presentation, we will open up the line, and we'll be happy to respond to any questions you may have. I will now hand over to Alasdair to get things underway.

Thank you, Kristen, and good morning, everyone. Welcome to our 2022 half year results presentation. Our half year results reflect the challenging conditions that regional exporters and importers have faced over the past 6 months. While it's not new operating conditions, the increased supply chain and shipping disruption, labor shortages and adverse seasonal weather conditions resulted in reduced primary sector cargo volumes this half year. This has flowed through to Napier Port's financial performance, which Todd and Kristen will discuss shortly. As we continue in the second half of our financial year, and the peak of our primary sector export season, we are encouraged that the trading environment and prices for key primary industry cargos that [ cross awards ] continues to be positive. The Board is pleased with the progress that has been made in the strategic initiatives, focusing on trade growth and operational resilience. Significant progress continued this period with the construction of 6 Wharf. Given that the first start of soil was turned the same month that New Zealand confirmed its first case of COVID back in February 2020, it is a credit to the team to deliver this infrastructure asset ahead of time and within our cost estimates. We look forward to 6 Wharf's official opening ceremony on Friday, 22nd July. The Board is also pleased with the progress made in the delivery of our health and safety road map. We continue to make significant financial investments in this area with a focus on mitigating critical risk exposure across the board. While we are mindful of the uncertainty regarding labor availability, global shipping disruption and inflationary cost pressure, we are confident that Napier Port's resilient long-term business model positions the company well in the face of increasing costs and the changing macro environment. The key strengths of Napier Port [indiscernible] and keep us focused on the horizon. We are a lifeline asset of strong underlying regional growth and a diversified trade portfolio. Our historic financial performance has been solid, and we have a record of executing growth opportunities. Todd will now take us through the challenges and highlights of the half year's results.

Thanks, Alasdair, and good morning, everyone, and thank you for taking the time to hear our half year results today. As Alasdair highlighted, there's been a challenging half year period for regional exporters and importers at Napier Port. A number of factors have impacted cargo volumes and flowed through to our financial performance this first half. Firstly, we've seen an escalation in regional and global supply chain disruption and in particular disruption to the container vessel shipping. This is [indiscernible] emissions, delays and inconsistent schedules across fewer vessel calls. At the same time, this has been accompanied by much larger container exchange sizes for both Napier Port and our cargo owners to manage. Internationally, Omicron outbreaks and pandemic related port lockdowns in China have put additional pressure on global supply chains with the flow on effects to shipping reliability and to New Zealand being felt locally. Secondly, with the border still closed during our first half year period, seasonal labor shortages continue in New Zealand's primary sector. This was exacerbated by the spread of Omicron throughout New Zealand during Napier Port's second quarter. Labor shortages lead to reduced overall production within customer operations. It also contributed to delay in processing of seasonal harvest and lower volumes arriving into the port. Thirdly, extreme weather conditions have contributed to delays in cargo arriving on port and caused several port and shipping stoppages in the second quarter. Swell events have been significant in February and March where 2 of the heaviest rainfall periods on record for Hawke's Bay, with the half year ending with a significant East Coast storm [ against ] over the course of a week in late March. I could say we've had an unprecedented series of events that came together, particularly in the second quarter, delay in meat, forestry and horticultural exports coming to Napier Port. Despite this, we have continued to provide high levels of service throughout, and we've responded with open lines of communication and the flexibility available to us to meet our customers' needs. This period has shown once again, the dedication and resilience of our port people through unusual and testing circumstances. The unwavering approach our team adopted last year to slowing the spread or inevitable spread of COVID across our workforce and Napier Port remained operational throughout the recent Omicron wave. The Omicron-related absence at any 1 time did not exceed 11% of the workforce, which means the mandatory vaccination and our on-port saliva testing were introduced help to keep people safe in our port operating with no closures. Whilst COVID protocols and absences have slowed us down at times within our workforce, we are now operating effectively unconstrained and enthusiastically tackling operational improvements in preparing to adopt 6 Wharf into our operations. As Alasdair mentioned, while cargo volumes have undoubtedly been impacted in affecting our financial performance this half, we are optimistic the factors that delayed the product getting to Napier Port in February and March are easing, and cargoes are moving more normally during April and May. Clearly, challenges remain for our cargo customers, including continued shipping disruption and labor issues. However, with the opening of borders and easing of restrictions in New Zealand and globally, we are hopeful of improved conditions looking forward. We expect a stronger second half for meat, forestry and horticulture exports with the delayed cargo now crossing our walls. With the maritime border reopening from 31st of July, we also welcomed the return of cruise ships. However, it remains too early to say how the current pipeline of bookings will translate into actual cruise ship visits for the new financial year. I'll now summarize the progress we've continued to make on our strategic initiatives that will expand our presence and capability to attract more cargo from across a wider regional footprint, beginning with the progress on the construction of 6 Wharf. Moving on to Slide 7. As Alasdair mentioned, we are proud to deliver an intergenerational infrastructure project of the size and complexity of 6 Wharf both ahead of time and within budget. Delivering this project across 2-plus years during a global pandemic that saw international borders closed, with lockdowns that force tools down and the wave of Omicron that has spread and split the country during the first half of our financial year has been challenged to put [ at modeling ]. Despite these challenges, we have continued to make the excellent progress of building [ this port ] and are ready for a go-live in July. At 350 meters long, 6 Wharf was able to [ birth ] larger vessels arriving in New Zealand and opens up growth opportunities and shipping options for cargo owners across the central and lower North Island. We expect the additional capacity 6 Wharf will bring to become evident in the new financial year. We also believe it enhances the attractiveness of Napier Port to shipping lines and that it will help to encourage others to follow ZIM Integrated Shipping Services, which has launched a new direct transtasman service and [ north Asia ] service that calls at Napier Port. Of course, sustainability as being a driving factor of the project since before the first soil was turned and we're proud to have partnered with mana whenua, fishing groups, marine users and a community to have delivered meaningful outcomes in this space, including full compliance with our resource consent conditions, in particular, water quality at the [indiscernible] significant site at Pania Reef. Establishment of the Napier Port korora/little blue penguin sanctuary [indiscernible] species. Development launch of our Marine Cultural Health Program with mana whenua, the first program that was [indiscernible] in New Zealand. And with the creation of 2 new artificial reefs that have helped to enhance the existing heritage and the health of the region's marine life and provide for local recreation, fishing. As we said in our last earning results, we now expect the total cost of the project, excluding capitalized overhead and finance costs to be between $173 million and $179 million. This has been reduced from our original cost estimate of between $133 million and $190 million. The final numbers will be -- we will send them over the second half of the financial year. Moving to the next slide, Slide 8, regarding progress on other key strategic projects. At the start of the financial year, our health and safety road map had reached a stage with much of its planned for national elements of the program were complete. This financial year, the board has committed to an additional $3.8 million into our critical risk program, which focuses on hazards with a potential to cause serious harm or fatality both on land and sea. Over the past 6 months, we have moved to embed critical risk control management and additional assurance activities across the port. The next step is validating us work and meeting any required changes. Napier Port has invested significantly in new mooring technology to better improve operational efficacy and safety on our walls and for our people. MoorMaster installed on 6 Wharf as a vacuum system that holds ships alongside replacing the need for more in lines. This provides greater shipping options, increase capacity and improve productivity. ShoreTension is a hydraulic and dynamic mooring [ tensioning ] system that will improve our operations by removing the need for shorelines to be used. ShoreTension is not only safer, but faster and reducing the time for people working around lines. Last year, we embarked on a range of other investments to further enhance our service proposition with customers. 12 months ago, we established a Napier Port landslide logistics service with our own teams starting work and committing coordination of road and rail services for customers. There's a site-to-sea supply chain solution that provides central and lower North Island customers with a range of freight and cargo handling operations by Napier Port. Use of the service is steadily [indiscernible] with road and rail running 7 days a week between Manawatu Inland Port and Napier Port. We've had positive uptake from existing and new customers, and that's [indiscernible] well with our jointly owned Manawatu Inland Port operation at Longburn [indiscernible]. Supporting this has been a number of international shipping lines now using Manawatu Inland Port as their inland point of acceptance, allowing the [ on-hire and de-hire ] containers for shipping and direct services being accessed through to Napier Port. We've worked with our customers to secure contracts for Napier Port services, have now deployed an on-port mobile log debarker. It is an operational -- it is operational, and we are working on processing increased volumes through the plant as we optimize it. A key benefit of debarking is that it has enabled us to end the use of methyl bromide fumigation of export logs which is a significant safety improvement and environmental win for our region. We're also preparing for the introduction of our mobile harbour cranes to be used for loading logs onto vessels. This will commence trials in the second half of the year and is anticipated to provide significant productivity benefits for customers as well as a new revenue stream to Napier Port with significant improvements in health and safety outcomes also. So to Slide 9. As a result of the challenging conditions for exporters and importers that I had described, our total cargo volumes were 2.5 million tonnes, a 9.8% decrease from the first half of 2021. Given the escalation in global container shipping disruption and other challenges faced by cargo owners, container volumes reduced 16.6% to 113,000 TEU from 135,000 TEU in the prior period. Bulk cargo volumes decreased 8.7% from 1.87 million tonnes in 2021 to 1.7 million tonnes. Also, there were a number of factors limiting domestic log supply and export market conditions, including labor constraints and poor weather. However, log prices remain relatively high with good log export flow out in this first quarter, reducing in line with expectations during the second quarter. Moving to Slide 10. As I said earlier, the reduction of 9.8% in target volume has flowed through to our financial performance. However, given the lower trade volumes and the absence of cruise, the revenue decrease of $1.9 million to $50.7 million, we consider to be a reasonably positive result for the half year. While we're experiencing like everyone higher operating costs, our yield focus means we have recovered our increasing operating costs and partially mitigated the impact of volume reductions of approximately $6.9 million. Our results from operating activities was down to $16.4 million from $21.3 million in 2021. This has flowed directly through to our underlying net profit after tax, which was down to $7.2 million from $10.6 million in 2021. Cash flow from operations remained robust, albeit reduced to $13 million from $14.6 million in 2021. And I'll now hand over to Kristen to talk through the detail of the financial and operating results.

Thank you, Todd. Adding to what Todd said, the key driver of our financial results for the first half of 2022 has been the lower trade volumes, which was down 9.8% overall. However, the much lower actual decrease in total revenue of 3.6% has benefited significantly from the strong impact of higher average revenues per unit across both main cargo revenue streams. Drilling into more detail on the next slide. Bulk cargo revenue decrease of $1 million or 5% compared to the prior year was the product of the 8.7% decrease in bulk trade volume and an increase of 4% in average revenue per tonne. Average revenue per tonne was $11.23, an increase of 4% compared to the same period last year. This increased by 8.5% meant removing the impact of the one-off cost recovery revenue in the prior year. Of this increase, the majority related to the new bulk infrastructure levy, which was introduced from the 1st of October, 2021, as a result of the significant capital investments in 6 Wharf and other development infrastructure projects. The average revenue per unit increases also included general tariff increases, changes in the mix of export customers and a small contribution by the new debarking operation. On Slide 14, log volume decreased 112,000 tonnes, which we consider to be a good half year volume result despite being down compared to the prior year, which in itself was a tremendous growth year with 28% growth across the whole financial year. The chart on the left shows the good momentum from 2021, continuing into the first quarter of the current financial year. As expected, and flagged back in December, the second quarter events saw lower volumes exported due to softer export market conditions, higher shipping costs and expected slowdown during Chinese New Year celebrations as well as COVID-related disruptions at Chinese ports. In addition to export market effects, log volumes arriving at Napier Port were impacted by COVID-related slowdowns and disruptions within our log export supply chain and the poor weather conditions in February and March. Access to logging sites was delayed by a period of the highest rainfall on record which at times also closed State Highway 2 and the [indiscernible] to major log chains. April and May to date has seen more volumes in line with the respective prior year months. New Zealand's supply-side issues have improved and export market conditions in China remain tentative, albeit prices to remain robust given limited market supply. Shipping costs, including fuel, remained high for our exporters. More recently, foreign exchange rates are also assisting [ net ] back prices to exporters. Slide 15. Container Services revenue decreased to $0.9 million or 2.9%, was a product of the 16.6% decrease in TEU volume, and an increase of 16.4% in average revenue per TEU. Given the escalations in global container shipping disruptions and other challenges faced by cargo owners, container volumes reduced to 113,000 TEUs from 135,000 TEU in the prior comparative period and container vessel calls reduced. Todd had outlined the main drivers affecting volumes. Reefer exports were down 20% and driven by lower volumes of export meat and early season apples due to delayed export seasons and industry labor shortages. Dry exports reduced 12.7%, both wood pulp and timber exports continues to be impacted by shipping schedule disruptions and shipping capacity constraints. Other container movements for the half year including DLRs and tranships containers decreased 48.6% due to decreased transhipment and [indiscernible] activity. Going against the tide containerized dry imports increased by 2.3%. Average revenue per TEU increased to $268 from $230 in the prior comparative period and was driven by a number of factors, including the increased infrastructure levy from the 1st of October, tariff increases, increased depot services and longer container drill times continuing from last year. Slide 16. Container vessel calls reduced from 133 to 102 this half year as container shipping disruptions escalated. During the half year, we welcomed a new ZIM trans-Tasman service as they continue their service expansion into the [ Australasian ] market. We also saw the cessation of Maersk OC1 Trident service calling as they restructured their services in New Zealand. This service carried cargo through the East Coast of North America. What we are seeing now is the majority of the local cargo that went on that service to that market, still making that service with Cargo now traveling southbound ex-Napier on the Southern Star service and [ trans-shipping ] onto the OC1 Trident service at Port Chalmers, [ Otago ]. The 2 charts here illustrate the practical impact of container shipping disruptions. The chart on the right, this illustrates the container shipping disruption we have experienced over the last 2 years. Shipping services maintained schedules until the onset of COVID, which, of course, was about halfway through our 2020 financial year. However, since then, calls have become more random resulting in being serviced largely based on a first [ come ] first-serve basis. As explained during our last update, this lack of [indiscernible] results in more rehandling and restacking of containers and container terminal as well as putting pressure on terminal space management and labor rosters, increasing operating costs. Increasing ship exchange size and reducing vessel calls are illustrated on the chart on the left. On Slide 17, operating expenses increased $3 million or 9.5% compared to the prior period. We have been expanding our [ net support ] team capability and resilience over recent periods. We are also now seeing high cost inflation across all spend categories. Our focus remains on controlling costs where we can and productivity improvements while pursuing our strategic direction. In addition, as we are unlikely to stop inflation, we continue our focus on growing revenues through our strategic projects and looking to recover costs where appropriate. Our largest expense, employee benefit expenses increased 8.1% year-on-year, representing wage growth and increased headcount. Additional resources have been added to support our strategic projects, such as the [ onboard ] debarker, supply chain initiatives and additional container operations resources have been added to assist with the impact of shipping disruptions. For example, container rehandling,[indiscernible] and container terminal tracking. Property and plant expenses have increased 27.7% compared to the prior period, with increases to mobile plant maintenance and fuel and power in particular. We have moved to mitigate the unit cost of diesel fuel which has increased significantly by implementing a fuel cost recovery on container exchanges and vessel movements. This took effect from the 1st of May, and we intend to continue this while diesel unit costs are above our average unit rate for 2021 -- financial year 2021. On Slide 18, the result from operating activities of $16.4 million has decreased $4.9 million compared to the prior year. Whilst nobody likes to see increasing costs in the face of lower revenues, I think it's worth putting this decrease into perspective. As highlighted in the chart which provides a simplified bridge analysis on our results and operating activities. The main driver of this decrease has been lower trade volumes. In this case, we have no doubt that this is a short-term phenomenon in the context of our long-term horizon. Positive in our half year result has been a demonstration of our proactive approach to growing revenue where we have deployed capital and resources for the benefit of our customers. In this period, whilst our operating expenses have grown, we have more than recovered those increased costs through proactively adjusting our pricing and providing additional services, which is reflected in the shown $5 million year-on-year increase in average revenue per unit. All of the unexpected sizable reduction in trade volumes has led to a reduction in earnings and guidance. I think it's important to recognize the inverse potential in the business study that has been created given what we have achieved with the average revenues per unit, which sets us up very well for healthy earnings growth as cargo volumes grow again. Slide 19. On a comparable underlying basis, the half year net profit after tax of $7.2 million, was $3.4 million lower in 2021. This principally follows the lower operating result after tax. The difference between reported and underlying net profit after tax for the half year was a $1.8 million investment property after revaluation. As we draw closer to the completion of 6 Wharf, we continue to highlight the expected P&L impact once this asset completes. The majority of our finance costs will be recorded in the income statement with the actual amount depending on, of course, underlying market interest rates and the extent of capitalization on other assets under development. Depreciation will also commence once 6 Wharf is complete and the approximate level of this is expected to be roughly $3 million per annum. Slide 20. Capital expenditure during the half year was $34.6 million or $43.7 million in cash flow spend terms, a majority of which again went towards 6 Wharf construction. Other investments included further paving to increase our log storage area, additional payments towards the log debarker and log grabs, for the mobile harbor cranes, and initial deposits for the ShoreTension mooring units. It's worth noting in the current global inflationary environment like other costs, cost of capital equipment and works are increasing. Currency depreciation also heads to this. These trends will continue to affect our capital asset replacement program costs going forward. Cash flow from operating activities decreased to $13 million from $14.6 million with improved working capital offsetting lower operating earnings in the current year. The final 2021 financial year dividends, payments in December of $9.4 million was $0.6 million less than in the prior year comparative period. After the net cash flow spend on investing activities of $43.7 million, net drawn debt increased by $40.2 million, consisting of cash balances increasing by $1.8 million and drawn bank debt increasing from $78 million to $120 million during the period. In addition to the drawn bank lending at the [ account stage ], we had $60 million in undrawn credit facilities available. Finally, a brief update on our capital management, which is to say our target for net debt to EBITDA remains unchanged. We also include here some further information on our current interest rate risk management profile. The chart here shows our current interest rate swaps in terms of the notional amounts of existing hedging and weighted average rates for those hedged notional sums. [indiscernible] rates, markets have moved massively over recent times, and the cost of capital is increasing. Whilst this profile is subject to change, together with market information, this should give an indication of what our near-term future finance cost profile looks like. Now I hand back over to Todd and Alasdair for concluding remarks.

Thank you, Kristen. And I'm just moving on to Slide 24, to sum up the first half of 2022. I would say that our regions exporters and importers at Napier Port face significant challenges and that has impacted the flow of cargo shipping in our financial results. Despite these immediate challenges, there are many reasons for us to be optimistic. Both our region and the underlying demand for export and fiber products continues to grow alongside our reputation for providing excellent and reliable levels of service to our customers. We've shown the ability to keep delivering on strategic products. And in doing so, we have the core infrastructure available for growth and revenue opportunities for our customers in Napier Port. In the face of increasing costs and macro challenges, our resilient long-term business model provides a very clear line of sight that keeps us looking forward as we manage immediate challenges. Prioritizing strong connections with our customers and building collaborative partnerships, we have hit hard to communicate with all of the supply chain to make changes to accommodate their needs, to ensure cargo and shipment services were maintained and delivered as seamlessly as possible. We made excellent progress on our health and safety critical risk program and have continued to invest significantly in safety and operational efficiencies. Working with customers, we deployed new services, such as the mobile log debarker on-port and are preparing to introduce log loading onto vessels by using our existing mobile harbor cranes. Creating a network of infrastructure through coordinated road, rail and port services, we continue progressing infrastructure at Landside Services that will provide cargo owners and shipping lines with a greater range of reliable and resilient freight and cargo handling options via Napier Port. We're also delighted with the progress we've made on 6 Wharf, including reducing our overall cost range by over $10 million and planning it opening ahead of schedule. For a large-scale infrastructure project whose construction began at the same time COVID entered New Zealand, it's a real credit to our team and partners to deliver it within budget and earlier than originally forecast. In light of the current freight and supply chain strategy review that's underway by government. We believe many of our strategic initiatives are fully aligned with the priorities of this review. Lower emissions, greater resilience, improved productivity and innovation and equity and safety. In terms of the current outlook, Slide 25, a few comments from me. As previously highlighted, cargo customers continue to be negatively affected by ongoing shipping disruption and increasing supply chain costs and ongoing labor shortages. Despite these ongoing labor shortages, sentiment amongst our customers is cautiously optimistic that the times that they have faced earlier this year, especially in February and March, but easing in overall production is climbing again. What we are seeing in Napier Port, reinforces that. There are positive indications and indicators that cargoes in April and May are flying more normally and delayed processing is arriving through our gates now. As mentioned, the trade outlook for our region is positive with primary commodity prices remaining high and the stronger second half anticipated for meat, forestry and horticultural exports. As we have noted extensively today, we do not expect any media easing in the global supply chain challenges. However, we are confident that as COVID becomes endemic and the shipping industry gradually adapts to the current trading environment, these pressures will lessen overtime. The 6 Wharf coming online in July as well as the growth in our Landside Logistics Services, we're seeing good interest in shipping lines and out-of-region cargo on us to call and utilize Napier Port. We're pleased to see the return in international cruise lines with the upcoming season, beginning in October. And Hawke's Bay and Napier Port remain attractive destinations, and we have over 90 cruise vessels currently scheduled to visit. The actual number will depend on how quickly cruise lines are able to put in place landing logistics required to call New Zealand again. This number of bookings compares favorably to the record 76 cruise vessels that actually called during our prematurely shortened 2020 cruise season. With the benefit of 6 Wharf, where we expect to welcome all the cruise vessels that can call without the vessel congestion and disruptions to cargo loading operations that we saw before 6 Wharf this year. In particular, this should significantly benefit our log exporters, especially given the higher shipping costs that they're currently experiencing. As we've highlighted previously, we are seeing broad inflationary cost pressure. Noting these continuing uncertainties and assuming a continuation of current market conditions, Napier Port reaffirms the earnings provided in April for the underlying results from operating activities for the year to 30 September, 2022, to be in the range between $38 million and $42 million. We intend to provide a further interim update to the end of this market regarding our third quarter trading results during August. And I'll now hand back to our Chair, Alasdair MacLeod.

Thank you, Todd. We have announced today an interim dividend for the current financial year of $5.6 million or $0.028 per share, which will be fully inclusive and paid on the 23rd of June. This is unchanged from the interim dividend paid in the last financial year. The Board continue to have regard to, amongst other factors, the economic outlook, the near-term earnings outlook, the group's existing capital commitments and its capital management policy and considers it is prudent to maintain a conservative approach to our balance sheet management. The Board in determining the dividend announced today remains confident regarding Napier Port's underlying earnings, cash flow and prospects despite the lower short-term earnings in this half year. I'll now hand back over to Kristen, who will conclude the presentation.

Thank you, Alasdair. That concludes our prepared presentation. We'd like to provide the opportunity for those on the call to ask questions related to our presentation. And therefore, I'll hand back over to the moderator to do so.

[Operator Instructions] Your first question comes from Andy Bowley from Forsyth Barr.

I've got a couple of questions. The first of which is around the revenue side of the business. And Todd, you referenced a stronger second half in the container operations, particularly given what you're seeing in the horticulture and forestry. Can you give us a sense of how strong the second half could be. I recognize you're kind of most of the way through, what would ordinarily be peak season now from a container point of view. But can we exceed the second half of last year? Can we make up for the shortfall of the first half?

I think we will see a stronger second half, Andy, because the -- particularly during February and March, we had those impacts on weather and things coming through and Omicron coming in and delaying some of the product coming to the Port. So we're seeing some of that delayed cargo reaching us now, April and May are more what we call normal, but still slightly down on what we'd otherwise have seen in recent years. But I think we'll catch up. It would be my summary of where container business will land for the end of the year. And I think we'll make up everything that's been lost, something going to run out of runway to be able to achieve that outcome.

And in terms of what you lost in the first half, that may have been permanently lost from FY '22, but you'd expect it to return in FY '23?

Yes, that's clear. I think the factors that caused that reduction relatively isolated events, we hope that isolated events, and that is no -- the labor availability, whether it's due to absence and sickness or just general labor shortage as well as those -- as weather events, we would see those as isolated one-off events. Shipping to soften obviously, these are various reasons that how long that will continue, but we expect it to continue for some time. And we believe that most of the market has somewhat adjusted to dealing with that. But I think that will still have an impact on volumes certainly in terms of ship calls for the foreseeable future.

Okay. And then with regards to the OC1 Trident service and the New Zealand service, is that kind of a net neutral in terms of volume flow? Or is it a net positive? Net negative?

I think it's net neutral. We're seeing most of that cargo that was going on OC1, going on to the Southern Star and in transshipping over to OC1 is hope to us. There maybe some volume is leaked out through to [indiscernible] and the chilled space. But the instruction of ZIM as well as a good uptake in some of trans-Tasman cargo that maybe we wouldn't have seen in the past is now flowing through our port as well as a little bit of extra imports in cargo as well. So I believe it will be a net neutral position overall.

Great. Okay. So sorry, that was my first question. Second question on the cost side of the ledger and you made some comments around inflation. And I recognize there's some people increases as well. Can you give us a sense of what you're seeing from a kind of a unit cost increase basis, i.e., what's the underlying inflation impacting various cost lines of the business?

Yes. So definitely seeing a pressure of inflation coming through, and I think some of the things that we've been doing around trying to minimize the impact of that are helping. But there's certainly a lot of cost which is coming through and things like utilities and fuel and other areas of cost in terms of insurance. And things you hear us talk about before a bit later, as there's an upwards pressure in terms of labor and certainly expectations around CPI and in some cases CPR plus these adjustments that we made for historical under recoveries before. So Andy, unit cost will, probably hand it over to Kristen to see if he can answer that one for you.

Yes, Andy, if you're looking for kind of a New Zealand macro and that kind of comment, I think what we're seeing now is sort of pervading right through the supply chains within the supply chains as well. So we've talked about costs across all categories, really, including flowing into capital projects and costs. The big movers are obviously fuel or diesel, particularly. We've repriced our electric -- electricity contracts in the period, which was significant sort of unit rates. I've talked about the labor, labor cost insurance is continuing better albeit it's looking a bit more moderate in context of things like fuel. Yes, we just see it kind of coming through. So the inflation story, we see that well advanced rather than beginning.

The OpEx increase and majority of that is inflation, I guess, not least because of the decline in volumes?

I wouldn't the -- kind of a table and get you which slide it was on, yes, there is some reduction in units given the lower volumes. So volume have kept reduction on unit costs -- on expenses, sorry, about $0.5 million. And then the overall expenses are up about $3.5 million half year. That's pretty much all unit cost other than the increased headcount resource. We talked about in the container terminal. That's probably the only, I guess, volume increase cost effects, that makes sense?

Yes.

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

First question, just a clarification of some numbers here. On the media release, you said CapEx was $43.7 million with 6 Wharf being $36.9 million. On Page 20, it says $34.2 million, the total was with 6 Wharf, $27.2 million. And on Page 7, it says $25.6 million for 6 Wharf. What's the difference?

So those numbers either include or exclude accruals. And then I guess if you look at our...

What's that?

Accruals. So from a cash flow numbers, accruals basis.

So I take it we should be using Slide 20 is the non-accrual one?

Yes. If you look at the small print there including the including the cost.

Okay. $161.9 million spent on 6 Wharf to date. Where is it seems to where it's going to come in, in that range. I mean the range is still $6 million. It's a reasonable amount in the context of what's left to spend. Can you give us any clarity on where it's going to come in? And if not, what's the reason for that?

Well, our range is unchanged from the $173 million to $179 million that we last announced. So we're very, very confident that we'll get in that range for sure. I guess, the variability really relates back to, I guess, unresolved items, I suppose, in terms of the context of a major construction contract over the several years. So some things are still in play. So I mean, I think our approach at this stage is put that conversation on pause and then we will come back to you as soon as we know more, which either, if not in August, in the year-end process.

What sort of things are in the result?

Yes, as you expect delays with these sort of projects is, I guess, you call them, adjustments or variations that have been discussed within the contractor and ourselves just to finalize. We're in the closing stages of that. Those aren't significant. So we're pretty confident that we'll be able to update you very shortly on once those conversations are completed.

Okay. First half replacement CapEx, $4 million, for which sort of seems low in the context of the historical levels. What should we expect in the second half?

Well, we're not providing a forecast necessarily on that, but it won't be significant. We're not expecting anything. So a lot of the stuff in the first half or actually like deposits on some of the things we talked about. So the debarker, the log, the harbor cranes, things like that. So I'll say the final payments on that. So I don't have an exact number for you, but it's not going to be significantly different.

Okay. The fuel cost recovery that you mentioned, I mean, it looked like fuel costs are up about $600,000 in that first half, which will be on mix of volumes. How much are you expecting to get back from that cost recovery?

Well, our -- that shows a short-term as far as basic benchmarked to the unit rates from last financial year, the average across the year. So whilst the rates are currently without -- we expect to pretty much recover all the cost impacts above that. So as yes, I said, kicks in from 1st of May. So we're covering, I guess, any kind of negative rate differences for the remainder of the financial year.

Right. Okay. So in other words, if you had it in place for all the first half, you should have recovered that full $600,000.

Correct.

Or thereabout.

Or thereabout. Yes.

Your next question comes from Jonathan Davis from ACC.

My questions have mostly been asked, but perhaps you could elaborate on the drop on the DLR moves, transhipment volume drop because of the change in the shipping services? Or is it related to condition of the port season?

I think last year, we saw quite an uptick in the DLR in tranships. And I think that was mainly as a result of the shipping lines going to move their services and things around and adjust with some of the disruption. And we saw Napier Port being utilized in that regard in terms of moving and restyling of vessels. We're obviously seeing a significant shift in the vessel exchange sizes coming through in Napier Port and the frequency of the vessels. So I think a certain element of shipping lines changing their behavior and their plannings in light of the disruption. So this year, we're seeing least of that requirement come through in terms of restoring the vessels when they arrive and more of a movement to just larger exchanges in total. So thoughts coming off and thoughts going on. So that's what's, I think, driving that.

[Operator Instructions] Your next question comes from Shane Solly from Harbour Asset Management.

Well done on a solid result in a really challenging period. A lot to be happy about that. Can you just talk a little bit more about the confidence in the supply chain port calls getting back to normal-ish? What are the catalysts you're looking for there? Can you talk about that core windows at end of the year? Or are we still a little way away from that?

Our conversations with the shipping industry, in particular, and they kept saying that there is a desire to get back on to windows, but it's really contingent on the whole macro global shipping scenes trying to stabilize. And as well, they are expressing that it also is contingent on new vessel actually coming on stream. So from our perspective, we still see that, that wouldn't be achievable. In the near term, it's going to be more likely to be 12 to 18 months away before we see the ability to resume, plus it's not just a New Zealand-centric issue. It's obviously a global issue. So yes. So that's the picture that we're seeing unfold at the moment. So I think the trend of less frequent and larger exchange sizes is likely to continue. What we'd like to see happen is that those -- as vessels start to arrive on a more reliable basis and going back to that model where we add 1 service on a particular day, you can set your -- is what we would like to see start to occur. But I think the overall vessel size and exchange size will prevail in the upward trend.

Just pick up on that larger exchanges. And clearly, it's been a tough time to -- for your team with COVID and other things continues the productivity ship teams and so forth. Is there anything you can talk about going forward, obviously with 6 Wharf coming on. Does that help?

Yes, it does. It does significantly help us in terms of being able to have additional capacity with the new mooring system and lines as well, we're expecting to be able to have more available time to process those large exchanges as we gain time back from a faster, more efficient, moor in process. It could be anywhere from an hour, 2 hour more available time during the day to manifest exchange sizes. And we're also looking at productivity improvements through the terminal and moving to different types of equipment and traffic management flows to feed the crane hook over the next while. And that will come on stream as we reorientate the yard to face 6 Wharf and obviously, the big benefit of 6 Wharf as well as that it actually opens the floor for the rest of the port availability of Wharfs and the Ferries for us to take more vessels across the bulk cargo, which is that you're seeing a lot more frequency of vessels come through in more cargo requirement to be loaded. So the availability of all the Wharfs and 6 Wharf comes on stream.

Got you. On charges, you've obviously reduced the fuel delivery -- new fuel delivery. In terms of the infrastructure deliveries they are continuing as the permanent -- either with permanent, is that right addition? Is there any other charges you're considering changing going forward?

There's nothing on the immediate horizon that we are considering at this stage in terms of additional levies or things like that, but we have been focusing quite hard on our general contract pricing. And as you heard us talk about as well around the yield on certain cargoes and things going through the port, we've seen that flow through. And you would have seen in the presentation might as well. We noted the impact of that. I've seen some of the additional costs that we've been seeing flowing through. So we made those moves early.

Okay. So is it more that comes through the existing charges or is where we are and where we're at?

I think we've always got -- we've obviously demonstrated we did have quite a bit of ability to leverage price when we need to. But at this stage, our focus is on making sure that the core contracts that we have with customers, shipping lines or cargo lines are structured in such a way that they are appropriate to trying to develop the returns that shareholders would -- are looking forward.

Okay. Just a final one for me. Now obviously, with 6 Wharf nearing completion, ahead of time and ahead of budget, which is very impressive. The capital structure for the business going forward, is that -- do they get reviewed or you're happy as to where it's currently sitting.

Yes. But I'm not expecting huge changes, Shane. I think -- the sort of the capital management policy and guidelines that we provide, I don't think will change. Obviously, we've previously steered towards sort of a lower debt to EBITDA type situation once we get through sort of the peak spend period, which is sort of the next 6 months. We'll -- obviously, we look forward to recognition, I suppose, that the major construction project risk is behind us as we move forward and look to make the most of the infrastructure we've put in place and to deliver the strategy.

There are no further questions at this time. I'll now hand back to Mr. Lie for closing remarks.

Well, thank you, everyone, for joining us for the Napier Port Holdings 2022 half year results call and for your questions. We look forward to providing you with a further update on progress with our 9-month interim results announcements expected to be announced towards the end of August. From the team here in Napier, have a good day, and goodbye.

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