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

Thank you for standing by, and welcome to the Napier Port Holdings Limited 2022 Nine Months Results Announcements. [Operator Instructions] I'd 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, CFO, and I'm joined on the call this morning with Todd Dawson, Chief Executive; and Alasdair MacLeod, Chair of the Board. 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 to the end of June and to provide an opportunity to address any questions you may have. As noted previously, the third quarter largely includes our peak produce export season. And this update enables us to talk about our trading with stakeholders and also allows our majority of shareholders to fulfill their own financial reporting requirements. In terms of the format of this call, as it is an update, we have not prepared a detailed presentation to talk to. Instead, we will provide an introductory high-level overview on 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.

Thank you, Kristen, and good morning, everyone. The financial results for the third quarter that we have reported today show a strong improvement on results of the first half year and also an improvement on the corresponding quarter a year ago. Napier Port continues to benefit from the strength of New Zealand's primary sector economy. Our customers and region have again demonstrated fortitude and an ability to persevere despite challenging conditions. This can-do attitude, together with the commitment of Napier Port's team to deliver services and solutions to keep cargo moving, contributed to an improved third quarter. Despite those demonstrated resilience, we remain mindful of the many ongoing challenges confronting our customers. Again, in this third quarter and year-to-date, we have made exceptional progress putting in place the infrastructure that will underpin the prosperity of the region and Napier Port for the long term. Te Whiti or 6 Wharf opened for business on the 22nd of July, ahead of schedule and within budget, a delivery of capability our region needs accommodating the larger vessels with call and the increase in volumes of cargo exchanged at each call as well as opening up availability across all our other wharves. We look forward to working in container, bulk and cruise vessels on Te Whiti and currently have 89 cruise vessels booked to berth at Napier Port this coming season. Final project costs for Te Whiti are expected to be available for our financial year-end reporting. However, we are pleased to provide further update today on our expected construction costs, excluding capitalized finance costs and overheads. We now anticipate they will come in at the bottom of our existing $173 to $179 million range. As I said at the official opening, it was a project that kept everyone safe from beginning to end. Prioritizing safety and having everyone go safely home every day is still a far more rewarding achievement than early delivery for the Board. Todd will now take you through the highlights of the 9-month results.

Thank you, Alasdair, and good morning, everybody. As highlighted by Alasdair, the uplift in third quarter trade volumes has flowed through to improved financial results for third quarter. Financially, we've reported third quarter revenue of $34.4 million and operating profit of $13.3 million, up from $30.4 million and $12.8 million, respectively, in the same period last year. For the 9 months to 30 June 2022, we've reported revenue of $85.1 million, up from $83 million and operating profit of $29.8 million, down from $34.1 million in 2021. The results for the 9 months are softer than the prior year due to particularly challenging trading conditions in the first half of the year. For the 9-month period, we have seen lower volumes of export apples and fresh and other chilled produce as a result of reduced overall production within customer operations due to COVID, global shipping disruption, labor shortages and weather events earlier in the year. On the whole, we are satisfied with our performance for the quarter and the 9 months given the number of challenges we faced in the first half. In the third quarter, the overall state of global and regional container shipping was largely unchanged from the first half with unpredictable schedules continuing and resulting in missed or delayed vessels, reducing overall shipping capacity and larger exchanges of cargo across fewer vessel calls. Global container freight cost indices while have moderated somewhat from their peaks remained very high. Global demand for Hawke's Bay's premium food and fiber products remains robust. Log exports while down 150,000 tonnes in the 9 months are generally being maintained at good levels despite more uncertain economic conditions in the key export market of China. As noted by Alasdair, bringing Te Whiti online during July was a highlight of the quarter. We are confident it will help to alleviate ongoing supply chain disruption being equipped to berth larger vessels that call New Zealand. Te Whiti's additional capability means improved operational performance across all our wharves. This in turn boosts productivity for cargo owners and efficiency for shipping lines. We continued to progress our strategic initiatives and invest in building our capability and capacity for the future. In addition to Te Whiti, we have been advancing our projects with a debarker and our loading of logs with our mobile harbor cranes. The debarker throughput is increasing as we optimize the plant operation, and we have recently added a second operational shift. New log loading mechanical grabs have now been commissioned and we are currently undergoing initial testing with the various operational teams as this trial progresses. In the second half of this financial year, we are putting into operation the ShoreTensioning (sic) [ ShoreTension ] dynamic mooring units that we highlighted during the half year results. As noted at the half year, we're continuing to see growing customer support for our site to sea logistics capability servicing the central and lower North Island. Kristen will now provide more detail on the numbers.

Thank you, Todd. With our third quarter 2022 trade volume release in July, we reported our third quarter year-on-year volume decrease of 2% for bulk cargo, an increase of 1.5% for containerized volumes, which increased due to higher other container movements and containerized imports offsetting lower reefer exports. For the 9 months year-to-date to June, the total container volumes decreased 9.8% and bulk cargo decreased by 6.3% compared to the same period a year ago. Then container volumes decreased 9.8% to 194,000 TEU from 215,000 TEU in the same period last year as volumes have been affected by shipping disruption, labor shortages and weather events. Log export volume for the quarter decreased by 5.1% and for the 9-month period decreased by 6.9% to 2.1 million tonnes from 2.2 million tonnes as export conditions have remained largely unchanged from the first half of the financial year. Container Services revenue for the quarter of $22.3 million rose 16.6% from $19.1 million in the same period last year. For the 9 months, Container Services revenue increased by 4.5% to $52.5 million from $50.2 million due to improved average revenue per TEU, partially offset by the 9.8% lower container volume. Average revenue per TEU for the 9 months increased by 15.9% to $270 from $233 in the same period last year. This was driven by a number of factors, including increased infrastructure levies and other cost recoveries and increased utilization of depot and storage services. Bulk cargo revenue for the quarter of $11.4 million increased 7.5% from $10.6 million in the same period last year. For the 9 months, bulk cargo revenue decreased 0.7% to $30.6 million from $30.8 million due to the 6.3% volume decrease, partially offset by improved average revenue per tonne. Average revenue per tonne for the 9 months increased 6% to $11.31 from $10.67 in the same period last year. This includes new infrastructure levy on bulk volume, tariff increases and an initial contribution from the debarking operation, partially offset by the one-off cost recovery revenue of $0.29 per tonne in the prior year. The result from operating activities for the third quarter rose 3.7% to $13.3 million from $12.8 million in the prior year period. For the 9 months, the results from operating activities decreased 12.8% to $29.8 million from $34.1 million as revenue growth of 2.6% was offset by 13.3% higher operating expenses. While we are experiencing high cost inflation across all expense categories, the principal components of higher operating expenses year-on-year were increased employee benefit expenses, fuel and power, plant expenses, insurance and health and welfare measures. Employee benefit expenses have increased as a result of additional staffing numbers in support of our growth initiatives and container terminal operations capability and resilience, and of course, higher wage settlements. In the current year, we have also seen increased repairs and maintenance expenditure across our plants and equipment in order to maintain fleet integrity as part of our critical risk management program and a result of early decisions taken to defer replacement CapEx. As we have noted previously, we have introduced revenue-generating recoveries for some of our bigger expense items such as insurance and fuel, which are helping to offset some of these cost increases. Underlying net profit after tax for the third quarter after adjusting for unrealized fair value movements on investment properties increased by 5.1% to $7 million from $6.7 million in the same period last year. For the 9 months, this decreased by 17.7% to $14.2 million from $17.2 million. Reported net profit after tax for the third quarter decreased 10.9% to $7 million, and for the 9 months decreased 13.3% from $18.4 million to $16 million. In respect to the balance sheet at the end of June, we had drawn bank debt of $130 million with an additional undrawn amount of $50 million available. Over the 9-month period, Napier Port has invested $61.5 million in capital assets, including approximately $50 million in bringing the 6 Wharf development project near to completion. Other nonreplacement CapEx spend includes $5 million development CapEx, including additional log area paving, the debarker, log grabs for mobile harbor cranes and the ShoreTension dynamic mooring units that Todd mentioned. While Te Whiti was officially opened during July, we've had some remaining construction works continuing around the 6 Wharf construction sites and the nonoperational part of the site area is being demobilized this month. This will trigger the asset depreciation and cessation of finance cost capitalization to this asset, as previously noted. By way of update to our debt coverage ratio guidance, we have stated previously that we expected our net debt-to-EBITDA ratio to peak shortly after the completion of the 6 Wharf construction project, and this remains the case. Currently, due to the lower earnings being experienced during the current financial year, we expect this ratio will peak in the near term above 3.5x. With the unchanged expectation, the ratio will be managed to within its long-term target range of 2 to 3x over time. Now that we're at the end of the 6 Wharf development and construction period, we are taking the opportunity to review our debt portfolio. I'm pleased to say that we have extended the maturity of $55 million of our facilities with ICBC New Zealand 2 further years out to September 2026. Further, we've announced this morning that Napier Port is considering making an overall offer of unsecured, unsubordinated fixed-rate bonds, which would be listed on the NZX Debt Market. This would be an offer of up to $75 million with the ability to expect oversubscriptions of up to an additional $25 million at Napier Port's discretion. Net proceeds of the offer would be used to repay a portion of Napier Port's existing bank debt and for general corporate purposes. As disclosed in the announcement, the potential bond offer would include a shareholder priority offer reserved for our equity shareholders. If the offer proceeds, we will be pleased to provide our shareholders another investment opportunity with Napier Port and to support us achieving our purpose of helping our region to thrive. Napier Port shareholders can register interest in the shareholder priority offer, the details of which are in our NZX announcements and replicated on our Napier Port website Investor Centre. I'll now hand back over to Todd to comment on the outlook.

Thanks, Kristen. Looking forward, the softening global economy and inflationary pressures will add to the challenges faced by exporters. There are signs the disrupted global container shipping is beginning to stabilize, but in the near term we expect continued disruption to supply chain networks and constrained shipping capacity. Currently, we are continuing significant shipping delays being experienced across some New Zealand ports. Whilst many of our present operating challenges are difficult to influence, we do want to put the spotlight on one particular aspect that requires prompt action to avoid a repeat performance for next year's primary sector season of crops, and that is labor. Our cargo customers remain concerned by restrictions on the availability of labor, and in particular, ongoing difficulty with securing RSE workers despite the borders now being open. As we have seen this financial year, the effect of our primary sector industries having insufficient labor results in losses to production, processing capacity and earnings throughout our economy. We support the call the government to take positive action now to ensure another primary sector season is not compromised by labor shortages. Despite these ongoing challenges, global demand for our region's premium food and fiber products remains very robust with commodity prices generally remaining good. We are looking forward to welcoming back cruise lines and their passengers to our region this summer. With 89 cruise vessels booked to call, we've grown confidence as we approach the season, which is due to commence in October in Hawke's Bay. We expect operating cost inflation to remain a challenge for the foreseeable future and continue to focus on mitigating this wherever possible while continuing to develop our capability and meet our customers' needs. We have reiterated this morning our earnings guidance by noting we continue to expect an underlying result from operating activities for the year to 30th September 2022 of between $38 million to $42 million. I'll now hand back over to Kristen.

Thanks, Todd. That concludes our prepared remarks. We would like to provide the opportunity for those on the call to ask questions related to our presentation this morning. And therefore, I 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 few questions, the first of which is around the cost side of things and you talked through the various cost segments of the P&L, and in particular, employee costs and property and plant costs. Can you just talk through, I guess, are these cost levels now the new norm? Were there one-offs within each of those buckets? For example, employee costs. I'm not sure how big absenteeism was an issue through Omicron. And Kristen, you also mentioned the deferred replacement CapEx, which I'd imagine, will be spent at some stage, which will reduce the property and plant costs in the future.

Yes, sure. I guess in terms of employment expenses, I mean, in any set of results, there are sort of pluses and minuses that are probably one-offs, but nothing material in this case. Yes, I think in the employment, the labor cost side of things is probably -- it's pretty much what we're seeing. So we've talked about increased head count and increased rates so there's probably not much dialing back on that, to be frank. The plant expenses, the higher plant maintenance. Well, I guess within that, you've got fuel and stuff which is pretty volatile in terms of subject to change in the future, and hopefully, things will settle down. In terms of the deferred maintenance spend that we've talked about, that's really been driven by a critical risk management program. In terms of highlighting, I guess, some of the fatigue in some of the equipment. And we've had to do some pretty chunky, I suppose, one-off costs related to our -- particularly our forklifts, but also our cranes. So it's probably fair to say that a bit of that work still to be run through. And obviously, we kind of try to manage it within the bounds of what's reasonable given the sort of the safety of the equipment being #1. Yes, that's probably -- so that's probably that. And then in the other areas, I guess there's bits and pieces and we -- I think one of the things I mentioned was around the health and welfare measures, and that's probably directly related to all the COVID stuff that's happened in the first half in terms of sort of us bending over backwards to make sure that we can do everything to keep our staff on-site, onboard and available to work and healthy, of course, yes, but that's probably in the several hundred thousands rather than bigger numbers.

And are there any maintenance cost, plant-related cost in relation to your 6 Wharf now that it's been commissioned?

No, not yet. No, no. Clearly, if you've introduced new infrastructure, you are introducing new maintenance and not OpEx going forward. So we're not expecting any significant maintenance spend in the near future. Things like the mooring units stuff will require annual maintenance and things like that.

And what would be the quantum of that, Kristen? Is that kind of annual maintenance going to be material? Is there going to be a step up in OpEx as a result of 6 Wharf?

Definitely not. Yes, not material.

So moving on. 89 cruise ships sounds pretty encouraging for the season ahead. Can you give us a sense of pre-COVID what level of cancellation rates you had? I.e., is 89 a reasonable proxy in terms of what you expect assuming that there's no more COVID-type restrictions in place or problems around new variants, et cetera?

Andy, I'll pick that one up for you. Pre-COVID times, the reliability of those bookings was pretty good, actually. Really, the only reason why a booking would drop out was driven out of maybe a weather event or something like that. That would mean the vessel couldn't call. So they're pretty reliable. Those cruise lines obviously got customers, passengers that are looking forward to being out to call various different ports, including Napier so they're reluctant to, once they've made them, back out of those. So the indications from the cruise industry at the moment is that they've got good strong demand, and we've got 89 bookings for this year. Passenger numbers are pretty healthy in what we're hearing. So as we get closer, we're getting more confident, but recognizing, of course, that it is an industry on the rebuild. So I think I've been quoted saying if we've got half of that number turn up in the first season, we'll be delighted. So we're not expecting all of them, but if we get half, we'd be delighted. But as such, indications are good, yes.

Yes. But you must be expecting a bit more than half, wouldn't you, given the increasing confidence and the level of bookings you're hearing about from the cruise lines.

Being more optimistic than pessimistic, Andy, as we get closer to October 24 as the first one that turns up, Ovation of the Seas. So that's a good start. Yes.

And in terms of what's scheduled at the moment, is there typically any flex in those schedules in the context of more bookings coming through this late in the -- or this late in the year for the season ahead? Or is the 89 likely to be the cap now?

Andy, it's a pretty good number to work upon for the season. By this time, we would normally -- in normal times, we would expect that number to be pretty firm at this stage. Forward-looking beyond that, we're also seeing good strong bookings in the later years as well, but that's one of the advantages of cruise is you are looking out 2 to 3 years and getting reasonable predictability about what's coming. And so that's looking strong as well.

Yes. No, no. Sure. Last question for me on CapEx. So we spent, I think, circa $60 million so far through the first 9 months of the year. What are you expecting for the full year in kind of broad terms?

Yes, we've got some completions going on with some of the other sort of strategic projects we've talked about. So maybe a bit of replacement capital sort of completion in the remaining fourth quarter. So depending on timing, I suppose, when payments are made around sort of maybe $10 million to $15 million, Andy, would be sort of ballpark.

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