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 hand the conference over to Mr. Kristen Lie. Please go ahead.

Kia ora, and welcome, everybody to the Napier Port Holdings 2023 half year results call. My name is Kristen Lie, CFO, and I'm joined on the call this morning with Todd Dawson, Chief Executive; and Blair O'Keeffe, Chair of the Board of Directors. During this morning's presentation, we will report on the highlights of our first half 2023 financial year, including some detailed analysis of our financial results. We will reference the suite of information released earlier today on the NZX reporting platform and also available in the Investor Center section of our website. At the end of our presentation, we'll be happy to respond to any questions you may have. I will now hand over to Blair to get things underway.

Thank you, Kristen. Kia ora koutou, and welcome to our 2023 half year results presentation. I'm Blair O'Keeffe, Chair of the Napier Port Board. I'd like to take a moment's silence for the lives lost and the livelihoods of those severely affected by Cyclone Gabrielle before we start. Thank you. Today's results show a strong first half year period. Napier Port was tracking to the upper end of guidance due largely to the diversity of its cargo base, together with increasing shipping services and greater operational flexibility since Te Whiti wharf opened. This resulted in good volumes and revenue across a wide range of cargo types, including containerized imports and exports, DLRs, transships, crews, logs, wood pulp and bulk imports. Following the unprecedented and un-forecast impact of the cyclone, trading resumed at reduced levels during the last 6 weeks of the half year. This is due to the damage to regional infrastructure and varying degrees of damage across crops and premises in horticulture, agriculture and forestry. Napier Port's infrastructure held up very well and fortunately, none of our people were injured. Early on, the port was the only entry port into Napier City and the wider Napier region. This allowed the defense forces to bring in vital supplies and provided them with a safe, secure base from which to operate. The Port team provided electricity generation to enable other lifeline services to open and join the civil defense emergency management team in specialist roles such as trade geographic information systems, helping to map the extent of the cyclone damage. Our team, led by Todd performed outstandingly during this crisis, deploying our embedded critical incident management and emergency response procedures. We are mindful of increasing costs and inflationary pressure and we are awaiting the outcome of our insurance mitigation. However, we have confidence that Napier Port's record of resilience and delivery and the strong performance demonstrated entering 2023, positions the company well for the long term. Todd will now take us through the half-year results.

Thank you, Blair. The first half year presented strong growth in revenue and operating earnings. Compared to our first half last year, total container volumes increased 5.7%. We entered our 2023 financial year very optimistically. For many trades, there's been good growing conditions and labor shortages in the primary sector were easing. Shipping schedules had been stabilizing and berthing windows were reestablished in March across Napier, Tauranga Auckland and Lyttleton ports. Te Whiti wharf has been enabling significant efficiencies, improved wharf availability and flexibility to receive vessels with the ships spending less time at anchor waiting for berth and less ship movements required inside the port. 3 new shipping services began, [ 4 ] improved the coastal vessel and it has allowed us to act as a relief valve for congestion elsewhere in New Zealand. This provided a sizable increase in restows and transshipment containers and for early inbound repositioning of empty containers before the season. This amounted to a 23.2% increase in empty and other container movements compared to last year. Container trading was impacted by the cyclone with reductions in export reef for cargo, meat volumes, squashed onions and apple exports, wood pulp and timber. The crew season was highly successful, with 62 calls compared to 1 in the prior year. 14 cruise vessels were canceled due to the cyclone. We currently have over 90 bookings for the '23-'24 crew season. Total bulk cargo volumes decreased 9.1% compared to the same period a year ago due to weaker volumes towards the end of the half year period in a subdued log export market. Turning now to the next slide. Revenue rose 22.8% to $62.3 million due to higher container volumes, return of cruise vessels, improving yields and increased revenue from our debarking operations. Results from operating activities for the half year increased 33% to $21.9 million. Ongoing enhanced cost pressures saw operating expenses increase 17.8%. However, these were comparable in quantum to the second half of its 2022 financial year. Underlying net profit, which excludes unrealized property revaluation gains, also increased marginally to $7.5 million from $7.2 million last year. Following the completion of the Te Whiti wharf last financial year, depreciation costs have increased and the majority of finance costs are now reported in income statement rather than capitalized as an asset. Reported net profit after-tax was down 3.3% to $8.7 million from $9 million in the same period a year ago. Turning now to the effects of Cyclone Gabrielle. We are expecting reduction in seasonal horticultural crops such as pipfruit for the remainder of this financial year. The extent of the areas that will require remediation and we're planting to restore production is still uncertain, but crop loss for next year should become clearer in spring when buds traditionally appear and give an indication of future production. The forestry industry has reestablished forest-based production. There has been some reduction in capacity due to short-term redeployments and some loss of industry transport capacity, but there is only minor damage to the immediate Hawke's Bay forestry catchment. Pan Pac's clean up and recovery of its plant is well advanced. Operations are expected to be restarted around the end of this financial year in September, with the ramp-up towards normal production levels during the next financial year. WPI pulp and timber cargo volumes haven't been impacted. However, there have been some transport mode changes to manage the cargo flow from the Central North Island via a mix of road and rail. Fertilizer volumes have reduced due to the damage, the Ravensdown plant in Awatoto and manufacturing is expected to resume from July onwards. Meat volumes have been impacted with access to farms disrupted by damage to the road and rail network. As repairs to the network have progressed, we are expecting to see a return to more normal volumes in the second half of this year. While pipfruit and the forestry sector combined represent approximately 55% to 60% of revenue, the diversity at Napier Port trades provides a level of resilience, including logs, wood pulp, pipfruit, timber, meat, fresh produce, fertilizer, oil products, general cargo, foodstuffs, crews and transshipments. Regarding the impact on regional infrastructure, there was minimal damage to Napier Port itself. Despite a citywide power outage, partial operations began within 2 days. Within a week, an army base had been set up on port. 3 navy vessels, a fuel tanker and a container ship had arrived and our mobile harbor cranes were powering the electricity substations on our port. We rather took a restorative dredging campaign to reinstate the shipping channel and berth depths, which had experienced infill as a result of the storm in swell, shipping wasn't impacted during this time. Key road access to Napier Port has been restored with ongoing repair to regional and mine roads, including forestry roads. The main rail line to the South and Central North Island has been restored as far as Hastings, which is approximately 20 kilometers from the port. Work on the rail line between Hastings and Napier is expected to continue through to the first quarter of the next financial year. That's -- you can see the damage represented in the picture on the right. And in the meantime, our team has worked hard with customers to support some of the cargo flows to and from Napier Port and the Central North Island hinterland via road and rail. The temporary coastal shipping services between Gisborne and Napier brings some additional resilience into the East Coast trade route and has reduced pressure on the roads while they're being repaired. Long term, the continuation of the service will depend on its commercial viability, especially as the road and rail network comes back online. I'll now hand over to Kristen to talk through the detail of the financial and operating results.

Thank you, Todd. On Slide 9, total revenue of $62.3 million was a record for the first half of the year, an increase of $11.5 million or 22.8% on the prior period. Revenue increased across all categories, while the return of crews accounted for nearly half of the total increase. The container services revenue increase of $4.4 million or 14.5% compared to the prior year was a product of the 5.7% increase in TEU volume and an increase of 8.4% in average revenue per TEU. Empty container volumes were up 5,000 TEU and anticipate a stronger export season. And transships and DLRs were up 6,000, as Napier Port was able to provide network capacity to help shipping lines meet berthing windows. As Todd mentioned earlier, full container volumes fell due to the cyclone traded -- impacted trades, including meat, squashed onions, apples, wood pulp and timber. Average revenue per TEU increased to $290 from $268 in the prior comparative period and was driven by a number of factors, including the fuel cost recovery charge that was introduced last May in the second half of the last financial year to partially offset large increases in fuel prices and tariff increases, partially offset by lower proportions of full TEU and higher proportions of empty TEU and other container moves. [indiscernible] vessel calls increased from 102 to 110 this half year on the back of improved schedule reliability and the introduction of new container shipping services in the period. Average container exchanges per vessel of 1,082 TEU per vessel was slightly down on the 1,104 average for the same period in the prior year. At Bulk cargo, the bulk cargo revenue increase of 1.4 million or 7.5% compared to the prior year was a product of the 9.3% decrease in bulk trade volume and an increase of 18.5% in average revenue per tonne. Average revenue per bulk tonne was $13.30 per tonne, an increase of 18.5%. Of this increase, the majority related to changes in cargo and vessel mix, general tariff increases, fuel cost recovery charge and a larger contribution of the debarking operation, which began in February last year. Turning to logs. Log volume decreased 172,000 tonnes compared to the prior year period. The chart on the left shows the good momentum from the second half of 2022 continuing into Q1 of the current financial year. Cyclone Gabrielle's impact on access and harvest, combined with the subdued log export market resulted in a noticeable drop in Q2 volume. Since the half year, the lagged effect of the cyclone saw export volumes lower than we would normally expect for April. However, inflows support have continued to grow and month-to-date vessel bookings indicate good volume for May. We note in the slide some additional log supply sources from Pan Pac and Central North Island wind-throw. Neither is expected to materially change volumes but they're adding additional supply and supporting our throughput in the short term. In terms of operating expenses, we are maintaining our close focus on managing operating expenses. We've discussed the challenging inflationary environment and the main drivers in previous periods and these are continuing. Although, operating expenses have increased $6.1 million year-on-year, we note this is at a similar level to the second half of 2022 in total quantum. Following the cyclone, we have taken additional measures to control where we can, spend on non-critical maintenance and CapEx and other more discretionary expense items. Lower cargo volumes have been the impetus for releasing casual staff, redeploying resources across the business we have acquired and actively managing leave balances. In this environment, employee benefit expense has increased $3.3 million year-on-year. Approximately half of this relates to wage growth and half to increased head count from the prior year. The majority of the additional resource has been added to direct revenue-generating activities like return of cruise and log debarking, as well as to insource call security operations based on financial business case. Slide 13. The result from operating activities of $21.9 million has increased $5.5 million compared to the prior year. As shown in the chart, the majority of the increase is attributed to cruise and our proactive approach to growing revenue through pricing and additional services has offset higher operating expenses during the half year. As we have pointed out in the past, the missing element from this picture is the expected trade volume growth. Meanwhile, the continued growth in average revenues per unit positions us very well to grow earnings when normal cargo volume and volume growth resumes. Slide 14. As highlighted earlier, our income statement profile has changed following the completion of Te Whiti wharf. The chart shows higher depreciation expense associated with the new asset and the majority of our finance costs now being recorded in the income statement rather than being capitalized during the construction period. Despite this, considering the circumstances, we are pleased to report on a comparable underlying basis, half year net profit after-tax increase of $0.3 million to $7.5 million in the first half year period. Capital expenditure. Capital expenditure during the half year was $6.9 million or $5.5 million in cash flow spend sense. The majority of the spend was directed to mobile plants, including the replacement of 4 container handling machines with more efficient Eco variants and a log loader for our debarking operation. Immediately following the cyclone, we brought forward our regular maintenance bridging program originally scheduled for the next financial year to restore channel and berth-pocket depths to pre-cyclone levels. This was necessary to avoid any impacts to container vessels, often sailing with deeper drafts than other vessels when fully laden. Until we have a clearer review of the financial impact of the cyclone, we've deferred the majority of non-operational non-safety critical CapEx. Cash flow on slide 16. Cash flow from operating activities increased to $21.4 million with improved underlying earnings and improved working capital compared to the prior half year period. The final 2022 financial year dividend payment in December of last year of $9.4 million was in line with the prior year. All investing and financing cash flows, including the dividend were covered by operating cash flow and without the need for additional debt drawings during the period. Finally, our capital management and debt position as well as the drawn bank lending at balance date, Napier Port had $46 million in undrawn credit facilities available at the end of the March half year period. Our debt-to-EBITDA ratio was 3.36x at 30 September 2022, and as expected, decreased to 2.96x at 31 March, which is within our target range of 2x to 3x. As at 31 March, $110 million or 82% of our total gross borrowings were subject to fixed rates that affects underlying base interest rate that is excluding margins and costs of just under 3%. I'll now hand back over to Todd and Blair for concluding remarks.

Thank you, Kristen. Let's move now to Slide 18 on the current outlook and turning to the remainder of the year and beyond. The fundamentals underlying Napier Port remained very strong. We are a critical lifeline asset for the wider Hawke's Bay region and our infrastructure and operations stood up to another challenge and demonstrated again our resilience and ability to deliver under very difficult circumstances. Te Whiti wharf is doing what we said it would do in delivering efficiencies for shipping lines, cargo owners and ourselves, as performance in the first months for the half year underpin a positive long-term outlook for Napier Port. We have strengthened our footprint in the Central North Island with growth in our supply chain services and our partnerships with Halls Group and Manawatu. As road and rail improvements continue, we expect to see more growth coming from this service. Central government has committed financially to the cyclone recovery, including cleanup, repair of road and rail networks, flood protection infrastructure and community well-being initiatives. Large businesses have committed to remain in the region and rebuild. Our horticulture sector talks about the opportunities the rebuild will bring and to invest in new operations and technologies, new premium varieties of crop produced on resilient land, as a sector with a solid track record of innovation. Trading will be subdued in the second half and we expect to return to traditional export flows next year. We're expecting a strong summer crew season, new crops and ongoing repair to regional transport infrastructure, including reinstatement of the rail line from Hastings to Napier. Noting the ongoing challenging New Zealand economic outlook and the post-cyclone drag on trade into the new financial year, we're taking a very conservative approach to our costs and outgoings. We intend to provide a further interim update to the NZX market regarding our third quarter trading results during August. I'll now hand back to our Chair, Blair O'Keeffe.

Thank you, Todd. 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. We've announced today an interim dividend for the current financial year of $3.4 million or $0.017 per share, which will be fully imputed and paid on the 22nd of June. This has reduced from the $0.028 per share paid at the same time last year. Despite the strong first half, we recognize uncertainty in the near-term trading and in relation to the insurance claim, which may impact full year earnings and inhibits the ability to provide guidance at this time. The Board remains confident regarding Napier Port's long-term underlying earnings, cash flow and prospects. I'll now hand back to Kristen, who will conclude the presentation.

Thank you, Blair. 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, hand back over to the moderator to do so.

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

Just a couple of questions from me. Can you just comment on the cruise revenue? The unit revenue per ship looked pretty strong relative to where it was a couple of years ago. What's happened with the pricing there? And what should we think about going forward?

Wayne, Todd here. I guess despite the interruptions of cruise sector to COVID, we still maintained a profile of looking at reviewing the rates and different pieces with the cruise industry, recognizing that costs didn't stay still during that period as well. So, we've been able to increase some of the pricing with the cruise industry across those 2 years despite the delay. And also it's linked to some of the size of vessels as well coming through the port, pricing is variable to [indiscernible] being on the size of the vessels coming through. We had a good number of larger vessels coming through the season also.

And price increases for next year?

Look, we're always reviewing the pricing across all our various different agreements, Wade. So, still be looking at that as we go forward.

The 3 new services, any impact on those going forward in the interim, given that they probably signed up thinking that volumes are going to be higher in the short term or any other services really?

I mean first of all, I guess, [indiscernible] from a New Zealand perspective, we've seen a number of new entrants into the market because obviously, conditions have been pretty buoyant for the shipping industry of late. So yes, we've benefited from that in terms of new services coming through at Napier Port as well. We're obviously keeping a pretty close watch on what's going to be the long-term sustainability of it in new services, both because of the potential reduction in volume coming out of the Napier Port in the short to medium term. But equally, as pricing across the industry is softening up again [indiscernible]. We potentially expect that some of those services could be more marginal longer term.

And second half CapEx outlook and also into FY '24, given some of this CapEx, say, around the dredging has been brought forward.

Look, we've obviously, at the moment, just taken a shorter-term decision around deferring some, what I'd say, non-critical [indiscernible] items for the remainder of this year and also just looking at what's achievable to be able to deliver in this -- remainder of this year with a tight market, et cetera. So, we're obviously not compromising anything related to safety critical items. And otherwise, we would expect to see more normal levels of CapEx expenditure aligned to what we traditionally expect to see each year. There will be some lumpiness over time in the long-term plan for the port as we have bigger items come up in the replacement, but largely back to normal in New Year.

And just finally for me, with the rail being out from Hastings and you mentioned changes to -- mode changes to some. Particularly with the WPI volumes, whose -- are you contributing to that, I assume, increased costs with the mode changes? Or is that all on them?

No. Napier Port is not contributing to that cost. That's an arrangement that WPI has or giving their cargo from their mill through to Napier Port. We're just obviously facilitating and working with providers to make sure it runs smoothly, but all that [indiscernible] on to road in the current state. It's actually expected to start to run through the Hastings in the next week or so. And there we'll be road bridged from Hastings through to the port.

[Operator Instructions] Your next question is from Andy Bowley from Forsyth Barr.

A few questions from me. The first of which is just around the dividend commentary. The kind of language you used in the presser was slightly different to what's used in the half year report where we talk about an expectation of reduced full year earnings. Can you talk to that in terms of what you specifically mean by that around which specific line in the P&L?

We're just saying there's uncertainty around the full year, it's Blair, Andy. We're saying there's some uncertainty around the full year earnings at this stage. So, I wouldn't read more into it than that.

But in the report, there's a specific reference to an expectation of reduced full year earnings?

Yes. I think that's in the presentation, I think we've made that clear given the circumstances, the expectation is we're going to see lower volumes coming through, particularly on the container side around some of those fresh produce and other affected categories or industries.

And maybe then just to clarify, by the earnings, you mean EBITDA or do you mean NPAT?

EBITDA is the primary metric there.

A question for, I guess, Todd, because you mentioned it in the presser around the contribution of forestry and pipfruit revenue to the group as a whole being 55% to 60%. Can you give us a bit more context to that in terms of what time period that reflects? Is that a kind of a normalized time period? Does it include empties, et cetera?