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

Thank you for standing by and welcome to the Napier Port Holdings Limited 2023 Nine Months Results Announcement. [Operator Instructions] I would now like to hand the conference over to Mr. Kristen Lie, Napier Port Chief Financial Officer. Please go ahead.

Good morning, everybody, Thank you all for joining us this morning. My name is Kristen Lie, CFO of Napier Port and I'm joined on the call this morning by Todd Dawson, Chief Executive. 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 update of our trading performance for the 9 months to the end of June and to provide an opportunity to address any questions you might 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. It also allows the majority shareholders to fulfill their own financial reporting requirements. In terms of the format for this call, we will provide a high-level overview of the results and current market and then we'll open up the line for any questions. And I hand over to Todd to get things underway.

Thanks, Kristen. Good morning, everyone and thank you for joining us. Today's results tell the story of a buoyant first half followed by a third quarter drop due to Cyclone Gabrielle's effect on exports. Financially, we are reporting revenue for the 9 months of $90 million, up 5.7% from last year's $85.1 million and operating profit of $29.3 million, slightly down from last year's $29.8 million. These results were bolstered by return of cruise during the period and pricing adjustments and yield increases linked to our infrastructure investments and additional customer services Napier Port is offering, such as log debarking and our container servicing depots. While we expect suppressed volumes to linger in the fourth quarter, we are increasingly confident we will see volume growth in the new financial year. This optimism is based on the progress we see in the region. Firstly, in terms of infrastructure rebuild and the government's prioritization of that work; and secondly, in the progress being made by our key cyclone-affected customers in either plants and building repair or in the manufacturing and operations coming back online. The region's transport infrastructure has been rebuilt in a swift pace and all roads access to Napier Port are open and KiwiRail have indicated a mid-September reinstatement of the rail line from the [indiscernible] container terminal site we have in Hastings through to Napier Port. Once that rail line is fully operational, we expect pulp, meat and log cargoes and pipfruit move on through [indiscernible] rail with an overall positive hit on our volumes. It will also allow us to reestablish the momentum behind our supply chain service offering. Pan Pac are making good progress reinstating their premises. Timber operations are expected to restart in the first quarter of our next financial year and pulp processing by the second quarter with a ramp-up towards normal production levels over the subsequent quarters. Positively, working with Pan Pac and we will shortly be beginning to receive woodchips with an estimated first shipment from Napier Port in mid- to late September. We expect this to continue for the -- at least 6 months. Ravensdown's fertilizer plant in Awatoto, which was shuttered during the cyclone has reopened and restarted manufacturing operations in July. Log volumes are steady and we are receiving some of the additional wood, sorry, additional windthrown logs from the Central North Island. Export market conditions for logs remain stable but subdued. In spring when fruit buds start to appear, we will have a clear idea of the extent of pipfruit areas that will require remediation and replanting to restore production. Just yesterday, I was out seeing one of our key customers, one of our largest apple exporters, his crop was badly affected this year by the cyclone. And yesterday, they were out replanting 12 hectares of new apple trees on land that was completely flooded. This is just one example of the confidence we are starting to see from businesses in the region looking to reinvest. The upcoming cruise season could be our busiest on record with 91 forward bookings currently in place bringing a record number of business to the region. Importantly, also in the post-COVID, post-cyclone environment, we are still seeing strong interest in shipping lines in calling in Napier Port. And this is a measure of confidence in the long-term volume growth of the region and the cargo that is grown and produced here. Kristen will now provide more details on the numbers.

Thank you, Todd. In our third quarter 2023 trade volume released in July, we reported third quarter year-on-year volume decreases of 31.6% for containers cargo and 28.6% for bulk cargo as the aftereffects of Cyclone Gabrielle were felt across nearly all cargo types. For the 9 months year-to-date June and compared to the same period a year ago, total container volumes decreased 10% from 194,000 TEU to 175,000 TEU. Total container volumes decreased 17% or 19,000 TEU, which is attributed primarily to dry exports as Pan Pac's wood pulp and timber mills remain closed and [indiscernible] exports as weather-related crop losses impacted apple -- export apples and fresh and other chilled produce. Empty and other container volumes were flat year-on-year as higher transships offset lower empty containers required to export cargo. Container services revenue for the quarter of $17.4 million decreased 22.1% from $22.3 million in the same period last year. The 9 months container services revenue decreased by 1% to $51.9 million as lower container volumes were largely offset by higher average revenues per TEU. Average revenue per TEU for the 9 months increased 9.9% to $297 from $270 in the same period last year. This was driven by a number of factors, including tariff increases, fuel and insurance cost recoveries and increased utilization of depot and storage services. For the 9 months, bulk cargo decreased 16.4% to 2.3 million tonnes. Log export volume for the quarter decreased by 21.4% and for the 9-month period decreased by 16.1% to 1.8 million tonnes due to adverse weather, damaged roading infrastructure and subdued log export market conditions. Bulk cargo revenue for the quarter of $9.4 million decreased 17.9% from $11.4 million in the same period last year. For the 9 months, bulk cargo revenue decreased 2% to $30 million due to the 16.4% volume decrease, mostly offset by improved average revenue per tonne. Average revenue per tonne for the 9 months increased 17.3% to $13.26 from $11.31 in the same period last year. This was driven by yield increases and increased contribution from our debarking operation. Our cruise season completed in April with 64 vessel calls and around 100,000 passengers, contributing a record $5.3 million to group revenue. The result from operating activities for the third quarter decreased 44% to $7.5 million from $13.3 million in the prior year period. For the 9 months, the result from operating activities decreased 1.4% to $29.3 million from $29.8 million as higher revenue from the return of cruise ship calls and revenue yield increases were offset by lower trade volumes and continued cost inflation pressures. For the third quarter alone, total operating expenses of $20.3 million decreased 4% versus the prior comparative period and were in line with the first half of the year and the second half of 2022. However, compared to the 9-month prior comparative period, total operating expenses increased 9.5% or $5.3 million with the principal components being increased employee benefit expenses, insurance, fuel and power and site expenses. We continue to see significant cost inflation rate pressure across all categories in the marketplace. As noted in the release this morning, we have recognized $3.5 million of insurance income receivable related to progress claims for business interruption losses incurred following the Cyclone Gabrielle event during February and which is recorded within other income and outside of our results from operations metric. The claim process is extensive and relatively slow moving. We're submitting claims to insurers as and when we determine our recoverable losses. Under our policy, the relevant business interruption indemnity period is 18 months following the loss event. So we expect to be submitting claims for a while yet and while we continue to experience Cyclone Gabrielle's adverse impacts on our trade. We note that we do not expect insurance to indemnify us for all of the negative trade effects following Cyclone Gabrielle as indemnified losses are subject to the terms and limitations of the relevant policy. In addition, all claims are subject to the review and adjustment by the loss adjuster and our insurers. It's worth noting that there is a disconnect between the period when the business interruption losses are observed and the time when claim payments are confirmed by our insurers and thus when accounting insurance income is recognized. For example, the $3.5 million recorded relates to a portion of the period between the cyclone in February and the 30 June balance date. And because of an interim nonspecific partial payment, it does not represent full amounts claimed for that specific period. So advise against trying to make any conclusions from the amount of insurance income recognized to date and the declines in revenue post Cyclone Gabrielle as they will not and do not match. Also note, we have adjusted our insurance income receivable from our underlying term metrics reported today in order to maintain comparability. Whilst on the subject of insurance, we renewed our material damage and business interruption insurance in July. Underlying net profit after tax for the third quarter after adjusting for unrealized fair value movements on investment properties and Cyclone Gabrielle related net insurance income fell by 73.4% to $1.9 million from $7 million in the same period last year. For the 9 months, this decreased by 34.3% to $9.3 million from $14.2 million as a result of increased depreciation and finance costs recognized in the income statement following the completion of Te Whiti wharf in the prior financial year. Reported net profit after tax in the third quarter decreased 40.2% to $4.2 million and for 9 months decreased 19.5% from $16 million to $12.9 million. We had good working capital performance period-on-period, which contributed to cash flow from operations increasing by $7.8 million or 31.2% to $33 million from $25.1 million in the same period last year. With respect to the balance sheet at the end of June, we have drawn bank debt of $132 million, down $2 million from March, with an additional undrawn amounts of $48 million available. Over the 9-month period, Napier Port has invested $11 million in capital assets. The majority consists of $1.3 million in development spend and $8.2 million in replacement capital spend, including for mobile plant replacements, paving replacements, post-cyclone restorative dredging of $1.4 million, ICT equipment and other asset maintenance spend. We remain well covered in terms of interest rate risks on our debt financing costs, benefiting financially from equity interest rate swaps in place. In respect of our debt coverage ratio, at the end of June, the ratio of 3.09x EBITDA having risen from the half year measurement of 2.96x due to the lower earnings being experienced during the third quarter. We expect that this ratio will trend up over the remainder of the financial year and into the first quarter of the next financial year before declining even as the next prime export season gets underway. I'll now hand back over to Todd to provide some final comments.

Thanks, Kristen. We have reiterated this morning, our earnings guidance by noting we continue to expect an underlying result from our operating activities, excluding insurance recoveries for the year to 30 September 2023, of between $34.5 million and $36.5 million. Now in the ongoing challenging economic outlook with inflationary cost pressures persisting we continue to focus on prudent financial management, including controlling spend and where possible, the recovery of rising costs. As mentioned at the start, we are increasingly confident in the volume growth as we look towards the new financial year, maintaining efficiency in value and customer service means we are well positioned to reap the benefits of the expected ramp-up in volumes that we're looking forward to. I'll now hand back over to Kristen. Thank you.

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

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

Just in terms of the insurance proceeds, like what you've put through the -- as abnormal here, you've got $3.5 million of revenue and $268,000 of cyclone costs. What were the cyclone costs? And does that mean that the other -- if I take that -- deduct that off the $3.5 million, does that mean that sort of $3.2 million was essentially business interruption claims?

The costs were largely immediate following the event, so cleanup costs. And then we've got ongoing costs I guess related to our claim. Here, I guess, I mean you can't get the [indiscernible] unexpected significant costs going forward.

I'm just trying to understand what the $3.5 million was for. And I guess the next part of that question is, therefore, you said more claims to come. Are you able to indicate how; a, how far through that process you are? And b, with this claim, was there any pushback from the insurance? Or is it -- did you get the full amount that you claimed for? I'm just trying to understand what the quantum here could be, [indiscernible] put a number on it?

No, I'm not going to give you a number but the $3.5 million is all business interruption claims and the processes we submit claims and then there's a fairly long gestation periods. And our, I guess, accounting policies is, when the insurers basically confirm a payment, we recognize it. But we're not in a position to, I guess, provide or provide an analysis of what's exception and what's not. And that's part of the overall uncertainty, overall in the process, makes it quite difficult, I guess, to know, I guess, where you're going with that in terms of total proceeds because it is, quite frankly, at this stage, we don't know yet either, may be a little bit more advanced.

So how much have you -- can you tell us how much you've claimed in addition to the $3.5 million that hasn't been accepted yet...

No, I guess I don't really want to do that because it's subject to review and negotiation.

Okay. And finally, on that, how does the tax work, I assume it's just treated as normal revenue and is fully taxable?

Yes, correct. That's the basic premise there..

Okay. Cool.

The next question comes from Andy Bowley with Forsyth Barr.

A couple of questions for me. First, around pricing for containers. So average revenue per TEU has gone up for the 9 months but more apparent in the last 3 months. Just keen to get an idea of what the drivers of that are. You've referred to a number of items specifically around tariff increases, fuel and insurance costs. But why specifically has third quarter pricing gone up a tad more than what we've seen previously?

I don't think there's any specific things to call out in the third quarter alone. I mean that metric obviously catches a lot of stuff, including sort of tariff, [indiscernible], the number of vessel calls. So we had pretty good volume compared to the prior comparative period of container ships through the fuel adjustment factor, which is sort of variable based on underlying market, the diesel price, depot and other container -- sort of storage and other things that we provide through the container side of things, insurance levies, all sorts of different things going through there.

No specific increases against second quarter or first half in particular?

No, nothing new, at least to call out that we've implemented on that, maybe...

There's nothing peculiar in the third quarter earnings that will be driving it.

Okay. And then can you just remind us when the fuel surcharge is implemented?

It's been in there in all the financial year, 18 months or so...

We'll come back to you...

As in the PCP, yes.

Yes.

Okay. No, that's all good. Second question, just around container volumes broadly. There's clearly a few things going on. And I recognize there's a little bit of underlying volatility from year-to-year in terms of seasonal conditions, et cetera. But when do you broadly expect container volumes to recover to precyclone level.

Good question. I think a lot of it depends on when we see Pan Pac fully recover, back up to its full capacity. And as we're sort of indicating with the ramp-up profile sort of taking over Q1 and Q2 of next year, we would hope to see them fully recovered by the end of Q2 at least but it's obviously dependent on their progress. It's clear that FY '24 is going to have some, what do we call it, impairments of volume. FY '25, we look forward to, I guess, as being bit cleaner, obviously, it's well publicized, some of the apple trees and things that will not -- have been lost as a result of the recent events. Yes, so it's certainly hard to say exactly when we'll be back to square one. But I guess just reiterating what we said in the half year around really, I guess, powerful performance we saw in the first half of the financial year. So there is kind of a lot of latent sort of demand capacity here once we kind of [indiscernible] some of these challenges. Yes.

FY '24, still subdued volumes, FY '25, we could be back to precyclone levels but there's some uncertainty, particularly around pipfruit.

Yes, that's there. I understand that's your first question. So May '22 was when the surcharge was applied.

Okay. So there will be an element of that not incorporated in the PCP in that quarter?

No.

Great. That's all for me, guys.

[Operator Instructions] I'll now hand back to Mr. Lie for closing remarks.

Great. Thank you, everyone, for joining us for the Napier Port Holdings 2023 9 months results call and for your questions. Have a great day and goodbye.

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