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, Napier Port, Chief Financial Officer. Please go ahead.

Good morning, and welcome, everybody, to the Napier Port Holdings 2024 Half Year Results Call. My name is Kristen Lie, and I'm joined on the call this morning with Todd Dawson, Chief Executive; and Blair O'Keeffe, the Chair of the Board of Directors. During this morning's presentation, we will report on the highlights of our first half '24 financial year, including some detailed analysis of our financial results. We will reference to a suite of information released earlier today on the NZX reporting platform and also available on the Investors Center section of our website. At the end of our presentation, we'll be happy to respond to any questions you may have. Now I'll hand over to Blair to get things underway.

Thank you, Kristen. [Foreign Language], and welcome to our 2024 half year results presentation. I'm Blair O'Keeffe, Chair of the Napier Port Board. Napier Port is delivering a pleasing interim results today underpinned by strong earnings recovery. To place this earnings recovery into context, the first half of the last financial year also started strongly, but was interrupted 6 weeks before the end by Cyclone Gabrielle. Today's result is linked to the recovery of volumes by key customers and cargoes. It also reflects many of Napier Port's underlying strengths, which are a diversity of trades and revenue streams, resilient infrastructure, providing operational flexibility and with available capacity to grow, operating leverage linked to revenue yields and focused cost management, and a track record of delivering under challenging conditions. The half year period is a good reminder of the strategic value of Napier Port as a critical regional asset. In times of emergency, it performs a lifeline function as we saw during the cyclone. At all other times, it connects the region's growers, farmers and foresters to their global markets. And in doing so, cargo owners and Napier Port both contribute significantly to regional prosperity. We're mindful of the ongoing inflationary pressure and uncertain economic outlook. However, we have confidence that Napier Port's performance to date and cost and capital discipline positions the company well for the remainder of the year. Our team led by Todd has performed very well to deliver these results today. Todd will now take us through the half year results.

Thank you, Blair, and good morning, everyone. I'll begin with a summary of the recovery of our volumes and earnings during the half year. Total cargo volumes in tonnes increased by 10.7%. This was driven by 1.55 million tonnes of log exports, which is a 35.7% increase compared to the same period last year. Despite softer market demand in China, the good momentum of log exports we saw towards the end of the last financial year continued for this half. Export volumes were supported by wind-thrown logs from the Central North Island and additional supply of unprocessed logs from Pan Pac, and cruise vessel visits and record passenger numbers with 88 cruise vessels compared to 62 last year. During the cruise season, it was fantastic to see the greater berth availability that 6 Wharf or Te Whiti has provided and which enabled us to accommodate several cruise vessels simultaneously alongside container and bulk cargo ships. This was something that was not previously practical. Container volumes were significantly reduced by 17.3% during the period, and this was largely due to Cyclone Gabrielle's damaging impact on Pan Pac production facilities and lower levels of economic activity. More positively, within those container volumes, we saw a good bounce back in the second quarter in refrigerated container exports for horticulture, meat and other chilled produce as the agricultural producers experienced good weather and growing conditions across the spring and summer. Just turning to Page 6 of our slide deck. Total revenue rose 10.1% to $70.6 million, which was driven by the strong log exports, cruise growth and average revenue per unit growth across all of our main business service areas. Once again, we have demonstrated resilience and the diversity of our trades and cargo base. As noted in this period, we've seen strong log exports and a resurgent cruise season, whilst container volumes have been below historic levels due to softer market conditions and one of our major customers, Pan Pac, rebuilding their timber and pulp manufacturing facilities. As highlighted previously, we've continued to focus on yield and positioning for volume-driven earnings growth. In this period, we have started to see the positive effects of Napier Port's operating leverage as conditions have improved and volumes have partially normalized. We still have a future container volume recovery to look forward to, and particularly as Pan Pac continues to ramp up across the remainder of this year and as the local economy continues its recovery. Our revenue result has been supported by our investments in infrastructure and additional custom services, our operational flexibility, both in terms of how we have managed cargo and our operations in this period, but also our response to our customers' needs and commercial opportunities that have presented themselves along the way. Examples of this include how we have supported Pan Pac by enabling their temporary woodchip export operation by carving out space on port, providing additional operational support; and secondly, we've enabled higher log export throughput by reallocating space that would normally be reserved for container operations and introduce a new log exporter on favorable terms to our business. Our operating leverage together with effective cost control was demonstrated positively in the results from operating activities for the half year of $27.4 million and an increase -- which was an increase of 25.1%. Underlying net profit, excluding unrealized revaluation gains, insurance income and the effective tax changes increased 48.3% to $11.1 million in the half. Underlying operating cash flow, excluding insurance claim receipts and other tax effects, also grew in the period, increasing by $3.2 million to $24.5 million. I'll now hand back over to Kristen to go through some of the details of the results.

Thank you, Todd. On Slide 7, reiterating what Todd said during the period, our revenue grew by $6.5 million or 10.1% to $70.6 million. This can be broken down into: container services revenue decreased $2.8 million or 7.8% to $33.6 million; bulk cargo revenue increased $5.6 million or 27.1% to $26.2 million; and cruise revenue increased by $3.8 million or 74.3% to $8.9 million. The decreased container services revenue was a result of the 17.3% decrease in TEU volume and increase of 11.5% in the average revenue per TEU. Total TEU volume was down 21,000 in the half year period. Within that, full container volumes sold by 9,000 TEU, principally due to the cyclone impact to Pan Pac's wood pulp and timber operations and lower economic activity affecting other cargoes, empty container volumes followed full containers, falling 6,000 TEU, and tranships and DLRs were also down 6,000. Average revenue per TEU increased 11.5% to $341 from $306 in the prior comparative period. Contributing factors included a higher proportion of reefer containers and associated reefer on power revenue, tariff increases and higher contributions from our container depot operation and Viewpoint supply chain service, which is moving cargo to and from the Central North Island. Partially offsetting these gains were a much lower Port Pack contribution due to significantly lower Pan Pac pulp and timber packing volumes. Container vessel calls increased from 110 to 124 this half year on the back of improved schedule reliability and better weather conditions in the period. Bulk cargo, the bulk cargo revenue increase in the period was a product of the 21.6% increase in bulk trade volume and an increase of 4.6% in average revenue per tonne. The bulk cargo volume growth of 0.33 million tonnes was driven by log exports. Most other bulk trade was down for the half year other than the temporary storage and export woodchips by Pan Pac. Average revenue per bulk tonne increased to $13.91 per tonne from $13.30 on changes in cargo and vessel mix, tariff increases and larger contributions by the debarking operation. There was a lower marine contribution to average rates as the trend of fewer vessels and higher loads continued. On to Slide 10, focusing on logs. Log volume increased 408,000 tonnes compared to the prior year period and resulted in a record first half year volume of 1.55 million tonnes. Despite the subdued log export market in China, growth came from 3 primary sources: a new log exporter on port, Central North Island wind-throw volume and Pan Pac exporting higher quantities of unprocessed logs. The latter 2 sources are expected to taper off during the remainder of the year. The chart on the left shows the distinction between the second quarter log volumes of the current year and the Cyclone Gabrielle impacted second quarter of last year. On Slide 11 in terms of operating expenses, total operating expenses have increased by $0.9 million or 2% to $43.2 million compared to the same period a year ago. This is a positive outcome in a continuing inflationary environment and as a result of our continued focus on managing costs in response to the current economic environment, reduced container volumes and inflation pressures. For the period, employee benefit expenses and property and plant expenses were practically flat half year-on-half year, while other operating expenses have increased $1 million on higher insurance premiums and cargo transport costs, the latter reflecting increased activity levels. For these particular cost increases, I note we have revenue mitigations in place for insurance levy revenue and Viewpoint supply chain revenue. On Slide 12, the result from operating activities or EBITDA equivalent increased $5.5 million or 25.1% to $27.4 million for the period. This resulted from strong operating leverage as the 10% or $6.5 million revenue increase materially exceeded the 2% or $0.9 million OpEx increase. This also provided a strong overall margin percentage recovery back towards historic 40% plus levels. On Slide 13, we take a closer look at the key components of the improved result from operating activities. As shown in the chart, the increased result is driven up by the increased cruise revenue and ARPU growth from our proactive yield -- proactive approach to yield management through tariff adjustments and additional services. As we had communicated in the past, we continue to position for expected trade volume growth with continued growth in average revenues per unit, and this is evidenced for the ARPU elements shown in the graph. Our results from operating activities on Slide 14, our results from operating activities was the key driver in our underlying net profit increasing $3.6 million or 48.3% to $11.1 million in the half. Our reported unadjusted net profit for the period benefited from $7.1 million of additional insurance business interruption claim net income following Cyclone Gabrielle and included an additional $2 million tax charge for the recent change removing tax depreciation on commercial buildings. Our capital expenditure during the half year was $7 million or $7.4 million in cash flow spend terms. The half year spending was directed to mobile plants, wharf and site spend, an additional paved area within the container terminal area. In the period, we have had a major update to our asset management plans with new comprehensive plans adopted across our whole site and mobile plant and marine plant assets. Whilst this does not materially change our future spending plans across our asset base, it does offer more comprehensive planning and financial risk improvements. Following an extended period of replacement plants deferrals, we are commencing our campaign for renewal for elements of our mobile plant fleet. In the short term, we will have on order 8 pieces of container handling equipment, and we are in the process of disposing of a similar number of end-of-life units. In addition, we've seen commencing a remediation campaign for our breakwater to replace and reinforce the [ echelon armor ] protection for this asset, and we are likely to undertake a further maintenance dredging campaign in the next few months for our shipping channels and berths. We're also undertaking planning and assessment of options around 2 container cranes with a price tag of approximately $20 million, which are scheduled for replacement and our asset management plan in the near term, but no decision nor time frame is certain related to these yet. For the '24 financial year, we expect a total CapEx spend of around $14 million to $18 million. Cash flow. Reported cash flow from operating activities increased to $25.3 million, with improved underlying earnings and supported with $2.9 million of business interruption insurance proceeds in the half year period. Underlying operating cash flow, which is excluding insurance claim receipts and other tax effects, also grew in the period, increasing by $3.2 million to $24.5 million. The final '23 financial year dividend payments in December of $7.1 million was decreased from the $9.5 million of the prior comparative period. Operating cash inflow exceeded capital and financing outflows, leading to a $9 million reduction in gross debt during the period. A brief update on the capital management and debt position. As noted, end-of-period debt totaled $121 million. In addition, Napier Port had $59 million in undrawn credit facilities available at the end of the period. Our debt-to-EBITDA ratio was 2.16x at the end of the period, which is well within our capital management target range of 2 to 3x. As at 31 March, $110 million or 92% of our total gross borrowings was subject to fixed rates and a fixed underlying base interest rate that is excluding margin costs of just under 3%. Finally, a brief update on our insurance risk management activity. As part of our risk management approach, we have incorporated a wholly owned subsidiary, insurance captive. Principally, this is to give us further insurance coverage options in our pursuit of affordable insurance. Additionally, with our risk management objectives being the driver rather than a financial investment driver, the Board has approved the future establishment of a risk reserve investment fund. The fund is expected to provide a source of short-term liquidity in the event of a significant natural event. The fund will also provide options for self-insurance with the cost of external insurance merited. As noted here, the initial fund target size is $25 million, which is expected to be created over a number of years. This period is not fixed in stone, but is likely to be a period of at least 5 years. Lastly, a brief update on our sustainability initiatives and emissions. Our total gross emissions reduced for the half year by 16.1% compared to the prior comparative period. This has followed the reduced container volumes and less generator usage this year, including as a result of the emergency reliance on generators during the Cyclone Gabrielle electricity outage period last year. On a relative metric basis, emissions per cargo tonne decreased by 24.2% as the more emissions intensive container volumes were a lower component of total cargo tonnes together with the effects of various efficiency reduction measures we have adopted. I'll now hand back over to Todd and Blair for concluding remarks.

Thank you, Kristen. Just turning to Slide 20 and our conclusion. Looking ahead, the strength that have underpinned our post-cyclone recovery also position us well for the second half and beyond. Our cargo base is diverse and resilient, and there was global demand for the food and [ pulp ] products that we export. Our operational flexibility and our ongoing investment in management systems and efficiencies enable us to manage our port dynamically to meet the changing demand coming through the gates. Our investments in infrastructure and customer services, our yield management initiatives together with focused cost management are providing the operating leverage seen in today's results. Looking ahead, we anticipate log volumes will reduce in the second half compared to the first half of this year given the continuing soft export market conditions, Central North Island wind-thrown volumes drying up and Pan Pac reducing its raw log exports with its pulp production increasing over the remainder of this calendar year. We expect container volumes will continue to improve as the post-cyclone environment improves, and we expect this will be further support -- or support our earnings growth. Our disciplined approach to all forms of expenditure will continue in the face of the continuing inflationary cost pressures and the economic uncertainty that we are seeing. Based on our existing bookings, we look forward to welcoming up to 90 cruise vessels for the upcoming cruise season commencing in October. And we note based on the mix of existing bookings that we do expect reduced passenger numbers and smaller vessels on average, likely leading to a reduction in overall cruise revenue for the 2025 financial year. New Zealand and Napier Port's productivity continues to be impacted by international and local supply chain challenges, and this has continued to interrupt shipping schedules for exporters and importers. We see this continuing for some time yet. And now just to touch on our earnings outlook for the remainder of the year, assuming current operating conditions continue and excluding insurance claim income, we expect our underlying result from operating activities for the 2024 year to be between $50 million and $53 million. I'll now hand back to our Chair, Blair O'Keeffe.

Thank you, Todd. The Board has resolved to pay a fully imputed interim dividend of $0.03 per share, which is an increase from the $0.017 per share paid at the same time last year. The record date for the interim dividend entitlement is 14 June, and the payment date will be 27 June. The Board is pleased to be able to announce the increase -- sorry, the Board is pleased to be able to increase the level of interim dividend compared to the same period last year. While recognizing the strong first half results, the Board continues to have regard to, amongst other factors, the economic outlook, the near-term earnings outlook, the group's future capital needs and its capital management policy. We intend to further assess the appropriate level of total annual dividend based on the information available at the time of the full financial year results due to be announced in November. I'll now hand back over to Kristen, who will conclude the presentation.

Thanks, Blair. That concludes our prepared presentation. I would 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 with Forsyth Barr.

A few questions from me. The first is around guidance. And maybe forget about this year's guidance for a minute and think back to the Investor Day and the 50% increase for FY '25. I assume -- there hasn't been a lot of commentary on that since the Investor Day, but I assume that's very much now on track and in your minds with regards to meeting that longer-term objective and still very achievable.

Yes. Andy, Todd here. Absolutely. I think what we think we're showing at the moment is that we have a fair wind at our back. These sorts of numbers are achievable. So actually, our focus for next year would be to try and attain that objective.

Good stuff. And then maybe with regards to FY '24 guidance, it implies a reasonably meaningful sequential decline in profitability during the second half versus the first half. You've talked to reduced log volumes and various other issues. I guess what I'm trying to get to here is how conservative you're being here. I recognize things can come out of left field as they have done in recent years. But is there anything else we need to be thinking about with regards to that guidance that you haven't talked to on Page 20?

Yes. I don't think so, Andy. I mean I think what we see is probably, as we've kind of been learning lots of moving parts, we see some good kind of things happening. And as we sort of indicated, it's volume that's really the driver and clearly, a lot of the volume's outside of our control. Yes. No, I think that's [ what's just ahead ].

So you're anticipating better container throughput through the second half? Is that fair, would typically be because that's particularly a better reefer. So the log fallback or decline must be reasonably material in terms of what you're anticipating.

I think what we're anticipating, Andy, is that I think we've seen, over the years, even with these ups and downs in the log market that we've all noticed and experienced the log volume through Napier Port seems to be fairly solid. And I think we put that down to a good mix of estate owners as well as sort of more wood lot owners in our forestry catchment. So although we're sort of expecting to see a softening in the outlook for logs for the remainder of the year with wind-throw kind of drying up, et cetera, and some of that stuff going back to Pan Pac. Actually, the underlying catchment is pretty resilient even though these ups and downs in the market. So we see some tailing off, but not significant tailing off on the log side. And obviously, we still got another good quarter or so of our traditional peak season to run around. There could be more refrigerated container business, but equally, the ramp-up around Pan Pac coming onstream, in particular as the pulp mill starts up, we're expecting those container volumes to lift overall. So I think our view around the outlook is cognizant of all those factors. I wouldn't say it's conservative or ambitious. I think it's a reasonable estimate for where we see things landing.

And just maybe, Todd, on log volumes. How much of the first half log volumes were wind-thrown and unprocessed Pan Pac logs? Have you got a sense for that?

Yes, we've got an estimate of around the range of 8% to 10% as the effect of that wind-throw and the volume that would have been going to Pan Pac.

Okay. So the decline in the second half, if your underlying log export volumes are reasonably stable, which you've alluded to, isn't going to be overly material?

No, I wouldn't call it dramatic. No, it wouldn't be overly material.

Yes. Okay. Cool. Sorry, that was my first question with quite a few sub-questions. So second question around the broader pricing backdrop. So the ARPU gain in the container side of the business was pretty impressive. But I recognize that there are a few mix influences on that ARPU gain. If we strip out those mix influences, I guess, the question here is what's the underlying unit pricing gain that you're able to achieve with the shipping lines and through tariffs?

Yes. Okay. I guess, yes, we've had some impressive gains over the last few years in that space, but it's all pretty much driven by individual contract negotiations with each of the lines. And they're all veering different places in that regard, probably just talk more about where we see things going perhaps. And in terms of the future, we think that the environment has probably been conducive to give those sorts of lifts in the last few years. That environment is going to be, I think, tighter, harder to do going forward, but it doesn't mean that we won't be still looking to try and achieve reasonable returns. We've always talked to the market about the fact that we want to get back to returns that are commensurate with an asset like a [ port ] 5 to 10 years [ post that ]. You heard us sort of talk about that before. So we're always continuing that sort of pathway. Yes, there's definitely mix in the air in terms of the types of containers going through and what we can achieve for those. But it's also, I think, quite interesting to see what's going on across the port sector at the moment. And we've been, I think, a market leader in this sort of area, but others are sort of starting to step up, and that's helpful for us as well as we go forward, I think, too.

And maybe then, Todd, with regards to those individual shipping line contractual arrangements that you have, were any implemented with changes through the influence this period? I.e., was there some unit price increases that have contributed to that double-digit increase in ARPU for containers during the period?

No specific one. I think we generally would had at least 2 to 3 lines that we are negotiating with throughout the year. But -- so there's no one I particularly call out that has driven a big lift in the ARPU this half year.

And then lastly, is there any reason to believe that ARPU wouldn't be better in the second half than the first half generally because mix typically is slightly better in the second half?

I mean, I guess we have just quite a little bit of caution, I suppose, because it is driven by a mix of services and things. So for example, we talked about some Pan Pac volumes coming back onstream, and they will have a positive effect on ARPU in terms of the Port Pack contribution. But things -- there are variables that are going both ways in there. Clearly, when we look at contract renewals, et cetera, we're looking to increase them. So there's going to be that sort of -- that affects overall, but just need to, I guess, proceed with caution a little bit, I think, for that.

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

Just while we're on pricing, what about sort of some of these ancillary revenues that Ports of Auckland has used that as a lever to try and increase revenue? Is that something that you guys have done as well?

Yes, we've -- I guess, again, we've been a bit of a market leader in some of these sort of revenue streams in the port sector in New Zealand. So it's pleasing to see some of these other ports taking a similar pathway. I think Ports of Auckland has obviously talked about increasing charges around its entry fees and things, and that's very much aligned to an Australian port model that we see over there. But we've, I guess, taken more of a spread approach to it. We've obviously been working hard around our actual contracts with major customers, shipping lines and things spreading the pricing effect across the various different cargo types we have, whether it's container trade, bulk trade and cruise being the 3 primary ones, adding those ancillary services and things as well. But yes, we are looking as well at those sort of entry, exit type fees that come with entering and using facilities and infrastructure like ports for [indiscernible] customers as well. But with sort of things like VBS fees, we've had those in the market for well over a decade at Napier Port, so yes.

So this is -- so going forward, we would expect more of that? Or you're saying that, that has been a contributor here or both?

It's been a contributor already and we're continuing to look at those fees both on an annual basis as we adjust our general tariffs. But equally, there is a chance that we'll be looking at other fees that we may be able to produce into the market in the future, too.

Just in terms of the Pan Pac, the ramp-up, where are they actually at now? And what's sort of the timing you're expecting for when they'll be back to sort of full capacity with volumes going into the Port Pack facility?

Yes. So the December mill is largely back to pre-cyclone production capacity now. So that's going really well. It's ramped up quite quickly and seems to be going well. So that's good. The pulp mill, we understand that they have got 2 production [ pots ], I guess, up and going on the pulp side, but 1 finishing line. Their second finishing line to be up and running by about November. So that will bring them back to their pre-cyclone. They've also -- given that they've only got one finishing line, we expect that it might be a bit lumpy through this period if it goes down. But by the time we get to November, the second finishing line's onstream. We'd expect it to be smoother volumes coming out of the year and then being back to 100% of their pre-cyclone levels.

Okay. So it's not -- we won't see that full amount in the second half. It's more of a next year thing.