South Port NZ Ltd – 2022 Annual Meeting Presentations

SOUTH PORT NZ LTD 2022 ANNUAL MEETING Chair - Rex Chapman This year's reported after tax profit of 12.8M requires some explanation in order to make a proper comparison with last year's result. This year's profit includes two one off adjustments. Firstly, we recorded an after-tax interest rate derivative gain of $980,000 which was a result of recent rate increases against our fixed rate interest rate swaps. Once these one-off items are removed, the normalised after-tax profit for the 2022 year was $11.16M which represents a 6.8% increase on the previous year's result of $10.45M. This is a very pleasing result having regard to the challenges faced this year which included: - The ongoing disruption in the world-wide container supply chain which resulted in a 24% reduction in container vessel calls to the Port and a reduction in total vessel calls. - As a result, container volumes were down 18.5% at 44,000 TEU compared to 54,000 TEU the year before. - Log and timber volumes collectively were down 13.9% at 667,000 tonnes. Despite the reduction in vessel calls greater volumes were handled which translates to a better environmental outcome. The next slide shows the breakdown of cargo between containers at 12% and bulk and break bulk at 88%. This statistic emphasises the continued importance of bulk cargoes to our financial performance. This year bulk cargo volumes were up 6.1%. The main contributor to this increase was a 148,000 tonne increase in stock food volumes. Climate and the milk price influence the volume of stock food imported and used in the region, and the milk price in particular this year would have supported the increase in volumes. The Company has a comprehensive asset management plan that was developed in 2016 for a 20-year period. We have previously advised shareholders that the forecast expenditure under that plan was expected to reach a peak during the 2021 financial year then decreasing to a more steady state. This has eventuated and is illustrated by the slide which shows 2022 expenditure decreasing by 35% to $2.8M compared with $4.3M in 2021 at the peak. Despite this rising maintenance expenditure in the previous five years, the Company has been able to maintain an impressive record of total shareholder return. By total shareholder return I am referring to the cumulative return in terms of dividends paid and share price increase over time. The next slide shows that our 10 year cumulative total shareholder return has been an impressive 250%. The current dividend policy is to consider both the Company's free cashflows and reported profits when determining the level of annual dividend. The full year dividend this year has been maintained at 27 cents per share. This represents a dividend pay-out of 55% of net profit after tax and equates to 73% of free cashflow. It is relevant to note again that although the payment ratio to net profit is lower than previous years, this reflects the one off non cash adjustments to this year's profit that I mentioned earlier. As shareholders will be aware, the Company has been embarking on a channel deepening project in order to increase the operating parameters for ships accessing the Port. We have named this project Kia Whakau. This work not only includes the deepening of the channel but also the deepening of the swinging basin, which is the area to the north of the Island Harbour used by vessels accessing the berths, and also deepening the berths themselves. The Kia Whakau project included the purchase of our new tug Rakiwai, which arrived and was commissioned this year at a cost of $10M. On 31 August this year the Company was granted resource consent for the channel deepening project, which authorised the drilling, blasting and removal of rock in the entrance channel to achieve a depth of 9.7m chart datum, 10.7m in the Island Harbour berth pockets, and 9.45m in the swinging basin. What this means for South Port is that our operating draft would increase by a full 1m, which will improve the safety margin for ship movements and provide greater capacity for vessels to take on additional cargo. The significance of this project for the future of the Company should not be underestimated. This will be the first occasion that the channel entrance has been deepened since the early 1980's, more than 40 years ago, and the successful outcome of this project achieving an increase in our draft aligns with the Company's purpose, which is to facilitate the best logistic solutions for the region. The work undertaken to deepen the channel in the early 1980's involved a drilling and blasting campaign in an attempt to deepen the channel to 9.2m. Unfortunately, due to the dredging equipment in use at that time there was insufficient capacity to remove all of the fractured rock, and therefore some of that material was left in the channel leaving us with an operating draft for the last 40 years of 8.5m. The resource consent that has now been granted authorises drilling and blasting to be undertaken to achieve an increased depth of 9.7m chart datum. The Company still retained an historical consent to remove fractured rock from the previous drilling and blasting campaign in the 80's. In August the Company contracted Heron Construction Company Ltd to remove this fractured or fragmented rock. Until this work started, the extent of the fractured material was unknown and it was expected that the removal of the fractured rock would allow the Company to determine what drilling and blasting may need to be undertaken in the channel to achieve the target depth. As was reported to the market on 7 October, the removal of this fractured rock has been more successful than we anticipated with the result that we expect to achieve 9.7m in the harbour entrance channel without the need for further drilling and blasting. We are now going to contract a suction dredge to deepen the swinging basin and berth pockets, which is authorised under the resource consent and this is expected to be completed in July 2023. Once completed we will have the benefit of the increased 9.7m draft, which will allow for larger cargo volumes on the vessels currently calling and the possibility of some increase in vessel size. Achieving this targeted 1m increase in operating draft, without having to drill and blast in the channel will reduce Kia Whakau project costs by approximately $10M - a very significant saving. This will enhance the business case, which has underpinned the project and will provide better than anticipated future financial returns. We will be in a position to quantify the impact to our profit once the project has been completed next year. We are now optimistic that NZAS will continue to operate past the current closure date of December 2024. The key to this will be the successful outcome of the commercial negotiations for electricity supply and satisfying regulators and stakeholders about improving environmental outcomes and site remediation. Securing the future of the Smelter, while at the same time continuing to explore the growth opportunities that have been identified such as green hydrogen and aquaculture would be a very positive outcome for the Southland economy, and potentially South Port. One such growth opportunity is the potential development of large-scale renewable hydrogen production in Southland promoted by Meridian Energy Ltd and Contact Energy Ltd. A formal process has reduced the prospective counterparties for this venture down to two being Fortescue Future Industries, a subsidiary of Fortescue Metals Group Ltd, and Woodside Energy Ltd. A decision on which of these two parties will be selected is expected before the end of the year. Until further detail is known about any proposed development, it is difficult to assess what impact this will have on South Port but the Company has been maintaining contact with Meridian and Contact to ensure that the Port is positioned to assist and take advantage of any opportunities that might arise. The Murihiku Aquaculture Group independently chaired by former South Port Director, Rick Christie, is working with industry participants Ngai Tahu Seafoods Ltd and Sanford Ltd to facilitate the development of this aquaculture opportunity for Southland. A reticulating aquaculture system (RAS) hatchery for growing Chinook salmon smolt, also known as King Salmon, initially planned for construction at Ocean Beach in Bluff has now been relocated to a Makarewa site because of site suitability. Ngai Tahu Seafood's resource consent application has been accepted for processing under the Covid-19 Recovery (Fast Track Consenting) Act 2020. If consented, this project would see the operation of a salmon farm within a 2,500 ha site approximately 2 - 6 km off the north eastern coast of Stewart Island. Sanford's have also lodged a consent to establish an open ocean farm at the south end of Foveaux Strait. This consent application is currently on hold while further stakeholder engagement is being undertaken. These applications are a vote of confidence in the southern region for large scale open water salmon farming and will present servicing opportunities for South Port. Last month Mercury Energy announced that earthworks had commenced at Mercury's 240MW wind farm at Kaiwera, near Gore. This $115M project will initially see 10 turbines built producing 43MW, enough electricity to power an estimated 20,000 homes or 66,000 electric vehicles. The components for these wind farms which will stand 145m in height from base to turbine tip, is expected to be brought in through the Port during the next financial year, which should provide a material increase in next year's cargo volume. This announcement by Mercury is confirmation of the wind energy potential in Southland. The development of the renewable energy potential in the south is expected to increase once the long term future of the Smelter is confirmed. The Company is working towards developing an environmental strategy and pathway to becoming carbon neutral. There are several connected contributors to this strategy. Firstly, the Company already has an overarching strategy of ensuring that the physical environment is respected and that continuous improvement is delivered in environmental outcomes including the reduction in our carbon footprint. Secondly, as a listed company we are required to develop a framework for climate related financial disclosures. These disclosures will meet the requirements under the new Aotearoa New Zealand Climate Standards, which will be introduced later this year. South Port will be implementing the disclosure framework for the 2024 reporting cycle in line with external reporting board guidelines. For the past four years we have been recording and reporting annually our greenhouse gas emissions by source broken down into scope one, two and three emissions. Carbon intensity is the most useful performance indicator in assessing carbon efficiency. Over the past four years relatively stable cargo volumes handled have seen carbon emissions, fuel and energy use trending downwards, which is pleasing. I now hand the time over to Nigel Gear, the Chief Executive. Chief Executive - Nigel Gear Thanks Rex, Tena koutou katoa, This morning following on from the Chair, I will focus on Safety, Health and Wellbeing including our response to Covid-19. What's happening in the infrastructure space, rounding it out with our people and our community. Our values underpin everything we do at the Port. They are a key part of our strategic framework, our daily communications and our decision-making processes. The most important of these values is safety first. Ports by nature are hazardous environments. We deal with large machinery on a daily basis, cranes, forklifts, trucks, loaders, diggers and vessels. Of note we recorded 260,336 inward traffic movements through the gate over the last FY, which is a significant amount of traffic. It important therefore, that we have good systems to manage traffic flows, pedestrians and that we continue to invest in systems and plant to promote better safety around the Port. Critical risks are an important focus for the port industry. A Port Health and Safety Leadership Group has been established, which includes the ports, stevedoring companies, port industry association, unions and the regulators - Maritime New Zealand and WorkSafe. This group has been specifically formed to focus on reducing harm in the workplace and focusing on critical risks. The two major pieces of work currently being undertaken are related to person versus plant and Fatigue. Ports put a lot of effort into this space, however with two fatalities recorded over the last 12 months it's important that we work collectively for the betterment of all people working in the industry. There was a significant amount of work undertaken in relation to Covid-19 over the previous financial year. Vaccination policies, departmental risk assessments, on site vaccinations and booster shots made available, rapid antigen surveillance testing and works teams created to reduce transmission on site. It was very pleasing that when community transmission was in full swing there was little impact on the South Port operations due to the measures undertaken. I would like to make special mention of the staff during this time. It was not always an easy process to be involved in, however the team got on with the job and I would like to thank them for their patience and efforts. The Port has a number of infrastructure projects currently underway or recently that we have completed. Shed No. 6 located adjacent to the container terminal was recently demolished to make way for additional container storage and a repair area. This additional space is much needed as there have been a number of times where there has been insufficient room to store export containers, especially during the peak season. It has also seen a marked improvement for the container repair function at the Port. This development has allowed the Port to separate the container repairs from all of the other remaining container terminal functions reducing the risk profiles of both activities. The paving of the South Rail log storage area was recently completed and opened for use. The completion of this 14,000 m2 area will help to improve the safety of the log marshalling operation, increase utilisation, provide better environmental outcomes and protect market eligibility of the logs. Our thanks go out to the log exporters that supported this long-term development at the Port. Since 2019 we have been on a journey to repair the access bridge installing Impressed Current Cathodic Protection (or ICCP) to each of the 14 bays. It is pleasing to say that we only have one bay left to complete, which will be done in the 2023 financial year. As mentioned previously the life span of the ICCP equipment being installed on the bridge is expected to last for 25 to 30 years. The upgrade of the town wharf fuel berth, accessway, pipeline corridor and discharge platform was completed this calendar year. This development has been constructed to IL3 seismic rating and has a life expectancy of a minimum of 50 years. This project was on the books for a number of years, however the end result has been very pleasing for both the Port and the infrastructure team winning both regional and national construction awards. The Port has made a conscious effort to work more closely with the community in recent years. One of the ways we communicate with the community is through a newsletter called Mai I Te Wapu or from the wharf. This newsletter is prepared biannually and is delivered around Bluff by staff members, the content basically discussing what is currently happening at the Port. The leadership team also meets with both the community Board and Awarua Runaka during the year to discuss similar topics around the Port and plans moving forward that the community should be aware of. A recent survey was carried out to gauge whether our engagement in the community is effective and where we can make improvements. There was an excellent response to this survey and we were very pleased with the feedback, taking on the recommendations on how we can improve. Our relationship with the Runaka is very important to the Port. We have consulted with the Runaka on a number of areas in the past, whether it be for resource consents, assisting with the naming of both the Port (Te Pukorokoro o Murihiku), the new tug (Rakiwai) and also the gifting of our logo. A long-awaited gifting ceremony was held this year at the Te Rau Aroha Marae which was thoroughly enjoyed by all that attended. The Port continues to provide scholarships, sponsor sporting organisations / community groups and provide gifts / donations for worthy local causes. When the opportunity is available to the Port and we have the capacity, staff work on community projects, with one day being set aside every year for each employee to carry out this work. To finish off, I would like to once again make a brief comment about our people. As you are all aware it has been an interesting few years operating on the border with a global pandemic. Through all of the challenges thrown our way the staff have continued to operate to a high standard, complete a number of projects and I very proud of the effort they have put in. Thank you. Chair - Rex Chapman - Outlook There are always uncertainties in any outlook and this year is no exception. Although global supply chains are starting to normalise with previous congestion and high freight rates easing, there is still uncertainty in global markets. Record high inflation rates globally resulting in central bank's increasing interest rates is raising risk of recession in many economies. However, we as a Company have reason to be optimistic about our prospects at least in the medium term. We expect to have a new operating draft by the middle of next year. There are near term opportunities with the handling of wind farm equipment and longer term opportunities in hydrogen and aquaculture. Our ongoing investment in our Port infrastructure and plant will continue to ensure that we are able to take advantage of these opportunities as they arise. In the first quarter of FY2023, our total trade is tracking in line with FY 2022 which is encouraging and in line with expectations. Logs and containers are still being impacted by market conditions, however, all other bulk cargoes are the same or slightly ahead of FY 2022. The log market faces ongoing uncertainty because of lockdowns in China affecting residential construction rates in-market. We expect the decrease in demand for logs shipped from New Zealand to last until the end of this calendar year. However, returns at the wharf-gate level in New Zealand have lifted due to shipping costs easing and the recent weakness of the NZ dollar versus the US dollar. Logs are traded in US dollar terms. The cost of shipping logs has fallen further than has the cost of containerised freight. The ANZ Bank has commented that this has been particularly helpful as freight now accounts for a significant part of the cost of logs landed in China. During recent months, there has been a sharp reduction in spot freight rates on major sea-lanes and in charter costs. In the New Zealand context, freight rates are likely to reduce at a slower pace and a return to reliable schedules for ship calls in the port industry remains uncertain. In a volatile phase in world shipping, South Port has consistent and stable services by Mediterranean Shipping Company one of the largest lines in the world. Both Australia and New Zealand are seeing interest from new shipping lines. South Port is watching these new developments with interest, while being aware that such ventures will need to attract long-term customers to ensure future viability. The cruise industry has made a welcome return with several vessels on the coast. Although only a very small number of vessels are expected to call at Bluff, we do provide pilotage services to those that visit Fiordland. At this stage we are expecting our full year earnings to be consistent with last year and on that basis will be aiming to maintain the current level of dividend. Updated profile guidance will be provided with the release of our interim result in February. On behalf of the Board, I would like to acknowledge the contribution of Nigel and his Leadership Team during the past year. It has been a very busy year, which has included the excellent progress that we have made with our channel deepening project, which is likely to be completed on time at a much lower total cost than expected. This is an outstanding outcome and is a credit to the whole of the Leadership Team. Our Infrastructure Manager Frank O'Boyle and his team have played a central role in the successful execution of this project and I want to especially acknowledge their work. We are currently going through a period of planned board renewal. This year Jeremy McClean retires and John Schol has been nominated to succeed Jeremy. As I noted at last year's annual meeting the current refreshment of the Board will continue with my retirement at next year's annual meeting. Jeremy was elected to the Board in 2011. Jeremy has been a valuable contributor to the Company's success over the period of his tenure having been a member of the Audit & Risk Committee and then Chair of that committee for the last six years. Jeremy's background as an accountant and valued business advisor to the farming sector, together with his sound business judgement and values are attributes that have been appreciated by all of us. We will miss his contribution and his company around the board table, and we wish him well. Thank you. End CA:00401537 For:SPN Type:GENERAL Time:2022-11-01 17:11:18