Channel Infrastructure NZ : Results transcript (pdf - 135 KB)

AUDIO TRANSCRIPT

Channel Infrastructure Half-Year results presentation call

25 August 2022

Naomi James:	Good morning and welcome everyone to our conference call for our first set of financial
	results as Channel Infrastructure. It's great to have so many joining us today on the line,
	and of course it was great to meet many of you recently at our Investor Day. As you know,
	we decided to reset our business and make the transition to an import terminal model so
	that we could look to the future with the confidence that comes from having a sustainable
	business model that delivers stable returns for shareholders. I'm pleased to report that
	these first financial results for the terminal alongside the significant progress we have
	made towards execution of our strategy, demonstrate the laser-sharp focus we have on
	driving shareholder value.
	Today I will run through our operating performance for the year, then I'll hand over to Jarek
	Dobrowolski, our chief financial officer to run through the financial results.I'll then finish
	with an update on how we are progressing with our carbon targets, some of our near term
	growth options and our guidance before opening up for Q&A.
	I'd like to turn your attention to the usual disclaimer information contained on page two.
	I'll start with the highlights and operating update on page four. The results we are
	announcing today really confirm the significant progress made towards delivering on our
	strategy and demonstrate our delivery to expectations for the new business model. After
	significant planning and preparation, we safely shut down the refinery and commenced
	terminal operations as we relaunched as Channel Infrastructure at the beginning of April,
	with an improved operating and financial model. The transition went smoothly and we now
	have almost five months of import terminal operations behind us with 19 import shipments
	discharged in the second quarter. Importantly, our conversion project remains on plan and
	to budget with the most intensive decommissioning work and workforce transition now
	behind us.
	We have made great progress with the reset in our cost of capital, with the successful
	retail bond issue completed in May, and bank refinancing now underway. We are tracking
	to guidance for FY22. And for FY23 are now expecting EBITDA at the top end of our
	guidance range. And in our very first quarter of terminal operations, we have delivered a
	strong EBITDA margin of some 66% and strong cash flows, which increases our
	confidence in returning to dividends in March 2023.
	Turning to safety performance on page five, we have always had a firm focus on our health
	and safety and protecting our environment. And this was even more important through the
	period of the refinery closure and intensive decommissioning that we undertook in the first
	half of this year. I'm proud that our team have completed the refinery shutdown and
	transitioned to terminal operations safely and to plan despite the challenges of COVID in
	the community through this time.
	channelnz.com

In the first half, we had no tier one or two process safety incidents and two recordable personal safety incidents, which did not involve any significant harm. At the same time, we have significantly decreased our environmental impact and through our transition have made a step change in our carbon emissions. We have seen a 98% reduction in our scope one and two emissions, with further reductions expected from Q3. Today, our energy requirements are significantly reduced with electricity demand down by 85% and no requirement for any gas. Together, this reduction in gas and electricity is equivalent to a reduction in New Zealand's electricity demand of around 3%. We have also completed our obligations under the national greenhouse agreement with the New Zealand Government, under which we have been reducing the energy intensity of refinery operations at Marsden Point over the last 20 years.

Moving next to fuel demand on page six. As we noted in our Investor Day presentation, we have continued to see fuel demand recovering from the impacts of COVID travel restrictions in the last half. Diesel demand remains strong as it has regardless of the impacts of COVID. Petrol demand showed rapid recovery from lockdown impacts. However, it has been impacted through the half by high pump prices, only recently recovering to pre-COVID levels. And lastly and importantly, we have seen a rapid recovery in jet demand following the opening of borders from the end of February with jet fuel demand recovering to over 50% of pre-COVID levels. I'll talk to the outlook for jet demand in more detail later on. The translation of this demand to throughput in to our infrastructure is shown on slide seven. The chart on this page shows the steady recovery of fuel demand over the last 12 months as COVID restrictions have eased. Fuel throughput was up 9% in Q2 compared to Q1 as fuel demand across all products increased. And we expect throughput to continue to grow as aviation capacity returns to New Zealand.

Refined product has now been flowing through our terminal and into the fuel supply chain for almost five months. And you will see the significant increase in fuel storage we are investing in through the transition with a more than 80% increase in fuel storage capacity at Marsden Point, compared to the refinery once we have all of our private storage available. Earlier this week, we welcome the largest refined product ship ever to be received in New Zealand. The STI LILY, which is classed as a LR2 vessel among the largest refined product ships in the world and capable of handling up to 120 million litres of fuel. As the largest fuels import terminal in the country, we are the only location capable of receiving product tankers of this size. And our tankage capacity means we are well placed to store and distribute the fuels on board providing significant freight benefits for our customers.

Turning now to page eight and the conversion project. Importantly, our conversion work continues to track to plan and to budget as we have communicated at the Investor Day and in our quarterly updates. The highest risk phase of the project being the refinery shutdown and intensive two-month decommissioning works was completed in May, safely, to schedule and to budget. Decommissioning works are now more than 70% complete with equipment cleaned, depressurized, and all catalyst and major internal equipment removed and sent for recycling. Our workforce transition is now substantially complete, and I'm really pleased with the outcomes we are seeing from our extensive programme of transition support, which I'll talk to shortly. Terminal upgrade works are continuing with the conversion of two of our former crude tanks into private storage tanks now underway.

channelnz.com

	Conversion project spend was approximately $84 million to the end of July, with more than
	half of the costs now spent or committed, reducing inflationary risk and increasing our
	confidence that this work will continue to track to budget. As we said at our Investor Day,
	we remain comfortable with the level of contingency we have in our project budget. Now I'll
	pass you to Jarek to run through the financials.
Jarek Dobrowolski:	Thank you, Naomi. And welcome everyone today. Starting on page 10, I'm really pleased
	to report that terminal operations are delivering strong cash flows. Our results reflect the
	change that we have undergone at Channel this year with the refinery as discontinued
	operations operating for three months to the 31st of March. And the import terminal
	operating from 1 April to 30th of June presented as continued operations. And as you will
	see, these results really highlights the benefits we have realised from moving to the new
	operating model and how this provides us confidence that we will be able to return to
	dividends in 2023. We have generated a strong EBITDA margin of 66% in Q2, reflecting
	the lower operating cost of the import terminal model. We have seen significant cash flows
	funding two thirds of the conversion spend. And the net profit for the six months has
	increased net assets by 5% from $1.33 to $1.40 per share at the end of June. And finally
	tax loss from refining assets write-offs are now crystallised as we cease the use of and
	shutdown refining units.
	As Naomi mentioned, we have made a good progress towards lowering our cost of capital
	through our retail bond issue in May. And our bank refinancing process is expected to
	complete in the second half. Our performance for the year is tracking in line with previously
	issued guidance, which increases our confidence in return to dividends at the end of this
	year. And for FY23, we are now expecting EBITDA towards the top end of the guidance.
	Let me now turn to page 11, which reflects continued operations, principally import
	terminal performance in its first three months, Q2. We earned nearly $30 million in
	revenue, mainly delivered by new terminal services agreements, which were in place from
	1 April translating to EBITDA of $19.7 million, and an attractive EBITDA margin of 66%.
	Below EBITDA, you'll see the effects of asset useful life review that we have undertaken in
	the first half. Terminal asset lives have been extended to reflect new service of these
	assets and resulted in a notable reduction in ongoing depreciation compared to our
	refinery. For a full year, we expect the depreciation to be around $32 million. Financing
	costs are tracking in line with our earlier market guidance reflecting the drawn debt being
	fully fixed, which provides us with certainty of funding costs looking forward.
	Now turning to page 12, as you are aware, our earnings profile is now more stable and we
	have some opportunities for operating cost reductions going forward. Our revenue is
	underpinned by our strong contract protections. In fact, over 90% of the revenue is fixed
	and the PPI indexation mechanism, which is effective from next year, provides an
	opportunity for earnings upside. Looking at our operating costs. They have now been reset
	to terminal levels and are largely fixed. The variable portion of operating costs relates to
	electricity, where we see a real opportunity to improve earnings by securing new
	partnerships for provision of long term supply. And through resetting transmission and
	distribution charges, which Naomi will talk to shortly.

channelnz.com

	Turning to page 13, I will now take you through the performance of the refinery, which of
	course was still operating in Q1 and is now classified as discontinued operations.The
	revenue earned under our processing agreements with customers, which concluded at the
	end of March with the refinery closed, included $47 million of processing revenue and $6
	million from pipeline fees. Operating costs in Q1 related to running the refinery in its final
	months and exclude any conversion related expenditure, which are presented below
	EBITDA. As a reminder, the majority of the conversion costs were recognised in FY 2021
	when the decision to cease refining operations was made and the ongoing operating costs
	relating to conversion in the first half relates to those that were not eligible for recognition
	of liability in 2021. Those for clarity are included in our overall conversion project budget of
	between $200 to $220 million.
	Also, as we have seen interest rates increasing during the period, we had updated
	discount rates, which resulted in a reduction in conversion provisions with a corresponding
	credit to the income statement, offsetting the ongoing conversion costs. Turning next to
	cash flow on slide 14. In the first half, Channel generated approximately $41 million in
	operating cash flows, which has funded a significant portion of the conversion spent. The
	residual spend has been funded through debt, with net debt at the end of June of $215
	million. While the borrowings are anticipated to increase, we continue to generate strong
	EBITDA and we are expecting net debt to remain below four times EBITDA at the end of
	this year, enabling a return to dividends from March 2023, which Naomi will talk to shortly.
	Moving to the balance sheet on page 15, we have seen a $114 million reduction in
	receivables and payables as we no longer collect excise duty following the
	commencement of import terminal operations. Provisions for the conversion fell from $185
	million to $131 million reflecting the amount spent to date. And the decrease in provisions
	due to higher discount rate, as I talked to earlier. Importantly, we saw tax losses
	crystallised with approximately $467 million available on day one of the terminal. And
	these are now recognised as part of the deferred tax asset in the balance sheet. Tax
	losses obviously are important asset of our business going forward as they will improve
	our free cash flows for many years to come. And given the profit realised in the first half,
	we have had a notable 5% increase in net assets from $1.33 to $1.40 per share.
	Finally, turning to our financing on page 16. You would be aware that one of our strategic
	pillars is to deliver value by improving the cost of capital of Channel Infrastructure. As
	such, during the first half, I was really focused on delivering our financing strategy to
	diversify funding sources and to improve the competitiveness of our debt. In May, we
	undertook a successful $100 million retail bonds issue and now our attention is on
	refinancing our bank debt, which is well progressed and focused on resetting our cost of
	bank funding to align with an infrastructure business. Our interest rate at the moment is
	higher due to the undrawn lines we are holding, this will come down though as our lines on
	our drawn and we expect to see a reduction in the interest rate we pay as we refinance our
	debt. We have confidence in our funding costs going forward as our debt is fully fixed and
	as I noted earlier, we are tracking in line with our guidance. I'll now hand back to Naomi to
	provide an update on strategy.
Naomi James:	Thank you, Jarek. Before I dive into providing you with an update on our strategy and the
	outlook for our business, I'd like to remind you of the three strategic priorities to deliver
	value to our shareholders, which you'll find on slide 18. These are to leverage our existing
	capabilities of safe, reliable, low cost operations with a high performance culture, to

channelnz.com

transform to deliver value through a competitive cost of capital and realising the full value of our infrastructure, and to position our business for future growth by supporting the transition to low carbon fuels and growing and diversifying our earnings. I won't talk to all of these today as we have done recently during our Investor Day presentation, but I will today provide an update on our progress with our climate targets, the outlook for jet recovery and near term growth opportunities.

Starting with climate on page 19. One of the first acts of our new business was to release our first ever sustainability report called Our Transition to a Sustainable Future. We believe infrastructure has a critical role to play in supporting the de-carbonization of the fuel supply chain. We know we must keep fuel affordable and available for everyone throughout the energy transition and the way to achieve this is by utilising existing infrastructure. In our sustainability report, we set ourselves three ambitious but achievable targets. And today I'm proud to provide you with some updates on the progress we have already made, starting with a just transition of our workforce. Only five former employees who have left the business are still looking for work with more than 90% of those who have already left having already found their next opportunity. With regards to our net zero target, as mentioned before, we've seen a 98% reduction in emissions and a 85% reduction in electricity consumption with no requirement for gas, contributing to a significant reduction in thermal generation required in New Zealand.

And lastly, we are making good progress towards meeting our long-term target of supporting our customers to reduce scope three emissions. We are working with customers and other parties on opportunities across biofuels, sustainable aviation fuel, and hydrogen to utilise the infrastructure we own at Marsden Point and expect to have more to update on later this year.

Moving next to the outlook for jet demand on page 20. We are the only supply route to Auckland Airport where more than three quarters of international flights out of New Zealand depart and the airport consumes 80% of New Zealand's jet fuel. We've seen strong growth in jet fuel demand since the borders started reopening at the end of February. Last week, AIA reported a 70% increase in international flight since February. And since that time, we have seen a near 60% increase in jet fuel demand to now sit over 50% of pre-COVID levels.

And we're seeing Air New Zealand report extremely strong load factors indicating the significant demand that exists when aviation capacity becomes available. This points to a strong recovery and jet fuel demand as aviation capacity returns, with a number of airlines due to reinstate New Zealand routes this summer and the potential for a faster recovery than we had previously expected. With a clearer review on COVID recovery than we have had for some time, we are planning to work with Hale and Twomey to update our demand forecasts in the second half of this year.

Turning next to near term growth on page 21. We see a number of near term growth opportunities beyond the contracts we have signed to date. We are still waiting on government to take policy decisions on the biofuel sales mandate and domestic stock holding policy, but in the meantime are working on some additional private fuel storage opportunities.

channelnz.com