POT Annual Meeting: Chair & CE’s Address

Chair's Address - David Pilkington I am pleased to present a summary of our performance for the year to June 2019. Port of Tauranga is, by an increasing margin, New Zealand's largest, fastest growing and most productive port. Our annual cargo volumes increased 10.2% to 26.9 million tonnes. Containerised cargo grew 4.3% to more than 1.2 million TEUs. Transhipments, where containerised cargo is transferred from one service to another, continued to show large increases, further evidence of our success in becoming New Zealand's major international hub port. In the year to 30 June, container transhipment grew 11.2%. Transhipment now makes up 32.1% of the containers handled at Port of Tauranga. Port of Tauranga handles 37% of all containers in New Zealand and 30% of total New Zealand cargo. Group Net Profit After Tax passed the $100 million milestone for the first time, increasing 6.7% on last year's profit to reach $100.6 million. Revenue increased 10.4% to $313.3 million. Parent EBITDA increased 12.4% to $168.6 million. And as you'll be aware, ordinary dividends for the year totalled 13.3 cents per share, a 4.7% increase on the previous year. Total dividends increased 6.5% with the last of four special dividend payments of 5.0 cents per share. We have resolved to continue paying a special dividend, of 2.5 cents per share per annum, subject to any change in our capital expenditure plans. We have capital spending of $310 million in the pipeline, in five stages aligned with ongoing future cargo growth. For the Port of Tauranga Group as a whole, results were mixed across our Associate and Subsidiary Companies. Overall, profits decreased 27.5% after a very disappointing result from Coda Group, our 50/50 joint venture with Kotahi. Coda Group's new Chief Executive, Gerard Morrison, has embarked on an extensive change programme to ensure its long-term success. We completed a new warehouse for Coda Group at our MetroPort Christchurch inland freight hub at Rolleston, which Coda is using to handle Westland Milk's exports. Our 100% subsidiary Quality Marshalling had an outstanding year, with profits increasing 15.1%. Our South Island joint venture PrimePort Timaru had a good year too, increasing its contribution by 36.6%. Timaru Container Terminal volumes decreased slightly, by about 10%. However, some of PrimePort's recent investments in building capacity have had immediate results for the terminal. Channel widening and a new tug have allowed the terminal to accommodate Maersk's Rio class vessels, currently the largest container vessels visiting the South Island. Maersk has also inceased its OC1/USA service from fortnightly to weekly and Swires have recently announced an additional Timaru weekly service linking through to Tauranga. Northport cargo volumes remained steady compared with the previous financial year. We welcome the news that KiwiRail will invest in refurbishing the Auckland-Northland rail line so that there will hopefully be capacity in future to handle increased cargo volumes. As you will no doubt be aware, a Government-appointed working group is looking at proposals to move Ports of Auckland volumes to Northport. We welcome the final working group report and believe that both Northport and Port of Tauranga have a key role to play in alleviating the congestion pressure on Ports of Auckland. The working group's latest report suggests the majority of Auckland's cargo be handled through Northport. To operate efficiently, this will require significant investment in road and rail connections to Northland. At the end of the day, freight owners will continue to choose the most reliable and cost effective supply chain. The working group's challenge now is to come up with an acceptable action plan proposal to achieve this, given the huge investment required. We have not yet had the opportunity to sit down and go through the detailed figures with the producers of the Ernst Young analysis. Some of the data the group has reported - around costs, future capacity and cargo forecasts - does not align with our own data. As mentioned at last year's annual meeting, we engaged Netherlands-based container terminal experts TBA Group to complete a capacity development review of our facilities. It showed we can accommodate up to around 2.8 million TEUs per annum on our current footprint, albeit with some further capital investment. We have identified that berth capacity is the biggest current constraint to further growth, so we are planning to extend the container wharves to the south of the existing berths. This will create a fourth berth. We will be taking delivery of our ninth container crane in January, heralding the start of the new programme of expansion. All of our planned investments pass the test of our usual rigorous cost benefit analysis. We seek a return of at least 7.5% after tax on capital investments. Unfortunately, the same rigour can not be attributed to some of the spending decisions of our competitors. A number of companies, and their owners, seem to ignore the Port Companies Act requirement to act as a successful commercial business. Many ports continue to make uneconomic investment decisions. The Office of the Auditor-General has found considerable variation in port companies' approach to valuations and we support the Auditor-General in any moves that result in greater transparency in financial reporting across the sector. We take climate change very seriously as a business and our Chief Executive will give you a progress update on the initiatives we have underway. As well as reducing our carbon emissions, our environmental focus has been on air and stormwater quality. We have invested heavily in the past few years in improving both. Following the changes to NZX guidelines, we have decided to discontinue our interim financial reports in their current format. We will, however, be giving you all a thorough half-year update, which will be distributed via email and available online. Before I hand over to Mark, I must highlight his win of a very prestigious award during the year. Mark received the Caldwell Partners Leadership Award at the 2019 Institute of Finance Professionals Awards. These awards recognise innovation and excellence in the financial and capital markets sector. The judges rightly pointed out Port of Tauranga's excellent productivity rates, industry-leading safety record, increasing cargo volumes and shareholder returns that have compounded by an average 20.4% since Mark took the Company helm in 2005. Another instrumental figure in that success has been Steve Gray, our Chief Financial Officer. Sadly, Steve has announced his retirement from June next year. Steve has served as CFO for the past 12 years and been with the Company for 32 years. Steve led the team that negotiated our long-term freight agreement with Kotahi that enabled Port of Tauranga to become big ship capable. We will be very sad to see him go but we are hopeful we will retain his services through his governance roles with our Associate Companies. It is inevitable that Mark too will eventually wish to retire, although we hope to put this off as long as possible. In preparation, the Board, together with Mark, has put a strong emphasis on succession planning and building our bench strength, and we have moved our Commercial Manager Leonard Sampson into the new role of Chief Operating Officer. This will give Leonard exposure to all parts of the business, while he supports Mark in his role. We have commenced the search for a replacement for Leonard as Commercial Manager, and Steve as CFO, and we will make appointment announcements in due course. We are also very pleased to have Simon Kebbell join the Senior Management Team, adding Company Secretary responsibilities to his IT / Finance Manager role. Finally I would like to express my appreciation to my fellow directors, Mark and the Senior Management Team, our staff and many contractors for the commitment and dedication to your great company. I'll ask Mark to now share some of the operational highlights for the year as well as the outlook for the 2020 financial year and beyond. Chief Executive's Address - Mark Cairns Thank you David. Kia ora tatou. Good afternoon Ladies and Gentlemen, thank you for your attendance this afternoon. I am Mark Cairns, honoured to serve as your Chief Executive of Port of Tauranga - New Zealand's largest, fastest growing, and most productive port. As David outlined, we had another successful year with exports increasing 11.2% to 17.1 million tonnes and imports increasing 8.4% to 9.8 million tonnes for the year ended June. Log exports increased 12.5% to 7.1 million tonnes. This trend is not expected to continue in the short term and I will elaborate further on this shortly. Sawn timber exports increased 5.4% in volume. Overall, forestry-related exports increased 10% in volume. Dairy product exports remained steady at just over 2.3 million tonnes. Imports of stock feed supplements decreased 11.8% in volume, and fertiliser imports decreased 9.2%. Kiwifruit exports increased 15.2% during the period, a trend that is expected to continue for the next few years. Other primary produce sectors also performed strongly, with frozen meat exports increasing 18.8% in volume and apple exports increasing 54.3%. In the construction sector, cement exports decreased 17.1% and steel exports decreased 7.7%. Salt imports increased 26.8% in volume. Oil product imports increased by just under 2% and dry chemical imports increased by almost 9%. We also had a bumper cruise ship season, with 116 passenger vessels, up from 83 in the previous year. Around 227,000 passengers and 89,000 crew visited the port and expenditure into the regional economy was estimated at $90.3 million. We have 112 cruise ships booked to visit this coming season. A key component of our hub port strategy is the long-term freight agreements negotiated with our key customers, to ensure we have the freight volume to justify the big ship services calling in Tauranga. Our relationships with cargo owners such as Oji Fibre Solutions, Kotahi Logistics and Zespri give us that assurance. I am pleased to report that we successfully renegotiated our second decade long partnership agreement with Oji in December. We also work both formally and informally with the three iwi with mana whenua status in Tauranga Moana. Through the two different schemes we administer, we awarded scholarships to 18 tertiary students with ties to the Bay of Plenty in the last year. We will continue to invest in the projects, organisations and events with long-term benefits for our community - such as the Pilot Bay boardwalk, the upkeep of the walking tracks on Mauao and the floodlighting at Bay Oval. I'm very pleased to report that we were able to contribute dividends of $66.3 million to our main shareholder, Quayside Holdings, which is Bay of Plenty Regional Council's investment arm. Since the company listed in 1992, Quayside has received a total of more than $800 million in dividends from its shareholding. This is on top of the $200 million Regional Infrastructure Fund that the Regional Council has established via its shareholding, to help fund major capital investments throughout the wider region, including the marine precinct and tertiary education campus here in Tauranga. We continue to make progress towards our health and safety goals. Last year we achieved a 55% reduction in Total Recordable Injury Frequency Rate, and a 17% reduction in Injury Severity. We had one lost-time injury during the year, involving blistered feet, and we consider that is still one too many. We've had a a very positive response to the introduction of our ShipShape staff wellbeing programme a year ago and it has proven to be a great platform for promoting teamwork amongst staff. We are developing a comprehensive training and development framework to ensure that all of our employees have a personalised plan to improve and expand their skills. Most of our people managers have recently had training on mental health issues, domestic violence, discrimination, bullying, harrassment and inclusivity. I am immensely proud of our Port People, who provide the Company with our greatest source of competitive advantage. Our people work around the clock, in all weathers, and thrive on the challenges presented to them. They embrace our culture of continually striving to do things better and demonstrating an enduring "can-do" attitude, contributing to our reputation as an innovative organisation that puts customer needs at the heart of everything we do. The Ministry of Transport monitors the productivity of New Zealand's six container ports. In 2018, we handled 44.3% more containers than the next largest port. Our productivity rates took a bit of a hit during the peak season as we had to accommodate unscheduled ship visits due to diversions from Ports of Auckland. However, our rates remain market-leading in Australasia. Our average crane rate over the year was 33.6 moves per hour. We remained the most efficient port measured by ship rate, with an average of 84.3 moves per hour in 2018 , 17% ahead of the national average of 72.3 moves per hour. We were 54% more productive than the average of the top five Australian container ports, whose average ship rate was 54.9 moves per hour. We occupy a very special piece of real estate and it is important to us that we are never seen to take our licence to operate for granted. I would like to pause here and show you a short video that embodies our desire to effect a step change in our environmental, social, and corporate governance performance. Measuring, understanding and reducing our carbon emissions has been a big focus in the past couple of years. We have gained certification of our carbon emissions through the Certified Measurement and Reduction Scheme, or CEMARS. We have set an initial short-term goal of a 5% reduction in Scope 1 carbon emissions per cargo tonne. Scope 1 emissions are those most directly caused and influenced by our business activities, and primarily come from burning diesel in our straddle carriers, and to a lesser extent, in our marine fleet and other vehicles. We are targeting net-zero emissions by 2050 and we are working on multiple fronts to achieve this. One is the establishment of an "inset" fund, where we invest the money we would spend on external carbon offsets on sustainability initiatives within our business. This year, this fund sits at just under $1 million, which we are using to subsidise the purchase of more expensive battery-hybrid straddle carriers. Our next stage of expansion will allow us to utilise fully-electric automated stacking cranes, avoiding increased diesel consumption from the increase in cargo handled. We are also replacing light vehicles with electric or hybrid models where we can, and using biodiesel where we can't. It's a bit of a balancing act. We have increased our wharf sweeping to prevent any dust or debris being washed into the harbour when it rains heavily. But this has increased our carbon emissions from waste going to landfill. A large proportion of bark from the log wharves is already recycled into compost, and we are looking at ways where we can recycle more waste. We favour rail transport over road because of the lower emissions, and we are promoting greater use of coastal shipping where feasible. Because we can use rail and coastal shipping to consolidate cargo at Tauranga, and because of the efficiency of the larger vessels that tend to call here, we can offer the lowest emission supply chain to our customers. In terms of air and water quality, we are very pleased to have secured resource consent for our stormwater network at Mount Maunganui. We have also made significant progress in dust suppression, which I alluded to earlier, with increased sweeping and updated bulk cargo handling rules. We fully support moves to low sulphur fuel use by ships, which will go a long way to reducing air pollution from shipping. We are working with a couple of suppliers to ensure the necessary fuel bunkering facilities are available for visiting vessels. We are also supporting moves to phase out or completely recapture methyl bromide for log fumigation. We have introduced financial incentives for bark removal on export logs prior to their arrival at the port. This minimises the amount of fumigation required and can even remove the need altogether. One of our largest customers, Kaingaroa Timberlands, is reporting great results from its new de-barking plant at its rail exchange at Murupara. We are trying to achieve environmental leadership visibility across all of our staff and I was delighted to receive this letter from Kaingaroa Timberlands welcoming our increased environmental focus. However, the fact remains that many of our export markets insist upon the use of methyl bromide to address biosecurity risk. And even our own Ministry for Primary Industries requires methyl bromide treatment of many imports to repel pests such as the brown marmorated stink bug. Keeping this pest out of New Zealand is a big focus of our biosecurity excellence partnership with MPI, Kiwifruit Vine Health and other agencies, which aims to build awareness among the wider port community. Meanwhile, we have capital spending of $310 million in the pipeline, in five stages aligned with cargo growth. We have progressed our plans to extend the container wharves to the south using existing port land. We hope to lodge a resource consent application in the next few months. Our ninth container crane and associated straddle carriers are on their way, including three new hybrid straddles that will give us fuel savings of 30 to 40% compared with the diesel-electric models we run currently. As David mentioned, we believe we can increase container throughput to 2.8 million TEUs in future within our existing footprint. Most of this growth will be transported by rail, which provides the lowest carbon supply chain and the least impact on the community. Our new vehicle booking system is improving traffic flows into the terminal by incentivising truck visits outside peak hours. This helps us speed up cargo delivery and pick up within the port gates, as well as avoiding adding trucks to the peak hour traffic on roads surrounding the port. Over the past five years, the compound annual growth rate in truck volumes to and from the port was 3.2%. We have renewed our call for state highway designation for Totara Street, which would help support upgrades to this important arterial route. It is considered unacceptable that we do not have a State Highway connection to the main gate on our Mount Maunganui wharves. The Mount Maunganui wharves by themselves are the second largest port in New Zealand, with Sulphur Point being the largest in terms of tonnes of cargo handled. As mentioned by David, we will be farewelling our hugely valued CFO in eight months' time after an awe-inspiring 32 years with the Company. I am pleased to report that Steve won't be leaving us altogether, and will be a feature on the Boards of our Subsidiaries and Associates and - I hope - continue lending me his ear from time to time. I personally have relied heavily on Steve's sound judgement and am grateful for his wisdom as well as his good humour. In 2017, I was proud that his immense strategic skills, as well as his financial qualities, were appropriately recognised in the Deloitte Top 200 Business Awards, when he was name CFO of the Year - a most worthy recipient and a popular choice for the market, which has long-respected his abilities. Looking now to the future and our prospects over the coming year: we continue to focus on maintaining diversity in our cargo and customer mix to give us some resilience amidst the usual fluctuations in trade conditions and commodity cycles. There are some large-scale developments happening in the Bay of Plenty and neighbouring regions. The Ruakura hub development by Tainui Group Holdings in Hamilton will get under way in the next few years, and we have formed a thirty year and potentially 50 year partnership with Tainui to help that get moving. There are also some significant production facilities in the pipeline in the eastern Bay of Plenty, as well as some potential new factories in the Tauranga area. While the availability of greenfields sites in the Tauranga city limits is starting to get squeezed, there is still plenty of land available at places such as Rangiuru, near Te Puke, where Quayside intends to develop a business park. Despite the potential developments locally, the global political and economic environment is expected to provide some short term headwinds. Current global infuences include increased trade protectionism, uncertainty with the ongoing Brexit process, and geopolitical tension involving the Middle East, Russia and North Korea, not to mention the impact of the on-going trade tensions between the United States and China. There are signs that we will see a softening of growth in some cargo categories in the coming year. Log prices dropped sharply a few months ago from their historic highs, and we have seen volumes become a bit patchier in recent times. Overall, the guidance we are getting from our larger customers is that log volumes are likely to drop back to about the same volumes we saw in the 2018 financial year. The first quarter saw cargo volumes slightly less than the prior corresponding quarter and consequently at this stage, our guidance for full-year earnings is in the region of $96 to $101 million, the same guidance we gave at last year's Annual Meeting for this year's record result. We are taking a hard look at all our costs to ensure we are in the best shape possible and our recent credit upgrade to A- will help with our financing costs over the coming year. We believe we are well placed to weather any coming economic storm, and will continue to invest. It just remains for me to thank our customers and partners. We've had the opportunity to celebrate a few milestones with them over the past 12 months and we look forward to acknowledging many more into the future. We remain confident in the long term outlook and will continue to strive for success as New Zealand's Port for the Future, delivering benefits to all our stakeholders, both here in the Bay of Plenty and well beyond. Thirty-six % of New Zealand's exports passing across our quays. Tens of thousands of New Zealanders rely on us for direct and indirect employment, with Port of Tauranga impacting 43% of the region's GDP. As I finish, I would like to leave you with a video showing the planned developments in our container terminal over the next few years. Nga mihi nui kia koutou katoa. Thank you for your attendance Ladies and Gentlemen. End CA:00343262 For:POT Type:MEETING Time:2019-10-25 11:58:08