South Port Tackles Industry Challenges

South Port Tackles Industry Challenges

South Port New Zealand Ltd anticipates generating strong operating cash flows, despite the likelihood of a reduced level of income in the current financial year ending 30 June 2005, shareholders were told at today’s Annual Meeting at Bluff.

The Company’s Chairman, Mr John Harrington, said industry circumstances continue to be a challenge. In the latest year to 30 June 2004, positive early trends were subsequently affected by the cessation in December 2003 of a weekly Trans Tasman shipping link, the ‘Butterfly Service’ operated by Mediterranean Shipping Company and P Nedlloyd.

Mr Harrington said the Company had planned infrastructural expansion to handle anticipated increases in containerised volumes and “a 77% increase in the volume of containers handled in the six months to December clearly confirmed that the Company’s strategic plan was appropriate.”

However, international charter rates have soared in response to strong demand from expanding economies such as China and have led to commercial decisions by shipping companies seeking to control costs.

“The major Chinese regional ports of Shenzhen in 2003 handled 10.6 million containers and have targeted an increase of 2.4 million this year,” said Mr Harrington. “The total handled in New Zealand by all ports is approximately 1.75 million.

“Twelve to fifteen months ago, vessels of 30,000 dead weight tonne size, which frequently call at Bluff, could be chartered for US$6,000 per day. Today these same vessels attract a daily hire rate of more than US$20,000.”

“Shipping companies needed to rationalise vessel numbers by reducing port calls and Bluff, unfortunately, was one of these ports.”

Annual net surplus decreased from $2.62m in 2003 to $2.04m in 2004. Return on equity fell from 11.3% in 2003 to 8.6% in 2004.

The Company has paid a 6.5 cents per share dividend (6.75 cents in 2003) in the latest year.

The return on equity is 8.6% compared with 11.3% in 2003, and Mr Harrington said it is difficult to see the Company achieving the equity return levels of 2002 and 2003 in the immediate future. However, “other regional ports struggle to achieve the 8.6% figure that the Company achieved this year.”

Against this turn of events, Mr Harrington said, “The level of dividend pay-out at 83% of profit this year may be considered by some as excessive.”

“The Board does not believe this is the case as the Company has a strong balance sheet and good operating cash flows. Should the Company generate a reduced level of income, it will still have strong cash flows to support dividend payments.”

The operating cash flow position will be aided by higher non-cash depreciation charges and limited future capital expenditure demands.

South Port’s financial forecasts indicate that a full 12 months impact from reduced container trade activity will produce a 2005 result that will be less than in 2004. “Notwithstanding this prediction, we are involved in an industry which can change very quickly.”

Referring to the Company’s share price, Mr Harrington said normally the profit levels would need to increase for the recent reduction to be restored.

In 2004 South Port achieved record cargo tonnage of 2.15 million tonnes, the third consecutive year that the Port has exceeded 2 million tonnes.

The Port has been steadily transformed by infrastructure improvement, said the Chief Executive, Mr Mark O’Connor.

The numbers of forklifts, small and large, has risen; additional reefer points and sealed hard storage areas have been added and container servicing has been established.

South Port has invested in the Jade Master Terminal IT handling system allowing monitoring of the status of containers, checking of refrigeration equipment on ‘reefers’ and reporting to shipping companies.

The purchase of a Liebherr mobile container crane had put South Port on the same footing as other regional ports.

Over a period of several years the transformation of services has enabled South Port to offer full depot services on port appropriate for improved frequency and transit times by vessels and the growth of the cargo base in the region.

Mr O’Connor said that South Port had container vessels calling every seven days during October-December 2003. Losing this container linkage in January 2004 was not helpful for the region’s exporters and importers or South Port.

The Company has subsequently taken several corrective actions. Replacement shipping lines have been canvassed and alternative distribution options have been evaluated. Capital expenditure has been pulled back and the level of required staff numbers has been assessed. Costs have been reviewed in all operating areas.

“Having the right shipping links is critical and South Port needs to offer excellent break-bulk and container options plus improved frequency.

“Because of Bluff’s physical environment and the trend towards further port consolidation, it is more logical for South Port to accommodate a coastal feed of containers as opposed to servicing direct international ship calls,” said Mr O’Connor. “To succeed a coastal service will need to match or better rail.”

Mr O’Connor emphasised the diversified business base of the Company that supports the strong operating cash flow trend.

“South Port has a solid level of base cargo which will support strong operating cash flow.

Cargo growth opportunities reflect the recent investment in regional forestry processing capacity and greater volumes being exported in processed form. Woodchip volumes are expected to lift in mid-decade.

Dairy production has expanded over the past four years and the Edendale plant presently generates output of 230,000 tonnes.

“Growth opportunities will come from the future provision of a coastal container feeder services and from new industry being established in the region.”

Messrs Rick Bettle, Graham Heenan, both existing Directors, and Mr Gary Kirk were elected as Directors