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Ports of Auckland Half Year Results Announcement

Ports of Auckland Half Year Results Announcement Tuesday 17 February 2004

Speech by Chief Executive Geoff Vazey

Introduction

Welcome to this briefing on the financial and operating results of Ports of Auckland for the six months to December 2003.

Once again, thank you for coming down to our offices. We prefer to hold our results briefing here at the port because it provides a less formal venue and also allows us to arrange port tours for those of you who would like to look at the operations.

Our Chairman is not with us today and he sends his apologies. He is presently recovering from surgery and is making good progress. As a result, I will cover both the financial and operating results.

We have arranged a teleconference for those of you who are unable to attend in person. People listening in can participate in the question and answer session following the presentations. Questions from the floor will be taken first.

Please join us for lunch after the question and answer session. A number of our senior managers are here and you can talk with them at that time.

We have arranged for a port tour from about 1pm for those of you who would like to see New Zealand’s biggest and busiest port at work.

Financial results

Turning to the financial results, I am pleased to report that the Company performed well in the first half of the year.

We signalled to you at the full year results in August that we expected a challenging year in an initially subdued climate. Although a strong dollar has affected the country’s exports, our container volumes have held up well.

The surplus after tax rose 4% to $21.2 million.

Total EBIT excluding unusual items rose 3% to $37.7 million.

Unusual items totalled a net cost of $880,000 compared with $472,000 in the same period last year.

The unusual items once again relate to: Legal costs associated with determining the extent of tenant responsibility for remediation on the Western Reclamation, and Costs associated with the Auckland Waterfront Group.

For this period we also have costs associated with the planned sale of the Westhaven and Hobson West Marinas.

Operations

The Company’s core business of cargo handling continues to provide our underlying strength.

During the half year, cargo handling bolstered the overall performance of Port Operations, offsetting a dip in the marine services contribution as a result of fewer ship calls and the exclusion of North Tugz Limited as a separate joint venture from April 2003.

Port Operations covers all cargo operations and marine services, and represents the bulk of the Company’s activities.

Port Operations EBIT rose 3% to $31.5 million during the half year.

Note that for the purposes of meaningful comparison, we have removed North Tugz figures from the half year to December 2002.

Port Operations revenue was up 4% to $75.8 million, once again excluding North Tugz from the 2002 period.

Port Operations costs were $44.3 million, a good result considering the 3% increase in container volumes. The Company has a firm hand on costs and has the flexibility to adjust expenditure requirements according to market conditions.

EBIT for Investment Property and Marinas was up 27% to $5.6 million. The sale of 19 berth units at Westhaven Marina during the period contributed to this result.

Returns to shareholders

Turning to our performance for shareholders, earnings per share were up 4% to 20 cents.

Shareholders’ equity was $362.4 million, up 4%.

The return on shareholders’ equity on an annualised basis was on a par with last year at 11.7%.

Directors have declared an interim ordinary dividend of 15 cents per share, the same as last year.

The dividend is fully imputed for tax and represents approximately 75% of after-tax profits.

In summary, the Company continued along a steady growth path to achieve a solid financial performance.

Ports of Auckland is a strong company underpinned by sound fundamentals. The business continues to deliver consistent profits. Our focus is on core business and the ongoing growth in containerisation. Our cash flows and balance sheet are very sound and our return to shareholders continues to show healthy growth over the long term

Operational performance

I will now move on to the operational results for the half year.

Container volumes continued to grow steadily, as you will know from our monthly Ports of Auckland Volumes Index update.

To recap, total TEUs were up 3% to over 344,000 compared with the first half of last year.

Auckland containerised imports continued their growth path, up 4% to over 130,000 TEUs.

Full export TEUs rose 1% to over 88,000. This is a pleasing result considering the continuing strength of the New Zealand dollar.

Auckland is New Zealand’s most balanced port, with a 60:40 ratio of full import to full export containers. This makes Auckland’s metropolitan port an attractive choice for container shipping to balance cargo flows.

Transhipment growth of 8% confirms the increase in hubbing on Auckland during the half year.

Moving into the second half, January container volumes were 12% ahead of January 2002. Imports kept on at a high level, which is unusual. Import cargoes have traditionally eased off in January but not this year.

At General Wharves, breakbulk again totalled 2.2 million tonnes for the half year. Imported vehicle numbers continue to make an important contribution and this is expected to continue into the future.

The trend towards fewer – but bigger – containerships is reducing ship calls.

The result is a 7% drop in Auckland ship calls to 906 for the half year, excluding North Tugz.

The current cruise ship season is another bumper one. Through careful preparation and enthusiastic marketing, the Marine Services team won calls by the Star Princess, the largest luxury liner to visit New Zealand.

The team proactively visited Vancouver to observe the processing of this vessel and that investment paid off.

NZAX Service

The New Zealand Asia Express (NZAX) service moves away from Auckland as of this month. We estimate the impact of this business at up to $2.5 million per year. The impact on the remaining five months of the 2003-04 year is estimated at approximately $1 million.

However, we are not taking this loss lying down and we expect the impact on our financial performance to be a brief one.

I need to emphasise that contracts have moved from port to port over the years and will continue to do so. The NZAX move is a good example of robust inter-port competition at work.

We have faced this situation before and we overcame it. In this case, too, over the longer term volumes will recover as a result of growth and new contracts as in the past.

We also know from past experience that not all cargo volumes involved follow shipping changes. It’s a bit early to tell yet as the contract moves as of this month, but I would be surprised to see all volumes involved go away and stay away.

In the meantime, we are fortunate in our high level of responsiveness to market changes. Time and again we have proved our ability to match costs to market demand. Where feasible, we need to meet customer expectations.

We are still handling New Zealand’s largest container exchanges. We have the infrastructure, the leading-edge e-commerce, reefer technology and container-handling equipment, and the skills.

Our productivity rates are high and thanks to such initiatives as the incentive scheme that we introduced two years ago, our container terminal performance continues to improve. Systemic improvements are also resulting from staff involvement in the productivity scheme.

Our customers continue to applaud our service delivery. On top of that, we have New Zealand’s largest import market right on our doorstep and we remain the most balanced port for imports and exports.

All these factors reinforce the fact that we are well set up to continue as New Zealand’s leading container port.

Shipping lane deepening

We have almost completed the mechanical dredging of the Parnell grit rock without the need to blast. This is achieving a significant cost saving and is avoiding the concerns of the community associated with the possibility of blasting.

An announcement on the contract for the main dredging work in the commercial shipping lane, and the associated reclamation construction, is expected to be made soon.

Logistics

Work continues in the area of container-freight logistics.

Container trucking outside traffic peak hours continues to increase. Ongoing work with road transport operators and development of inland ports are working well both for the port and for Auckland.

Containers trucked at night and on the weekends rose 28% compared with the half year to December 2002. The proportion of containers trucked after hours as a percentage of all containers moved by truck rose from 27% to 33%.

That is, a third of all container trucking now occurs outside peak commuter hours.

This is really good news for Auckland’s freight logistics because it is helping to achieve smooth container flows. It is also great news for the city’s commuters because it is getting port-related container trucks off streets during busy times.

Investment Property and Marinas

Moving on to Investment Property and Marinas, we are continuing with our strategy to unlock and optimise value from our non-core property in order to focus on our core business of container handling and marine services.

Now that we have formally secured – with Auckland City – public access in perpetuity, we have begun the sale tender process for the Westhaven and Hobson West Marinas.

Advertising began on 11 February and the Information Memorandums are now available to prospective purchasers.

Our agents, Bayleys, report that they are receiving active interest from a number of local parties and we expect a sale within this financial year as planned.

In the Western Reclamation, we have reached agreement with BP on the early exit from its leases in the Western Reclamation. Remediation continues at a number of sites, including remediation by BP at the sites that have now reverted to Ports of Auckland.

We continue to work actively through the Auckland Waterfront Group on the development of a co-ordinated vision for the future of the Western Reclamation.

A number of major issues remain before a detailed vision, which could form the basis of a zone change, can be finalised and presented for public comment. Important discussions with Auckland City are progressing in regard to the nature of potential public and civic components of the vision.

Border security

Border security remains a key issue for New Zealand seaports. Ports are required to comply with various regulations that have been introduced internationally and are being introduced locally with tight timeframes.

Port security compliance has been required under international legislation, container security compliance has been required by both our customers and Customs legislation, and biosecurity compliance has been required by the adoption of a new import health standard by MAF.

Systems and processes have been reviewed and are being modified as the authorities develop the standards to be met.

Importantly, these changes will enable New Zealand to continue its trading partnerships with countries around the world without interruption.

Sustainable Development

On the important subject of sustainable business development, I am very pleased to say that the Company has met the required global corporate responsibility criteria for membership of the FTSE4Good Index. We were advised of our selection in January.

Investors around the world use the FTSE4Good as an asset allocation tool. It helps them identify companies that meet criteria that contribute to reducing non-financial risks.

But equally importantly, being a constituent member demonstrates to our shareholders and other stakeholders our commitment to social and environmental responsibility.

It is very gratifying that our depth and breadth of sustainability reporting has been so quickly acknowledged in the global arena.

We joined the New Zealand Business Council for Sustainable Development in the latter half of 2002. And although our annual reports have traditionally achieved a high level of disclosure, sustainability reporting was tackled in earnest for the first time in our latest annual report published in September 2003.

Outlook

In conclusion, I can confirm that we are achieving value creation in three ways:

Firstly, we are growing our underlying container business. The recent loss of one contract is a set back. I fully expect to brief you in the future on our recovery from that.

Secondly, we are optimising our key assets. We are making best use of valuable container-handling space at the terminals through improved layout and use of the inland ports.

Thirdly, we are optimising the value of our non-core property assets by, for example, participating in the AWG project for the development of a vision and rezoning for the waterfront area.

Looking ahead, container volumes will be affected by the recent loss of a contract, but we will recover through cost control, growth in containerisation and further marketing efforts.

Our long-term strategy is to remain focused on our core skills of container handling and marine services.

We remain committed to improving New Zealand container-freight logistics, and to providing superior service to customers.

The Company’s prospects are good.

End

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