U.S. markets open in 4 hours 57 minutes

Edited Transcript of MWY.AX earnings conference call or presentation 27-Feb-20 3:00am GMT

Half Year 2020 Midway Ltd Earnings Call

Mar 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Midway Ltd earnings conference call or presentation Thursday, February 27, 2020 at 3:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Anthony R. Price

Midway Limited - MD, CEO & Executive Director

* Ashley William Merrett

Midway Limited - CFO

================================================================================

Conference Call Participants

================================================================================

* Damien Williamson

Bell Potter Securities Limited, Research Division - Fixed Income and Hybrids Analyst

* Heath Andrews

PAC Partners Securities Pty Limited, Research Division - Senior Research Analyst

* Joshua Goodwill

Ord Minnett Limited, Research Division - Research Associate

* Mile Stojanovski;Aurum Accounting Group;Analyst

* Shaun Suitor;Department of State Growth;Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Thank you for standing by, and welcome to the Midway Limited HY Results Conference Call. (Operator Instructions)

I would now like to hand the conference over to Mr. Tony Price, Managing Director and CEO. Please go ahead.

--------------------------------------------------------------------------------

Anthony R. Price, Midway Limited - MD, CEO & Executive Director [2]

--------------------------------------------------------------------------------

Thank you, and thank you, everyone, for joining our FY '20 half year profit results. You'll all have read the ASX announcement this morning, so I'll just focus on touching on key points.

As you'd appreciate -- or as you'll all appreciate, the numbers are very disappointing given we achieved a record profit in the same period last year. The reality, however, is that the last 6 months of 2019 were probably the worst global trading conditions we've had to deal with for the last 10 years. The U.S.-China trade war, overproduction of pulp in Brazil resulted in excess stock globally and had a significant effect on the market pulp price, dropping from about USD 760 a tonne down to USD 450, which has had flow-on effects to the woodchip demand and price. As a result, our EBIT numbers, a key measure of profitability, was only $4.2 million for the half. This was well down on the previous period of $12.2 million.

The statutory net profit after-tax for the first half was again well down under $1 million compared with $14.3 million in the previous corresponding period. Before the impact of significant items, Midway recorded an underlying NPAT loss of $1.2 million. Two significant items that resulted in a write-down were PMP to the value of negative $4.8 million and also a write-off of $1.5 million for our investment in ADDCO, our logistics business. These significant items are -- the result -- or this result came about due to the deterioration in the global trading conditions with both companies finding it very, very difficult to operate.

As a result of these low profit numbers, the Board of Directors has decided that Midway will not pay an interim dividend this year. However, Midway does retain a strong balance sheet. It's strongly supported by our banks, and we're confident that profit and dividends will grow again as the long-term fundamentals of the global market outlook are very, very positive still.

I'll now touch on some of the key business drivers for the first half. While our sales volume resulted in a reduced EBITDA of $7.5 million for the first half, the impact of higher payments to forest owners also resulted in a reduction of $2.1 million in the first half. Midway also recorded lower earnings for our Logistics business and PMP as a result of this market downturn as I mentioned earlier.

Bone dry fiber content was also slightly down on the previous period. The -- we also -- these negative impacts on EBITDA were partially offset by a more favorable exchange rate and a higher sales price for blue gums, our highest-quality product from Geelong and Portland.

The average exchange rate in the first half was $0.71 compared with last year where it was $0.73. This contributed to a positive $2.2 million towards EBITDA in the first half.

However, the main driver of the result is due to the product mix that we sold. So we have a higher-quality fiber that we generally produce in Geelong. We lost sales to one of our major customers in the first half, and as a result of that, much of that volume was replaced by the lower-quality material which generated a lower margin.

In terms of the balance sheet, net debt increased to $55.4 million as a result of higher working capital requirements due to the need to fund quite high stock levels, particularly in Geelong. Cash flow was also affected by the higher inventories and working capital claims during the first half. However, our banks have been very, very supportive and are prepared to adjust the covenants to ensure that we operated within those whilst we get through these short-term trading issues. I think it's a very comfortable debt-to-equity ratio of 31% that we have, particularly given our interest cover is 14.9x.

So moving on to business development. Despite the challenging trading conditions, we continue to pursue a range of opportunities to assist the future growth of the business. Wood fiber processing will remain the engine room of Midway in the foreseeable future. The Midway Logistics and Plantation Management have been fully integrated into the business now, and we're very confident they'll contribute to future earnings.

Midway continues to explore options to increase exports from -- particularly from our Geelong site, which is underutilized. We're looking at such things as grain and also softwood. And we're growing rapidly our business in Tasmania where we're trading cargoes for third parties along with developing our own business in that state.

Midway is also expanding our biomass business in Western Australia, and that's likely to grow very quickly over the next 3 to 4 years. And we're also exploring further biomass export opportunities on the East Coast of Australia, focusing in the first 2 -- first instance on our operations in Brisbane.

We're very, very pleased to advise that the largest global timber investment manager, Hancock Timber Resources Group, which has about $10.6 billion of forest and land assets under management, has acquired the ex-Midway plantations in Victoria, which were purchased by GMO. This is a very good outcome. We've got a very strong, strategic relationship with Hancock, and we see them as a potential partner in the future in terms of expanding our plantation estate.

We're also progressing discussions with investors for a second rotation plantation on the Tiwi Islands. We've sent out a [file] on Tuesday to 15 potential parties, and we've already had 5 came back within 24 hours expressing strong interest. So we're very, very optimistic about getting a second rotation plantation program happening on the Tiwi Islands. Well, we strongly believe that all of these investments will positively position Midway to really build our sales and earnings once the global market turns, which we believe is just around the corner.

In terms of the market outlook, woodchips, Midway is seeing signs of improved demand in -- with -- from our Chinese customers, and we've actively diversified or increased our sales into the Japanese market. Global pulp and wood fiber stocks are gradually returning to normal levels, and pulp and woodchip prices have stabilized. As a result, Midway will have shipped as much wood fiber from Geelong in the first 2.5 months of this calendar year as we did in the full first half -- 6 months of the full first half. However, in this current market, there's still ongoing uncertainties that will play or may play out over the next 6 months. However, we do have some confidence that we're starting to see the market recover.

A point to note, given the strong interest in the coronavirus, we've had none of our shipments to China at this point affected by the virus. In fact, all of our customers have operated through the Chinese New Year. We've had a number of vessels arrive in China in recent times, and at this stage, we're not seeing much impact with a small exception that banks have been a little slow in opening LCs or putting LCs in place, but that's just a timing issue that we're working through.

The annual price negotiations with our Japanese customers will be conducted over next few months. We're hoping that we'll be able to secure pricing in the same -- at the same level as we have with some Chinese customers of USD 175 a bone dry tonne. It's probably worth noting that we've just signed a contract with a new -- a Chinese customer that we've not been dealing with much in recent years for 7 cargoes in 2020, and we've secured the price of $175 for the full calendar year. Finally, we also have some uncommitted cargoes, and we're talking actively with customers about securing that volume.

If the export prices remain stable and our customers meet their contracted shipments, Midway is confident we'll record a much stronger second half. And at this stage, Midway remains very comfortable with the current consensus and earnings forecast for FY '20.

So with that, I'll just hand back over to those on the call, and Ashley and I would be happy to answer any questions that people might have.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from John O'Shea from Ord.

--------------------------------------------------------------------------------

Joshua Goodwill, Ord Minnett Limited, Research Division - Research Associate [2]

--------------------------------------------------------------------------------

It's actually Josh Goodwill on the line for John here. Just my first question's around the full year consensus EBITDA. When you say that you're confident you'll meet that consensus EBITDA, does that take into account the AASB 16 accounting changes? Or is that pre the changes that you're referring to?

--------------------------------------------------------------------------------

Ashley William Merrett, Midway Limited - CFO [3]

--------------------------------------------------------------------------------

That's underlying EBITDA, Josh.

--------------------------------------------------------------------------------

Joshua Goodwill, Ord Minnett Limited, Research Division - Research Associate [4]

--------------------------------------------------------------------------------

Okay. And aside from the technical question on accounting, just in terms of your exposure to China and Japan, where do you -- I can see it's come down or gone more in favor of Japan throughout the half. Do you have a sort of medium- to longer-term target for how you'd like that split to look?

--------------------------------------------------------------------------------

Anthony R. Price, Midway Limited - MD, CEO & Executive Director [5]

--------------------------------------------------------------------------------

Not in terms of numbers, Josh. I think we've brought down our Chinese sales down from 70% to 53%, Ashley, what was it?

--------------------------------------------------------------------------------

Ashley William Merrett, Midway Limited - CFO [6]

--------------------------------------------------------------------------------

Around 55%.

--------------------------------------------------------------------------------

Anthony R. Price, Midway Limited - MD, CEO & Executive Director [7]

--------------------------------------------------------------------------------

Around 55%. Yes, 50-50 would probably be nice. But yes, now we've established those sales in Japan. We'd expect those to be ongoing. So we've maintained at least the current levels of sales into Japan that we have now.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Your next question comes from Heath Andrews from PAC Partners.

--------------------------------------------------------------------------------

Heath Andrews, PAC Partners Securities Pty Limited, Research Division - Senior Research Analyst [9]

--------------------------------------------------------------------------------

My question is really around stock levels. Could you perhaps give us a bit of indication of how many boats have sailed already this half and what sort of quantum of stock decrease you've seen?

--------------------------------------------------------------------------------

Ashley William Merrett, Midway Limited - CFO [10]

--------------------------------------------------------------------------------

So it might not be the easiest way. At the end of December, Heath, we had approximately $31 million of stock. Normal stock levels would be around that $15 million mark. Come the end of March, we'll be back down around the normal stock levels. So the high stock at 31 December was -- a lot of that was in the Geelong area where we've lost a customer and, as Tony alluded to, signed up some new Japanese and Chinese -- and a Chinese customer. That's meant that we've been able to get that stock sold and, yes, get back into normal stock levels.

--------------------------------------------------------------------------------

Anthony R. Price, Midway Limited - MD, CEO & Executive Director [11]

--------------------------------------------------------------------------------

And probably, just to give you a sense, Heath, so I think we're running to the end of the first half at, say, 160,000 tonnes of stock, and it's a high-end stock as well as eucalyptus globulus. We've had our contractors back operating at full production. And by the middle of March, I think we'll be down to less than 40,000 tonnes of stock on the pile. So we've turned a lot of that stock into cash.

--------------------------------------------------------------------------------

Heath Andrews, PAC Partners Securities Pty Limited, Research Division - Senior Research Analyst [12]

--------------------------------------------------------------------------------

Yes. And in that first half as well, did you -- were you operating at full capacity? Or were there periods where your plant was idle because of the stock build?

--------------------------------------------------------------------------------

Anthony R. Price, Midway Limited - MD, CEO & Executive Director [13]

--------------------------------------------------------------------------------

Yes. No. We had a number of shutdowns. I think in total, we would have had 5 to 6 weeks. Is that right?

--------------------------------------------------------------------------------

Ashley William Merrett, Midway Limited - CFO [14]

--------------------------------------------------------------------------------

Yes. Most probably from about October, Heath, we put -- particularly in the Geelong or Victorian catchment areas, we put contractors on sort of [70%] of their quotas. And some of them even went lower than that in -- out of South West Fibre. And basically mid-December, we shut down for roughly 2 -- somewhere between 2 and 4 weeks depending on which facility you were.

--------------------------------------------------------------------------------

Heath Andrews, PAC Partners Securities Pty Limited, Research Division - Senior Research Analyst [15]

--------------------------------------------------------------------------------

Yes. Okay. And just a last question. Could you perhaps give a bit of guidance on the discount between globulus and the other varieties, whether that's sort of opened up or...

--------------------------------------------------------------------------------

Ashley William Merrett, Midway Limited - CFO [16]

--------------------------------------------------------------------------------

Well, yes, look, the globulus is at headline price number, and then there's various discounts off that for the different products, whether it be out of Tasmania, out of Queensland, native hardwoods, and then most probably the lowest quality is the product out of Melville Island or the Tiwis. And the range can be roughly USD 50 a bone dry metric tonne.

--------------------------------------------------------------------------------

Anthony R. Price, Midway Limited - MD, CEO & Executive Director [17]

--------------------------------------------------------------------------------

Yes. So it's a range between $120 for the lowest-quality product through to $175 for the highest-quality product.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

(Operator Instructions) Your next question comes from Mile Stojanovski from Aurum Group.

--------------------------------------------------------------------------------

Mile Stojanovski;Aurum Accounting Group;Analyst, [19]

--------------------------------------------------------------------------------

Tony, a question in relation to potentially your banking covenants. Given the fall of the share price and the reduction in cash flows or net profit or EBITDA, are we still within a reasonably comfortable position with the banks?

--------------------------------------------------------------------------------

Ashley William Merrett, Midway Limited - CFO [20]

--------------------------------------------------------------------------------

Yes. Our -- the banks have been strong supporters of us. And we went in anticipation of being close to our operating leverage covenant at 31 December. We went to the banks and asked for them to review those and which they increased. So we would have still been within the covenant -- our old covenants, but the bank has given us an increased covenant for December, March and June quarters and a slightly increased month of September '20 and then back to normal levels for the operating leverage covenant from December 2020.

--------------------------------------------------------------------------------

Mile Stojanovski;Aurum Accounting Group;Analyst, [21]

--------------------------------------------------------------------------------

So you're pretty comfortable that we will be able to meet them without having to do a capital raise at significantly declined share price.

--------------------------------------------------------------------------------

Ashley William Merrett, Midway Limited - CFO [22]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Anthony R. Price, Midway Limited - MD, CEO & Executive Director [23]

--------------------------------------------------------------------------------

Absolutely.

--------------------------------------------------------------------------------

Ashley William Merrett, Midway Limited - CFO [24]

--------------------------------------------------------------------------------

But the real -- the long-term debt is still around that $30 million mark. We had working capital debt at 31 December of around $19 million. Effectively, come the end of March, that $19 million will be gone. So the operating leverage covenant is a net debt-to-EBITDA calculation, so there'll be no issues.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

Your next question is from Damien Williamson from Bell Potter.

--------------------------------------------------------------------------------

Damien Williamson, Bell Potter Securities Limited, Research Division - Fixed Income and Hybrids Analyst [26]

--------------------------------------------------------------------------------

Yes. Just a question, just if you got a pipeline on any further pricing contracts that you announced on 10th December, is there a pipeline of further announcements that you can give to the market just to show how that price is sticking on any further contracts? And also, the ability to shift supply into Japan versus China, what's the appetite for your Japanese customers to shift supply away from China?

--------------------------------------------------------------------------------

Anthony R. Price, Midway Limited - MD, CEO & Executive Director [27]

--------------------------------------------------------------------------------

Well, I'll answer your second question first, Damien. So we've already moved, as I said, probably a significant volume back into Japan. Within the current calendar year, it's probably unlikely to change outside the ranges we've currently got. So yes, the balance we're currently sort of operating at is probably where it'll be. But as I said before, we've significantly reduced our exposure to China.

In terms of pricing, so when we made the announcement last year, that was to do with a contract that we've got with a sizable buyer of eucalyptus globulus in China. Subsequent to that, the -- a couple of other exporters from Australia are also settled with another customer at that price level of $175. We've already signed a contract with the customer that we'd settle a price with, but we've signed a full year contract for 2020 for 7 vessels at the $175. So we've got some good price points. It doesn't mean the Japanese customers won't try and negotiate something different than that. But that's a discussion we're currently having, and I can't really confirm exactly where that's going to end up. But needless to say, we'll all be wanting to end up at that point.

--------------------------------------------------------------------------------

Damien Williamson, Bell Potter Securities Limited, Research Division - Fixed Income and Hybrids Analyst [28]

--------------------------------------------------------------------------------

Okay. And just a follow-up question. In terms of operating cash flow, the last couple of reporting periods, that's -- that metric hasn't reflected well on Midway. Is there an opportunity to say this, just sort of you can produce a very strong cash flow half this half to get that into -- more in line with where your EBITDA will report at?

--------------------------------------------------------------------------------

Ashley William Merrett, Midway Limited - CFO [29]

--------------------------------------------------------------------------------

Yes. Look, the key -- one of the key things for that, Damien, is the high stock levels that we had. So we'd be expecting that there's going to be reductions of somewhere like $15 million on what the stock levels were at 31 December come 30 June. So that should reflect well on the operating cash flow.

--------------------------------------------------------------------------------

Operator [30]

--------------------------------------------------------------------------------

(Operator Instructions) Your next question is from Shaun Suitor from the Department of State Growth.

--------------------------------------------------------------------------------

Shaun Suitor;Department of State Growth;Analyst, [31]

--------------------------------------------------------------------------------

Sorry, I was on mute there, guys. Would you be able to provide a bit commentary around the impact of the falling Australian dollar? Do you have it all -- that quantified, so for example, if it falls by $0.01, how much impact that has on your bottom line?

--------------------------------------------------------------------------------

Anthony R. Price, Midway Limited - MD, CEO & Executive Director [32]

--------------------------------------------------------------------------------

Yes, we do. It's sort of -- I think it was for every $0.01, if we don't change anything, I think, from memory, was it...

--------------------------------------------------------------------------------

Ashley William Merrett, Midway Limited - CFO [33]

--------------------------------------------------------------------------------

I'll just...

--------------------------------------------------------------------------------

Anthony R. Price, Midway Limited - MD, CEO & Executive Director [34]

--------------------------------------------------------------------------------

Just hang on for a sec.

--------------------------------------------------------------------------------

Ashley William Merrett, Midway Limited - CFO [35]

--------------------------------------------------------------------------------

Now Shaun, if you're talking FX, plus or minus 1% on an NPAT basis has about $1.3 million impact in isolation. Obviously, we do also hedge. So yes, look, yes, we're going -- we have a hedging policy in place. We don't hedge 100%, so the falling dollar is obviously going to be a positive, but we have got some cover through to 30 June already in place. So we won't take the full benefit of it because -- but I think we should be able to average somewhere around the [59] mark for the second half of the financial year.

--------------------------------------------------------------------------------

Shaun Suitor;Department of State Growth;Analyst, [36]

--------------------------------------------------------------------------------

Yes. Yes. One more, although it's unfortunate you've had potentially a couple of competitors knocked out of the market with Kangaroo Island plantation and a woodchip mill. Does that have any impact, positive or negative, on your business or potential to get future business or to sell your [hedging or your] unallocated loans?

--------------------------------------------------------------------------------

Anthony R. Price, Midway Limited - MD, CEO & Executive Director [37]

--------------------------------------------------------------------------------

Well, if you talk about Eden, for example, they -- we've already picked up, helped them out with a cargo, and I think -- and I'm assuming it's from Tassie. So I think Tassie will benefit from a couple of cargoes in the short term until Eden gets up and running again. So that's a [now fee]. In terms of Kangaroo Island, I think that's yet to be understood, but obviously, Kangaroo Island, we're progressing plans to develop a port to start exporting. That port's not in place at the moment, so that might take some time to come to fruition. So I don't see -- we don't say -- there weren't any sales happening anyway, so there's no benefit to us in terms of what happened there.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

(Operator Instructions) There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.