Midway : Investor Conference Transcript

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MIDWAY LIMITED ABN 44 005 616 044 10 The Esplanade, North Shore VIC 3214 T [phone]

www.midwaylimited.com.au

MIDWAY LIMITED (ASX: MWY)

25 February 2022

INVESTOR CONFERENCE (24 FEBRUARY 2022) TRANSCRIPT

Tony McKenna: Welcome to today's analyst and investor presentation on Midway's first half 2022 results. My name's Tony McKenna (TM) and I've been Managing Director of Midway for one month now, so I ask that you bear with me as I develop my knowledge of the business and review its strategy.

However, I'll do my best to walk you through the results, key drivers and the status of important business initiatives. I'll also give you an update on trading conditions in the first few months of the second half of F22 and my initial perspectives on the Company strategy.

With me this afternoon is Midway's Financial Controller, Michael McKenzie (MM). I'll refer to Michael where he is closer to the detail than, at this stage, I am.

At the AGM last November my predecessor, Tony Price, flagged that the first half 2022 results would be affected by the COVID-19 pandemic power cuts in China. The headline results are obviously very disappointing and caused by a number of factors out of the company's control as well as underperformance of some business units.

Revenue and EBITDA were substantially down on expectations and Midway recorded a modest loss after tax. The operating cash flow includes $6.7 million stock build up which is a normal part of the working capital cycle.

Given the results, the directors decided not to pay an interim dividend.

Despite our high debt, our gearing ratio remains modest, just above our target, and we have adequate interest cover.

I'm also pleased with the strength of the balance sheet and the opportunity it provides for a strategic reset. Remedial actions are being taken to address underperformance in some business units and I'll look hard at how this can be expedited. I'll approach this challenge with fresh eyes and I'm prepared to take whatever action is necessary to return to profitability and improve shareholder returns.

The cost cutting initiatives at South West Fibre are beginning to show results, and the strong focus on securing key contracts for the WA logistics business and the Tiwi Islands operations are gaining traction.

Financials

The numbers show what can only be described as a disappointing result. There is a lot of red ink on this page which is primarily driven by a large drop in revenue. Much of it was due to factors outside the Company's control. There are actions that we can and will take to improve. I'm clearly focused on understanding what is under our control and what the management team can do to turn around performance as quickly as possible. These numbers mask mixed performance by business units across the

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Company. More recent acquisitions of both Logistics and Plantation Management Partners remain loss making and remain under review in the interim. However, I'm confident that we have the plans in place to give the businesses the best chance of the making the necessary turnaround.

Looking at the key drivers of performance, the positives on this chart are:

• A solid contribution by South West Fibre, after the temporary closure of the Portland mill in June 2020.
• Midway has also negotiated an extension of the timber supply agreement with ABP, and will see continued supply.
• Also, a solid performance by QCE in Brisbane which is partly offset by the volume loss in Geelong and in Tasmania.
• The Tiwi operations of Plantation Management Partners re-opened after the COVID-19 lockdown with the first acacia shipment for some time in the first half of 2022. Prices were also higher on a pcp basis, but there was a mix change with less higher margin globulus out of Geelong and native timber out of Bell Bay, and more softwood out of QCE in Brisbane.

We've included a chart in the attachments for the first time to show shipments by port to help you better understand our business. The negatives on the chart are a significant drop in export volume from Geelong and Bell Bay due to power cuts in China in the first half of F22, and higher freight reducing demand for lower quality products. High E-globulus price worked as a disincentive for customers and suppressed demand as they search for cheaper alternatives.

The foreign exchange rate on a pcp basis is significantly higher at 75c for the first half of F22, compared with 69c in the first half of F21. Also, the wetter La Nina conditions and a higher mix of timber from wetter areas including Brisbane and Tasmania contributed to a lower bone-dry component of sales, 55% in the first half of F22, compared with 57.6% in the first half of F21.

Looking at the cash flow, the drop in sales volume and $6.7 million build in stocks, affected our working capital position and contributed to the negative operating cash flow. This was a key driver in our net debt result, but we remain well supported by NAB and, as the next page shows, our balance sheet remains strong.

Term debt remains $29 million, our gearing ratio remains modest at 29% and we have adequate interest cover of more than four times.

Looking at the balance sheet, the bottom line is net assets increased by 2.7% to $135 million. This was largely driven by a revaluation of property contributing $12 million. It also benefited from an increase in value of biological assets on the back of higher wood prices on a pcp basis. Overall, the balance sheet is underpinned by $155 million property, plant and equipment which has been well placed to leverage its strength and support strategic growth opportunities by recycling capital.

Trading conditions

The good news is that we are seeing signs of improved training conditions early in the second half of F22. We will experience much better shipments from Geelong in the first quarter than we did during the first quarter last year and we are seeing encouraging

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signs there. Demand seems to be returning as stocks normalise, and pulp prices have stabilised. Customer enquiries have definitely improved from the first half of the year. We are closely watching Japanese and Chinese paper prices in demand which is not yet showing signs of returning to pre-COVID levels. We do not expect a quick turnaround as the next slide shows lingering issues from COVID-19 supply chain disruptions.

COVID-19 supply chain disruptions also affected the Company, both overseas and domestically.

Ships and crew shortages saw the Baltic Dry Index increase greatly during the first half and bunker fuel costs also increased significantly.

Major customers in China tried to offset these rising freight costs by switching to lower cost wood fibre from Vietnam and Thailand.

This directly impacted sales volumes out of Geelong and Tasmania.

Midway also experienced COVID-19 supply chain issues in Victoria and Western Australia, where lack of harvesting and haulage crews affected timber supply and operations.

We expect these constraints to gradually ease as COVID-19 restrictions and supply chain bottlenecks are removed.

Business Initiatives

Following the sale of the Upper Goulburn property, Midway is close to finalizing the sale of its plantation properties at Wandong, just north of Melbourne.

The gain on this sale is expected to be around $2.3 million above our book value.

The net proceeds after buying back trees will be used to repay bank debt, fund the Bell Bay expansion in Tasmania, and support growth opportunities.

The sale of surplus land allows us to focus on the plantation estate fund, which I'm pleased to say is progressing well.

Midway is in an advanced stage of negotiation with a major investor to create the plantation estate fund.

We anticipate being able to brief you with more details in the next few months.

At a high level, the fund offers an opportunity to work with a major investor to build our plantation estate in the Geelong catchment.

It also provides Midway with the opportunity to reposition the balance sheet, reducing the amount of lower yielding land assets we're carrying.

Geelong Grain Terminal

The development of a grain terminal at our Geelong facility is an important strategic initiative for the Company. It will increase capacity utilization and return on assets at North Shore, Geelong and contribute volume towards our "take-or-pay" contract with

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the Geelong port. As the plantation fund increases timber supply, the grain terminal will complement our core business.

We're in discussions with potential partners for the establishment of the facility and are considering leasing options as well as the previously mentioned JV concept. We're aiming to reach agreement in the second half of the year.

Tasmania Bell Bay Project

There has been solid progress towards establishing a Midway controlled export site at Bell Bay in Tasmania. Unlike other catchments, Tasmania has a large uncommitted forestry resource and presents an appealing growth opportunity. The conveyor connecting Berth 7 to the Tasport ship loader is complete. The first softwood shipment will depart Berth 7 in the second half of F22.

Phase one of the Norfolk St Development is expected to be completed in July. This will enable us to expand our export options and the range of products we can sell from Bell Bay.

Outlook

Overall, we are seeing improved customer interest, but the results aren't going to see an immediate turnaround.

Major projects have good momentum and will start to show results in the second half of F22.

We are working on initiatives to improve the performance of our underperforming businesses, and I will be conducting a complete strategic review, looking at improving financial performance and determining the optimal strategic positioning for the company.

I'd like to open it up for questions.

Simon Conn. I suppose you're been in the role a couple of weeks now or a couple of months. Can you give us your impressions of the business strengths, and weaknesses? You've obviously reviewed the asset pool you've got. Just give us some high level thoughts about where you want to take the business.

TM. Yes, sure, so clearly the results are disappointing.

But there are some really good prospects there I think. The potential in Tasmania is very promising and the infrastructure that we're putting there gives us a good toe-hold in that market.

I think the grain initiative goes a long way to helping defray take-or-pay costs with the Geelong Port and better utilizing the site there.

The Wondong sale I think makes good sense.

The work on the plantation estate fund is progressing well.

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I see potential for, and I expect that we will see improvements in the performance out of both the Tiwi Islands and the Western Australian logistics business and they're businesses that we're watching very closely and will make hard calls as required, but there's promising signs there with key contracts being signed.

I think where we sit very naturally next to what's happening in the carbon space presents a real opportunity for us and we are building a capability there, recruiting some resources to start developing our own in-house expertise in that because it does sit so closely to what we're doing and is a logical point for expansion.

So in summary, while disappointing first-half results and difficult conditions that won't be fully resolved for the second half, I think the mid to long term future is very, very promising.

Simon Conn. Tony you're sort of alluding to green shoots, but you're saying the second half is not going to be much better? Or you're saying if you will see better benefit in the second half?

TM. The second half will be better, but it's not the answer, there's still some hard work to do.

We have had issues with not having any demand. We're now having issues that teams aren't available, crews unavailable. We haven't got truck drivers to bring logs into yards which is slowing us up on the on the supply side and demand is not 100% back and there's some of the life that we're seeing and the interest from customers is for first half of next year.

Simon Conn. And just one last question, can you give us just a further elaboration on the plantation estate development? What's the likely timing of that? We've been talking about this for some time and it was flagged at the AGM, but still has been delayed.

TM. Yes, I appreciate that, but it is a complex transaction. Certainly for this organization it's a large transaction and it is complex and there is a counter-party who we have to bring along. It is progressing well, and I am confident that we'll be announcing something later in this half.

Simon Conn. Thank you.

Charlie Kingston. I appreciate you've only just joined Midway, so it's certainly not your strategy. You're working your way through the business. That being said, you know that there's a lot of talk in this presentation about whether the growth strategy is being funded by selling land. A cynical question, but you're expanding capacity when you've just mentioned demand is clearly an issue when your revenue's fallen 40% but you're not making money off the current capacity that you have, and it's been a pretty bad period for three or so years. Can you just give a simple explanation as to why you think the strategy of increasing or your current capacity is actually going to generate returns for shareholders when it hasn't done so for three or so years now?

TM. So is the expansion in capacity that you're talking about relate to Tasmania?

Charlie Kingston. Yes.