Port Performance in a Post-COVID World (CPE)

Transcription:

Annie Hardy (00:08):

Good afternoon everybody. Welcome to our last session of the day. So thank you for making it this far with us.

(00:19):

I'm Annie Hardy, Senior Vice President at Siebert Williams Shank. I'm a senior member of the firm's Dedicated Transportation Group, so I cover airports and seaports and transportation clients across the country from here in South Florida to California to New England, and everywhere in between. So I know everyone is anxious to get to the cocktail hour, so I promise we will do our best to get out of here on time or early if possible. So I am here with our two distinguished panelists. We're here to speak about the seaport sector and kind of what trends we're seeing emerging in this post COVID world. So to my far right, we have Andy Hecker, who is the Deputy Director and CFO of PortMiami right here down the road in South Florida. Andy was appointed by the mayor of Miami-Dade County to this position in 2022, and in this role he oversees the divisions at the port such as capital development, finance, economic development, and strategy.

(01:14):

In prior to joining the port, Andy worked for Moffatt and Nichol leading their commercial division and focusing on cargo ports and also at Ernst and Young, where he led the firm's supply chain and operations consulting practice. And then beside me, we have Bill Poole, who has served as the Finance Director for the state of Alabama since 2021. In this role, bill serves as an advisor to the governor and legislator on all financial matters including the port of mobile. Prior to this role, bill served in the Alabama House of Representatives for 11 years as chairman of the Alabama Innovation Commission and was a private attorney for 17 years. Welcome Andy and Bill, and thank you for being with us here today, and thank you again to our audience for sticking with us. So to kick things off today, I think it would be great for the audience to just get kind of a quick overview of each of the ports that you work with, kind of just to give everyone idea of the size of your port and the scope of this services that you have there. So Andy, do you want to kick us off?

Andrew Hecker (02:13):

Sure. Thank you Annie. So yeah, I'm the Deputy Director, CFO of Port Miami. We're the southern most port in the United States at the tip of the state of Florida. We're an urban port, which has some challenges, but it also brings some opportunities. A 522 acre island. About half of our island is devoted to the cruise industry. We're the largest cruise port in the world. Last year we moved 7.3 million passenger movements, which was a world record, the cargo side. We consistently moved right over a million TEU. Our high water mark was during the pandemic, 1.25 million TEU. Our economic impact shows that we generate 340,000 jobs in the state of Florida, direct, indirect, and induced 43 billion in economic output activity. We are working, and I know we have some questions coming up to continue to modernize our port. As an island, we have no land on port to expand, so we're constantly trying to figure out what are the right investments and what is the right sequence of investments to improve capacity, improve efficiency, and better serve our markets.

Bill Poole (03:29):

So I'll talk about the port of mobile briefly. We have one of the faster growing ports in the country. Forbes recently recognized the port of mobile as the second fastest growing port over the last decade, increasing capacity by 122% over that period of time. We are seeing explosive growth at our port, primarily in containerized cargo, but the port moved a total of four 43 million tons of international and domestic cargo in the last calendar year are leading imports into the port of mobile, include oil as the leading vehicle, parts as the second, and aircraft parts as the third leading sector. Alabama now leads the nation as it relates to car automobile exports and that's part of a growing automotive manufacturing industry in Alabama and across the southeast of course. But we've also seen very significant growth in aerospace inclusive of airbus's assembly facility in mobile. That's undergoing a major expansion as we speak.

(04:35):

There are 18 diverse cargo handling facilities at the port and have direct access to a 45 foot deep deep water birthing opportunity. And I'll talk about this more during the panel, but as we speak, there is a deepening a project to deepen the port to 50 feet that will render the port of mobiles, the deepest water port along the Gulf Coast. So here again, significant growth at the port of mobile, I think demonstrating a lot of growth across the region, but we certainly experience an enormous positive economic impact across the state generated 22.5 billion in personal income and local consumption in 20 22, 2 0.4 billion in state and local tax revenue in 2022. I could give a number of other statistics, but suffice to say the port of mobile is growing substantially and I think that's reflective of the broader regional growth as well as competitive advantages that the port of mobile has.

Annie Hardy (05:36):

Great, thanks. Let's just dive right into our questions. So with conflicts in the Red Sea, as most of you are probably aware, continuing to make headlines as well as the challenges that we're seeing from Panama Canal water levels. Are you seeing any issues affecting your cargo volumes at mobile or here in Miami or any shifts away from your port to the west coast ports? Okay,

Andrew Hecker (05:59):

Great question. Multi-part answer. So let me start with the Red Sea. We are not really been impacted by the Red Sea that's dominated by an Asia to Europe trade lane. We do have one Suez service and there's been some minor delays associated with that, although it's not extremely large cargo volumes for us. So the Red Sea, while it's a global issue, has not really impacted the southeast United States as far as I can tell and certainly hasn't impacted Port Miami as far as the Panama Canal goes. And I believe they're back up to 44 feet. So they have a little bit to go. And as an aside, this marvel of engineering to not think about retention ponds to recycle the water in the future is obviously something they're going to have to figure out how to address. And I know they're working on it. We've had some delays but no loss of cargo.

(06:54):

So the vessels have gotten off of proforma in their scheduling to some degree. But as I mentioned when I opened up, we're right running around for the last three years at about 1.1, 1.15 million TEU, and we're still on track to maintain that. We see a little bit of flattening and demand at the moment that we hope will pick up in the last quarter of the year. The rainy season is getting ready to start in Panama. They're hopeful and well hopeful that in a relatively short number of months, those water volumes will get back to where they need to be. I think there was a third part or

Annie Hardy (07:31):

No, I think that was it. That was it. Just two parts this time. Excellent.

Bill Poole (07:34):

So the Port of Mobiles experience is really very similar. I think what we are seeing is the impact, particularly on Suez Canal issue on carriers and customers, but not on volumes at this point. And as it relates to the Panama Canal, as water conditions have improved, certainly that removes some concerns, but to the point of at some point within the next two years, the port of mobile will have an ability to draft 50 foot deep. And so if the issues linger at the Panama Canal could restrict the capability and the volume of those larger ships. But at present volumes are maintaining.

Annie Hardy (08:11):

And kind of along the same lines of shifting demand and supply chain issues, the East Coast and Gulf Coast labor contracts are expiring this fall. Have you seen any shifts away from your port towards West Coast supports given this uncertainty? And do you expect any sort of supply chain disruptions in the wake of these negotiations?

Andrew Hecker (08:32):

Good question. The short answer is no. The one thing about the East coast, and they have a long, long history of this, is lack of labor disruptions. They're spirited negotiations as you would anticipate, but time and time again, the ILA and UMX and management has always managed to reach an agreement without a strike or without a labor disruption. And I think because of that reliance, we haven't seen a shift to the west coast, like you saw from the west coast to the east coast in 2000 when they had the labor disruption with ILWU.

Bill Poole (09:09):

So our port leadership is seeing the same thing. Maybe some minimal kind of hedge or defensive moves from carriers, but no substantial impact at present, nor is it expected. Of course, if there is any type of labor disruption that prolong that would have large impacts. But at this point I don't think that's anticipated under the current circumstances.

Annie Hardy (09:29):

Great, thanks Bill. Andy, this question's for you with significant competition from Port Everglades right up the road here and Port Canaveral in Orlando, what competitive advantages does Port Miami have that allow you to attract such a large number of cruise customers each year?

Andrew Hecker (09:45):

Okay, yeah, so focused on cruise. So with cruise, there's a couple of different things. I'll cite a senior vice president at one of the cruise lines, and obviously we have very close relationships. Most of their head or at least North American headquarters are in Miami. We actually have one on port In their view, they have five or six criteria to what makes a perfect port, and one is the number of destinations you can get to in a day. The second one is at the home port is the destination by itself. The third one is a great international air connections, the number of ice free days that you have or weather, lack of weather impeded days that you have at your port. And then the political environment. And Port Everglades is just 18 miles up the road. They do a good cruise business, I think around 3.94 million cruise passengers.

(10:40):

Canaveral has had excellent growth over the years. They're dominated by the Disney connection from Canaveral to Orlando and then coming out of the pandemic, certainly initially. And we're seeing some stickiness to the drive-in market. But I think the combination of five attributes that we have, and following up with what that senior vice president said, there were only two ports in the world that could offer that. And I was surprised by the second one. It's Miami and Singapore. So we think as long as we have the infrastructure, as long as we can keep the passenger volumes flowing without undue congestion or disruption, then we're in a good position to be number one, stay number one.

Annie Hardy (11:25):

And sticking with the cruise topic with this renewed cruise demand, now that we've gotten through covid, are you seeing any challenges keeping up with the demand? And for you, bill, do you see any challenges on the cargo side keeping up with the momentum?

Andrew Hecker (11:38):

I was going to let Bill go first. Oh,

Annie Hardy (11:40):

Go ahead and go, bill.

Andrew Hecker (11:42):

I'll stay. Well, no on the cruise side. So yeah, the demand is sticking and originally when the first vessels, cruise vessels started sailing again, they called it pent up demand. Now they're calling it sustainable demand. The bookings are through the roof. The volumes are not so difficult to handle for us at the moment, like I mentioned last year was a world record, 7.3 million passenger movements. This year we're looking right around eight. If we go under our contracts in the next five years, we'll be over 10 million. And we obviously continue to invest in infrastructure and traffic flow and roadways and things of that nature to the best of our ability to keep it moving. There have been a couple of things we need to pivot on when they occur. So there's some technology that the cruise lines implemented and we'll call it facial recognition. It used to be you'd get in line with your luggage, you'd clear CBP, and there was kind of a metered flow as you were coming out of the terminal. Now you walk off a ship and as you're walking by, your face shows up on a monitor. If you get a green box around it, you keep going. So what used to be, remember vessels used to be smaller. So what used to be 4,500, say 5,000 passengers flowing out into our network over 2, 3, 4 hour period of time is now 7,000 passengers coming onto our network in 45 minutes to an hour and a half.

Bill Poole (13:08):

So from a cargo standpoint, the port of mobile has seen continued growth post pandemic. So there's not been any struggle at this point to maintain prior trends. And I think that speaks to a number of issues inclusive of the strength of the domestic economy. We've seen consumers to continue to buy. So we all know what some of those economic indicators are, but by way of a couple statistics, the port of mobile from a container number standpoint, at its third highest month of volume in March of 24, since 2008. So that would demonstrate very high levels of volume post pandemic I mentioned Forbes has recognized the port as one of the second fastest growing. Those growth statistics are continuing, and whereas globalized container cargo markets have depressed, the port authority of mobile saw 27% increase in TUs over the prior year. So here again, demonstrating continued growth on the cargo front and really not seeing any foreshadowing that that demand is going to decrease.

(14:05):

I think if anything, the port is struggling to keep up with demand and stressing intermodal capacity. And I think we'll discuss that in a minute. But really we think there are kind of three drivers that give the port of mobile to some degree a competitive advantage, if you will, but certainly speaks to the ability to maintain cargo levels. One is connectivity. We have two major interstate systems, five class, one railroads, and four short Line railroads, 15,000 miles of connected waterway and two airports in the immediate vicinity. So a lot of intermodal capacity, not withstanding, we're seeing stress on that capacity right now. A number of optionalities for bulk cargo and other containers to allow customization for customer needs and also efficiency. Intermodal service can get to Chicago from the port of mobile in three days, takes seven to 10 days from the west coast. So we're seeing some of those efficiencies, some of those capabilities, the intermodal optionalities, which benefit customers from a pricing standpoint really benefit the port of mobile from a competitive standpoint.

Annie Hardy (15:08):

Thanks, Bill. With these growing cargo volumes, as you just spoke about, and the record breaking cruise passengers, are there specific capital improvements that you've been making over the last few years or plan to make in the coming years to enhance your facilities to keep up with this demand?

Andrew Hecker (15:26):

Yeah, so yes and yes. During COVID, there was two things that we did. Everything else was on the table. We did not lay off personnel and we did not stop our construction projects. We brought two cruise terminals online. We have three more that are three more bursts that are under construction that'll give us 12 cruise bursts on the cargo side after deepening the channel to 50 52. And we have a tunnel that connects the port directly to the interstate system. We've continued to modernize. So for us, that's densification. So moving from, for those you're not familiar equipment that reduces the number of containers you can stack per acre because of the way the equipment operates to gantries over stacks, which will increase our capacity by about 40% over the next couple of years, we're going to complete that conversion. We're decarbonizing, we're converting everything to electric equipment at some cost, but initially it was the right thing to do for the environment. Now there's actually a groundswell of requests for it on both the cruise and the cargo side.

Bill Poole (16:38):

So mobile standpoint, really cruise is not a significant contributor, so I'll stay focused on the cargo. And again, at present, there's over a billion dollars of planned capital projects at the port. Those are obviously intended to modernize and increase capacity. We divide as we think about the port mobile into the lower harbor and the upper harbor, the lower harbor, I've alluded to the project, to deepen the channel to a 50 foot depth. By mid 2025, over $370 million have been dedicated to that project. That's a combination, primarily federal money, but also a substantial state investment. Those are clearly intended to increase a variety of capacity and service opportunities. And as we think about the larger ships coming in, that requires different equipment to handle that cargo. In terms of the upper harbor, obviously a little further into the harbor moving inland, there've been substantial investments in the terminal railroads, general cargo improvements.

(17:37):

We have a steel terminal that's expanding at present, so a variety of opportunities there. The state is also investing in inland intermodal cargo facilities. So rail it up, we've just, I think we're on the verge of opening an intermodal facility in the Montgomery area in the central part of the state, soon to announce a project in Decatur, Huntsville north of Birmingham. So trying to move that cargo off of that core facility into some intermodal opportunities further inland. And we're blessed at Alabama to have a number of navigo waterway opportunities. That channel, we can move cargo inland pretty quickly, particularly commodities like coal, steel, aluminum recycling materials. So we see a lot of that cargo move up and down our inland waterways as well. And the loading facilities are expanding to accommodate that increased demand.

Annie Hardy (18:34):

Wow. Sounds like a lot of big projects coming up and it sounds like you can keep all this momentum going. Andy, you kind of talked about earlier the cruise facial recognition. Are there other technological improvements you're making at your port, either on the cargo side or the cruise side to help with efficiencies? And are you using AI or automation technology at all?

Andrew Hecker (18:56):

Okay, I'm trying to think where to start. So lemme start with automation. As I said, we don't expect labor disruption during this round of negotiations. We don't work towards automation, we work towards optimization. So none of it is intended to replace our union labor and our workforce or what have you. When it comes to technologies first, yes, we work on a number of technologies. They obviously take a while to design, create the functionality, test it, incubate it, run parallel systems. So a lot of these are multi-year processes. We're working on a cargo visibility platform. We're actually working that in partnership with a number of ports, including La Long Beach and some others. We've kind of teamed together one of the hardest things for the ultimate end user of the cargo, and it's got inventory carrying costs involved in that cost of transportation, alternative access. If a shipment's delayed is they lose track of where their cargo is at certain points in time.

(20:04):

So we're spending a lot of time working on that. We're just in the process of designing a traffic management system because again, when we talk about what happens at the port, and we can do a hundred thousand passengers, and I'll talk about the cruise side for a second. We can do a hundred thousand passengers in a day. That day is between 9:00 AM and 3:00 PM. So it's a tremendous think of a stadium event or a football game, and then everyone's trying to get out at the end. So we're investing in traffic management systems. We've assisted our stakeholders with GATE technology. So advanced notification of when you're arriving, recognizing the transaction before the truck arrives, sending the signal to the terminal operating system so that it's the right allocation of labor and equipment to optimize or create as much efficiency with the move as possible.

Bill Poole (21:01):

So I think in mobiles, the case is very similar. With the expansion, there's a number of opportunities to optimize, create efficiencies. They're implementing new operating system, new dashboards to track tonnage. I think everything they can do, obviously to create efficiencies with new technologies. ai, the port of mobile has not become an issue to the core services or functionalities in terms of the administration of the port. Certainly as AI develops, that's going to be a growing issue across all industries and all operations. But at this point, AI has not become an integral part to the day-to-day operations of the port. Yeah.

Andrew Hecker (21:40):

Let me, if I can, I'm watching the clock, a follow-up comment on AI. Similar to Bill, we're monitoring AI and we're going to see where it's going to go. We know it's going to have an effect for us at some point in time, so it's kind of a wait and see. But I will pass along one story. It's kind of interesting. The cruise lines on their ships are much further along in the AI process. So one of the things they've been working on is food wastage. So they scan every tray as they dispose of food, and over time it'll say, stop serving beets, or you have too many garnishes and it's all about not throwing away what's not being eaten. They've had an 80% reduction in food waste. So AI is powerful. It's trying to determine where's it fit

Annie Hardy (22:26):

And related to AI, but definitely not related to food waste. President Biden recently came out with an executive order relating to minimum cybersecurity requirements at ports as well as securing Chinese manufactured cranes. Have your ports taken any actions to comply with these new security requirements at this point?

Andrew Hecker (22:46):

So on the cybersecurity executive order, and that was designated to the Coast Guard to handle the implementation and the execution of it under our facility security plan, which I think technically is private or whatever, we have fully complied with the Coast Guard requirements and document and everything related to that. Now, the future procurement of cranes, we can talk about that. That's a little bit more of a sticky issue. Yeah,

Bill Poole (23:13):

So the Port of Mobile's in compliance as well though when you talk to the leadership about it at this point, our leadership doesn't feel there's a concern with existing cranes, but obviously it is an issue. I think procurement of new cranes is certainly going to be an issue impacted by the executive order. So it clears an issue on the horizon, but our leadership doesn't see an immediate threat as it relates to immediate equipment on site.

Annie Hardy (23:39):

Got it. Great. Other than cybersecurity, are there other big threats that you're comfortable talking to all of us about that might keep you up at night about the port?

Andrew Hecker (23:48):

We're robust in our physical security Coast Guard, CBP, I'm sure mobile's similar. Our security force is sworn Officer Miami-Dade County Police Department. What can be a challenge for other reasons? When it comes to moving cargo and passengers, we only have two modes of ingress egress. One is the tunnel that goes under the harbor and connects to the interstate. That gets closed by the folks that manage the tunnel at certain off hours. And then one bridge that connects downtown Miami to the port that gets officer patrol car gated after working hours. You can only get through with your pass. The water entries are patrolled. We have some technologies in place to pick up unknown vessels and things like that. So I think cybersecurity over and above the cranes, I want to say Miami-Dade County got attempted hacks over a hundred thousand times in the last month. And so I think cybersecurity is a general rule, is where we're constantly focused.

Bill Poole (25:03):

I think similar to Andy at the port of mobile, you have your typical security threats from water or land. But I think when you think about what really worries them, their economic factors at play, that could certainly disrupt and be unpredictable. Although the strength of current volumes, I think you wouldn't see immediate and drastic change. But I think the primary concern is any swift or unanticipated change of federal policy or environmental policy that would add costs, that would cause delay, that would require restructuring, whatever that may be. That could be in the cybersecurity area or across just about any function to the extent that there's a policy change that had major implications.

Annie Hardy (25:45):

Sticking on the topic, the general security of your port, the current and future impacts of climate change. Obviously on the top of our mind here in Florida and along the Gulf Coast, how are you preparing today for future and current environmental changes?

Bill Poole (25:59):

Well, I'll take one first. Yeah.

Andrew Hecker (26:01):

And I'm interested in hearing also on a state level. This is a interesting topic.

Bill Poole (26:06):

So the port with a GOMESA grant, which is a substantial grant related to one of the last hurricane events, is conducting a comprehensive resiliency study. So how do we make the port more resilient? We've heard those factors in different panels today from weather events, from other events, from ship impact, whatever the case may be, you moving a lot of large volume ships in and out of the vicinity. So they've worked really hard on those issues, but it's an infrastructure challenge. How do you protect and maintain your infrastructure? You're in a salt water environment, you have a lot of threats coming from different angles. So I think they've worked really hard to assess those from a climate standpoint, but it's never ending. Part of the deepening and dredging of their disposing of a lot of the materials that are dredged. They're using that for coastline rehabilitation, other economic restor, or I'm sorry, environmental restoration projects. So it's been a comprehensive approach, but I think understanding the resiliency issue

Andrew Hecker (27:08):

So similarly, and for a couple of different reasons, Miami, call it Hurricane Central or call Florida Hurricane Central. We, we've always been sensitive to weather events. So everything we build is above the thousand year, I believe, prediction for sea level rise, whether that ultimately comes to fruition or not wind resistant, everything we build is rated over 186 miles per hour. So there's the sea level rise aspect. There's the wind aspect. We were in the process of doing this anyway, but our current administration is very focused on the environment. So we're decarbonizing every step in sequences, starting mostly with both the cargo handling equipment going from diesel to electric, and then we're the first port in the nation on the cruise side, on June 17th, we're going to do the ribbon cutting for five bursts. That'll be shore power ready. And so I think in the aggregate, that puts us out there, if not in the lead, but certainly out there in terms of resiliency, climate action, and things of that nature.

Annie Hardy (28:25):

And that leads directly into my last question. We can't have a panel without saying the words ESG, even here in Florida. Bill, are there any ESG initiatives going on at port of mobile that you want to share with us? So

Bill Poole (28:39):

I think when we think about ESG within this context, I think we think about environmental issues. Obviously the port of mobile has been certified Green Marine, which is the largest voluntary environmental certification program in North America since 2018. They're very proud of that at the Port of Mobile in the upper Mobile Bay Wetlands project created 1200 additional acres of wetland in the upper mobile bay over the next 10 to 20 years using the dredge sediments. So that's going to be a positive environmental impact. Lots of projects under the Restore Act related to Gulf Coast restoration from hurricane impacts. So a lot is occurring on those fronts. Also, environmental protections. I think the Port does a phenomenal job of trying to monitor and mitigate any issues, whether that's spill prevention, greenhouse, greenhouse gases, the cranes have moved to electrification. So there is a big move towards electrification of all to the greatest extent possible of the loading and handling equipment. So a lot of what I think really are common sense issues, but the port is very intentional and recognizing it's in an environmentally sensitive location. The TENOL delta, which feeds freshwater into the port of mobile is a very sensitive ecological area. It's not well known, but folks call it the Amazon of North America. It is one of the most substantial deltas across the entire hemisphere, second only to the Amazon. So they do a very good job of maintaining their efforts to protect the environment.

Andrew Hecker (30:17):

So when it comes to, I'm not allowed to say it. Yeah, I know. Call

Annie Hardy (30:21):

It what you

Andrew Hecker (30:22):

Will. No, but seriously, two things we have not issued, nor do we intend to issue anything that's rated and qualified under the ESG. We think a lot of what we do, some of which I've mentioned, decarbonization, shore power, things of that nature would qualify. One of the things we have been looking at for about three years, and for those in the financial world, issuers, buyers, and what have you, we have not found substantiation of a difference in premium or a different in tick total interest cost or what have you. By going through the rigors of getting it rated and then continuing to monitor and do the reporting on it, I think the aspirations of protecting the environment make a lot of sense. But yeah, there are state policy issues and what have you, but we haven't seen the return.

Annie Hardy (31:17):

Yeah, you're absolutely right. So that concludes all our questions for today. Does anyone in the audience have anything for Bill or Andy?

Andrew Hecker (31:25):

Every question keeps you from the bar.

Annie Hardy (31:29):

See a lot of thirsty people out there, I guess. Well, thank you guys. Appreciate it. Thank you.