Aurizon Holdings Ltd. · ASX:AZJ
Aurizon — FY2017 Earnings Presentation
67 slides from Aurizon's earnings presentation, Aug 14, 2017
Slide 1: FY2017 Results
FY2017 Results Andrew Harding – MD & CEO Pam Bains – CFO & Group Executive Strategy 14th August 2017
Slide 2: Important notice
Important notice No Reliance on this document Confidential information This document was prepared by Aurizon Holdings Limited (ACN 146 335 622) (referred to as The material contained in this presentation and any accompanying oral briefing is confidential. “Aurizon” which includes its related bodies
Slide 3: Year in review
Year in review Andrew Harding - Managing Director & CEO
Slide 4: Targeted initiatives driving safety performance, new measures in FY2018
Targeted initiatives driving safety performance, new measures in FY2018 TOTAL RECORDABLE INJURY FREQUENCY RATE (TRIFR)1 Incidents per million person-hours worked 22.34 13.14 5.85 -37% 4.24 2.80 2.41 2.69 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 1. TRIFR includes employees only and does not i
Slide 5: Cyclone impacted underlying performance, strong cash flow delivers shareholder returns
Cyclone impacted underlying performance, strong cash flow delivers shareholder returns FINANCIAL RESULTS › Revenue flat at $3.5bn – Below Rail increase offset by Above Rail decrease › Underlying EBIT down 4% to $836m due to impact of Cyclone Debbie › Statutory NPAT ($188m) due to Bulk and Intermodal
Slide 6: Above Rail impacted by cyclone and weak Freight results
Above Rail impacted by cyclone and weak Freight results REVENUE › Coal Above Rail up 1% on revenue quality despite cyclone impacted volumes › Freight down 8% due to lower revenue quality and volumes › Iron Ore down 12%, with volumes down 4% and impact of rate relief UNDERLYING EBIT › Down 8% to $402
Slide 7: Below Rail solid despite cyclone
Below Rail solid despite cyclone REVENUE › Increased 7% to $1.3bn despite impact of cyclone › $80m true-up from under recovery of UT4 revenue from prior years UNDERLYING EBIT › Down 3% to $490m with additional cyclone-related operating costs and increased depreciation › Regulatory mechanisms to reco
Slide 8: Transformation continues to generate value
Transformation continues to generate value HEADLINE BENEFITS › $129m generated in FY2017 OPERATIONS › Labour productivity improved 10% ($94M) › Changes to regional management structure › Increase in variable traincrew numbers › Fleet productivity1 metrics impacted by cyclone, initiatives to note inc
Slide 9: Results analysis
Results analysis Pam Bains – CFO & Group Executive Strategy
Slide 10: Group financial highlights
Group financial highlights $m FY2017 FY2016 Variance Revenue 3,452 3,458 0% › Revenue includes increased Below Rail from UT4 timing differences offsetting volume driven Operating costs (2,031) (2,026) 0% reduction in Above Rail › Operating costs reflect increased fuel, energy and Depreciation & amor
Slide 11: Earnings reconciliation and significant items
Earnings reconciliation and significant items EARNINGS RECONCILIATION SIGNIFICANT ITEMS – IMPAIRMENTS FY2017 $m FY2017 FY2016 2H 1H $m Underlying EBIT 836 348 488 871 Intermodal (162) Significant items Bulk (526) Impairments (811) (554) (257) (528) FMT1 project (64) Redundancy costs (116) (52) (64)
Slide 12: Underlying EBIT bridge – Group ($m)
Underlying EBIT bridge – Group ($m) › Coal - $18m › Iron Ore - ($15m) › Bulk - ($10m) 89 › Intermodal - ($19m) 129 45 › Coal – $14m1 › Iron Ore - ($14m) › Bulk - ($22m) › Intermodal – $12m 137 131 10 Includes: 26 › Labour & consumables escalation - ($40m) › Asset impairments – ($29m) › Costs support
Slide 13: Underlying EBIT bridge – Above Rail ($m)
Underlying EBIT bridge – Above Rail ($m) › Labour - $79m Includes: › Fleet productivity - $20m › Labour & consumables escalation – ($34m) › Engineering & maintenance - $6m › Lower capital recoveries – ($16m) › Other - $10m › Increased fuel prices – ($10m) › Coal – $14m1 › Coal - $18m 20 › Iron Ore -
Slide 14: Underlying EBIT bridge – Below Rail ($m)
Underlying EBIT bridge – Below Rail ($m) Includes: › UT4 true-ups: › MAR - $80m › GAPE & AFD - $12m Includes: › Bank guarantee - $15m › Corporate overhead allocation – ($26m) › Recovery of energy costs - $10m › Fuel & energy - ($16m) › Insurance claim recovery - $7m 69 137 54 30 506 490 FY2016 Reven
Slide 15: Group gearing targeted at ~40%
Group gearing targeted at ~40%1 Target gearing based on the following considerations: Cash flow sustainability Flexibility Credit Rating Cost of capital › Sustainability of cash › Flexibility to adjust to › Board supports current › Seeking to minimise flows through the changing market credit ratings
Slide 16: Capital spend continues to reduce
Capital spend continues to reduce CAPITAL EXPENDITURE FY2016 – FY2019 ($M)1 -24% › FY2017 capex ~$20m below forecast 703 › Growth capital increase from previous expectations in FY2017 & FY2018 due to NSW growth volumes 276 532 ~525 ~500 › Transformation capital spend 437 dependent on timing and prio
Slide 17: Continuation of strong FCF generation
Continuation of strong FCF generation $m FY2017 FY2016 EBITDA - statutory 493 904 › Strong performance despite cyclone impact Working capital & other movements 76 (85) › FCF includes $98m proceeds from sale of Non-cash adjustments - impairment 841 528 Moorebank investment Cash from operations 1,410
Slide 18: Funding update
Funding update CURRENT RATINGS ARE APPROPRIATE ABOVE RAIL $0.4BN1 MATURITY PROFILE › Moody’s credit rating outlook was lifted to stable in February 2017 $m › Aurizon Network issued second bond in the Australian debt 75 Drawn bank debt capital markets (7yr A$MTN Medium Term Note) in June Undrawn bank
Slide 19: Business and customer update
Business and customer update Andrew Harding – Managing Director & CEO
Slide 20: Progress and delivery on focus areas informs future strategy
Progress and delivery on focus areas informs future strategy Freight Review • Focus on Bulk freight • Intermodal exit announced Capital • Target gearing ~40% • Dividends maintained at 100% underlying NPAT management • $300m buy-back announced Structure • Business unit structure implemented 1 J
Slide 21: New structure enabling delivery of Bulk priorities
New structure enabling delivery of Bulk priorities Freight Review analysis New Structure Immediate Priorities Three initial decisions › Regional leadership, greater Customer service 1 emerged focus and accountability › Retain – either already achieving or › Improving reliability and close to target
Slide 22: Intermodal exit delivers value and certainty
Intermodal exit delivers value and certainty TRANSACTION SUMMARY STRATEGIC CONSIDERATIONS Disposal of Acacia Ridge Terminal and Queensland 1 Removes financial losses Intermodal business for $220m › Historic losses despite TSC subsidies › Sale of Acacia Ridge freehold site including transfer of ~30 ›
Slide 23: Capital allocation framework
Capital allocation framework Operating Sustaining Dividends Surplus capital Cash flow & (70-100% Returns (e.g. Buy-backs) payout ratio) & Transformational Net borrowings Capital Growth capital (at ~40% targeted gearing) FY2018 OUTCOMES › Group gearing target of ~40% › Final FY2017 dividend maintaine
Slide 24: New business unit structure implemented July 2017
New business unit structure implemented 1 July 2017 CEO Technical & Coal Bulk Network Services CFO & Strategy Corporate Intermodal Planning Ed McKeiver Clay McDonald Michael Riches Mike Carter Pam Bains Tina Thomas Andy Jakab Benefits of new structure › Enables the enterprise to drive transformation
Slide 25: Outlook & summary
Outlook & summary Andrew Harding – Managing Director & CEO
Slide 26: FY2018 guidance excludes Intermodal
FY2018 guidance excludes Intermodal PROVIDING EARNINGS GUIDANCE CHALLENGING DUE TO UNKNOWN UT5 OUTCOME1 › Underlying EBIT $900 – 960m › Operating ratio 69.5% - 71.5% › Key assumptions: › Below Rail › Transitional tariffs assumed for full year FY2018 › FY2016 revenue cap ($24m to be repaid to custome
Slide 27: Questions
Questions €P AURIZON.
Slide 28: FY2017 Results Additional information
FY2017 Results Additional information
Slide 29: Aurizon fundamentals on a page
Aurizon fundamentals on a page ENTERPRISE ABOVE RAIL BELOW RAIL IMPROVE RETURNS › Core business characteristics: › Defensive, regulated asset supporting major export industry with RAB of › Effective allocation of capital to › Long life assets supported by long $5.8bn ensure optimum portfolio mix and
Slide 30: Aurizon's rail haulage operations are Australia-wide
Aurizon’s rail haulage operations are Australia-wide Key operational statistics COMMODITIES Coal, iron ore, bulk freight and intermodal PEOPLE More than 4,000 operational full-time employees ROLLING STOCK Over 500 active locomotives WAGONS Over 13,000 active wagons OPERATIONAL FOOTPRINT 173 operatio
Slide 31: Key Above Rail operating markets
Key Above Rail operating markets COAL IRON ORE MARKETS › Coal prices have retreated from the peaks › Price support driven by: experienced in FY2017, however they remain at › Increase in Chinese crude steel production higher levels compared with FY2016 › Strong Chinese steel mill margins › Australia
Slide 32: Group Financial Information
Group Financial Information
Slide 33: Financial highlights (underlying)
Financial highlights (underlying) $m FY2017 FY2016 Variance Revenue 3,452.3 3,457.9 0% Operating costs (2,031.7) (2,025.6) 0% EBITDA 1,420.6 1,432.3 (1%) EBIT 836.0 871.0 (4%) NPAT 461.0 510.0 (10%) EPS (cps) 22.5 24.4 (8%) Final dividend (cps) 8.9 13.3 (33%) ROIC 8.7% 8.6% 0.1ppt Gearing 39.6% 37.5
Slide 34: EBIT by segment (underlying)
EBIT by segment (underlying) $m FY2017 FY2016 Variance Below Rail (Network) 490.4 505.9 (3%) Above Rail 401.7 435.0 (8%) - Commercial & Marketing 2,718.2 2,877.8 (6%) - Operations (2,316.5) (2,442.8) 5% Other (56.1) (69.9) 20% Group 836.0 871.0 (4%) 34
Slide 35: Group operating highlights
Group operating highlights FY2017 FY2016 Variance Revenue / NTK ($/’000 NTK) 50.0 48.3 4% Labour Costs / Revenue 24.5% 24.6% 0.1ppt NTK / FTE (MNTK) 12.3 11.4 8% EBITDA Margin – Underlying 41.1% 41.4% (0.3ppt) Operating Ratio – Underlying 75.8% 74.8% (1ppt) NTK (bn) 69.0 71.6 (4%) Tonnes (m) 259.4 2
Slide 36: Operations metrics
Operations metrics Metric FY2017 FY2016 Variance Net opex1 / NTK ($/’000 NTK) 33.6 34.1 1% Opex Net opex / NTK (excluding access2) ($/’000 NTK) 20.7 19.9 (4%) Production Total tonnes hauled (m) 259.4 270.9 (4%) Net tonne kilometres - NTK (bn) 69.0 71.6 (4%) Full Time Equivalents (FTE)3 4,393 5,013 (
Slide 37: Balance sheet summary
Balance sheet summary As at ($m) 30 June 2017 30 Jun 2016 Total current assets 729.4 843.9 Property, plant & equipment 8,835.0 9,719.2 Other non-current assets 281.5 305.9 Total assets 9,845.9 10,869.0 Other current liabilities (665.2) (733.3) Total borrowings (3,376.2) (3,490.1) Other non-current l
Slide 38: Reconciliation of borrowings
Reconciliation of borrowings $m Commentary Total debt including working capital facility 3,383 › Non-current debt on a Cash basis Reconciliation to Financial Statements Add/(less): › Transaction costs directly attributable to borrowings are capitalised Capitalised transaction costs (10) to the balan
Slide 39: Material items to note
Material items to note $m FY2017 FY2016 Variance Redundancy expense (5) (24) 19 › Table represents items that are included in Long term and short term incentives (43) (31) (12) Underlying EBIT › This table is designed to assist investors to Employee shares gifted - (16) 16 ‘normalise’ underlying ear
Slide 40: Redundancy cost breakdown
Redundancy cost breakdown Redundancy costs Redundancy costs Year included in classified as underlying EBIT Significant items ($m) ($m) FY2011 2 63 › Redundancy costs since IPO have been included in underlying EBIT as well as classified as a significant item FY2012 15 - › Aurizon classifies redundanc
Slide 41: Dividend history
Dividend history Amount per share Payment Date Franking Payout Ratio (cents) FY2017 Final 25 September 2017 8.9 50% 100% FY2017 Interim 27 March 2017 13.6 70% 100% FY2017 Total dividend 22.5 FY2016 Final 26 September 2016 13.3 70% 100% FY2016 Interim 29 March 2016 11.3 70% 100% FY2016 Total dividend
Slide 42: Function & Segment detail
Function & Segment detail
Slide 43: Below Rail profit & loss (underlying)
Below Rail profit & loss (underlying) FY2017 $m FY2017 FY2016 Variance 2H 1H Tonnes (million) 210.8 97.9 112.9 225.9 (7%) Revenue - access 1,199.9 571.4 628.5 1,135.9 6% Services/other 62.2 19.6 42.6 42.5 46% Total Revenue 1,262.1 591.0 671.1 1,178.4 7% Operating costs (484.3) (249.9) (234.4) (414.8
Slide 44: Above Rail profit & loss (underlying)
Above Rail profit & loss (underlying) FY2017 $m FY2017 FY2016 Variance 2H 1H Revenue 2,981.2 1,486.9 1,494.3 3,146.1 (5%) Track access (888.9) (444.0) (444.9) (1,015.6) 12% Employee benefits (701.7) (336.8) (364.9) (739.8) 5% Consumables (536.4) (290.6) (245.8) (500.0) (7%) Fuel (127.5) (66.2) (61.3
Slide 45: Commercial & Marketing profit & loss (underlying)
Commercial & Marketing profit & loss (underlying) FY2017 $m FY2017 FY2016 Variance 2H 1H Total revenue 2,751.1 1,357.4 1,393.7 2,932.0 (6%) Coal 1,795.0 904.6 890.4 1,881.4 (5%) - Above rail 1,164.7 579.1 585.6 1,147.5 1% - Track access 630.3 325.5 304.8 733.9 (14%) Freight 682.7 318.3 364.4 739.4 (
Slide 46: Operations profit & loss (underlying)
Operations profit & loss (underlying) FY2017 $m FY2017 FY2016 Variance 2H 1H Revenue 230.1 129.5 100.6 214.1 7% Track access (888.9) (444.0) (444.9) (1,015.6) 12% Employee benefits (676.2) (323.5) (352.7) (710.4) 5% Consumables (534.5) (293.9) (240.6) (493.6) (8%) Energy & fuel (127.5) (66.2) (61.3)
Slide 47: Other profit & loss (underlying)
Other profit & loss (underlying) FY2017 $m FY2017 FY2016 Variance 2H 1H Revenue 6.5 4.5 2.0 15.4 (58%) Employee benefits (29.3) (11.6) (17.7) (34.9) 16% Consumables1 (8.6) (5.0) (3.6) (36.0) 76% Other (17.8) (15.0) (2.8) (9.8) (82%) Total operating expenses (55.7) (31.6) (24.1) (80.7) 31% EBITDA (49
Slide 48: Coal Above Rail revenue composition
Coal Above Rail revenue composition CORE REVENUE1 REMAINS STABLE DESPITE CYCLONE IMPACT 612 575 577 586 579 42 570 24 30 23 26 › In FY2017 fixed revenue (capacity charge) has increased 21 20 12 6 18 10 8 and variable revenue (usage charge) has decreased reflecting increase in new form volumes. 134 1
Slide 49: Coal contract expiry
Coal contract expiry AURIZON ABOVE RAIL CONTRACT VOLUME EXPIRY BY YEAR (mtpa, as at 30 June 2017) 50 45 40 Million tonnes per annum 35 30 25 20 15 10 5 0 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28 FY29 FY30 Yanzhou: Cameby Downs Batchfire Resources QAL Carborough Downs Coal Manageme
Slide 50: Coal market update: Market Fundamentals
Coal market update: Market Fundamentals METALLURGICAL COAL: CONTRACT AND SPOT PRICE (USD) Month Average › Driven by the relaxation of policy that had previously limited $400 domestic coal production in China throughout 2016, coal Price [USD] per tonne $300 prices retreated at the start of January 20
Slide 51: Coal market update: Australia
Coal market update: Australia GLOBAL METALLURGICAL COAL SEABORNE EXPORT MARKET AUSTRALIA METALLURGICAL COAL EXPORTS BY DESTINATION VOLUME AND MARKET SHARE, CALENDAR YEAR FINANCIAL YEARS (MILLION TONNES) -6% 180 188 189 400 70% 177 +3pts 157 154 140 143 300 65% Million tonnes Market Share 200 60% 100
Slide 52: Below Rail snapshot
Below Rail snapshot CENTRAL QLD COAL NETWORK (CQCN) KEY NETWORK FACTS Townsville PORT OF ABBOT POINT LEGEND 40 + operating coal mines serviced Abbot Point Coal Terminal (APCT) City/town Open access network with three Power Station Bowen Coal Export Terminal above rail coal operators – Aurizon Rail S
Slide 53: Below rail regulation
Below rail regulation UT5 strategy CONTEXT › Record volumes1 for four years in a row, with improved operational metrics › RAB value now $5.8bn2 with ~300mt capacity – as requested by industry › Maintenance regime underpins performance, which benefits the entire supply chain › Stable regulatory regim
Slide 54: Below Rail volumes (mt)
Below Rail volumes1 (mt) FY2017 FY20172 Variance FY2016 2H 1H fav / (adv) Newlands 12.0 5.8 6.2 12.1 (1%) Goonyella 111.1 49.7 61.4 121.5 (9%) Blackwater 52.6 25.1 27.5 56.3 (7%) Moura 12.2 6.0 6.2 11.9 3% GAPE 13.3 6.6 6.7 16.0 (17%) WIRP 9.5 4.6 4.9 8.1 17% Total 210.8 97.9 112.9 225.9 (7%) Averag
Slide 55: Queensland FY2017 Take or Pay
Queensland FY2017 Take or Pay $m Above Rail Below Rail Consolidated Income › The Blackwater and GAPE Systems triggered take or pay in FY2017 for Aurizon Network Coal customers 4.6 4.6 › In all other systems, actual GTK’s exceeded Network customers - 42.2 42.2 system forecast GTK’s adjusted for Netwo
Slide 56: Network revenue cap adjustments
Network revenue cap adjustments AT2-4 AT5 Total Year (diesel tariff) (electric tariff) $m $m $m 1 2017 ~29 ~13 ~42 › Revenue cap is the difference by system between Aurizon’s Total Actual Revenue (TAR) and System 3 2016 (26.7) 2 3.1 (23.6) 2 Allowable Revenue (SAR) and also includes MCI/CPI, rebates
Slide 57: Reconciliation of billed MAR to reported access revenue
Reconciliation of billed MAR to reported access revenue $m FY2014 FY2015 FY2016 FY2017 Actual Actual Actual Actual Billed Access Revenue (AT1 to AT5) (ex. GAPE) 794 787 924 892 Approved Adjustments to MAR Transitional tariff adjustment (70) - - - Flood Claim recovery from 2013 Event - 12 6 - WIRP Sm
Slide 58: Movement in Network MAR FY2016 to FY2017
Movement in Network MAR FY2016 to FY2017 $m1 Regulated Access Revenue FY2016 923 Revenue Over Recovery FY2016 (17) MAR FY2016 906 MAR Step-up (FY2016 to FY2017) 24 Flood (FY2015 recovered FY2017) 5 True Up FY2014 / FY2015 89 WIRP Revenue Ramp-up FY2017 20 Uplift in MAR FY2016-FY2017 138 Flood (FY201
Slide 59: Above Rail volumes (mt)
Above Rail volumes (mt) FY2017 FY2017 FY2016 Variance 2H 1H Coal 198.2 94.7 103.5 206.8 (4%) Iron Ore 22.7 11.3 11.4 23.7 (4%) Freight 38.5 18.0 20.5 40.4 (5%) Bulk 35.6 16.7 18.9 37.6 (5%) Intermodal 2.9 1.3 1.6 2.8 4% Total 259.4 124.0 135.4 270.9 (4%) Intermodal TEUs (‘000s) 405.2 193.0 212.2 372
Slide 60: Coal haulage tonnages (mt) by system
Coal haulage tonnages (mt) by system FY2017 FY2017 FY2016 Variance 2H 1H Queensland Newlands 17.8 8.4 9.4 20.9 (15%) Goonyella 54.3 24.3 30.0 60.6 (10%) Blackwater 59.4 28.3 31.1 62.2 (5%) Moura 12.0 5.9 6.1 12.4 (3%) West Moreton 7.0 3.7 3.3 6.9 1% Total Qld 150.5 70.6 79.9 163.0 (8%) New South Wal
Slide 61: Above Rail Coal contractual outlook
Above Rail Coal contractual outlook AURIZON’S ANNUALISED ABOVE COAL ABOVE RAIL REVENUE “OLD FORM” VS. “NEW FORM” RAIL COAL CONTRACTED BREAKDOWN COAL VOLUMES4 VOLUMES (MTPA)1 229 232 233 222 100% 4% 4% 4% 4% 100% 49 59 59 61 29% 29% 29% 29% 96% 96% 96% 96% 173 171 174 173 71% 71% 71% 71% FY2017 FY201
Slide 62: Capital Expenditure
ee Capital Expenditure —
Slide 63: FY2017 group and functional capital expenditure ($m)
FY2017 group and functional capital expenditure ($m) 532 360 252 230 95 231 105 76 47 67 59 31 3 5 16 3 13 3 FY2017 Network Operations Support Other1 Sustaining Transformational and productivity Growth 1. Capitalised interest 63
Slide 64: Ballast undercutting – a critical supply chain efficiency driver
Ballast undercutting – a critical supply chain efficiency driver Ballast Undercutting Machine in Operation New Spoil Management Wagons Undercutting scope (Linear kms) +49% 124 123 133 118 89 85 FY12 FY13 FY14 FY15 FY16 FY17 BALLAST UNDERCUTTING TRANSFORMATION BENEFITS › Ballast supports the sleepers
Slide 65: Network Control improvement project
Network Control improvement project Rockhampton Control Centre Train Control Diagram – paper based Interactive Train Graph – electronic (pre July 2016) (post July 2016) APEX INNOVATION TRANSFORMATION BENEFITS › APEX - Advanced Planning & MOVEMENT PLANNER (FOUNDATION) KEY BENEFITS Execution › Paper T
Slide 66: Glossary
Glossary Metric Description Access Revenue Amounts received by Aurizon Network for access to the Network infrastructure under all Access Agreements Average haul length NTK/Total tonnes Contract utilisation Total volumes hauled as a percentage of total volumes contracted CQCN Central Queensland Coal
Slide 67: Aurizon
7, 7 AURIZON. —