Aurizon Holdings Ltd. · ASX:AZJ
Aurizon — Debt Investor Presentation (August 2018)
58 slides from Aurizon's debt investor presentation, Aug 29, 2018
Slide 1: Aurizon Network – FY2018 Results Debt Investor Update
Aurizon Network – FY2018 Results Debt Investor Update Chris Vagg – Head of Investor Relations and Group Treasurer David Collins – Head of Finance and Regulation - Network 29 August 2018
Slide 2: Disclaimer
FY2018 RESULTS Disclaimer NO RELIANCE ON THIS DOCUMENT NO OFFER OF SECURITIES This document was prepared by Aurizon Holdings Limited (ACN 146 335 622) (referred to Nothing in this presentation should be construed as a recommendation of or an offer to sell or a as “Aurizon” which includes its related
Slide 3: Agenda
FY2018 RESULTS Agenda Full year in review – Aurizon Group Chris Vagg Full year in review – Aurizon Network David Collins Regulation Update David Collins Funding and Capital Management Chris Vagg Outlook and Key Takeaways Chris Vagg 3
Slide 4: Biographies
FY2018 RESULTS Biographies CHRIS VAGG DAVID COLLINS HEAD OF INVESTOR RELATIONS & GROUP HEAD OF FINANCE & REGULATION NETWORK TREASURER David has over 20 years’ experience in finance and Chris has more than 20 years’ experience in the finance commercial roles covering businesses in Australia, the indu
Slide 5: Full Year in Review – Aurizon Group
FY2018 RESULTS PERFORMANCE OVERVIEW Full Year in Review – Aurizon Group Chris Vagg Head of Investor Relations & Group Treasurer 5
Slide 6: Update on key priorities
FY2018 RESULTS PERFORMANCE OVERVIEW Update on key priorities $1bn returned to shareholders since March 2017. Three year transformation target of $380m has been achieved CAPITAL MANAGEMENT NETWORK REGULATION (UT5) › $1bn returned to shareholders since March 2017, › UT5 draft response strategy in exec
Slide 7: FY2018 highlights
FY2018 RESULTS PERFORMANCE OVERVIEW FY2018 highlights1 Solid result with $941m EBIT, 10.9% ROIC and 69.8% OR FINANCIAL RESULTS CASHFLOW › Underlying EBIT up 6% to $941m with earnings › Free cash flow (FCF) down 5% to $669m growth in Bulk › Total Above Rail volumes up 4% - growth in Coal (7%) SHAREHO
Slide 8: Key financial highlights
FY2018 RESULTS PERFORMANCE OVERVIEW Key financial highlights1 EBIT growth from transformation and improved earnings in Coal and Bulk › Revenue impacted by UT4 and FY2016 $m FY2018 FY2017 Var revenue true up in Network and lower volumes in Bulk, offset in part by higher Revenue 3,113 3,143 (1%) coal
Slide 9: Coal update
FY2018 RESULTS PERFORMANCE OVERVIEW Coal update Operating in a supportive market environment, Coal is focussed on improving cost competitiveness, asset utilisation and delivery performance and achieved $47m in transformation in FY2018 COAL MARKET CONDITIONS COAL CUSTOMERS CONTRACT WINS › Annual volu
Slide 10: Full Year in Review – Aurizon Network
FY2018 RESULTS NETWORK PERFORMANCE Full Year in Review – Aurizon Network David Collins Head of Finance and Regulation Network 10
Slide 11: Network
FY2018 RESULTS NETWORK PERFORMANCE Network Performance in line with expectation, cost reductions and higher volumes offset by UT4 adjustments from FY2017 Revenue $m FY2018 FY2017 Variance › UT4 one off true up (~$90m) in FY2017 Revenue 1,219 1,262 (3%) › FY2016 revenue adjustment ($22m) Operating Co
Slide 12: Network profit & loss (underlying)
FY2018 RESULTS NETWORK PERFORMANCE Network profit & loss (underlying) $m FY2018 FY2017 Variance Tonnes (m) 229.6 210.8 9% Access Revenue 1,167.1 1,199.9 (3%) Services and other 51.6 62.2 (17%) Total Revenue 1,218.7 1,262.1 (3%) Operating costs (430.1) (481.7) 11% EBITDA 788.6 780.4 1% EBITDA margin
Slide 13: Network Cash flow – free cash flow growth
FY2018 RESULTS NETWORK PERFORMANCE Network Cash flow – free cash flow growth $m FY2018 FY2017 › Free Cash Flow has remained steady in both half year periods EBITDA - statutory 776 773 Working capital & other movements 6 (6) › Higher cash inflows from operating activities primarily driven by lower No
Slide 14: Network balance sheet
FY2018 RESULTS NETWORK PERFORMANCE Network balance sheet › Total current assets has decreased due to As at $m 30 June 2018 30 June 2017 $19m lower cash holdings and $13m lower Total current assets 259 296 trade and other receivables. Property, plant & equipment 5,408 5,390 › Slight increase in PP&E
Slide 15: Network Key Financial Metrics
FY2018 RESULTS NETWORK PERFORMANCE Network Key Financial Metrics REVENUE EBIT VOLUMES (A$m) +37% (A$m) (mT) +40% +63% 1500 600 250 226 226 230 506 215 211 1,262 1,219 500 484 481 481 1,178 200 182 1,108 417 412 167 1,012 164 1000 980 400 892 150 827 325 295 300 100 500 200 100 50 0 0 0 FY11 FY12 FY1
Slide 16: Regulation
FY2018 RESULTS REGULATION Regulation David Collins Head of Finance and Regulation Network 16
Slide 17: Network context - UT5 draft decision recap
FY2018 RESULTS REGULATION Network context - UT5 draft decision recap QCA’s UT5 draft decision risks value erosion across the CQCN coal supply chain AURIZON QCA DRAFT AURIZON NETWORK’S NETWORK UT5 DECISION RESPONSE TO DRAFT SUBMISSION DECISION Total Adjusted MAR 4,892 3,893 4,757 WACC (post tax nomin
Slide 18: Network update
FY2018 RESULTS REGULATION Network update Aurizon is pursuing multiple pathways to resolve UT5 UT5 DRAFT RESPONSE STRATEGY OPERATIONAL RESPONSE TO THE DRAFT DECISION › Regulatory › Aurizon has aligned maintenance and operating practices with draft decision given retrospectivity to › March 2018 respon
Slide 19: Operational response to the UT5 draft decision
FY2018 RESULTS REGULATION Operational response to the UT5 draft decision Operating and maintenance practices and risk tolerance have been aligned to those assumed in the draft decision due to the retrospectivity of UT5 to 1 July 2017 EXAMPLES OF CHANGES • No deviation from the plan (excluding emerge
Slide 20: Risk, capital and maintenance
FY2018 RESULTS REGULATION Risk, capital and maintenance Operation of the CQCN to deliver optimal value to all stakeholders requires the appropriate balance of investment, maintenance and operational support • For an infrastructure asset, the level of capital investment is directly related to its rel
Slide 21: Network EBIT Bridge
FY2018 RESULTS REGULATION Network EBIT Bridge Worst case scenario assumes final UT5 decision equals the UT5 draft decision INDICATIVE NETWORK EBIT* FY2017 – FY2019 ($M) Based on transitional tariffs If transitional tariffs in place for full FY19, EBIT UT4 Adjustments UT5 Adjustments ~470-490 481 481
Slide 22: Funding and Capital Management
FY2018 RESULTS FUNDING AND CAPITAL MANAGEMENT Funding and Capital Management Chris Vagg Head of Investor Relations & Group Treasurer 22
Slide 23: Capital allocation strategy
FY2018 RESULTS FUNDING AND CAPITAL MANAGEMENT Capital allocation strategy Aurizon’s capital allocation strategy remains unchanged with credit ratings and gearing to be reviewed once the UT5 final decision is released PRIORITISATION OF CAPITAL 1 Credit rating Gearing Non Growth Capital 2 UT5 DRAFT DE
Slide 24: Funding update
FY2018 RESULTS FUNDING AND CAPITAL MANAGEMENT Funding update Interest costs reduced in FY2018. Strategy remains to diversify debt investor base and increase average tenor UT5 DRAFT DECISION IMPACT KEY DEBT METRICS FY2018 FY2017 › UT5DD now supports Moody’s Baa1 credit metrics for Network (threshold
Slide 25: Capital expenditure
FY2018 RESULTS FUNDING AND CAPITAL MANAGEMENT Capital expenditure FY2019 capital expenditure mix change with Network decrease offset by increase in Above Rail CAPITAL EXPENDITURE1 FY2016 – FY2019 ($M) -30% 703 › FY2018 capex in line with guidance at $490m (guidance $485-495m) › Capital expenditure g
Slide 26: Network RAB, CAPEX and Depreciation profile
FY2018 RESULTS FUNDING AND CAPITAL MANAGEMENT Network RAB, CAPEX and Depreciation profile RAB ROLL FORWARD CAPEX ACCOUNTING DEPRECIATION 93% 569 281 363 80 283 257 7 308 5.7 5.8 5.8 5 300 5.1 258 215 3.0 288 283 252 276 FY10 FY15 FY16 FY17 FY18f FY15 FY16 FY17 FY18 FY15 FY16 FY17 FY18 Regulated Asse
Slide 27: Outlook & Key Takeaways
FY2018 RESULTS OUTLOOK & KEY TAKEAWAYS Outlook & Key Takeaways Chris Vagg Head of Investor Relations & Group Treasurer 27
Slide 28: FY2019 outlook
FY2018 RESULTS OUTLOOK & KEY TAKEAWAYS FY2019 outlook Providing Group earnings guidance is challenging due to uncertainty around UT5 final outcome › Underlying EBIT guidance for above rail business $390-430m › Providing guidance for Network is challenging as transitional tariffs in place for only 1H
Slide 29: Key takeaways
FY2018 RESULTS OUTLOOK & KEY TAKEAWAYS Key takeaways Delivered to expectations in FY2018. Earnings headwinds in FY2019 with new strategic framework positioned to deliver long term earnings growth EARNINGS UT5 › Solid FY2018 performance with EBIT up 6% › UT5 draft response strategy in execution acros
Slide 30: Additional Information Group
FY2018 RESULTS ADDITIONAL INFORMATION Additional Information Group 30
Slide 31: Australia’s largest integrated freight rail network
FY2018 RESULTS ADDITIONAL INFORMATION Australia’s largest integrated freight rail network RAIL HAULAGE RAIL NETWORK Multiple commodities, customers and integrated supply Asset Maintenance, Network Management and chains Infrastructure Development NETWORK MANAGEMENT COAL • Operates and manages Austral
Slide 32: Aurizon’s rail haulage operations
FY2018 RESULTS ADDITIONAL INFORMATION Aurizon’s rail haulage operations KEY OPERATIONAL STATISTICS1 COMMODITIES Coal, iron ore, bulk freight and intermodal ROLLINGSTOCK 500+ active locomotives OPERATIONAL FOOTPRINT More than 160 operational sites PEOPLE More than 4,500 operational full-time employee
Slide 33: Aurizon’s vision, purpose and values
FY2018 RESULTS ADDITIONAL INFORMATION Aurizon’s vision, purpose and values Focussed on customers and recognises its important role in both regional Australia and global supply chains VISION PURPOSE Achievement of vision represents: The first Growing choice for regional • #1 in the market bulk Austra
Slide 34: Strategic levers required to fulfil Aurizon’s vision
FY2018 RESULTS ADDITIONAL INFORMATION Strategic levers required to fulfil Aurizon’s vision Execution against the three strategic levers is aimed at driving differentiation, competitive advantage and sustainable performance STRATEGIC LEVERS Delivering a cost effective Labour and asset Improving the a
Slide 35: Capital structure objectives
FY2018 RESULTS ADDITIONAL INFORMATION Capital structure objectives Optimal capital structure to enable balance of shareholder returns and investment Flexibility to adjust to changing market conditions and Sustainability of business risk and cashflows to take advantage through the cycle of future opp
Slide 36: Additional Information Network
FY2018 RESULTS ADDITIONAL INFORMATION Additional Information Network 36
Slide 37: Network snapshot
FY2018 RESULTS ADDITIONAL INFORMATION Network snapshot Central Qld Coal Network (CQCN) KEY NETWORK FACTS 40 + operating coal mines serviced LEGEND Townsville PORT OF ABBOT POINT Open access network with three Abbot Point Coal Terminal (APCT) City/town above rail coal operators – Aurizon Power Statio
Slide 38: Network strategic levers
FY2018 RESULTS ADDITIONAL INFORMATION Network strategic levers Priorities are focused on the development of a fit for purpose network that creates value and facilitates changing the regulatory environment for the benefit of all Fit for purpose Existing UT5 solution Capability Customer solutions Regu
Slide 39: Network Strategy
FY2018 RESULTS ADDITIONAL INFORMATION Network Strategy Getting closer to our customers will drive improved performance, better alignment of asset condition and management of long term requirements THE PROBLEM TODAY THE PATHWAY TO A SOLUTION Clearly defining …provides clarity of …therefore driving …f
Slide 40: Transformation in Network
FY2018 RESULTS ADDITIONAL INFORMATION Transformation in Network Progress has been made in transforming the cost base which drives value for the whole supply chain NETWORK OPERATING COSTS TRANSFORMATION INITIATIVES ($M)1 359 $ Operating costs Corporate costs 39 28 Compressible Footprint consolidation
Slide 41: Future of regulation
FY2018 RESULTS ADDITIONAL INFORMATION Future of regulation Moving to best practice regulation will improve regulatory outcomes aligned with our business operating model STANDARDS OBJECTIVES CURRENT BEST PRACTICE Upstream and Adjusting statutory Objective downstream competition Customers at the heart
Slide 42: Supply chain capability
FY2018 RESULTS ADDITIONAL INFORMATION Supply chain capability The opportunity to create value for the whole of supply chain will be underwritten by regulatory reform Network Today Network Tomorrow Supply chain value Supply chain value ▪ Alignment of supply chain Supply chain ▪ Optimisation of capita
Slide 43: Network revenue adjustment amounts (revenue cap)
FY2018 RESULTS ADDITIONAL INFORMATION Network revenue adjustment amounts (revenue cap) AT2-4 AT5 › Revenue adjustment amounts (RAA) are the Financial Total (diesel tariff) (electric tariff) difference by system between Aurizon’s Total Year $m $m $m Actual AT2-5 Revenue and Allowable AT2-5 1 Revenue
Slide 44: Reconciliation of billed MAR to reported access revenue
FY2018 RESULTS ADDITIONAL INFORMATION Reconciliation of billed MAR to reported access revenue FY2014 FY2015 FY2016 FY2017 FY2018 $m Actual Actual Actual Actual Actual Billed Access Revenue (AT1 to AT5) (ex. GAPE) 794 787 924 892 940 Approved Adjustments to MAR Transitional tariff adjustment (70) - -
Slide 45: Network financial and operating metrics
FY2018 RESULTS ADDITIONAL INFORMATION Network financial and operating metrics FY2018 FY2017 Variance Tonnes (m) 229.6 210.8 9% NTK (bn) 56.9 53.2 7% Operating Ratio 60.6% 61.9% 1.3ppt Maintenance/NTK ($/’000 NTK) 2.2 2.3 4% Opex/NTK ($/’000 NTK) 13.0 14.7 12% Cycle Velocity (km/hr) 23.5 23.5 - Syste
Slide 46: Additional Information Coal market
FY2018 RESULTS ADDITIONAL INFORMATION Additional Information Coal market 46
Slide 47: Australian export coal demand
FY2018 RESULTS ADDITIONAL INFORMATION Australian export coal demand The fundamentals of metallurgical and thermal coal remain strong, driven by steel and energy demand growth in Asia, supporting growth in Australian exports of ~2% pa over the next decade INDIA: CRUDE STEEL PRODUCTION (MT) +54% Metal
Slide 48: Coal market: Australia
FY2018 RESULTS ADDITIONAL INFORMATION Coal market: Australia AUSTRALIA: METALLURGICAL COAL EXPORT AUSTRALIA: THERMAL COAL EXPORT 250 $300 250 $150 Hard Coking Coal Price (USD/t) Thermal Coal Price (USD/t) 200 200 million tonnes million tonnes $200 $100 150 150 100 100 $100 $50 50 50 0 $0 0 $0 FY11 F
Slide 49: Coal trade
FY2018 RESULTS ADDITIONAL INFORMATION Coal trade AUSTRALIA: METALLURGICAL COAL EXPORT AUSTRALIA: THERMAL COAL EXPORT 20mt 120% 20mt 20% 80% 10% 15mt 18mt 40% 0% 0% 10mt 16mt -10% -40% 5mt -80% 14mt -20% Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep- Dec- Mar- Jun- 16 16 17 17 17 17
Slide 50: Coal Price | Coal Capital & Exploration Expenditure
FY2018 RESULTS ADDITIONAL INFORMATION Coal Price | Coal Capital & Exploration Expenditure HARD COKING COAL SPOT PRICE (US$/t FOB) THERMAL COAL SPOT PRICE (US$/t FOB) $300 $150 $250 $105 $191 $200 $100 $150 $100 $50 $50 $0 $0 Jun- Dec- Jun- Dec- Jun- Dec- Jun- Jun- Dec- Jun- Dec- Jun- Dec- Jun- 15 15
Slide 51: Coal demand
FY2018 RESULTS ADDITIONAL INFORMATION Coal demand CHINA CRUDE STEEL PRODUCTION INDIA CRUDE STEEL PRODUCTION 1,000mt 20% 120mt 15% 100mt 750mt 10% 10% 80mt 500mt 0% 5% 60mt 250mt -10% 40mt 0% CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 Crude Ste
Slide 52: Australia coal competitiveness
FY2018 RESULTS ADDITIONAL INFORMATION Australia coal competitiveness METALLURGICAL COAL CASH COSTS (US$/t, CFR INDIA, 2018) THERMAL COAL CASH COSTS (US$/t, CFR JAPAN, 2018) $120 $80 $70 $100 $60 US$/t US$/t $80 $115 $120 $106 $50 $72 $95 $63 $64 $60 $57 $58 $75 $40 $40 $30 Russia Australia Canada Mo
Slide 53: Additional Information Regulation
FY2018 RESULTS ADDITIONAL INFORMATION Additional Information Regulation 53
Slide 54: Regulated Revenues within a stable & well-established Regulatory Regime
FY2018 RESULTS ADDITIONAL INFORMATION Regulated Revenues within a stable & well-established Regulatory Regime WELL ESTABLISHED REGULATORY STABLE REGULATED REVENUE WELL DEVELOPED BUILDING REGIME BASE BLOCK APPROACH TO REVENUE DETERMINATION WACC (return on › The provision of transportation services by
Slide 55: The CQCN Regulatory Framework Provide Revenue Protection Through a Building Block Approach
FY2018 RESULTS ADDITIONAL INFORMATION The CQCN Regulatory Framework Provide Revenue Protection Through a Building Block Approach MAXIMUM ALLOWABLE REVENUE REGULATORY REVENUE TOTAL ACTUAL REVENUE PROTECTION TESTS (FORECASTED) FOR EACH YEAR OF UNDERTAKING PERIOD AT1 Outside the revenue protection scop
Slide 56: Revenue cap
FY2018 RESULTS ADDITIONAL INFORMATION … with Take-or-Pay Protection Should Revenues Fall Short (With a Revenue Cap) ToP › Primary revenue protection mechanism available AT2 Train Paths to Aurizon Network Take-or-pay Revenue cap Take or pay AT3 Net Train Kilometres (NTK) mechanisms › Allows Aurizon N
Slide 57: Glossary
FY2018 RESULTS ADDITIONAL INFORMATION 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 co
Slide 58: ROS
ROS ‘4 AURIZON.
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