Aurizon Holdings Ltd. · ASX:AZJ
Aurizon — Debt Investor Presentation (August 2017)
45 slides from Aurizon's debt investor presentation, Aug 22, 2017
Slide 1: Aurizon Network - Debt Investor Update FY2017 Results
Aurizon Network - Debt Investor Update FY2017 Results Chris Vagg – Head of Investor Relations and Group Treasurer David Collins – Head of Finance and Regulation - Network 22 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: Agenda
Agenda Year in review – Aurizon Group › Chris Vagg Year in review – Aurizon Network › David Collins Regulation › David Collins Funding and Capital Management › Chris Vagg Outlook and summary › Chris Vagg 3 3
Slide 4: Biographies
Biographies Chris Vagg David Collins Head of Investor Relations & Group Treasurer Head of Finance & Regulation Network Chris has more than 20 years’ experience in the finance David has over 20 years’ experience in finance and industry in both Australia and the United Kingdom. commercial roles coveri
Slide 5: Year in review – Aurizon Group
Year in review – Aurizon Group Chris Vagg – Head of Investor Relations and Group Treasurer
Slide 6: About Aurizon Group
About Aurizon Group WHO WE ARE › Aurizon (ASX: AZJ; market capitalisation of circa A$11bn1) is Australia’s largest rail freight operator and a top 50 ASX company › Each year, we transport more than 250 million tonnes of Australian commodities — connecting miners, primary producers, and industry with
Slide 7: 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 8: 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 9: 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 10: 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 11: 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 12: 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 13: 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 14: Year in review – Aurizon Network
Year in review – Aurizon Network David Collins – Head of Finance and Regulation - Network
Slide 15: Below Rail (Network) snapshot
Below Rail (Network) 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 – Auri
Slide 16: 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 17: Below Rail profit & loss (underlying)
Below Rail profit & loss (underlying) FY2017 $m FY2017 FY2016 Variance 2H 1H Tonnes (million) 210.8 97.9 112.9 225.9 (7%) Revenue - access 1,199.9 571.4 628.5 1,135.9 6% Services/other 62.2 19.6 42.6 42.5 46% Total Revenue 1,262.1 591.0 671.1 1,178.4 7% Operating costs (484.3) (249.9) (234.4) (414.8
Slide 18: Underlying EBIT bridge – Below Rail ($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 19: Cash flow – significant free cash flow growth
Cash flow – significant free cash flow growth $m FY2017 FY2016 EBITDA - statutory 773 756 Working capital & other movements (6) (21) › Free Cash Flow increased 41% to $404m due to the cessation of growth capex with the focus Non-cash adjustments - impairment 8 8 shifting to sustaining capex over the
Slide 20: Aurizon Network Balance Sheet
Aurizon Network Balance Sheet As at ($m) 30 June 2017 30 June 2016 Commentary Total current assets 296 289 › Slight decline in PP&E due to no growth capital with focus on sustaining capital works program Property, plant & equipment 5,390 5,432 › Borrowings primarily decreased due to the mark-to- mar
Slide 21: 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 22: Aurizon Network: Key Financial Metrics
Aurizon Network: Key Financial Metrics Revenue EBIT Volumes (A$m) +41% (A$m) (mT) +67% +29% 1,500 1,262 600 250 226 226 1,108 1,179 484 506 490 215 211 980 1,012 500 200 182 1,000 892 827 417 412 164 167 400 325 295 150 300 500 100 200 100 50 0 FY11 FY12 FY13 FY14 FY15 FY16 FY17 0 0 FY11 FY12 FY13 F
Slide 23: Regulation
Regulation David Collins – Head of Finance and Regulation - Network
Slide 24: Aurizon Network – UT4 Final Decision
Aurizon Network – UT41 Final Decision MAXIMUM ALLOWABLE › Overall maximum revenue of $3.933 billion over the period of the Undertaking REVENUE (MAR) › Weighted Average Cost of Capital (WACC) - 7.17% TRUE-UP RECOVERY › The Final UT4 Decision highlighted a net under recovery of Regulatory Revenue in F
Slide 25: UT5 – Submitted November 2016
UT5 – Submitted November 2016 REVENUE PROPOSAL › Significantly larger Regulated Asset Base (RAB) of ~$6.2 billion1 as a result • CONTEXT of customer requested expansions. › Aurizon Network submitted to the Queensland Competition › The roll-forward RAB now includes the majority of capital expenditure
Slide 26: UT5 Draft: MAR and Forecast Volumes
UT5 Draft: MAR1 and Forecast Volumes UT4 UT5 MAR Total FY2017 FY2018 FY2019 FY2020 FY2021 Total $m Return on capital 1,526 420 409 402 395 386 1,592 Depreciation (less inflation) 771 218 284 281 289 287 1,141 Maintenance costs 805 207 221 225 235 240 921 Operating costs 815 223 206 211 217 221 855 T
Slide 27: UT5 Draft: Allowable Return on Capital
UT5 Draft: Allowable Return on Capital FINANCIAL OUTCOMES UT4 FINAL UT5 SUBMISSION Decision Date 28 Apr 2016 n/a Risk-free Rate 3.21% 2.13% Averaging Period 20-Day to 31 Oct 2013 20-Day to 30 Jun 2016 Term of Risk-free Rate 4-year 10-year Gearing Ratio 55% 55% Benchmark Credit Rating BBB+ BBB+ Asset
Slide 28: Below rail regulation: UT5 strategy
Below rail regulation UT5 strategy CONTEXT › Record volumes1 for four years in a row, with improved operational metrics › RAB value now $5.8bn2 with ~300mt capacity – as requested by industry › Maintenance regime underpins performance, which benefits the entire supply chain › Stable regulatory regim
Slide 29: Funding and Capital Management
Funding and Capital Management Chris Vagg – Head of Investor Relations and Group Treasurer
Slide 30: Group gearing targeted at ~40%
Group gearing targeted at ~40%1 Target gearing based on the following considerations: Cash flow sustainability Flexibility Credit Rating Cost of capital › Sustainability of cash › Flexibility to adjust to › Board supports current › Seeking to minimise flows through the changing market credit ratings
Slide 31: Capital spend continues to reduce
Capital spend continues to reduce CAPITAL EXPENDITURE FY2016 – FY2019 ($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 32: Network RAB, capex & depreciation profile
Network RAB, capex & depreciation profile RAB roll forward Capex Accounting depreciation 93% 569 281 363 80 257 5.7 5.8 5.1 5 3.0 288 258 287 283 252 220 FY10 FY15 FY16f FY17f FY15 FY16 FY17 FY15 FY16 FY17 Regulated Asset Base (RAB) $Abn Growth $m Sustaining $m Depreciation $m › RAB Roll-forward, in
Slide 33: 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 34: 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 35: Outlook and Summary
Outlook and Summary Chris Vagg – Head of Investor Relations and Group Treasurer
Slide 36: New business unit structure implemented 1 July 2017
New business unit structure implemented 1 July 2017 Benefits of new structure › Enables the enterprise to drive transformation, improve customer service and deliver sustainable productivity improvements › Greater management accountability › Retains benefits of central support areas › Regional focus
Slide 37: 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 38: 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 39: FY2017 Results Additional information
FY2017 Results Additional information
Slide 40: 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 2016 3 (26.7) 2 3.1 (23.6) 2 Allowable Revenue (SAR) and also includes MCI/CPI, rebates
Slide 41: 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 42: 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 43: 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 44: 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
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