Aurizon Holdings Ltd. · ASX:AZJ
Aurizon — H1 FY2017 Earnings Presentation
63 slides from Aurizon's earnings presentation, Feb 13, 2017
Slide 1: 1HFY2017 Results
1HFY2017 Results Andrew Harding – MD & CEO Pam Bains – EVP & CFO 13th February 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: Half year in review
Half year in review Andrew Harding - Managing Director & CEO
Slide 4: Operating safely remains a core value
Operating safely remains a core value TOTAL RECORDABLE INJURY FREQUENCY RATE (TRIFR)1 Incidents per million person-hours worked 22.34 13.14 -18% 5.85 4.24 2.80 3.01 2.41 2.47 FY2011 FY2012 FY2013 FY2014 FY2015 1H FY2016 2H FY2016 1H FY2017 1. TRIFR includes employees only and does not include contra
Slide 5: Solid performance as commodity markets strengthen
Solid performance as commodity markets strengthen FINANCIAL RESULTS › Revenue up 1% to $1.8bn - increase in Below Rail partly offset by volume driven decrease in Above Rail › Underlying EBIT up 21% to $488m, driven by transformation benefits in Above Rail and impact of finalisation of UT4 in Below R
Slide 6: Above Rail business benefits from transformation outcomes; Freight / Intermodal drags
Above Rail business benefits from transformation outcomes; Freight / Intermodal drags REVENUE › Coal Above Rail up 2% with revenue quality offsetting marginal volume decline › Freight down 8%, consistent with volumes › Iron Ore down 15%, with volumes down 9% and impact of customer rate relief UNDERL
Slide 7: Below Rail result benefits from UT4 finalisation
Below Rail result benefits from UT4 finalisation REVENUE › Increased 15% to $671m due to true-up from under recovery of UT4 revenue from prior years UNDERLYING EBIT › Increased $50m (20%) to $295m due to higher revenue OPERATIONAL › Improving asset management leads to 20% reduction in system closure
Slide 8: Transformation continues to deliver real improvements
Transformation continues to deliver real improvements HEADLINE BENEFITS › $64m generated in 1HFY2017 OPERATIONS › Labour productivity (NTK / FTE) improved 13%: ($52M) › Continued benefits from new Enterprise Agreements (EA) including introduction of flexible crewing › Removal of management layer and
Slide 9: Results analysis
Results analysis Pam Bains – EVP & CFO
Slide 10: Group financial highlights
Group financial highlights $m 1HFY2017 1HFY2016 Variance › Revenue growth includes timing differences in Revenue 1,781 1,758 1% Network to reflect UT4 finalisation and bank guarantee for Bandanna Operating costs (1,006) (1,075) 6% › Operating costs decrease reflects $64m in transformation benefits a
Slide 11: Earnings reconciliation and significant items
Earnings reconciliation and significant items EARNINGS RECONCILIATION SIGNIFICANT ITEMS – IMPAIRMENTS 1H $m FY2016 FY2017 FY2016 $m Underlying EBIT 488 403 871 Intermodal (162) Significant items FMT1 project (64) Impairments (257) (426) (528) Freight review contract costs (10) Redundancy costs (64)
Slide 12: Material items for note
Material items for note 1H $m Variance FY2017 FY2016 › Table represents items that are included in Redundancy Expense (3) (16) 13 Underlying EBIT Long term and short term incentives (29) (25) (4) › This table is designed to assist investors to ‘normalise’ underlying earnings Employee shares gifted -
Slide 13: Underlying EBIT bridge – Group
Underlying EBIT bridge – Group Includes: › Below Rail depreciation & energy - ($27m) › Labour & consumables escalation - ($17m) › Asset impairments – ($9m) › Asset sales - ($8m) › Transformation costs - ($7m) › Refer slide 12 › Net fuel increase – ($6m) › Coal - $15m › Iron Ore - ($8m) › Bulk - ($3m
Slide 14: Underlying EBIT bridge – Above Rail
Underlying EBIT bridge – Above Rail › Labour - $39m Includes: › Fleet productivity - $14m › Labour & consumables escalation – ($15m) › Engineering & Maintenance - $4m › Net fuel increase – ($6m) › Other - $4m › Coal - ($5m) › Iron Ore - ($9m) › Bulk - ($13m) › Intermodal - $10m 34 38 › Coal - $15m ›
Slide 15: Underlying EBIT bridge – Below Rail
Underlying EBIT bridge – Below Rail Includes: › UT4 true-ups: › MAR - $45m › GAPE & AFD - $12m › Fuel & energy - ($10m) › Bandanna bank guarantee - $15m › Corporate overhead allocation – ($13m) › Insurance claim recovery - $6m › Recovery of energy costs - $5m › Sustaining capex (incl. ballast & rail
Slide 16: Capital spend continues to reduce
Capital spend continues to reduce CAPITAL EXPENDITURE FORECAST(f) FY2017 – FY2019 ($M)1 294 ~550 › FY2017 capex forecast down $50m ~525 ~500 › Growth capital in 1HFY2017 fully committed › Transformation capital for 1HFY2017 has 206 focussed on operational technology programs including: 370 › Way
Slide 17: Strong FCF generation helped by Moorebank
Strong FCF generation helped by Moorebank 1H $m FY2017 FY2016 EBITDA - statutory 454 257 › Strong growth in FCF due to stronger earnings and lower capex Working capital & other movements 33 (47) › FCF exceeded dividend payments Non-cash adjustments - impairment 266 426 Cash from operations 753 636 ›
Slide 18: Funding update
Funding update CURRENT RATINGS ARE APPROPRIATE ABOVE RAIL $0.6BN MATURITY PROFILE › Board supports current credit ratings in light of market $m outlook (Moody’s Baa1 (negative), S&P BBB+ (stable)) Drawn bank debt › Strategy remains to diversify funding sources and extend 300 Undrawn bank debt tenor
Slide 19: Business and customer update
Business and customer update Andrew Harding – Managing Director & CEO
Slide 20: Initial focus areas to grow value and returns
Initial focus areas to grow value and returns STRUCTURE 2 CAPITAL 1 ALLOCATION • Growth capital to be TRANSFORMATION benchmarked against • Refer slide 21 capital returns • Delivers value at all STRATEGY stages of the cycle • Technology and innovation will be key Structure drivers 4 UT5 3 • Need to e
Slide 21: Transformation scope to broaden
Transformation scope to broaden › Good progress so far with more available, but harder to get › Strengthened governance and reporting Revenue Expanded scope › Facilitates idea generation and implementation › Ensures accountability of initiatives and Cost Current scope delivery of financial benefits
Slide 22: Freight review update – Bulk in execution, Intermodal work continues
Freight review update – Bulk in execution, Intermodal work continues with early restructure decision BULK INTERMODAL › Detailed analysis of each Bulk haul to understand key › Detailed analysis of markets and competitive financial data including haul margins and returns dynamics of Intermodal and IME
Slide 23: Improvements in key operating markets, too early to call volume impact
Improvements in key operating markets, too early to call volume impact COAL IRON ORE MARKETS › Strong prices driven by supply restricting policy › Price support driven by: in China › Increase in Chinese crude steel production › Near term volume upside more apparent with › Demand for higher grade ore
Slide 24: UT5 submitted with emphasis on correcting risk / return
UT5 submitted with emphasis on correcting risk / return UT4 (FY2014-FY2017) › Finalised and implemented 11 October 2016 › $89m true-up to be recognised in FY2017 UT5 (FY2018-FY2021) › Proposed revenue › Maximum Allowable Revenue (MAR) $4.9bn including 6.78% WACC and $5.8bn1 RAB value › Recovery of m
Slide 25: Capital allocation reworked to clearly highlight buy-back benchmark
Capital allocation reworked to clearly highlight buy-back benchmark Operating Sustaining Dividends Surplus capital Cash flow & 70-100% Returns e.g. Buy-backs & Transformational Payout ratio Net borrowings Capital Growth capital › FCF expected to grow further in FY2018 driven by transformation and co
Slide 26: Outlook & summary
Outlook & summary Andrew Harding – Managing Director & CEO
Slide 27: FY2017 guidance range unchanged
FY2017 guidance range unchanged FY2017 FY2018 › Revenue $3.35 - $3.55bn › Achievement of 70% OR target remains dependent on: › Underlying EBIT $900 - 950m, assumptions: › Delivery of $380m transformation target › Above Rail › Above rail volume growth › Moderate growth from prior year – transformatio
Slide 28: 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 29: Questions & Answers
Questions & Answers 4 AURIZON.
Slide 30: 1HFY2017 Results Additional information
1HFY2017 Results Additional information
Slide 31: Aurizon's rail haulage operations are Australia-wide
Aurizon’s rail haulage operations are Australia-wide Legend Darwin Key operational statistics1 Coal Iron ore Bulk COMMODITIES Intermodal Wyndham Coal, iron ore, bulk freight Existing rail and intermodal Cairns City/town Broome NORTHERN TERRITORY Townsville PEOPLE Mt Isa Port Headland Bowen More than
Slide 32: Group Financial Information
Group Financial Information
Slide 33: Financial highlights (underlying)
Financial highlights (underlying) 1H $m Variance FY2017 FY2016 Revenue 1,781 1,758 1% EBITDA 775 683 13% EBIT 488 403 21% NPAT 279 237 18% EPS (cps) 13.6 11.2 21% Interim dividend (cps) 13.6 11.3 20% ROIC 9.6% 8.8% 0.8ppt Gearing 37.1% 35.4% (1.7ppt) 33
Slide 34: EBIT by segment (underlying)
EBIT by segment (underlying) 1H $m Variance FY2017 FY2016 Below Rail (Network) 295 245 20% Above Rail 219 185 18% - Commercial & Marketing 1,377 1,468 (6%) - Operations (1,158) (1,283) 10% Other (26) (27) 4% Group 488 403 21% 34
Slide 35: Group operating highlights
Group operating highlights 1H Variance FY2017 FY2016 Revenue / NTK ($/’000 NTK) 49.2 48.2 2% Labour Costs / Revenue 24.8% 25.5% 0.7ppt NTK / FTE (MNTK) 12.6 11.3 12% EBITDA Margin – Underlying 43.5% 38.9% 4.6ppt Operating Ratio – Underlying 72.6% 77.1% 4.5ppt NTK (bn) 36.2 36.5 (1%) Tonnes (m) 135.4
Slide 36: Operations metrics
Operations metrics Metric 1HFY2017 1HFY2016 Variance Net opex1 / NTK ($/’000 NTK) 32.0 35.2 9% Opex Net opex / NTK (excluding access2) ($/’000 NTK) 19.7 20.9 6% Production Total tonnes hauled (m) 135.4 138.9 (3%) Net tonne kilometres - NTK (bn) 36.2 36.5 (1%) Full Time Equivalents (FTE)3 4,523 5,104
Slide 37: Balance sheet summary
Balance sheet summary As at ($m) 31 Dec 2016 30 Jun 2016 Total current assets 756 844 Property, plant & equipment 9,454 9,719 Other non-current assets 257 305 Total assets 10,467 10,868 Other current liabilities (596) (732) Total borrowings (3,388) (3,490) Other non-current liabilities (940) (932) T
Slide 38: Reconciliation of borrowings
Reconciliation of borrowings $m Commentary Total debt per slide 18 3,404 › Non-current debt on a Cash basis Reconciliation to Financial Statements Add/(less): › Transaction costs directly attributable to borrowings are capitalised to Capitalised transaction costs (13) the balance sheet and amortised
Slide 39: FY2011 – FY2017 redundancy costs breakdown
FY2011 – FY2017 redundancy costs breakdown Redundancy costs Redundancy costs Year included in classified as underlying EBIT Significant items ($m) ($m) › Redundancy costs since IPO have been included in FY2011 2 63 underlying EBIT as well as classified as a significant item FY2012 15 - › Aurizon cla
Slide 40: Dividend history
Dividend history Amount per share Payment Date Franking Payout Ratio (cents) FY2017 Interim 27 March 2017 13.6 70% 100% FY2017 Total dividend tbd FY2016 Final 26 September 2016 13.3 70% 100% FY2016 Interim 29 March 2016 11.3 70% 100% FY2016 Total dividend 24.6 FY2015 Final 28 September 2015 13.9 30%
Slide 41: Function & Segment detail
Function & Segment detail
Slide 42: Below Rail profit & loss (underlying)
Below Rail profit & loss (underlying) 1H 2H Variance $m fav / (adv) FY2017 FY2016 FY2016 Tonnes (million) 112.9 114.0 (1%) 111.9 Revenue - Access 629 560 12% 576 - Services/Other 42 21 100% 22 Total Revenue 671 581 15% 598 Operating costs (234) (211) (11%) (204) EBITDA 437 370 18% 394 EBITDA margin
Slide 43: Above Rail profit & loss (underlying)
Above Rail profit & loss (underlying) 1H 2H $m Variance FY2017 FY2016 fav / (adv) FY2016 Revenue 1,495 1,612 (7%) 1,534 Track Access (445) (519) 14% (497) Employee Benefits (364) (399) 9% (340) Consumables (246) (262) 6% (239) Fuel (61) (71) 14% (49) Other (18) (23) 22% (14) Total operating expenses
Slide 44: Commercial & Marketing profit & loss (underlying)
Commercial & Marketing profit & loss (underlying) 1H 2H $m Variance fav / (adv) FY2016 FY2017 FY2016 Total revenue 1,394 1,510 (8%) 1,421 Coal 891 950 (6%) 931 - Above rail 586 577 2% 570 - Track access 305 373 (18%) 361 Freight 364 397 (8%) 342 Iron Ore 139 163 (15%) 148 Operating costs (15) (39) 6
Slide 45: Operations profit & loss (underlying)
Operations profit & loss (underlying) 1H 2H $m Variance FY2017 FY2016 fav / (adv) FY2016 Revenue 101 102 (1%) 113 Track Access (445) (519) 14% (497) Employee Benefits (352) (382) 8% (328) Consumables (241) (257) 6% (238) Energy & Fuel (61) (71) 14% (49) Other (20) (6) - (17) Total operating expenses
Slide 46: Other profit & loss (underlying)
Other profit & loss (underlying) 1H 2H $m Variance FY2017 FY2016 fav / (adv) FY2016 Revenue 2 13 (85%) 2 Employee Benefits (18) (19) 5% (16) Consumables1 (4) (19) 79% (16) Other (3) - - (10) Total operating expenses (25) (38) 34% (42) EBITDA (23) (25) 8% (40) Depreciation and amortisation (3) (2) (5
Slide 47: Coal Above Rail revenue composition
Coal Above Rail revenue composition CORE REVENUE1 REMAINS STABLE DESPITE VOLUME DECLINE 612 575 577 586 42 570 24 23 › Fixed revenue (capacity charge) has increased and 21 18 10 30 8 20 12 variable revenue (usage charge) has decreased reflecting increase in new form volumes 134 182 178 233 › Fuel re
Slide 48: Coal contract expiry
Coal contract expiry AURIZON ABOVE RAIL CONTRACT VOLUME EXPIRY BY YEAR (mtpa, as at 31 December 2016) 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 Yancoal: Duralie Yancoal: Cameby Downs AGL Macquarie Notes: › This repre
Slide 49: Coal market update: Market Fundamentals
Coal market update: Market Fundamentals METALLURGICAL COAL: CONTRACT, SPOT AND REALISED PRICE (USD) METALLURGICAL COAL: SPOT PRICE AND AUSTRALIA EXPORT VOLUME Month Average (January 2015 to December 2016) 100 96 92 95 94 96 $250 89 90 +242% 79 Price [USD] per tonne $300 73 $200 75 Million Tonnes $15
Slide 50: Coal market update: Australia
Coal market update: Australia METALLURGICAL COAL SEABORNE EXPORTS AUSTRALIA METALLURGICAL COAL EXPORTS BY DESTINATION Volume and market share, calendar years Calendar years (million tonnes) 186.5 186.2 190.0 400 +7pts 70% 170.0 158.5 145.0 300 65% 132.2 Million tonnes Market Share 200 60% 100 55% 0
Slide 51: 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 3 above rail Power Station Bowen Coal Export Terminal coal operators – Aurizon Operations
Slide 52: Below Rail volumes (mt)
Below Rail volumes1 (mt) 1H 2H Variance FY2017 FY2016 fav / (adv) FY2016 Newlands 6.2 6.1 2% 6.0 Goonyella 61.4 59.8 3% 61.7 Blackwater2 27.5 30.8 (11%) 25.5 Moura 6.2 6.5 (5%) 5.4 GAPE 6.7 7.9 (15%) 8.1 WIRP 4.9 2.9 69% 5.2 Total 112.9 114.0 (1%) 111.9 Average haul length3 (kms) 251 253 (1%) 252 1.
Slide 53: Network revenue cap adjustments
Network revenue cap adjustments AT2-4 AT5 Total Year (diesel tariff) (electric tariff) $m $m $m 1,3 2 2 › Revenue cap is the difference by System between 2016 (23.3) 2.7 (20.6) Aurizon’s Total Actual Revenue (TAR) and System 2 2 Allowable Revenue (SAR) and also includes rebates 2015 (29.0)2 (2.7) (3
Slide 54: Reconciliation of MAR to reported access revenue
Reconciliation of MAR to reported access revenue MAR to reported access revenue FY2014 FY2015 FY2016 FY20171,3 Actual Actual Actual Estimate Access Revenue (AT1 to AT5) (ex. GAPE) 794 787 924 932 Approved Adjustments to MAR Transitional tariff adjustment (70) - - - Flood Claim recovery from 2013 Eve
Slide 55: Above Rail volumes (mt)
Above Rail volumes (mt) 1H 2H Variance FY2017 FY2016 fav / (adv) FY2016 Coal 103.5 104.4 (1%) 102.4 › Refer slide 56 for Coal system detail Iron Ore 11.4 12.5 (9%) 11.2 Freight 20.5 22.0 (7%) 18.4 Bulk 18.9 20.4 (25%) 17.2 Intermodal 1.6 1.6 - 1.2 Total 135.4 138.9 (3%) 132.0 Intermodal TEUs (‘000s)
Slide 56: Coal haulage tonnages (mt) by system
Coal haulage tonnages (mt) by system 1H 2H Variance FY2017 FY2016 fav / (adv) FY2016 Queensland Newlands 9.4 10.5 (10%) 10.4 Goonyella 30.0 28.9 4% 31.7 Blackwater 31.1 32.3 (4%) 29.9 Moura 6.1 6.9 (12%) 5.5 West Moreton 3.3 3.4 (3%) 3.5 Total Qld 79.9 82.0 (3%) 81.0 New South Wales Hunter Valley 23
Slide 57: Above Rail Coal contractual outlook
Above Rail Coal contractual outlook AURIZON’S ANNUALISED ABOVE COAL ABOVE RAIL REVENUE “OLD FORM” VS. “NEW FORM” RAIL COAL CONTRACTED BREAKDOWN COAL VOLUMES4 VOLUMES (MTPA)1 227 227 227 219 100% 100% 4% 4% 4% 46 56 58 21% 48 31% 33% 33% 37% 96% 96% 96% 181 171 171 169 79% 63% 69% 67% 67% FY2016 FY20
Slide 58: Capital Expenditure
Capital Expenditure
Slide 59: 1HFY2017 group and functional capital expenditure ($m)
1HFY2017 group and functional capital expenditure ($m) 256 164 125 117 41 114 68 57 12 24 19 2 2 8 3 7 3 2 1HFY2017 Network Operations Support Other1 Sustaining Transformational and productivity Growth 1. Capitalised interest 59
Slide 60: 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 (kms) +57% 140 118 124 123 89 85 FY12 FY13 FY14 FY15 FY16 FY17f BALLAST UNDERCUTTING TRANSFORMATION BENEFITS › Ballast supports the sleepers; and
Slide 61: 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 62: Definitions
Definitions Metric Description Access Revenue Amount received for access to the Network infrastructure under the Access Agreement Average haul length NTK/Total tonnes Contract utilisation Total volumes hauled as a percentage of total volumes contracted CQCN Central Queensland Coal Network Diesel fue
Slide 63: Aurizon
~ 2 AURIZON.