Qube Holdings Limited (1K1.F) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Qube Holdings Limited FY '25 Full Year Results Investor Briefing. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mr. Paul Digney, Managing Director. Please go ahead.

Good morning, all, and thank you for joining us this morning to discuss another solid financial performance. I'm joining the room by Qube's CFO, Mark Wratten and Head of Investor Relations, Paul Lewis. As usual, I'll kick off the call with a summary of our full year '25 highlights, followed by some comments on the divisional performance. I'll then hand over to Mark to discuss the key financial information. I'll then turn back to the outlook before taking your questions. So let's get started. Turning to the highlights. Slide 6, results overview. Qube has once again delivered a solid full year result, with growth across all our underlying performance metrics. This result again demonstrates the resilience and the financial strength of our business as well as the benefits that we derive from our diversification across markets and geographies. Activity levels remain mostly favorable across our core markets throughout the year. And again, the strategic diversity of our operations enabled the business to more than offset any earnings impact from any challenges in the period. Turning to Slide 7, safety performance. Pleasingly, the strength of our financial performance is also matched by a positive safety performance. Our TRIFR has decreased by 14%. Our LTIFR and CPA remain within the target range and below score of 1. Importantly, we also achieved or exceeded all of our internal leading targets for the year, exceeding leading KPIs such as critical risk verifications, safety leadership, and safety engagements with Workers Insight, which all form a part of our strong safety leadership and awareness culture at Qube. And this year, we are further enhancing this with the rollout of our new B-Safe leadership and safety awareness program. Turning to our financial performance on Slide 8 and the theme of diversification. This slide illustrates both how that benefits Qube in the terms of riding and how it helps you to insulate the business against headwinds and disruption like we experienced in the year, such as industrial action early in the year, extreme weather events in the second half of the year and the suspension of some of our customers' mining operations. As you will see on the slide, we still achieved growth in most states and in New Zealand 2025, despite these headwinds. Slide 9, return on average capital employed. When I spoke at last year's results, I said we were revising our medium-term target from 10% to at least 12%. As this slide shows, we remain well on track towards this new target. The continued improvement highlights Qube's disciplined approach to investment and operational leverage that we've been able to achieve from our infrastructure and other strategic assets as we grow. Slide 10, segment overview. You're all familiar with this slide, so I'll wait later on it. Suffice to say, it shows the continuous growth path that we've been able to achieve in earnings over the last 5 years. Now turning to our key markets. Slide 11. Qube's key markets. As we've come to expect, strong performance in some areas helped balance out some challenges in others. Containers remains relatively stable. Patrick's market share normalized back to 42% as expected and as guided. And our container logistics activities continue to deliver and a growth in most regions. Agri made a strong contribution, and I'll dive into that shortly. As forecasted, automotive revenues were down on the prior period as the quarantine related backlog cleared and storage volumes reduced. And the industrial action in the period also had an impact to earnings in this sector. We saw continued profit improvement in forestry in part aided by a full year's benefit of major cost reductions in program in New Zealand from the prior year and from better-than-expected log export volumes in Australia. Mine suspended and adverse weather events created some challenges in our Resources business, especially in the second half of the year. But overall, we achieved steady volumes across most commodities, and the Colemans acquisition performed in line with internal expectations. Energy once again achieved a strong full year performance for us, and we saw some impact of profits in our general [indiscernible] business and some ports in the first half of the year due to industrial strike action taken by the lane. which was all resolved by February. Now turning to divisional performance. Slide 13, operating division. For the operating division, revenue for the year was inflated due to the full year of grain trading and grew by 27% from the prior year. And more pleasingly, the operating division's EBIT grew by 17.4%. And I'll go into each business unit now. Turning to the logistics and infrastructure business. Slide 14, Logistics and Infrastructure. Profits jumped around 20%. And and overall margins increased by 1.5% for the year. Grain-related activities delivered a good portion of the growth of the year, and I'll talk a little more about this on the next slide. The core containerized business also saw growth in margin improvement, thanks to new business wins and productivity efficiencies achieved, including increased volumes at Moorebank, which I'll touch on soon. A full period of the Pinnacle acquisition and additional growth in New Zealand also assisted the result. AAT performed weaker, mainly due to a reduction in storage and ancillary services. And while there was lengthy delays with the AAT's approval for the Morat acquisition, we were pleased the commission accepted the undertaking that we proposed, and we completed that acquisition in May. Slide 15, Qube Agri and grade trading update. Full year '25 marked the first full year of grade trading for Q and the benefits of that strategy. The growth in that business underscores our ability to identify an opportunity to do the research and plan put in place the appropriate commercial and risk parameters, act with agility and execute the strategy for the benefit of our customers and shareholders. In the case of our agri business, it meant that bulk exports to reduce grain terminals doubled in full year '25 to around more than 3 million tonnes. Throughput across our up-country grain facilities in New South Wales reached 750,000 tonnes. Our trains were fully utilized. We lifted our container packing volumes and the pass-through benefits to the business. And most importantly, the agri business made a significant contribution to earnings and a return on capital employed. We also undertook some further strategic investments in agri infrastructure during the year, a small acquisition adjacent to our existing Narrabri facility and have improved the success of the model in New South Wales, we are now looking to selectively expand into other states, our agri flash grain business. With the addition of the bulk handling facility at the port of Aldi in Western Australia, which we recently acquired last month in July, along with establishing new container packing operations this year from existing sites within the Logistics business in Brisbane, Melbourne and Fremantle. Now turning to Slide 16, Moorebank IMEX terminal. This gets a lot of attention, disproportionate to the rest of the business. Operations at the IMEX are now cash flow and EBITDA positive. We expect that momentum will carry into full year '26. As you can see from the chart on the right, the TE run rate is stepping up. and is on track to reach 1 million BU target sometime between 2031 and '34. The Moorebank Avenue realignment will be critical to that. So it was great to see that project commenced late January this year. The Moorebank warehousing development continues to build out with additional number of new tenants commencing in full year '25 and the big announcement that the Kmart DC will be operation at Moorebank in full year 2. The math on the next slide shows the current tenant takeup at Moorebank for your viewing. Now turning to Ports & Bulk on Slide 18. Again, we saw good margin growth in this business, profits up 10% and margins increased by 0.6%, which is particularly pleasing considering the headwinds from industrial action, weather impacts and some impacts from mine suspensions. Despite this, the business is able to generate growth and margin improvement. Volumes were generally mixed with growth in grains, steel products and forestry products. Qube energy logistics activities also increased significantly with additional work from existing customers, a new supply base and project-related work on during the year. In the bulk operations, the diversification of those operations, together with disciplined cost controls and productivity gains, and also with the contribution from the Colemans acquisition, all helped more than offset the headwinds I mentioned earlier. And the business also secured several significant contracts that will commence in full year '26, including contract wins late in the year, such as a logistics service for the new Iluka West Balranald project in New South Wales, the WAO decommissioning logistics work for Chevron, a new warehouse supply base facility for Rio Tinto at Karratha. Moving to Slide 19. Briefly looking at Patrick's. I've already mentioned that Patrick's market share normalized back to 42% as expected. In saying that, to achieve the same profits as the prior year was a very good outcome and slightly above our expectations that we had at the start of last year. Actually delivered the result by improved productivity efficiencies, higher ancillary revenues and a more fatal mix in volumes. Patrick has also extended several customer contracts across the period. On top of that, management delivered a 3-year rollover of the enterprise agreement with the EMA during the year, which was a fantastic outcome. These productivity efficiencies and the margin improvement achievements gained in full year '25 will contribute to growth of earnings in full year '26. Moving to Slide 20, associates. Apart from MITCo, all other associates track broadly in line with expectations. And you would have seen the announcement last week about the impairment of the MITCo asset. We made no secret of the challenges relating to Moorebank in estate Terminal and securing users of the terminal since to become operational. The construction of that facility by Sunsedate was an obligation for Qube under the overall deed of development Atmorbank. And while we hope and believe it is a long-term asset of potential be, it is now impossible to know when any significant demand for use will come at this point in time. And on that basis, we took the decision to impair the asset. I will now hand over to Mark to discuss some key financial information. Over to you, Mark.

Thanks, Paul, and thank you to everyone on today's call for listening in. As Paul has already highlighted, it has been yet another positive financial result for the Qube group for the FY '25 financial year. I'll now take you through a few financial slides. Starting with Slide 22, Qube underlying results. Paul has already given a lot of color through our logistics and infrastructure and ports and bulk business units as well as Patrick's results. A few other points to note include: the strong result in our operating division and Patrick contributed to an increase in group underlying EBITDA of 18.5% over the prior period. Pleasingly, Qube EBITDA margin, excluding the high revenue, low-margin grain trading business increased to 10.5% which is a full percentage point better than the prior period. As we had guided to earlier in the year, this EBITDA improvement was partially offset by an increase in net finance costs as well as lower contribution from our associates. Net finance costs increased by $22 million against the prior period due to higher average debt balances and base interest rates versus last year as well as no capitalization of interest on the MLP terminals, which alone was a $10 million period-on-period impact. The NPAT share from associates reduced by $8 million, which was mainly attributable to Qube's share of the losses from the MITCo joint venture, which owns the Moorebank interstate terminal asset. I'll talk more to that in a minute. At the underlying NPAT line, we delivered $288 million, which was an increase of 6.2% over FY '24. On the back of these results, the Board has declared a final dividend of $0.057 per share fully franked, which will be payable on October 14, 2025. This brings our full year dividend to $0.098 per share, which is a 7.1% increase over FY '24. Before leaving this slide, I'll just make some short comments on the material nonunderlying adjustments that we announced to the market last Thursday. The more straightforward item was the significant profit on sale of the Minto property which transacted late in the first half. This transaction delivered circa $201 million of gross proceeds and almost $90 million of nonunderlying profit. The second and more material item totaled some $219 million and related to the full impairment of Qube's carrying value of a 65% investment in the MITCo joint venture of $127 million as well as several other downward fair value adjustments and onerous contract provisions, all relating to Qube's obligations with the interstate terminal at Moorebank. $157 million of the $219 amount is noncash and the balance represents costs Qube is forecasting to incur to fully complete Stage 1 of the interstate terminal post the completion of the realignment of Moorebank Avenue, which is anticipated to be in late calendar year 2026. Most of the cash is forecast to be spent in the second half of FY '27 and during FY '28. In addition to the ASX announcement last week, further details for those specific items and other nonunderlying adjustments are included in the appendix to this presentation as well as in the review of operations section within our annual report. Moving to Slide 23, capital expenditure. In FY '25, Cube's net CapEx was $561 million. This is broken down into the 4 major categories on this slide. The completion of the MIRRAT acquisition on the first of May, combined with the Colemans acquisition in the first half, man spent a total of $453 million on M&A in FY '25. I'll talk to both of these and a few other strategic asset purchases on the next slide. Qube spent $151 million on organic growth related assets in the category set out in the table below. The major spend was on properties, new bulk storage facilities in Queensland, Western Australia and mobile assets to support new or expanded contracts. In the period, we also spent $209 million of replacement CapEx and mostly on mobile fleet assets and materials handling equipment. This represents circa 88% of our FY '25 underlying depreciation expense. Finally, we spent $28 million on the 2 Moorebank rail terminals split relatively equally between the IMAX and the interstate. During the year, Qube received proceeds of $281 million from the divestment of assets with the significant amount being for the Minto property, which I mentioned earlier, and some rail rolling stock assets in excess of our business requirements. Taking you now to Slide 24, acquisitions. As mentioned on the previous slide, in FY '25, Qube acquired the Colemans and at businesses. The Colemans business is a West Australian-based business that focuses on the highly specialized security-sensitive ammonia nitrate supply chain. It will be managed and reported within our bulk business unit. The integration of this business has been completed and is performing in line with our expectations. We expect this business will meet Qube's revised return on capital hurdle in the medium term. The second and larger acquisition was the Morat business based at Web Dock West in Melbourne. Murat is the only dedicated roll-on roll-off terminal servicing the Victorian market on a long -- with a long-term lease over key port infrastructure. The business integration is also progressing well and like Colemans, we expected to meet Qube's return on capital targets in the medium term. One item to note for analysts modeling Qube is that these acquisitions will add approximately $13 million of incremental noncash amortization of intangibles to our FY '26 P&L and into future years. This is associated with intangibles such as customer contracts and port concessions. In addition to the 2 acquisitions I've mentioned, we wanted to highlight that Qube also continues to acquire other strategic assets such as properties with on-site infrastructure. In addition to the Karratha and Narrabri properties, mentioned on this slide, we also invested in bulk storage facilities in Rockingham, Western Australia, Newcastle, New South Wales and non-Fisherman Island in Queensland. Over the past 3 years, Qube has acquired a number of other strategic properties with existing built out infrastructure close to key ports or agri accumulation and logistics hubs and built a number of other bulk storage facilities to service growing customer demand for these facilities, and we expect further investment in this asset category in FY '26. Finally, as Paul mentioned briefly when talking about Qube grain trading, in early July 25, Qube acquired the ABH business for $25 million. This business owns bulk export infrastructure and operations on a site lease from the Southern Ports Authority at the Port of Albany in Western Australia and currently is mostly focused on wood chip exports. Qube intends to upgrade the facilities to handle multiple commodities, including mineral sands, spodumene and grain and significantly increase the volume through this facility. This business will report through our bulk business unit. Taking you now to Slide 25, cash flow. During FY '25, Qube net debt increased by circa $403 million, with the key cash flow items detailed on this bridge. Our cash conversion, excluding grain trading working capital, which I'll talk to shortly, was 87%, which overall was somewhat disappointing and an area we continue to focus on. Our grain trading business has required a significant investment in working capital as we build this business up during FY '25. Working capital for this part of the business grew $66 million in the period, to be over $146 million at the end of the year. You will remember though that at December '24, our working capital balance was over $210 million, so some of that has unwound in the second half. Since July 1 this year, Qube has received more than $122 million in bulk related receipts. And at this point, we expect first half working capital levels will likely be similar to those we saw in FY '25. Our FY '25 cash flows also included $545 million of net CapEx that I spoke to on the previous slide as well as over $170 million in distributions and shareholder loan repayments received from our associates, mainly Patrick. The Patrick shareholder loan has now been fully repaid. Another material cash outflow on this bridge is the $75 million Qube was required to pay Martines as part of a security of payment at claim they bought against Qube, which in the second half was ultimately determined in their favor. This outcome does not affect Qube's ultimate position, which will be dealt with through arbitration. An arbitration process has now commenced covering the entirety of the project, and Qube's assessment is that its contractual position will prevail. It is likely that the arbitration process itself will take another 12 to 18 months to conclude. I would refer you to our contingency note 29 of our financial statements for further information on this particular item. Finally, I can take you now to Slide 26, balance sheet and funding. Qube had an incredibly busy FY '25 in terms of capital management. As I mentioned back in February, Qube had obtained and made public investment-grade BBB equivalent credit ratings from both Fitch Ratings and S&P. On the back of the credit rating process, we tapped into the Australian medium-term note market for our inaugural issuance in early December 2024 and successfully issued $600 million of long-tenured senior unsecured notes. We continued this momentum in the second half and completed a full refinancing of our existing bank debt in June 2025. This $2 billion refi delivered a small upside in available facilities However, more importantly, we improved our pricing, increased our tenure and made some favorable changes to our debt terms. Given the above, we closed FY '25 with our average debt maturity increasing from 3.2 years to 5 years. Qube had over $1 billion of liquidity at the end of the period and now have no refinancing requirements until FY '28. Qube's gearing ratio increased to 33%, which is at the midpoint of the Board's current approved range. Overall, we retained significant headroom against our bank covenant. That's all for me. So I'll now hand you back to Paul.

Thanks, Mark. Now to summarize and provide the outlook. Slide 28. To summarize this scorecard, another record year for Qube. Revenue improved significantly. Margins improved again. Return on capital improved and on its way to a new target of 12% plus. Our earnings per share improved and shareholders saw further dividend growth. Slide 29, Qube strategy. This slide notes the past 5 years' performance that our strategy continues to deliver healthy growth. Not every year, we deliver double-digit growth rates. However, we remain confident that our strategy and the opportunities that lay ahead will continue to deliver healthy growth rates well into the future ahead. Now turning to Slide 30. Outlook across Qube's key markets. The outlook across our key markets for next year is generally favorable. In containers, market growth is expected to be in line with GDP and the continued ramp-up of our New Zealand operations will help growth. Patrick is expected to return to volume growth and margin growth. The outlook for agri and our grain exports is very positive with a strong harvest forecast and with the help of our continued grain training strategy to build out further growth. In automotive, we expect to see steady automotive import volumes but an ongoing reduction in storage-related activities at the AAT facilities is forecast to have some impact in full year '26. And we'll have the full benefit of the contribution of the acquisition of MIRRAT. So a bit of a mixed bag on outlook on cars and vehicle revenue for next year. In forestry, we expect broadly flat volumes in New Zealand with rate adjustments offsetting wage and cost increases. And weaker wood chip volumes in Australia, offset by higher log export volumes. In our Resources business, it will be impacted slightly by some customer impacts and mine suspensions from full year '25. Although this business may go backwards slightly next year in profits, it will still contribute meaningfully to the group, and there's an outlook to improve in full year '27. In energy, the positive outlook for further growth continues, assisted by new contracts and additional work commencing in full year '26. And our general [indiscernible] business will recover from the impact of industrial action of last year. Slide 31, underlying earnings outlook. So to conclude, we currently expect to deliver solid NPAT and EPS growth in full year '26, with strong earnings growth in the Logistics & Infrastructure business unit, modest earnings growth in the ports and bulk business unit and return to good earnings growth from Patrick. Net interest cost is expected to increase by between $15 million and $20 million. CapEx is currently projected to be around $600 million to $650 million although further asset sales are expected to partially offset this figure. I will now be pleased to take your questions as I hand back to the moderator. Thank you, everyone, for joining the call this morning and look forward to your questions.

[Operator Instructions] And our first question today will come from Darcy White with Jarden.

Mark, I appreciate the opportunity to ask a question today -- just a couple of quick ones from me. Can I ask if the CapEx guidance that you provided includes M&A? And second, for the solid EBITDA growth outlook that you provided in the pack -- if we assume a modest with 6% in FY '25, should we then assume that sold is going to be greater than 6%, so therefore, closer to 10% or a bit higher, please?

Yes. Yes, the CapEx that we've guided to does include some M&A -- so that -- so the number could be much lower if not, we do little M&A. But yes, it's sort of based on what our sort of where we expect it to be. From an EBITDA perspective, we're not going to really give any EBITDA perspective. We're not going to give any more guidance than what we've got there. But in terms of giving you specific quantitative guidance, unfortunately.

No problem. Okay. Just 1 last question, if I may. Could you also provide some commentary, please, in the net interest line as it's expected to be higher in FY '26. What's happened to [indiscernible]. Would you mind just refreshing our understanding to the sensitivity to rate changes, please?

Yes. So it's -- obviously, our gross or net debt, as you can see in the cash flow slide is much higher than it was at the beginning of FY '25. So obviously carrying that higher level through. And obviously, you've got all of the asset proceeds offset by higher CapEx, the large acquisitions, $450 million for the 2 acquisitions. And all of the other items. So we do carry higher debt into FY '26 and that will be -- that's a key driver for it all. Obviously, the other part is we -- obviously, interest rates are coming down, and that's a bonus, but it's really more linked to the higher debt overall. As I said in my commentary, we did -- through our bank refinancing, we did receive some margin improvements there. So that's all factored in. And one of the -- and so that's really effectively driving the increase overall from the interest expense line. Yes. I mean we'd love to have more RBA rate cuts. That would be nice if they're listening.

Your next question will come from Cameron McDonald with E&P.

A couple of questions from me, if I can. Just Firstly, in terms of Patrick's and the repayment of the shareholder loans, you've now got a senior debt balance there of $1.4 billion versus an enterprise value of $6.6 billion, $6.7 billion underpinned by a transaction. What's the potential -- I mean, that looks ridiculously undergird as an infrastructure asset. What's the potential between -- and the discussions between you and the new co-shareholders of Patrick's to think about capital management within the Patrick's vehicle, please?

Yes. Cameron, it's Mark. So yes, Patrick has been, I guess, like you said, for an infrastructure asset, it's relatively conservatively geared, and that's something that both ourselves and Brookfield have agreed on over a number of years. And so we don't see that changing. We don't -- we're not really looking to gear it up any higher than what it has been, which is sort -- and that's just a decision that the shareholders have made jointly as being at the appropriate level that fits both shareholders rather than just the Patrick business.

So you'll just see that come through as much higher profit numbers as an associate profit number?

Yes. So we -- obviously, the distribution is coming through from Patrick have been a combination of dividends, shareholder loan repayments and the like. So obviously, and interest, sorry, on the loans, those loans are now being fully repaid. That's probably another reason why our interest expense goes up because it's not being netted off by the interest coming through from Patrick loans. So we don't expect -- distributions from Patrick will continue to be a nice line item in our cash flow regardless of how their gearing is.

Okay. And then in terms of the BHP Olympic Dam contract at Calgary lost during -- more recently, I understand that those assets have been redeployed. Is that being redeployed into the new contracts that you've called out? Or are there additional contracts that we should be aware of?

Yes, Cameron, that's yes. So yes, they are getting redeployed into some of the contracts that I called out. We are still exiting that contract. So some of them actually are still there at this point in time. So -- but the plan is to move those assets and some resources into existing work and new work a combination of both. The beauty of our diversification, I guess, in a growth pipeline.

Okay. And then just finally, just on the CapEx. So the net number of $480 million to $510 million after asset sales. I'm assuming that includes the $62 million you called out on the interstate obligations at Moorebank. And then.

Yes, it doesn't, Cameron. -- that $62 million cash per interstate, it will be only a couple of million this financial year because it's really -- we can't really start the heavy work on that until Moorebank Avenue realignment is complete, which is sort of scheduled for the end of 2026 calendar year. So that will be into FY '27. So in my commentary, I sort of spoke most of that CapEx will be spent in the second half of FY '27 and throughout FY '28.

Okay. And is there -- you've called out 1 property in WA. My understanding is that you're also looking at a second property. Is that -- is that still being examined -- or is that -- has that fallen through?

You're talking to in regards to acquisitions of property or.

Yes, yes, that's correct.

Yes. No, well, we -- we actually -- as I said in my -- that acquisition slide, we bought a second property at Narrabri. You'll remember a year before last, I think it was that we bought another property there. And the one up in Karratha, which is a second property as well adjacent to one that we bought a year or so ago as well. So we continue to look at opportunities to acquire properties that are, as I said, that are adjacent to key ports, or linked to the agri logistics hub, be it in accumulation areas that sort of got really good rail access. So we'll continue to look at that, but we have -- we're not really guiding to that line at the moment. But that -- anything would be probably included in that overall CapEx guidance.

The next question will come from Samantha Eddie with Morgan Stanley.

I've just got a couple of questions. So the First question is on MIRRAT. Could you provide some more details on the earnings contribution from MIRRAT in FY '25? And I guess what we can also expect heading into FY '26. And then also, is that asset performing in line with expectations so far?

Yes. So so far, the MIRRAT acquisition is broadly in line. It's a little bit a little bit off that due to, as I mentioned before on the call around -- there's been probably a fair reduction in storage and ancillary revenues at this point in time. I mean, we're extremely pleased with the acquisition and what we can do in Melbourne between Web dock West and and Appleton Dock with those 2 facilities for AAT. So we're just working through that synergy value over the course of the next 12 months. Yes. The earnings guidance is we don't use to give the exact amount, but from a return on capital, you can sort of work it out that it will be around.

I can add a bit more color to that. In our annual report, in the business combination note Page 100. We actually have to sort of state what the earnings would have been if it was on a full year basis. We only had it in for 2 months of FY '25. But you'll see in that note that if we had it at the beginning of July 24, we would have had circa $66 million of revenue and $21.6 million of EBITDA, effectively. So you'll expect the FY '26 will be sort of in that ballpark.