Qube Holdings Limited (QUB) Earnings Call Transcript & Summary

[Audio Gap] across the supply chain. We saw a strong performance from the operating division from organic growth, contributions from acquisitions and growth CapEx and from the ability by us to mitigate, effectively mitigate cost pressures. We saw a solid performance from Patrick's despite vessel scheduling issues and industrial disputes. Other highlights. In the period, Qube successfully completed the Moorebank Logistics Park monetization on 15th of December. Today, we have announced an increase of 20% to the interim fully franked dividend at 3% per share, reflecting a strong performance and a positive outlook. And also with our strong balance sheet, today, we have indicated a capital management initiative of up to $400 million to likely commence in the second half of this year. With high demand for our services in most markets and for our infrastructure assets and for our expertise across the supply chain, we currently expect to deliver a strong underlying full year earnings in 2022. This is subject to any material change to the current market conditions. If I can turn to the next slide, Slide 5 -- Slide 6, sorry. Sorry, I've got the wrong slide, Slide 6, which is the Safety slide. Before I do that, sadly, I would like to note, yesterday, we, at Qube, woke to some tragic news that an employee of Qube's driving between 2 depots in Mount Gambia in a light vehicle on a public road, his vehicle left the road and resulted in his death. Our sincere condolences and our total support is with his family and with his work colleagues at Mount Gambia at this trying time. I move to Slide 6. Our continued focus on safety and health. During the period, our TRIFR remains low at 8.8 compared -- that isn't compared to the industry standard industry KPIs. CIFR remains very low at 0.3, which represents the effectiveness of the Qube safety critical risk processes and safety awareness programs that we have in place today. In regards to COVID and our response to COVID over the last 6 months, again, we've adapted very well to the ever-changing environment around COVID and government changes. And so when Omicron wave hit us just before Christmas, we were able to adapt quickly once again, introducing and reintroducing new and existing health measures while keeping the business going, which demonstrated again strength of our management team and our workplace culture to dig in when it was needed. We saw times up to 50% of our workforce absent in parts of our business during the period during COVID, and this has now normalized to 5% to 10%. So we're getting some relief at this point in time. Challenging time, but managed very well through the efforts of our business, and we kept the business running and kept most of the revenue, if not all, the revenue intact. In the period, we also rolled out a new Health and Well-being program called Thrive to help our employees manage their health and their well-being risk with a slogan Stuff That Matters. The program is also assisting our COVID response with our employees. On a last note here on this slide, also during the period, Management's continued focus on developing a long-term goal around the sustainability strategy to address a Low-carbon Footprint. We are currently in the process of undertaking our TCFD assessment. And we also are currently working with our customers on a number of projects around reducing carbon emissions. At the full year, we intend to inform the market of our progress in regards to our TCFD assessment. Moving to the next slide, which is Slide 7, which demonstrates or shows the NPATA Bridge for the period. This demonstrates a record underlying NPATA achievement of 16.9% growth compared to the previous corresponding period. Key call outs here are the operating division and the Patrick's performance. Operating Division was the key contributor with high volumes across most activities, particularly containers, grain, ports and energy activities. But also during the period, in the Qube operating division, business was effectively able to manage cost pressures and mitigate cost pressures through contractual protections or from benefits of scale and operational efficiencies and/or which is most important to us by proactive management or engagement with our customers to review and optimize a broader supply chain solution with our customers. Which with the business we've built over the last 16 years, we have a great ability to do across all supply chains. Also, during the period, the contribution to Qube from Patrick was pleasing as it was also achieved despite flat volumes to the vessels -- due to vessel scheduling and industrial relation disruption. Now moving to Slide 7 (sic) [ Slide 8 ]. I'll quickly touch on this slide. This slide demonstrates some of our core markets and some of our growth drivers. The first item here is Australian grain exports, which obviously coming out of a 3-year drought, Qube is currently seeing volume benefits in this space. In regards to the second item here, the Australian base and bulk commodities price index, we're seeing strong prices, and we also, therefore, seeing strong volumes and then further opportunities. However, due to labor shortages and border restrictions around Western Australia, we probably haven't received the full benefit of this in our bulk space in the period due to the COVID-related shortages in labor shortage and operational costs, but we are now hoping for this to improve now that WA is now finally opening up its border. Third item here is the rolling -- 12-month rolling container growth in Australia's 4 biggest ports, which we operate in Logistics space and also the Patrick space. And obviously, we've shown the rebound from COVID in regards to container traffic. And the last one is in relation to new vehicle sales in Australia, which is starting to recover as supply in our states to catch up with the resurging demand for new vehicles, which we are starting to see new vehicle, our vehicle automotive volumes get back to some normal -- normality. Moving to the next slide, Slide 9, half year highlights for the Operating Division. Revenue is up 28% to over $1.6 billion revenue for the half year. EBITA up over 19% at $126 million EBITA for the half year. Total gross CapEx was up 106% on the previously corresponding period. Those increases in CapEx spend was largely to do with the Newcastle Agri-Terminal acquisition, which was acquired in September, growth CapEx that we've spent on the BlueScope contract, which has now commenced in January. This CapEx will both deliver additional future financial benefits in the second half of this financial year. And on the slide here, it shows our return on capital employed in the Operating Division staying around the 10% mark. So calling out Logistics and Infrastructure highlights here in regards to Logistics Infrastructure, strong earnings uplift in this space, up 36% and near on $70 million EBITA result for the half year with margin improvement of 1.1%. Again, as mentioned before, higher volumes across the board assisted the strong result in this area of business, containers, agri, steel and general cargo volumes through our AAT terminals. And we also had the benefit in this space from the partial benefit from the 2 acquisitions, being the Newcastle Agri-Terminal, which I just mentioned. In the agri space being the bigger of the acquisition and another smaller acquisition, AST, in the container space. Moving on to Ports & Bulk. Earnings were up 4% at $70 million EBITA result for the half year. This was assisted by higher volumes across Bulk activities for most products such as iron ore, mineral sands, lithium, nickel and copper customers. And our port activity, such as grain, steel, machining and Australian forestry. We also saw high growth from our energy customers, which assisted the result. However, this was partly offset by low New Zealand forestry volumes impacted by COVID lockdowns and a weaker demand from China. And the underperformance of some contracts impacted by the ongoing labor issues in WA due to the border restrictions, which I had mentioned previously. We also had some delays in renewable projects and crane lifting projects during the period. These 3 areas impacted margins, especially the impact in Western Australia. The margin also in this area was also impacted by the JobKeeper subsidy being included in the full year '21 underlying results, which was subsequently repaid later in that financial year. Moving to Slides 9 and 10. Slides 9 and 10 highlights -- sorry I think that's 10 and 11 no? sorry, Slides 10 and 11. These slides highlight the revenue segmentation and, most importantly, the highly diversified revenue by region, product and industry across the Operating Division. On Slide 10, Logistics and Infrastructure. You'll see there that New South Wales was the biggest growth region for this area of business due to the -- due to agri volumes and then followed by Queensland. Agriculture was the biggest growth industry, which included the Newcastle Agri-Terminal for a half of the period. All industries increased revenues during this period other than the Infrastructure and Project category, which was flat in the period. Also, a key note here is that the top 10 Logistics and Infrastructure customers only represent 10% of the total Operating Division's revenue, highlighting the spread of revenue by region, product and industry. Moving to Slide 11, Ports & Bulk. WA was the biggest growth of -- growth region by revenue despite the impacts of the border closures. Northern Territory followed as the second largest area of growth for the Ports & Bulk business due to energy customer wins. The period saw revenues grow from most products and commodities such as iron ore, copper, nickel, lithium, forest products in Australia, although New Zealand volumes were down. A significant gain from energy volumes are a reflection of our new customer wins, as I've already mentioned. As I mentioned in the previous slide, and a note here is that the top 10 Ports & Bulk customers only represent 19% of the total operating revenue -- Operating Division's revenue, highlighting again the spread of revenue by region, product and industry. Moving to Slide 12. Property division and Moorebank Monetisation highlights. In December, we finally and successfully completed the Moorebank Monetisation transaction with the LOGOS consortium for a $1.66 billion sale price. Receiving $1.36 billion of those proceeds in December last year, the $300 million deferred payment is conditional on planning approvals and Qube building the Interstate terminal. We anticipate to receive a majority of this deferred amount in this calendar year with the remaining monies expected to be in 2023 when the Interstate channel is fully completed. As at the 15th of December, the Property Division has now been discontinued following the Moorebank transaction with LOGOS. Just for noting, the remaining Qube Moorebank activities are now reporting into the Operating Division in the Logistics and Infrastructure section. These remaining activities are: The IMEX Terminal operations and the completion of the automation; Qube's current warehousing and future warehousing and Logistics operations located at Moorebank; construction of the Interstate terminal; and once that Interstate terminal is complete, Qube will own 65% of that asset, LOGOS 25%, and Moorebank Intermodal Company will own 10%, which will align all stakeholders on the Interstate terminal. And also remaining activity will be the Beveridge property option and the future development of that property. Moving to Slides 13 and 14, Patrick's half year highlights. Again, Patrick's had a pleasing result considering that volumes were flat due to vessel scheduling and industrial relation issues. Although Patrick's market share dropped from 44% to 42%, revenue did increase by 6%. Qube's share of underlying NPATA jumped 14% to $28.9 million for the half year. Qube's return on capital employed in Patrick improved by 1.4% from 4.6% to 6% in Patrick compared to the prior corresponding period. We received $40 million of distributions in the period with a further $20 million being distributed in February this month. Just after the end of the period on January 6, Patrick's announced an increase to its landside and ancillary charges, which will be effective March '22. This will support the significant investment being made to landside infrastructure and equipment, which will further improve the return on capital in Patrick's. On to Slide 14, some other highlights here that I'll call out just a few. During the period, Patrick renewed 2 key contracts in the period. Port Botany Rail -- Automated Rail Terminal is now performing strongly, and has commenced the most important phase, the second phase of the civil works, which is on track to be completed by mid next year 2023. Rail -- Melbourne Rail project has also commenced and is due to be completed around the same time. Both projects here will also benefit Rail operators, including Qube. Lastly, an update in regards to Industrial Actions and the Enterprise Agreement at Patrick's. On the 7th of Feb, Patrick reached an in-principle agreement with MUA for a new 4-year deal, effective January 2022, to deliver future workplace stability for the business. New agreement will remove restrictive recruitment conditions and also deliver more flexible work arrangements across all 4 terminals. Both parties are currently working towards putting this new agreement to vote. With that, I will now hand over to Paul Lewis to talk through some of the key financial information of the presentation. Over to you, Paul.

Great. Thanks, Paul, and good morning, everyone. Starting with Slide 16, Qube's statutory results. As you'd probably be familiar, the statutory earnings include a small number of items that we exclude from underlying earnings, given they're predominantly non-cash and/or nonrecurring. As Paul touched on, in H1 FY '22, we've shown the -- we're required to show our ongoing operations separately from the discontinued operations, being the Property Division and predominantly the Moorebank Logistics Park. So in FY -- in H1, the main items that are in the statutory results but not in the underlying relate to the Moorebank Monetisation. They include an overall loss of $9.7 million, and that is mainly due to the requirement as part of obtaining the consent from the Moorebank Intermodal Company that we -- the Qube would sell them a 10% interest in the Moorebank Interstate Rail Terminal for nominal consideration. Based on our current expected CapEx of that Terminal of around $154 million, that equated to a $15.4 million loss that we expense to be recognized in the period. Other key items were redundancy and the related costs associated with discontinuing the Property Division being around $7.4 million pretax. The other items in the statutory results that are more regular include the impact of AASB 16, so the non-cash associated with the leasing standard. That reduced Qube's NPAT by around $16.1 million in the period, and that's inclusive of the impact of Qube share of AASB 16 on Patrick's results. There was a small overall fair value gain of $5 million. But given it's non-cash, that we don't include that in underlying results. And we also include in the statutory but not the underlying results, some one-off transaction costs, dam duty, et cetera, associated with the acquisitions undertaken by the Operating Division. Turning to the next slide, Slide 17, our underlying results. As Paul touched on, we're really, really pleased with the underlying results. As you can see, strong growth across almost all key metrics, showcasing the resilience of Qube's business, the favorable markets in which we operate and our strong positions in these markets. So underlying revenue growth of almost 28%, underlying EBITA growth of 19%, despite the ongoing cost and revenue impacts of COVID-19, some of the industrial relations challenges at both Qube and Patrick in the period, impact of the trade war, which continues to impact our Australian forestry volumes, and then the slowdown in China, the impact of the log export volumes out of New Zealand that Paul talked about. Patrick, also a great result. Underlying revenue growth of 6.3%, but almost double that in underlying EBITA growth of 12.1%. And as Paul mentioned, the cash distributions of $60 million, including what we received in February, more than double the underlying NPATA contribution. So really strong cash generation from Patrick. Looking at the margins on this slide. At the headline level, it looks disappointing. Margins have declined. But as we've said previously, the margins are actually more a function of our business mix. Different activities have inherently different margins. So for example, part of the strong growth in the Operating Division was driven by a big jump in energy activities. A lot of the energy activities are supply-based actuaries, which are very profitable but have inherently lower margins. So that part of the business grew. Forestry activities, which were -- had an impact, as we touched on, a higher margin. So the overall margin decline is partly attributable to the mix. There was some margin impact, particularly from Western Australia from the driver shortages that Paul talked about, where we weren't able to operate certain contracts at our desired productivity levels and it also impacted the profitability of those contracts. We view that as temporary. So there should be improvement starting in this half, but really once borders open, so that's more in FY '23 upside opportunity. We do focus and continue to focus on improving margins within each activity through scale and operational improvements, but the overall margin outcome will be a function of business mix predominantly. The strong underlying result has enabled the Board to increase the interim dividend by 20% to $0.03 per share fully franked, and that's in addition to the capital management initiatives that will be undertaken in the near term, and I'll talk more about that shortly. As you see from our full disclosure today, the Board has approved a new dividend policy, reflecting the completion of the significant CapEx associated with the Moorebank project, which will essentially involve a full year dividend payout going forward of 50% to 60% of underlying earnings per share pre-amortization but subject to any relevant considerations at the time. And the interim dividend is at the upper end of that range. Look, it's worth noting before I leave this slide, post the completion of the Moorebank Monetisation and the cessation of the associated property development activities, Qube is now a pure logistics company, effectively comprising the Operating Division and our 50% interest in Patrick. From a financial perspective, even though we fully benefit from our 50% interest in Patrick's revenue and EBITA, et cetera, from an accounting perspective because we don't control Patrick, we only report the contribution through our share of associates NPAT as well as interest income on the shareholder loans that were partly used to fund our investment. So while the overall accounting treatment doesn't change our NPATA or our EPSA, by looking at the numbers on this slide, it doesn't necessarily give a full appreciation of the earnings and cash flow of Qube's overall Logistics activities, inclusive of our share of Patrick. And just as a guide, what I mean by that, if you look at Qube's share of Patrick's underlying EBITA in the period, it was about $65 million, which was broadly comparable to the cash distribution that we received from Patrick, including the $20 million just received. As a comparison, the underlying NPATA we recognized was only $28.9 million. So given Patrick represents a fairly significant portion of Qube's overall value, and historically, it's cash distributions have exceeded the underlying accounting profit, and we just felt it was important to highlight that to make sure that everyone is aware of that dynamic. And so we refer you to Appendix 6, which shows the full underlying P&L for Patrick, of which Qube benefits 50% of that. Turning to Slide 18. CapEx. Paul touched on the significant CapEx in the period, around $440 million, most of which was in the Operating Division. The largest items were the acquisitions of the Newcastle Agri-Terminal and the AST assets, so around $111 million or almost $112 million in total. Other CapEx items are about $35 million finishing the BlueScope equipment procurement. That contract has now started, is ramping up. So we expect a more meaningful contribution in the last quarter, but next financial year will be a full year's contribution. We're procuring some additional grain wagon to take advantage of the strong agri environment, and we continued spending on the IMEX Terminal automation, Rail access as well as initial design work on the Interstate terminal at Moorebank as well as equipment for new contracts to improve productivity and safety and, of course, maintenance CapEx. And all of that CapEx only contributed partly in H1. So again, it will be a catalyst for future earnings growth. In the second half, we're guiding to around $300 million to $400 million of CapEx, although as always, it could be more or less depending on suitable opportunities that meet our criteria. And it's worth noting that guidance doesn't take into account the potential receipt of any of the deferred consideration relating to Moorebank that Paul talked about. We do expect to do additional bolt-on acquisitions in the Operating Division. We have already completed a small one in January in the Forestry area in South Australia. Again, very small, not material but consistent with what we've done in the past, which is negotiating it bilaterally at attractive multiples and where we think will generate both revenue and cost synergies. We're considering several other acquisitions of a similar nature, albeit there's no certainty any will proceed. We'll continue to progress the funding of the Interstate terminal, probably around $15 million to $20 million in the second half, and we should complete the IMEX automation which will commence operations in the first half of next financial year. And our indicative guidance is full year maintenance CapEx this year will be around 70% to 80% of depreciation. Turning to Slide 19, balance sheet and cash flow. Post receipt of the Monetisation proceeds, our net debt is around $388 million, equating to leverage of about 10.3%, which is well below the bottom end of our target range of 30% to 40%. We have liquidity in the form of cash and undrawn debt facilities of around $1.8 billion and material headroom to covenants. And that's before the deferred consideration, albeit it's also before paying tax on the capital gain, which we estimate to be around $200 million and before the CapEx that I mentioned. So we're in a very, very strong position to fund any upcoming debt maturities, continued growth CapEx, pay regular increasing dividends aligned with underlying earnings growth and undertake capital management initiatives to enhance shareholder value. Just on that front, on capital management. You'll see we've announced that the Board -- the strong financial position post monetisation has enabled the Board to support capital management initiatives of up to $400 million in addition to the ordinary dividend. We're still finalizing the exact form of that capital management. Obviously, all options are on the table, including special dividends on- or off-market share buybacks or a combination thereof, but the objective is to deliver optimal value to shareholders. We're just working through the final approvals and other relevant considerations. And as flagged, we expect to commence the initiatives this half. So we'll provide more information in the near term of that. With that, I'll hand back to Paul to talk a bit more about the outlook.

Thanks, Paul. Just turning to Slide 23 -- 21, sorry, 21, the full year outlook. So Operation Division's outlook, strong underlying earnings growth with solid to strong volumes across most parts of the business. We're expecting further contribution from past growth CapEx that I mentioned before and acquisitions, some recovery from areas of the business that were impacted in the first half of the year, and the growth being assisted by management's strong ability to mitigate the impact of cost inflation. In regards to Patrick's outlook, a strong underlying contribution from Patrick's with solid volumes across all 4 ports, benefits from the increase to landside fleets from March this year and anticipated improved productivity outcomes. In regards to the Property Division, the Property Division is anticipated to breakeven by the end of the year and is now discontinued. Corporate costs will increase slightly due to the Moorebank transition costs that Paul just mentioned, and some higher insurance costs. In regards to CapEx for the second half of the year, it is expected to be around $300 million to $400 million, which will exclude any monies that we get back from the deferred payment on the Interstate terminal and the money that we spend in the period to June. Of the $300 million to $400 million, that would be comprising of Moorebank IMEX construction -- Interstate construction, which will get that money back and acquisitions of some grain wagons, further bolt-on acquisitions and maintenance and sustaining CapEx. The level of this CapEx, obviously, will be subject to the timing of the growth opportunities and if they fall within the next 6 months. Capital management. As Paul has just mentioned, the Board has endorsed the capital management up to $400 million, and we intend to proceed within this second half of the year. As Paul mentioned, also, the precise nature and the timing is dependent on a number of factors. In summary, Qube's group's outlook is for strong increase in NPATA and EPSA compared to the full year '21. This assumes no adverse -- no material adverse change to the current market conditions due to COVID and/or impacts to domestic or global economic conditions. With that, I'd like to hand back to the moderator and ask the questions. Thank you.

[Operator Instructions] First question is from Matt Ryan from Barrenjoey.

Just got a question on the Operating Division and the 28% revenue growth that you guys posted. It's obviously a pretty stronger than -- It looks like quite a lot of things together during the period. I'm just wondering how abnormal you think that period was, if at all, either through COVID-related benefits or maybe particular industries seeing greater-than-normal volumes? Or do you think this is sort of, I guess, a new base that we can sort of grow off as we move forward?

Look, it's obviously a hard question. We don't think it's abnormal. There's no question that strong agri helped, and there are going to be years where there's a drought. But I think, again, as we've highlighted, the diversity of the business is what I think has enabled this. So we did have lower Forestry volumes out of New Zealand. We did have impact at Sydney and WA. It could have been much stronger revenue, but for some of the labor shortages. So there are always going to be swings and roundabouts, and that's the benefit of having a highly diversified business. So we'll have grown a straight line, who knows, but there's certainly nothing here that we think means this is a peak that we can't grow earnings and revenue from this level. So there were no abnormals and certainly no thing, if anything, COVID dampened revenue in the automotive sector and some other areas that I touched on rather than gave us any tailwinds.

And I think you just alluded to my next question, just on WA labor shortages, but I guess I was going to ask more of a general question on your margins. And I think you've sort of highlighted that the business mix was the primary driver, but I'm probably more interested in what sort of cost inflation that you're seeing at the moment? And I guess, how you're planning to offset that moving forward?

Yes, I can -- obviously, we're seeing some cost inflation and probably some additional cost to combat some of the aspects of COVID impacts. Again, I think as I mentioned on the call, we've got contractual protections in our contracts. But because of what we've built over the last 16 years in this business, this diversification across the supply chain, we get economies of scale. We get efficiencies as we grow volume. But also just working proactively with our customers, we can help mitigate those costs by improving their supply chain. So it is a combination of that. I mean, obviously, we're seeing some small wage pressure. We're obviously fuel and those things are recovered through fuel levies. We've got cost escalations in our contracts. But before we do that, we want to sit down with the customer and work with the customer. And given the ability that we've built over the period of time, we can deliver a product or a service for a customer. We can give them a suite of services across the supply chain. We can give them a just-in-time model, or we can give them a just-in-case model. And we're seeing a lot of shifts that COVID's probably shown to a lot of customers that having a fragmented just-in-time supply chain, probably it comes with a bit of risk. So we're seeing more customers running a bit of a just-in-case type of supply chain and having more services with the likes of Qube so that we can streamline these difficult periods. So -- and that also helps to offset some of our costs because we've got the infrastructure. We can store more product. We've got buffer area. So we end up using where we -- where the cost might be impacted and we might be able to -- we might be able to be achieving more revenues through the dynamics of what's happening through COVID. So we're in a really good position to get the benefits of that. So if that answers the question, Matt.

Yes, that's helpful.

Next question is from Jake Cakarnis from Jarden Australia.

Just to start on the Capital Management. You've noted in the release up to $400 million. Can you just give us a sense of what's predicating that range up to $400 million and some of the considerations that would mean it's either up $400 million or less than that quantum, please?

Look, we can't be too specific. I think it's fair to say that the expectations will be there or thereabouts. But until the Board come to a definitive landing on exactly what it is, we just need to give a range. But I think you should read that as a clear message that it's going to be meaningful and it's not a range where you're going to get 10% of that or anything like that. That's the intention. It will be in that order. But it will depend on the precise form that's adopted and all relevant considerations. And as I said, we'll be providing more information in the near term.

And then just carrying on the cost inflation for the Operating Division, clearly, it looks as though the COVID levies were implemented from 1 January. Can you just talk to how that potentially influences the cost and margin outlook into the second half, specifically for the Operating Division or Qube Logistics?

Yes. Jakob, I mean, obviously, we had the Omicron wave hit us around that period of time, and there was additional costs, obviously, to stretch -- stretch labor, everyone probably have to work a bit longer over time, getting contractors in to do the work. So we kept the customer satisfied, get product moving. So there was an additional cost with that, sort of an abnormal cost. And obviously, we're still in this COVID environment at the moment. So it's probably more -- it's more cost recovery or it is cost recovery. So we'll be assessing that as COVID moves in its own space and the impacts around, I guess, us as a community and us as a workplace opening up more because obviously, there's going to be more impacts around people being sick from COVID and not attending work. So we've got this normality at the moment. And so at this stage, the COVID levy is required to recover some of that cost.

Just a follow-up to that, Paul. With WA potentially opening up, obviously, there's going to be some potential disruption there. Is that market also eligible for the same sort of cost pass-through that I imagine that you're doing on the East Coast?

I will assess it when it happens. So I mean we're also seeing probably some upside about getting some more labor in there as well. So how that balances that to us, how we work with our customers? How we will be -- obviously, we're always fair and reasonable, and we want to work with our customer first. So we much need to get more workers into WA. It's been 2 years, been a bit of a struggle for the businesses, and it has impacted margins. And in some areas, we seek to have discussions with the customers, but it's a bit of a balancing act at WA at the moment, but hopefully, we see upside.

Next question is from Andre Fromyhr from UBS.

The first one relates to, I guess, capital and how much capacity you might have to either look at other acquisitions or sort of major growth projects. Am I right in understanding based on your current gearing versus even just the low end of your target range, that there's probably about 750-odd headroom? And then if I think about the other moves being the deferred consideration, you're going to get a net capital management, is it something in the order of 600 to 700 of capacity you've still got to deploy versus your target gearing?

Yes. Look, we don't look like that because ultimately it's going to be a function of what are we buying and what are the earnings and those metrics. And as we've always said, the 30% to 40% is a long-term range. It's not a sort of hard and fast rule or a covenant or anything of that nature. So without being specific, we have plenty of capacity to make acquisitions. We're generating very strong cash flow in the businesses. We're getting high cash flow from Patrick. So I'd put it differently, we don't view capital as a constraint. It was a really, really large acquisition. Then we look at other funding sources, be it equity or hybrid or whatever. So for us, it's more about finding opportunities that fit the strategy to generate the appropriate returns with right risk and then will fund either through existing capacity or sourcing new ones.[indiscernible]. We will remain conservative. So wherever we are in that range, we'll look to make sure we've got headroom to covenants and refinancing risk and all the other things you'd expect us to take into account.

Okay. And just moving to Moorebank IMEX. How has it sort of utilization improved over the period? And to what extent are we going to see some leverage as cost might drop out from the startup or even just the fixed cost leverage you get in that business?

Yes. Look, there's been some improvement. So you'd see when you get to the details of the review of operations that the volume in January was more -- it was about just over 10,000 TEU, which was more than for the full 6 months to December. And we think that run rate should be there or thereabouts. So it's definitely improved, but it's still not at scale. As we said previously, it needs to get to about 300,000 to 400,000 TEU to sort of wash this space, and thereafter, it starts get incrementally profitable. And to get to those levels, it will be dependent partly on the LOGOS warehousing build-out and partly on what happens with road pricing versus rail, et cetera. So while we're happy with how it's going, it's still very early days and the progress on those dynamics. And we said it's probably 3 to 4 years before we get to those levels. So on track, but still a way to go to get to breakeven and then profitability.

Great. And just one more, if that's okay. The Patrick market share you flagged, the share drops a little bit during the period. How much of that would you put down to industrial disruption? And therefore, would you expect some of that to stabilize or come back as we look out the rest of the year?

Yes, Andrew (sic) [ Andre ] , I mean, yes partly impacted by industrial relations and then partly impacted by scheduling. At times, we've been 10 days, 14 days, I think, delayed. So we'll try and catch that up now with productivity, 10 days, [ 60 ] [indiscernible] that you'll never catch up again. So -- and you can mark that down to the industrial relations, so you can mark that down to blue water shipping delays as well. So yes, we have to catch up a little bit because, obviously, we're at the endpoint of the industrial relations. And us having to deal with the MUA, we've now management and the employees can reconnect and do what they do best and unload ships.

Next question is from Anthony Moulder from Jefferies.

If I can start with the proceeds from Moorebank, $1.36 billion, excluding the deferred $400 million is going into capital management. When will we hear is the use of the rest of those proceeds, please?

Look, as we've said, initially, it's gone to reduce debt. So you'll see in the balance sheet, we've paid down a lot of debt, still setting some cash because we can't repay all our facilities. And then we'll continue to assess the optimal use. I mean there are -- what we've guided the CapEx in the second half, it will still be significant. We're continuing to look at opportunities. So there's no hard and fast decision. We'll assess whether any additional capital management initiatives make sense in the future, whether it goes to growth CapEx based on opportunities and outlook. As we've said in the past, we're not going to rush to do anything, but nor are we going to have a lazy balance sheet forever more.

Sure. What was the tax paid on for sale then, please?

We haven't paid it yet. The tax payable will be in the order of $200 million. I think it's due December next year.

Okay. That wasn't expected.

Yes.

The Patrick, we've seen shipping lines report very strong profitability. How are you thinking about pricing in recontracting to the shipping lines through Patrick, please?

Anthony, it's Paul. I mean, obviously, that is probably a better environment than it was a couple of years ago in regards to having those discussions with customers. So it has normalized a bit. And so we'll be working through -- and capacity is growing as well. So there is the ability to have a look at increasing tariffs in time, but it's always a commercial situation and discussions. So yes, that's moving in the right direction.

But not a focus of the services that have recently been recontracted?

On commercial terms?

Yes. As far as pricing, I guess, we haven't seen pricing increases through the [indiscernible] for [indiscernible] I guess, just interested as to when that starts to reverse.

We're starting to reverse marginally at the moment.

The next question is from Anthony Longo from JPMorgan.

Just a quick question on guidance, just more clarity around that. So in the context of what we've done for the first half, I mean, how should we be thinking about full year guidance? And anything that we may have to take into account for the second half?

No. Look, as you know, we don't give quantitative guidance because we want to run the business in the long term, but you should just read the commentary as we're very, very positive about the outlook. So I think strong is the most positive adjective we've used. January has been really good. Absent anything unexpected due to whether it's another COVID outbreak or geopolitics, which we're not expecting, we expect to be a really, really good full year result.

Great. Second one for me, just on the acquisition opportunities. I mean it's something that you have done over the years. Just in the context of where you think there might be additional growth areas for you or particular focus areas, can you perhaps give more color as to what sort of sort of opportunities are you looking at?

We're looking at opportunities across the board. We've always done that. So across the 10 or so dozen different markets, so the team, the different teams and the different divisions are putting up a target list or the ones in discussion. So the pipeline is usually pretty healthy across the board. So we never really completely target any areas. There might be some areas where we might be coming a bit overweight, and we might slow that area down a bit because we like to balance it, and we like this diversification hedge in our business. So -- and things are going to be -- the opportunities are going to be there at the right time, too. So to answer your question, there's no real area of business that we're going to -- that's going to take us all the way in the next period in regards to growth. It will be a combination of different aspects between Ports & Bulk and Logistics and Infrastructure. That's what we're looking at, at the moment. So again, a mixture of all.

No worries at all. And look, so I mean you did mention you run the business on the longer-term view, which is fine. But just looking through the numbers. And I guess, just trying to understand what -- with the Moorebank Monetisation now largely done, I mean what -- what do you envisage is a good sort of return on capital or EPS growth rate? I mean over the next little while, the number of acquisitions and the amount of investment that's gone in, I mean perhaps those returns probably haven't grown to the extent that you probably would have liked. So I just want to get the sense as to what you think the long-term growth rates might look like?

Sure. Look, I'm happy to touch on that. In the Operating Division, as we've said, we think double-digit ROCE is a minimum target. Every incremental acquisition, generally speaking, would target at least that. Depending on the risk, it might be a bit lower, but generally speaking, overall, there may be a lag. So the BlueScope contract is a great one where we're procuring the equipment for 18 months, and it was well over $100 million of CapEx. So there might be timing lags between getting that. If you have a draught, it will obviously impact ROCE because you have a high fixed cost asset. But in general, that's what we're targeting for the Operating Division. Patrick is a little bit more challenging. And as I touched on, Patrick now represents a big chunk of Qube's value, ex-Moorebank. If you look at the headline ROCE, Patrick is generating 6%, which doesn't look very exciting. But obviously, we've got much more insight in terms of the value of Patrick, both around future earnings, around valuation for assets like that. So we think the actual return to Qube is far in excess of that and well above our cost of capital. But we recognize that from a visibility perspective, all you can see is EBITA and our capital employed, which is 6%. We do think that will track towards 10%, but that will take time because there's a lot less levers to pull with Patrick. It's more around volumes, but it should get there. So ultimately, as a group, we're targeting at least 10% on all new investment acquisitions, albeit if something is very, very strategic. And we think it will take -- it will get there, but it might be medium term. We're not afraid to do the right strategic decision and tax by short-term ROE. And obviously, -- and if we achieve that, it should flow through to a higher earnings per share growth.

Next question is from the line of Paul Butler from Credit Suisse.

I just wonder if I could ask a question back on cost inflation. Obviously, you've got lots of different customer contracts. But to what extent is your ability to pass on cost based on indexation, which is written into those contracts versus sort of being able to reopen them and have a discussion with your customers?

So Paul, a lot of our contracts are either 1 to 3 years or 1 to 5 years. So obviously, at the expiry of contracts, there's always a discussion to reset the cost base -- the index. So it's a combination of both, and there's also some drivers in there for abnormal circumstances that you can actually have a discussion around recutting the base or working through some continuous improvement opportunity that which we do proactively with our customers all the time to obviously save their money and make sure that we keep our margins intact.

Okay. So that means that it tends to be a bit of a delay in being able to pass on higher costs that you see in your business?

There can be a lag in some areas, yes, of 6 months in some circumstances. But overall, I think it's really reasonably balanced, and we're [indiscernible] engaged with the [indiscernible] there's some abnormal [indiscernible].

And just on the Capital Management, what are the level of franking credits available to potentially be used along with that?

Look, we're still working through that. We think the constraint is not going to be franking credits, but more around retained earnings because you got to meet both tests, if we use -- if we the capital management involves franking, which obviously is one of the considerations, but that will depend. So I can't -- I mean I think the franking, I don't have the number to hand, but it's significant franking balance, I think, in the order of close to $300 million in terms of franked dividends. It could be high, but let me come back to you on that. But as I said, ultimately, that is 1 consideration around capital management, but it's not necessarily going to be the definitive factor.

Okay. And just to clarify, you said that the tax related to Moorebank would be paid in December of next year. Could...

No. Sorry, this year. Sorry, I was seeing where we were. So December '22 is when it's payable.

Next question is from Owen Birrell from RBC.

Look, I just had a question around the Agricultural space where you've grown that contribution from about 15% to about 25% in that Logistics portfolio. I just wanted to get a sense of the growth profile from here. Firstly, just given the timing of the NAT acquisition, how much more of a step-up in earnings can we expect in the second half?

Well, from the net earnings, we had only 3 months in the first half of the year, so we get a full 6 months of the Newcastle Agri-Terminal earnings.

How do you quantify that?

There's some metrics in the accounts around the fiscal around if we had it from 1 July. So that will give you a guide. But ultimately, it's so dependent on volumes. And I mean, given the facilities and then on Rail. So the accounts will give you some guide. But ultimately, it's going to be a function of falling through the Rail, how efficient that is, the ships.

Sure. I guess at least my second question on that is, in terms of your current storage capacity across your Ag network, I'm just wondering how full are you at this point? And really, how much surplus capacity do you have in the system to absorb more organic growth through the course of this year?

It's probably not around storage. It's more around throughput. I mean at the end of the day, we can move it quicker or we can move it more efficiently through our grain terminals. There's uplift there. And so just having -- even buying some extra couple -- extra train sets is going to help that supply chain. Basically you know...

But you still have the capacity to grow from here, just organically, you don't have to go out and buy any more big facilities.

No, but it could be a consideration, too.

Okay. And just, I guess, finally on this, is there any particular commodities or geographies that you think you're underrepresented in and, therefore, provide some opportunity for further growth going forward?

Sorry, I just missed that. Sorry.

Sorry, just if there's any particular commodity markets or geographies within that Ag sector that you think you're underrepresented in?

We're obviously heavily weighted in New South Wales. So I mean, we could always look at other opportunities if they come about so in other parts of Australia.

Okay. And look, just one final question for me on the Capital Management. Just wondering if the timing of the Capital Management in terms of the full up to $400 million, is that reliant on the $300 million final receipt? Or do you think the balance sheet is comfortable enough to do it all kind of upfront ahead of that final receipt?

Yes. No, it's independent of the timing of the deferred consideration.

The next question is from Scott Ryall from Rimor Equity Research.

Paul Lewis, I don't know if this is your last result, but if it is, thank you very much for over the years.

Thank you.

I'm just looking at the operating division, first of all, the Logistics and Infrastructure area, you've got some decent operating leverage in the business. You pointed out that Agricultural and New South Wales container volumes are probably the key drivers of revenue growth. Could you just confirm? I think from Paul's comments earlier, it's probably not driven by container volumes going through Moorebank and, therefore, getting operating leverage. So I'm imagining that most of the operating leverage has come from the agricultural side. And I would take it that, that means it's gone through your own facilities in both Newcastle and Wollongong. Can you just confirm that, first of all? And then I guess, associated with that is just whether the agricultural volumes have been more bulk or container?

The split is there's container and Logistics volumes, there's been strong volumes across not just New South Wales across the country for us, which means also, I think I mentioned before that a lot of customers have gone from just-in-time to just-in-case, which means we do more from, we hold more stock, we've got more storage and also. So there has been growth in that container space, what we call container space, but it's when it comes out of the container as well. There's also been growth in our AAT terminals. We've seen a lot of general cargo and still go through our AAT facilities because of the cost of containerized sea freight and some of that cargo has been -- come back into [indiscernible] bulk. So we're seeing that. So it has been a combination of Agri, the container logistics and volumes that have gone through our AAT facilities in that Logistics and Infrastructure space. In regards to your question around the split between containers and bulk in the Agri space, it will be heavily weighted -- more heavily weighted now to the bulk side of things than it would be to the container side, but I couldn't give you -- I couldn't give you the percentage split off the top of my head right now.

That's fine. That gives me an indication. And then on the flip side, Ports & Bulk, you had really good revenue growth, but not so much earnings growth -- underlying earnings growth. So I mean you called out a few of the impacts on the margin in that business. But I find it really difficult to believe that's due to the business mix and not some of the one-off costs. So can you -- is there a way of walking us through maybe the -- what you see as the one-off impact there versus what is actually business mix related?

There has been significant costs and impacts in WA for us because some of the contracts in certain regions where we've had issues around labor and doing additional costs and additional training costs and recruitment costs and subcontractor costs in certain contracts. So we have seen some margin decline there, which we need to improve by getting more consistent labor in and also sitting down, discussing some items with our customer. The mix in New Zealand Forestry is one of probably the high fixed. So when we got a lot of volume going through there, it's good, healthy margins. And when there's a bit of a downturn, which we've seen for a couple of months now due to they had a lockdown in October and then the China demand dropped off and then the Chinese New Year plus the Winter Olympics. So I mean we're hoping to see that volume come back. Our sources say that volume is going to come back in March and April. So that does impact when Paul Lewis mentioned about the mix that impacts that mix in the top business in regards to margins. So it is a combination of both.

And the other thing to add, and it's in the presentation, I didn't specifically mention it. We did have JobKeeper last year, particularly in the Ports & Bulk sector, which didn't go through revenue or just reduced costs. So I didn't actually add to earnings because they basically offset lower revenue, higher costs. It did improve margins because, obviously, you're only moving cost on revenue. So we more than offset that in this period through a new business, but there was obviously a cost associated with generating those additional earnings. So the technical [indiscernible].

Yes, all right. All right. And then just following on your comments on WA, Paul, given that's your biggest market for Ports & Bulk. Is that something -- is it connected to the point you're making on border closures, meaning you haven't been able to have your workforce kind of cross border and therefore, you have seen higher inflation and higher costs associated with acquiring -- getting labor, I guess, to your operations? In remote areas has been far more complex, and therefore, it's higher cost. And hopefully, once the border's open then some of that will reverse. Is that a fair comment?

Yes. So there's been sort of short-term inflationary issues without putting extra costs to keep the business running and keep the customers' product moving as much as we can. Western Australia is highly reliant on East Coast employees to come across. We haven't really seen that for 2 years. So it's been a real challenge. It's not a challenge just for us. It's a challenge for any logistics company in this space or any miner in this space. So I think we all welcome the Board is being open and we get back to some normality. That might come with some absenteeism as well. So it might have -- it might take a while to settle itself. But once we get -- going to get back to normal, normal the better.

Yes, I'm into that. Then last question just on BlueScope, which you reminded us is starting or started already. Is that -- you made a comment on your top 10 customers representing x percent of each of the divisions. Is that still your single biggest customer in the Operating Division once it's in there for full year?

It will be yes, 1 or 2, yes. When it's fully -- on a full year basis once it kicks off. And no, that started very well during January. A real difficult time for us. Omicron hit so we had -- we were marching everyone around the place. It was a fantastic effort by our team. Went off smoothly. So it was -- that's good. And there's a lot of steel at the moment. So that's good.

The next question is from Cameron McDonald from E&P.

Just 1 sort of question for me. We're seeing reports all over the industry that -- and I think, Paul, you touched on this with the just-in-case sort of stock levels. But hearing of capability shortages across supply chains, whether it's in warehousing, trucking, pallets, stranded containers at the ports and the inability of goods to be actually moving, what is your current capability at the moment? And what are the discussions going on with customers around capability versus price? And how has that changed, say, over the last couple of years?

Yes, moving from just-in-time to just-in-case, a lot of cargo owners are realizing that's what they need to do. So you're correct that it has put a bit of a strain on some infrastructure in the port. We've got a lot of it. So we've been able to accommodate some of that buffer. Yes, most areas are full at the moment, so obviously, there's an opportunity to build out and build some more infrastructure as well and just balance that out with the customers in regards to -- is this normal? Or are you going to go back to a hybrid model? Is it just-in-time, just-in-case, somewhere between that. So I think that's what everyone is grappling with at the moment. Obviously, people don't want to be caught short. They don't want to be caught short with a fragmented supply chain, and they don't want to be caught short with a complete just-in-time. So my team and the expertise and our team are just working through that with each customer on different circumstances at the moment. So -- but we're in a really good space to do that.

So how much capability do you currently have if you don't invest in further infrastructure on facilities? If a customer came to you today and said we've got 100,000 boxes we need moved, could you -- how would you actually do that?

You have to ask the operational guys, but -- to be honest. Obviously, it's quite tight at the moment, but we find ways of doing things at the moment. So it is challenging because you've got the issue about absentees and you got some other pressing points. We're just working with the customer. We'll work out how we do it. So I mean it's probably not a bad position to be in at the moment with the demand and just working out. And it all takes time, I guess, something we built out over the next 3 to 6 months. And at the end of the day, we've been satisfying our customers. We've been doing the best we can. I think the [ log jam ] starts in the blue water and it hits our shores and everything gets dumped and we're going to move it, especially from an import point of view. We're going to move the best we can, as efficient as we can as Qube in a good space. So it's hard for me to answer that. I mean, in some areas, we'll have some flex left, in some areas, we might have built out most of the flex we had due to the shifting nature of the supply chain.

Next question is from Ian Munro from Ord Minnett.

Just to double check that I'm hearing it correctly. So what we're saying is subject to mix and mindful of cost overruns and levies within the business, we're expecting sort of margins sort of half-on-half to be relatively steady. Can I just confirm that, please?

No, what we're saying is we'd look for margin improvement like-for-like as we get benefits of scale, some of the headwinds and impacted margins dissipating, et cetera. It will be a function of -- subject to as caveats you mentioned, but I would expect improvement.

Okay. And then just with respect to the M&A opportunities that you spoke to, Paul. Can you maybe give us a sense of comparison between M&A opportunities and customer anchored projects and perhaps the return profile of each of those and how they look sort of side by side from here?

In regards to growth CapEx, I think the return profiles are usually roughly the same. We work the same IRR metrics and. So looking on that basis, as Paul mentioned before, if it's highly [indiscernible] term, we might look for lower IRR in those projects. And it's really a balance of what opportunities are out there and where it fits our business at the time, Ian.

And maybe just a final one. Just with respect to Moorebank IMEX, obviously, 10,000 containers gone through in January. Can you give us a sense of the customer experience, how many customer tenants on the site are utilizing that transport service and what it might look like in 12 months?

Yes. I mean we've got a bit of extra volume than we thought. I think as I mentioned earlier, I think I mentioned before that with the transaction with LOGOS and discontinuing of the Property Division, that the operations of the IMEX for this financial year completely moved into the Operating Division. They gave it a bit more value as well to get some small catchment areas as well. I don't know the split between tenant and catchment, but there's been more catchment than we thought in the period. So that's why we've had a bit more extra volume. But I think the overall run rate and the overall model that we look is we're on track with that. We're on the track of that model. We may be a little bit ahead of it already. But yes, it will be still a function or an aspect of how LOGOS build out the facility. And we're in discussions with LOGOS. They've got a pretty aggressive plan for warehousing builds.

The next question is from Nathan Lead from Morgans.

Just 2 or 3 for me, if I could. So first, I suppose it's a bit of a devil's advocate type of thing, but Patrick, 50% stake in that. Do you still consider it to be core? I mean, if I recall properly, it was partly bought to protect Moorebank. So does it sort of sit in your portfolio appropriately, does that have synergies with the rest of the business?

Look, I'd say this, we think it's a very, very high-quality business, very unique, very much within our strategy. So if the question -- if the question is, is it critical? Would the Operating Division be materially impacted if we didn't own Patrick? Probably not. There are some benefits. But now that Patrick has invested in Rail, which was a key objective of ours to make sure that Patrick supported Rail movement, so you say we're out of Moorebank. So I don't think it's critical to the Operating Division, but we think it's a really high-quality business that is very strategic. And therefore, we wouldn't be looking to sell it. Let's put it that way. I think when the other half comes up for sale, which is probably where you're going, as we've said before, we'll look at all options. We don't think that's happening soon. But whether we do nothing buy more or potentially sell, we'll wait up at the time. But I think it's unlikely best seller.

Okay. Second question is, you referenced before about your targets on ROCE. Slide 9, you're running at 9.8% at the moment. You've got an average capital employed number there, Paul. How do we triangulate in on that? Is that something that we can reference somewhere or saw somewhere in the accounts?

Not really because we measure it internally. Obviously, we look at each month when we take an average, so as we spend capital. So we'll provide it obviously with our periodic reporting to give a flavor, but it's quite a complex calculation.

Okay. And then finally for me, there's a statement about having reached agreement with MIC regarding Qube's option to acquire land at Beveridge. Is that an agreement for you guys to sell your option to MIC? Or is that looking to buy something off MIC?

We can't say too much about it at the moment, but it's an agreement to partner a Beveridge with MIC, but we're still working through the long-form agreement.

The next question is from Edmond Karu from a retail investor.

Could you please give us a bit more color than you did earlier on the BlueScope Steel contract with its rail haulage from Port Kembla to Brisbane, Melbourne and down to Long Island, near Hastings? And in particular, with BlueScope's optimism, is there a potential over the medium term to expand the tonnages that you handle annually?

The answer is yes. I mean, obviously, they want to move more tonne where they can at the moment. So we're working with BlueScope to see how we can bolster that up for them.

And look, my only other question, if I could, Paul, is in relation to Beveridge, which the previous call I just alluded to, a competitor made a comment after acquiring its parcel of land at Little River at Beveridge, the doubles or trucks or whatever would just keep driving presumably, it meant largely to Brisbane, but perhaps to Sydney as well. Do you have a response to that sort of comment from the media?

I mean everyone is entitled to their views. I think all potential terminals have got some benefit. I think we think that Beveridge is, obviously, from a double stacking point of view and being in that location is probably the preferred location. But it's always subject to other people's views and other people's agendas.

[Operator Instructions] There are no further questions at this time. I'll now hand over to Mr. Digney for closing remarks.

Yes. Thank you, everyone, for participating in the call and your questions. I should have said at the start, it will be Paul Lewis's last results call. Thank Paul for 16 years of Qube, 11 years of Qube as the Qube brand, but here from the start with myself. Fantastic work all the way. Heap of stuff for Qube and his life membership, he won't be missing at Qube. So other than that, thank you, thank you for your attendance today.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.

Thank you.

Thank you.