Qube Holdings Limited (QUB) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Qube Holdings Limited Half Year Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Paul Digney, Managing Director. Please go ahead.

Welcome, everyone, to the call, for our results call half year 2024. With me today with the presentation is Mark Wratten, our CFO, and Paul Lewis, our Group Investor Relations Manager. Okay, I'd like to start off on Slide 5, if I can, our first half highlights. Following on from a strong financial performance in full year '23, our diversified and resilient business strategy has delivered a sound financial performance once again in the first half of '24, delivering solid underlying growth for the period and dividend growth to our shareholders, as highlighted in the slide. Our first half performance was even more pleasing, considering that some areas of our business were below expectations. For example, low agri and New Zealand forestry volumes for the period than what we expected, and that our interest cost was significantly higher in the period compared to the same time last year, which mainly reflects an increasing interest rate environment throughout the period. Turning to the next slide, Slide 6. Qube's key markets. I'll spend a little bit of time on this slide. This slide provides an outline on -- over our key markets, markets that we've fared well in the period, markets where we saw some challenges, and we also provide a bit of an outlook for the rest of the year. I'll kick off with containers and the automated businesses within Qube. They both performed very much, much better than expected. Both Qube and Patrick had strong container volumes across all activities through the period, and that was despite an overall decline in container volumes across the industry in the period. It is expected that our container volumes may moderate a little in the second half. However, we expect they'll be very healthy within the group in the second half of the year. Automotive continued to have high volumes across all activities. And like containers, there may be some moderation in the first -- in the second half. However, we are still expecting some very healthy volumes of activities in the automotive space in the second half. Our energy business continues to grow, and we expect that growth to continue in the second half. It is going well, and we're well-positioned for growth in the energy space. Agri. Our agri volumes in particular, bulk rain volumes in New South Wales were lower than expected and materially lower than the same period last year. However, we're expecting good grain volume improvement in New South Wales in the second half. This is due to more favorable market conditions and also the commencement of acute training activities, which will drive revenue into our agri infrastructure in New South Wales. Moving to -- staying on the same slide, I'll go to New Zealand Forestry. The performance in the period improved somewhat to the period of last year -- the last 6 months of last year when volumes dived, although it wasn't to the expectation that we expected from the volumes that we thought we would get. Going forward, the New Zealand volumes may be a bit lumpy with exports into China, but we've delivered some cost initiatives in the first half that we expect will deliver improved earnings in the second half of this year. Australian forestry, although a smaller operation in New Zealand, that improved significantly in Australia with higher log exports than compared to last year. And this is expected to continue in the second half. Our resources sector saw steady volume growth across most commodities. However, the bulk business still had some ongoing impacts from skilled labor shortages, which impacted margins in some areas of the business. So we remain cautious about some volume impacts with some customers in the second half with a downward movement in commodity prices in some areas in resources. However, if there is any volume impacts, we expect that, that will have a minimal impact in the second half due to the diversification across the resources sectors that we have and our ability to reduce our relay costs within Qube. In the other area on this slide, which relates to a bit of a catch-all for the logistics market, i.e., noncontainerized logistics, other rail activities not covered in the above markets. Break bulk, general steering activities, project cargoes, heavy lift activities in other markets. Overall, all these areas of business remain in good shape, and we expected continued solid performance in the second half of the business. Moving to Slide 7, safety performance. Regrettably, during the half, we sadly had a fatality to a colleague in our South Australian operation, forestry operation. As well, there was a fatality of an employee of a third-party contractor at a rail crossing in Victoria. Investigations into both incidents are ongoing. And again, we send our sincere condolences to the family and friends of both men. During the period, our LTIFR and our CIFR performance reduced, while our TRIFR remained flat. During the period, the management team continued to focus on new safety initiatives relating to risk reduction programs. And we also continue to investigate and roll out new technologies and engineering solutions to strengthen our safety controls within the business. We made further investments and commitments into our safety leadership programs also during the period. If I can turn to the next slide, Slide 8. Qube's revenue diversity, I won't spend much time on this slide as this slide here highlights our revenue spread across the regions and the movement within the period. Moving to Slide 9. Our ongoing focus on return on capital employed. Our group return on average capital continues to trend towards our current target of 10% plus. It is currently sitting at 9.4%, with approximately $430 million of capital not generating any returns at present. When excluding the current IMEX in Interstate terminals, capital which is employed at Moorebank, which is generating losses at present, the group return on average capital employed will be approximately 10.1%. Moving to the next slide. Slide 10. Qube remains highly resilient. Again, in the period the business demonstrates ability to effectively manage any headwinds across challenges noted on this slide. Instead of going through each of these areas in detail right now, I'm more than happy to answer questions in regards to how we manage these challenges or any topics in general on any of these topics. Any questions in general during the Q&A time on the call. Now moving on to the divisional performance slides. I'd like to turn to Slide 12, operating division. The operating division achieved solid revenue and earnings growth for the first half. Ports & Bulk contributed to core growth in the period. While Logistics & Infrastructure coming off a very strong full year '23, delivered a solid result with modest growth. And now I'd like to move to the next slide. Slide 13, Logistics & Infrastructure business unit. Couple of callouts here. Logistics & Infrastructure had strong earnings from its core container logistics, as I mentioned previously as well as high utilization across its automotive terminals at AAT, which offset a decline in a weakness in our agri-related revenues during the period, in particular bulk grain exports in New South Wales. As mentioned earlier, our outlook on agri volumes for the second half is for good improvement. And our grain volumes will also be assisted by the commencement of an in-house grain trading capability, which is focused on delivering additional volumes through our agri network in New South Wales while maintaining a prudent trading risk framework. Another pleasing aspect of the first half in Logistics & Infrastructure was with the grain business only contributing a very small amount to earnings, the Logistics & Infrastructure margins still held up and it actually grew by 1%. Also to note in this business unit, 2 acquisitions of Stevenson in WA and the remaining 50% of Pinnacle in New Zealand, which was completed in November will also deliver earnings uplift in the second half. Moving to Slide 14 and staying within the Logistics & Infrastructure business unit, I'll give a Moorebank terminal's. IMEX update. With IMEX, we're now in a good position to ramp up volumes. With the IMEX automation nearing completion, which has now completed as of today and the Patrick's rail expansion, which was completed last year, the rail duplication to Port Botany completed this month and the introduction and the development of a Qube Moorebank empty container park which has commenced this month also. By the end of this financial year, we will have 5 rail port shuttles operating per day at Moorebank. We have 15 regional train services for Moorebank per week, which will then generate an annualized run rate of between 300,000 and 350,000 TEU throughput at Moorebank, leading to next financial year. So we're about to really kick off with IMEX. Interstate update. Construction of the Interstate terminal is now back on track with a successful test train occurring in late January, which is in picture on this slide. During the period, we terminated Martinus as our principal construction contractor. And we engaged John Holland to manage and construct the remainder of the project. John Holland has been a breath of fresh air with getting the project back on track, pardon the pun, back on track. Our total estimated cost remains in line with our previous estimates of $200 million. Based on a commercial and legal assessment, any post-termination dispute with Martinus will not materially impact Qube's financial position or underlying returns from the Interstate terminal. Interstate terminal continues to have significant interest from potential users and we'll be open for business in the last quarter of this financial year. Moving to Slide 15, Ports & Bulk business unit. Some callouts here. Ports & Bulk achieved strong growth in revenue and earnings during the period. The results benefited from strong revenue across most areas of the business and from a full period of contribution from the Kalari acquisition last year. Margins improved in most areas of Ports & Bulk. However, overall margin improvement was holded for 2 main reasons. One, our New Zealand forestry performance wasn't as good as we expected in the first half. And the second one was due to some areas within the bulk business, where margins still remain impacted by labor shortages and due to lumpy volumes with some key mining customers. Overall margins are expected to improve for the full year in Ports & Bulk from the positive impact from New Zealand restructure and from Ports & Bulk business improvement in general. Moving on to Slide 16 and Patrick. Patrick delivered a strong contribution in the period from high market share. Although overall, the container port trade data shows a 4% decline in the period Patrick was able to achieve high volume growth in the period due to gaining market share from 2 things, one, from the full benefit from winning additional services that was secured in the latter part of last financial year and from additional volumes serviced by Patrick through the industrial license impacts at DP World terminals. Patrick's market share for the period settled at 49% higher. It is expected that Patrick's market share will moderate a little in the second half of the year. And potentially, we will get back to within the 41% to 43% market share range by next financial year. Patrick's ability to efficiently handle this surge of volume during the period really stood out, demonstrating our prudent path to investment to build productivity and spare capacity at each of the terminals, including our land side investment. Moving to Slide 17. Qube's proportional underlying results. This slide reflects Cub's EBITDA and EBITA earnings when you overlay our Patrick's 50% shareholding interest. And sometimes this data is missed. I will now hand over to Mark Wratten to take you through some of the first half key financial information. Over to you, Mark.

Thank you, Paul, and welcome to everyone on today's call. As Paul has already taken you through another set of solid financial results for the Qube group for the first half, I'll take you through some financial slides and then I'll hand you back to Paul. Starting with Slide 19, our underlying results. Paul has already spoken to the business units and Patrick's results. Just at a high level, the Qube-owned business units in totality produced a very pleasing first half performance with EBITDA up 11% and EBIT up 8% on the prior period. Our growth in EBIT, however, was offset as expected by the higher underlying net finance expense, which is around $20 million higher than the same period last year, reflective of the combination of increased base rates, higher debt balances and lower interest income from our shareholder loans to Patrick. The share of profit from associates increased 54% on the prior period, driven by a material increase in Patrick, which Paul has spoken to, and also from a stronger result from our other associate investments, in particular Prixcar. The net result was an increase in underlying NPATA of 6.5% to $141.2 million and underlying EPSA of also $0.065 (sic) [ $0.067 ] to $0.08. On the back of this strong financial performance, the Qube Board declared a fully franked interim ordinary dividend of $0.04 per share, which represents a 50% payout ratio, which is consistent to the payout ratio that we applied to the H1 FY '23 interim dividend. Moving to Slide 20, capital expenditure. In the first half, Qube invested gross CapEx of some $357 million in these 4 buckets. $79 million was on growth CapEx. You will see on the slide, we've put in a little table, which sort of shows you where a lot of that growth CapEx was spent, but it was included strategic property, warehouses, storage sheds and some rail assets as well as other mobile transport equipment. We spent $104 million on maintenance or replacement plant and equipment. This represented around 100% of our first half underlying depreciation. The largest spend in this category, as you can see on the slide were mobile fleet assets and material handling equipment. We also incurred $74 million on the Interstate and IMEX terminal, including capitalized interest of $6 million for the period. And for both these terminals, the CapEx spend will wind down in the second half of '24. And future CapEx in '25 and beyond is expected to be minor. And the last category is the 3 acquisitions that Paul briefly spoke about. I'll cover that in another slide, albeit the Narrabri acquisition was predominantly an asset purchase. Moving on to Slide 21, the acquisitions in more detail. As I just mentioned, there was 3 with a combined cost of $99 million. In September 23, we acquired strategic rail terminal and grain storage and handling assets in Narrabri. These assets comprised of the land and warehouses and grain bunkers. This asset will significantly enhance the Qube agri rail business, although it is not expected to be contributing to earnings in any meaningful way in the short term, but it's a great addition to our portfolio. In November, Qube acquired the remaining 50% interest in Pinnacle, which is a New Zealand-based logistics services company, and that's been performing very well. We equity accounted that investment for the first 4 months of the year when we were still under 50% or at 50%. And then now that's been consolidated at 100% within the Logistics & Infrastructure business unit. The integration of Pinnacle is in progress and should be completed by June of this year. At the same time, same day, we announced the acquisition of 100% of Stevenson. Stevenson is a well-established container transport and logistics operator located in North Fremantle in Western Australia at the port precinct. This transaction expands our capabilities and exposure to the hay and agri export market in Western Australia and will complement our existing logistics operations in that state. The integration of that business is also in progress. Our acquisition pipeline does remain very healthy, although we're not currently expecting any further opportunities to be completed in the second half. Moving on to Slide 22, cash flow. Qube's net debt at December '23 was $1.249 billion, which is a material increase of circa $300 million from our June '23 position. The key outflow items include a negative working capital movement of circa $100 million, which resulted in lower operating cash flows and a cash conversion ratio of 60%. I'll park that item for a moment, and then I'll come back to it. As I covered in an earlier slide, we had a large CapEx spend in H1. Net CapEx, which is net of asset sale proceeds, was $343 million, and we do expect CapEx in the second half to be lower unless further M&A opportunities are completed. We had large tax prepayment late in the first half in advance of a lodgement of our -- and finalization of our '23 tax returns. We're actually on a tax refund position. So we should see cash outlays in the -- cash tax outlays in the second half be pretty much neutral. And then we obviously had the $79 million of the final distribution -- sorry, dividend from FY '23 and also cash interest costs. Key inflows. We received $21 million from associates. Most of that was from Patrick for dividend and interest payments. We do expect H2 distributions will be materially higher based on Patrick's strong financial performance in the first half and the outlook over the full year. In the first half, we received circa $39 million of deferred payments relating to the Moorebank terminals. In the second half, we should receive the final deferred proceeds from LOGOS of circa $13.5 million relating to the warehouse divestment as well as the initial payment for the deferred consideration on LOGOS' 25% stake in the Interstate joint venture. So taking you back to working capital. As I mentioned, our working capital was negative by around $100 million in H1, driven by a number of factors. I do expect that most of these will unwind or reverse in the second half and that our full year cash conversion ratio should be closer to 90% and hopefully a little higher. Some of that negative in the first half was driven by trade receivables and accrued revenue balances increasing period from the June year-end number from a combination of taking on board the initial working capital positions for Pinnacle and Stevenson as well as the timing of receipts from some of our major customers, most of which have now been recovered. Working capital swings on a month-to-month basis in the receivables category can be quite meaningful if our larger customers missed payment time frames at month end. Prepayments also built up over the period. This is pretty typical. That's driven by annual insurance premiums paid in the first half. These premiums unwind across the course of the second half. Same for STI bonuses, paid in October. So that unwinds in the second half. And finally, our inventory balances increased in the first half as we build up container stock for our container sales business and also commenced our new grain trading business that Paul alluded to earlier, which resulted in having grain inventory in our accounts for the first time. We do expect monthly volatility in grain inventory balances across the remainder of the financial year and year-end balances in that category are difficult to predict at this stage. As I said, overall, I do expect our cash conversion percentage to improve significantly over the remainder of this financial year and also expect that our net debt position should be lower than what it was at December. Lastly, on to Slide 23, balance sheet and funding. I'll just cover a few points here. We had a very active first half in this area and took a number of steps to further improve our balance sheet strength, including extending or putting in place new debt facilities totaling $740 million. The majority of these facilities had 5-year terms. We terminated $515 million of expiring facilities, which included $305 million of the ASX listed notes and maturing -- and $210 million of maturing revolver bank debt facilities. The listed notes were our most expensive debt tranche. Net-net, we increased our funding facilities by $225 million and increased the average tenure of our facilities to 3.3 years versus 2.5 years at June '23. Our gearing ratio is just under 29%. And on the back of this -- it did increase on the back of increased debt balances. However, it's still below our board lower policy range of 30% and certainly well within our covenant. As of December, we had $953 million of available liquidity, comprising undrawn debt facilities and cash. I'd now like to hand you back to Paul to finalize the presentation.

Thank you, Mark. I apologize for anyone that's on the webcast that the slides are in a bit of delay mode, so. I will move to Slide 25, H1 summary. The slide highlights some of our internal financial targets during the period. During the period, we achieved revenue growth at GDP+, EPSA growth and dividend growth for our shareholders. During the period, our margin growth stagnated. However, with our agri and our New Zealand forestry performance in the second half likely to improve, we are expecting that, that will be a green dot on our scorecard for margin growth at the full year. And our return on capital is now tracking ever so close, as I mentioned before, to our target, our current target of 10% plus. Scorecard is looking good. Last slide, Slide 26. Full year '24 outlook. Our current outlook for the full year '24. Operating division. No change to our previous guidance. We are forecasting solid underlying revenue and earnings growth. In regards to Patrick's, we're expecting a strong NPATA contribution for the full year on the back of high market share achieved in the first half and the second half volume outlook. Although that's not expected to be as good as the first half in volumes. In corporate, we expect our net interest cost to be around $35 million to $40 million higher than last year, which is a slight improved position from our previous guidance. CapEx, we estimate our full year CapEx to be in the $550 million to $600 million range, which doesn't include any additional acquisitions, as Mark just mentioned. However, it includes the ongoing Moorebank's CapEx, which will be finally finished for the full year. So outlook for the Qube group. Qube presently expects that full year '24 underlying NPATA and EPSA will be between 5% and 10% above last year's strong result. Before I finish, I'd like to just note for investors that we are looking to schedule an investor site to a day in Sydney and Port Kembla, showcasing an update on Moorebank, Patrick's Port Botany, Kembla ops, which include grain, AAT, general [indiscernible] and rail operations there. We're looking to schedule that in early May. So look out for that and we'll set some details in due course. I will now hand back to the moderator for questions. Thank you.

[Operator Instructions] And today's first question comes from Justin Barratt with CLSA.

Congrats on the result. Just really keen to understand, we've been hearing about the labor shortage issues in your bulk business now for a little while. So just want to understand what you continue to do there and how long you think these labor shortage issues could persist?

Yes, Justin, actually, over the course of the last 6 months, we've made some pretty good progress on recruitment drives, both domestically, but also from the foreign market. So we're able to get some outcomes in the transport sector in some regions of Western Australia where we've got what you call [ Dames ] approved. So we're in a good space to have, I guess, 2 pools of resources in regards to getting additional labor into those markets. So it is improving. I think it will improve over the course of the next 12 months with the efforts of our people and culture team and the Bulk team about that. And I mean, also probably a little downturn in the market will probably help. There's a silver lining, so a bit of a downturn in the resources market in regards to that labor market as well. So we definitely feel this will improve over the next 12 months for us.

Yes, I thought that might be the case, no worries. And then just noting that you've slightly increased your CapEx guidance for FY '24 compared to where you had it at the August result. I just want to understand the key drivers of that increased CapEx guidance. Is it just the M&A activity that you completed to this point in the year? Or is it something else to do with like the MLP or something like that as well?

No, you've got it right. It's the -- when we guided back in August, we exclude any M&A because it's so unknown. And we completed $99 million in the first half. So if you take that off the new guidance number, so we're back to -- in the range of where we guided to back in August.

And our next question comes from Jakob Cakarnis with Jarden Australia.

Just 2 for me, please, if I can go back to Slide 13. Just having a look at the performance of that logistics division, you had revenue down 3.5%, but EBITDA up. And then you saw the EBITA margin increase around 120 basis points. Can you just talk us through what's going on in the margin profile in that business, please, through the first half and what to expect in the second?

Yes. I mean, obviously, it was -- the first thing was impacted by the agri, agri volumes being down. So the uplift has been across the logistics core business, improved with revenue but also margin improvement. And the AAT facilities had good revenue, good ancillary revenue and some still overhang of some quarantine services, which is -- which we had high activity through that period. So -- and we also in the container space, we -- even our imports are down, a lot of our export customers were strong around meat exports and dairy and a few others. So we get the benefit of triangulation between imports and exports balance. Even though imports are down, our exports are up. So there is some margin benefit within the logistics sector when that occurs. So again, probably a diversity when things aren't going that well. Sometimes it comes back and we get a benefit out of it. So there's a combination of that, Jakob, that sort of helped margins.

That's really helpful. Just one for Mark, if I could, please. On Slide 23, just wanted to marry up the balance sheet position that you're talking to, looks as though you're trending ex leases below the low end of your target range, but the dividend payout looks to still be around that 53% mark. It sounds like you're going to get better Patrick's cash flows into the second half. How do we think about the balance sheet moving from here just acknowledging? I think the commentary so far has been maybe no planned M&A for the second half?

Yes. We don't -- that's correct. We haven't -- we don't expect anything will complete in the second half. But as I said, when I talk to, I guess, the cash flow slide, I do expect our net debt position to improve from where it is at December '23, and that's a combination of better inflows from Patrick, better improvement in working capital, as I spoke to. And some of those other items also working favorably, lower cash CapEx as well. So I do at this point -- and that's -- but that's excluding any acquisitions. If something comes forward, well, then yes, that will probably -- that will change our estimates in that space.

Just a follow-on on the working capital. I mean, how do we think about those receivables coming in over January and February? Are you prepared to give a quantum of what those look like versus the balance date?

No, no, not really. I mean, like -- I mean, we had some large customers that particularly -- Christmas is a pretty tough time too, because people go and leave. And so people who process payments aren't there, sometimes customers also drag things into the next month for reasons of their own. And then we get -- might get caught up very early in the following months, like early in January. So we're pretty much back on track. I mean it's one of those areas where we're constantly working at, but it's -- yes, some of our larger customers have longer payment terms. They also have complex processes that we've got to navigate around in terms of getting purchase order approvals and the like. So yes, it's an ongoing sort of matter that we deal with. But yes, we're not concerned overall with our receivable balance. We'd love to get them in earlier for sure.

And our next question comes from Anthony Moulder with Jefferies.

If I can start with Ports & Bulk, obviously we're expecting a bit more of an improvement in margins through Ports & Bulk relative to logistics. But you called out New Zealand Forestry as a key factor in that margin improvement not coming through. How big is New Zealand forestry and what do you need to see? Is it just volume that you need to see? Or is there a restructure that you can do for that to help the margins in the second half, please?

Yes, Anthony, we have done a significant restructure through the first half, which we'll get benefit from. So there will be benefit there. Visibility and line of sight around volumes is still a bit lumpy for us. We believe they're on the improved, but I don't know if we can get much confidence out of what's happening in China at the moment. So we get both of those. We'll get good improvement. We know we're going to get some improvement from the cost initiatives, which I mentioned before in the presentation. So both would be good. But I think we're going to get more around cost initiatives and some moderate improvement in volumes.

Yes. Okay. So that's more muted as far as that improvement through Ports & Bulk. Can I also ask about Patrick? You've called out a high market share, obviously, for this half, but I think things will trend back to 41% to 43%. What would stop you from achieving a high level of market share given the performance that you delivered through the first half?

We just feel that's probably where it's going to level out again. I mean we did a great job. We had that surge volume and we were able to deliver on it. It was obviously -- it's really hard to really quantify exactly how much volume we did get from shippers that may have used shipping lines that would have normally use DP World, but they choose shipping lines to call Patrick because of no disruption and better service. We think that DP World's industrial issues have gone, finished or near-finished. That will moderate a bit. And just where the customer profile looks like at the moment with the services or shipping lines, we think that we'll probably head back maybe by the time next year starts, we'll be sort of in that 41% to 43% range. That's just an estimate for us. We could be higher, we could be lower. I don't think we'll be lower. But that's where -- I mean we didn't really expect to be at 49%, but we continue to grow volumes. And the market was down. The trade was down by 4% over the 6-month period. So it's really a testament to -- when we talk about landside investment, I mean, if we didn't do that, I think it would have been a world of hurt, we wouldn't have been able to deliver for consumers and people, but we delivered with that like we're doing 40% of the market share was very well executed by operations, which shows the capacity that we've built into the terminals is, just can't take that surge. I hope that answered your question.

Yes. It helps. And the reason that it's a slower profile back because obviously DP World seems to have fixed their industrial issues, but it sounds like that volume is moving across shipping lines as opposed to you just [indiscernible] some of the ships that should have been calling across the DP World…

Yes, it was definitely more than that than us having subcontracted vessels because that volume wasn't huge.

And our next question comes from Anthony Longo with JPMorgan.

Just a quick one for me. With respect to price increases and tariff increases that you put through throughout the year, I mean you just called that out on a number of divisions. Are you able to give a sense as to what that ultimately looks like throughout the year?

Not in a percentage, I couldn't quantify in a percentage term. I mean, again, diversified business, some areas where we needed to execute price increases and justifying, and we did some areas where we didn't, we actually delivered an outcome for customers by cost reductions, that sort of stuff. I would not even be able to quantify a macro number. It would be too difficult for me to quantify. I don't think we've even done the exercise of what that would be.

I mean, this is Mark here, Anthony. At any point in time, our business unit directors and their teams are working with customers across all of our sites around opportunities to maybe to do more work, which might increase margins, which -- or change equipment out, which might improve margins as well as pricing opportunities, repricing. So it's happening, it's ongoing, and it's not like a set target that anyone has. It's where they can provide value and prove that up and get it through.

Yes. I appreciate that. Next one for me is just on the return on capital target. I mean I appreciate the commentary around grain and agri that you're sort of seeing, but how much of that has been a drag this year in terms of both the margin impact, but also the returns sort of targets getting towards that target range?

I mean in any given year, and I think it shows that market, the key market slide where we have green dots and red dots. I mean if we add all green dots, our return on capital will be above 10%. And we, probably we're pushing through now where we can probably have a red dot next year or the year after, and we'll get past that 10%. So if every market is in what we call a green dot position, we'll be in a good space, but there's always going to be something, agri was in that last year and at least this year. Containers in automotive are much stronger than we expected. So on [ RSM Boring ], but the diversification sort of just helps us moderate ourselves. One day we'll get…

Boring.

Sorry, Boring, sorry.

No, no, Boring is good sometimes.

I think one of the things -- sorry, Anthony, Mark, again, one of the things that we get asked a lot when we -- over the last -- or since I've been here is our agri business and what does it mean when there is lower grain volumes. And as we saw on Slide 13, our first half volumes were down 57% versus the first half last year, which was a very strong year. And yet the business has still been able to deliver these results. So it just talks again to what we talk about a lot around the balance of our portfolio. Some things are down and others bounce back and cover it off.

Yes. And sorry, last one for me. Just on -- earlier you made some comments about sort of investing in grain trading capability and the like. I mean what sort of levels of investment are you sort of thinking about [ playing ] into that? And how do you sort of think that might impact the overall volatility of that business line?

Yes. So we've developed a strategy there, which is really based on feeding our own infrastructure, not going outside those 4 walls with a prudent risk framework. We rolled that out a couple of months ago. It's been successful from a strategic point of view. But we'll be careful the way we grow that. The key focus is to support our infrastructure and get volumes through our infrastructure. So it's a strategy we've been contemplated for some time, and we decided to execute it.

So from an investment perspective, Anthony, it's actually quite small. There's a team of people that we've brought on board that are experienced grain traders. The biggest really investment is the working capital around grain inventory levels, which we have to hold at a point in time until the boats get loaded and we get our FOB or an LC payment. So it's really just that, it's actually quite minor.

And our next question comes from Andre Fromyhr with UBS.

Just going back to the Ports & Bulk margin. I understand you've called out sort of the headwinds of accessing regional labor and the impact of New Zealand forestry. But I was just wondering if you could help us understand -- have there been structural changes or mix of the business changes over the last couple of years that would mean that there is sort of a long-term difference in the margin versus what the Ports and Bulk division has delivered previously, pre-COVID.

I don't think structurally, I think we've just come out of COVID. We've had those issues with labor and regional labor, which is -- which impacts Ports & Bulk more than logistics infrastructure. I think that will improve, as I mentioned before. And we've just got to be mindful what's occurring probably right now with the resource sector that might be a bit lumpy with volume. So that will -- that may alter a bit. But overall, we think we'll get business improvement. There's some areas of the ports business that we think is going okay. And the New Zealand side of things, probably for the last 3 years has probably not delivered what it would have done 3 or 4 years ago, but we think that will get back to a position to and help. Those margins are reasonably poor at the moment. So it's just those elements for us. I don't think anything structural has changed. I think at the end of the day, we should be able to price contracts the same as we priced it 5 years ago going forward and get the right return on capital as well. So I think we're just in this phase of just repairing and building it back into a double-digit sort of EBIT number. And there's a pipeline, there's visibility to do that. We probably expect it to be a little bit better but at this point in time, but nothing has changed with our aspirations. I think we'll get there.

And then maybe just minor follow-up on the margin in the logistics side of the business. Obviously you've called out the volume impacts of agri. But can you talk a bit about the contracts that exist in the agri space? Like is there any kind of take-or-pay being activated in an environment where volumes are down by that much, that could actually be helping your margin in the short term?

Commercially, we have different arrangements with different customers. It was probably -- there is an element. I mean there's an element of volume risk. There's a fair bit of element of volume risk in the agri space. I'll probably leave it at that. There is some fixed components, but there there's an element of volume risk.

And our next question today comes from Samuel Seow with Citi.

Maybe just following on the agri forestry questions, if I ask in a different way. Just on the margin, can you give us the color on the relativity of those activities, I guess, compared to group? I mean, I guess we're always just trying to get a feel of the potential impact if those businesses come back.

The impact should be good. There's a reasonable amount of fixed cost associated with those 2 activities. I think we've mentioned that previously. So volume is a good driver in those businesses. Yes, there will be good improvement if we get good volumes from those 2 areas going forward.

Got it. Got it. And then maybe on the IMEX and Interstate, could you perhaps outline the drag on profits in the first half? And I guess, looking forward, the profile of earnings. And I guess, as you ramp that up, do you expect to lose more money first before breaking even? Or just any thoughts around the color and the profile of the earnings?

Yes, we have lost more money than previous years with the ramp up. But as I said in the presentation, we've now got -- we've got an ability to really ramp up. So that drag will sort of -- that curve will go the other way fairly quickly if we get to get to that 300 and 350 TEU rate. So we think that the impact of profits getting worse in the short term is kind of move quicker the other way in the near term. So yes, we're pretty reasonably confident of -- we've got a good pathway now. Finally, we got a good pathway on IMEX infrastructure, automation, rail duplication. Putting a container park out there is going to give us the ability to go and we've got things in the pipeline to move volume. And even move some volume that we've already got off-road back into rail, so. Yes.

And just, Sam, just on Interstate, that's really not a drag at the moment because it's under asset under construction. But as you know, we'll drop into a joint venture between ourselves, NIC and LOGOS. And so sort of going forward, we haven't -- we'll be able to update you in August in terms of how that will be accounted for, even though we've got a higher proportionate, it all gets down to management control, et cetera, in terms of whether we equity account it or consolidated. But yes, in this financial year, it's not really having a drag on our P&L. Finance costs. Funding it.

And our next question today comes from Owen Birrell with RBC.

A couple of questions from me. First one just around the grain trading opportunity. It's obviously very early days. I'm just wondering how that will be reflected in the P&L going forward. Are you effectively taking a cost for the grain that you are buying and then taking a revenue on the other side? Or is it just a trading margin that you're taking through the P&L? And then in terms of the magnitude of the working capital that you expect to, I guess, see the rise and fall in that cash position half-to-half, you can give us a sense of what that magnitude should be going forward.

Yes. So we should see the full -- in the P&L, we should see the full cost of grain as well as the revenue from the sale of the grain. As Paul said, the key reason for doing it is to also feed our infrastructure. So that's part of the rail agri business where they'll just typically treat -- they'll treat our grain trading business as a customer. So you'll see the whole lot in the P&L. And then in terms of working capital, like in the first half, the working capital position in terms of inventory was under $10 million at December. But the expectation is that, that could -- that may swing up to $30 million or $40 million at any point in time. So it's -- we're sort of -- we're sort of learning as we go to a certain extent. But just that really depends on as you build up your grain and you've got customers on the other end and when that will get delivered. So you might have a contract to sell the grain or locked up, but it's not going to be delivered until late March, for example. And in the meantime, we're building up our grain inventory. So it will ebb and flow a fair bit. It's likely to be quite lumpy for a period of time.

And can I just ask, with the I guess the pricing structure there. Are you taking any price risk for the time you're holding it? Or are you sort of buying and selling at the same time on a forward-delivery terms?

Yes, that's right. We are putting in swaps to protect any open positions. So yes, so we don't -- we really have no risk in terms of that. Well, very little. I mean, there's always -- they're never perfect these positions, but we certainly have that covered.

And obviously, it's going to have some influence if you take in the revenue and the cost on your margins in logistics, albeit small. Just wondering, can we assume that your trading margin is going to be similar to the EBITDA margin that you currently make in that business? In other words…

Yes, it's a bit early for me to sort of comment on that, but you're absolutely right. It's something that we started to talk about in terms of it because we don't expect to make much margin on the actual trading of the grain. It's really just making sure that we're feeding our infrastructure, which will have the strong margins and even improved margins, as Paul said, as we leverage the utilization of that. So we'll have to -- we haven't come to a landing yet on how we'll disclose it. But it's likely -- it could potentially dampen logistics' overall margins. And so we need to really want to call that out for you all to understand that.

Okay. And just a second question for me on Patrick. We've heard a lot about DP World's EBAs that have just come due. I'm just wondering when the next Patrick's EBAs are due. And can you give us an update on the potential for the sale process there?

Yes. Our Patrick's EBAs not up till Christmas next year. So what are we, 18 months away from that position. No real update on the sale from 6 months ago. There's no update from Brookfield. And we've got rights and we'll assess it when they have a conversation and come to market. Again, we love the asset. It's a very strong asset of [indiscernible] network in Australia. Australia being an island. We made good investment in it for the long term. So -- but we'll assess everything when it comes to market.

Can I just ask on Patrick just finally. Infrastructure charge increases of, call it, 15%, I think, was the average coming through. Can you give us a sense of what the operating cost inflation that you're seeing at Patrick's at the moment as well?

Not off the top of my head, I can't. Sorry.

I mean their EA was linked to inflation. So there's that element.

Plus CapEx investment that we've made, so that kind of -- we couldn't give you a percentage [indiscernible].

And our next question comes from Cameron McDonald with E&P.

Couple of questions from me. Just looking at -- I think you mentioned in the presentation all around some of the headwinds in some of the commodity exposures you've got. Can I get a specific comment around nickel and lithium, in particular looking at -- you've got a contract with Liontown, which you announced last year for 10 years, and you've also got a contract with BHP Nickel West where you had to build a haul road with -- and that's in a relationship with Watco?

Yes. Yes. I'll start with nickel. Nickel is about 2% of our revenue as Qube's, so been very diverse. It's only 2%. Obviously there's a fair bit to play out with nickel at the moment being now a critical mineral, so there's a bit to play out there. The haul road actually we've built it and BHP Nickel West bought it back. So we don't actually own that haul road anymore. So probably potentially a good thing. And I think with those businesses, we will continue to work with customers and for the future of nickel and outsource stuff. Most of our assets are mobile assets. And if anything was to go to turn the other way, then we've got the ability to relocate and move those to other areas of business and just not spend any maintaining CapEx we need to spend on equipment such as that because it's movable and it can be used somewhere else. In regards to lithium and Liontown yes, that's on a bit of a delay at the moment. So we'll -- again, our commitment there is a lot of mobile assets. So we'll work with Liontown in regards to the lithium space. Lithium again is probably at a high 3% of our revenue. It's probably 2% at the moment with a bit of volume decrease with some of our customers. We're working through that yes. So again, we're diversified across the resources sector. A lot of the equipment we've got is common. We can move things around or we don't have to spend money on maintenance CapEx if it is a little bit of a downturn and labor is in the shortage, so we can fly and fly works we can put them to other jobs. So we're in not a bad space. Obviously, it's not ideal when there's a little bit of a downturn in certain customers, but we'll work with those customers. Some of those -- a lot of those lithium customers will continue to operate and may operate at lower volumes for a short period of time. Yes. So we're just -- we -- I mean, it's not a big impact to us. It's something that we'll need to manage.

Yes. Okay. I mean the mobile assets was a question I was going to come back to. So that's good that you've highlighted that. Now just an extension to that resources space. When is it appropriate for you to start engaging with something like RIO and right prospecting around [ Roads Ridge ] as a potential project?

I don't know. It'd be up to our business development people to do that and bring it to me. I can't really answer that. I mean -- yes.

It's just that it's a massive project, is the reason I'm asking.

Yes, yes, yes. There is massive projects in all different sectors at the moment. So our teams are out there and we've got an investment case that we bring to the table and start putting resources to it and see if we can win that opportunity or be a part of that opportunity, so.

Yes. Okay. And then just in terms of the East Coast or more East Coast focused, particularly around logistics and the Patrick's businesses. What's the current sort of warehouse utilization running at, at the moment?

I don't think we're completely full at the moment. I think there's been a bit of destocking. So we're not at the ultimate level that we'd like to be, and we just -- we'll work through that managing it. So to probably answer your question is warehouse inventories have come off over the last 6 months.

Okay. And then the other thing I'm sort of hearing is that -- and particularly with the issues around Patrick -- sorry, DP World, empty storage parks seem to be overflowing. Is that consistent with your view? And is that causing new problems?

They've been more full than they haven't been over the course, over the period, not really. I mean we have swings around about. We operate container parks, operate a lot of container parks. So if they're full and got a full bit of activity, that's great. If the turn times aren't great in container parks, it might impact our transport operations, so there's a bit of swings around about the diversification. So all manageable for us.

Just opened a new one at Moorebank too. More capacity for us.

Okay. Sorry. And just a last one, which just sort of sprung to mind. With the problems that DP World faced, obviously you service from a land side logistics perspective, picking up containers at DP World. What sort of headwind was that creating for you in the logistics space…

Yes, yes, we had -- it impacted us. It impacted most freight operators over the time. I can't put a dollar figure to it, but it was time-consuming for management. It was impacting trying to reorganize yourself when there's ongoing protected action stoppages. So it was very -- I mean for the haul road transport sector is a difficult situation when something goes that long. Impacts customers, impacts consumers, impacts a lot of people's livelihood, it is disruptive, right? So the team managed it fairly well. There would have been a cost of all that. But nothing of material, no. But I guess the guys running that P&Ls inside all our different P&Ls would have thought, yes, it was -- it did impact them.

And our next question comes from Scott Ryall with Rimor Equity Research.

These are just follow-ups to some of the previous questions, but I was just wondering on Patrick, Paul, when you talk about the market share going back from where it is currently to more like a normalized 41% to 43%. Does that imply that the services that you talked about last year and have led to some of the market share increase that they were effectively one-off in nature or so this year only?

Scott, it's just our assumption at the moment. I mean it's really hard to put a number to it. I mean that moved from 41% -- or 41% or 43% to 49%. We know a reasonable chunk of that would have been from the DP World. And then there's another chunk from more business that we won. There's services moving around at the time the guys within Patrick, the commercial team that tries to analyze what I think has happened with the market and what volumes may come through our terminals through the customers we've got. That's just their best estimate at this point in time. So we didn't think we'd get to 49%, so they got that one wrong. Do we get as low as 41%, maybe not, I don't know. So it's just giving an idea that we will moderate, and it will be probably in that range over the course of this year, maybe that's where we end up. So we'll give a better update when we get through this year and the next 6 months. And yes, I think we'll be in a better position then. That will play over the next 6 months.

Sorry, Scott, it's Mark. We just also, in the review of operations, we point out that part of the guidance down to 41%, 43% was the loss of some volumes in Melbourne. So it's not -- there's a whole combination of things, as Paul said, DP World [indiscernible] winning contracts, losing and things moving around, so.

Yes. Yes. Okay. All right. That's fair enough. And then the other question I had was just on Slide 9, which you spend a couple on at the moment. It was really helpful to get the quantification of the capital not yet generating a return. A big chunk of that obviously relates to Moorebank-related investments. So in terms of -- you mentioned that the new contractor and you've got things back on track. And yes, it was a good joke -- the -- what I'm wondering is could you just give me an update on when the kind of building blocks to being able to fully utilize that will be in place. So I think you were due to have finished your port investments at Patrick. What's the latest that you've heard from [ ARTC ] in terms of the duplication works that are going on and when that will be fully operational, please?

Yes. So the duplications to Port Botany has been completed this month, just announced, so that's good. Patrick has finished their rail expansion last year. So that's good. And our IMEX terminal has gone into what we call full automation mode this week, which is good. And we've also introduced or built over the last 6 months, we've put in an empty container park which was up and operational this month as well. So it sounds like a lot of things happened this month, but I think it was all building towards our position. So we're in a really good position from IMEX's point of view, doesn't really now deliver volume through the IMEX. And Interstate, obviously we're back on track, and that's -- we're not far away from completing Stage 1A, which means it will be even open for business in quarter 4 for potential users to bring Interstate trains into Moorebank.

So when can we expect -- just based on the volumes at Moorebank at the moment, when -- you're obviously going to ramp up as all those pieces are now in place. So when do you think you -- how long does it take to ramp up your services?

As I mentioned on the call, we anticipate that we'll have 5 port shuttles per day running by the end of this financial year, so going into next year. And we're also putting some regional services through there, which will triangulate imports and exports and through the container park and there's about 15 services that will call Moorebank per week. And we get to that position, we will have a number of 300,000 to 350,000 TEUs. So we're getting close to a cash positive position at that point in time. So things are going to happen reasonably quick over the next 12 months for us. And because the infrastructure is there, and we're ready to go because there's no real construction impediments. Not just us but outside our 4 walls, so.

Okay, brilliant. Great color.

Sorry, Scott, just to add to that. And when we talk about sort of cash flow breakeven, that's really just the terminal itself. So there's all of these other ancillary services surrounding it around the empty container park and the handling of ins and outs that would be incremental to that.

And our next question comes from Adrian Atkins with Morningstar.

I'm just wondering what drove the increase in profits for the small associates? Is that just volumes and whether it's sustainable going forward?

Yes. All the associates, a little bit probably better than expected, but we knew they were on a -- going forward that are going to be beneficial for us. Prixcar on the back of automotive and getting market share was good. It's nice to see that that's moving to that space. We think that's sustainable and maybe more upside there. The other associates sort of incrementally were better through NSS. Pinnacle won't be an associate going forward because we bought 100% of it, so that will be consolidated into our business. And the IMG/Watco JV is traveling okay at the moment.

Okay. Just one other, if I can. Just I've noticed consumer confidence is -- looks like it's starting to improve now. Is it too early to see any improvement through your businesses?

It's [indiscernible] been diversified. I think the imports are still light from -- in that space. But as I said before, our export volumes are good with our export customers. The other parts of the business from a consumer point of view don't really come into effect. So there's only upside when that moves, when the imports move to some extent in regards to volumes. I don't see it in the next 6 months.

And our next question comes from Ian Munro with Ord Minnett.

Just following up on the Moorebank commentary, just looking at the fourth quarter run rate and suggesting that we're sort of tracking a little bit ahead of some of the targets, more medium-term targets that we've put on the IMEX terminal. Just interested in your comments around that, please.

In regards to your IMED?

Yes.

Yes. I just -- as I mentioned before, I mean, the worlds have aligned well just recently with those number of things that have happened. So it's going to give us some -- the ability to move quick now instead of being sort of stagnated. And so that -- I mean we're still going to get the volume through, but we think there's visibility in the pipeline through volumes that we control and other interest that volume will start to kick in. Triangulating regional trains through Moorebank will -- as well will help with those volumes as well. So we're in a good -- we're in a much better space than we have been [indiscernible] something that's wrong [indiscernible] it's really up for us now to push volume through.

And just -- so just in terms of that medium-term profitability, I think we've sort of targeted a $14 million EBITDA within sort of 5 years, 500,000 TEU. So just, I guess, trying to drilling on the expectation around that. Is that sort of now within sort of 3 years or something of that magnitude?

In 3 to 5 years. I mean let's get through the next 6 months, 12 months and see how that position works. We know we've got a bit of visibility now to get to that 500,000 TEU. So yes, let's -- I'd say you're right. Maybe it's not 5 years now, maybe it's closer to 3, but let's just see how it all plays out in the short term.

Right. And just one more, please, just following on from the questions around Logistics & Infrastructure. So if we exclude agri and exclude auto, can you comment perhaps on, I guess, the cadence of revenue over the half and how that's looking into the second half, just noting your comments around some spare warehouse capacity and I guess some softness in peers across the market.

I think the softness around the imports is probably going to be the same as what we incurred in the first. I don't think it's going to be improvement. I don't think from our perspective, talking to our people on the book that's going to be any different. And then the automotive business, as I said before, we've had good volumes, strong -- I mean, they'll still be very healthy. Will they be to the same level, we're not too sure. So we've just been a bit cautious there. And the agri is going to have some upside. So how big that upside is, we'll know probably when we get through this next quarter. But at the moment, it looks okay, so. Thanks, Ian. I think that's the last question. So thank you, everyone, for your time, and have a good day.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.