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Edited Transcript of QUB.AX earnings conference call or presentation 20-Feb-19 11:30pm GMT

Half Year 2019 Qube Holdings Ltd Earnings Call

Sydney NSW Jun 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Qube Holdings Ltd earnings conference call or presentation Wednesday, February 20, 2019 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Maurice A. James

Qube Holdings Limited - MD & Executive Director

* Paul Lewis

Qube Holdings Limited - CFO

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Conference Call Participants

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* Cameron McDonald

Evans & Partners Pty. Ltd., Research Division - Head of Research

* Ian Munro

CCZ Equities Pty Limited, Research Division - Senior Analyst

* Jakob Cakarnis

Citigroup Inc, Research Division - Associate

* Owen Birrell

Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst

* Paul Butler

Crédit Suisse AG, Research Division - Director

* Paul Mason

RBC Capital Markets, LLC, Research Division - Former Analyst

* Scott Ryall

Rimor Equity Research Pty Ltd - Principal

* Simon A. Mitchell

UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Qube Half Year Results Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, February 21, 2019. I'd now like to hand the conference over to your first speaker today, Mr. Maurice James, Managing Director. Thank you. Please go ahead.

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [2]

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Thanks very much, and good morning to everybody. Welcome to the call. With me today, I have Paul Lewis, our Chief Financial Officer. And what we propose to do is just quickly run through the Investor Presentation and then open it up for questions.

In summary, we are very pleased with the first half results continued -- Qube continues to grow its underlying revenue and earnings. We continue to invest in our underlying businesses, and the strength of the results really shows the diversification strategy that we embarked on some time ago where we believe we've now got Qube to scale where we have various commodities and locations around specifically Australia and New Zealand. That diversification, as we've talked about in the past, really is a strength of Qube in the context of parts of the markets or commodities suffering particular weaknesses as we've seen in the half just finished with both vehicle imports into the country and new car sales declining, and with the continuation of the drought in New South Wales affecting parts of our business. But we've been able to more than overcome that and increase our earnings and revenue or revenue and earnings on the back of some contributions, particularly from our bulk base and our Patrick investment.

I think I really would like to just start on Page 4, and that really is a key summary. I'll leave you all to look at the numbers, but very pleasing result with an 18% improvement on the prior year and underlying NPATA and an 18.4% increase in earnings per share. Our pre-amortization, that was consistent with our guidance that we've provided on our full year results.

The board decided to slightly increase our interim dividend to $0.028 and to introduce or apply an interim special dividend of a further $0.01 per share but originally will be fully franked.

I think the 6 months for us, as I touched on, has been continuing to grow our underlying business, continuing to see improvements in the Patrick business, and we're very, very happy with the management and the direction of Patrick and continue to execute implement on the Moorebank project. And really, there's no change to our previous guidance with the expectation that change will commence running into the third quarter of this calendar year. And there has been continued interest -- strong interest in leasing.

Paul and his team have done a really good job over the last 6 months and renegotiated our funding arrangements. At the 30th of June, we had cash and undrawn debt facilities in the order of $800 million -- at 31 December, sorry. Sorry, 31 December. Paul just picked me up. And as part of that base, we extended the average maturity of our debt facilities to 5.1 years. So we believe stronger -- Qube is in a very strong position to continue to grow.

I'll just quickly move through the pack and the waterfall bridge on Page 5. And it fixes really, the 2 slides that show the impact of very strong earnings in our bulk business, particularly on the back of some strong commodity volumes and also new bulk contracts that we have been implementing where we've been investing capital into plant and equipment to provide services for new contracts.

The results also includes the full year contribution from the MCS acquisition in the logistics business and from stronger revenue from particularly Minto and Moorebank compared to prior year. The results also reflect, as I said, the acquisitions of MCS, the Russell Industrial Park in Western Australia and 3 other small acquisitions in the Ports & Bulk parts of our business. And those were partially offset by previous period returns from Austrans which was sold and divested back to the original vendor. And the call out, which I mentioned before, where AAT seized operations in December '17 at Webb Dock in Melbourne.

So all in all, look, really, we think it's a strong result. And as I touched on earlier, that continued growth despite some challenging parts of the business around particularly, the drought and lower new car sales and motor vehicle imports. I should just call out that some of that decline as well in relation to new car vehicles has been impacted by -- the import of new vehicles has been impacted by what we call the stink bug problems and car vessels being turned around and not being allowed into Australia that have got particularly European motor vehicles. And there's been several vessels turned around to head back to Asia for fumigation before those vehicles. So there was an impact to our business in terms of imported motor vehicles that impacts both AAT and airports due to the running business.

Just moving on quickly to Slide 7 on safety. We are really down at small numbers in LTIs and in particular, lost time injury frequency rate. We have seen a slight increase in those KPIs. They do move around when you're down at low levels of [wanting] and lost time injury frequency rates, and there's been a slight increase there. Really, as we called out at the AGM, we did have a tragic fatality in Gisborne in New Zealand in our export logging business back in August last year. It's something that's really been difficult for the family, the company and we've been very closely working together. That really highlights our ongoing focus and commitment to this area to make sure our workplace is safe and employees go home every night. And we're continuing to invest significantly in this area, particularly in training, in equipment and systems and assessing the risks right across our workplace environment. And so we are continuing there, there's a lot of reviews going on in relation to the interface between mobile plant and equipment and our people and that people -- pedestrian accesses on sites where forks and the like are interfacing with employees on the ground.

And we're spending a lot of time in terms of ensuring that our employees are fit to work, well-being programs, fitness programs, all designed to assist the employees and make the environment in which we work safer. So we continue to focus very strongly on that.

Just moving on to Slide 8, really touch base the Operating Division, 5.6% up in revenue and 5.3% in underlying EBITA. We're continuing to invest, as I said earlier, in this business with $138 million of capital continuing to be invested into the business. You can see there, it's difficult now to produce the EBIT for each of the previous divisions because it's fully integrated and we have moved activities from one part of the business to the other, but we can still monitor revenues closely. And flat revenue in our logistics business but strong revenue in the Ports & Bulk side, as I previously mentioned around the returns particularly from bulk.

Each of these boxes really just summarizes the 3 activities. I've touched on logistics with the MCS acquisition that's more organic growth. We have completed a new warehouse, 30,000 square meter warehouse in Melbourne at Altona with our new client before the warehouse was completed. And as you'll see, we have committed on board approval to a 50,000 square meters of a warehouse at Moorebank the Logistics business will occupy and operate, and we're already talking positively with a number of potential customers for that.

Revenue and earnings in the Logistics really were up, especially the measured earnings given the integrated nature now, but New South Wales continues to be a challenge with the ongoing droughts and competition in the intermodal spaces in terms of merging.

The Ports business really had some mixed results across various commodities that's handled with strong volumes in the energy, forestry, fertilizer, and general cargo. Lots of windmill project cargoes that also benefit AAT. However, as we've called out, weakness in motor vehicle imports and steel and scrap steel-related activities across our ports.

The investment in the Bintan was completed in December. We're starting to see some earnings and revenue coming into that business but really, the major benefit will flow through, we expect, next financial year from that investment.

In the Bulk space, as I called out earlier, really got some strong volumes through existing contracts and existing customers. We've also had some benefits from new contracts, and I called out the lithium projects that we're involved in at the Pilbara and Esperance, for example. But also a new contract in Whyalla for the stevedoring operations in that area.

If I move quickly onto Slide 9, the Infrastructure and Property group increased earnings in this group, really reflects the full 6-month contribution at Minto from the investment and the capital that occurred down there. And we received income strength for the full 6 months where it wasn't there in prior year. We also had the benefit of some higher earnings and operating margins from the Moorebank project, which is rental fee incomes on the existing warehouses, the reservation fee. And that reservation fee with the proponent allowance that has reserved 150,000 square meters of land has been executed. The fees are now coming and we have started discussions regarding warehouse requirements for that tenant or potential tenant. We also picked up other management fees in relation and ancillary income in relation to the development that's benefited this division. The third area really is AAT. So AAT was lower revenue and earnings associated with the lower motor vehicle cargo imports. And as I mentioned earlier, not having the contributions from Webb Dock in Melbourne in that 6-month period. They partially offset the strong income and earnings from Minto and Moorebank.

We have just highlighted there that at the full year results, we did indicate that we are in a dispute with the Moorebank Intermodal Company over land preparation works that has been resolved in the period, and there's no material impact on the project or on these underlying results from that dispute we had.

Just quickly moving on to Slide 10 and just a bit more update around Moorebank. The planning processes are very complex. They have there where they're calling out that for a while, having to deal with 3 levels of government, but all of the requirements to build an industrial city in South West Sydney. We have tried to give a bit more flavor for those issues and they're all processes, in our view, in terms of how we get to commence operating the trains and running the IMEX terminal. And as I said earlier, still on our target, July to September time frame. But there's, like anything, if you have a development application approval for a residential development, you have set of conditions that come up with that planning approval that you have to work through. And we're working through those issues and they're well advanced. And things like site audits being completed for environmental purposes or plans around noise mitigation for rail operations, subdivision approvals from the government as part of the planning process. We're working through those. No reason to be alarmed or whatsoever. It's just keeping the market informed that these are the processes we need to follow to get to commencement of operations.

The construction updates on Slide 11. Rail track is being laid this week on the IMEX terminals, so we're very well advanced in construction of the IMEX terminal, there are a few photographs on Page 12. The top right-hand side shows the track being laid on the IMEX terminal. Half that terminal was up, the half-side that we'll be operating in manual operations as mentioned has been laid. We're very well advanced with the IMEX terminal, and the rail connection to the Southern Sydney Freight Line. That part of the work is being funded by MIC. The bridge over the Georges River is well advanced, or part of, most of the girders are in. There's a couple of shots there of the access point to the -- on Slide 12, to the Southern Sydney Freight Line, and you can see the earthworks across that easement and under the Moorebank Avenue, which had to be slightly realigned to go under. So really well advanced with that. And as I said earlier, all heading to commencement of operations in the third quarter of this calendar year.

In terms of leasing, we still continue to receive strong interest in prospective tenants. There's a slide on Slide 13, which is really there to give you a picture of where we're at and the status. That block on Slide 13 is really the eastern side of Moorebank Avenue, that's the 83 hectares that Qube owns. The project also has 160 hectares of land on the western side of Moorebank Avenue. The Target warehouse is well under construction, expected to be handed over and we see no reason -- we will hand over well in advance of the third quarter of this year. Target has a fit-out but the expectation is that will be operational in a similar time frame to the commencement of the trains. That Target warehouse is also a slide showing the full roof and the slats have been poured, et cetera, and that's back on Slide 12.

The Qube -- all approved construction of the Qube Logistics warehouse of 50,000 square meters is on that slide. And the 17,800 square meter warehouse to the rear, to the eastern side as we call it. An agreement for lease has been signed with a retail logistics supplier for 2/3 of that warehouse. We were receiving a lot of interest in part use of warehouses, and it's quite attractive to build it, in this case, an 18,000 square meter warehouse that's capable of being divided into 3, 3 lots of 16,000. The 3PL Logistics operator took 2. We're well advanced at 2 of those lots, taking 12,000 and well advanced with a third party for the completion of that.

For the third warehouse, the fourth warehouse is under negotiation at the moment and the fifth is in considerable interest and proposals for the proponents for that. So nothing alarming whatsoever for us in terms of interest or leasing in respect to Moorebank.

I'll just move quickly on to the Patrick on Slide 14. A 10% increase in underlying revenue, a 15% increase in Qube's share of underlying NPAT. As I said earlier, we're very comfortable with the management and they all did a good job on Patrick and where we are. A solid result for the quarter given the market. In terms of the 4 ports, market growth has been around 4.4% of TEU. Ports always (inaudible) TEUs, 3.3% in lifts, which really reflects the continued increase in 40-foot containers through our ports.

Importantly, Patrick actually increased its market share. We measured our rolling quarterly statistics. The rolling quarterly statistics to the 31st of December showed Patrick had a 45% market share that increased it from 43% in the prior year, corresponding period. And really, that's on the back of some growth in the market in prior year and these 6 months.

The issue around container growth is that in that 6-month period to the end of December, the market grew at about 6% in TEU terms in the first quarter and just short of 3% or 2.8% in the second quarter. So we did see some slowing towards the end of December. Too early to call yet. When I talked to some major importers, they were determined to bring the stocks in early and they had advanced orders and therefore, were in the third quarter. Not as much increased business, so we -- it was reflected through into our Logistics business, which during that peak December period into Christmas and after Christmas, which usually is hectic and frantic and we were able to meet all our customer demands during that period and it all worked very efficiently for us.

The solid financial performance from a customer volume growth during the period plus the introduction of infrastructure levy increases back in March '18, you will note that Patrick just recently announced another level of infrastructure levies to apply from the 4th of March. So a contribution from that will occur in the next 6-month period.

The distributions for Patrick was strong at $40 million for the year, broken up between our dividend return on capital and interest income, which I'll let Paul talk a little bit more about later.

So strategically or operationally in regard to Patrick, we have seen some continued gains in productivity and improvement in train rates and truck turnaround times. We are well advanced in progressing the negotiations and discussions with Melbourne over the lease extension at Swanson Dock and incorporation of the -- to grow the empty container park into the container terminal going forward, plus with the government WALE incentives that are available for ports that are railed in Melbourne. So there's a fair bit of work happening there to enable Patrick to continue to grow its business at Swanson Dock. You would have seen a recent announcement that we're now in exclusive negotiations with the Fremantle port in terms of our lease extension in Fremantle.

In terms of Patrick and its investment in Port Botany, there was a recent announcement too in regards to NSW ports, committing $120 million really in a joint arrangement with Patrick to invest into the rail infrastructure at Patrick's Port Botany. We have been talking about this for quite some time since we first acquired Patrick that we want to automate the rail interface NSW port which we're going to invest in all of the -- in rail and hard stand infrastructure, and Patrick will invest in all the operating equipment. So that's been agreed. We're now well advanced with planning. We expect them to be fully completed in 2023, with Phase 1 of that coming probably around 2020 where we've got a staged transition from manual operations to automation, and then in the second stage into full automation. The Patrick's basic commitment to that is in the order of $70 million. $40 million of that is through the 2023 on equipment. Equipment has been ordered so the balance of that will be future investment into equipment as demand and volumes increase through the terminal.

So on that note, a very quick overview and summary of our business, I'll hand over to Paul.

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Paul Lewis, Qube Holdings Limited - CFO [3]

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Great. Thanks, Maurice, and good morning, everyone. Turning to Slide 15, our statutory results. This period, the statutory results were very similar to the underlying results. There were 2 main differences. On the revenue front, the statutory results exclude the trading between Qube Port and AAT, which is about $22.5 million, given Ports is AAT's largest customer. The other difference is in finance costs. The statutory results include the mark-to-market loss in our interest rate hedges that we use as part of our interest rates risk management, and we exclude that in the underlying results as they really reflect our actual cash interest costs or our interest costs.

Other than that, they're very similar. They're fairly clean results and very solid overall results, as Maurice has touched on. The only other comment on Slide 15, as Maurice mentioned, we've increased the ordinary interim dividend by 3.7% to $0.028 and the special dividend of $0.01 per share, both fully franked. And that reflects the very positive results, high cash flow generation and positive outlook. Those who have followed us knows that the payout ratio is above our target stated dividend payout ratio of 50% to 60% of underlying earnings per share. And you'll note in the review of operations, the board is undertaking a review of the current dividend policy (inaudible) the current stated payout ratio to determine if it should be amended to provide more flexibility.

Turning to Slide 16, the underlying results. It was really pleasing that all divisions generated increased earnings in the period. I won't go into each of the divisions in detail because Maurice has already covered that, but I will talk very briefly about margins. You'll see from the underlying results, Qube's overall margin did improve in the period. As we've said before though, the ultimate margins are a function of business mix as different parts of the business inherently have different margins.

If you look at the Operating Division, overall, the margin is broadly flat. Qube Logistics was slightly negative ignoring overhead allocation. And that was really a positive being MCS starting to achieve the synergies which we expected an increased contribution, the Altona warehouse Maurice touched on, that warehouse generated high margin revenue. And that was really offset by the continued effect of the drought. And as I've said previously, the drought hits us in 3 ways, directly through the lower containerized grain, lower bulk grain and indirectly through inability to get the same level of operating efficiencies by balancing imports and exports. Also, there was still fairly significant competition. I don't think it's got -- well, it certainly has gotten worse and it has been but more fairly competitive markets in which we operate. And we're also impacted by the end of 2 contracts we had with Aurizon that related to the intermodal business. So the net effect of all of that was likely a slight decline in margin. Q4 for bulk was broadly flat overall. The healthy volumes, as Maurice talked about, assisted margins as well as the new contracts. But (inaudible) point volumes were down slightly. And as we've said, as an infrastructure type asset that has higher margin, so the lower revenue and lower earnings had a higher impact on margins. But overall, if we look at the margins in the Operating Division and both past that, in absolute terms, they're very, very healthy margins. And that reflects the significant investment we've undertaken over a number of years in establishing key sites, building scale, investing in technology and assets as well as delivering on that integrated logistics model we've talked about. So we will focus on continuing to improve our margins. We're very pleased with where the margins are, particularly given some of the headwinds that Maurice has talked about.

The biggest improvement in margin, as Maurice also touched on was infrastructure property, because those items he referred to being the increased strength of Minto, the higher management fees and the ancillary income. That revenue falls almost entirely to the bottom line. So overall, the business continues to be highly diversified, very strong market position. And that has assisted us in delivering very strong underlying revenue and earnings despite the challenges.

Turning to Slide 17. Maintaining a strong balance sheet and undertaking accretive growth CapEx has been a key driver to growth achieved over a number of years. So it was very pleasing that despite the considerable CapEx in the period of around $250 million, we finished the period with cash and available undrawn debt facilities of around $800 million. And our leverage ratio was 28.1%, which is below the bottom end of our target range of 30% to 40%. So although we have no intention of adopting an aggressive financial risk, we're maintaining a prudent approach to our balance sheet. We did finish the period with plenty of capacity from both a balance sheet perspective and available funding to continue to support accretive investments in growth opportunities. The majority of the CapEx in the period was growth oriented. The largest component being just over $100 million on the Moorebank development, $41.5 million on the Russell Park Industrial Estate that Maurice mentioned, which is the largest bulk storage facility in that area and very complementary to our bulk logistics activity. And we spent almost $85 million on land, equipment, warehousing and other similar assets to support new contracts and growth, including the BOMC development.

You'll notice on Slide 17, we have upgraded our full year CapEx guidance. So we now indicatively suggest that it will be $500 million to $600 million. As always, that could be higher or lower, depending on opportunities and timing. The largest component of the second half CapEx will continue to be Moorebank, and we'll continuing to fund the warehousing of recent infrastructure and the construction of the IMEX terminal, both the manual and starting to get ready for the automation. And we'll continue to spend on equipment for new contracts that were secured as well as warehousing on land that was purchased.

Turning to Slide 18, looking at our cash flow. It was another period of high cash flow generation of around $180 million, including the distributions from associates. The largest component of which being the $40 million we received from Patrick in the period, which was well above the corresponding earnings. And we do expect Patrick to continue to distribute cash to shareholders in excess of profits, not necessarily to the same extent but certainly higher than profit. And there are 2 main reasons for that, Patrick maintenance CapEx is expected to be around 50% to 60% of depreciation certainly for the medium term. The main reason being that a lot of the CapEx Patrick has undertaken is on pavement which is a long-life asset that doesn't require much actual cash maintenance CapEx. The other reason is as part of the acquisition accounting for Patrick, it has to report an amortization expense around $23 million per annum that's noncash. And therefore, Patrick is able to distribute that burden to the shareholders. So we'll all make sure we maintain adequate cash to fund growth CapEx such as the rail automation project. We expect healthy distributions from Patrick to continue going forward.

At the overall Qube level, the cash conversion was around 93%. But more pleasingly, from the operating position, the cash conversion was around 97%. So the businesses are generating very, very healthy cash flow which is being used to fund the growth CapEx and maintain a healthy dividend payment to shareholders.

Turning to Slide 19. We continue to proactively manage our debt position. During the period, we extended the majority -- the maturity of the majority of our bilateral debt facility. The majority of our debt as you'll see, now matures in FY '24, with very limited near-term maturities. We also established new 7-year bilateral debt facilities with very favorable pricing. The net effect of those initiatives was to increase our available funding, reduce the cost of that funding on a fully drawn basis and extend the maturity of that debt from 4.9 years at 30 June to 5.1 years to 31 December. So we're in a very strong position from a funding perspective to support our growth, and we'll work very hard to make sure that that remains the case. Also just note that we're working very closely with Patrick management and the Brookfield management team to refinance Patrick's acquisition debt. They've put in place $1 billion of debt back in August 2016 to part fund the (inaudible) acquisition. In that time, the risk of Patrick business has decreased materially in a number of respects, including the separation from Asciano is now complete. The management team which we knew at the time have established themselves as leading in the industry. The risk around the third entrant has been partly mitigated largely because of the very strong market growth since we bought Patrick. And the board acceptance of the infrastructure levy as a mechanism to recover significant cost increases such as rent has also recovered a significant investment in land, (inaudible), logistics infrastructure has also mitigated the risks of the business going forward. So we're well advanced in that process and we expect it will result in a significant improvement in pricing as well as much more flexible terms, reflecting the quality of the Patrick business and the cash flow that it generates.

With that, I'll hand over to Maurice, to talk to you about the outlook.

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [4]

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Thanks very much, Paul. Look, really in summary, we are very pleased with the first half revenue and earnings on prior -- the growth on prior year. We see that continuing into the second half. We are not seeing anything that really changes our outlook at all. We have called out, as we had in the past, that there's some seasonality in our second half results, and there's also the expected slowdown in container volumes built into that.

Overall, really in terms of guidance, we've moved to a modest increase in contribution from Moorebank and -- sorry, the Infrastructure & Property division, which includes Moorebank. Really, we've upgraded the guidance to reflect the strong first half results. We do expect the second half in that division to be lower than the first half. But essentially, move from an overall similar contribution to a modest increase.

So overall, as we said, we don't expect anywhere -- no change in our guidance really. We currently expect the second half NPATA to be well ahead of the prior year but lower than the first year, which reflects those factors -- lower than the first half, sorry, that reflects those factors I just spoke about.

So on that note, I'm more than happy to hand over for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question is from Simon Mitchell from UBS.

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Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand [2]

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Just a broad question to start with. Obviously, as a lot of your businesses are ultimately linked to domestic demand, so housing cycle and consumer demand, you've made some comment around slowing across the division. Perhaps, can you just wrap it up into a sort of summary as to what you're seeing across the whole business on that front, and how you kind of think about that heading into the second half of this year and ultimately into FY '20?

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Paul Lewis, Qube Holdings Limited - CFO [3]

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Yes. I think it's fair to say, Simon, we haven't really seen it in a significant way in our operating businesses. I think activity is still healthy. Competition is still there, but that's always been the case. I think it's really -- you'll recall when the container volume growth was well above long-term fees, one of hypothesis as to why that was the case was housing construction and consumer demand. So given it did slow in the second quarter of last calendar year, that's really just one view as to what caused it. So I wouldn't say we see it as a major risk at this stage, but it's really just calling out that that's potentially one factor that has caused that slowdown. And we don't see any reason in the macro changing and therefore, we see some risk to the growth rate of container volumes if that trend continues.

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Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand [4]

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Okay. And then on Patrick specifically, obviously, you gained share in the first half. Given the contract moves, mostly -- I guess, the contracts that you've won over the course of the last 12 months, how do you expect that market share dynamic to play out into the second half, still expect the gain?

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [5]

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Well, I think it's very difficult to call, Simon. I think what we have seen is a stabilization of the shipping industry in the context of mergers and acquisitions that were happening for the last couple of years. Going forward, what we are seeing is a little bit of changes in consortiums. So there is a few balls in the air at the moment around consortium changes or structures, using more consortium and a continuation of various consortiums. So there's a bit to play out there. All I'll say is if you go back when we acquired this business, we called out the fact that there had been significant investments into excess capacity into the [stable earning] market by the introduction of Hutchison and Vic Dock in Melbourne. Last year -- that's really a follow-on from your previous question that Paul answered, last year, we saw an unexpected growth of 8% to 9% in the container volumes through our ports. But what we've said was our view around the long-term run rate of 2% to 3%, but we see that's coming back closer to that range and it's where we are sitting at the moment.

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Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand [6]

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Okay. And just lastly on logistics. The MCS acquisition completed in December a year ago, that would have contributed or should have contributed out of what, something like $13 million of revenue to logistics, but logistics revenue is flat. Does that imply there has been a decline there on an underlying basis?

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Paul Lewis, Qube Holdings Limited - CFO [7]

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No. What you should assume is the Austrans revenue, although it was lower margins, had similar sort of revenue. So the net difference from the MCS acquisition and the Austrans disposal wasn't material from a revenue point of view.

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Operator [8]

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Your next question is from Owen Birrell from Goldman Sachs.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [9]

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Just wanted to -- so I guess, firstly, on Patrick's, just on the, I guess, the competitive environment there. It's good to see that NSW Ports is assisting the investment in the rail conversion. But I'm just wondering how you see that manifesting itself in your rivals, given that they're likely to get the same level of assistance?

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [10]

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Well, I think NSW Ports, if I go back one step, the arrangement that we entered into between Patrick and NSW Ports was really NSW Ports recognizing that as the landlord or the landowner on the long-term lease, writing really the claims to deliver on the government strategy around modal shift from road to rail, and it benefits not just Qube and Moorebank, but other intermodals in the Sydney network. And they had to say it, as you called out, that they are prepared to see the similar sorts of investments at DP World and at Hutch. Our view is that both of those terminals probably have a fair bit of work to do to go down that path. Hutchison, at the moment, you would be aware, is having industrial issues around renewal in their enterprise agreement and highly protected industrial action. That's why we reported that they are losing significant sums in their investment into Australia, so heading down further investments for them, I think, is some write-off. Similarly, DP World has sort of issues around its capacity constraints in Sydney and has a big decision to make in the context of it is the only nonautomated terminal -- container terminal in Sydney with the automation of Patrick and the automation -- part automation at Hutchison. So you're probably well aware of the changes in shareholding at DP World, the changes in management at DP World. They have another -- they have -- their enterprise agreement expires this month. So there's a number of challenges for them going forward and rail automation is only part of the decision over the overall automation and how they do it in their terminal. So I think our view is we have put in place these projects that we have been very keen on as part of our investment decision around Patrick's. And we're certainly, I think, got the jump for a quite a number of years on the competitors in the market there.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [11]

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That's great. Can I just ask also just on Patrick's? We've heard sort of considerable surcharges now being applied, both from the infra side but also shipping companies trying to direct container terminals back to the port, and those additional charges being passed onto the trucking company essentially. What impact do you think that has on, firstly, volumes, but also the mix in rail versus trucking?

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [12]

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I think in that latter part, I think it enhances the opportunity for rail to handle more empty container returns. The real issue here is that the shipping lines have focused on trying to reduce their cost by redirecting empty containers back directly into the container terminals, and that has put a cost on the transport industry that is being passed back to the importer or exporter who has the agreement with the shipping lines. So it's a complex commercial structure that needs to work through. And if you've read some of the commentary around infrastructure charges, the commercial structure substance shipping lines actually charge the importer or exporter as part of their tariff on line item for terminal handling charges. And there is a debate about where the structure -- where the charges to the importer or exporter end up through the infrastructure charges or through shipping line. So I think commercially, those things will work out over time, but I do -- because we do the trucking, support the view that with the additional cost being imposed on the trucking industry, they need to recover that -- those costs.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [13]

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Okay, understood. Look, just one final one from me on Moorebank. I just thought it's quite interesting that you've signed a 3PL into one of the warehouses. I think from our previous discussions, 3PLs were sort of down the list in terms of companies that you would like to be in Moorebank at the early stages. I'm just wondering what's the interest like from your core retailers and importers, I think, which were sort of more in preference. Is there a decent interest there, or is that starting to wind?

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [14]

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No, no, there's interest there. I think what we have called out on the 3PLs has been that we expected that they would increase their interest when it's closer to operating because they really are generally focused on offering a standard warehouse that you can -- you win a 3PL contract, you can have a warehouse up in 9 to 12 months and bang, you're operating. And so the interest in that sector of the market has become very strong because like I say, in reality, the train is going to be there, third quarter this year. So that's where we've got to and that was the early guidance around that sector. It hasn't stopped the interest, I'd say the retail market is still very interested and suppliers in the retail market are still very interested. I think some of those decisions as we've called out recently are much more complex now. There the players were really looking at the impact of automation in the warehousing. The warehousing decision is a much bigger capital decision. It's a 5-year project, not a 1-year project. It's analyzing their distribution networks and all of those things. So they are continuing. So I wouldn't read anything into it apart from that.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [15]

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Okay. And then just one more, if I could, on Moorebank. The train starts running in the third quarter of this calendar year. I know you said you had some additional volumes that you would bring through Moorebank out of SIMTA instead. Just wondering if you can give us a sense of what sort of volumes you'll expect to pass through the terminal in the first half of fiscal '20, if timing [all goes ahead]?

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [16]

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Look, we're not going to put a quantitative figure on that. Yes, we've always expected that there will be a ramp-up period in volumes. We could put a lot of volume in early days and have an impact on our existing intermodal business at Leonora and Minto. We don't want to do that, we want to manage it carefully and as a transition out, where our customer is more ideally located to go to Moorebank. We will transition rail with one of the existing, we'll transition them there, but we'll be focused on how we backfill that volume that will be moved from one intermodal to the other. It's -- we do see the opportunity, and we haven't strongly marketed this yet, but we do see the opportunity for players who are running trucks to all the way to Botany today to actually operate in and out of Moorebank. Quite different -- completely different to what we're doing in our Qube Logistics business and how we can move volume to Moorebank. But we believe we drive congestion, all the works that are happening on road, the increase in tolls, that we have an opportunity to run a shuttle to Moorebank, put it on to truck and move it around the M7 towards -- and taking them out at industrial precincts. But we haven't gone strong to start that marketing yet.

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Operator [17]

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The next question is from Jakob Cakarnis from Citi.

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Jakob Cakarnis, Citigroup Inc, Research Division - Associate [18]

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I was just wondering if you could give a shape of the additional CapEx that you're calling out for Moorebank that's going to occur now in the second half of '19, please?

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Paul Lewis, Qube Holdings Limited - CFO [19]

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It's not so much more than the project. The phasing of Moorebank is, obviously, very fluid, in and when warehouses get approved, the timing of ordering the equipment for the automated IMEX. So I mean, as I said, if you look at the second half that we're guiding sort of $250 million to $350 million total, Moorebank would be the largest single component. And as I said, it's split between having the infrastructure at the IMEX and warehousing. The precise quantum might vary from that just depending on the -- as things progress. Just to reiterate, it's not any cost increase in the total proceeds, it's purely timing compared to the original expectation.

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Jakob Cakarnis, Citigroup Inc, Research Division - Associate [20]

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Sure, sure. And in that timing, is the spend more split towards warehousing than what you'd expect, given where we are in the time line at the moment?

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Paul Lewis, Qube Holdings Limited - CFO [21]

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Not really. In our original numbers, as you know, we never put warehouse material, because warehouse -- every warehouse has its various funding options. But really, our funding will now include the Qube warehouse which we're funding and that 3PL warehouse.

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Jakob Cakarnis, Citigroup Inc, Research Division - Associate [22]

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The second one that I just want to cover off. In the Patrick's market share gains, just wondering if you could speak to how much of that was overflow from potential disruptions at both Hutch and DP in the period, just given industrial action? I know that there are some benefits from new contracts. Is there any light that you can shed on how much of that was temporary versus ongoing, please?

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [23]

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There is very little temporary in that 6 months. Most of the overflow that's happened this financial -- this calendar year, January into February, and the Hutch issues.

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Operator [24]

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Your next question is from Cameron McDonald from Evans & Partners.

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Cameron McDonald, Evans & Partners Pty. Ltd., Research Division - Head of Research [25]

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Just a couple questions on the operational front. You've mentioned that iron ore was down slightly at Utah Point. Can you just give us a sense of what the quantum of that was? And then maybe also, what do you think the outlook for the operation of Utah Point is at the moment and, obviously, with the change of ownership that you've seen at the customer level?

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Paul Lewis, Qube Holdings Limited - CFO [26]

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Yes, sure. The total volume is down just under 14% and that reflects sort of 2 of the customers had lower volumes: one had increased volumes; so that was a net outcome.

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [27]

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Mine closure.

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Paul Lewis, Qube Holdings Limited - CFO [28]

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And part of that was the full period effect of that versus mine closure in the prior period. We haven't seen any change with regard to the change of ownership with that. So sure, we didn't make any call on that, but so far volumes are still good. I think the only uncertainty in terms of volume outlook, I think given where the iron ore price is now, it's reasonable to assume that the players are looking to pursue as much volume as they can and looking potentially to sort of export some finds, which now might make sense to current pricing. So we wouldn't expect, all things being equal, any further decline in volumes certainly of that nature. But yes, so just under 14% in the half compared to [PCC].

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Cameron McDonald, Evans & Partners Pty. Ltd., Research Division - Head of Research [29]

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Okay. And then you've mentioned when you look out to other places, the competitors have had some industrial relations issue. Where are you with relation to your ABIs, and in particular, if we get a change of government, are you worried about being bolden into, of your workforce?

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [30]

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Our agreements and the Patrick agreements end in 2020, Patrick's 2020, with Qube course is '20, range of other agreements across our logistics, BWU agreements, rail agreements sort of all varying times, like just varying for 3 years. So there's a -- probably the focused ones are around distributing around ports is next year. So we're someway off from that. Look, governments have changed. We go through cycles with governments. We've had to deal with it in the past, we do -- we deal with it. The structure there, we have to adapt to whatever changes occur. I think we'll do that at the time. So it's not a complete focus on our business today. It's still going to happen. The change of -- if there is a change of government, so I think they were hypothetical. But -- we are certainly monitoring what the opposition is saying, what's the ACT lobbying for. And at the end of the day, you sit down in that environment and negotiate an ABI with the union and your employees, and that's really where we'll get to.

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Cameron McDonald, Evans & Partners Pty. Ltd., Research Division - Head of Research [31]

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While we're on the potential for a change of government, as part of the review that the company and board are undertaking around the dividend policy, and you've paid out a couple of special dividends now, you've still got a reasonable excess franking credit balance. Is that being fed into that sort of review and thinking around that process?

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Paul Lewis, Qube Holdings Limited - CFO [32]

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Well, look, I think at any given period, the board are mindful of the whole range of considerations including the CapEx requirements and liquidity funding as well as our franking credit balance. So it's all in the mix. But certainly, there's no -- there shouldn't be any expectations of the additional special dividend going forward. But I mean, it's certainly one of the considerations that changes that the board looks at and to propose a dividend policy in any period.

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Cameron McDonald, Evans & Partners Pty. Ltd., Research Division - Head of Research [33]

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Okay. And just a last question on Moorebank. When do you think you'll be in a position to actually name the counterparties that you've currently got other than Target?

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [34]

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Not really sure, it's in their hands. I would expect we're probably 6 to 12 months away from that. On the reservation agreement one that you're -- I think you're referring to, yes.

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Cameron McDonald, Evans & Partners Pty. Ltd., Research Division - Head of Research [35]

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Yes. Well, I mean even the 3PL.

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [36]

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Look, I'll need to take that one, I noticed on the 3PL, but I don't think it's a major issue going forward. I'll -- I don't know off the top of my head on that.

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Operator [37]

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Your next question is from Paul Butler from Crédit Suisse.

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Paul Butler, Crédit Suisse AG, Research Division - Director [38]

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Congratulations on getting Moorebank within site. I just wonder on that, the party that's reserved 150,000 square meters, where exactly is that space? You've given us some map on Page 10 of the presentation. Can you just give us an indication of where they'd be?

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [39]

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It's not on that map. That map on Page 13 is purely the...

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Paul Butler, Crédit Suisse AG, Research Division - Director [40]

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Page 10, Page 10.

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [41]

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Page 10, sorry. Oh, it's in the MPW3 area.

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Paul Butler, Crédit Suisse AG, Research Division - Director [42]

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Okay. And what's the access from that area like to the IMEX terminal?

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [43]

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That will have complete access to the IMEX terminal. You probably need to go back and have a look at some of our concept plans that were previously released. There's -- the intention from the IMEX to have what we call an internal road to all of the warehouses on the MPE2 site and all of the warehouses on the MPW3 site. So an internal road from the IMEX. So you can see on that plan, the road is proposed to go around the outside of the MPE2 site and join up. That enables us to have direct access from both sites. We basically close Moorebank Avenue down the middle. Moorebank Avenue will then only run truck into the IMEX and into the business by terminals. So that MPW3 site will be fully integrated across into the IMEX terminal. Well, that internal road, we propose to service the warehouses on the MP3W site with the automated straddle as well as the MPE2 site.

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Paul Butler, Crédit Suisse AG, Research Division - Director [44]

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Okay, okay. Now the other question I had is when does the logistic services that you're going to offer in relation to Moorebank become material for Qube overall? Because obviously, you were talking about the potential for some transfer of business from other sites to Moorebank, but as you said, being mindful of backfilling those sites.

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Paul Lewis, Qube Holdings Limited - CFO [45]

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Yes. That's really going to be a function of the timing of can take up who they are, what services they want, whether we're doing logistics, whether we're operating the warehousing, whether we're funding the warehousing. So...

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [46]

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And the contribution really starts to come when we have achieved some scale at Moorebank. We're not going to put a time on it. But from a volume perspective, I would want to see 200,000 TEU plus sort of in and out in total operating out at of Moorebank to sort of get -- that's the scale. So we're adding 250,000 or thereabouts at Minto today and Leonora today, so it's building some scale. And as Paul said, it's really a function of the tenant mix and the volumes for each of the tenants and what we're going to attract and the real mix between the [tied us] to the warehouse is on the site and containers to warehouses off the site. And we have in our investment case, a whole lot of assumptions around the off port site. We would want to build that early -- acquire the proportion of upside container volumes early days and then wind up that over time as we develop the warehousing.

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Paul Mason, RBC Capital Markets, LLC, Research Division - Former Analyst [47]

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So you're just saying basically once you can get to say 25% utilization of the 1 million container capacity...

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [48]

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That's one way of looking at it, yes.

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Paul Butler, Crédit Suisse AG, Research Division - Director [49]

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Yes, okay. And the Qube Logistics warehouse that you've got, the 50,000 square meter facility, are you going to be processing stuff through there that you do at Leonora and Minto currently? Or is it all...

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [50]

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As I just touched on it before, it could be a client or clients that are at one of those sites that are better suited to Moorebank, in which case, they have been moved into Moorebank and then backfill other clients into those sites. Those sites are running pretty close to capacity. There's probably -- if we spend a little bit more capital, you can get some more volume in there, but that maybe the case. We are certainly -- logistics are active in the marketplace looking at new customers for that site, I expect it could be a mix. And just to give you a bit of flavor around that. I think, we're extremely confident that logistics will get clients there. And they really achieve that with the new warehouse, 30,000 square meter warehouse in Melbourne. We decided to invest. It was a speculative investment, if you like, into a new warehouse. We thought there was a market we fill that before you even finish the warehouse, so -- with new clients, principally one client, new client into the warehouse, so we're confident that the same that will happen here in Moorebank.

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Paul Butler, Crédit Suisse AG, Research Division - Director [51]

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Okay. And that facility there, is that going to have a cross-dock capability? Or is it going to be...

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [52]

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Yes.

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Paul Butler, Crédit Suisse AG, Research Division - Director [53]

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Warehousing?

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [54]

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Both.

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Paul Butler, Crédit Suisse AG, Research Division - Director [55]

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Okay. And then just one last from me. You previously expressed interest in the Acacia Ridge facility in Brisbane, but just wondering if you could comment on sort of exactly how that supports the business? I mean, is it the interstate business that it helps you get into? Or is it import, export?

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [56]

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It's linked to the interstate. It's linked to the commitment that we go to the Commonwealth Government in terms of the development of Moorebank to -- one of the must-haves from the Commonwealth in this process was a new interstate intermodal terminal in Sydney. From a policy perspective, those roads that given the view is that Chullora is constrained from a capacity perspective but also a road interface perspective. So that was a policy objective. We have always had the view that there was an opportunity to move into intermodal rail operations. Hence, our interest in the Acacia Ridge terminal and our interest in the Aurizon intermodal business that was subsequently closed down by Aurizon. So we were disappointed with their actions there. And that's really the driver for all the interest in Acacia Ridge.

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Operator [57]

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We have our next question from Scott Ryall from Rimor Equity Research.

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [58]

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Maurice, I wonder if you can just comment on where we are in terms of the cycle of port infrastructure fees? In one of the articles in that paper, I'd say Rod Sims raised an eyebrow on behalf of the ACCC on the last increase that Patrick put through. How much further can they go, please?

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [59]

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I can't answer you specifically on that question, all I'll say is that you're right, Rod Sims in the ACCC report raised an eyebrow, but they also said that they have no power to stop anyone increasing prices in the marketplace. But they also made a note that the average return on capital for stevedores is below -- is low and below acceptable levels from our perspective. So any future infrastructure fees is really a matter for the Patrick board. I can't speak for that. I will say though that the whole level of fees that Patrick charged is driven by what happens in the market, market growth, the economies of scale, the trajectory in the terminals and the likes. And so it's not a single decision, it is in Patrick's case reflective and when put models around the cost of the main site operations, the infrastructure, the investment into train site operations and our -- we continue to do that, but really as a policy, sort of question I couldn't answer your question.

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [60]

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Okay. And then in terms of 3PL at Moorebank, can you just let us know broadly speaking, what services do you provide and what does the 3PL do themselves? I'm just -- I'm trying to get a sense of what the basis of your charging model will be? Whether it will just be rent only or whether you provide services to the 3PL in addition to just the box, please?

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [61]

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Well, 3PL has its own customer base. And they'll be running the warehouse themselves, we'll run the Qube warehouse ourselves. The services we will provide will be to provide the logistic service to the warehouse where it's low than they will be, I don't know, but they won't be using lot of subcontractors to provide the rail service through the terminal (inaudible) into their warehouse.

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [62]

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Okay, great. And then the last question I had, you mentioned within the discussion on the logistics business, the weightiness in revenue or the softness in revenue, I get the export side of it. Could just comment a little bit around -- your comments or elaborate a little bit more around the intermodal competition you're seeing, please? What sort of -- what's the nature of the competition? Where is it -- where are you seeing it most aggressive? Why is it heightened now as opposed to previous years?

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [63]

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Yes, okay. So the first sort of change in the market was really DP World making a decision to try and enter that logistics market. And that involved -- if you recall we were the tenant and the operator of a site, what we call, Sydney Haulage in Port Botany, which was a DP World [divide] site. Our lease expired there and DP World Australia has set up its own logistics activities and taken over that site and operate that site. So that's sort of been the first change in the competitive market. The second change in the competitive market is Rail Link, which is sort of former Patrick's out of the breakout of eventually auto, logistics and ports business. They took the lease on Enfield, which is an NSW Ports property. And if you recall Aurizon originally took the lease on Enfield from us trying to establish a port shuttle business but also for the interstate intermodal business. And when they shut that intermodal business, they negotiated an arrangement with Links to take over that lease. So Links is becoming more active in the intermodal space as well. That competition means enough pressure. Scott, hello?

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Operator [64]

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The line for Scott has been disconnected. We can now proceed to the next questions. Next one is from Ian Munro from CCZ Equities.

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Ian Munro, CCZ Equities Pty Limited, Research Division - Senior Analyst [65]

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Just looking at Moorebank and specifically the timing of the Rail Link coming into operation, can you perhaps comment on what happens with Target from a logistics revenue point of view? If, for whatever reason, that Rail Link is delayed beyond the third quarter?

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [66]

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We have a contingency plan that we are obligated to provide by road.

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Ian Munro, CCZ Equities Pty Limited, Research Division - Senior Analyst [67]

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Okay. So we'll start to see logistics revenues in theory as soon as Target enter the lease agreements on Moorebank?

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [68]

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As soon as they commence operations, yes.

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Ian Munro, CCZ Equities Pty Limited, Research Division - Senior Analyst [69]

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Okay. All right. And just I guess a question on Patrick's. Can you comment on the tender pipeline and any update on how much of your contracts are locked away for the next 12 months or so?

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [70]

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There's not really a tender pipeline as we know. If you recall, we were successful in a couple of contracts. And the outstanding one was the Hamburg Süd business that had been acquired by Maersk. That was – as does DP World and was retained by DP World. And so there's not, to my knowledge, there is not any Patrick business that's expires in the near future. That's -- most of that has been locked away. The change that might happen is what I touched on earlier is where there are consortiums, there is an ability for a consortium to be restructured and to move volume from one terminal to another. So you have contractors for shipping line but there's also a consortium contract and they do have the ability to break that consortium arrangement with Stevedore. So there's a lot happening in that space at the moment. I will look at it and say, the last 2 years what we're seeing is consolidation of shipping lines, and the acquisition, mergers of shipping lines, that's predominantly stopped. What I think we're going to see for the next year or 2 is just restructuring of consortiums that really flow from the acquisitions. And that's where we have bit of activity but it's a few balls in the air, we just have to manage our way through that.

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Operator [71]

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We don't have any other questions as of the moment. Presenters, please continue.

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [72]

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Thank you. All I'd like to say is thanks very much for those that dialed in. I realize we had a bit of a glitch this morning, so I apologize for that, but that's sort of out of our control, it's on the line. So thank you very much, everybody. Good morning.

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Operator [73]

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Ladies and gentlemen, that does conclude our call for today. Thank you for participating. You may all disconnect.