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Edited Transcript of QUB.AX earnings conference call or presentation 22-Aug-19 12:30am GMT

Full Year 2019 Qube Holdings Ltd Earnings Call

Sydney NSW Aug 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Qube Holdings Ltd earnings conference call or presentation Thursday, August 22, 2019 at 12:30:00am 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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* Ian Munro

CCZ Equities Pty Limited, Research Division - Senior Analyst

* Jakob Cakarnis

Citigroup Inc, Research Division - Associate

* Matthew H. Ryan

UBS Investment Bank, Research Division - Executive Director and Research Analyst

* Nathan Lead

Morgans Financial Limited, Research Division - Senior Analyst

* Nira Sonah;Evans & Partners

* Owen Birrell

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

* Paul Butler

Crédit Suisse AG, Research Division - Director

* Robert Koh

Morgan Stanley, Research Division - VP

* Scott Ryall

Rimor Equity Research Pty Ltd - Principal

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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 Holdings Limited Full Year Results Conference Call. (Operator Instructions) I must advise you that this conference is being recorded.

I'd now like to hand the conference over to your first speaker today, Maurice James, Managing Director of Qube. 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 on the call. I have with me as usual, Paul Lewis, our CFO. And between the 2 of us, we propose to flick through the presentation pack that we've released earlier today. And I assume that you do have that.

I think really starting on Page 4, the result was a very positive result for Qube in FY '19, where we're extremely pleased with the growth in earnings across all of our divisions.

As you can see on Page 4, underlying NPAT, up 15.4% to $123.2 million. And our underlying EPSA pre-amortization up 13% to $0.087.

On the statutory side, you'll see NPATA at $212.6 million, which includes a sizable fair value gain on our investment properties, but that's slightly below the comparable FY '18 gains, hence the negative 1.3%.

As normal, we will focus this presentation on our underlying performance and go from there.

During the year, as at 30th of June, we've had in the order of $537 million in cash and available undrawn debt facilities, and our leverage ratio is at the lower end of our guidance of 32.5%.

The Board decided yesterday to declare a fully franked $0.029 per share dividend, which takes the yearly dividend to $0.067.

In summary, I think the strong result represents our strong market positions across various parts of our business. And as I've talked about before, the deliberate strategic decision to diversify our portfolios of businesses and that diversification strategy has once again enabled us to deliver growth despite some headwinds in some sectors of the markets in which we operate. And Paul and I'll talk a little bit more about that later in the pack.

The pack though is quite large, and this probably reflects Qube growing in size in itself, and further details of which I aim to provide to the market, so in the interest of time, I will skip through the pack fairly quickly.

Pages 5 to 6 really bridge diagrams showing the contributions from each division into the overall results. The overall result clearly is a combination of acquisitions that we've made, and the contributions for -- from those acquisitions, capital investments and organic growth across various markets. And while that growth in the market has obviously offset a decline in some areas like lower new car sales volumes and therefore, import volumes, continuation of the droughts in Queensland and New South Wales and slowing container volumes.

Page, 7, really an update on just our presence in locations around Australia and New Zealand, now over 6,500 workforce in 130 locations. I won't spend too much more time on that.

Moving on to Slide 8, really showing underlying results and assets by division and really I just wanted to focus -- and I think that the way we're looking at and the way the pack is represented is we're looking at the Operating Division as one division, we're looking at Infrastructure & Property that includes Moorebank as a division, and we're looking at Patrick, which we're defining as a division even though we're a 50% equity holder in that business. So that's the way we are thinking. You can see on Page 8, the contributions from the various divisions, and I'll leave you to look at that later.

Slide 9 really summarizes, as we all know, some of the challenges in our industry, the headwinds that we're facing. Having said that, the results are extremely positive, and we're positive about the FY '20. I'll talk about the guidance here later.

Really, the graph on the top left is showing the slowness in container volumes. Certainly, over the last 2 years, above our expected long-term growth rates at 3% to 4%. I think it really starts from the new car sales, down 7.8% in the year. I won't spend too much more time on that. And grain exports down.

Slide 10, I do want to spend a little bit of time just focusing on safety, health and sustainability within Qube. You can see the metrics there on the continued improvement across our businesses in the last few years. It is a focus, we've been talking about it. We always talk about it in terms of our investment in this critical area for us. We continue to review our risks to look at controls put in place recently to minimize any risk for our employees in our workplaces. And it's right -- driven right through to the Board level, where even directors do safety walks through various parts of their business.

The last 12 months have seen a significant focus in terms of the health and well-being of our employees. The introduction of a myQube app and access to news and ability to send important messages to employees around their health and well-being together with a number of initiatives that we've introduced, really is in our view delivering some results. And we're actually seeing that in the benefits of lower workers' lost times and workers' comp insurance costs as well.

During the year, we did an initial climate change risk assessment on Qube. That assessment was done across 6 Australian sites and 1 New Zealand site. Those were the sites that we thought if there was exposure to climate risk, that they would have more likely. For example, Utah Point at Port Hedland, potential impacts of soft (inaudible) in that area that potentially increases the risk for Qube. Those sites represented 27% of our consolidated underlying revenue, and it is pleasing to say that, that assessment really concluded that Qube has a low-to-moderate risk exposure to climate change. 90% of the emissions that we put out are diesel emissions relating to trucks and rail movements. And you can see then the focus that we have been delivering not only in our existing operations. We turn over long-distance truck fleets every 3 to 4 years. We are focused on the latest greener and energy-efficient equipment. And also the Moorebank development, particularly in relation to taking trucks off the road and the core strategy of where we can take trucks out off the road, transfer to rail. And also the embedded network that we're planning to build -- or we are building at Moorebank.

Now Slide 11, I won't spend too much time on. It is really a summary of the Operating businesses. It is very much a continuation of business as usual. You can see there, underlying EBITA growth of 6.8%, CapEx of $367 million in the year. Across -- I'll let you read it later, but across most of the businesses, really growth in the business despite some impacts on various markets, and that's really a continuation of the past, and we see that continuing into the future, and I'll talk about that later.

I won't spend too much time on slide 12 and 13, but really looking at the Logistics business unit, as we call it. The revenue by region and by industry. Again, really just calling out the top 10 customers in this business unit. It represents about 14% of the Operating Division's revenue.

Slide 13 is really looking at Ports & Bulk unit. Again, the diversification by region and product, really it highlights the importance of Western Australia to us. Whilst Logistics is essentially focused on capital cities, the majority of this business is focused on regional activities around Australia and regional ports and commodities.

Again, the top 10 customers in Ports & Bulk represents about 20% of our Operating Division's total revenue. I will call out there, as I said, Western Australia, the importance of Western Australia, but also on the pie charts around product, the reductions, if you followed us, of our exposure to iron ore, that's now 9%.

In the interest of spending a little bit more time on Moorebank, I'll jump on to Slide 14. Infrastructure & Property, really the results there up 18.4% EBITA. I'll let you read each part of Infrastructure & Property and its contribution to that. Essentially, it is the full year impact of [internal] property leases this year compared to prior year. It's also an increase in fees and ancillary income above our expectations for the year, partially offset by some incremental costs. And really those ancillary incomes have had a significant impact on margins because the incremental costs are low in that area.

Really -- I'll move to Slide 15, and I suppose the message here is that Moorebank is here. The Target warehouse was completed, and Target is operating in that warehouse. Qube Logistics is delivering containers to that warehouse. The rail and the IMEX terminal are essentially complete, there's still final landscaping works and other activities going on, but we have received accreditation for the IMEX terminal from the national regulator. We've had a locomotive in there testing the site, testing loco site shifters. And we're still expecting, as previously guided, that the first train will operate within a matter of weeks before the end of September.

That's a real positive news for us, where -- it's been a long time in the coming for us, but we're very excited about the status at Moorebank.

Just sort of a little bit more on what's happening on the site, Moorebank East land preparations has progressed. We've accelerated some of the CapEx, and Paul will talk about that in a minute, but we've accelerated some of the CapEx on land preparation works for warehouses, really on the back of interests we're discussing with potential tenants striving that, and so we're doing that. We are waiting now on -- and we expect within a matter of weeks that we should get the determination from the Independent Planning Commission for Moorebank West planning approval Stage 2. That then enables us to get into the land preparations on the western side for potential warehouses on that side of the Moorebank Avenue.

Now 16 and 17 pages are really giving an update around leasing, 16 in particular. The chart diagrammatically represents where we are. Warehouse 1 on that picture is Target. We have what we call W2, is the warehouse 2, is the 5 existing warehouses that have remained, they'll be the last to be demolished with modern warehousing, but they're leased.

Warehouse 3 is leased to BRW Logistics and Caesarstone, effectively roughly half-half.

Warehouse 4, we have terms agreed for roughly half of that warehouse as well with discussions well advanced with another party for the other half. Warehouse 5 is the Qube Logistics warehouse. 6 and 7 we're under discussions with several parties around those opportunities. And W8 is available. It's definitely something that we've flagged as a possible work Qube Logistics expansion, but we'll work through that as discussed and secure it with other parties.

On the West side, down at the bottom of that picture, really the market's fully aware that land [reservation agreement is 150,000] square meters of land, those discussions with that party is continuing. And we are in discussions over another area there under negotiation, as highlighted on that plan, adjacent to the Interstate terminal. The development of a warehouse on the western side is a function, including those planning approvals that are outlined on Page 15.

I won't discuss 16. I've really summarized 16 in the context of the diagram on Page 15.

17 -- sorry, 18. Page 18 is really just a time line, some CapEx updates. We've spent $461 million to date, for known CapEx for FY '20 and beyond. And so it's not just FY '20, it's $636 million, and that includes the warehouses what we have commitments on going forward.

Slide 19, really it's just a few pictures of the site, and you can see the IMEX terminal, you can see the locomotive, in testing the loco site shifter at the northern end of the site.

And If I could, I'll just quickly move on to Patrick's on Page 20. Very good result for us, the Patrick's. We've seen the market, as we have talked about, decline or slow to 1.9% on a rolling 12-month basis. Patrick's growth in the year was 6.8% in TEU terms. But as most of you are aware, it's in lift terms where the Patrick earns most of its revenue, so that's a 5.8% growth in lift terms. That's really come from contracts that we had secured in prior year or some services wins during FY '19. Plus, there is always incremental volumes where we've been able to pick up subcontracted volumes and other stevedores, the occasional empty evacuation ships that come on an ad-hoc basis to pick up empties. And Patrick appears to be the one that can deliver on those very successfully.

So all in all, a good year. Yes, the market is slowing, but we're -- I'll talk about the old Patrick, and we're still very positive about the growth in Patrick going forward.

I think I won't spend too much time there, apart from the fact that Qube's share of underlying NPAT increased 9.5% to $38.1 million, and I'm sure Paul will talk about it, the distribution that Qube received from Patrick was $100 million in the financial year.

Just on a couple of developments. We're in sort of finalizing lease agreements in regard to the extension of the Port of Melbourne lease and finalizing the Fremantle lease after that tender process.

Slide 21 is really just a few more graphs around Patrick. At June, the one to call out really is sitting at 46% market share. And that's been the result of those contract wins and extra volume with [the helpful effect].

On that note and in the interest of time, I'll hand over to Paul to go through the financials.

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Paul Lewis, Qube Holdings Limited - CFO [3]

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Great. Thanks, Maurice, and good morning, everyone.

Looking at Slide 22, Qube statutory results. They exclude the following key items that we exclude from the underlying results because generally they're either noncash or nonrecurring. The largest item, as Maurice touched on earlier, was the fair value gains in our investment property of around $155.5 million pretax, of which Moorebank is the largest component. And that valuation uplift reflects progress we've made at the development of Moorebank, including the completion of the Target warehouse as well as strengthening industrial land values, particularly in Southwest Sydney and for those assets that have a logistics' component as well.

There was a small uptick in our other investment properties, Minto and Russell Park, but they were more modest than the Moorebank uplift. That was partly offset by impairments in 3 of our associates being NSS, Prixcar and Quattro totaling $14 million, largely due to our lower revised medium-term forecast outlook for those businesses.

The main other items in the statutory results that are not in the underlying results are things like the mark-to-market fair value on our interest rate hedging that we use for risk management, some of the acquisition costs as well as normalizing the tax rate to reflect a long-term 30% tax rate on our underlying earnings. And all the adjustments are consistent with those we've made in prior periods.

Turning to Slide 23, our underlying results. Maurice has already gone through this and indicated that they were very solid underlying results. I won't spend long on this. Just to highlight, you can see the margins improved overall. As I've said previously, it is largely a function of business mix with different activities having different margins. While it does also reflect cost outs and the benefits of scale, it is still a very competitive environment in which we're operating in. So to get further margin improvements, we will rely on our efficiencies, the benefits of our scale and continued investment to drive further margin improvement in each area of the business.

Pleasingly, we did return to solid underlying earnings per share growth, which support the growth in the full year dividend that Maurice touched on. And as you'll see in our [pack], the Board has revised the dividend policy. We're moving the target payout ratio in order to provide more flexibility to return the appropriate dividend in each period. And that will be determined having regards to a relevant consideration, including underlying earnings, cash flow, outlook and future CapEx requirements.

Turning to Slide 24, overview of our CapEx. It was another period of very substantial CapEx, around $630 million, the majority of which was growth-oriented. And that included around $190 million in acquisitions. The majority of the CapEx did not contribute fully to earnings in FY '19 so will support future earnings growth.

The slide highlights that the largest component of the CapEx was Moorebank, it was around $253 million or around 40% of the total, mainly on [increasing] enabling infrastructure, construction of the IMEX terminal and the completion of the Target warehouse. And obviously, that expenditure will drive future earnings but didn't see sit within -- in FY '19.

Other key items included over $50 million on equipment and new contracts in the bulk area, the warehouse at Altona for Qube Logistics, continued development of the BOMC facility in Indonesia as well as new cranes and a terminal upgrade for AAT, so really growth CapEx across the group. Maintenance CapEx is around 55% of depreciation or around $60 million, and we do expect that to increase in FY '20.

Turning to Slide 25, it provides a snapshot of some of the key acquisitions we undertook the last financial year. I won't go into detail on all of them, but just to highlight that all of these acquisitions are consistent with our strategy, are expected to deliver attractive financial returns and all are consistent with Qube's risk parameters.

I'll just touch on 2 of them. The LCR acquisition that we completed in May this year, this calendar year, very much complements both the logistics and the bulk activities while providing additional service capabilities in terms of lifting capability, previously, we've had to subcontract that. And also further geographic diversification for the bulk haulage by extending our activities in the Bowen Basin in Queensland. But importantly, in addition to those capabilities, it strengthened our management team. The management team obviously are high quality and we're very excited to have them join the Qube group at Qube group. And we do think that acquisition will drive both cost and revenue synergies over the medium term.

The other one I want to touch on is the Beveridge call option that you'll see there. So during the period, we secured a call option to acquire a substantial parcel of land at Beveridge in Victoria, that we believe to be ideal for future logistics and warehousing activities. And the importance of that is, through the call option structure, it's a very low-risk way for us to get substantial exposure to what we believe could be a very significant and value for growth option for the group. And the structure of that gives us time to further assess that, work through planning and determine how to go forward with that to maximize value for Qube shareholders. So we'll continue to assess other opportunities to enhance the quality and the value of the group through acquisitions and growth CapEx. But as always, we'll take a disciplined approach and there is certainly no must-have. So we'll only continue to pursue growth at CapEx that meet all the criteria I touched on.

Turning to Slide 26, our cash flow. At the high level, clearly, there's a very strong cash generation in the period. Our cash conversion exceeded 100%, plus as Maurice mentioned, we received $100 million in cash distributions from Patrick, which is well above the corresponding profit. That cash flow plus debt was used to fund the CapEx I mentioned. As a result of the high CapEx, our net debt increased by around $467 million in the period.

Turning to Slide 27. Despite the increase in net debt, Qube remains in a very strong financial position, as you can see from the chart here. Our leverage is towards the bottom end of our target range. We have no near term debt maturities, having already paid the $50 million that matured in July -- of July calendar '20. We have adequate liquidity, very diversified funding sources and material headroom to covenants.

It's worth noting that some parties have lifted our net debt and our EBITDA and suggested that the net debt-to-EBITDA metric is higher than it has historically been. So I thought it's worth touching on several reasons why, from our perspective, that metric is not really relevant in terms of our gearing and how we look at our balance sheet.

First, as we've mentioned in the past, Qube doesn't have a net debt-to-EBITDA covenant. And the reason is, we always knew we'd be using debt to fund the Moorebank development as well as other growth. And although this accentuates immediate and substantial value to Qube, the nature of the investment means the earnings will follow the expenditure. And therefore, net debt-to-EBITDA covenant doesn't reflect that metric. And we were able to explain that to our lenders who fully agreed. And therefore, we don't have that metric.

That doesn't mean that we don't internally look at net debt-to-EBITDA as one of the metrics to assess the company's gearing and use of debt. But for those reasons, we back out the investment properties from the net debt as well as the related earnings to get a better assessment of what the underlying operating leverage is in the business given it's [low priority] businesses that have that more cyclical exposure. And using that adjustment, our net debt-to-EBITDA is well under 1.5x. And even if you include Patrick's proportion of debt, given the importance of that asset, even though the debt is nonrecourse, it's still in the low 2s. So we're very, very comfortable with our leverage and we will continue to use debt in a prudent manner to fund our growth.

Having said that, you'll see from Slide 27, consistent with what we said in the past, we continue to assess suitable partnering options for Moorebank, which is where a lot of the expenditure has been undertaken in order to maximize value for shareholders. And we feel that now the IMEX is operational, the Target warehouse is complete and we're making very good progress with a range of other potential tenants, we believe it is the appropriate time to more actively assess suitable funding and ownership options for Moorebank that appropriately reflect the unique characteristic of the Moorebank project as well as the strong demand currently for quality industrial assets, particularly in New South Wales, and also taking into account the low interest rate environment and outlook.

And we believe that a range of partnering and funding options that we'll explore have the potential to release some of the very significant value that's already inherent in the Moorebank project and could also reduce our future funding path. And so it's worth noting that the impact of any such initiative is not reflected in the CapEx guidance in this presentation or the outlook, given there are a range of possible structures or outcomes that we'll be assessing.

With that I'll hand back to Maurice who'll talk a bit about the outlook.

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

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Thanks, Paul. Just in relation to the outlook, I think it is worth noting that we're essentially assuming business as usual, no material change to economic conditions and competitive dynamics in FY '20 compared to FY '19, no real improvement in container, grain or vehicle and general cargo volumes through our ports and no significant change in conditions in Qube's other key markets, such as bulk commodities, et cetera.

But on the back of that and no material adverse change in economic or market conditions, we expect another solid increase in underlying NPAT for FY '20 and continued improvement in underlying earnings per share. We will note and as we made a point there, that statutory accounting next year will reflect the introduction of our new leasing standards. It will reduce our statutory earnings but will not impact our underlying earnings, cash flow and compliance with covenants.

In summary, that guidance is on the back of expected continued solid growth in our Operating Division, a modest decline in the Infrastructure & Property Division, essentially due to some of those ancillary revenues coming off at Moorebank and the introduction of their operations, which we expect to have modest losses in as we build some scale. We do expect a solid growth in the performance and earnings of Patrick. Our corporate costs increased slightly in regard to us being a larger organization.

And finally, in regard to CapEx, we have a forecast -- indicative forecast of $500 million to $600 million, including the scrip issue to Chalmers' shareholders in FY '20. And the majority of that CapEx is obviously on Moorebank. And as Paul said, we are looking at a range of options to how to support Qube going forward with that development and capital requirement at Moorebank.

So on that note, 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)

Your first question comes from Matt Ryan from UBS.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [2]

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Just starting at Moorebank, I can see the tenant sign-ups are progressing to plan. Can you clarify whether all of the warehouse tenants are also using the IMEX and whether that's a requirement to sign up to the MLP?

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [3]

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I'll answer the last question. It's not a requirement. It's clearly a strategy and let's say, our strong preference around tenants. And we've always indicated to the market that, that's a preference for tenants is to be users of the IMEX or potentially the future Interstate Rail Terminal. In regard to those that are signed, yes, they are intending to be users of the IMEX terminal.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [4]

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Okay. And I see you've taken out an option for an intermodal in Melbourne over the medium term. I think so far progress on intermodal is that it's summer term and (inaudible) south have been pretty slow. So is there something that you can see from the government to suggest that, I guess, interests from other stakeholders is increasing?

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

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Yes. There's a couple of key points. One is the inland rail project, Melbourne to Brisbane inland rail project. And the Victorian government has been highlighting for some time that there's a couple of options for intermodal terminals. One is in the west, they call the WRIFT; and the other's -- the second is Beveridge, and that's the site that we have the option on. Victorian government has never said it's one or the other. It's like Sydney, I think in the long term there'll be multiple terminals but it's clearly one factor.

The other issue or the other positive around it is that the private owners of the Port of Melbourne had a requirement on privatization of that port to put a plan to the Victorian government for on-dock rail and rail advancements at the Port of Melbourne. That's been submitted. There's been industry consultation around it, the government or the port authority -- I'll call them the port authority, the port owners are proposing to invest into on-dock rail. And Patrick are in serious discussions with them over that. And that on-dock rail clearly will complement the opportunity of intermodal as in and out of the Port in Melbourne. That has been slow for the last decade.

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Matthew H. Ryan, UBS Investment Bank, Research Division - Executive Director and Research Analyst [6]

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Okay. And just the last one for Paul. I see that $50 million of dividends and capital return came from Patrick. Can you just talk a little bit about the CapEx profile moving forward for Patrick, specifically?

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Paul Lewis, Qube Holdings Limited - CFO [7]

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Sure. I mean, we flagged and -- at least a review of operations that we expect the distributions from Patrick will be lower in FY '20 because there is a ramp-up in CapEx this year, mainly to the Fremantle development as well as the new [trains]. So it is high and as well as the Port Botany rail automation. So I would expect CapEx to ramp up probably for the next 3 years. So there still should be healthy distributions, but not as high as FY '19, probably to a certain extent FY '20 and probably for FY '21 as well, but that will be subject to earnings and outlook.

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Operator [8]

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Your next question comes 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 a few questions from me. Just wanted to start on Moorebank. Just noted the CapEx guidance for FY '20 onwards was around $636 million. I assume that's likely to be a warehouse build. That's not too dissimilar to what you've guided about 12 months ago. And I'm just wondering what the -- obviously, all the CapEx you've spent today, was that not in the previous forecast or what's actually changed there?

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Paul Lewis, Qube Holdings Limited - CFO [10]

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The time frame has changed a lot. So the main difference from previous guidance is, the expected that we've indicated there, but (inaudible) and infrastructure costs have gone up. Some of that was unexpected around certain items that, as we did the development we had to spend additional money. Otherwise, just changing standards or acceleration compared to what we previously thought.

The other point to note is the minimum CapEx does change as we lock in warehousing because we always said in the minimum, it didn't improve warehousing initially because we didn't know whether we'd be funding it, whether the tenant would want to fund it. So as we lock in that we will be funding warehousing, then the cost of that warehousing is included in that number.

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

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And I notice there was a comment there that the return profile doesn't change. So I was just wondering, is the warehouses that you're now building leading to a higher rate of return than you previously expected as a result?

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Paul Lewis, Qube Holdings Limited - CFO [12]

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It's a combination. I mean, some of it's earlier. So we had that aggressive ramp up over 10 years of warehousing. Based on the interests, we still expect that will happen a lot faster. You've got cap rate compression on some of the analysis, obviously land values have gone up. So really, it's a combination of factors that are expected to offset that cost increase.

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

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Can I ask a question on Patrick. A very, very strong performance relative to the market during the year. That rate of growth, I'm just wondering, is there any temporary growth in that, that essentially reverts next year? I guess what I'm trying to understand is, what share are you at with the market at the moment? And do you expect that -- do you expect to be able to hold that share into next year or are we -- should we see some of that volume come off?

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

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Roughly at 30th of June, we're at 45.9%, 46% market share. We're expecting a continuation of those volume level, of that market share. It is a little uncertain at the moment because I think as we have been talking about it for a couple of years now, we've seen shipping line consolidation happening. We're in the middle now of consortium consolidation and there's lots of balls in the air with consortium consolidation. But we're expecting -- our expectation is maintaining that level of market share.

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

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And can I ask in terms of the stevedoring rates. We've seen a lot of compression of stevedoring rates over the last few years given the amount of competition and the consolidation of the shipping lines. Have you seen a stabilization of stevedoring rates or are they still sort of coming down?

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

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It's a little hard to call. I think off-balance I would say a stabilization on balance. It is different on every contract. It's different in every port. Drivers of pricing often depends on berth availability and [window] availability for [shifts] and things like that. So -- but on balance, I think I'd call that stabilization.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [17]

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Okay. And just finally from me on the operating businesses, just 2 questions. One, just the underlying performance of the business. How much of the impact year-on-year did drought have? And if that normalizes next year, can you give us a sense of what you expect the sensitivity of an uplift is?

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Paul Lewis, Qube Holdings Limited - CFO [18]

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Look. It's really hard because it's not a stand-alone item. Generally speaking, the way the business works is, it's that integrated offering. So it did have another impact this year, pulling more than we would have expected originally. Given the volumes (inaudible) I don't think -- if grain came back, I think it would certainly have a positive impact on the division, quantification really just depends on what else is happening.

I think we indicated a couple of years ago that the impact of drought is probably in the order, if I remember, of $5 million to $10 million EBIT. So that's probably some idea. But again, the actual number will really depend on a whole range of factors, including where the volume was, what services we did, et cetera. That's a rough guide, I think.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [19]

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That's good color. And just finally on a number of acquisitions obviously made during the period. I'm just wondering if you can give us a sense of what the uplift you expect to cycle through into next year's earnings?

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Paul Lewis, Qube Holdings Limited - CFO [20]

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I mean, look, the LCR one that's in the accounts, you can see that in the (inaudible) give an idea about, on an FY '19 basis, what the uplift would be. And I think from memory, on a full year base it's about $9 million EBIT. That doesn't include obviously funding or synergies or growth. That's just their financial numbers. It's a large acquisition. Russell Park, we had for 11 months. There'll be a little bit of annualization there. But I think those are probably the major ones. That will go up a little bit.

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Operator [21]

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Your next question comes from Paul Butler from Crédit Suisse.

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Paul Butler, Crédit Suisse AG, Research Division - Director [22]

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Just had a couple of questions on Moorebank. Just wondering if you could explain on Page 16 where you show that map and on the Moorebank Logistics Park West, those areas that you've got under negotiation and then you've got the land that's reserved. Can you just give a bit more color on what's happening there?

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

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Well I think the first one on the reserve land, that's the regulation agreement we've announced previously. We're bound to confidentiality on that. That contributed, there is some income from that reservation agreement that contributed to the performance of the division in that year. I can't really add much more color to it than that. That reservation agreement was a 7-year agreement. It had commitments with the parties to enter into agreements within a time frame about roughly within 5 years from commencement. It would be 12 months old now, close to 12 months old. So I think that's as much as I could really say on that one at the moment. The other one is under negotiation for a facility there that we would expect, we'd hope, in the next 6 to 9 months to have a resolution on that. Yes. So 2 great opportunities for us but we're still on it.

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Paul Butler, Crédit Suisse AG, Research Division - Director [24]

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Right. So on the parcel of land that's covered by this reservation agreement that runs for 7 years, are you likely to have something more to announce on that before we get to the 5-year point?

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [25]

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I would expect much earlier than that.

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Paul Butler, Crédit Suisse AG, Research Division - Director [26]

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Okay. And then secondly, can you give us a sense of when once, let's say, Moorebank is fully occupied, what's the quantum of logistics revenue that you might be able to derive there? I mean, just in sort of how significant could it be in the context of, I think, the roughly $600 million of logistics revenue that you're currently getting?

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Paul Lewis, Qube Holdings Limited - CFO [27]

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It really will be a function of a whole. We calculate [upcycle] it's going to be a function of what is logistics market share of rail and what are, if you like, road rates at that time because rail still has to be competitive with road. How much of that volume stays on-site, how much goes offsite, how much activity Qube Logistics has with warehousing for tenants versus just that rental. So, I mean, as for timing of scale, we think it will be a meaningful contribution to earnings. But as we've always said, in the early years, I mean as we said, in FY '20, it will be loss-making and it will progressively ramp up [as we have just discussed]. Actually, we can't quantify it because it depends on too many variable factors at this stage.

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [28]

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I think it's still the view that we could reach up for 1 million TEU through there. There's a 1.55 factor on 40-foot, 20-foot mix. You can work out the number off this. You could make some judgments around certainly the terminal impact for logistics -- Qube Logistics. And as Paul said, it will be a function. It is an open-access regime terminal. Other rail operators could come into that terminal in the future and it will -- for Qube Logistics, it will be a function of what percentage of the rail business we hold, in and out of Moorebank in the future.

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Paul Butler, Crédit Suisse AG, Research Division - Director [29]

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What about the potential for other sort of contract logistics services apart from the terminal and the rail transport?

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

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Well, I think that's being built into the assumption around the 50,000 square meter warehouse on W5 where Qube Logistics would operate. So that is [greatly on top] of logistics activities. It's not dissimilar to what we're doing today in other locations around Australia.

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Paul Butler, Crédit Suisse AG, Research Division - Director [31]

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Okay. And you talked about alternative financing options for Moorebank. I'm guessing you're referring to potential to look at a REIT structure?

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Paul Lewis, Qube Holdings Limited - CFO [32]

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That's one. I mean, we're going to go with a very open mind around what structures will maximize value and amid our financial and strategic objectives. So we haven't got a firm view at this stage as to what the end structure will be, we'll assess a whole range of options.

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Paul Butler, Crédit Suisse AG, Research Division - Director [33]

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What's the time line on what you'd sort of look to do something around that?

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Paul Lewis, Qube Holdings Limited - CFO [34]

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We'll certainly progress it more actively in the next 6 months. How long it will take to bring it to a conclusion, really just depends. But certainly in the next 6 to 12 months, we'd expect to make pretty good progress around our preferred direction.

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Operator [35]

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Your next question comes from Jakob Cakarnis from Citi.

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Jakob Cakarnis, Citigroup Inc, Research Division - Associate [36]

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Just speaking with Moorebank, I think previously the commentary had been that there's a lot of tenants or potential tenants looking at train services and the potential efficiencies that they could deliver before committing to the warehousing. Now that we're getting close to those Rail Link commencing, can you just shed some light on to whether or not there are different discussions going on at the moment for those to be positioned [this year or next]?

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [37]

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I think the best way to answer that would be to say that there is considerable inbound inquiry. Our team are talking to quite a number of players. And you can also infer that from the reference to warehouse 6 and 7 and discussions that are occurring with potential tenants on 6 and 7.

So I think, certainly, the road market in Sydney today is very competitive. We don't think that's sustainable with rising tolls, rising fuel, et cetera. But I think the metrics still works very well for the environmental and rail into Moorebank and particularly for those wanting to lease warehouses on Moorebank.

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Jakob Cakarnis, Citigroup Inc, Research Division - Associate [38]

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Okay. And just one quickly for Paul. Just in the Operating Division, I think you called out some competitiveness that you're seeing in your Logistics business. Can you just elaborate a little bit more on what that competitiveness looks like? Is it still pricing pressure, is it competition for new contracts? How should we think about that moving forward?

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Paul Lewis, Qube Holdings Limited - CFO [39]

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Look, it's just -- it hasn't got worse. We've seen similar prior periods, as Maurice said. Sort of [road casting] is coming down. You've still a lot of small operators passing through incremental cash flow, retail is under pressure. So everyone's trying to get costs out and rates down and that's just the function of the industry we're in. So the best way to mitigate that is through our scale, our investment and getting our own costs down, which is what the guys have done, but it remains challenging.

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [40]

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I think the other point probably just to call it out is that the world is endeavoring to get into logistics with the Sydney Haulage [rights] on-site that we used to lease and hand it back in -- I think it was March last year. So really, in one sector of the market targeting, if you can time those right -- or if you can tie those back into Port Botany, where we do have a mix of some -- is a Brookfield asset business that took a lease on Enfield, endeavoring to do some port shuttles in and out of Enfield. We've always had the view that in the medium to long term, whether it be multiple intermodal terminals in Sydney in that they'd complete with a bit of overlap in some areas. But in the medium to long term, the catchment for running around each intermodal will be closer to that intermodal. And so those are competition pressures that are occurring at the moment as well.

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Jakob Cakarnis, Citigroup Inc, Research Division - Associate [41]

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Sure. Just final one on the acquisitions. What's the strategy moving forward? Are you looking for bolt-on acquisitions obviously where it makes sense or whether it's synergies for the business? I'm just noting that there obviously was an impairment taken in the period. Just wondering what the strategy is and the value creation is moving forward for these acquisitions.

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Paul Lewis, Qube Holdings Limited - CFO [42]

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So the answer is, as I said, we'll always continue to look for acquisitions that make sense, whether it's synergies or diversification. But it's not a strategy of we've got to make them for their own sake. If something comes along like an LCR or a Chalmers, we're certainly open to it.

The impairments were all to be [associates], and I think it's fair to say our ability when we own 100% of the business, to get the cost and revenue synergies is much, much stronger than when we have no control. So we haven't impaired the operating businesses. So I think it's important to differentiate that.

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

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I think the summary I'd make is that, that strategy has not changed at all. It continues to be, look at opportunities predominantly in that import-export supply chain area. We have looked at unaffected (inaudible) core interstate intermodal activities on the fringe of that but it's same customers moving same products. So it's -- the core strategy remains the same. And as we've always said to the market, we won't -- as Paul touched on, we won't make acquisitions for the sake of acquisitions to just deliver on (inaudible), it's got to deliver on the strategy.

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Operator [44]

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Your next question comes from Scott Ryall from Rimor Equity Research.

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [45]

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Could I start on Patrick, please? I'm just interested, probably for Paul, if you can elaborate on the fact that EBITDA grew a lot -- at a lower rate than revenue for the period. And what were the increase in costs -- operating costs as a result of that please?

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Paul Lewis, Qube Holdings Limited - CFO [46]

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Yes. I mean, costs in terms of capital, utilities as well as labor have gone up. And there's some timing issues because obviously, the infrastructure that we did was increased in March to recover some of those costs, but there is a lag. So there was only a few months of that benefit whereas the costs were there for longer in the period. And then the other fact with revenue is some of the rate pressures that Maurice mentioned got straight to margin. So I mean it does vary period to period, but that's probably -- that's the [major thing].

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [47]

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Okay. And then in terms of the investigation that you've talked about around funding on Moorebank, do you -- I mean I know you've got a lot of options and things like that in front of you. But in terms of taking advantage of low costs of capital, what do you tend to see you is in either, call it, property or infrastructure asset, a high level of visibility around cash flow is critical. And in the context of Moorebank, that would imply like there's a high visibility around the divesting environment and your -- the proportion of Moorebank that is when you've reached agreements on leases and warehouse rather and that's built up.

So do you believe you can maximize the value for shareholders as you're ramping up the leasing with Moorebank? Or will that be one of the critical factors that you progress over the next 6 to 12 months, is that the timing might not be as quick as that, but you'll have a vision on where you want to get to?

Sorry, it's a very long-winded question but...

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Paul Lewis, Qube Holdings Limited - CFO [48]

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It's a fair question. I think the bottom line is we're not going to do anything unless we believe it's appropriate value to keep shareholders. In the current market, I mean, one, given the progress on the leasing discussions, there will be a reasonable level of visibility around income streams, which is part of the answer. But I think the unique nature of Moorebank, given the size, the location, new rail, dedicated rail line as well as near the major road networks, combined with the scarcity of quality industrial land means, we believe, based on sort of feedback we've had and various inquiries that there will be strong demand for the land, whether it's from certain players who would be very confident of the ability to attract quality tenants in the short to medium term. So we need to explore that and see if that's the case, but as I said, we're going to look at a range of options. And if it needs to be done in different stages or we're only doing part of a site or we do nothing. We'll make that assessment when we've got the information based on regulatory and process.

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [49]

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I think my view is that it would be remiss of us not to explore all of these options at this point in time, given as you touched on, interest rates where they are, the future -- or likely future of interest rates, cap rates, which exist in the market, as Paul touched on, the scarcity of good quality industrial land in Western Sydney. I mean, all those factors drive you to this direction. And as I said, it's a period in which we should investigate in the interests of our shareholders.

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [50]

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In terms of Moorebank and the -- you've given some very helpful color on the leasing update and some of the negotiations that you're undertaking that are confidential. Could you just clarify though? You've talked about the usage of the IMEX terminal. What are the nature of the discussions so far around the usage of the interstate terminal, please?

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [51]

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Yes. Look, I think it's fair to say several of the players that we're talking to are focused on -- strategically on where they can, moving to rail, road-to-rail solutions. And the opportunity to move freight out of Sydney, into Melbourne, into Brisbane is something that they have been discussing with us. If you look at a position from a company that might want to import products into Sydney and distribute to the East Coast, the interstate terminal becomes the option in which they'll use that.

The other area that we are having discussions around is the players that are domestic freight movers in their own rights and the potential for them. So I'd say that's Moorebank and the strive for demand for interstate rail services really.

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [52]

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Okay. So they are the currently -- they're effectively the G6 players as opposed to the end customers that you're talking down that path are they?

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [53]

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Yes. It's got 2 strengths of discussion.

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [54]

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Okay. And then the last question, if I may. The property over which you've got the option at Beveridge. What -- is that purely an inland rail play? And I'm sorry, I haven't got my map of North Rail at the moment. But could you -- could that be utilized for the current freight network in addition to inland rail?

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [55]

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I think our view, and we're working through it, is -- our view is that it's a large parcel of land. It's a 1,000 -- in excess of 1,000 hectares of land. Put that into context, (inaudible) makes 240 hectares. And certainly, one driver is the interstate intermodal. There, I think Victoria recognizes that the terminals north of the port in [guidance], the South Rail and North Rail are not the ideal long-term location for interstate intermodal terminals. So Beveridge is one option. We're exploring that.

And our view would be that if we do proceed, whether it not only will serve the interstate intermodal, but it would serve as 4 shuttles into that facility and then distribution around the future, add a ring road in Melbourne, which has significant advantages from -- it is a fair way out of Melbourne but in the future, we'll have significant advantages in that a lot of freight today actually is imported into the west and then has to cross east-west through West Gate Tunnel and CityLink. So having a site in the north and distributing around the other ring is -- makes a lot of sense.

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [56]

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Okay. But in terms of the linkage to the interstate network, is it reliant on inland rail for most of it? I guess that's my question. Or is it just easily accessible for the current base network?

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Paul Lewis, Qube Holdings Limited - CFO [57]

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Yes, it's easily accessible. However, it's not absolutely reliant on the interstate operations. Having said that, the interstate track is adjacent to the boundary of that property. So it's an easy offtake, [it's inside] the interstate network.

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

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Okay. And Melbourne has traditionally been the starting point or quite a big starting point for the east-west services, are you thinking parties in the context of this? Or is this more around the other things north-south which is very likely going to be infrastructure piece at the moment?

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

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Look, potentially, it could service the east-west. The challenges for east-west out of Melbourne today is you can only have single-stack trains to Adelaide. There's a cost to double stack those trains in Adelaide to go to Perth. Technically from Beveridge, it could get to parks and go to Perth, double-stack trains all the line in the future.

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Operator [60]

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Your next question comes from Rob Koh from Morgan Stanley.

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Robert Koh, Morgan Stanley, Research Division - VP [61]

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I joined the call late, a thousand apologies. If you've answered my question already, just tell me, and we'll move on. Did you comment about Patrick CapEx levels relative to D&A? Are we expecting more CapEx at Patrick but still lower than D&A?

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Paul Lewis, Qube Holdings Limited - CFO [62]

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No. So in FY '20, CapEx will exceed D&A because our spending on the -- we expect to spend on the Fremantle redevelopment as well as additional claims.

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

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And the Port Botany.

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Paul Lewis, Qube Holdings Limited - CFO [64]

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So I did mention that we expect CapEx to step up certainly in FY '20 and possibly '21 as well, which is why we expect cash distribution from Patrick to still be solid but to be below the levels we received in FY '19.

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Robert Koh, Morgan Stanley, Research Division - VP [65]

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Okay. Great. Paul and Maurice, appreciate that. Just on the Moorebank leasing, and very pleasing to see a big, a growing group of people in discussions there. Can you give us some color on kind of what things need to happen for them to see the light and sign on the dotted line? Are they waiting for some of the toll roads to finish so they can get a view on that? Or are they waiting for their own leases on other facilities to expire? Just kind of with the view to us looking for catalysts, I guess.

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

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Well it's not just a combination of all those things plus other things. I think the first probably point that we've felt for a while, and that is that some tenants have really wanted to see the thing operating. It's been a plan, a plan, a plan for a long time. And we're here now in terms of operations. So I think that's been probably the first catalyst above everything else.

I think the second catalyst is, as we've talked about, often existing leases expiring is a constraint on a potential tenant. That's generally been the starting point, I think, for some tenants. Or in the case of international forwarders, major contracts that they've won or lost is the driver. I think it's hard to sort of single out every single driver. But I think our view would be the fact we're operating there. And you can see from that plan that the IMEX is becoming real and there's a serious chance that we're going to be pretty full on east side in terms of commitments pretty quickly.

Probably the other one driver I think that is probably more relevant, just thinking about [financials], as I'm talking, is what we've explained on Page 15, just around getting planning approval. Those planning approvals have taken us a lot longer than we expected on the west side. It has been -- everybody in development understands it's difficult in New South Wales for the processes required for planning approvals, et cetera. But we're expecting that approval for MPW2, that Moorebank west stage 2 planning approval in the next month. And that's probably, you do staff discussions on the west side. The first question is, do you have planning approval? And that's probably the key driver, I think, on the west side, is planning approval.

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Robert Koh, Morgan Stanley, Research Division - VP [67]

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Okay. Great. That's very helpful, Maurice. And I guess just in terms of the kind of rates that you're negotiating on the leases and the incentives, would it -- would we be right to be thinking that as the thing proves itself, as the train leaves the station, so to speak, that you'd be able to then start charging premium rental or better rents that reflect the value -- the strategic value of the property versus the more generic properties in that space? Is that the right way to think about it?

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

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I think that's our expectation. There's no question that we were sharp in terms of rates for all the early tenants, and we would expect that to increase over time.

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Operator [69]

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Your next question comes from Ian Munro from CCZ Statton Equities.

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Ian Munro, CCZ Equities Pty Limited, Research Division - Senior Analyst [70]

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Just thinking of the Ports & Bulk segment, can you perhaps comment on the organic growth levels and just, I guess, update on sort of some of the capacity utilization levels versus some of the projects and investment that's been made over the last sort of 12, 24 months, please?

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Paul Lewis, Qube Holdings Limited - CFO [71]

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Sure. The organic growth from the Ports & Bulk, particularly the bulk area, is very, very positive across a range of commodities, as you can see from the pie chart. So we're very happy with that.

In terms of capacity, it's much harder to be specific. In the bulk area, typically what happens is we'll secure a contract, we'll invest capital and that capital will service that contract. There's always a buildup -- there's more capital for new contracts. There's generally fund surplus capacity across the group. We have an ability to redeploy assets. But the bulk area generally is contract-specific.

In the ports area, it's different. There's a lot of capacity, generally stevedoring. So vehicle volumes were well down. So we're trying to see if there was a pickup in that. We can handle that very, very easily. Forestry volumes were fairly strong. There were some productivity issues we should address. So again, if volumes are strong, you really expect earnings to be a bit stronger.

So it really is different-based activity, but fair to say, we have capacity if volumes do pick up to handle that without too much of a problem in most areas of the group.

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Ian Munro, CCZ Equities Pty Limited, Research Division - Senior Analyst [72]

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Great. And then just on the financials and the commercial dispute, where do we see that show up in the cash flow and/or CapEx?

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Paul Lewis, Qube Holdings Limited - CFO [73]

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Are you [coming out] with MIC?

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Ian Munro, CCZ Equities Pty Limited, Research Division - Senior Analyst [74]

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Yes.

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Paul Lewis, Qube Holdings Limited - CFO [75]

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So that was -- we generate results in the first half in December. So that was in the first half cash flow. We received an inflow from MIC representing the majority of the strategic amount.

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Operator [76]

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Your next question comes from Nira Sonah from Evans & Partners.

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Nira Sonah;Evans & Partners, [77]

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I've got a question on your retail customer supply chain. The feedback from industry participants has been that the retail supply chain [dropped]. Just wondering, what are you views on that and implications for Qube?

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [78]

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Yes. Look, I think the participants of the market, the -- look to be honest, I'm not sure I want to comment on that. I don't know now enough of the details around various players. But container volumes have been slower. And it -- look, it plays out in various ways, and so we have a view. I'm not sure that our analysis is detailed enough to really answer that question, to be honest.

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Operator [79]

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And your last question comes from Nathan Lead from Morgans Financial.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [80]

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I've got 3 or 4 questions. Just first up, with Moorebank and the IMEX terminal just about to start operating. Do you care to put a dollar number on just what the operating cost base will be for those Moorebank-centric logistics operations and give us a flavor for whether it's more fixed or variable in nature with volumes?

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Paul Lewis, Qube Holdings Limited - CFO [81]

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With the IMEX, we're not going to quantify it as it's fairly commercially sensitive in terms of what we're charging in the general operation. Given that we're investing in the automated model, initially, it's manual. So I think it's going to be more variable, but once it's in automation mode, it will be lower incremental cost and higher depreciation.

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [82]

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I think, as you say so, that it is fair to say that the open [negotiation] we agreed with MIC has requirements for us to publish tariffs, and that will be published (inaudible) for next (inaudible) operations, so you'll be able to see the tariff structures.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [83]

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Okay. That was supposed to be this month, wasn't it, that it was going to be published? Can you...

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [84]

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We're probably a little bit behind. I'd expect in the next month we'll see something. That's our expectation.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [85]

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Okay. And just on Patrick, cash is king. Can you give us a flavor for what the operating cash flow, investing cash flow, debt balance was? Obviously, the cash balance of Patrick came down a lot. But if you could just give us a bit of a flavor for those other items. And then while we're on Patrick, obviously, there was the refinancing. Can you give us an idea of what the cost of debt looks like, post refinancing?

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Paul Lewis, Qube Holdings Limited - CFO [86]

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Look, given it's a joint venture, we can't really disclose information without the other partner's consent. But it's fair to say that there were meaningful reductions in the margins reflecting the progress of the business as well as improved terms. So that's why some of the -- you'll see in our presentation the Patrick numbers, was the external interest costs were down. That was 1/4 of the benefit of the lower interest cost. But importantly, the covenants were improved significantly [which was made of] Patrick contributing a lot more cash.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [87]

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And so what's happened with the swap book for Patrick also (inaudible)?

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Paul Lewis, Qube Holdings Limited - CFO [88]

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The interest rate hedging?

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [89]

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Yes.

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Paul Lewis, Qube Holdings Limited - CFO [90]

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They've hedged around 50% of the debt. So they're exposed to half the debt floating and the balance is fixed.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [91]

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Okay. And now I turn to -- yes.

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Paul Lewis, Qube Holdings Limited - CFO [92]

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The other financial information I can really show is what's in the accounts, on Page 98 of the annual report, where we've got effectively a P&L on the balance sheet, but not the cash flow.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [93]

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Can you tell us the debt? The debt used to be $1 billion didn't it? Has that moved? Or is that still the...

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Paul Lewis, Qube Holdings Limited - CFO [94]

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Yes. The gross debt is still $1 billion and the cash has gone down. So the net debt was probably close to $900 million because of their position, they couldn't pay out all the cash. Now the net debt is pricing at just under $1 billion now.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [95]

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Okay. And Paul, while I've got you, one thing I've been having a look at is just the [day of] debtors on the balance sheet. It looks like they increased in FY '17 into '18 and have never really recovered. What's caused that? And is that likely to reverse? Is that a competition thing? Or what was happening there?

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Paul Lewis, Qube Holdings Limited - CFO [96]

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It's a combination of 2 factors. The cash conversion was over 100%. So we are actually collecting all of the cash flow. But there's probably 2 factors. One is the nature of the agreement with MIC on the MIC funded works can impact timing because the way that effectively works is we fund the CapEx and recover it from them. So depending on -- about a month later, but depending on exactly what the outstanding amount is and when it's recovered, that can have a material impact just on the statutory accounts.

It is fair to say in the logistics area in particular there has been pressure on some contracts as part of the contracts, particularly with larger players, to extend the payment terms. And that's just part of the competitive nature. And that's been there for a little while now. So it's a combination probably of those 2 factors. Certainly there's been no deterioration in bad debt in any way.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [97]

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Yes. Just a final one from me. Just the Chalmers acquisition. Maurice also stated the real sort of kicker from that acquisition with the value of the strategic land, particularly down in Melbourne. It's -- can you give a -- put a sort of value on just how much that land's worth compared to what you paid for it?

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Paul Lewis, Qube Holdings Limited - CFO [98]

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Look, that -- I mean, it's fair to say that land is a significant asset, but we're assessing the optimal use. So that for us it was more around the synergy values. But in Brisbane and Melbourne, we see a lot of cost savings and revenue opportunities just by combining our activities. In terms of the land, that's something, as I said, we'll just assess the best use for it. But it certainly does have a medium-term development potential.

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [99]

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And it was a large component of the acquisition.

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Paul Lewis, Qube Holdings Limited - CFO [100]

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Yes. It does represent a significant chunk of the price. And yes, the -- our assessed value is higher than the book value they had. But we won't put a number on it at this stage.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [101]

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Okay. Can you put a number on the revenue and cost synergies that could come through?

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Paul Lewis, Qube Holdings Limited - CFO [102]

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No. Look, again, our team are working through that. What we said is we expect it to be a nice accretive financial investment, but it's not going to be material to Qube.

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Maurice A. James, Qube Holdings Limited - MD & Executive Director [103]

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So given that that's the last question, I'll round up by saying thanks very much to everyone who dialed in. I hope it was worthwhile for you. Thanks very much. Good morning.

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Paul Lewis, Qube Holdings Limited - CFO [104]

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Thank you all.

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Operator [105]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may all disconnect.