Mullen rejects Asciano demerger


Asciano CEO John Mullen rules out further restructure or asset sales on the back of firm results announced today

Mullen rejects Asciano demerger
Mullen rejects Asciano demerger

By Anna Game-Lopata | August 24, 2011

Asciano CEO John Mullen has ruled out further restructure or asset sales
on the back of the company’s firm full year results announced today.

The ports and rail business today reported an increase in revenues of 7 percent for the period ending June 30, 2011.

This was despite significant external pressures in its three remaining divisions Pacific National Coal, Pacific National Rail and Patrick, consolidated in a restructure during 2010.

Impacts included floods in Queensland, coal availability constraints, congestion in the Hunter Valley rail network and significant industrial relations activity on the ports.

"An overall downturn in economic activity in Australia impacted both revenue and margins across the three divisions, but in spite of these factors Asciano delivered year on year growth in both revenue and profit," Mullen says.

The increase was driven by organic growth in bulk rail and new bulk and coal contracts.

Profit before tax and material items increased 52 percent reflecting, lower net financing costs and lower amortisation on a reduced intangible asset base.

"We are pleased to be able to report an improved operating result despite a significant number of negative external factors impacting our three business divisions over the twelve month period," Mullen says.

"NPAT after significant items of $145.2m represents a significant turnaround from last year’s loss and places us on a strong footing to move forward."

Given Asciano’s strong financial turnaround, Mullen asserts the board and senior management has rejected options of asset sales or demerger to fund the group’s growth initiatives going forward.

"We are of the view that the clear and present opportunities to pursue growth in each of our three core divisions far outweigh the risks of any sale or demerger process," Mullen says.

"We will continue to review the structure of the group put in place on an annual basis as you would expect."

Mullen says the decision was made following a full strategic review of Asicano’s planning processes undertaken in March this year.

As Mullen was one of a new senior management team appointed this year, he says the review was particularly rigorous, to allow a full understanding of the business risks and opportunity profile of the group where gaps existed in terms of its international and domestic competitors.

Focusing on a three to five year timeline, the review focused on improving operational performance through metrics, key performance indicators and a new group management office to manage the wider change program.

It also examined the three key alternatives for the structure of the business in detail.

"The conclusion that the board and senior management team came to was that organic growth and improvement opportunities in each of our core three businesses currently far outweigh the costs, risks and uncertain benefits that might be realised from asset sale or demerger," Mullen says.

"Much progress has been made on restructuring the group’s balance sheet and we’re now in a position to fund the growth opportunities ahead without the need to raise additional capital.

"To consider significant structural change would potentially undermine our current standing and near term growth opportunities."

"We believe Asciano’s management teams are now demonstrating the financial leverage and opportunities available to each of the businesses divisions when focused and properly funded," he adds.

"The distraction of a sale or a demerger has the potential to be extremely damaging without offering any realistic upside compared to the execution and delivery of our stated strategy.

"In addition to I believe the business has not yet concentrated on looking at the integration opportunities of the supply chains we compete in," Mullen says

"While it’s early days I’m encouraged by the feedback from our customers and investors regarding the potential to unlock value which to this point has not been pursued."

"Finally I can’t emphasise enough the importance to this business of simply delivering on performance expectations," he says.

"Our organisation now has the opportunity to concentrate on organic delivery and the operational plans in place are very compelling."


PN COAL
The Coal division reported a 22 percent increase in revenue (net of access charges) to $577m over the 12 month period reflecting new contracts that came on stream in Queensland and the repricing impact associated with renegotiating a number of legacy contracts to performance based contracts.

EBITDA increased 23 percent to $259m, EBITDA margins remained strong at 31.4 percent.

"The Coal division has signed three new contracts over the last twelve months in Queensland that will lift tonnes under contract by 6.3mt from January 2012, a further 10.9mt in FY13 and an additional 4.4mt in FY14,’ Mullen reports.

However achieving this full volume will be dependent on a number of factors including the wet season, congestion and third party related disruptions to the coal chain operation.

"Asciano does not expect congestion issues in the Hunter Valley to be resolved until a third track from Maitland to Muswellbrook is completed and the ARTC track infrastructure matches or exceeds peak port and mine infrastructure capability," Mullen told investors.

PN RAIL
The Rail division reported an 8 percent increase in revenue to $1.2bn over the 12 month period driven by good growth in Bulk Rail offset by lower freight forwarding volumes.

Revenue from Intermodal and PN Queensland increased 7 percent to $861.4m.

Freight forwarding volumes were down, impacted by soft consumer spending and track flooding in Q3 on the East/West corridor, however Express volumes increased by 10.6 percent.

Overall steel revenue increased by 6.2 percent, despite soft construction activity in Australia.

Bulk Rail revenue for the 12 month period increased 19 percent reflecting strong volumes in the export grain business and construction materials.

Bulk Rail tonnes overall increased 21 percent and NTKs increased 27 percent over pcp.

EBITDA increased 7 percent to $275.8m, the result was boosted by a number of business improvement initiatives totaling $19m, in the areas of fuel consumption, slot and path utilisation, labour and planning improvements.

PATRICK
Patrick increased total revenue 1.4 percent to $1.2bn over the 12 month period.

Revenue from the Terminals business was down 2.2 percent on a 4.5 percent decline in TEUs over the period reflecting the loss of customer contracts in 2H FY10, changes to shipping consortia and soft market volumes.

Port Logistics revenue was down over the period impacted by the sale and exit of
some businesses.

Underlying revenue growth excluding the impact of these businesses was 3.8 percent.

Ports & Stevedoring revenue increased 13 percent reflecting growth in steel, fertilizer and iron ore and the benefit of take or pay arrangements.

Autocare revenue was up marginally but was adversely impacted by the disruption to the supply chain post the Japan earthquake.
EBITDA increased 4.7 percent to $269m, the result benefitted from, cost initiatives, higher volumes in Bulk Port and General Stevedoring plus the net $12m settlement of a construction dispute offset by the negative impact of industrial activity and lower Terminal volumes.

OUTLOOK
"We expect the Coal division will continue to be impacted by the aftermath of weather events in FY11, congestion issues and lower than contracted coal supply in the first six months of FY12," Mullen says.

"The impact of announced new contracts and revised terms of existing contracts are
expected to offset the impact of external factors.

"PN Rail will also continue to be impacted by the prevailing weak economic conditions in Australia however additional contract volumes secured during FY11 and ongoing buoyant volumes in some commodities should offset this weakness.

"Over the last eighteen months Patrick has invested in a number of initiatives to improve operating efficiency and deliver an improved service offering.

"Recent contract wins as a result of these initiatives will see an increase in market share in Patrick over FY12."

Mullen adds resolution of the long running dispute with the MUA is a key focus of the management team to ensure that the business can continue to improve its customer service offering and focus on strategies to ensure market competitiveness in the face of a third operator.

CARBON TAX
Asciano is continuing its assessment of the potential impacts of the Federal Government’s proposed carbon tax, in particular the impact it will have on customers.

"We are disappointed that despite both Federal and State government rhetoric around the need to shift freight from road to rail in Australia the proposed tax perpetuates and for an interim two year period, increases, the cost advantage road has over rail," Mullen says.

However, despite the uncertainties created by the current macro environment Asciano says the business can continue to deliver solid growth over the medium term.

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