Rail giant, Aurizon (AZJ) is facing a tough 2016-17 after it forecast flat rail haulage volumes in the coming year in the wake of a weak result dominated by a series of impairments that turned the final six months of 2015-16 into a series of bad news events.
And despite cutting staff and facilities and impairing assets at the cost of well over a billion dollars in recent years, the company is pledging deeper cost cuts over the rest of the financial year, including reviewing its intermodal and bulk freight business.
Despite that promise and other talk from management, Aurizon’s shares fell 6% to $4.70 on that weak outlook for 2016-17. After all the cost cutting of the past three years, it seems as though the company is still not shipshape.
Aurizon reported an 88% drop in full year net profit to $72 million, a result not unexpected given the $528 million of previously-announced asset impairments. Underlying EBIT fell 10 per cent to $871 million, as Aurizon warned last month last month in the wake of a shake up in senior management ranks and reporting structures.
Aurizon’s freight business performed poorly, with the company hauling 40 million tonnes down nearly 10% from the 44 million tonnes in 2014-15.
Freight revenues dropped 20% to $739 million, and the company said it took a loss )n an earnings before interest and tax basis) despite cutting freight operating costs by 20%.
“We are in loss-making mode in freight,” CEO Lance Hockridge said in a statement.
Most of the drop in freight revenues was due to the loss of a legacy freight transport contract with the Queensland government.
Aurizon is reviewing all of its intermodal and diversified bulk freight operations and the CEO said he had not ruled out selling all or part of the freight business, which moves grains, minerals, and live cattle in Queensland, NSW and Western Australia, as well as its national intermodal business, which moves freight containers.
"There’s nothing that’s off the table," Mr Hockridge said. Aurizon will examine each part of its freight and intermodal business, including the regions it operates in and the goods it carries.
Aurizon’s coal revenues dropped 1% to $1.8 billion after on a 2% fall volumes, while iron ore revenues slid 8% to $311 million.
The company has forecast flat rail haulage volumes of between 255 million tonnes and 275 million tonnes in fiscal 2017, with coal haulage expected to be between 200 million tonnes and 212 million tonnes.
Earnings from Aurizon’s rail networks business are also forecast to be flat in the next 12 months due to rising energy and depreciation costs.
The company claims it will deliver an additional $250 million in cuts to slash total costs by $380 million by the end of 2017-18. Some 300 jobs are being axed and some maintenance works are being outsourced.
And as part of the tougher line on costs and to conserve cash, Aurizon has also axed the remainder of its $500 million share buyback so it can manage its balance sheet.
The company had around 20%, or $100 million, left on the buyback which was announced in 2014.
Aurizon expects free cash flow to increase "significantly" during the next few years as capital expenditure is cut and additional cost savings are booked.
Much of the previously announced impairments and write-offs relate to an ill-advised attempt to get into the iron roe industry in WA with Baoshan Iron and Steel of China, via an investment in Aquila Resources and grandiose plans to develop a high cost magnetite mine and transport and port facilities. Of the $528 million before tax of impairments, $226 million related to Aquila, $177 million on rolling stock and $125 million on strategic projects.
The full-year result of $88 million is down sharply from $604 million the previous year.
While volumes are expected to be flat over the next year, Aurizon sees an improvement in underlying earnings – which is expected come in between $900 million and $950 million – driven by cost savings, an anticipated stable volume environment and no major weather impacts. The company also expects to make further cuts in its investment program as well. The guidance excludes a minimum of $100 million in restructuring costs expected in 2016-17.
