Logistics, Ports & Terminals

Intermodal struggles, abandoned systems overhaul lead to $321m Aurizon impairment

Aurizon train on Queensland Rain Network. Photo: Aurizon

A challenging intermodal market and the abandonment of a systems overhaul have led Aurizon to announce a $321 million impairment will be part of its first-half results.

Challenging conditions in the intermodal market have driven the Queensland-based operator to almost halve the book value of its intermodal assets. A $162 million impairment will leave Aurizon’s intermodal assets with a book value of just $177 million.

Despite a recent increase in volumes, Aurizon said “considerable challenges” within the intermodal market have impacted the cost side of the business, leading to an overall decline in profitability.

Aurizon said it would move commercial and operational intermodal activities under one vice president, Andy Jakab, effective immediately.

Meanwhile, the company has abandoned a $91 million Freight Management Transformation project, which was launched in 2014 with the aim of consolidating 18 separate legacy systems for logistics planning, scheduling, ordering and billing to a single platform.

“Following a review, it has been decided to terminate this project and as a result an impairment charge of $64 million will be recorded in the [first half] accounts,” the company said.

$27 million in value invested in the project hasn’t been written off, as it is represented through software and licences which are currently in use.

Aurizon also announced a $10 million impairment from the loss of a haulage deal for Glencore for mine inputs and outputs between Mount Isa and Townsville, which will result in the cancellation of the multi-customer freight service from that contract.

In addition to the impairments, the company flagged $85 million in transformation costs as a result of an ongoing redundancy and restructuring program would also be attributed in the first half results.

Aurizon made 494 employees redundant in the first half of FY17, at a cost of $64 million, while $15 million of property, plant and equipment was impaired, along with a further $6 million relating to various projects no longer proceeding and assets identified as “surplus to requirements”.

The impairments and costs announcement did not appear to bother investors: Aurizon closed on Tuesday up 2.04% to $5.01 a share on the ASX.

The company said it is conducting a freight review, to provide “greater granularity” around operational costs, asset utilisation and potential opportunities for investment.

“While the deterioration in underlying trading performance has resulted in this impairment, the freight review is ongoing and no final decision on the future of the intermodal business has been taken,” the company told the ASX.

The review is expected to conclude by the middle of the year.

Aurizon managing director and chief executive Andrew Harding said a key focus for him was “getting the company’s core business right”.

“The [systems consolidation project] was not delivering value for the business, was at high risk of over-spend and delays, and so it was stopped,” he said.

“By undertaking the freight review we’re getting the granularity we need to make informed decisions and to clearly understand the future value and potential of the businesses in this area.”

Harding said underlying earnings and above rail volumes remained on track for FY17, despite the impairments. Aurizon is forecasting underlying earnings before interest and tax of $900-$950 million, and total above rail tonnages in the range of 255-275 million tonnes.

Formerly the iron ore boss at Rio Tinto, Harding replaced long-time Aurizon boss Lance Hockridge for the top job late last year, and was quick to make changes at the Brisbane-headquartered operator. CFO Keith Neate left the business a fortnight after Harding joined, and was replaced by Pam Bains, who was promoted from her role as vice president of network finance.

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