CEO's Report

The successful transition from Government-Owned Corporation to publicly listed company was the defining event for QR National in 2010/11.

As a public company we have the ability to move forward with precision in executing the changes necessary to realise QR National’s vast potential. We are doing so with a very clear mandate — to create shareholder value by transforming QR National into an accountable, efficiently-managed organisation with outstanding safety performance, superior customer service and excellent growth prospects.

The ASX listing signalled the start of a new era for the Company and formed the ideal platform for us to extract maximum value from the five key planks of our enterprise strategy:

  1. Achieve excellence in customer service
  2. Establish an accountable, performance-based culture
  3. Improve asset utilisation and return on capital
  4. Leverage and expand our leadership position in coal
  5. Pursue opportunities for growth and diversification.

I’m pleased to report QR National has made excellent progress across these five priorities, despite the challenging operating conditions that have prevailed since once-in-a-generation floods in Queensland in December and January.

Undoubtedly, we approach the future from a position of strength. Our unique assets and unrivalled haulage and infrastructure expertise are an exceptional base from which to achieve our growth and commercial targets. As a national company more than 80 per cent leveraged to the thriving Australian resources sector, we have significant growth prospects before us. We are determined to succeed, but we recognise there is much to do.

Safety

As we reshape QR National, safety remains our top priority. I am focused on achieving change across the Company without sacrificing our commitment to providing a safe environment for employees, our customers and the communities in which we operate. In recent years we have undertaken a major program to implement world class safety performance standards across QR National. We achieved a 50 per cent reduction in our lost time injury frequency rate in 2010–11 and while this is a step in the right direction, our goal of ZEROHarm means no injuries to anyone, ever.

Financial Results

QR National delivered a solid improvement in financial performance in 2010–11 compared to the prior year, despite the impact of the Queensland floods and Cyclone Yasi. The impact on our customers resulted in reduced coal availability and contributed to a 37 million tonne reduction in haulage volumes for the year. Given these conditions, the robust full-year financial result is a testament to the resilience and strength of QR National’s business.

Revenue rose to $3.3 billion for the reporting period to 30 June 2011, an 11 per cent increase over the prior year (FY10: $3.0 billion). The combination of revenue growth with cost reduction and reform initiatives contributed to a 17 per cent improvement in underlying* Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) to $813 million (FY10: $696 million). Underlying* Earnings Before Interest and Tax (EBIT) increased by 35 per cent to $367 million (FY10: $272 million).

Total assets were $9.2 billion, and earnings per share was 14.94 cents. The Company’s strong cash flow has supported our major investment program, with capital expenditure totalling $1.4 billion for the year. The Company’s net debt position as at 30 June was $686 million, reflecting a net gearing ratio of 9 per cent.

Operations

Flooding and cyclone impacts affected the overall profitability of our operating divisions in 2010–11, substantially interrupting rail operations and causing some minor damage to our rail infrastructure. Mines are progressively returning to improved operational capacity and as coal supplies increase over the months ahead QR National is poised to capitalise on the expected uplift in tonnages.

We took pride in our response to the floods, with the Company undertaking swift action to repair and reopen the Central Queensland Coal Network for customers in a matter of days of the floodwaters receding. As mine production recovered, QR National had infrastructure and haulage capacity to respond to customer requirements.

With such a large presence in Queensland, many of QR National’s employees were personally impacted and our people united to assist with the flood recovery efforts in whatever way they could. The fantastic contribution of so many QR National employees made a tangible difference to the recovery of the Company and many Queensland communities.

Coal

Reduced coal production throughout the year translated into weaker than expected haulage volumes of 182 million tonnes for the Coal division. Full year revenue of $1.7 billion was broadly in line with the prior year, although revenue per net tonne kilometre (NTK) grew by 11 per cent. Underlying EBIT declined by 29 per cent, or $65.4 million, to $158.8 million.

During 2010–11, the Company signed long-term contracts for cartage of coal in excess of 26 million tonnes per annum with a revenue value of more than $1.6 billion. These new contracts include commercial incentives for strong operational performance by QR National, leveraged off the size, scale and expertise of our coal haulage business.

Network Services

Network Services contributed full year revenue of $1.2 billion and underlying EBIT of $284.7 million, which were up on the prior comparable period by 11 per cent and 3 per cent respectively. Despite lower volumes, access revenue was largely protected through take or pay mechanisms. The increase in revenue reflects the increased activity in Rollingstock Services and the securing of new maintenance contracts. Work continued on a number of strategic growth projects to position the Company to capture the forecasted surge in coal production over the coming years, with capital expenditure for the year totalling $707 million.

Freight

Total revenue in the Freight division grew 11 per cent in 2010–11, or $127 million, to $1.3 billion, over the prior year. Underlying EBIT grew by 132 per cent, or $126.4 million, to $30.6 million and is reflective of the Transport Services Contract with the Queensland Government for regional services. Capital expenditure grew from $89 million to $197.8 million to support iron ore growth projects.

At the start of 2011–12, our Freight subsidiaries ARG, CRT and Interail were rebranded as QR National. For the first time, all QR National operations nationwide fall under the new QR National brand – a brand that is rapidly becoming recognised for safety, outstanding performance and high levels
of expertise.

Growth projects

QR National is well positioned for growth in all of our target markets. We have a pipeline of large-scale capital projects, at various stages of commitment, which will provide the foundation for our growth moving forward. Our signature capital project is the $1.1 billion Goonyella to Abbot Point (GAP) Expansion Project in Central Queensland. The GAP project will increase the capacity of coal that can be railed to Abbot Point for export to 50 million tonnes per annum by connecting the Goonyella and Newlands coal systems. Construction continued unabated through Queensland’s extreme wet weather and the project remains on budget and on schedule for opening in January 2012.

The contestable iron ore market in Western Australia provides a major opportunity to diversify the QR National Freight business, and during the year the Company established a distinct iron ore business. In a major development, QR National secured a new contract to haul 10 mtpa of iron ore for the Karara Iron Ore Project, contributing approximately $900 million in revenue over the next 10 years, commencing in 2011–12. The Company is on track to treble iron ore volumes in WA over the next three years.

In the New South Wales Hunter Valley coal region, we expanded our presence with the addition of $360 million in new rollingstock which will support new and existing coal haulage contracts. During the year we continued to build to 30 per cent market share in this highly-competitive and growing market.

Moving forward, future expansions of Queensland’s coal ports continue to open significant growth opportunities for the Company. At present the Company is working closely with coal customers to scope a number of new capital projects in Central Queensland including the Wiggins Island Rail Project to support the new Wiggins Island Coal Export Terminal.

Transformation

The transition from government-owned business to a high-performing public company requires substantial change to refocus operational and commercial priorities. QR National’s primary objective since listing has been to ramp up the transformation that has been underway since 2008–9. There is a range of initiatives in progress to deliver cultural changes, productivity improvements and cost reductions, with work focused in four key areas:

  1. Capital productivity
  2. Labour productivity
  3. End-to-end efficiency improvements
  4. Cost savings through improved asset management.

More than 660 voluntary redundancies took effect during the financial year. We have flagged our intent to embark on an organisational restructure in the current year, subject to consultation with staff and union representatives. The restructure aims to make the Company as competitive and efficient as possible, better aligned to the markets in which we operate and above all, absolutely committed to customer service.

Outlook

In the coming year we are focused on building on the momentum achieved since our ASX listing. We will be working particularly closely with our coal customers in Queensland to maximise the recovery from the 2010–11 flood events.

We expect strong volume growth in all of our businesses over the next five years and global demand for Australian coal and iron ore is expected to surge. Australia’s domestic freight task over the next decade is also forecast to double. Growth of this magnitude presents massive opportunities for our business and the rail sector generally.

Acknowledgements

The success of the past year was achieved through the hard work and commitment of so many associated with QR National. In particular, I sincerely thank our employees for persevering with spirit and determination through some major organisational changes, and for their outstanding efforts with the flood and cyclone recovery. Thank you to the executive management team, who worked above and beyond the call of duty to deliver a successful IPO while maintaining a continued focus on safety and business priorities. I am also most grateful to the Chairman and the Board for their astute counsel during the year. They have provided strong leadership and invaluable guidance through a time of great change and complexity for the Company.

It is also important to acknowledge the outstanding work during the IPO of Queensland Treasury and the Joint Lead Managers, namely Credit Suisse, Goldman Sachs, Merrill Lynch, RBS Morgans and UBS. This team of people delivered their work for the float with great focus and professionalism.

In addition, I express my appreciation for the support of the community over the course of the year. Our Company places high importance on maintaining a good relationship with communities in which we operate, and we give a firm commitment to continuing to proactively fulfil our obligations as a responsible corporate citizen.

Finally, welcome and thank you to our shareholders from around the world, the new owners of the business, for your ongoing support and confidence in the Company. I am confident QR National has emerged from the challenges of 2010–11 as a much stronger organisation, fully equipped to capitalise on the clear growth prospects ahead of us.

Lance Hockridge

Managing Director and Chief
Executive Officer

*Underlying results differ from the Group’s statutory results. Refer reconciliation to statutory earnings on page 129.