QR's slow track to success

QR National's first full-year earnings result as a listed and privatised company were always, given that it remains a long-term work-in-progress, going to be difficult to decipher. The Queensland floods and the billions of litres of water still lying in its customers' mines have added to that complexity.

The loss of 37 million tonnes of coal volume and the estimated $187 million impact of the Queensland floods and cyclone obviously disfigured the result. QR said today that only $65 million of that lost revenue will be recoverable in future years.

QR National was never a short-term turnaround story, however. In the short to medium-term the challenge for Lance Hockridge and his team is to continue to improve the group's performance on costs and capital efficiency and the quality of its contracts while positioning the group in the longer term to get a leveraged benefit from a continuation of the Chinese and Indian growth stories.

Given the loss of volume and revenue as a consequence of the floods, Hockridge would be reasonably satisfied with the group's inaugural results as a privatised entity. Revenue was up 11 per cent, underlying earnings before interest tax, depreciation and amortisation were up 17 per cent and on a statutory basis the net profit of $350 million compared with a loss of $220 million previously. Its profit margins are also continuing to edge up.

Perhaps of greater relevance than the earnings numbers were the improving trends within the business. There was a big decrease in lost time injury frequency rates; QR held labour costs to revenue steady despite the flood-related revenue losses; it shed about 600 people; and, most importantly, it continues to renew contracts and negotiate more commercial terms.

About 29 per cent of its contracted tonnages are now covered by higher-yielding, recently-renegotiated, contracts.

The one good thing to come out of the floods from QR National's perspective is that it did demonstrate the quality of its infrastructure, which was only modestly damaged by the floods. It is the extent of the disruption to its customers' production that impacted its results so materially, not its own capabilities.

QR National is steadily improving its productivity and is growing its market shares outside Queensland, particularly in NSW. Its network business also produced solid sales and earnings growth despite the floods and its diversification into iron ore in Western Australia is gaining momentum.

It also continues to pour capital into the business. It invested $1.4 billion last year to bring the capital spend on new projects to $3.5 billion over the past four years.

Another $1.6 billion is planned for this financial year. With the continuing renegotiation of its legacy contracts, it is the efficiency of those investments and the returns they generate that will determine whether the story that international rail freight investors bought during the float – of QR National's ability to lift its productivity to international standards and creating that operating leverage to the growth in the coal sector – is borne out by results.

Without doubt the current 4 per cent return on equity is a long way short of where it will eventually need to be.

Certainly the underlying trends in the business and QR National's financial performance are tracking in the right direction, although BHP's public musings about the possibility of building its own rail line from the Bowen Basin to the export terminal at Abbot Point would be slightly disconcerting.

Given BHP is probably the biggest beneficiary of QR National's sub-economic legacy contracts, and that there is an enormous amount of expansion occurring in the Queensland coal industry, that might not be as threatening to QR National as it might once have been.

Had it not been for the floods, which will probably continue to impact QR National well into 2012, Lance Hockridge might have been reasonably satisfied with the group's initial performance as a listed company.

The transformation of the gold-plated former government-owned bureaucracy, however, was never going to be completed within the near-term and, in broad terms, his strategy for transforming the group remains on track.