Aurizon Holdings Limited (AZJ) Earnings Call Transcript & Summary

Good morning and welcome to the interim results for financial year 2020 for Aurizon. Pam and I will go through the presentation that we lodged with the ASX this morning, which is available on our website. At the end, we will take your questions with the rest of the executive team, who are in the room with me here in Brisbane. Just to remind you, the team is Ed McKeiver, Group Executive, Coal; Clayton McDonald, Group Executive, Bulk; Jason Livingston, Acting Group Executive, Network; Mike Carter, Group Executive, Technical Services and Planning; and Tina Thomas, Group Executive, Corporate. Now turning to safety performance. At Aurizon, we always start with safety. Tragically, we lost one of our long-serving and highly respected train crew, Hans Ah Chee, in a road accident in December 2019. This incident is under investigation by Queensland Police, who will prepare a report for the Coroner. Workplace Health and Safety Queensland has advised it has considered all issues relating to the accident and is not investigating the matter any further. While we await the results of the police investigation, this incident is a sober reminder of the need to continue our broader efforts to make road travel safe for our employees. Notwithstanding this tragic fatality, we have improved our total recordable injury frequency rate by 14% during the half. The other metric we use to measure safety performance is rail process safety or RPS. This measures core rail operations, including derailments, signals passed at danger and collisions in both mainline and yard environments. During the half, there was a decline in RPS by 7%. A significant contributor to the result this period was low-speed yard derailments. We continue our work on improving our safety performance with a focus on leadership capability and safety risk management and simplifying our safety tools and processes. Aurizon also continues to invest heavily in technology to mitigate risk, including technology and locomotive cabs, trackside monitoring equipment and train control systems. As a final comment, you will note that the 2 measures, total recordable injury frequency rate and rail process safety, can move around from half to half. It's important to acknowledge that there's been a long-term improvement in Aurizon's safety performance over the past decade. This trend has leveled off in recent times. This is why we are absolutely focused on driving further significant improvements in our overall safety performance. Safety remains Aurizon's core value, and our resources and investment must be -- must continue to be prioritized to lower the potential risks of serious injury or fatality for our employees. Turning now to the first half highlights. The company delivered a solid half year result, which confirms full year guidance. The creation of shareholder value through actions aligned with the enterprise strategy remains Aurizon's primary objective, and we believe these results provide evidence of that value creation. Underlying EBIT was 12% higher than the prior period, reflecting the positive impact of the finalization of the UT5 undertaking for Network and the improved performance in our Bulk business. In Coal, volumes were flat at 106.3 million tonnes for the half. Coal volumes have been impacted by specific customer production issues, particularly in CQCN, which I'll cover in more detail shortly. This has been partly offset by increased railings in New South Wales for MACH Energy as they ramp up production. The flat volume performance has resulted in EBIT being marginally lower this half. Network volumes were also flat at 116.6 million tonnes. Statutory NPAT was up 51%, reflective of the improvement in underlying EBIT and a pretax gain on sale of $105 million for the rail grinding business. The proceeds from this sale helps free cash flow grow 26% to $465 million, and ROIC improved 50 basis points to 10.5%. And finally, on shareholder returns. The Board has declared an interim dividend of $0.137 per share, an increase of 20%, which represents a payout ratio of 100% of underlying NPAT for the continuing operations, a level that has been maintained for 5 years. We've also announced a $100 million increase to the on-market buyback program, taking the total to $400 million. As the profit on sale of grinding was not included in underlying earnings, it does not impact the dividend as we pay this out of underlying NPAT. Therefore, we've increased the buyback to ensure shareholders benefit from this successful transaction. We have already completed $215 million of the buyback, therefore, we have $185 million remaining. Moving to Coal. During the half, we've executed 2 contracts with existing customers, both of which involved an extension of term and additional volume. These extensions have substantially derisked the near-term contract book for the Coal business with only 9% of contracted volumes expiring in the next 3 years. This means we have 60% of the Coal book -- Coal contract book with a duration of greater than 7 years, an improvement of 11 percentage points against FY '19. You will note that 6 months ago, we advised that 72% of contracted volumes had an expiry of greater than 7 years. Due to incorrect labeling, this number should have been 49% at 30 June. The detail is disclosed on Slide 63. We've been able to execute the strategy of lengthening the Coal contract book through a combination of flexible offerings, leveraging delivery performance and fleet to share risk and by finding the right commercial value. As we have stated for some time, this can result in pressure on contract rates as dictated by the market. With the near-term contracting environment now largely complete, we're in a better position to comment more on what this means for revenues. We expect above-Rail revenue growth for Coal to be limited over the next 3 years as lower contracted rates will largely offset the positive impact of volume growth and escalation. Coal volumes in the first half were lower than expected due to a number of factors. First, weaker prices resulted in some customers primarily BMA, prioritizing maintenance earlier in the year rather than production. We expect higher second half volumes as prices have recovered. And second, production issues specific to certain customers have impacted volumes. This includes Peabody within North Goonyella mine being closed longer than initially expected, and Whitehaven where production guidance has been lowered due to recent bushfires and a labor shortage. Volumes being lower than expectations in the first half had a consequential impact on EBIT, and Pam will provide more detail on this shortly. Due to these impacts, our expectations for FY '20 volumes are now 210 million to 220 million tonnes or a reduction of 10 million tonnes. As per our normal practice, we do not assume any impacts from one-off events like weather. This also extends to any potential impact from the emerging coronavirus situation in China. The overall demand picture for Coal remains solid with a range still expected 1% to 2% volume growth per year for 10 years for both met and thermal coal. Thermal coal will be towards the bottom of that range and met coal towards the top. Coal remains focused on what they need to deliver, which is excellent delivery performance and reliability. This is closely linked to Coal's continuing journey of operating efficiency improvement. There remains a substantial program of work designed to improve productivity and lower costs, and we have seen progress on some key initiatives. The condition monitoring site in the Hunter Valley has been installed and is awaiting commissioning after a testing phase. This is exciting given the benefits we've seen from this equipment in Queensland. The Queensland Coal EA has been approved by Fair Work with pay rises between 2% and 2.5% each year for 3 years, and we continue our work optimizing train design with longer consists in Hunter Valley and Southeast Queensland. Project precision has executed a schedule adherence trial in the Blackwater system after implementation in the Moura system. Unsurprisingly, we found the implementation in Blackwater more challenging due to the scale and complexity in the system. We still have work to do, but our customers recognize the benefits that can be unlocked with the project. We'll continue to roll out this important initiative in other systems this year. These efficiencies and many other initiatives are important in providing a differentiated service to our customers through exceptional service delivery and performance excellence. In addition, they will also mitigate the impact of lower contracted rates on revenue. Moving to Bulk. The Bulk business continues its turnaround journey, and the result this half clearly demonstrates this. A dedicated Bulk team was established around 2.5 years ago, and today, we have a business that is performing ahead of expectations with the Bulk business, excluding iron ore, generating a profit ahead of the original 3-year time frame. Underpinning Bulk's success is its customer-focused strategy. This includes leveraging its strategically located land and facilities, utilizing available capacity and flexible deployment of its assets and people to efficiently access end markets for our customers. This has resulted in a number of new contracts over the past 2 years, including 2 executed during the half. First, we've signed a 3-year contract with Mineral Resources. This includes a full suite of supply chain services and yard operations, representing a return to servicing this customer after almost 10 years and a return to the Esperance region for Aurizon. Second, we have secured a 4-year contract with Rio Tinto for the operation and maintenance of its ballast cleaning machine in Pilbara. Whilst this is new work for the Bulk team, we have leveraged Aurizon's existing capability in this space. You can see that the opportunities are varied, with these 2 contracts involving minimal new capital utilizing existing assets and operational expertise. These opportunities reinforce how Bulk is quite different to Coal. It holds many products, some requiring specific rolling stock to undertake the task. Not only does it operate in a very competitive rail market, in many cases, it is assessed against the road option as customers look for the most efficient solution to access end markets. Therefore, contracts in Bulk tend to be lower in volume, shorter in duration and often share more operational risk with customers. While this means additional challenges in terms of future revenue profile, it also means additional opportunities if you are flexible enough to respond to the market. A large part of Bulk's turnaround success has been its continued focus on efficiency improvement. Over the last 6 months, the focus on business improvement and service delivery in Bulk West has seen a rise in cancellations reduce by 59% for Alcoa, which in turn has seen Bulk deliver record bauxite volumes for our customer. In Bulk East, the business has deployed a flexible maintenance delivery model to its operations. This sees a move away from fixed site static maintenance to mobile maintenance crews and allows the business to be more responsive and flexible in dealing with maintenance issues. The focus on efficiency, coupled with the new Queensland EA that received approval from the Fair Work Commission in January 2020, demonstrate Bulk's ongoing focus on cost control, which is essential in maintaining Bulk's competitive position in the market it operates. Turning now to Network. The result for Network is in line with expectations and reflects the approved UT5 undertaking. This now means UT5 is in place until June 2027. This delivers benefits not just for Network and its customers but for the whole supply chain. It will allow Network to work more closely with customers to align maintenance and capital plans. And from a customer perspective, it makes Network accountable for performance through the performance rebate process. The weighted average cost of capital is now 5.9% and will increase to 6.3% on the report date when Network responds to the independent experts' Initial Capacity report in the event there is a capacity deficit. We expect this to occur in the middle of this calendar year. The Initial Capacity report will provide a review of capacity for the CQCN. If there is a capacity deficit, Network will need to remedy this by either inviting access holders to voluntary relinquish their access rights, a change in operational practices or a once-off capital investment up to a total of $300 million, which will then be added to the RAB to earn additional revenue. The independent expert is in the process of being established, including the appointment of key personnel. And the initial work on system capacity modeling is well progressed. The Rail Industry Group, or RIG, has been established, and Network has submitted the maintenance and capital plans for FY '21, which are due for approval. These plans will be submitted to the QCA by the end of this month to form the basis of tariffs for next year. On operational efficiencies, UT5 now provides a mechanism for Network to drive efficiencies through the business. And before I hand over to Pam, an update on the progress of some additional items of the business. The sale of the rail grinding business successfully completed in October when ownership transferred to Loram. As stated earlier, the net profit on sale will be returned to shareholders through the additional buyback announced today. On Acacia Ridge, we were pleased with the Federal Court's decision in June. However, the ACCC has appealed the decision with a court date set for later this month. You can see from our results that Acacia Ridge made $7.5 million EBIT this half, which is shown as earnings from discontinued items. So the business continues to generate a positive return while we wait for the court process to play out. On Wiggins Island, the Supreme Court of Queensland's favorable decision in June has been appealed by the customers, we will -- which will be heard in March. Given the uncertainty, no work fee has been recognized to date. And finally, last September, we commenced proceeding seeking damages and declarations for the breach of long-standing contractual rights regarding the sale of Australian assets at Genesee & Wyoming. This matter is currently before the court with no trial date set as yet. And now I will hand over to Pam.

Thank you, Andrew, and good morning to everyone on the call. As a reminder, the results I will cover today are based on the continuing operations. During the half, we have continued delivering on our promises, and our EBIT result demonstrates this with a 12% improvement against the prior period, largely due to the positive benefits of the UT5 undertaking, which was approved late in the half by the QCA and the strong performance within our Bulk business with new contract wins and a continued focus on costs. I'll run through the individual business unit results shortly. The statutory EBIT result includes the benefit of the $105 million gain on sale of -- for rail grinding. This also contributed to the strong growth in free cash flow over the half. We continue to maintain our 100% dividend payout ratio with an interim dividend of $0.137 per share. As a dividend is based on underlying net profit after tax, it does not include the gain on sale for rail grinding. Therefore, we have increased the on-market buyback by $100 million to $400 million. Starting with the Coal business unit. EBIT decreased $4 million to $206 million, with Coal volumes flat against the prior period at 106.3 million tonnes, which was lower than expected. We expected reasonable growth in volumes in FY '20 and, therefore, costs have been incurred during this half to support the expected growth. This includes activities such as recruiting and training new drivers and reinstating rolling stock to operational condition. With volumes and, therefore, revenue not coming on as anticipated, earnings have reduced, albeit mitigated by protections within most contracts and efficiency improvements. Revenue quality has improved with lower contract utilization and benefits of CPI escalation. Operating costs, net of access and fuel, have increased $11 million against prior period mainly due to costs -- due to cost to install capacity, as already noted, and CPI impacts, offset in part by efficiency improvements. Depreciation increased $6 million as a result of investments in technology and rolling stock overhaul activity. As Andrew highlighted, given the competitive haulage market, we have seen pressure on rates for some contracts as we moved through the recontracting cycle. Accordingly, we expect above our revenue growth for Coal to be limited over the next 3 years as lower contracted rates will largely offset the positive impact of volume growth and escalation. However, the continued focus on efficiency improvements is designed to mitigate this impact. Moving to Bulk. The underlying EBIT improved from $14 million to $44 million due to higher revenue with new volume growth and revenue quality impacts. The Bulk business, excluding iron ore, is now EBIT positive, which is a great result and demonstrates the work the Bulk team have been executing on the turnaround. Bulk East earnings were higher primarily from the Linfox contract and increased volumes on the Glencore freighter. In the West, volumes were broadly flat with higher export bauxite volumes, offset by lower iron ore railings, mainly Mount Gibson. Bulk's railing spot volumes for Mount Gibson post cessation of the haulage contract back in January 2019. This is expected to continue until June this year, albeit at a reduced rate. Revenue quality in Bulk has benefited from some minor contract variations, the expiry date -- the expiry of a rate relief arrangement for an iron ore customer during the second half of FY '19 and CPI impacts. Operating costs have increased due to growth in new contracts, but this has been partly offset by ongoing operational efficiency benefits. The impairment benefit of $9 million on the bridge is due to the improved performance of Bulk East, resulting in sustaining capital no longer being expensed to the P&L. We indicated this was a possibility 6 months ago and are pleased to make this decision, further reinforcing the turnaround of the business. It is worth noting that even if we exclude the impact of the impairment benefit this half, the Bulk business, excluding iron ore, is still profitable. In terms of the second half, the new IPL contract has commenced in January and is on improved commercial terms. The benefits from this will be offset by the cessation of the GrainCorp contract, which occurred during the first half, a ramp-down in volumes from Mount Gibson and general seasonality for other Bulk customers. Therefore, we anticipate the second half EBIT to be slightly lower than the first half. With the introduction of contracts like Linfox, and now the Rio ballast work, Bulk has several contracts invoiced on services, not tonnes and NTKs. Therefore, volume-related metrics are becoming less meaningful. Accordingly, we have removed some operational metrics from the reporting. Moving to Network. Access revenue has been booked this half based on rail tonnes and tariffs that reflect the UT5 combination DAAU, which combines both the outcomes from the approved UT5 undertaking and the volume reset for FY '20 of 240 million tonnes. This includes an increase in the WACC from 5.7% to 5.9% from the initial date of 3rd of May 2019. Volumes were flat against the prior period at 116.6 million tonnes for the CQCN. Turning to the EBIT bridge. Truck access has increased by $31 million. To assist investors, we have provided a detailed breakdown of this amount on Slide 76 as there are several moving parts to this, including the impact of higher tariffs, the reversal of the UT5 final decision true-up in the prior period and revenue cap impacts in both halves. Other revenue increased $8 million, principally related to higher external construction works. Other operating costs increased $5 million, largely relating to CPI impacts for labor costs and higher energy and fuel costs, partly offset by reductions in consumables and other expenses. Depreciation increased $5 million due to ballast and asset renewals. In terms of the full year results for FY '20, we have included on Slide 77 the usual maximum allowable revenue bridge, with updated numbers following the various submissions and adjustments that have occurred. This indicates a total maximum allowable revenue for FY '20 of $937 million, excluding GAPE. This includes bringing forward the $12 million revenue cap adjustment for FY '19, which was done to support the volume reset this year. Noting this is only a timing impact, and while adverse this year, it is a positive for FY '21. The bridge assumes no volume variance and no performance rebates are payable. It also assumes a report date of March 2020. As a guide, for every month delay in the report date, the impact on MAR is approximately $2 million, representing the 40 basis point uplift in WACC. Moving to capital expenditure. Capital expenditure for the half totaled $230 million, and we now expect FY '20 total capital expenditure to be lower than indicated 6 months ago, in a range of $500 million to $530 million. The $20 million reduction includes change in timing for growth capital, namely wagons. We received the first tranche of 66 wagons, and the second installment of 66 are in transit from China. We expect the second set of wagons will be delayed with the manufacturer calling FM as they are built in the Wuhan province in China. Growth capital in the half was $11 million and includes the purchase of the new coal wagons just mentioned. We expect sustaining capital for the second half of the year to be higher with the completion of works on the Jilalan Yard. Our expectation for FY '20 does not include any assumption for capital related to the initial capacity assessment as part of the approved UT5 undertaking. With an expected report date mid-calendar 2020, any capital that may be required will fall into '20 -- FY '21. As a reminder, this could be a one-off commitment of up to $300 million. Long-range expectations for sustaining capital remain around the $500 million per year mark. At the FY '19 results, we outlined the new legal and capital structure proposed for the group. Our objective was to create a simplified structure that allowed us to optimize the balance sheet. This process is now largely complete with the change in ownership of Network from operations to holdings and a new credit rating for operations confirmed at BBB+/Baa1. Network has retained its ratings and the group rating has been withdrawn. This structure, as shown on the slide, allows for separate credit ratings and funding structures for each business. The thresholds provided by the rating agencies are consistent with what we communicated at the FY '19 results, and the group will have approximately $1.2 billion of additional funding capacity, with the debt to be added progressively over time in order to more effectively manage the execution. This is a great outcome for the group and will unlock significant value for shareholders. The increase in the buyback announced today has not impacted this amount. The final remaining task is the revocation of the existing Deed of Cross Guarantee and the establishment of a new Deed of Cross Guarantee for the consolidated operations group. This will take place later this month. On funding, our priority in the next few months is the refinance of the $525 million AMTN, which matures in October 2020. We will be looking to refinance in the most favorable markets, noting we have a bias to longer-dated tenors of at least 10 years. During the half, we issued an $82 million private placement to a Japanese investor at a fixed yield of 2.9%. This is a great result, especially given the long-dated term of the bond to March 2030. In terms of interest rates, the group's interest cost on drawn debt is 4.5% and 94% of the debt is fixed until the end of FY '21, in line with the original UT5 final decision. Given the approval of the UT5 undertaking, hedging out to FY '23 is ongoing and is around 60% fixed at this stage with the objective to align with the WACC reset. We expect debt cost to trend lower given current market conditions. However, this will take some time to see in our interest costs given the current hedging profile. Thank you, and now I'll hand back to Andrew.

Thanks, Pam. Turning now to the financial outlook for FY '20. In August, we provided guidance for the group of $880 million to $930 million for underlying EBIT, and today's result places us comfortably within that range. We have reduced our Coal volume assumptions for the year down to 210 million to 220 million tonnes, but this impact is offset by the strong Bulk result. As per our normal practice, we do not assume any impacts from one-off events like weather. This also extends to any potential impact from the emerging coronavirus in China. And finally, a summary of key takeaways. Aurizon has delivered a solid first half FY '20 result. Over the last 18 months, the Coal business has derisked the contract book with only 9% of contract volumes expiring in the next 3 years. This includes the extensions of the Coronado and Peabody contracts we are announcing today. Coal is now focused on achieving excellent service delivery and exceptional performance. Operational efficiency improvement is at the heart of this, not only for Coal, but the whole business. There is a substantial pipeline of initiatives that the business is targeting. The focus on efficiency improvement will not reduce. Bulk is performing ahead of the expectations that were set when we commenced the turnaround process back in 2017. This success continues with the new contracts announced today for Mineral Resources and Rio Tinto. There's still more work to do, but we are confident of Bulk's ongoing position in the Aurizon business as it transitions from turnaround to growth. On Network, we have now received QCA approval of the groundbreaking UT5 undertaking. Our focus continues on delivering the benefits from this deal for the whole Coal supply chain and our shareholders. We've implemented the new legal and capital structure of the group, which will unlock future value for our shareholders. We also continue to deliver for our shareholders today with an increase in the dividend of 20% and an increase to the buyback program of $100 million to $400 million. This brings the total shareholder distributions to more than $2 billion over the last 3 years. I now welcome your questions.

Your first question comes from Owen Birrell with Goldman Sachs.

A couple of questions from me. Firstly, just looking at Coal. You pushed the contract expiry out reasonably considerably. Just wondering if you can give us a sense of the actual rate decline that you're seeing on those new revised contracts.

Ed, I might hand that question to you.

Yes. Thank you, Owen. And I can't talk as you -- about the arrangements, the commercial arrangements and the rates themselves. What I can tell you, as we've flagged for some time now, we're certainly seeing downward rate pressure as legacy contracts that we recontract are done in a more competitive environment. And with our -- and we're able to pass on some of our cost savings to our customers.

Okay. And second question for me, on rail grinding, I assume that business was part of the Coal segment. Can I just ask the -- that's how it concluded at the end of October. Can you give us a sense of the earnings impact of that service? I assume that you obviously have to outsource that service now. Can you give us a sense what the impact will be, either on a pro rata basis for FY '20 or on an annualized basis?

Yes. So on Coal, I'll get Pam to explain the framework for that change.

So rail grinding is actually not included in Coal. It's included in Other. And I mentioned last year, the full year impact of rail grinding sale is $15 million on EBIT at the half. It was sold at the end of October, so you have 4 months' results compared to the prior half impact, about $4 million to $5 million.

So next year, we can assume it will be roughly $11 million that is an additional cost to the business?

Yes. Full year EBIT is about $15 million.

Okay. And just finally, on the Bulk's decision not to expense the CapEx in this half. Can you give us a sense of what that amount was that we've seen in the pcp that's not in this period? And I assume that, that additional CapEx is still within that lower CapEx guidance that you've provided.

Pam, I'll let you go for that.

Sure. Yes, the CapEx is $9 million for the half. And yes, the capital forecast includes the Bulk component.

Your next question comes from Anthony Moulder with Jefferies.

If I can start in revenues for Coal. Revenue per NTK growth is 3.1% includes that benefit of take-or-pay revenue, given low NTKs. Wondered if you're able to provide revenue per NTK growth for the period based on activity.

Ed, do you want to have a go at that?

Yes. I'm not sure I understand the question, actually. Could you rephrase it for us?

So the revenue per NTK in this period would have included a benefit of revenue that didn't have NTKs, revenue per take-or-pay protection. I wonder if you can -- is there a figure that you can give us on growth for this half that didn't include that.

No, I can't comment on that.

Okay. The comments that you made, Andrew, about revenue growth to be limited in Coal, are you still expecting revenue per NTK on an activity basis to be positive?

I think I was confining my comments to -- I'll go back and state where we got to from a strategic point of view when we confronted the market, and we could see that there was some downward pressure on rates. We -- and also, the value to us of extending contract tenor was apparent. We said about 2 years ago, 18 months to 2 years ago, on a strategy to actually execute longer contracts, recognizing that we would need to meet the market because that's how rates are set, and we've executed against that. And what you can see is the end result of that is the longer tenor. We have pointed out for some time that there was a downward pressure on rates and that we see the impact from a revenue point of view is that revenues would be -- for the next few years, you would only see moderate growth in revenues, basically because the volume benefit and the contract escalation benefits don't, by themselves, completely mitigate the impact you do from the recontracting. The focus then turns to the need to, as we have put a lot of pressure on our cost management for a number of years, it continues to be something that we actually have to focus on in the years that are coming. We have a number of long, multi-year projects that have -- that are underway and will continue to be underway for some time to deliver further cost benefits. Those projects include names that you will have heard many times before from operational projects like Project Precision, technology projects like the Train Guard project as examples.

Can I ask you to talk to one of those? The Precision Railroading project that, I think back in 2018, you gave a figure of $50 million benefit by the end of fiscal '21. Obviously, trial is still continuing this year. But are you still confident of that figure being delivered in the next financial year?

So -- well, actually, I might ask Ed to talk about how he's seeing it from the -- above our point of view and then Jason as -- from the Network point of view. Ed?

Yes. Thank you, Andrew. Thank you for the question. I expect as -- we've moved into the Blackwater in recent months, and I've been doing the trial. I mean we've certainly seen that the benefits are -- the opportunity is there. There's some numbers quoted in the 4D, which you can see the improvements, some of the improvements we're seeing. My expectation is we'll be at the run rate of those benefits come through the end of the financial year. And it will depend on other things, including supply chain performance in relation to the overall savings for the year. But we're pushing on.

Thank you, Ed. Yes, from a Network perspective, as we expected, moving from Moura into the Blackwater system was always going to be challenging due to the complexity and the larger scale of the Blackwater system. However, as Ed was just mentioning, we certainly see the benefits of actually rolling into the Blackwater system, and working through this more complex arrangement is definitely progressing well.

So that's run rate by -- of $50 million, above $50 million by fiscal '21 -- end of fiscal '21?

Yes, that's correct.

And I'll just probably add that it's not necessarily a cost out. It's also a release of -- potential be a release of capacity and, therefore, a revenue benefit.

Your next question comes from Matt Ryan with UBS Investment Bank.

Maybe just the first question for Pam on debt funding rates. It seems that the SGA concerns, obviously, increasing a little bit around the play. Are you seeing any change in what lenders are able to borrow to you at? And I obviously can say that you've done a deal recently, but how are you thinking about the larger deal to come in October?

Yes. I think your comment is correct. We have recently seen a private placement at a long tenor, 2.9%. At this stage, we haven't seen any reason to be concerned, and we're looking to refinance the bond that's due to mature in October, in the second half. So nothing at this stage.

Okay. And maybe just a little bit of a broader question on the buyback. Just curious on, I guess, how you're managing that, maybe not for this year, but moving forward. What are you taking into account in regards to debt metrics and the share price or anything else when you think about the timing and quantum?

Yes. All of the above. We think about the metrics and, as we've talked about, the new ratings in place for both Network and operations, BBB+/Baa1. So we manage to that. And we will progressively work through that $1.2 billion to ensure sensible execution.

Okay. And just a quick one to finish on, the train derailment in January. Can you make any comments on any impact to volumes there?

Ed, do you want to talk about the train derailments?

Yes. Certainly. Thank you, Matt. We had, as you well know -- I presume you're talking about the derailment in Middlemount, where we experienced a -- what looks to be a heat-related infrastructure failure. No -- first, most importantly, nobody was hurt as a consequence of the incident, and we're able to recover the track reasonably quickly. I mean the ensuing cancellations run into the dozen or more, in that kind of order. We've managed to make up some of those with additional services, hence, and up and running again now.

Your next question comes from Paul Butler with Credit Suisse.

I just wanted to ask again about the competition or the competitive pressure that you're seeing putting pressure on rates in the Coal business. Does that -- that seems to be -- you're highlighting that a bit more than you were at 6 months ago. So I recall then you'd won a couple of contracts and were saying that you hadn't taken any cut to pricing then. Is the pressure you're seeing in both New South Wales and Queensland? And is there anything that's changed in terms of competitive dynamics? Is there an extra player in either of those markets?

Yes. Sure. Thanks very much. So we've been talking about the pricing pressure for some time, longer than -- much longer than 6 months ago. That's been no surprise. The market -- the competitive market paradigm is the same as it was when I first started in this business 3 years ago. There has been -- I suppose, a number of years ago, there was speculation about Genesee & Wyoming entering the Queensland market. It's fair to say, while they don't come and advertise with us what they're doing, there are a number of good market signals to say that they're actually doing that and entering the Queensland market, although the exact detail is not something that I can readily share or even though with any certainty. But we -- but our long-term plans, let me take it from a strategic point of view and a 10-year planning process, we do assume that there will be another competitor in the Queensland market at a point in time. The -- what you may be -- I think I would say that we've actually not -- we have spoken about the pricing pressure previously. The reason that I stated in my remarks at the beginning more clearly about the impact on revenue is that in prior periods, we've said we were in the process of doing this recontracting. It's not appropriate for us to actually share the impact on the business now that we're actually very close towards the end of that whole process. It is appropriate for us to start sharing how that strategic -- how we responded to that strategic challenge impact from the business and giving you some sense of what to expect in coming years.

Can I just ask your comments about GWA? I mean is it that you're aware that they are active in bidding in the market? Or are you suggesting that they have potentially won a contract in Queensland?

Okay. What I'll do is I'll get Ed to talk as appropriately as he can about the market intelligence we've received. Again, our position in this says, market intelligence that we received and not written documentation that is posted to us by Genesee & Wyoming, okay? Ed, over to you.

Thank you, Andrew, and thank you, Paul. The -- look, there's no secret that Genesee & Wyoming have looked to enter the Queensland market. You know that they've been edging the paper looking for drivers, and we know there's a locomotive on the back of a flat bed on the weight. We -- on the intel that I have as a competitor and in the region is that they're bringing an A train, and I'm not aware -- we're not -- I'm not aware that they've won any or signed up any business for that concierge yet. So it's early days. We're not sure where they're going to be based. One thing I can say is we've been on the front foot with our recontracting, as Andrew was just talking about, with the announcement today about Peabody and the announcement about Glencore at the last half and, of course, a long-term BMA contract in place. We've largely got our recontracting risk put to bed for the next decade in the Goonyella system.

Okay. Just a couple of more questions. On the Bulk business, it's clearly, a very strong result there. Can you talk to the sustainability of that level of margin performance? I mean, you gave us the detail about the Mineral Resources contract, and I think it was the Rio ballast cleaner contract for 3 and 4 years. But is there anything else that's contributed to that result that is of a shorter-term nature?

Okay. Well, look, I'll get Clay to take us through his thinking from a sustainability point of view for the Bulk business.

Yes. Thanks, Andrew. Thanks, Paul. It's -- I guess, let's start on H2. Pam gave a bit of an insight into that. But first of all, we're very focused on the safe and successful startup of the MRL and Rio ballast cleaning contracts in H2, and they've got some initial costs associated that we'll have to take up in H2. In addition to that, we've got the GrainCorp business that has come to an end and some uncertainty around some iron ore volumes. So as Pam mentioned, Paul, we see H2 being slightly softer than H1. If you look forward, I guess, the Bulk business has been very focused on the turnaround in getting the business fundamentals in place, and those fundamentals around a strong safety culture; service delivery -- good service delivery for our customers; asset utilization; commercial contracts; and finally, our sustainable cost base. We're still a work in progress. Plenty of opportunities still there, but we're pleased with the progress we've made.

Okay. And just one last one on free cash flow. Can you -- it looks -- so in the free cash flow of $465 million, I think there's $165 million of the benefit from the Rail Grinding asset sales. So it looks like on an underlying basis, we've seen a decline in free cash flow. I just wonder if you could explain what's driving that?

From an operating activities perspective, there were some swings between debtors, creditors and uplift -- a slight uplift in inventory. We bought in additional inventory for our Rail Grinding and control systems work together with some parts for our overhaul activity. So there are a couple of hit things that might have contributed. And obviously, you've got the movements between the true-ups in prior year compared to current year as well.

Your next question comes from Jakob Cakarnis with Citi.

It's quite a crackly line on my side, so apologies for that. Can we just get a little bit more comment on the outlook for coal costs and where there are options to remove costs there? And Pam, maybe you could just highlight which parts of the cost base we're experiencing inflation in the first half, please?

Yes. So I'll comment, and then happy to let Ed add any additional comments. In the first half, labor costs, we've got CPI and also an uplift in drivers. So we were getting prepared for higher volumes in the first half, which obviously, won't reoccur in the second half, but we have anticipated higher volumes. And in terms of sort of more broader outlook -- sorry, just also comment on maintenance. Maintenance costs were slightly higher, again, reinstating some of the rolling stock. We should see that sort of level out through the full year. In terms of the broader outlook, I'll let Ed comment. And as Andrew has touched on, there are a number of technology multi-year projects and otherwise like project precision that will drive the costs down going forward.

Yes. I'm sorry, Jakob. Did you have another question? I was just going to [indiscernible] build on that.

Yes. I need to follow-up with Pam. The FTE look like they fell 2% in the first half, but we're saying that we've got higher labor costs. Is that high unit labor costs? And is there anything in there that I should think about optimization or drawdowns?

No. Not at this stage. We did have renegotiation of the EA and then CPI impacts as well as some increase in coal FTE.

Yes. 2% to 2.5%. And as Pam said, Jakob, I'm not sure where you're picking that number up, but coal FTEs grew marginally in order to support the new volumes we expected. I might just comment on some of our -- now the focus we have on the cost line to mitigate the pricing pressure while we talked about it, and also maximize EBITDA over a multi-year frame. I mean, we still -- we have had some -- quite some success this year with our business in terms of some of the productivity projects, including extending our trains, reconfiguring them for a 2% uplift in payloads. And we've seen velocity improvements in the CQCN of about 4% and 100,000 running in the [indiscernible] Basin. There's also delivered as a productivity evident. We've got -- our investments in reliability are flowing through to what was a 13% improvement in wagon reliability in Central Queensland and a 10% improvement in local reliability in New South Wales, and that's underpinned a 35% reduction on year-on-year cancellations for the entire New South Wales business. So there's still plenty of opportunity from a cost-management perspective. Longer term, multi-year technology projects, we've got a trifecta of TrainGuard, TrainLink and TrainHealth. They're actually named by our employees, these projects. But TrainGuard is the most significant of them in that it will allow us to implement train stop, as speed control technology on the train on the fleet. Good for safety, good for productivity. And also a pathway to drive around the operations and in our core corridors. TrainHealth, of course, will give us the ability to see real-time diagnostics in relation to engine performance and driver performance. And TrainLink will allow us to move into a contemporary and modern rostering environment to be able to manage variance in the day. So lots of opportunity.

Just one final one, while I've got you, please. Would anything in the ABI that was struck about the movement to Driver Only? And is there any way that we should think about how that timing can be realized?

We have the -- in relation to the EA, for some time, actually, we've had Driver Only kind of approved in our enterprise agreements. The -- and that's particularly when there is technology to ensure safety control. And so it's not a risk to us. We've also been quite transparent with our workforce about that. We're running -- I must say, at this stage, we're still in the development stage with a trial to be run in the next 3 months, a live trial. It's only post that trial in that we've convinced ourselves of the viability, the technology where we move forward to consult with our workforce on our proposal capable of implementation.

Your next question comes from Anthony Longo with CLSA. Your next question comes from Cameron McDonald with Evans & Partners.

Ed's answer was too long.

Your next question comes from Rob Koh with Morgan Stanley.

Hello, can you hear me?

Yes. Thank, God.

All right. A lot of buildup there, and I've got a really boring question. Look, I just -- I wanted to just make sure I understood how to think about the CapEx guidance for this year. My understanding of what you said is that there has been some kind of delay of expenditure from the first half into the second half because of Wuhan-related delays, but you have actually also reduced some of the -- or deferred some of the growth CapEx. So just wondering if you could give us some -- just confirm if that understanding is right? And then give us some color on what projects you've deferred?

Yes. So we have updated our guidance to $500 million to $530 million. So a reduction of $20 million, which largely relates to growth capital. That $20 million is a judgment based on the timing of the arrival of wagons. So we have received half the wagons or certainly half -- some are here and some are in transit. And we expect the second set of wagons to be delayed because the manufacturer called FM. However, exact timing is not known. So we expect some of the growth capital to drop into FY '21, hence, a reduction of $20 million on the range.

Okay. All right. So it's primarily just the FM Wuhan that's caused the change to guidance. Is that right, Pam?

Yes. That's right. Yes.

Yes. Okay, cool. And I guess, sadly, while still on the topic of FM, I guess there have been some FMs called on gas import contracts. Are you hearing anything about coal import contracts? And if there were to be FM coal, and that's a big if, what would be the impact to you, guys?

That is definitely a big if. Our assumption that for the year that we lowered by 10 million tonnes took into account all the most recent information we had from our customers and their expectations of what they're going to be requiring us to deliver for them. We have normal up-to-date information than what's put into the algorithms that generate that range that we actually state. So I can't comment any further than that, really.

Okay. Yes. Just last question. I noted your comment about the Bulk business changing its competitive dynamic over time. Good work of your team there. Can you comment on how you price the products versus road products? And, also, how the carbon intensity of the rail product versus the road product compares?

Yes. We'll do. Actually, I'll get -- that's worth a topic that's close to Clay's heart. I'll get him to talk through that.

Yes. Thanks very much. I mean, as Andrew and Pam mentioned, that the Bulk business very different to the Coal business, and that is that we are in a competitive market that includes road. So I mean we don't really look at going head-to-head with road transport. We look at sort of the whole supply chain and what competitive advantage do we have in rail if you think about long-haul, heavy freight, particular bulk products. Now road and rail have their place in the supply chain of bulk products, but we look at that sort of sweet spot for rail, which is normally longer-distance heavier products, and in a certain vicinity of our land and locations. So yes, it's a dynamic we think about. And we can't compete for everything where there's not infrastructure there or road haulage just matches the product requirements. But yes, we're kind of in slightly different markets in that regard.