Aurizon Holdings Limited (AZJ) Earnings Call Transcript & Summary

Good morning, and welcome to the results for financial year 2020 for Aurizon. We are based in Brisbane today. Therefore, I acknowledge the traditional custodians of this land, the Turrbal and Jagera people, and pay my respects to the elders both past, present and future for they hold the memories, the traditions, the culture and the hopes of Aboriginal Australia. We must always remember that under the ballast, sleepers and rail systems where Aurizon does business was and always will be traditional Aboriginal land. You'll notice on the front page of the pack our locomotive with indigenous artwork. The locomotive is a 2,700 class that operates on the West Moreton Coal System into the Port of Brisbane. It's the artwork of one of our employees, Laurie Anno, a Kalkadoon man with Aboriginal and Torres Strait Islander heritage. One of our commitments in our Reconciliation Action Plan is about community connection and respect on behalf of the 6% of our workforce that identify as Aboriginal and Torres Strait Islander. I'm joined by George Lippiatt, our new CFO, who will introduce himself in a minute, and we 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; Clay McDonald, Group Executive Bulk; Pam Bains, 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. As we noted at the half year results, one of our employees was killed in a road accident in December. Hans Ah Chee was a highly respected train driver working in our Coal business and based at Sarina in Central Queensland. This incident bought added focus to motor vehicle road safety, including a review of our control environment for this risk. Workplace Health and Safety Queensland has advised it has considered all issues relating to the accident and is not investigating the matter any further. With respect to the 2 safety measures we use in the business, total recordable injury frequency rate, TRIFR, and rail process safety, RPS, they have remained broadly consistent with the results that was reported at the half. The FY 2020 TRIFR was 9.92 injuries per million hours worked, which is a 10% improvement against the prior year. RPS, which measures operational safety, including derailments, signals passed at danger and rolling stock collisions, deteriorated 8% in FY 2020 to 4.74 incidents per million train kilometers traveled. We are continuing to invest in technology, processes and people to deliver further safety and productivity benefits. In May, we made the decision to proceed with Train Guard project on our electric locomotives operating on the Blackwater and Goonyella systems of the Central Queensland Coal Network. Equipment is installed on board locomotives, which continuously supervises train speed and signals through associated trackside equipment. By preventing over speed events and signals passed at danger, Train Guard will support improved safety outcomes for our people and continued delivery performance for our customers. Train Guard also supports the potential for expanded driver-only operations in the Coal business. It is estimated that we will complete Blackwater mainline installation in 2021, Goonyella mainline in FY 2022 and the balance of Blackwater and Goonyella corridors in early FY 2023. While it's important to note that over the past decade there has been a long-term improvement in Aurizon's safety performance and culture, we remain absolutely focused on driving further significant improvements. Safety remains Aurizon's core value, and we are determined to focus our resources and investment on managing what matters and identify and learn from events that have the potential for serious injury and fatality. Last year, I reported on the extensive work we've commenced to enhance safety, including systems, leadership and culture. In FY 2021, we're moving to the next phase of this work and building on the improvements and successful initiatives that have been delivered over the past year. Before we talk about financial results, I want to talk about COVID-19 and what the experience has been at Aurizon and how we see it impacting the market we operate in. Early in the year, the Crisis Management team was stood up and led by myself. This group continues to meet on a weekly basis. In addition to increased staff awareness on personal hygiene and enhanced cleaning protocols, early decisions by the CMT included revised workplace protocols for business continuity, including separation of business-critical teams such as deployment, critical train control and payroll; bringing forward of inventory procurement should supply chains be disrupted; and the cancellation of all nonessential travel and training. At an operational level, revised rosters and schedules were rolled out in addition to the development of labor contingency plans. A practical example is crew sign-on now taking place outside of a number of depots. At a corporate level, our move to a flexible working space a couple of years ago, and that our IT infrastructure was already set up for remote working, enabling the shutdown of our Brisbane office with little impact. Although the office has reopened, capacity is currently targeted at 25%, with the majority of employees continuing to work remotely. We remain well placed should additional restrictions be implemented by governments in response to the pandemic. Although the volume impact was not significant for our railings during the year, the underlying demand for coal metallurgical -- global metallurgical coal has been disrupted by the curtailment of steel capacity in key export nations, particularly in the June quarter. Crude steel production in India and Japan was minus 42% and minus 31% in the quarter, reducing demand for raw materials. To date, Australian metallurgical coal export volume has been resilient in the face of this economic disruption with competing metallurgical coal supply nations primarily impacted. This has been witnessed in past periods of low prices, where Australia's share of the seaborne market grew in response to low prices. We have started to see this emerge in the June quarter as higher-cost competing supply exits the market. Despite the strength of Australian supply in terms of quality and cost effectiveness, a continued reduction in steel production in addition to China import restrictions is expected to result in a softer first half for Australian export volume. The long-term fundamentals of coal demand remain with steel production linked to economic growth, particularly in Asia, where almost all Australian coal is destined. For our Bulk customers, strong iron ore demand has offset the small impact of COVID-19. The company delivered a solid result in the middle of our EBIT guidance range. This is especially pleasing this year as it shows the strength of the Aurizon business and the resilience of our people to be able to operate through this period of uncertainty. Underlying EBIT increased 10% to $909 million, 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, but there was a strong final quarter despite some volatility in customer orders. There were specific customer production issues earlier in the year, particularly in CQCN, and including Peabody's North Goonyella mine being closed longer than expected and BMA prioritizing maintenance over production. This was 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 when compared to the prior year. Network volumes were 2% lower due to a number of customer production issues, as noted earlier, in addition to the stoppage at Anglo's Grosvenor mine. Statutory NPAT was up 28%, reflecting the improvement in underlying EBIT and the pretax gain on sale of $105 million for the Rail Grinding business. Free cash flow was down slightly despite the proceeds from Rail Grinding due to some adverse working capital movements, which George will provide more details on shortly. ROIC improved 1.2 percentage points to 10.9%. We're also continuing our strong dividend payout, with the Board declaring a final dividend of $0.137 per share, an increase of 10%. This takes the full year dividend to $0.274 per share, an increase of 15%, and marks the fifth year of maintaining a payout ratio of 100% of underlying NPAT for the continuing operations. And finally, on capital management, we completed a $400 million buyback in FY '20. And today, we are announcing a further $300 million buyback to be completed in FY '21. This, combined with our strong history of dividends, reinforces our commitment to return surplus capital to shareholders and demonstrates the strength of the balance sheet. Moving to Coal. The recontracting process has progressed well for coal -- the Coal business, and we've substantially derisked the near-term contract book, with only 13% of contracted volumes expiring in the next 3 years. 58% of the Coal contract book has a duration of greater than 7 years, an increase of 9 percentage points against FY '19. The new Peabody contract I announced at half year commenced in July and is an extension of existing mines and the addition of new mines in Queensland, resulting in Aurizon being Peabody's national hauler. We will also begin hauling more coal for Peabody in the Illawarra region early in calendar year 2021. We've also commenced railings for Bluescope, with coal hauled to the Port Kembla Steelworks. With this contract, we are the only rail operator with services to every coal export terminal on the East Coast of Australia. COVID-19 and the low coal price environment has resulted in some volatility in customer ordering patterns, although the June quarter was a solid performance ahead of the end of financial year, with record railings in New South Wales for June. As I mentioned earlier, we expect some volume softness in the first half, with coal demand being lower due to COVID-19. Our volume outlook for FY '21 is flat despite the growth in contracted tonnes over the past 2 years, reflecting this first half softness. With contract rates coming down, as we've previously noted due to the competitive market, this flat volume expectation is likely to mean lower revenues in FY '21. This is expected to improve in FY '22, driven by volumes and increased contract utilization. Despite these near-term impacts, the overall demand picture for Coal remains solid, with the range still expected at 1% to 2% volume growth per year for 10 years, driven by infrastructure development and energy demand in Asia. As always, there remains a substantial program of work designed to improve productivity and lower costs. Project Precision involves many initiatives designed to reduce turnaround time, which increases throughput and improves capital productivity. We spoke about the schedule adherence trial in Blackwater, which, as we expected, was more challenging than Moura. However, this has been successfully implemented, with improvements realized in key operating metrics such as the on-time arrival to the mine and port. Schedule adherence is planned for Goonyella later this year. Last month, the Callemondah yard in the Blackwater system has begun implementation of more initiatives, including new provisioning processes, the introduction of block maintenance and a reduction in crew change time. There are many initiatives outside of Precision, such as the longer trains in the Hunter Valley driving a 2% increase in payloads. The introduction of distributed power has enabled 4 locomotives to now haul 96 wagons, an increase of 12 wagons. The commissioning of the Jilalan wagon maintenance facility is expected this month, with this facility consolidating all wagon overhauls for the 106-tonne wagon fleet in Queensland. This will reduce the time to overhaul and improve maintenance costs and safety performance. These initiatives, plus future ones like Train Guard, are critical for the Coal business in order to provide a differentiated service to our customers and mitigate the revenue impact of lower contracted rates. Moving to Bulk. The Bulk business has had a strong year, and the success of the turnaround program can be seen in these results. All divisions within the Bulk business are now profitable, and they have set up a great platform for growth although do not expect them to double EBIT every year. Although I wouldn't mind being wrong on that prediction, like I was 6 months ago when I said don't double $44 million in EBIT, as you would expect, the forecast growth rates will slow with the earnings base now above our original expectations. The growth results in the Bulk business having a more diverse revenue base by product, providing a more balanced platform for the future. Bulk continues to focus on leveraging its strategically located lands and facilities, utilizing available capacity and flexibly deploying its assets and people. This is how they have been successful in securing new contracts such as with Mineral Resources. This contract commenced during the year and has been operating very well given strong demand for iron ore. Mineral Resources has been operating the mine above the headline production level that the previous owner did so the ramp-up has proceeded faster than expected. We've also secured an extension to a long-term customer, South32, for their Cannington operation in North Queensland. This will take the contract to end of mine life and comes on the back of their recent strong production numbers that exceeded FY '20 guidance. Efficiency improvements remain a key part of the Bulk strategy, and we've highlighted a few examples here. We are now running some combined fertilizer and acid services for IPL, which reduces the number of train starts to serve the contract. The larger task for Linfox has enabled us to deliver crewing synergies. This is being done through roster optimization and by consolidating depots in Townsville, Rockhampton and Mackay. In both examples, this has enabled improved revenue and costs. Bulk has also expanded its product offering with the $25 million acquisition in March of Townsville Bulk Handling & Storage, which has been renamed Aurizon Port Services, or APS. This business is a long-term lease of assets at Townsville Port that are adjacent to rail lines already owned by Aurizon. Therefore, we now provide storage and stevedoring services for a range of customers that transferred with the acquisition. Long term, this will also provide the opportunity to increase rail utilization through aggregation and help grow earnings for this business. APS increases Bulk's strategic footprint of land and facilities in the growing North Queensland minerals province. These sorts of opportunities are attractive to Bulk given the fragmentation in the market and the benefits to the industry from converting volumes from road to rail. Turning now to Network. A solid result for Network in line with expectations, reflecting the UT5 undertaking, which was approved earlier this year. The focus has been on the implementation of the undertaking, which is in place until the end of FY '27, providing long-term certainty for all stakeholders. We've highlighted the performance of network under some of the key areas of the undertaking to demonstrate how it has worked in practice given the approval of the consolidated agreement. Although early days, we believe it has been a successful start and demonstrates the collaborative nature of the undertaking. Processes have been established such as the Rail Industry Group, whereby maintenance and capital are agreed collaboratively for the following year. The cost performance in FY '20 demonstrates how the undertaking works in practice with benefits for both Aurizon and customers. On operating costs, we've spent $12 million less than the allowance, which is a financial benefit that is retained by Aurizon. You will recall that these benefits are available for the length of the undertaking, with the clear incentive for Aurizon to be as efficient as possible without impacting customer service. The Network team is working on further cost-out opportunities, which we will update in future presentations. For maintenance costs, we have spent around $4 million less than the allowance. This benefit will be passed through to customers through the revenue cap mechanism in 2 years' time as per the agreement. Maintenance and capital programs are agreed with customers in advance. So if spend is lower, the customers will benefit, as demonstrated here. The maintenance costs and capital have been agreed with customers for FY '21 so this true-up process will be repeated each year. You will recall that the trigger for the step-up in the WACC to 6.3% was the report date, which is when the independent expert's initial capacity assessment is handed down and we respond. This was expected by now. However, the process to establish the independent expert has taken longer than anticipated. The Chair and the CEO have been appointed. However, the report date is now expected in the second half of FY '21. The tariffs for FY '20 did assume a higher WACC for -- from 1 March. Therefore, the delay means an adjustment of $8 million to customers. This, together with the adjustment for maintenance and other rebates, mean that there will only be a small revenue cap up to about $3 million for recovery in FY '22. The impact from COVID-19 on coal volumes in FY '21 also applies to Network as the tariffs were based on a forecast of 239 million tonnes that is -- that was approved earlier in the year. Therefore, our revenue under recovery is likely, but this is a timing issue only with recovery 2 years later. We have factored this into the guidance, as I will go through at the end of the presentation. And before I hand over to George, an update on the progress of some additional items of business. The sale of Acacia Ridge had positive news in the half, with the appeal decision in our favor in May. However, the ACCC has now sought leave to appeal to the High Court. We are hoping for a decision on the special leave application before the end of this calendar year. You can see from our results that Acacia Ridge made 12.7 million tonnes -- $12.7 million of EBIT this year, which is shown as earnings from discontinued operations. So the business continues to generate positive earnings and cash flow while we wait for the court process to play out. On Wiggins Island, a favorable decision for Aurizon was appealed by the customers and was heard in March, so we await a decision. Given the uncertainty, no WIRP fee has been recognized to date. And finally, last year, we commenced proceedings seeking damages and declarations to 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 George.

Thank you, Andrew, and good morning to everyone on the call. Given it's my first time speaking as CFO, I thought I'd give a brief introduction. I've been at Aurizon for 7 years and most recently was Head of Strategy and Corporate Development. In that role, I led the freight review in 2016, resulting in our decision to retain the Bulk business and exit the Intermodal business. I also led the vertical integration review, resulting in the announcement 12 months ago that we would retain our above and below rail business structure. In the CFO role, I am continuing the focus on 2 deliverables: business efficiency and capital allocation. On business efficiency, this involves helping to drive our major programs, including Precision and asset maintenance as well as other transformation outcomes. On capital allocation, my focus is on prioritizing capital for those areas of the business we believe will grow longer term; and where there is surplus capital, returning it efficiently to shareholders. Turning now to results. As usual, the results I will cover today are based on continuing operations, meaning they exclude the financial performance of the Acacia Ridge terminal. FY '20 has been a solid performance in a year characterized by uncertainty due to COVID-19. The resilience of our business model and the response by both Aurizon and our customers meant that we did not amend or remove guidance in the face of this global health crisis. An EBIT performance in the middle of the $880 million to $930 million guidance range is testament to that. The 10% improvement in underlying EBIT to $909 million was driven by the positive benefits of the UT5 undertaking and the strong performance of the Bulk business with new contract wins and a continued focus on costs. Revenue growth reflects the stronger performance in Network and Bulk, with the higher operating costs and depreciation reflecting the investment in new contract growth for Bulk and future volume growth for Coal. I'll run through the individual business unit results shortly, noting the performance in the second half was consistent with the first half. The statutory EBIT results includes the benefit of the $105 million gain on sale of Rail Grinding. While the proceeds from the sale are a positive for free cash flow, this was offset by some adverse working capital movements, as Andrew indicated earlier. The first was the receipt of the Cliffs termination payment in the prior year, and the second was the cash payment of the UT5 true-up in FY '20. Including the free cash flow from discontinued operations, results in free cash flow being marginally higher for the year compared with FY '19. We continue to maintain our 100% dividend payout ratio with a final dividend of $0.137 per share, an increase of 10%, consistent with the growth in underlying earnings. This brings the total dividend per share to $0.274. Franking is set at 70%, a level that can be maintained for the next few years. Moving now to Coal. EBIT decreased $4 million to $411 million, with Coal volumes flat against the prior period at 213.9 million tonnes. Volumes were in line with our revised assumption of 210 million to 220 million tonnes for February, but lower than our original expectation at the start of the financial year. Contracted volumes as at 30 June 2020, increased to 248 million tonnes due to the success that Coal business had in recent years in retaining and winning new business. Therefore, costs such as additional train crew and reinstating rolling stock to operating condition have been incurred to support these contracted volumes, as you can see on the waterfall, with operating costs up $15 million and depreciation up $11 million. But contract utilization has fallen due to a combination of customer-specific production issues, as highlighted in the first half, and some volatile trading conditions in the second half. This has resulted in a flat volume performance, with revenue quality improving due to fixed capacity charge and CPI benefits. As Andrew has highlighted, we are expecting a flat volume performance in FY '21 with a softer first half due to COVID-related demand impacts. This is expected to impact revenue due to lower contracted rates. Low inflation rates will also impact Coal in FY '21, with contract escalation not matching some costs such as labor due to fixed EA increases. Revenue is expected to improve in FY '22, driven by volumes increasing from FY '21. Moving to Bulk, and I have to say that the Bulk result is something we're all very proud of. Only 3 years ago, this business was losing $14 million. But now I'm pleased to say that Bulk's underlying EBIT improved by $53 million to $90 million due to higher revenue from volume growth from new business and existing customers. The strong performance of the Bulk business means that sustaining capital for Bulk East is no longer expensed to the P&L, providing a benefit of $11 million. There was also an increase in depreciation of $3 million, which is why you see $8 million on the bridge. CapEx is expected to increase to support the growth profile of Bulk, albeit within the overall group expectations, which I'll touch on shortly. In Bulk East, the revenue growth came from the full year of the Linfox and Glencore contracts, the new APS business and improved rates [ and ] railings for other customers. In the West, the main drivers of revenue were the new Rio Tinto and Mineral Resources contracts. Mount Gibson continues to rail due to the strong iron ore price, although we anticipate this to end sometime in the first half of this financial year due to end of stockpiled material. Revenue quality in Bulk benefited from some minor contract variations, the expiry of the rate relief arrangement for an iron ore customer during second half FY '19 and CPI benefits. The increase in operating costs reflects the new contracts, partly offset by ongoing operational efficiency benefits. Looking forward for Bulk, we do expect earnings to grow, although not at the same rate as this year. Growth is expected from a full year run rate for new contracts, such as Mineral Resources and Rio Tinto. Partly offsetting this will be the end of the Mount Gibson contract, the full year impact of the end of the GrainCorp contract and an increase in depreciation from higher levels of CapEx. This places the Bulk business in a strong position with further growth opportunities available and the ability to leverage the recent acquisition of APS. Moving to Network. Network EBIT increased $69 million or 17% to $469 million due to higher revenues from the UT5 undertaking despite volumes being 2% lower. Access revenue has been booked based on railed tonnes and tariffs from the UT5 combination DAAU. This assumed a report date of 1 March and therefore, a WACC increase to 6.3% on this page. It also assumed volumes of 240 million tonnes. And therefore, the actual performance of 227 million has resulted in a revenue under recovery, which will be recovered through the revenue cap process in 2 years' time. However, the delay in the independent expert report, the reduced maintenance spend, which is passed through to customers, in addition to other expected adjustments means that the revenue cap in FY '22 will only be small, up to $3 million. Turning to the EBIT bridge, track access revenue has increased by $61 million, and we have provided a detailed breakdown of this amount in the appendix. This table summarizes MAR movements, volume under and over recoveries, revenue caps and rebates. But the summary is that MAR is higher than the prior year due to the finalization of all revenue allowances, including the WACC increasing from 5.7%. Other revenue increased $9 million, principally related to higher external construction works. Other operating costs were $7 million lower, with consumables, overhead savings and lower employee costs. As noted by Andrew, operating and maintenance costs came in under the UT5 allowance. The benefit from lower operating costs is retained by Aurizon, while the benefit from lower maintenance cost is passed through to the customers. Depreciation increased $8 million due to increased levels of ballast and asset renewals. We also show in the appendix the forward view of the MAR with updated numbers. This is being completed on a consistent basis as before. So it assumes a report date has already occurred, and therefore, the WACC is 6.3% for FY '21 and beyond. As the report date is not expected until later this financial year, each month of delay is worth $2 million in revenue. This waterfall also assumes no volume variance or other adjustments and therefore, no revenue cap. As Andrew said, for FY '21, the tariffs are based on volumes of 239 million tonnes, which is unlikely due to COVID-19, resulting in a revenue cap 2 years later. Therefore, our guidance assumes a volume-related revenue under recovery, but it's important to reinforce this is a timing impact only with a revenue cap benefit in FY '23. Incorporated into the final revenue cap number will be other adjustments, like there are this year, including WACC and maintenance if required. I appreciate there are many moving parts and adjustments to consider. And therefore, we will always update these charts and information to give you as much detail as possible to get an accurate picture of revenue movements. Turning to cash flow. This is by far my favorite slide in this pack and the one I was most looking forward to covering. We talked earlier about the resilience and stability of the business, and these charts demonstrate just that. Free cash flow has been steady the past 4 years and has exceeded dividends, which have been paid out at 100% of NPAT. This free cash flow has enabled further distributions in the form of buybacks, with $1 billion completed over the past 5 years, including $400 million in FY '20. And we are continuing the commitment to shareholder distributions with our announcement today of a further $300 million of on-market share buybacks. This is the first step in deploying the $1.2 billion of additional funding capacity that was released from the corporate restructure last year. Consistent with our capital allocation hierarchy, we will deploy surplus funds to shareholders when growth options don't achieve requisite returns, which should provide investors comfort about our commitment to strong shareholder distributions. We also maintain our commitment to the current credit ratings at BBB+/Baa1, reinforcing the strength of the balance sheet. CapEx totaled $527 million, which was in line with guidance. We spent $37 million on growth capital, which was mainly coal wagons supporting additional contracted volumes. Some capital on these wagons remains to be spent in FY '21 given a delay in delivery, but we expect these to be received later this year. Our total spend of $527 million excludes the cost of the APS acquisition, which was $25 million. We will also be spending some capital for Bulk rolling stock, supporting their growth ambitions over the next few years. At this stage, we have not included any assumption for CapEx that may be required for Network's response to the initial capacity assessment. This will be determined once the report is handed down. And as a reminder, this could be a once-off commitment of up to $300 million. Long-term expectations for stay-in-business CapEx remains around $500 million per year. In June, we completed the refinancing of Network's bank facilities when we canceled existing syndicated facilities and replaced them with bilaterals with maturities ranging from 2023 to 2025. We also increased the capacity by $420 million to $1.3 billion to allow for the upcoming bond maturity of $525 million, as shown on the chart. This was necessary as the Aussie dollar bond market was effectively closed to corporate issuers at the time we were looking to issue. As the intention was always to refinance the bank facilities at that time, we decided to increase the capacity to compensate for the lack of capital market availability. Corporate activity has emerged since June, so we will revisit this after results as our strategy remains to term out debt in the capital markets. We have flexibility in timing as extending the maturity of the bank facilities means that we do not have any refinancing commitments after October until June 2023. In terms of interest, the group's cost on drawn debt is 4.5%, and 95% of the debt is fixed until the end of FY '21, in line with the original UT5 final decision. We have also hedged 91% of floating debt a further 2 years due to the extension of the WACC reset after FY '23 from the new UT5 undertaking. This will bring overall interest costs down as these hedges were put in place in a lower interest rate environment. So in summary, I'm pleased to be able to talk through my first result as CFO and for it to be a solid performance, consistent with guidance provided 12 months ago. This, combined with a strong balance sheet position, means we can pay out a dividend at the top of the range and pursue further capital management, as we've announced today. Thank you, and I'll now hand back to Andrew.

Thanks, George. Turning now to the financial outlook for the 2021 financial year. We're expecting a range of EBIT of $830 million to $880 million, with the key assumptions as follows. As I noted earlier, COVID-19 is expected to impact coal demand, and this will lead to some volume softness in the first half, particularly for met coal. The volume assumption indicates fairly flat volumes for the year. This volume softness will also impact the timing of Network revenues. This year's tariffs are based on an approved volume forecast of 239 million tonnes, which is 5% higher than this year's actual volumes. This is unlikely to be achieved given the impact of COVID-19 on coal demand. Therefore, Network is expected to have an under-recovery of revenue, which, in turn, impacts EBIT. Flat volumes in FY 2021 implies a revenue under recovery of about $50 million. Any shortfall will form part of the revenue cap in FY 2023, partly offset by other adjustments, including WACC. As per our normal practice, we do not assume any material disruptions to commodity supply such as -- commodity supply chains such as adverse weather. And finally, a summary of key takeaways. This slide summarizes the journey of Aurizon over the past few years and how everything we do is to enable the delivery of shareholder value. The items in orange are work in progress, and some of them, especially the ongoing improvement in operational efficiencies that will never stop. A substantial pipeline of initiatives remains. And hopefully, the information you have received today reinforces the importance of this work. The balance sheet is in strong shape, and we have continued our commitment to shareholder distributions with another dividend payment today at the top of the range. In addition, we completed a $400 million buyback during the year, and we are announcing today a further $300 million buyback in FY '21. The above rail contract book has been substantially derisked this year for both Coal and Bulk, providing greater volume and revenue certainty for longer. We have included Bulk's growth ambitions here for the first time given the strong performance this year and the new business we've acquired in APS. Bulk's success so far has given it the right to grow, and this capital investment will also provide opportunities to our existing customers. Further opportunities like this will also be explored in the future. And on Network, it's been a successful year with the approval and implementation of UT5, which provides a long-term certainty for all stakeholders, albeit with the WACC uplift delayed. There have been benefits realized already for the supply chain, and our focus remains on delivering further opportunities. I now welcome your questions.

[Operator Instructions] Your first question comes from Matt Ryan with UBS Investment Bank.

The first question is just on the flat coal haulage guidance. Obviously, this is a pretty fluid situation, but just hoping you can give us some color on how much transparency that you've got with the production outlook could be customers.

Okay. Matt, thanks for the question. Ed, I might just get you to talk through a little bit as much as you can safely do, a bit of color on that.

Yes. Thanks, Andrew. Thanks, Andrew. We obviously engage with our customers regularly, and we keep track of forward orders sort of monthly and a 3 monthly and an annual basis. One of the themes we're seeing is that our customers themselves don't know, and some of them have got long-term contracts in place and are estimating delivery of their full budgets. Others are announcing -- sometimes announce surprises, and sometimes we found out about those with -- in media releases as well. Broadly, though, we factored in all of that into our market guidance for the year, 210 million tonnes to 220 million tonnes, those ups and downs.

And I think, George, it might be worth just joining that up with how we work on estimating the impact flowing back from the earnings of the customers.

Yes. Thanks, Andrew, and thanks for the question, Matt. So as well as what Ed has described, we also look at our customers' customers and in particular, on the demand side, what's happening in China, India and Japan. What we've seen in China is for the financial year '20, they ran at steel production of 4% above the prior year. That was offset, though, by India, which was down about 13% on the prior financial year. We see India coming back very much in the second half of the year. So that's on the demand side. The other thing we watch is competing supply. It's a pretty complex market and therefore, we have to watch a number of indicators. And what we've seen so far is that Australian production and exports have been much more resilient, certainly compared with the U.S., where we saw production and exports down over 20%. So that gives you some color on what we watch week to week.

So I guess, just going on from that, there's a comment about the soft first half volumes, which sort of implies a stronger second half. That's the first point to clarify. But the additional question would be, are you assuming a better second half based on an improvement to things like steel production, et cetera? Or are you assuming a better second half because of what your customers are telling you?

So Mike, can you just elaborate a bit more on that and clarify the different paths?

Yes. So the short answer to your question, Matt, is yes. We're assuming a stronger second half than first half based on steel production coming back online. And if you look at one of the charts Andrew showed on India steel production, we've already seen it improve from April to June. So that's a good sign. So the short answer to your question is, yes, we see steel production improving second half compared with first. We also see ourselves picking up some market share throughout FY '20, which will help also.

And just last question just on your cost base. Costs have historically been pretty fixed, I think, in the coal haulage business, but is there anything that you're doing at the moment to maybe improve that situation given you are seeing lower volumes at the moment?

Yes. So Matt, I'll obviously hand that over to Ed in a second, but I thought I'd -- just by way of starting. So the going-in thinking for our guidance for the financial year is to view the performance from the end customers -- or the demand that's coming through from the end customers to be temporary in nature to reflect -- our COVID-19 impact to be temporary in nature to those -- to the steelmaking business and thermal. So we also need then to be ready for the bounce back. And to be ready for the bounce back means that because of the long time it takes to bring on board staff and that you can't just make a dramatic temporary reduction and then a dramatic restart moments later, it actually has to be something where you actually are ready for the bounce back. So our plan assumes we're ready for the bounce back. Ed, do you want to add some stuff to that?

Yes, certainly. Thank you, Andrew. So in the context of Andrew's -- we're keen to preserve our capacity because we do believe there'll be a bounce back, and so we're looking at near-term cost levers. The levers we can pull are limited, but we're doing what we can. Redeployment of people to corridors where we have excess demand or more demand than the capacity, including encouraging people to go to West Australia for the bulk growth contracts, over time curtailment and also directing more annual leave than we'd otherwise do. The other major expense we have is in the maintenance sort of area. I mean in that regard, we're looking at -- we're doing a review of our maintenance strategy in terms of periodicity of maintenance activity and/or suspension if we've got rolling stock stowed. And we're seeing benefits from things like our condition monitoring process now being able to -- that we -- that was installed during the year, being able to -- starting to flow through. So there are fixed costs we can't control, like the enterprise agreements that are not indexed to CPI. So we still have those costs in front of us this year.

Your next question comes from Anthony Moulder with Jefferies.

Ed, the -- you delivered very good increases in market share through the Goonyella system in the second half of fiscal '20. I appreciate some of that have been as a consequence of the Anglo accident. But can you talk through the reasons as to why you believe you won the contracts that you did? And also what's the expected -- or what contracts do you have from competitors that are likely coming up for renewal over the next sort of 1 to 2 years, please?

Certainly. Anthony, thanks for the question. I mean in relation to why -- what the track record of contract -- recontracting success we've had in recent years, I mean, fundamentally, it's -- our strategy is based on delivery performance leadership and doing that in a way that provides value to the customer. So price is an important factor. But other things, we listen to each of the customers when we're in a negotiation, things -- utilization, fixed variable charges, mechanisms for nominations. All of those things factor into the value for the customer and for us, and we seem to get there at our hurdle rates more often than not. The second part of the question related to contracts coming up in current -- in the near term. I mean it's a pretty -- it's pretty slim pickings, I think, in the near term based on our recontracting success in the Hunter Valley, Blackwater, Goonyella, major systems and also given the context of the COVID. So we're looking -- we're probably more in a defensive posture over the next year or 2 in looking to -- for the sort of small volumes, the 13% or so that do come off, looking to retain those where we can.

George, if I can ask a question on the independent expert. Obviously, a delay to the timing of that report to the end of this fiscal year. Obviously, a component of that was the potential to spend up to $300 million of CapEx. How are you viewing that in the context of completing or going forward with another $300 million worth of buyback with the potential that, that independent expert could give you a CapEx spend of an equal amount in 12 months' time?

Pam, why don't I get you to talk about the independent expert and where we are and a bit more color on that process? And then, George, if you could just pick up to how that may possibly flow through the buyback. Thank you.

Thank you, Andrew. Yes. So from an independent expert perspective, just to give you some color on where we are with the process Andrew talked about. The Chairman, Phil, is on board. We have set up the company, which is called Coal Network capacity company. And we have the CEO also appointed, Craig Doyle, but he doesn't start until mid-August, which partly explains why there's been a delay. Once we have both of them on board, from the whole of industry perspective, we'll work towards looking to deliver that report as soon as possible. Both parties been incentivized given that we have a performance-based rebate, which also kicks in at the same time as the WACC uplift. So in terms of capital, the capital will not be required until we've firstly responded to that report. So the independent expert will deliver the report, and then we have to respond in terms of what might be required in terms of dealing with a deficit. And obviously, until that report is available, we don't know what that deficit is. In terms of the buyback, I'll let George comment on that.

Thanks, Pam. Thanks for your question, Anthony. So I think we announced 12 months ago $1.2 billion of additional funding capacity. This $300 million of buyback that we're announcing today represents roughly 25% of that. And in terms of our thinking, the independent expert report and timing has been factored into it, and so we have the position of waiting to see what that independent expert report says. And if we need to spend that $300 million, then, obviously, that will take up some of that $1.2 billion of additional funding capacity. That's one of the reasons that we've only announced a $300 million buyback today. We want to add debt progressively rather than doing it all in one go.

And that is not inconsistent with the thinking that we had when we first announced the entire concept of taking our time to deal with the capacity that we had and the fact that nothing was going to happen in -- over the year that we made the announcement or in any short order because we wanted to take on -- be very cautious as to how we move forward year-on-year.

And related to that, is the money coming from Acacia Ridge, there's no indicative timetable as to when that could be forthcoming?

George, I might just get you to talk about the Acacia Ridge thinking.

Yes. So in terms of that, Anthony, as we mentioned, when the ACCC announced their intention to take leave to appeal, we're hopeful for a decision on that leave before Christmas. And so if we're successful or if the ACCC is unsuccessful, then we would be able to proceed with that transaction and get the remainder of the proceeds.

And lastly, if I could, for Clay on Bulk. This move into port services is interesting. I wondered if that's particular to Townsville or whether or not it's something that you look at elsewhere for Bulk, but also other parts of the business category.

Yes. Thanks. We're really, really pleased with the acquisition of TBSH. Now it's a great follow-on for our business, very complementary to the rail services that we had up in North Queensland. In regard to further opportunities, I guess, you think about the strategy that Bulk has been pursuing some time, the extend strategy on utilizing better our strategic land and locations and integrating further into our customer supply chains, we'll keep looking for those types of assets that bolt-on really neatly and complement our core rail business.

Yes. And I wouldn't read anything that Bulk's doing as actually may or may not take it up in the GrainCorp business. This activity is specifically to Bulk.

Your next question comes from Anthony Longo with CLSA.

Just a quick one for me. Looking at contracted volumes and coal, I guess what I'm trying to get a sense of is to -- what's the current take-or-pay proportion you contract across the book? And perhaps how that's changed over the past couple of years? So I guess what I'm trying to understand is, are you starting to get more pressure from your customers on that front to maybe potentially share in that additional volume risk, given the price and demand environment?

Look, Ed, why don't we get you to give some insight into that and how many of those discussions play out.

Yes, certainly. Thank you, Andrew, and thank you, Anthony. Yes, certainly, there is a -- contextually, most of the contracts, we also have been recontracting in recent years were signed and signed up in a time of less competition. So there were -- as we've seen competition increase, there's definitely a change in the market. I mean so broadly, if you go back a couple of years, we were in the 60% to 70% of our contracted volumes were fixed charges [ to providers ] nowadays, it's directionally reducing, but it's still in the 50% to 60% as a portfolio.

Okay. Great. That's helpful. Second one, I just wanted to get a sense of -- so you made the comment earlier, it was increased competition, as you have flagged at the previous result. But just I'm trying to get an understanding as to longer-term demand for coal seems to be resilient based on what you've said in the presentation, so that 1% to 2% volume growth. But just trying to get a sense of given that competition, how should we ultimately be thinking about translation to top line revenue growth in that environment?

I'll take that one. So thanks, Anthony. Our translation of the top line revenue, well, certainly this -- for the same reasons I just explained, there's certainly downward pressure on contract rates. That's been happening and consistent with what we've said over the last couple of years. So therefore, by managing the contract book and lifting our volumes, our longer-term contract volumes, we see offset that. At the same time, work on both near- and longer-term transformation in opportunities to protect our EBIT. So that's the trends, Anthony.

No. That's helpful. And a final one for me, just looking at Bulk, that was obviously a great result. I just wanted to get a sense to -- so you did touch on the earnings diversity that you're now seeing in that segment. So when we look at this business now going forward, you're just -- now the base level of earnings that you do expect on a going-forward basis with some growth?

Mike, can you talk about your expectations?

Yes. I think -- I mean Andrew and George both covered it this morning, but what you'll see next -- or this financial year that we're in, you'll see the upside of the Rio and MRL contracts coming through full year, which is a positive for us. Offset against that, you'll see the GrainCorp and the Mount Gibson tonnes come out. This year, very much focused on 4 major recontracting tasks that we have with existing customers, 3 in the west, and 1 in the east. So a lot of focus there on recontracting, reforming, retaining those contracts going forward. So all in all, on balance, you'll see growth in Bulk, but again, not at the rate that you saw from FY '19 into FY '20.

Your next question comes from Paul Butler with Crédit Suisse.

I just wanted to clarify the timing of the WACC uplift to 6.3%. Does that occur once the independent's report comes out or is it based on when Aurizon responds to that?

Pam, can you just clarify the exact steps?

Yes. It's -- actually, it's the latter, Paul. It's when we respond to the report. Just a reminder, the WACC kicks in on 1st of March when the tariffs were uplifted. So we are getting the WACC in our numbers. And as Andrew and George talked about, there will be an adjustment in the revenue cap once that report response have been given from that date.

And can you just clarify or will give us a bit more color on why we've had the delay now? Because this looks like it's sort of 12 months of delay. And what's the risks we should be keeping in mind in terms of whether it's delayed further?

So as I mentioned earlier, Paul, there's been a delay partly the recruitment process and getting the legal entity set up. And then once we've set the entity up, we've -- the Chairman has been appointed. The CEO, Craig, he doesn't actually start until mid-August, unfortunately, a 3-month notice period. So there were some delays in the recruitment process, identifying the right people. And then from there, they will need to recruit a small team of technical and commercial experts, and he will start that process of recruitment as soon as he's on board. So -- but what we have been doing is working behind the scenes, pulling together all the information to ensure that we minimize any further delays. But ultimately, the timing will depend on the independent expert and the process they go through. It is a key piece of work, and we need to ensure that it is accurate because it is underpinning the long term Central Queensland coal network and can result in incorrect investment if they get it wrong. So we want a quality output, but we're doing everything we can to ensure that progresses.

Right. And because I understand a lot of work's already been done on this, but how do you get comfortable that the team that's going to get recruited to complete this and sign off on it is going to be comfortable with whatever the work that's already been done.

That would be a matter for the independent expert, the role they have and the purpose it was set up, and the Board members will need to ensure that happens.

And who are the Board members?

So we have 4 Board members that are Aurizon network, including myself. And then there are 4 Board members representing industry for our customers.

Okay. Okay. And can I just ask about the -- you're targeting $50 million of benefit from the Precision railroading project. And I understood from your comments, Andrew, that the rollout in Blackwater has been successful, but required a bit more work. Can you sort of give us a bit of color on whether that $50 million is still the right number that you can get to?

Yes. Thank you very much for the question. Pam, I might get you to just talk through how you -- has the person managing the Precision project, how that's rolling out, in a little bit more detail.

Yes, so in terms of -- thank you, Andrew, in terms of project precision, it involves numerous initiatives. So from a network perspective, as we improve turnaround time on the network, that benefits every operator on the network. So from our perspective, we have started improvements in the Blackwater System, and we'll look to incrementally drive initiatives across the other systems. And from a network perspective, that includes disciplined train operations, the way we plan our maintenance and run trains and improving speed restrictions. So there's -- as you'd imagine, there's a lot that goes into it from just network, but then how we improve our load-out times and also how the operators are working the system. As you might recall, we've previously mentioned those savings are based on revenue in addition to the cost savings. So it will be volume-dependent as you increase capacity as well.

So probably to just add something to that. The activities will get done. But you've got -- there is that estimation of that's a volume that may be -- that's available at the time. And that volume has to be there. But the activities that actually Pam is managing around project precision to get done. It -- but it just translates based on volume. So you've got to have the volume uplift required to actually get a reasonable quantity of that benefit.

Okay. And just to clarify, because Pam, I didn't realize that you were leading that initiative. Do the benefits flow through to the Network business or to the Coal business or both?

It flows through all operators. So Aurizon operations, Pacific National and the other operators on the network.

[indiscernible] itself gets nothing out of doing it. They do most of the work and a lot of -- or thereto, the chunk of the work and the benefit flows to the above rail operators.

We have the ability to improve the supply chain, which is where Network's role is.

The original thinking that we talked about when our first announced Project Precision that was recognized as the -- having the largest market share, we get a significant quantity of that, but it is -- there are benefits that flow through to competitor above rail businesses.

Perfect. And just one final one, if I may. With the -- your acquisition of the Townsville Bulk Storage & Handling, I mean you've made the comment that kind of -- it made sense because it's very integral to the Bulk business. But I'm just wondering if you can give us a sense of what's the quantum of other opportunities out there? Is -- does this one make sense because you've got a high density of operations to and from Townsville? And so are there a lot of other locations around the country where this sort of thing could be attractive or is it quite specific to a few number of locations?

So Clay, I might -- I'll obviously hand that -- the answer to that to you, just make sure we don't overpromise at all.

Yes. Thanks. Look, I think when we think about the Bulk strategy and the extend strategy into providing additional supply chain services. So we look, first of all, what are the key corridors and commodities that we really like, and we try and then look at the services we provide in those key corridors and those commodities and then say, well, how do we extend those services to those customers. To give you, indicatively, Paul, if you think about that Mount Isa corridor, right, so out of 100% of spend for that -- for our customers out there, above rail's about 40%. So if you take below rail's 30%, that at 70% -- there's 30% of logistics spend there that we're trying to target in those key corridors. So the best way to answer this is look at the key corridors we operate in, look at the supply chains there and the commodities we like, and then we'll be looking for opportunities around then.

Our next question comes from Owen Birrell with Goldman Sachs.

Guys, look, a couple of questions from me. Look, firstly, just looking at the network outlook. You're talking about sort of $50 million lower revenue to be captured next year. I'm just wondering if you can give us a sense of what EBIT margin we can attribute to this revenue to get a sense on what impact that's had to your earnings guidance. That's the first question.

Yes. Pam, can you get you to cover that?

Yes, I can cover that. The $50 million is only a sensitivity, just so that you're aware. And the volumes, and we used a range, volumes that we railed this year, 227 million tonnes, and the volumes the regulator has approved is 239 million tonnes. So if you take that difference, that gives you a sort of a sensitivity to work to. In our guidance, we haven't assumed the $50 million. We've obviously made a decision based on what we think -- based on what we're hearing from our customers. And then the other point to note is that $50 million, you would always have to adjust for other movements, such as the WACC date that has finally delivered maintenance, to underspend, from any savings we achieve CPI capital adjustment. So hopefully, that clarifies your question.

So just to confirm, the FY '21 EBIT guidance of $830 million to $880 million doesn't include -- doesn't assume an underrecovery next year?

It assumes an underrecovery, but what we're not saying is what that under recovery is because we've assumed -- the purpose of the $50 million is just a sensitivity, so you understand how much if you assumed flat volumes.

Well, I guess what I'm trying to work out is, in 2 years' time, when you get that back, what is the earnings impact in 2 years' time that you get back?

Yes. And that's -- I guess, the sensitivity was just to assume flat volumes. We can work out what we think our customers are going to rail, and there's always a judgment call as to what other operators would rail, which then dictates the volumes that you rail on the network.

George, can you add anything that you think is necessary, from a finance point, of view on that?

Yes, sure. Owen, I mean the FY '23 revenue cap will likely be lower than the $50 million because it needs to be adjusted because at the moment, we're charging at 6.3% and the independent expert report hasn't been delivered yet. So there will be at least a $12 million reduction to that $50 million in the example that we set out in the outlook.

Okay. Okay. And just to confirm that the underrecovery in FY '20 of $23 million, that will be recovered in FY '22? And is there any sensitivities around that, that we should be aware of?

Yes. So the FY '20 through revenue cap, that $23 million is the shortfall in volumes of $13 million against the regulator's forecast of 240 for FY '20. So that's the key component. But against that, Andrew and George had touched on, we have maintenance savings so that would be reduced as benefits going back to our customers. The $8 million of WACC, which was assumed in FY '20 would have to be adjusted. And then there other adjustments like CPI inflation. And hence, we said that the revenue cap is likely to be less than $3 million, around that number.

So is that -- that's the revenue recovery?

Yes. But again, it's subject to QCA approval. So we've just guided, so it's not $23 million. It's a lower figure.

That's fine. Just a quick question on the coal outlook. Have you included any assumptions around Carmichael volumes in both the below rail and the above rail volume assumptions.

Ed, do you want to talk to above rail?

Yes. Yes, sure. Owen, from an above rail perspective, we're not aware of a tender in the marketplace for the Carmichael volume. So we're not currently engaged in a conversation with Adani really regarding their volumes. And…

Pam, did you want to make any comment about below rail?

Nothing other than we would do what we're legally required to do in terms of access to any miner on the system.

And Owen, if you want any update on the access request, you need to talk to Adani.

Sure. No, that's fine. I had one last question, if I may, just on the outlook for the Bulks business. Clearly, new contracts present a huge growth opportunity within that business. But obviously, very hard for us to forecast. I'm just wondering, Clay, if you can give us a sense of, what is the available opportunity over the next 1 to 2 years? Are you aware of any other contracts that are coming due that we can sort of look out for?

So we've given a pretty good sort of summary of what we'll face in FY '21. Beyond that, I think we've always talked about the bulk market being around a $1.25 billion market, growing at around 3%. And so yes, there's opportunities sort of come up and other opportunities that you think are going to present themselves, don't. So depending on commodity and price, et cetera, and project viabilities. But I think that the guidance that we provide this morning is pretty good. There's nothing material on the radar for us for FY '21, it's about recontracting those 4 key contracts that we've got today, holding them and reforming them.

Just to clarify. When Clay says $1.5 billion, that's revenue, not earnings.

Yes, Andrew. Yes, yes.

And so the only other thing I'd add to that is that we've now got our Bulk business in a position where it's earning EBIT margins consistent with what we believe is in the market. So that should give you a sense for the limitations around future growth. We're also putting more capital into Bulk, which, therefore, over time, you'll see depreciation increase, too.

Our next question comes from Ian Myles with Macquarie.

Guys, just a couple of quick ones then because most questions has been asked. Just on Bulk, to continue that theme for a second. Firstly, you mentioned the 4 contracts being renegotiated this year. Do you see those as being relatively mispriced against? Are they one of the ones you needed to improve or are they okay?

Two are reformed, Ian. We've talked about these over the last couple of years, 2 and one's in the East and one's in the West and 2 are really retaining contracts for us.

Okay. That's fine. On Mount Isa, I think it was pretty much flooded last year, and the line was shut for 3 or 4 months. I was just wondering, how much of the kickback in that second half is actually due to the line coming back and you being able to provide services versus the -- just the organic growth?

Yes. I think what you'll see from previous comparable period, it's not material. Most of it is coming through from that full year of Glencore and the APS earnings coming through for -- we've had it since March, that business. So that is sort of the most material impacts on those numbers.

Okay. On the Coal side, last half, we had lots of conversations about One Rail and their new train set up in the Goonyella. I’m just [ hoping ], we’re now 6 months on what you may have seen on that? And I guess how has the spot market changed in that market given volumes sort of diminishing. Does that have a greater size effect on the Coal businesses?

Thanks, Ian, for the question. As a matter of policy, as you know, we don't typically talk about competitors. And my MO is to focus on our -- what I can control, what we can control, our delivery performance and strike the right value with our customers. I've not noticed -- we've not noticed any impact in the spot market that's discernible.

So is the spot market actually that significant now given volumes are all sort of falling below contract?

No more than normal. No more than normal, Ian, particularly in the current price environment.

Okay. And one final question. With the sustained business CapEx at $0.5 billion, it's been pretty stubborn at that high level, maybe that's the wrong word to say stubborn, but is there scope for you to actually sort of look at that unless you bring it down to a newer level, if we are in a lower growth environment?

So Ian, I think when you think of that $0.5 billion, that's not -- that capital is not the capital that Ed spends. I mean half of that is maintaining 2,700 kilometers of track from a network point of view. So really then, you're only looking at half of that. And when you look at those sort of numbers, they are very, very comparable across industry benchmarks very well.

Okay. So you suggest it's pretty much -- it's sort of stuck at that sort of $0.5 billion, you'll be able to -- you just have to leave it at that level?

I think $0.5 billion has been a good assumption for a number of years, and I would use that as a ballpark going forward. There's numbers in there like that of transformation and that sort of stuff, but $0.5 billion's the number.

Okay. And one final question. Just on the sort of the…

I'd just say, sorry, I just forgot. It's actually not -- the number is not a stubborn number. It's the CEO's a stubborn person. That's kind of why.

One final question. Just on the tenders for the coal volumes, which you've been winning and the likes. Appreciate the step down from the heavy years of 2007 to 2010, but you're seeing them normalize out at sort of a similar sort of rate. And I appreciate all of them are different, but at a similar rate across the new levels that we're not declining further?

Yes. Directionally, yes, but there's still pressure, markets downward route -- rate pressure. I don't think it's going to subside anytime soon. And it's so -- because you only get 1 or 2 data points a year, it is difficult to forecast accurately.

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

Just a clarification on the outlook. You've said that redundancy costs are included in that outlook number. What sort of estimates should we be thinking about in the redundancies? Is it similar to the last few years and sort of sub-20?

Look, Mike, could I get you to cover the redundancy question?

Yes. So they are included in the outlook, Cameron. They're above the line, and I'd suggest they're not going to be dissimilar to last year.

Okay. That's great. And you -- I think early on, you were talking about the coal contract structure and that above-rail EBIT was likely to be down because of the fact that you were incurring contracted costs, such as EBA increases that you couldn't pass through to customers? What's -- is that going to be an ongoing trend or when are you actually able to then reset your cost base and pass that through in new contract structure?

Ed, could I just get you to cover as much as you can?

Yes. Yes, thanks, Cameron. I mean yes, in FY '21, it's -- we have installed the capacity. We've been building it over the last year or 2 as we've been building the contract book. And we certainly expected that volume to show up during the course of '20 initially and then -- and certainly then into '21. With the COVID outlook in the soft first half and the range we've given, we're still in a situation where we've got capacity installed. And we look through fiscal year '21 to '22 where we believe we'll see that the volume is starting to flow and the revenues along with it.

The other thing I'd add, Cameron is we've actually got a breakdown on Page 40 of the pack around EAs and when they roll off. So that should give you some sense around the end point for those current EAs. The only other thing I'd say is fuel is pass-through, so we don't get the benefit of fuel prices lowering when it comes to CPI.

Yes, I'm assuming that EBAs don't go backwards though, so if you can't pass them through now, they're not going to give you a reduction in the rate once they renegotiate. And my final question, just on that comment about the expected volume, the 210 million to 220 million. I mean if I look back over the last 6 or 7 years, you've actually averaged around about the 210 million. It's been -- to pick up on the earlier comment, it's been remarkably stubborn at those sorts of levels. I mean even the mid-point would be a record volume haulage task for you. And certainly, at the top end would be the 220 million you've never done anything like that. So what -- like I'm just a bit confused and concerned that in the current environment that we've never seen before, with significant slowdown globally in terms of manufacturing, what gives you more comfort that the second half is going to be presumably as strong as you've ever seen?

George, it might be worth just reminding people about the end market sort of activity?

Yes, sure. No, happy to. And thanks for your question, Cameron. I mean what we've seen in China in particular, in terms of steel production, is record steel production through FY '20. We see no catalyst for that to change. The -- what we've said is the weakness in the first half is more driven by India and Japan, which have been lower, but there are signs that their steel production is coming back, in particular, India. The only other thing I'd say then is we have made investments over the last year or 2, which give us additional capacity to move more volume in coal, so the investments in wagons in the CQCN and also the investments in wagons in New South Wales and moving into modal rolling stock into New South Wales. So we have more capacity than we have had before.

Ed, did you want to add anything to that?

Yes. I'll just -- the piece I'll add is about the growth contracts we've signed up, essentially, the different -- the key difference between '20 and '21 is the National Peabody contract that we've signed up, which has gone live in July in Goonyella. And but also -- and growth into the Illawarra, which is -- I'm excited about, and it's new for us. We've started railing down there for Bluescope Steel in April. And as inbound coal, where we've got metrop volumes to export due in the second half. And so that's largely -- given that the capacity, given -- and it is dependent on end demand, of course, as George has explained, I mean that gives us the confidence around the upper range -- the mid- to upper range.

Our next question comes from Jake Cakarnis with Citi.

Just quickly with George. I'll start with you, mate. We've got a CapEx guidance for FY '21 of $500 million to [ $550 million ]. Can you just shed a bit of light into how that will be spread between the year, first half/second half? And just give us a sense of potentially how much is related to some of the rolling stock investment in the Bulk business versus what you need to do further in the Coal business as well?

Yes. So I might touch on the first part of your question, Jake. So the timing and typically, there's a bit more capital spend in the second half than the first. I don't see any reason for it to be different in FY '21. In terms of the mix of where we're spending capital, you might see coal come down a little bit and bulk come up a bit, but the increase in bulk will be similar to what we saw going from '19 to '20 to '20 to '21. So I think it increased about 10 million from '19 to '20, should expect something similar '20 to '21.

Okay. And then just the second one for Ed. I know that there was some commentary that you're not seeing it yet in terms of competition in the spot market. But how should we think about it with potentially weaker volumes coming out from some of the customer announcements in New South Wales? Do you think that further competition in the spot market in Queensland could put further pressure on rates and returns there? And then I guess the second part of that, how are you guys thinking about the regearing of the OpCo balance sheet just in light of potentially more competitive pressure, but also a change in the market since you announced the regearing of that structure, I guess?

I might take the first part of the question on the gearing part.

You take the first part, Ed.

And I believe I'll throw the second one to George. So I mean most -- so I think just to rephrase your question, Jake, it's in a soft demand environment with capacity of flood, are we -- is the spot business a risk to our earnings? I mean by and large, the vast majority of our income is generated under, as you know, take-or-pay contracts. And in many of our contracts, not all of them, but the majority have terms in them, which guarantee us certain volumes, and in some cases, even exclusivity in relation to -- and that's part of that value exchange or value we cut with our customers. So really, you're more exposed, if you have a particular customer that has an exposure to the end markets, thermal in China, for example, or -- that's got the potential to have more impact on your income or railings with a particular customer than the spot market does.

Thanks, Ed. George?

Yes. Jake, I mean -- I think Ed's answer the first question, gives me a lot of confidence in the second, which is that there's no real change to our plan around the $1.2 billion of extra funding capacity. Most of it, as you outlined, in operations. And so no real change. We'd continue to look at that and add that progressively.

Sure. And will there be an envelope, potentially, George, to review that if there is a sustained deterioration? Or are you guys steadfastly pushing ahead with the $1.2 billion because that's what you've committed to the market?

And the other thing we've committed to, Jake, is the BBB+ rating. So that's the primary commitment we make and the credit metrics that flow from that. So long as our forward forecasts for free cash flow doesn't change, and hasn't changed as part of the last year or so that we've seen, then we would continue to add debt progressively.

Your next question comes from Rob Koh with Morgan Stanley.

Just going right back to the first question about the volume outlook for the second half. You kind of commented in your Coal outlook statement about the risk of China import restrictions. I'm just wondering if you can share your insights there and what you're assuming.

Yes. George, can I get you to cover that, please?

Yes, happy to. I mean I think that the China import cap of 300 million tonnes has been in place for a while now. China is running ahead of where it was last year in terms of imports. What we have seen though, particularly in the last couple of months, is China is starting to pull back on lignite, so lower quality coal imports and tending to keep up imports of higher quality met coal and thermal coal. So that's something that we're watching every month. At the moment, there's good signs that China is prioritizing higher-quality coal. But as we outlined, and Andrew outlined in his speech earlier, that's something we're watching.

Great. Okay. That's clear. If I then try to think about kind of normalizing OpEx, would it be fair to say that FY '20's OpEx performance includes very little impact for to the additional activities you undertook for COVID-19. Is that fair?

Yes. I mean the additional costs, OpEx costs around COVID-19 were very small, immaterial, less than $5 million. So things like hygiene supplies, additional contracting for services, for cleaning. And they were largely offset, Rob, by savings in lower travel spend.

Yes. Okay. All right. That's good. A worthy activity, of course, but yes, good to hear. Just, I guess, broadly on the COVID-19 impact. At the start of the year, we did actually see some kind of supply chain disruptions as well. I presume that's a bit normalized. But just wondering if you can talk about the consumables in the supply chain, things like the wheels, stuff like that. Have you made some initiatives to diversify supply?

So Mike Carter, who looks after -- or has responsibility for the procurement area, just to talk through a little bit of color in that space, Mike.

Rob, like many companies, we've been watching the supply chains very carefully. And early in the year, we thought we might have some exposures. But over time, what we found is all supply chains have been able to keep up in terms of our parts in relation to wheels. We have a dual supply strategy, both international and domestic, and that has stood the test of the last 4 or 5 months. We continue to watch it. And one of the things we're doing on an ongoing basis is reviewing the resilience of all of the key supply chains to make sure that we've got options as we go forward. We don't see it as a material risk for the company and the go-forward at this stage. Thanks, mate.

Yes, great. All right. Just last question. I guess just in the context of thinking about the pace and the sizing of the buyback programs. And you've been clear about the court cases and the growth CapEx for this year, which are clearly the high priorities. For the $300 million capacity investment potential in network, should we be still thinking that should be about 55% geared as -- on a CapEx basis?

George, it's for you.

Yes. So I mean -- I think I wouldn't assume any material changes to network gearing, Rob.

Your next question comes from Scott Ryall with Rimor Equity Research.

Hopefully, I won't be too long. Could I just ask who is responsible for the independent expert process?

Yes. Pam, can I get you to talk through in more detail on the independent expert?

Yes. So the independent expert process, I guess, the independent expert is responsible for ensuring the report is delivered, but then there is a Board that sits there, as I mentioned earlier, 4 members of the network business and then 4 from industry. So they're responsible for ensuring the report gets delivered.

But I mean in terms of the delays, Pam, that you've seen so far, look, I would have thought that it's in your interest to push ahead as quickly as possible, but maybe you could suggest that the coal companies don't have the same interests. So I'm just wondering what actually pushes the process forward and gets it done? Because, obviously, there's a reasonable amount of value for you guys there and getting the WACC increased. I'm just trying to figure out in terms of what actually will make it happen?

Scott, the -- both our customers' industry and ourselves are both incentivized because if you recall upon completion, we'll obviously get access to the increasing WACC from 5.9 to 6.3, but industry also get access to a performance-based rebate regime. And that rebate regime kicks in at the same time. So that's -- there is benefit for both parties to ensure that happens. Industry, we're keen to have the capacity review because it could increase -- it could highlight some areas where there is a deficit, and we have committed to spending up to the $300 million to allow that capacity shortfall to be rectified. So there's interest on both parts.

Okay. All right. And then I suspect the rest of my questions are for Ed, who's been pretty busy today. Can I ask, Ed, I'm just going to go back to your last 2 years and each half year, you've delivered, with roughly flat volumes, about 2% above rail revenue growth, so I'm ignoring track access revenue and the access costs here. So each half year, you've done about 2% growth. Then last year, in -- just looking at your operating costs, they were up 8% to 9%. This -- in the first half, they're up 3%. In the second half, they were down slightly. I'm sure you got some fuel price impact, although looking at your consolidated numbers, the fuel change for the second half wasn't massive. Can I -- just in terms of the earlier questions you've been getting on volume growth, so is the second half '20 results, from an operating cost point of view, about as good as you can do while you're still carrying the expectation of growth going forward? I'd take Andrew's points earlier on, you've got to have the cost base there if you believe the growth is coming. So is this about as good as you can do, actually getting a slight decline in operating costs while you're waiting for those volumes to come through?

You talk -- thanks, Scott, are you talking about in FY '21 or more longer term?

Just near term. While you've painted a picture of flat volumes for fiscal '21, so just near term. And then I guess my follow-on question from that is, if you then approach a contract utilization of 90%-plus on the contracted volumes that you've got, and you're able to deliver some of that growth, I guess my main question there is how much operational leverage can we expect to see? And I don't expect you to quantify that, but how much of your cost base then is fixed because you've carried all these costs for 2 years?

Yes. I think -- can I just -- I think the -- in terms of the cost increase year-to-year, I actually have a second half -- you must be factoring in access costs to those -- that cost are for a 9% year-on-year increase? Because I -- my notes show, I'm on a 3% from '19 -- weaker cost from '19 into '20. And the second half, while -- was about 1% favorable to the first half, net of [ access ].

Yes. The 9% within '19, right? On '18?

Yes. Thank you. Look, I think we had a strong -- remember, we -- the short answer is, I think we can do better. To my question -- but it's limited. We -- keep in mind, we had a very strong fourth quarter. And so we had everything running in [ anger ], and we had a very strong June, particularly. So now we've seen -- now we've started to get in the first quarter of '21. We're starting to see more volatility in demand. And that's -- they're the levers I spoke about earlier in relation to over time management, annual leave, redeployment of people and assets and looking at our maintenance strategies where we may find ourselves surplus. So it's limited. There are fixed cost increases like EAs, as I mentioned earlier, we're going to have to bear those. So I think there is some downside in the near term. Longer term, of course, our transformation agenda is really geared at resetting our OpEx base. And that's when we see things flow through, like the train guard technology and some other key investments we're doing, and not to mention precision and the quick -- and the faster turnaround times.

Scott to -- a very simple question to your quite complex -- answer to your quite complex question is I think he will do a little bit better. He said better, but I'd say a little bit better.

In '21?

Yes.

And then beyond this, the -- once you start seeing the volume growth in '22, as you're expecting, are we -- is at the same time -- I guess what I'm wondering then is how much of your cost is fixed and is there still downside as you transform the cost base or are we going to see margins pretty similar to what we're seeing now?

We should see some -- to Andrew's point, some marginal downside of improvement. And it's -- directionally, as these technology projects -- as the technology investments we're making flow through.

Your next question comes from Nathan Lead with Morgans Financial.

Guys, hopefully, I'll be quicker for you. Just 3 very quick ones. First up, I just noticed the contracted coal contracts there declined from 250 million tonnes, to about 246 million tonnes. But you've added Peabody and Bluescope, so maybe if you could just talk through what's happened there with the decline. Yes. That's the first question.

Can I give that to you?

Yes. Mostly, those declines are roll-offs and nominations -- downward nominations in our existing contracts. There is -- one of our contracts in [ CQCN ] coming to an end in -- that's the Minerva contract with Sojitz. But other than that, I won't say when it's in the nearer term.

Okay. My second question, just the low coal prices we're seeing at the moment. Is there any sort of concerns you've got when you look across your coal contract book for just, I suppose, a throwaway to put like a sort of customer survival through this period?

Nothing significant or material, Nathan. We are contracted with good quality counterparts with good assets.

Okay. And then, Pam, just on network, you talked about having a $12 million beat against the reg OpEx assumption. What are you thinking going forwards in terms of just how much of a beat you can achieve over 2, 3 years?

Thanks, Nathan. In terms of cost savings, we achieved cost savings across OpEx, maintenance and in FY '20, and Andrew and George touched on them. We don't provide targets, as you know. We will continue to look for opportunities, as we have and we've proven that in the past across the transformation we've done across the group. So obviously, OpEx savings benefit us but lower maintenance and capital savings benefit our customers, which we've also seen as well.

There are no further questions at this time. I'll now hand back for closing remarks.

Look, thank you very much for spending the time with us this morning as we went through the prior year's performance and talked a little bit about what we see in the coming year. I mean it is a year of uncertainty, but I think what you've seen from our performance in the last financial year, we are an extremely resilient business and able to weather any and all of the potential outcomes that you could reasonably consider that could occur. So thank you very much.

That does conclude our conference for today. Thank you for participating. You may now disconnect.