Aurizon Holdings Limited (AZJ) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Aurizon analyst teleconference. [Operator Instructions] I would now like to hand the conference over to Mr. Andrew Harding. Please go ahead.

Good morning, and welcome to the full year results for the 2021 financial year. 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 past, present and future for they hold the memories, the traditions, the culture and hopes of aboriginal Australia. We must always remember that under the ballast, sleepers, rail systems and office buildings where Aurizon does business was and always will be traditional aboriginal land. It is obviously a challenging time with the current COVID situation, and our thoughts are with individuals and communities that are being impacted. We continue to maintain our COVID protocols to ensure the continued well-being of our team. Flexible and remote working will be an ongoing feature for many of our head office staff for some time. This call is being made from our head office this morning, and I'm here with our CFO, George Lippiatt. Joining me on the call but dialing in from outside of the office are Ed McKeiver, Group Executive, Coal; Clay McDonald, Group Executive, Bulk; Pam Bains, Group Executive, Network; and Gareth Long, Group Executive Corporate. We will shortly 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. Mike Carter, who many of you know and has been with Aurizon and previously QR for more than 30 years, will be leaving Aurizon later this year after the consolidation of various functions as part of our corporate support area review. I thank Mike for his many years of contribution to the company. Mike is also on the line and will be happy to take any questions. Now turning to safety performance. Our results have been flat across the safety metrics of total recordable injury frequency rate, TRIFR; lost time injury frequency rate, the LTIFR; and rail process safety, RPS. TRIFR has deteriorated 3% in comparison with last year's 10% improvement. This deterioration has been the result of an increase in low-severity strain and sprain injuries. LTIFR has improved 8% year-on-year, which is a positive trend. RPS, a measure designed by Aurizon to improve rail safety operations, including derailments, signals passed at danger and rolling stock collisions, has been flat in recent years. RPS deteriorated 8% in FY 2021. This has been caused by an increase in low-severity yard derailments. During the year, we continued the safety leadership program that equips operational leaders with skills to effectively lead our safety strategy and continually improve safety in their team. We're also focusing on initiatives to accelerate safety improvement through targeting the main contributors to TRIFR and RPS and a specific focus on identifying and learning from events that have the potential for serious injury and fatality. Turning to an overview of performance. Before we get into the results for the year, I wanted to take a moment to reflect on the recent Investor Day and some of the key takeaways. This slide shows that each business unit has a unique focus, but they're all aligned to common enterprise objectives. Aurizon has a unique place in critical supply chains across the nation. Our involvement in improving these supply chains will support long-term demand for key commodities on global export markets. We will continue to deploy capital efficiently to support these supply chains with a view of generating attractive growth and shareholder returns. For Coal, the focus is return on invested capital and free cash flow. With a contract book well set, this can be achieved through a continuous push on transformation and productivity. Capital will be spent carefully with some assets able to be deployed into or shared with Bulk to support their growth ambitions because of Coal's efficiency improvements. For Bulk, with growing markets and new adjacencies, the focus is on revenue and earnings growth. This requires more capital such as the 2 Aurizon Port Services businesses, but it can also take advantage of assets from Coal that can be cascaded to support these growth markets. For Network, the focus is on embedding UT5 to ensure long-term regulatory certainty, reducing costs and enhancing the efficiency of the supply chain, which will ultimately increase throughput for the entire industry. I just reminded you about the different focus areas of the business units, and that is because this focus enables Coal and Network to provide a resilient base which provides value to our shareholders and supports the growth ambitions of Bulk. Demand for bulk commodities is expected to grow strongly, and Aurizon is well positioned to capture this growth as well as new markets such as bulk port terminals. These new markets provide a much larger profit -- potential profit pool, which underpins our aspiration to more than double Bulk's current EBIT to $250 million over the next 10 years. This growth could result in the commodity mix changing within Aurizon. Consequently, if Aurizon is able to capitalize on this, revenue from thermal coal could be less than 20% of the above rail portfolio by 2030. The detailed presentation, including transcript and the webcast, is available on our website for those who missed it. Now moving on to the financial results. We are pleased with the results of $903 million underlying EBIT, being at the top of the guidance range of $870 million to $910 million. EBITDA of almost $1.5 billion was up 1%, and it is this measure that we will focus on going forward, along with CapEx as they are a proxy for free cash flow. The results reflect the continued growth in Bulk, which now accounts for 32% of above rail's revenue and the commencement of WIRP fees in Network. This offsets the impact from lower volumes in Network and a 6% reduction in coal volumes. We expect coal volumes to improve this year with improved demand, strong commodity prices and seaborne markets now rebalanced to offset the impact of the ongoing trade situation with China. Statutory NPAT was steady at $607 million, and ROIC was down slightly at 10.7%, consistent with the slight decline in EBIT. Free cash flow was up slightly to $734 million, noting that this number includes the after-tax proceeds from the sale of Acacia Ridge, which completed in March. And finally, our record of strong shareholder distributions through dividends and buybacks has again been demonstrated this year. We completed our $300 million buyback, taking the total buybacks completed to $1.3 billion since 2016. The final dividend of $0.144 is 5% higher than last year and is equal to the interim dividend, which was our highest ever. It maintains our payout ratio at 100% for over 6 years, with the increase reflecting the benefit from buybacks reducing the share count. Moving to an update on commodity markets. After being heavily impacted in the first half of 2020, steel production recovered during the remainder of the year and into 2021 with production returning to pre-COVID levels as economic activity resumed in major export nations. The month of June was the 11th consecutive month of year-on-year growth in global crude steel production. Based on crude steel production in the first 6 months of 2021, India is projected to set a new annual record for this calendar year. India is, of course, Australia's largest metallurgical coal export market, representing 1/3 of volume in FY '21. Thermal coal electricity generation has also returned to pre-COVID levels with the International Energy Agency noting last month that after declining by 4.6% in 2020, global thermal coal electricity will increase by almost 5% in 2021. In further data released by the IEA just last week, the Asia share of global coal trade has reached a record high, representing 85% of the market. A reminder that this is a continent where nearly all Australian coal is destined. Southeast Asia now accounts for over 40 million tonnes of Australian export volume, doubling in just 3 years. Despite the Chinese ban on Australian coal import volume continuing, our customers are successfully exporting to markets outside of China with export volume in the June quarter just 1% lower than the prior year despite 0 export volumes to China. Although not seeing a resolution in the foreseeable future, evidence to date continues to show the resilience of Australian coal in the face of this challenge. We've also shown here some indicators of bulk markets, although this is a more challenging task to summarize on a slide, given the diversity of the commodities and the multiple drivers of demand. Given that Asia is the major key destination of bulk commodities, PMI, or Purchasing Managers' Index, for manufacturing industry is a reasonable starting point. This index, of course, measures sentiment with a reading above 50 indicating expansion in the sector and below 50 indicating a contraction. As noted on the chart, we've now seen 12 consecutive months of expansion readings. Beyond infrastructure development, commodities such as copper and nickel that are associated with battery storage and electric vehicles are at a multiyear high. From an Australian perspective, the most recent 6-year supply projections from the Office of the Chief Economist shows annual compound growth of 5.4% for nickel, 3.5% for zinc and iron ore and some 16% for lithium. This has translated through to confidence in capital expenditure in metal ore mining, as shown on the slide. Annual capital expenditure was at a 6-year high in 2020 and in the latest quarterly data. March CapEx was over 20% higher than the same period of the prior year. Turning to the Coal business. The focus for the Coal business is on preserving returns and free cash flow through ongoing transformation and productivity. This, along with Network, provides a stable base which supports growth ambitions elsewhere in the company. The financial results of EBITDA, down 13% to $533 million this year, were driven -- were mainly driven by a 6% decline in haulage volumes, which we expect to recover and grow around 5% this year. On the contracting front, we are pleased to announce that we have executed contract extensions for existing agreements for all our Queensland mines with Glencore. This is in addition to the new agreement with Anglo in Queensland across multiple mines we announced in June. After these announcements, our contracted tonnage position for FY '22 is now forecast at 230 million tonnes, which includes the end of New Acland mine later this year. Importantly, when looking at our contracting chart, just 10% of volumes expire within the next 4 years, of which only around 70% is considered contestable. Progress on the major operational efficiencies continues, as we went through in detail at the Investor Day. Precision is an enterprise-wide program designed to improve throughput for our customers and capital productivity. We achieved this by reducing asset turnaround time, which is a wider measure of capital productivity compared to measures such as system velocity. Asset turnaround time captures the relationship between throughput, the number of train sets deployed and the average time it takes each train set to complete a cycle. In its simplest form, our aim is to achieve faster train cycles to deliver more tonnes using less trains. This year, Network worked in conjunction with all operators to test the application of these principles in an integrated planning process. This voluntary process enabled the network to assist operators in developing optimized weekly train plans in response to customer orders. The integrated planning approach removes contested access requests, whereby 2 or more operators seek the same path on the network. This integrated planning revealed that planned throughput improvements were able to be achieved when compared with conventional planning methods. Also contributing to Precision was work done during the year to reduce the time trains spent in yards. This included streamlining of wagon maintenance into blocks, which, combined with on-train repair work, reduce the numbers of shunting movements required. A good example of the combined results of Precision initiatives occurred in Moura, where we were able to reduce asset turnaround time by around 1.7 hours on a prior comparative period basis. For ARAM, benefits can be seen in reductions in maintenance cost and capital. Component change-out, for example, reduces overhaul costs by 10% to 15% for our 2,800 class locomotives for our Bulk business and has now commenced in our coal depots. And finally, with TrainGuard, there have been some delays in the rollout of this key program of work due to supplier issues, as we've previously indicated. Pleasingly, in Blackwater, all locomotive and network hardware installations have been completed, while in Goonyella, installation has commenced on locomotives and rail infrastructure. This project provides safety benefits through enhancements to speed control and signal enforcement and also provides a pathway to expanding driver-only operations in Central Queensland. In Blackwater, it is scheduled for deployment in the first half of next calendar year. Moving to Bulk. The Bulk business continues to perform strongly with EBIT of $112 million and EBITDA up 27% to $140 million. Bulk now represents 32% of revenue and 26% of EBIT for the above rail business. And as we've previously said, we expect these numbers to increase in coming years. We have commented before how busy the team has been, and you will have seen our announcement regarding a 10-year agreement to haul grain for CBH. This comes off the back of a short-term deal we announced earlier this year and completes the return to hauling for this customer after 10 years. We are very happy to be back in the WA grain market in what is shaping to be a strong harvest for the farmers. Today, we also announced a 3-year extension of our contract with South32 for the haulage of alumina and associated inputs at their Worsley refinery south of Perth. This continues our long-standing relationship with one of our largest customers in Western Australia. We have previously advised of the 2 other major contract news on the page, and the team is working hard on converting more opportunities across all regions in which we operate. When I gave the recap on the Investor Day, I spoke about the long-term aspiration of Bulk to more than double EBIT over 10 years. Part of this journey is moving into other parts of the supply chain, including bulk port terminals, and we're pleased with how Aurizon Port Services is tracking in both Townsville and Newcastle. These terminals are strategically linked to their important minerals provinces and provide an expanded service offering to our customers. In addition to this diversification beyond our haulage, the Bulk business is also diversified at a commodity level with no single commodity accounting for more than 28% of revenue. Looking forward into FY '22, we are pleased with the fundamental demand drivers for the Bulk business. In the agricultural sector, WA, Queensland and New South Wales have received good autumn rains that are widespread and have supported a significant winter planting. Iron ore prices and demand remain strong, and the minerals, metals and rare earths sector continue to see positive investment in exploration and project development off the back of increasing input requirements driven by the future economy. We expect these conditions to underpin another solid year for the Bulk business. Turning now to Network. EBITDA for Network was up 6% to $849 million with revenue from WIRP fees offsetting an underrecovery from lower volumes. $60 million of WIRP fees were recognized in FY '21 with $49 million relating to prior years and $11 million being the approximate annual value of fees each year until 2035. The appeal of the Expert Determination commenced last December with the outcome to determine the final amount of the fees payable by customers. We indicated at the half that based on volumes to date, take-or-pay would trigger in some of the systems. The final volumes resulted in take-or-pay triggering across all major systems of $88 million, bringing forward the revenue recovery to this year. The revenue cap in 2 years is now expected to be minimal, given this larger recovery this year and the delay to the independent expert report. In terms of that report, what is called the Initial Capacity Assessment Report, it remains our expectation that this will be delivered by the independent expert at the end of September. Today's results demonstrate the effectiveness of the revenue protection mechanisms with take-or-pay offsetting a large part of the volume-driven underrecovery this year. The chart on the left shows the history of excess revenue compared to volumes. You can see that revenue has remained reasonably stable despite volumes moving, particularly in 2017 and this year due to take-or-pay and revenue caps. We think this is a good visual representation of Network's resilience and stability over time. And before I hand over to George, an update on the progress of some other matters: The sale of Acacia Ridge completed in March, which was a great result after many years of uncertainty; likewise, the commencement of WIRP fees. As I just said, there remains an ongoing process with the appeal of the Expert Determination, and we'll keep you updated on that progress. There remains no significant update on the legal proceedings against Genesee & Wyoming with the matter currently before the court with no trial date set as yet. And finally, a date has been set with the declaratory relief proceedings with the ATO of March next year. As a reminder, this relates to the treatment of our share capital account balance from prior to the IPO. And on that note, I will hand over to George.

Thank you, Andrew, and good morning to everyone on the call. It's my second time talking to you about Aurizon's full year results, and you'll notice Andrew and I are saying very similar things to what we did this time last year. That's because, as this first page shows, the results are consistent with last year, highlighting that the business has performed well enough to offset the demand impacts from COVID and China import bans. It will be no surprise to listeners on today's call that free cash flow is a measure I often speak of when presenting not only Aurizon's ability to generate strong cash flows but importantly, the options available to deploy this cash, either through growth opportunities, primarily in our Bulk business; or return to shareholders, as we have consistently demonstrated. With this emphasis on free cash flow, we are focusing more on EBITDA and CapEx, given they are a proxy for free cash flow. This will also be used for guidance, as Andrew will present shortly. The flat EBITDA and EBIT performance was driven by a volume decline in Coal being offset by improved earnings in Bulk from revenue growth and Network, primarily due to the commencement of WIRP fee billing. There was also an improvement in the other segment with lower central costs and profit on sale of minor real estate assets. Group revenue declined 1% with revenue growth in Bulk driven by new contracts and in Network driven by recognizing WIRP fees for the first time following the Supreme Court decision in September 2020. Coal revenue decreased by 9%, driven by volume and lower track access revenue. I will provide more detail for each business unit shortly. There was a flat result for both NPAT and statutory NPAT with the FY '20 result including the posttax net gain of $74 million on the sale of Rail Grinding, while the FY '21 result excludes the posttax net gain of $113 million on the sale of Acacia Ridge. Although both were asset disposals, Acacia Ridge was treated as discontinued, whereas Rail Grinding was considered continuing. The reason for that, as you may remember, is that we announced the sale of Acacia Ridge almost 3 years ago, whereas we started and completed the sale of Rail Grinding within a single year. Given the difference in treatment, free cash flow from continuing operations is lower this year, but this is because the proceeds from Rail Grinding are in the FY '20 results. To assist in comparison, we have included free cash flow figures that include both continuing and discontinued, which show a 1% increase in FY '21 to $734 million. We continue to maintain our 100% dividend payout ratio with a final dividend of $0.144 per share, up 5% despite the flat underlying NPAT. The dividend is franked at 70% and takes the full year dividend to a record $0.288 per share. Moving now to Coal. EBITDA decreased $83 million or 13% to $533 million with volumes down 6% to 202 million tonnes, primarily driven by lower end market demand impacted by COVID-19 and the challenging trade environment with China. Beyond volumes, revenue and also EBITDA was impacted by some access rights being transferred to end users, non-pass-through of network take-or-pay and lower yields shown in net revenue quality on the bridge. Lower volumes also resulted in lower operating costs related to fuel, train crew and maintenance. But there was an increase in depreciation and support costs following investment in capacity, technology and overhauls completed on rolling stock. As a result, operating costs, excluding fuel and access, were flat. Operationally, key productivity metrics deteriorated with lower volumes and NTKs. However, average payloads and velocity have increased as a result of successful efficiency initiatives, including increasing train lengths in the Hunter Valley and South-East Queensland, implementing improved driver methodologies and a reduction in empty wagons on the CQCN. Moving now to Bulk. Bulk continues its strong performance with EBITDA growth of 27% to $140 million. Previously, we spoke of Bulk achieving $100 million EBIT, which Clay and his team were not -- able to not only meet but surpass. Bulk has shown it's pretty good at outperforming expectations, and we hope that's a pattern that will repeat. In the table, you can see a 23% reduction to access costs during the year. The driver of that is a Mt Isa corridor customer taking an access agreement in-house rather than held through Aurizon. Given the pass-through nature of access, that also reduced revenue by a similar amount in FY '21. While the table shows revenue up 4%, putting aside access, revenue would have increased by 10%. Turning to the bridge, and I still remember looking at a bridge for the Bulk business in 2017 that started and ended with a negative number. It's nice to reflect on that and see where we are now. As with previous reporting periods, the EBITDA bridge is straightforward with volumes driving revenue growth and higher operating costs to support that revenue growth. If we turn back to the table, you can see that depreciation increased year-on-year. It will continue to increase as we invest further capital into Bulk, both in absolute dollar terms and as a percentage of the overall group. This allocation of capital is based on our confidence in retaining and attracting new bulk customers as well as our view that Australian bulk commodity exports will grow at GDP-plus rates. In terms of tonnes, Bulk's East Coast volumes were flat, driven by stronger grain volumes in New South Wales and Queensland, offset by lower livestock volumes. In the west, iron ore volumes were up 3 million tonnes, driven by the ramp-up of Mineral Resources volumes, partly offset by lower Mount Gibson volumes due to end-of-mine life. We expect an uplift in bulk volumes in FY '22 due to the commencement of our long-term agreement with CBH, Australia's leading grain cooperative. This year saw the initial contribution of both Aurizon Port Services businesses, and we should see some incremental growth to EBITDA in the future as they ramp up. In summary, another strong performance from Bulk. Moving to Network. Network EBITDA increased $51 million or 6% to $849 million. This was due to the commencement of WIRP fees and operating cost improvements offsetting a revenue underrecovery due to an 8% reduction in volumes. As Andrew demonstrated earlier, the regulatory model provides revenue protection in periods of lower volumes. A quick reminder on how the 2 mechanisms operate. Take-or-pay, or as it would be better called early recovery, is a contractual measure that recovers revenue in the same year; while revenue cap, or as it would be better called delayed recovery, is the mechanism which recovers anything left after take-or-pay and other adjustments 2 years later. As usual, a summary of these mechanisms, in addition to a forward view of the maximum allowable revenue, or MAR, is included in the appendices. Turning to the earnings bridge. And you can see the track access revenue increased by $47 million with historical WIRP fees and take-or-pay more than offsetting the volume-related underrecovery. The tariffs approved by the QCA were based on a regulatory system forecast of 239.7 million tonnes, while actual tonnes were 208.3 million. As such, and given the low level of Aurizon network-caused cancellations, $88 million of take-or-pay was booked across the Blackwater, Goonyella, Moura and Newlands systems. At the half, we indicated that take-or-pay would trigger in at least 3 systems and total around $60 million, but it also triggered in Blackwater, increasing the amount of take-or-pay this year. This brings forward the recovery from FY '23. And our revenue cap expectation, excluding GAPE, for that year is now close to 0, given the repayment of WACC due mainly to the delay in the independent expert report. In relation to the WIRP fee, looking forward, we expect the annual amount to be around $11 million until 2035. The final amount will be subject to Aurizon's appeal of the Expert Determination and the finalization of a cost variation factor related to WIRP project costs. Other revenue, as shown in the bridge, decreased by $11 million due to lower external construction works and insurance recoveries. Operating costs decreased by around $15 million due to lower external construction costs associated with the lower revenue, reduced electric traction charges and lower maintenance costs, partially offset by expenditure incurred on the Project Precision railroading initiative. Turning to cash flow. Any page with free cash flow in the title is typically my favorite slide, and this is no exception. On the left, we highlight the historical amounts we make from operating the business, less the amount of money we spend to sustain the operations. What's left, free cash flow, is then available to either be distributed to shareholders or invested in further growing the business. Following on from IPO in late 2010, you can see a period of heavy investment, while post 2016, Aurizon instigated greater focus on capital and efficiency to enable stronger cash flows. You can also see that coal volumes, shown by the orange line, aren't the key driver of free cash flow for Aurizon. And that should be reinforced as our Bulk business continues to grow. Importantly, the black line is very consistent from 2017 onwards. It is this stability in cash flows that has enabled shareholder returns with over $4 billion distributed since 2016 in the form of dividends and on-market buybacks. Briefly to CapEx. CapEx totaled $490 million in FY '21, which is $37 million lower than the prior year and slightly lower than our full year guidance, mainly attributable to lower network asset renewals. Non-growth capital expenditure guidance for FY '22 is $475 million to $525 million. This figure excludes growth capital and any M&A activity. FY '22 growth CapEx is dependent on Bulk contracting outcomes where there are a few live opportunities. We will be able to provide more detail at the next result but expect this to be at least $50 million. Long-term expectations for stay-in business CapEx remain around $500 million per year, although this is constantly reviewed in conjunction with our long-term volume outlook. Turning to the next slide. And I know this chart on the left is partly a repeat from our Investor Day in June, but they are 2 important points it emphasizes. Firstly, you can see the differential between historical free cash flow and dividends. This demonstrates that even at 100% payout of NPAT, we still have surplus cash flow to deploy within the business or return to shareholders. Secondly, while aggregate dividends have remained relatively constant, dividend per share has increased due to about 150 million shares being bought back and canceled over the last 2 years. This year's record total dividend payment of $0.288 per share is 20% higher than 2 years ago. As I have noted previously, we want Aurizon to be known as a company that is predictable, resilient and is constantly striving to create value and reward shareholders with strong returns. Last but not least, to funding. During the year, the treasury team executed 3 debt market capital issuances, representing a combined $1.075 billion with 7- to 10-year terms and coupons of 2.9% to 3.3%. This included an inaugural issuance for Aurizon Operations, a 7-year AUD 500 million note at a coupon of 3%. The 3 FY '21 issuances can be seen in the chart on the right-hand side, where we continue to lengthen the tenor of debt facilities with no maturities now until June 2023. We also have significant available liquidity with over $1 billion, including undrawn working capital facilities. As noted at the half, with interest rates coming down, we expect our interest cost to trend lower, albeit at a slower pace, given we have higher levels of fixed debt within Network to align to the regulatory reset period at the end of FY '23. The recent bonds will, however, help to bring average rates lower. And with all debt floating beyond FY '23, interest costs will come down again from that point, assuming rates remain low. And finally, can I say how pleasing it is to have taken you through these financial results for FY '21. While a lot of external factors have had an impact on the markets where we operate, not much has changed for Aurizon financially. Our earnings have been stable. Our cash flows are strong, and we've lengthened our debt profile, thanks to the continuing support of capital markets. Thank you, and I'll now hand back to Andrew.

Thanks, George. Turning now to the financial outlook for the 2022 financial year. With our focus on free cash flow, we've determined to provide guidance for both EBITDA and sustaining CapEx as a proxy for free cash flow. Our EBITDA guidance range is $1.425 billion to $1.5 billion, which compares to this year's $1.482 billion. And our sustaining CapEx guidance is $475 million to $525 million. As George noted before, growth CapEx will be in addition to that, and we can provide a firmer picture of that next year with some Bulk growth opportunities still to be decided. We have listed our key assumptions by business unit as we believe that will be the most useful and effective way to help investors and analysts understand the major drivers. For Coal, we assume EBITDA will be broadly flat with the volume growth of around 5% and lower costs from transformation being offset by lower contracted rates. We are not providing a range of volumes, given we don't believe there is a strong connection between that assumption and group earnings. But we do want to give an indication of volume direction. We will also no longer provide quarterly above rail volumes, but we'll continue to report volumes at each financial result. Bulk is expected to grow with the full year benefit of received -- of recent contract wins and port acquisitions. And Network is expected to be lower with the retrospective WIRP fees of $49 million not repeating and the MAR being lower, mainly due to capital recoveries to reflect lower-than-forecast CapEx spend. Network volumes will be relevant to the timing of revenue recovery, as we saw this year, and we will update you on that early next year. As per our normal practice, we do not assume any material disruptions to commodity supply chains such as adverse weather or COVID-related restrictions. In conclusion, this slide summarizes Aurizon's value creation record over the past few years and provides a platform for the future. All the activities shown here have set up each business unit and, ultimately, the group for the future by ensuring a resilient foundation. This has resulted in stable cash flow, which has delivered consistent distributions to our shareholders, as evidenced by the chart on the right. As noted earlier, Aurizon has a unique place in critical supply chains supporting Australian commodities in global export markets. We will continue to deploy capital efficiently to support these supply chains with a view to generating attractive growth and shareholder returns. For Coal, the focus is return on invested capital and free cash flow. With a contract book well set, this can be achieved through a continuous push on transformation and productivity. Capital will be spent carefully with some assets able to be deployed into or shared with Bulk to support their growth ambitions because of Coal's efficiency improvements. For Bulk, with growing markets and new adjacencies, the focus is on revenue and earnings growth. It will need more capital, which has already begun such as the 2 Aurizon Port Services businesses. But it can also take advantage of fleet from Coal that can be cascaded to support these growth markets. For Network, the focus is on embedding UT5 to ensure long-term regulatory certainty, reducing costs and enhancing the efficiency of the supply chain, which will ultimately increase throughput for the entire industry. The result is a business with a stable and resilient core through Coal and Network, which provides a platform for Bulk to achieve its growth aspirations. We look forward to continuing the journey for Aurizon and to continue to create value for shareholders. I now welcome your questions.

[Operator Instructions] Your first question comes from Matt Ryan from Barrenjoey.

Just with the capital management, I think you just mentioned in your last slide that there's still some Bulk growth opportunities that are yet to be decided. But can we assume from the lack of the buyback announcement today that, that decision has got something to do with the One Rail process that's still ongoing?

Matt, look, I think we will leave it at the level of that which we said, which is that there are a number of opportunities in front of Bulk. While those opportunities exist and the opportunity to add value through them may occur, we want to actually stay where we're currently at from a buyback point of view.

Okay. And I'm not sure whether Clay is on the line or not. But my understanding is that the deal that you did last week with CBH, only about 60% of the 14 million tonnes is on rail at the moment. So just curious on whether it's going to be possible to move more of those tonnes to rail over time. And just any color that you can talk about in regards to what you're going to be contributing for train sets. So I understand that there's only something like 3 of the 13 train sets that need to come from Aurizon. So just any color there would be helpful.

I hope that he is -- you have him? Clay?

Yes. Thanks, Andrew. Thank you, Matt. Yes, listen, Matt, we're delighted to be working with CBH again. And for those who don't know much about CBH, they're Australia's largest grain exporter with about 40% of the total grain market and an average yield of around 14.5 million tonnes. You're right about the road-to-rail split at the moment. So it's about 60-40. But CBH is on the record as saying that they had been disappointed with the performance of their supply chain, particularly in the rail area and looking for a counterparty that can perform more reliably and add value to their customers' products. So when you think about that, it's about the benefits and efficiency of moving more of their product to rail. So we're very keen to do that. Obviously, it's got a symbiotic benefit in a cost improvement for CBH and their customers and a volume benefit for us. As you think about what we try to do here, I use this as the classic case of 2 years of hard work to achieve an overnight success with CBH. We've been working with them for some time on wagon leasing, fleet renewal work and providing additional capacity in some of their regions. And so our RFP was all about utilizing key land and locations to enhance their operational maintenance outcomes. But that flexi fleet that you spoke about, putting 2 -- 3 additional fleets in, 2 narrow gauge and 1 standard gauge, to increase throughput in the key delivery windows for them. They have this key delivery window where their growers get a higher price for their product on the international market and are very keen to see that window or volumes through that window increase. And so we'll be targeting that with those 3 additional fleets.

And can I just ask on that? I mean, how unique is this opportunity, whereby there's already train sets in place? Is this something maybe you think there's more of out there for you?

Do you mean more CBH-style customers?

Yes. Or just the idea that they've already got something like 10 of their own train sets and that you're only having to contribute a few of your own.

Well, if you look across our portfolio, Matt, like we do something similar with MRL, we've got hook-and-pull-style contracts with Linfox. These style or type of contracts are not unusual in the bulk market. And so whether you're operating and maintaining a customer's fleet and capital or whether you're augmenting that with your own, you're always after what's the value proposition here for the customer. What makes your proposition unique? And in this case, it was those key land locations of Avon and Forrestfield and Albany, where we've got maintenance facilities and the ability to schedule trains from Avon down to the key port of Kwinana better than what was happening today. So we can stage them out of Avon to increase throughput on rail. Get it -- those sort of opportunities are around, probably not on the scale of CBH in the grain market. This is the largest grain producer in Australia by a long mile.

Your next question comes from Jakob Cakarnis from Jarden.

Can I just start off with maybe Ed and George in the Coal business? Can you just describe the dynamic there of the non-pass-through of the take-or-pay in the period and what that relates to? And whether that's something that we should expect moving forward?

I'll get George to go first on that, and then Ed can come in on the back end if needed. Yes.

Yes, Jakob. So you can see that in the bridge under Coal, about $10 million, and it was booked in the second half, which is why you might notice that second half earnings in Coal were a bit weaker than the first half. That relates to a small number of customer contracts where we hold the take-or-pay risk. They are legacy contracts. They've been renewed since, but they are legacy contracts. And it is a small number of them. Hopefully, that gives you some color.

And I don't have anything to add, though.

For FY '22, are we expecting that the relationship of the change between CapEx and the change between D&A keeps midsized in the sense that D&A or the change in D&A is going to be higher than the change in CapEx, just given the CapEx is going into Bulk?

Jakob, I think I missed the first part of your question. But I think generally, it was about DA and CapEx. So let me answer that and tell me if there's anything else. So we saw depreciation and amortization increase by about $20 million from FY '20 to '21. We expect it to go up again from '21 to '22. And in terms of CapEx, I think that will largely be a function of growth CapEx in Bulk. So we hope to give a bit more color on that at the half year results. But generally speaking, you can expect DA to go up a little bit more year-on-year from '21 to '22.

Your next question comes from Anthony Moulder from Jefferies.

If I can start on Coal, please. I think, Andrew, you mentioned that 70% of those contracts that are renewing are contestable. How do you determine the contestability of those contracts, please?

Ed, I might get you to answer that question. Thanks.

Yes. Thank you, Andrew, and thank you for the question, Anthony. The reason we're saying we believe 70% of them are contestable is because the other 30% relate to options we have and the nominations. In relation to the 70% contestable, we have a reasonable level of confidence around our ability to recontract. We have a good track record, and we have some of the balance of our customer focus and service. And also, the mechanisms we have, have served us well. But we never take that for granted, Anthony. So rest assured, we're working on positioning ourselves for those recontracts [indiscernible].

Yes. If I -- Anthony, I might just add that a significant amount of the volume relates to the New Hope operation, which is winding down. So by that very nature of it, it's not contestable. There is another operation that has -- that I can't name for contractual reasons. The customer references confidentiality on a repeated basis. It was a contract that we lost many years ago but actually terminates in the near future.

Just related to the competitive dynamic on the coal market, obviously, we've seen One Rail going into Queensland. I don't know if whether or not that's part of the Hail Creek 1 million to 2 million tonnes coming out. But just as to what you're seeing from them and the level of competitiveness from Pacific National also, please.

Yes. Look, I mean, I've probably addressed this question many times over the years, and I don't think it actually changes much, Anthony. We're seeing very similar levels of competition in the market now for a number of years. Nothing much has changed from our point of view. As to exactly what One Rail is up to, we don't actually get a lot of insight into that. So I can't really speak to the detail of what they might be doing, particularly if it's at a competitor hauled operation.

Okay. I thought I'd try again. The last question I had was around CapEx. Obviously, maintenance CapEx seems to be fairly steadily at around that same sort of level. Appreciate there is growth CapEx, and that's nice to see, growth CapEx. But I appreciate that trains are getting longer. There are less assets required to haul the same amount of -- same tonnages effectively. When could we start to see that maintenance level of CapEx starting to come down?

There's a number of, what you would say, overlapping issues that you're looking at when you're looking at for CapEx spend -- for maintenance spend. We -- I've highlighted in my talking points the -- about the Above Rail Asset Management program. That is a program that is designed to cause significant reductions in the cost of maintenance and improvements in the way maintenance is done, and we've been seeing that program rolling out for some time now to good effect. And that will continue for a very long time. So that's a tailwind of an improving ability to do maintenance and do without an improving cost. At the -- as far as the actual maintenance task itself, and I think you were just referring to rolling stock in your question, but it kind of does also relate to below rail. It's a very mathematical thing, the maintenance cost. It -- the metal-like wheels, where, depending on the volume, all the distance traveled. So it's not something that goes down if do more work at a physical level, only if you're actually better at executing the cost of maintenance. So all that said, we will absolutely see improvements in our efficiency of asset management, and we have done quite spectacularly in the last year or so. And we'll see that again for a number of years. But as the actual activity task goes up, that's not going to help our maintenance levels drop. It's actually quite sort of intrinsically mathematically related, if that makes sense.

Your next question comes from Rob Koh from Morgan Stanley.

Can I ask -- I just want to ask some, I guess, treasury-style questions. Can you give us an update on where you're seeing your debt headroom versus the rating metrics? I presume you're not changing your target ratings.

Rob, I'm going to hand this very quickly over to George.

Rob, so we're still BBB+/Baa1 across Network and operations. Our FFO-to-debt metrics in Network are 13%. We're much closer to 20% than 13%. So when we look out, range between 17% and 20%, so a bit of headroom there. And on operations, while it's the same rating, different FFO-to-debt metrics. So the FFO-to-debt threshold there is 50%. Noting my comments around capacity and balance sheet capacity, that's largely on the operations side as well. So compared with that 50% FFO-to-debt threshold, we're going to range between 70% to 100% when we look forward. That's obviously as we sit here today and depends on how we use that balance sheet capacity. But hopefully, that gives you a sense.

Okay. Cool. And then just seeing as -- it seems you guys love treasury questions. I'll ask another one. The rate hedging strategy, did I hear correctly that you're actually largely floating from FY '23 and just the rationale behind that? That's a change in policy, if I'm not incorrect, if I'm not mistaken.

Robert, it's a continuation. And the rationale for that is most of our debt sits in Network at this point of time, and there is a WACC reset in FY '23 in Network. So we're floating in terms of debt beyond that to hedge ourselves to that WACC reset. If you look between now and FY '23, our hedging -- we're about 80% to 90% fixed between now and FY '23.

Your next question comes from Justin Barratt from CLSA.

Just one quick question for George. I think you highlighted the -- or mentioned very quickly the impact on EBITDA margins from new contracts in Bulk. But can you just maybe provide a little bit more detail? Could broader Bulk margins be a little bit compressed as you onboard these contracts and then expand as they are up and running?

Yes. I mean, I might start that one, and then maybe Clay can see if he wants to add anything. If you look, Justin, at the EBIT margin results for Bulk year-on-year, our EBIT margins have actually improved. So if you go back to FY '20, our EBIT margins were around 15%. EBIT margins, as we look at FY '21 results, are closer to 18%, and that's EBIT divided by revenue, including access. In terms of the forward view, it will really depend on where Bulk is growing and whether that's growth through taking share off-road or whether that's growing with our existing bulk commodity customers. So that's the view as we sit here today. I might see if Clay wants to add anything.

No. I think you're spot on, George. It's a case-by-case basis. Obviously, competition in some sectors and some corridors, yes, there's more competition there than others. Sometimes in a well-established contract, the ability to renew that contract on reasonable returns, others when you're trying to break into the market, et cetera. So no, I think that's a fair response.

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

George, I was hoping to follow up on Rob's question on the balance sheet capacity. Could you just specify exactly how much capacity you believe you've got left after the capital management activity you've done in the last couple of years?

It's got -- so about $900 million of balance sheet capacity.

$900 million.

Yes. And that's obviously after the $300 million buyback we did in FY '21.

Yes. Got you. Okay. And then this is -- it's probably going to end up with it. But Andrew, maybe you want to start with it. The Coal contracted volumes of 230 million, down 5% from the year just gone, is that mostly New Acland expiring?

Look, I might actually just give that straight to Ed. Ed?

Scott, yes, it is New Acland, but it's also the contract Andrew alluded to in New South Wales in the Hunter Valley system that we're not obliged to comment on. And also, it is in the loss of Stanwell from December 8 months ago, which is not carrying forward as well, of course.

Yes. Okay. And then just a follow-on on that. So your contracted volume is down 5%, but your volumes, you're expecting up 5%. And I understand there's been some disruptions and things in the last 12 months, obviously. But that would get you to a contract utilization rate that you haven't seen since fiscal '18. Is that something -- I mean, obviously, you're comfortable with it to talk about it. But what do you think is the driver behind getting back to strong contract utilization rates, please?

Yes. Well, I would actually -- thank you. I would actually think that getting back to the sort of 90% contract utilization rates are not particularly strong or the early 90s. We -- I mean, we've got the -- as you know, we had 244 million contracted moving to 230 million. We railed in the mid to low 80s of that. And historically, we've had a good track record of delivering around those low 90s in the contract utilization. So we're seeing -- now our producers -- our customers have found new end markets and seaborne trade is rebalanced, we're seeing a reasonable start to this financial year with July just closed and some of our competitors jostling for capacity in the -- certainly in the Queensland system. So giving us -- it's always difficult to predict where things are going to be, but it gives me some certainty, enough certainty around the 5% volume uplift to about 212 million.

All right. Great. And then my last one probably is for Andrew. There's -- could you just talk about the independent expert on Network and just clarify? Obviously, that's a process that's been delayed and, I'm sure, a source of frustration. Do you have confidence that the report will come by the end of September?

Yes. Scott, I've got a lot of confidence in it. And -- but I will actually hand over to Pam, who lives and breathes this stuff and is very much ready for your question. Pam?

Thanks, Andrew. Thanks, Scott. So yes, the current expectation has not changed, as we've talked about at Investor Day. In terms of confidence levels, we're obviously very closely working with the independent experts. We know they're well resourced in both internal staff and also consultants. The system operating parameters, which is a key input into that capacity model, have been released to industry for consultation, and that's a key part of the process. So obviously, the results can change from consultation, but we do understand that the independent expert is progressing well on the draft model. And all the information that we received from the independent experts indicates that we very much remain on -- or they remain on track to deliver at the end of quarter 1. And then obviously, we have the 20 days to respond to that report.

Okay. Great. And just lastly, hope Mike Carter enjoys his time off. Thanks for the 10-plus years of interaction. That's all I wanted to say.

Thanks very much on behalf of Mike, unless Mike wants to say something.

Thanks, Scott. Your questions have always been fantastic, and I'm disappointed we didn't talk TrainGuard. But maybe someday, we will again. It's been a great journey. Thank you.

I can't see his face, but it feels like there's a big smile on it. Yes, let's stop there.

Your next question comes from Owen Birrell from RBC.

Just got a general question at the outset as to why the guidance was changed from EBIT guidance to EBITDA. And can you give us a bit of a sense on where D&A is likely to go into FY '22?

George, do you want to pick that one up?

Sure, Owen. You might have seen at our June Investor Day, we're focusing much more on free cash flow going forward. So what we decided to do is to give guidance on both EBITDA and CapEx as a better proxy for free cash flow. So that's the driver for the change. In terms of the second part of your question around where DA is going, it increased $20 million from FY '20 to '21. I'd expect it to increase a little bit more from '21 to '22, so starting to approach $600 million.

Okay. And can I ask just -- I guess associated with that, are there any, I guess, operating assets that you expect to move into leases over the next 12 months to obviously impact that EBITDA number?

No. Owen, there aren't.

Okay. Just a question on Network. The last couple of years, obviously, there's been a bit of a structural change in the coal market. And I note that the realized tonnes have started to deviate from the forecast tonnes set out in the UT5. I'm just wondering -- and so that's basically resulting in underrecovery on a sort of a go-forward basis. And I'm just wondering, is there any facility or when is the next time that, that, say, regulated forecast tonnes reset? Is there a trigger for that to reset?

Pam, do you want to take the question and maybe just cover a bit of the process by which the volumes are set?