Aurizon Holdings Limited (AZJ) Earnings Call Transcript & Summary

Good morning, and welcome to the first half results for the 2022 financial year. We're based in Brisbane today, therefore, I acknowledge the traditional custodians of this land, the Turrbal and Jagera people, and paying our 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. I'm joined on the call by the CFO, George Lippiatt; and the rest of the Group's executive team. We will shortly go through the presentation that we lodged with the ASX this morning, which is also available on our website. At the end of the presentation, we will take your questions. Turning to safety performance. A 1% unfavorable movement was recorded for total recordable injury frequency rate or TRIFR during the half. Lost time injuries declined by 7% and generally consist of lower severity injuries such as muscle strains. Localized injury prevention initiatives continue to be implemented to help prevent these events. This year, the potential serious injury and fatality frequency rate was introduced to more accurately represent our business as it grows beyond rail. This measure shows the number of events as represented per million hours worked that had the potential to cause or did cause a serious injury or fatality. After a review of the recorded events last year, we've recategorized 23 incidents, resulting in a restatement of the outcomes, as seen on the slide. We have recorded significant improvement in this half, with 1.78 incidents per million hours worked compared to the restated results of 4.41 in FY 2022. The result was primarily driven by fewer serious motor vehicle and rail incidents. These numbers exclude Bulk Central as we transition processes and systems from the acquired business to group reporting over the remainder of the financial year. However, what I can say is that Bulk Central TRIFR recorded a 5% improvement in the half compared to the prior year. In addition, Bulk Central did not report any events that were considered an actual SIF event. Finally, as many on the call will be aware, on the 29th of January, between Rockhampton and Gladstone, a third-party freight train derailed and an Aurizon coal train on the adjacent track subsequently made contact with debris that had fallen across the track. Thankfully, there were no injuries, but there was significant amount of damage to the rail line and associated infrastructure. Rail services on the Blackwater corridor were subsequently suspended for 13 days and reopened over the weekend on Saturday night. To provide some context of the scale of the incident, the scope of recovery works included replacing 2 kilometers of rail, inserting more than 2,000 new concrete sleepers, laying down 1,000 tonnes of ballast, replacing 12 electrical mass and replacing 1.5 kilometers of overhead wire. I'm proud of the round-the-clock work by the network team in bringing the Blackwater system back online after this significant incident. Around 1/4 of network volume travels across this part of the Blackwater corridor, with the extended outage, therefore, impacting volumes in the second half for both network and coal. This has been factored into our guidance, which I will turn to later in the presentation. As always, our focus remains on protecting our employees, our customers and the communities in which we operate. Before going into the results, I want to share achievements we've made in delivering our strategic objectives, as outlined at the 2021 Investor Day. You will remember that the objectives for the network and coal business units are to maintain and enhance safety, productivity and capital resilience, with a focus on invested capital and free cash flow. These cash-generative businesses can then support the deployment of capital for attractive opportunities presenting to the bulk business. Although faced with challenging operating conditions in the half, I'm very proud of the achievements made in building long-term returns for shareholders. The first items on this slide relate to the coal and network businesses. First, a reminder that in the face of higher inflation and interest rates, the preliminary WACC of 8.18% will apply from network -- for network from 1 July this year and has been approved by QCA. The final WACC we set to apply from July 24 through to the end of UT5 will be based on market parameters as at June this year. Second, since December 2021, we've had enterprise agreements secured that cover 70% of the EA workforce. These have been successfully negotiated in a period of record-low employment and 30-year high inflation. The weighted average wage increase in year 1 across these EAs is slightly over 4%. And third, TrainGuard technology was deployed on initial trains and about 500 kilometers of track infrastructure in Blackwater in December. Installation on the remaining [ concourse ] in the corridor will take place in the second half, with the Goonyella system to follow. This next-generation technology is designed to support driver decision-making relating to speed control and signals through continuous supervision of a train journey. It is the first use of such technology on heavy haul fleets in Australia. TrainGuard is also a pathway to reducing separation time between trains and also explaining -- expanding our driver-only operations in Central Queensland. It promises to be a real game changer, both in terms of safety and productivity. And turning to objective to grow bulk. First, after a long journey, the acquisition of One Rail completed last July. We believe this is transformative for our business and provides a platform for future growth. There is a significant pipeline of projects in this region, and the opportunities in leveraging the below rail infrastructure with connections to ports and the East West line. Although we always knew of the high quality of the business we're acquiring, what we have seen since completion gives me further confidence in the future. Last week, the ACCC approved the sale of East Coast Rail, sold at a strong price through a trade sale. The sale is now unconditional, and closure is due to take place later this month, with the proceeds initially used to reduce group debt. Second, Aurizon's commodity exposure is changing at a group level, given the scale of non-coal opportunities presenting to the business, in addition to the contribution of Bulk Central. We have also seen a greater range of commodities and services within the Bulk business unit. Grain now contributes around 15% of bulk revenue, with record railings in the half, including a record 1 million tonnes of rail for CBH in December. When combined with our services in Bulk Central and East Coast, we are the largest grain rail operator in the country. Third, outside of grain, we've signed new contracts and extensions across all regions Bulk operates. These include our 5-year contract extension with OZ Minerals for the haulage of copper in South Australia and the Northern Territory, a 4-year contract with Centrex for road, rail and stevedoring of phosphate rock in North Queensland, a 5-year contract with Aeris Resources for road, rail and stevedoring for base metals in New South Wales, and capital investment for truck upgrades and 10-year contract extension with GRA for gypsum in South Australia. Fourth, in response to both the current and projected future opportunities, we've invested in supply chain solutions over the past 3 years. This includes port assets such as APS, Townsville and Newcastle, bulk trucking in support of rail services, and of course, rolling stock. This investment is increasing with CapEx of $130 million in the half. There is more to come to support the significant opportunities that are presenting to the business. And finally, our bulk team has over 200 potential opportunities in the pipeline with more than an estimated $1.5 billion in annual revenue. These opportunities are across all regions where Aurizon operates and cover commodities such as copper, nickel, iron ore, rare earth, vanadium, lithium and fertilizer. As I mentioned, these achievements have been made in the face of very challenging operating environment and underscore our unwavering commitment to delivering our business and growth strategy at Aurizon. Turning to the results. Wet weather has played a significant partner results this half, with above rail coal volumes down 8% and network volumes down 2%. This was the major contributor to underlying EBITDA being down 7% to $673 million. Bulk benefited from higher grain volumes in Western Australia, in addition to the inclusion of One Rail, now referred to as Bulk Central, from July. This acquisition was a significant milestone for Aurizon as we now have -- we have now expanded our operations into this part of Australia, which is exposed to many future-facing commodities. Lower EBITDA and the One Rail acquisition has impacted ROIC this year, but this will improve in the future as earnings continue to grow. Free cash flow from continuing operations and excluding the One Rail acquisition, decreased 76% driven by higher CapEx supporting bulk growth and increase in tax payments and adverse working capital movements. George will spend some time going through the detail of the cash flow in a moment, but this includes the impact from the acceleration of our investment in the growth of Bulk. I will shortly present more information regarding the many opportunities available to the bulk business which is driving the capacity investment. You can see the early results of the bulk investment, which has increased its share of revenue to 44% of the group, excluding network. I know that some have been expecting an increase in the payout ratio with the successful sale of East Coast Rail. The interim dividend declared of $0.07 maintains the payout ratio of 75%, which we believe is appropriate given the investment cycle we are currently in. In periods of low growth opportunities, we are very happy to pay dividends at the top end of the range and conduct buybacks where appropriate. At this stage, with many growth opportunities in front of us with adjusted dividends accordingly, there will be an opportunity again in the future to consider increasing dividends once the growth cycle completes. Moving to an update on commodity markets. Compared to the 10-year average, double the amount of rainfall was recorded in the key coal-producing regions of Central Queensland and Hunter Valley. Although individual months of significant rainfall can be seen with some regularity in historical records, the continued occurrence of such results has been the cause of the disruption in the half. This has impacted coal supply by our customers' port availability, and at times, the ability for Aurizon to operate services. Near all major coal producers have recorded lower production and/or reduced guidance, and Australian coal export volume reduced by 11% in the half. Significant rainfall has continued into January in Central Queensland, resulting in the closure of the coal export terminals of Abbot Point, Hay Point and Dalrymple Bay for up to 8 days, impacting the Goonyella and Newlands Systems. This has been a very difficult operating environment for the coal network and bulk businesses on the East Coast, resulting in lower volumes. Turning to the other side of Australia. It is pleasing to see the run of record grain production continuing in Western Australia, with a further record projected for the 2023 season at 42 million tonnes. Aurizon is the major rail operator for grain in the state with a long-term contract with CBH. Putting aside the supply challenges faced in Australia, there is a very strong demand environment for coal. Coal power generation is expected to have risen to a record in 2022 driven by India, China and also European nations who have returned to the reliable source of energy to power their economies. India, Australia's largest trading partner for metallurgical coal, achieved record crude steel production in 2022. After a 2-year break, it was pleasing to see vessels sail into China in January loaded with Australian coal. All our Australian coal producers were able to find alternative buyers for coal in the absence of China. Having another participant in seaborne trade is a positive development. As a result of strong energy and steel demand, global coal demand is expected to have surpassed 8 billion tonnes last year, an all-time record. The IEA has projected demand to remain at this record level at least through the end of their short-term projection in 2025. Supported by continued elevated coal prices, our recovery in coal volumes is projected for the year ahead, and we have the capacity to respond. Our long-term view of coal demand remains unchanged. Almost 3/4 of global steel production draws upon metallurgical coal. Steel-intensive growth in India is expected to be the largest driver of seaborne trade demand. Despite already being the world's second largest steel producer, India is considered to be at the early stage of development. For thermal coal, it is recognized that global consumption will reduce in the decades ahead. However, the demand for Australian coal is dependent on the seaborne trade market that is dominated by Asian demand. Against an expected retirement age of 40 years, the average age of coal-fired generation capacity in Asia is just 14 years. As I noted earlier, the quality of the One Rail business, now referred to as Bulk Central, has exceeded our expectations. This applies to the people, assets and opportunities in the Central Australian corridor, particularly with links to ports in both Northern Territory and South Australia. The operational performance and projected synergies are tracking as expected, and it is great to see -- to already see contract activity so soon after the acquisition, with OZ Minerals, SIMEC and GRA. This level of contract activity in Bulk Central is representative of what we are seeing across all bulk regions. In response to the high number of opportunities, investment is being made in capacity including rolling stock, track and port terminals. As I noted earlier, the bulk business development team is assessing a potential pipeline of around 200 opportunities. Clearly, not all opportunities will progress through the production, but it indicates the strength of demand. We've shown the map on this slide a number of times in the past, and I won't go into detail about the specific mining projects. But what I will point out is the alignment of Aurizon's presence with the opportunities, primarily in and around the key mineral provinces of Northwest Queensland and Central New South Wales, key Western Australian regions of the Goldfields, Midwest, Esperance and into the Southwest and port assets at Townsville, Newcastle, Gladstone and Darwin. The acquisition of One Rail provides the opportunity to further expand our service offering in containerized trade. This infrastructure connects to the Port of Darwin, enabling a national capability in this growing market. This could expand beyond our existing Adelaide to Darwin and Brisbane to North Queensland services. In response to accelerating containerized freight trends, there is a growing use of rail globally to improve our supply chains for both speed and reliability. Examples of this can be seen in North America and Europe. Over the past 40 years, containerized trade has grown more than any other form of seaborne trade, with an annual growth rate of over 8%. This is not about Aurizon getting back into full-service intermodal, as some in the market are claiming. Our previous intermodal business was not optimal because it involved full end-to-end services, including warehousing, a significant trucking fleet, last-mile delivery and managing more than 600 customers. This was and is still not a business suited to Aurizon's capability. Aurizon's core competency is safely transporting bulk product efficiently, which includes containerized freight. On that, I will hand over to George.

Thank you, Andrew, and good morning to those joining us on the call. As Andrew said, these results are characterized by 2 major themes. First, adverse weather on the East Coast of Australia, which has impacted volumes and revenue across all business units; and second, a ramp-up of investment to underpin our strategy of growing bulk earnings, as underscored by the One Rail acquisition and further investments in rolling stock, port equipment and track infrastructure. Turning to the table on this page, which excludes the earnings from the East Coast rail part of One Rail, given it's treated as discontinued. As you can see, underlying EBITDA declined 7% to $673 million. The change in first half EBITDA was predominantly driven by coal and network volumes being down 8% and 2%, respectively. The declines in coal and network EBITDA were partially offset by bulk being up $25 million driven by the 5 months of earnings from One Rail or Bulk Central, as we now call it. As you can see in the top row of the table, revenue increased 12%, with bulk and network higher. Operating costs increased 30% due to the acquired One Rail business and increases in fuel and energy costs. Given fuel, energy and access costs are largely a pass-through and the One Rail acquisition is a recent addition, I find it useful to look at operating costs excluding those items to get a sense of how the underlying business is managing cost inflation pressures. Adjusting for those items, highlights that operating costs only increased 7%, with the main driver being cost uplift to bring on new capacity in bulk in Western Australia and the Eastern states. I'll go into more detail on each of the business units and their performance shortly, including showing how each performed when we exclude fuel, energy and access pass-throughs. Staying at group level, and you can see in the table that depreciation increased 12%. This reflects recent investments in equipment to support bulk earnings and the integration of the acquired One Rail business. The One Rail depreciation is driven by the provisional purchase price accounting, which we have finalized and included in our accounts. It shows that the $1.45 billion purchase price of the One Rail bulk business comprises $200 million of rolling stock assets and $1.2 billion of track infrastructure, which is to be depreciated based on distinct asset lives but generally over the remaining 30-year concession period. Unlike prior periods, free cash flow was materially lower for the half as well. As the reduction in EBITDA, this reflects higher capital investments as well as a number of one-off or timing impacts, such as a higher tax installment rate in the prior period including in cash tax benefit from the Aquila disposal in FY '21. I will cover free cash flow in more detail on a later slide. The final dividend of $0.07 per share has been declared based on approximately 75% of underlying NPAT, which is consistent with the last 2 dividends and will be fully franked. While the successful trade sale of East Coast Rail provides additional balance sheet flexibility, the 75% payout ratio is prudent given the current capital investment cycle we are in. These investments will support earnings growth, the execution of that bulk growth strategy and long-term shareholder value. Moving now to coal. The result for coal highlights the volume impact of prolonged wet weather and the ongoing focus on cost control. This is best explained by stepping through the EBITDA bridge on the right as it excludes both revenue and cost impact of fuel and access costs, which are largely a pass-through. EBITDA at far right of the bridge was $230 million for the half, a decrease of 20% against the prior period. The first and largest impact was from volumes which accounted for $47 million or 84% of the EBITDA reduction. As Andrew said, we witnessed extraordinary levels of rainfall, and it occurred over a prolonged period of time, meaning that our coal customers found it difficult to recover their operations at a time of labor shortfalls in most markets. The second red bar on the bridge is net revenue yield and was $6 million unfavorable against the prior period. This represents the contract rate reduction and end of 2 contracts which we flagged previously, partially offset by the benefit from higher CPI flowing through in quarterly contract resets. The last bar I'll touch on is operating costs, which increased $4 million against the prior period when fuel and access costs are excluded. This increase represents a 1% uplift, which is a good result in a higher inflationary environment. We've also taken significant steps during the half which provide operating cost certainty in future periods, including the commencement of TrainGuard as well as the agreement of Coal Queensland EAs at 4% to 5% for year 1 and inflation for years 2 to 4. This was a great outcome, particularly given agreement was reached without any industrial action. It was a challenging first half for coal, and we are expecting a similar coal EBITDA in the second half before an expected recovery in FY '24 as volumes increase and the benefits from CPI contract resets flow through. Moving to bulk. Bulk EBITDA increased in the half to $100 million, an uplift of $25 million or 33%. This reflects the first 5 months of the new Bulk Central business, partially offset by lower earnings on the East Coast. Revenue in bulk was 51% higher or 21% when One Rail is excluded. In terms of operating costs, this was $421 million or 57% higher. However, similar to coal, when excluding fuel and access costs, which are largely a pass-through, operating costs were up $120 million, mainly reflecting the new Bulk Central business. When One Rail costs as well as pass-through, energy, fuel and access costs are excluded, operating costs were up 18% on the prior corresponding period. This reflects the build of capacity in the bulk business in anticipation of higher grain, minerals and containerized freight volumes in coming periods. As I highlighted earlier, while the West and Central Australia operations of bulk delivered to expectations, East Coast earnings were lower. This was due to wet weather causing track outages, several derailments and customer-specific issues which impacted bulk EBITDA by approximately $10 million during the first half. Looking forward, we expect higher bulk EBITDA in the second half before further earnings step-ups in FY '24 and '25 driven by the One Rail acquisition and new equipment being deployed. Moving to network. Network EBITDA decreased $17 million or 4% to $363 million for the first half. This was driven mainly by lower access revenue, shown on the bridge as a negative $11 million movement against the prior period due to a 2% reduction in volumes. Other revenue was $5 million higher as a result of external construction works, which is offset by the $5 million increase in other operating costs, shown on the bridge. Energy and fuel is shown separately on the bridge as a $6 million negative impact against the prior period. While energy and fuel costs are passed through to network customers, this $6 million reflects higher electric connection costs, which are recovered as part of the AT5 tariff. The important item to note on network is how lower volumes are dealt with under the regulatory arrangements. To illustrate this point, our FY '23 guidance, which Andrew will cover, assumes a volume-related under recovery of approximately $100 million, excluding GAPE. Of that $100 million, we are currently expecting take-or-pay to trigger in 1 of the 4 CQCN systems, and that network will book approximately $60 million of take-or-pay in the second half of FY '23. The remaining $40 million would then be part of the usual true-up in 2 years' time and be reflected in the FY '25 revenue cap. Turning to free cash flow. We've dedicated a single slide to this topic because there are a number of one-offs and timing-related drivers behind the decline in free cash flow. Free cash flow, excluding growth CapEx, was $95 million for the half, which is down $300 million. Working left to right, and the first item shown is one I spoke to earlier, which is the $54 million reduction in group EBITDA for the half. The second item is working capital, which was $122 million unfavorable. But of particular note are 2 items we've called out: first, network electric charge revenue of $37 million, which we've accrued in the first half, but from a cash perspective, won't be collected until the second half. Second, network take-or-pay, which is booked within the financial year but not collected from a cash perspective until the following year. As FY '21 take-or-pay was $55 million higher than FY '22, this resulted in a corresponding adverse movement in working capital for this half. As I said before, we are expecting higher take-or-pay in FY '23, which will benefit cash flow in the first half of FY '24. The third bar across is sustaining CapEx, which increased from a cash perspective during the half by $25 million. The next item across on the bridge is an adverse tax movement of $76 million against the prior period. That prior period included the one-off cash tax benefit from the Aquila sale, and we've seen higher tax installment rates for FY '23. This should drive a favorable cash tax result in FY '24 as the installment rate is reset lower and the benefits from temporary full expensing flow through. Interest costs were also higher by $26 million, reflecting higher rates and additional debt to fund the One Rail acquisition and bulk equipment purchases. This then arrives at $95 million. The last item we've shown is growth CapEx from a cash perspective, which was a $135 million cash outflow in the half. This reflects the proactive choices we've made to invest in rolling stock, port equipment and track infrastructure to support our bulk growth strategy. As you can tell from the nature of the items in this bridge, we are expecting free cash flow to improve in the second half of FY '23 and to increase further into FY '24. We would expect free cash flow in FY '24 to be more consistent with levels we have seen in the previous 3 years. Turning to CapEx. CapEx for the first half was $403 million, with $130 million of that for growth CapEx, which is slightly different to cash CapEx I just mentioned. In terms of sustaining or non-growth CapEx, it increased $60 million to $273 million in half 1. There are 2 drivers of this increase. First, as we flagged in the prior results, sustaining CapEx for FY '22 came in under expectations as some network track work was delayed and pushed into FY '23. That's consistent with the increase we've seen in the first half, where network CapEx was up $22 million. Second, we've expanded the footprint of our bulk business with the inclusion of Bulk Central and several port terminal operations. That's resulted in a $28 million sustaining CapEx increase in bulk during the half. Despite this increase, we are still expecting FY '23 sustaining CapEx to remain in the range of $500 million to $550 million. Turning now to growth CapEx, and we thought it useful to provide a view of the last 5 years on the left and on the right to show the current view of capital associated with bulk growth. What's noticeable in the chart on the left is the transition we've seen from a historic focus on coal and network CapEx to one now focused on CapEx supporting the various bulk mineral sands, grain, copper and containerized freight opportunities in front of us. We expect growth CapEx for FY '23 of around $210 million, as shown in the middle of this page. While on the right, we provide an aggregate view of the FY '21 to '25 bulk capital which totals $430 million, with about $200 million of that spent so far. This includes $320 million in fungible standard-gauge locomotives, wagons and containers that can be deployed across the country to meet the bulk earnings pipeline Andrew mentioned earlier. $60 million in port equipment, with the majority to expand our operational footprint by utilizing the concession we acquired as part of One Rail within the Port of Darwin. $30 million in freehold land acquired at the Port of Newcastle to develop an input supply chain for the New South Wales minerals province, and $20 million to support a track upgrade for our Gypsum contract, which we extended for a further 10 years. We expect these investments to deliver returns of greater than 10%. Although I note there is further upside beyond this, particularly in South Australia and Northern Territory should volumes of grain, minerals and containerized freight accelerate. The last item I'd note on CapEx is this slide reinforces why the trade sale of East Coast rail was the preferred outcome. The $435 million of cash proceeds we now expect is $10 million higher than the $425 million we flagged in our December announcement. That's due to completion timing being pushed back to February and the cash generated by ECR being for Aurizon's benefit. These cash proceeds will initially reduce debt and can then be utilized to invest in equipment, which will accelerate the earnings growth of the part of One Rail we wanted to keep and where we see significant growth opportunities. As has been the case for the past year, many investors are asking about inflation and interest rates and the impact this could have on Aurizon. This is a topic we actively monitor and manage, and so we thought it was worthwhile discussing it on 1 page. Starting with inflation. And as we've seen recently in Australia, it's risen to almost 8% in the December quarter. For Aurizon, inflation flows through differently in our respective businesses. For our above rail businesses, coal and bulk, we have revenue protections in place through quarterly or annual CPI escalation in our customer contracts. There are, though, 2 sides to every coin, and the main risk is inflation driving wage escalation. Pleasingly, with the recent Queensland Coal and staff EAs being voted up, we have renewed 70% of EAs in the past 12 months, with the most recent agreements being 4% to 5% wage uplifts in year 1 and years 2 to 4 being tied to CPI with a cap and floor. For network, the regulation is designed to deliver the owner, in this case, Aurizon, with a real rate of return. To do this, there are a variety of inflation true-up mechanisms. For historical inflation, the regulated asset base is rolled forward at an assumed rate of inflation. And at the reset point on 1 July 2023, there is a true-up where actual inflation differs from the estimate at the start of UT5. This will result in the FY '24 RAB being increased to $5.9 billion, an increase of 5%. This means network will see the benefit of higher inflation but not until FY '24. For forward inflation, this is reset alongside the WACC for the FY '24 to '27 period with a higher inflation assumption reducing regulatory depreciation. Also on this page, we thought it worthwhile to talk about the network WACC reset, as this is where higher interest rates are reflected. When we settled the commercial deal with customers for UT5, it was designed for a reset in 2023 and for this reset to be simple and mechanical, with adjustments to certain market parameters such as the risk-free rate and the debt risk premium. There is actually an interim step in this process, and the numbers you see here are for the preliminary WACC reset, the WACC that is used to determine tariffs for FY '24. You can see that the increase in both the risk-free rate and the market risk premium takes the WACC from its current 6.3% to 8.18%. The final reset will occur in June '23 and be reflected in tariffs from FY '25. The difference between the final and preliminary WACC resets will then be reflected in a revenue cap adjustment in '26. As you can see from this page, Aurizon has protections from rising inflation and interest rates. To underline that point, based on the RAB and WACC reset as well as the prior year adjustment of revenue cap, we expect maximum allowable revenue for network to increase in FY '24 to $1.06 billion, an increase of $95 million from FY '23. This is highlighted in the chart on the bottom right of this page. And before handing back to Andrew, I will spend some time on a funding update. It's been a successful period in terms of funding activity, and I'll start by talking about East Coast rail. As highlighted when we announced the trade sale in December, the debt package we secured will be now dated across the new owners. This includes the amortizing bank debt in place at Aurizon's acquisition as well as the $340 million 10-year U.S. Private Placement we successfully issued post acquisition. This USPP issuance was a key event that enabled Aurizon to extract value from the trade sale and I think demonstrates the ongoing demand from capital markets for a business such as East Coast Rail, noting that it is majority thermal coal-exposed and rated BBB-, which is 2 notches below the respective Aurizon ratings. This bodes well for Aurizon's future debt capital market raisings. Our treasury teams have also been busy on the core Aurizon debt profile, with a refinancing of approximately $1 billion of network bank debt facilities across 3, 4 and 5-year tenors and issuance of $70 million of new 10 and 12-year private placements of the existing network program in December. Both of these recent funding outcomes are shown in green on the chart on the bottom right of this slide. The long-term funding strategy remains unchanged, that is to ensure we access multiple pools of capital and lengthen debt maturity to align it with Aurizon's long-duration assets. Looking at some of the metrics on the page, I note the weighted average cost of drawn debt at 4%, which is consistent with what I foreshadowed at full year results in August and reflects a high fixed portion of network debt. We also saw group gearing increase to 55% during the half, a reflection of the debt utilized for the One Rail acquisition. Importantly, we will see this figure reduced to around 52% post completion of the East Coast Rail trade sale. This trade sale, combined with holding the dividend at a payout ratio of 75%, means that issuance of a hybrid in FY '23 is no longer intended. Finally, I'll say in closing that while this half has been impacted by weather, we continue to deliver on our strategy. Cost control and inflation-linked earnings in coal and network and investments across the supply chain to meet the demand from containerized freight customers and the expected uplift in Australian bulk commodity exports. Thank you, and I'll now hand back to Andrew.

Thanks, George. Our EBITDA guidance range has been lowered to $1.42 billion to $1.47 billion, with a 4% reduction primarily driven by prolonged wet weather and the impact of the third-party Blackwater incident I spoke of earlier. Although the network has take-or-pay and revenue cap mechanisms in place in periods of low volumes, the above rail business does not hold the equivalent level of protection. Group non-growth CapEx is unchanged at $500 million to $550 million. With more certainty on growth opportunities, our growth CapEx guidance is $210 million. We have listed our key assumptions by business unit. For Coal, lower EBITDA is expected due to volumes now expected to be lower compared to the prior year in addition to the previously-advised revenue yield reduction. Bulk revenue and EBITDA growth is expected from increased volumes and services and inclusion of Bulk Central. And for Network, lower EBITDA driven by lower volumes is now expected to be below regulatory forecast, with revenue under recovery of around $100 million and take-or-pay of $60 million booked in the second half. The net under recovery of around $40 million used to be included in the revenue cap mechanism in FY 2025. As per our normal practice, we do not assume any further disruptions to commodity supply chains such as major derailments or extremely-prolonged wet weather. Later this year, we will be hosting an Investor Day which will focus on bulk Central and the bring forward of opportunities presenting to the Bulk business unit. With that, we will take your questions.

[Operator Instructions] Your first question is from Andre Fromyhr with UBS.

Just thought I'd start with probably asking George. You called out sort of 2 major themes across what's driving earnings period, just go on being weather and growth investment in bulk. Can you help us size some of these things? So firstly, are you able to tell us just how much you saw, specifically on One Rail business, for the 5 months that it contributed in the half? But then I'm also interested in when you add it all up, what you think the impact to EBITDA was from weather?

Yes. Got it, Andre. Tackle the first part, which was Bulk Central. Bulk Central, it delivered to our expectations which, as you would have seen from our prior presentations, we're expecting $100 million EBITDA over the first 12 months. EBITDA was only 5 months contribution in our first half, and there is a ramp-up profile as we get to full run rate on synergies and some growth projects. So Bulk Central hit expectations. Bulk West, so the Western Australia business, hit expectations. It was Bulk East that was both below our expectations and below the prior year, so that's what impacted bulk during the year. In terms of weather more broadly, I'll break that out. So the first thing to note is the wet weather and its volume impact on network. Network had a volume under recovery of $50 million in the first half. We don't book take-or-pay in the first half, so if that first half under recovery of $50 million repeats in the second half, which is what our guidance assumes, you have $100 million under recovery. Take-or-pay would then recover some of that, we're assuming $60 million, although there's a number of things that can move that number. That then means there's a $40 million catch-up or true-up in 2 years' time. So remember, network always recovers. It's maximum allowable revenue. It's just a question of whether it recovers in the year we're in or in 2 years' time. If you then go to bulk, I called out bulk's significant items on the East Coast being weather derailments and some customer production issues, which were weather-driven. That was about a $10 million impact. And then you have coal, which we showed on the bridge in my presentation, about a $45 million to $50 million impact from volumes. That was largely driven by weather. So I know I've given you a lot of detail there, but hopefully, that answers your question.

Yes. And just 1 more, if it's okay. Specifically on the pricing environment in coal, I take the point, you split out the dollar impact of that once you strip out things like pass-through of fuel. But maybe more broadly, you could help us with the outlook for coal pricing? Are you having these conversations with customers about contract resets that also includes commitments around capital? I understand in general Aurizon seeking to not spend growth CapEx into the coal business. But are there customers that are asking for new fleets and better reliability in order to support prices going forward?

I think -- it's Andrew. I thought I might get Ed to talk more about the customer discussions and whatever he wants to.

Yes. Andrew, Andre. Over the last few years, we've seen the market for coal which services stabilized, I'd say. As George outlined, part of the revenue yield reduction this year is due to the rate reset in one of our medium-sized contracts. There are no further material resets, but the market does remain dynamic and competitive. We find that while rates are important, customers are valuing things like volume and origin destination, flexibility, shared risk positions, delivery incentives, so it depends on the customer. We are prepared to invest capital where there is a -- where there are -- returns meet our hurdles. And in the period, the first half, there's just been little, little opportunity to do that.

The next question comes from Justin Barratt with CLSA.

Look, really appreciate the color on your free cash flow and your growth CapEx expectations sort of over the next couple of years. George, you made the comment that you expect FY '24 free cash flow to return to previous levels prior to FY '23, I guess. I just wanted to understand, is that before your growth CapEx expectations?

It would be after growth CapEx expectations. And to give you a bit of color on that, Justin. And if you look at some of the one-offs and timing impacts, obviously, we'll see EBITDA recover in the second half and EC in the second half. But when you look through to FY '24, we'll expect a cash tax benefit from temporary full expensing and installments rates being reset lower, so that's a big driver. We'll also see EBITDA uplift, and what I'd point you towards there is the network MAR bridge I touched on in my presentation, so a $95 million uplift in network MAR, but also Coal and Bulk as we see CPI flow through and volumes recover. You'll also, don't forget, get the take-or-pay recovery from a cash perspective in FY '24. We book it in this financial year, but from a cash perspective in the next financial year. So hopefully, that helps you with how the one-off and timing-related items impacted us negatively in '23, but will flow through as favorables in '24.

Yes, fantastic. That's very clear and very helpful. And then look, I know it's early stages in terms of the second half of '23. But I just wanted to ask you or if you'd be willing to share what you're seeing in terms of coal rail volumes to start off the second half ex the Blackwater derailment?

I might get Ed to talk about that.

Yes. Thank you, Justin. From a volume perspective, well, we plan to have a better second half. It won't be record-breaking, but customers are telling us to expect their orders to hold up. At a portfolio level, I expect volumes will be up from first half aligned with second half of '22, the previous half. Of course, there's always factors outside our control, the bad weather, the third-party derailment that we've talked about, but we are factoring that in.

Your next question comes from Anthony Moulder with Jefferies.

If I can start back in bulk, please. Obviously, there was a lot of factors in that bulk first half '23 result. But I wanted to understand because the cost growth was significant, how much in that cost growth is related to future periods? How much investment are you making for future growth in bulk, please?

Clay, I might get you to give some color on that?

Yes. I might start with reiterating just sort of what happened, Anthony, I'll try to -- George, on that investment. So as outlined by Andrew and George, there's sort of 3 different stories in bulk in the first half. You had the integration of One Rail, which we're pleased about, and operating, as we said in line with our business case. We had strong performance for most customers, the most commodities over in the West, offset by impact in the East. Weather, derailments. And we had a particular customer that we installed a lot of capacity for that didn't rail for the full 6 months, which had quite a significant impact. So that's kind of the view on the half. George, I might throw you on the second part?

Yes. Anthony, I think you need to look at the revenue and cost line in bulk because there are a number of moving parts in the first half as you look forward to the second half. So I find it most useful to think about it in the context of EBIT margins or EBITDA margins. So from an EBIT margin perspective, historically, we've been at 15% to 20%. You saw in this half, it reduced to 9%. That's a product of those one-offs and investments that Clay mentioned. But also you've got higher fuel revenue, which is a pass-through, so it increases your revenue line but it doesn't increase your EBIT line. You also have higher depreciation coming through from the investments we've made. When we look forward, we're still targeting that 15% EBIT margin in bulk across the business. So hopefully, that helps.

Yes, that's helpful. You also talked about this investment cycle. Obviously, we're seeing that in the second half in the CapEx profile, but you talked about related to the payout ratio for dividends. Do I take from that, that this will last well beyond 2023?

George, I might just get you to talk about the few years?

Yes. That's 1 of the reasons, Anthony, we tried to give transparency as to what we see as the CapEx investment cycle in that slide I touched on. You'll note that it looks out to FY '25, $430 million, and so we see this CapEx investment cycle lasting '23 and '24 and then '25, it tailing off. Although one thing that may happen, these opportunities may come forward before we expect them to. But at this point, what we're saying is it's '23 and '24.

And that profile is associated with your expectations or are you getting close to signing customers, that will be used for that investment?

Do you want -- go ahead, George.

It's a combination, Anthony. So if you break down the capital, I mean we mentioned $20 million of track upgrades. That's supported by a 10-year contract in South Australia. We've got $20 million of containers that are to support a number of customers that we have contracted recently, including the Centrex contract Andrew touched on. The port equipment is obviously expanding what we do for a lot of existing rail customers. And then the rolling stock capital is more about the forward pipeline, and we expect to sign customer contracts over the coming 6 to 12 months.

Very good. And lastly, if I could, on coal with Ed. So we used to talk about take-or-pay customers. Obviously, that's less of a focus, but it was that take-or-pay protection that gave a lot of protection to your coal earnings. Where is that now at, and are customers still signing with any form of take-or-pay or is it purely, here's the rates, we had to rail that there's no downside from a lower level of contract utilization?

Yes. Thanks, Anthony. Consistent with previous results releases, we're still seeing capacity charges in the 50% to 60% range. And yes, customers do principally seek capacity charge protection or certainty of service from us. Actually, they have an incentive to make sure that the capacity is in place.

Your next question comes from Sam Seow with Citi.

Just on the free cash flow, I think previously, you've talked about $500 million to $650 million. Is that still relevant or similar, I guess, to the dividend as you think about the next couple of years of reinvestment that, that potentially is lower?

George, do you want to take that?

Yes. Our expectations haven't changed from what we mentioned at that Investor Day 18 months ago.

Okay. And maybe just following on from an earlier question to unpack that Bulk Central contribution. Is there any seasonality in the business? And maybe some color around what you mean by ramp-up given, I guess, the business was largely operating when you took over?

Clay, do you want to talk about that?

Yes. There is some mild seasonality with -- as you've seen in most of containerized freight or the intermodal side of the business. There's some seasonality in that. But generally, these are the consistent production mines -- consistent production facilities. So unless there's weather impacts from a lot of seasonality on the bulk commodity side.

Just to add to that, Sam, in terms of the ramp-up, what we're referring to there is in terms of synergies and some growth volumes. So you might remember that $80 million was the historical EBITDA of that business, and we see it stepping up. There were 2 drivers of that step up. First was synergies, which we said is $7 million to $10 million. Of those synergies, the first part is corporate related. They were cash flowing very early on. The other part is operational, for example, replacing halls where you've got 3x or 4x the number of locomotives that there could be on that hall. They take longer to execute, so that will really ramp up in the second half. You also have some growth volumes, which we've always flagged would come through in the second half of the financial year.

Got it. Got it. And then just quickly on revenue yield, I guess, in coal, you've obviously combine that with the contract rails just on an underlying basis. Can you give us maybe an idea of what the CPI rollover was, and did that cover kind of the operational cost increases?

Yes. George, can you cover that?

Yes. You can actually work that out if you go back to our full year results and look at what our expectations were for EBITDA. So if I remind you, we were expecting EBITDA to be lower, but volumes to be up. And so that was clearly meaning that the EBITDA reduction we're expecting in the year was going to be driven by yield reductions. What we've actually seen is volumes being below our expectations. And so when you back that out, the revenue yield reductions almost exactly offset CPI, albeit there's a wedge of that $6 million, which I have discussed in my presentation.

Your next question comes from Jake Cakarnis with Jarden Australia.

Andrew, George. George, I'm just trying to tie together some of the commentary that you've given. You've said that, that One Rail Bulk business, Bulk Central, is on track per internal modeling. You suggested there that it was $80 million. I think the last update we got was calendar '21, so we're a little bit behind for that business. On the period of ownership, 5 months, it will be about a $33 million EBIT contribution. Can you just confirm that there were no synergies during the half? And then if that is the case, I know that you've identified $10 million of EBITDA headwind from poor weather, but it still leaves 1/3 of the EBITDA decline in that underlying bulk business year-on-year unspecified. Can you just dig into that into a little bit of detail and then how that recovers into the second half, please?

Yes. So let's start with Bulk Central EBITDA, pretty similar to what you've described there. So you take that $80 million and divide it by 12. That gives you a run rate for that first 5 months. But there were some synergies in the first 5 months, those synergies will step up in the second half. If you then go to the other impacts that we've seen, I called out $10 million from weather, derailments and customer production issues. But there was also another similar number, call it about $10 million that was early costs that we've brought on to support growth that will come through in future periods.

Okay. And then just a follow-on to that then, I guess, George. Some of the problems that you're seeing for your customers in the fourth quarter of '22, can you just confirm that they've been resolved and that's on the run rate now as we get into the second half of '23?

I might get Clay to confirm that.

So that particular customer on -- that's had an impact in New South Wales. We expect that to come online and be at full roll in the second half of H2.

Sure. But the issue that you had in the fourth quarter of fiscal 2020, I think it was in Bulk West. Has that now gone back to normal? Is that contract fully restored? Is that customer back up and running per normal?

In Bulk West?

No. The Bulk West you might be referring to was CBH grain run rates. We're now run rating at an expectation for the CBH. The customer production issues we were talking about in the fourth quarter of FY '22, there was 1 in the Mount Isa corridor. That was shut. That's now been restored. And the other 1 was ramp-up issue. That ramp-up issue is still a ramp-up issue, and has been slowed by further flooding in the Broken Hill region.

And just to add -- just to make sure it's not -- that there's no Bulk West misinterpretation. The CBH contract -- performance for CBH is setting records. And you can see that published in external documentation for the interest of farmers in Western Australia, so there should not be any sort of uncertainty about that. It's going very well.

And one final one for me, both for Andrew and George. Just for the bulk of business for the capital investments that are going in there, are you considering them on an incremental return on invested capital that's going there or it's versus group hurdles?

George, do you want to take the easy question?

Group hurdles is the short answer to that.

Your next question comes from Paul Butler with Credit Suisse.

I just want to ask first about the restatement of the safety metrics for last year. What is the explanation for that?

Yes. So look, the -- the SIFR measure looking, just significant incidents was designed to actually replace our previous sort of metrics which didn't cover the entire business. And so we've introduced them. We ran them through the year. We formalized them this year. As part of the formalization process from a good governance point of view, we had experts go back and look at all the classifications of the prior incidents to make sure that we were comparing like-for-like. And in that process, we found that in the prior year, we were reporting some things are significant that didn't meet the hurdle, and we had to remove those.

Okay. And just to clarify, if you were restating it on the previous basis, would you also be showing this decline in incidences that you've shown for the half?

Yes. So it's still a major improvement. It's just that it's less of a major improvement. But it's still significant. It's that we've actually done that restatement, so it is a definitely strong improvement.

Okay. And a question for George. You said just a moment ago that you're targeting a 15% EBIT margin in the bulk segment. Do you sort of think about that as being sort of a minimum target, or is that a stretch target?

No, I don't think it's a stretch. We're about 15% and above a year or 2 ago, so I don't think it's a stretch.

Okay. And Clay, I think you said the 1 customer you've been having the issue with in New South Wales being back to full roll in the second half. Will it have a full contribution for the half, or is it going to be first half next year before we get the full contribution?

No, I would say, it's the last quarter of the half. That operation's still standing up after a prolonged weather impact, so it will be the last quarter of that -- of H2.

Okay. And just one other question. The D&A in bulk, is the change in that sort of pretty much all just driven by the One Rail consolidation? Or is there also some changes from other investments that you've put into other parts of the bulk segment?

It's a combination, Paul. That 80% to 90% of it is driven by One Rail, and the rest is driven by the investments in new equipment.

Next question comes from Ian Myles with Macquarie.

Just at a broader macro level, you showed us the EBA agreements being sort of 4% to 5%. Inflation is probably running a little bit -- still running a little bit ahead of those sort of numbers. Can we actually expect a broader margin improvement into the second half and into FY '24 as a result that you're doing better on inflation than the cost -- labor costs?

Yes. George, you want to add anything to that?

Yes, absolutely. We do, Ian, in coal and bulk, but network will more be driven in FY '24 by that mass step-up that I described earlier.