Aurizon Holdings Limited (AZJ) Earnings Call Transcript & Summary

Good morning and welcome to the first half results for 2024. We're 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. I'm joined on the call by the CFO, George Lippiatt and the rest of the group executive team. We'll shortly go through the presentation that we lodged with the ASX this morning, which is also available on our website. As usual, at the end of the presentation, we will take questions. Turning to safety. At full year results in August, I spoke about the continuing efforts by Aurizon and the rail industry to improve level crossing safety for our train crew and the general community. This work is ongoing, but near misses and collisions continue to happen far too frequently. Tragically, 2 industry colleagues from Pacific National were killed in a level crossing collision with a truck in South Australia on New Year's Eve. This terrible event again highlights the need for care and vigilance across the community, when using level crossings and the risks faced by train crew in going about their daily work. Aurizon strongly supports the upcoming national rail level crossing safety roundtable in Brisbane next month. Collectively, we must step up efforts and investment to improve safety at level crossings. This includes the rail and road industries, all levels of government, enforcement, and road safety agencies, and the general community. Given increasing instances of level crossing incidents and the near misses over the past 18 months, an Aurizon task force had already been established to combat this issue. The focus continues to be on technology, enforcement, and awareness. During the period, we also launched a number of safety frameworks and strategies to support our employees, including a new fatigue risk management framework. We saw an improvement in both total recordable injuries and potential serious injuries during the half and note that these measures now include Bulk Central. As always, our focus remains on protecting our employees, our customers, and the communities in which we operate. As planned Coal, Bulk and Network all contributed to the step up in earnings published today. This was driven by the contribution of new contracts, an increase in Network revenue as a result of the regulatory reset in July, and a recovery in volumes, although noting heavy rainfall impacted railings in the last 2 weeks of the half and has continued into this calendar year. Group containerized freight volume increased by almost 70% as national interstate capacity is being stood up. Although the ramp-up schedule, including costs, remains on track, containerized freight is expected to be an immaterial negative EBITDA contribution in FY 2024, driven by softer freight market conditions flowing through to volumes. Despite the strength of the first half, full year EBITDA guidance has been maintained, given the impact of supply chains in Queensland and Northern Territory in January and February from Tropical Cyclone Kirrily, including the heavy rainfall thereafter and a projected reduction in coal revenue yield in the second half. The interim dividend declared represents 75% of net profit after tax in accordance with Aurizon's capital allocation framework. As noted on the slide, the strong cash flow from Aurizon is generating -- provides more flexibility to increase shareholder returns in FY 2025. Turning to the results. Group EBITDA increased by 26% flowing through to the uplift in net profit after tax, return on invested capital and free cash flow. Volume recovery and new contracts supported volume growth across Coal, Bulk and Network. Despite this performance, this period still saw production issues from some mining customers and also lower grain volumes, particularly on the East Coast. As noted earlier, an uplift in regulatory revenue flowed through to network earnings and the period also saw the approval of the final WACC of 8.5% -- 8.51%. An interim dividend declared of $0.097 per share maintains the payout ratio at 75% of net profit after tax. Moving to our business units. Coal volumes increased by 4%, driven by both the recovery in railings compared to the prior period and contracts in New South Wales and Southeast Queensland. While volume increased, maintenance, mine sequencing, and unscheduled stoppages impacted some customer coal production during the period, primarily in the Goonyella corridor. As George will speak to shortly, the increase in revenue yield during the period was supported by the mix of volume between corridors and customers in addition to CPI indexation. New contracts were executed in the period, including a 12-year contract with New Hope, which commenced in October 2023 for the New Acland Stage 3 mine. A contract extension was also signed with Queensland Alumina. In January, we railed first coal for Pembroke's Olive Downs, a green metallurgical coal -- a greenfield metallurgical coal mine in Central Queensland. During the half, we railed for New Wilkie Energy in Southeast Queensland. We are currently working with the receivers of that operation and it is important to note that rolling stock deployed on the haul is fungible across the corridor. Bulk earnings increased by 12% driven by increased iron ore volumes in Western Australia and the additional contribution of Bulk Central during the period. This was partly offset by customer-specific production issues, primarily in Queensland, and lower grain volumes on the East Coast. Additional contracts secured during the period include a rail haulage contract extension and volume uplift for mineral resources in Western Australia, a rail haulage contract extension for Ampol in Western Australia, and a rail haulage and terminal services contract extension for Glencore in Queensland. Importantly, volume growth has been secured in Bulk Central with 2 new contracts to commence in the second half of this financial year. The opportunities for Northern Iron and Linecrest were both identified at Investor Day in July and it's great to see these progress so soon after. A reminder that revenue captured on Bulk Central is for above and below rail, a key differentiator compared to bulk hauls outside this corridor. We've previously spoken about Aurizon's fleet position and the flexibility it gives us in deploying capacity to maximize earnings. As a result of lower grain volumes on the East Coast, we transferred locomotives and train drivers from Bulk into Coal to match the step-up in demand for coal haulage. While the short-term performance has been impacted by customer production issues in Queensland and lower grain volumes on the East Coast, our confidence in the bulk opportunity remains unchanged, particularly in Central Australia. The step -up in Network earnings was driven by a recovery in volumes and an uplift in regulatory revenue as a result of the reset of the regulated asset base, and the preliminary WACC applying 2 tariffs from 1 July. In October, the QCA approved the final reset values, including a WACC of 8.51%, which will be incorporated into tariffs from July 2024. In a higher interest rate environment, it is important to remember that around 70% of group debt is held in Network. The regulatory revenue of Network provides compensation for high interest costs and is reflected in the uplift in WACC. Finally, to containerized freight, where we continue to ramp up to the full schedule of 7 weekly services from April. The sixth service, Sydney to Perth begins next week. In addition to our launch customer, we're railing spot volumes for 3 additional customers with a utilization across the period in the mid to high 60s. As noted earlier, we now expect an immaterial negative EBITDA contribution in FY 2024 driven by softer freight market conditions flowing through to volumes. From our announcement this time last year, I'm pleased by the progress in standing up capacity and establishing a truly national service for critical freight. On that, I will hand over to George.

Thank you, Andrew, and good morning to those joining us on the call. We've seen an uplift in earnings with Coal, Bulk and Network business units all contributing. This performance has enabled an increase in the interim dividend and when combined with strong free cash flows, should enable balance sheet and shareholder return flexibility in FY '25. Turning to the results table. Underlying EBITDA increased by 26% to $847 million. Growth in revenue and earnings was achieved through a recovery in volumes in addition to new contracts coming online and an uplift in network revenue following on from the regulatory reset in July. As expected, operating costs increased due to additional labor and maintenance costs associated with volume growth along with general cost escalation. Total FTEs increased 6% as growth areas of the business begin to establish and ramp up operations. This includes the ramp-up of containerized freight, which is captured in the other segment. I will go into more detail on each of the Coal, Bulk and Network business units and their performance shortly, including showing how each performed when we exclude fuel, energy and access pass-throughs. As you'll hear, we are expecting a stronger second half for Bulk, but a softer second half in Coal and Network, driven by recent weather events and a less favorable customer and corridor mix. For those reasons, earnings guidance, as Andrew will cover, remains unchanged. Staying at a group level and the first half result, you can see in the table that depreciation increased 4%, driven mainly by investments in bulk and containerized freight. Net finance costs increased, primarily driven by debt-related interest expenses due to higher interest rates and a higher debt balance to fund new equipment. I'd also note that the higher interest rate environment is reflected in the uplift in Network WACC, which flows through to regulated revenue. FY '24 group debt-related interest expense is expected to be around $300 million, noting we are carrying temporarily high debt loads as we have done proactive debt raisings to cover debt repayments in 6 months' time. Free cash flow was materially higher for the half, driven by, of course, earnings, but also cash receipt of FY '23 network take-or-pay. Looking forward, the second half will include higher CapEx. But that will be offset by a tax refund of around $100 million. Group cash flow should also benefit from the expected $125 million of deferred consideration from the East Coast Rail divestment. While the East Coast Rail cash flow won't be reflected in the underlying continuing numbers at full year, these cash inflows will further reduce gearing levels and assist the balance sheet flexibility I mentioned earlier. An interim dividend of $0.097 per share has been declared, representing a payout ratio of 75%. The dividend is to be franked at 60%, with this franking amount reflecting our expectation of paying lower cash taxes in FY '24, and therefore, having fewer franking credits to distribute. Moving now to Coal. A strong half 1 performance for Coal, reflecting a volume recovery, the contribution of new contracts, and an uplift in revenue yield. Turning to the bridge. EBITDA at the far right was $283 million for the half, an increase of 23% against the prior period. The first impact was from volumes, which increased $21 million. Coal volumes increased by 4%, driven by New South Wales and Southeast Queensland corridors. Central Queensland volumes were flat with an uplift in Blackwater and Moura, offset by declines in both the Goonyella and Newlands corridors. The second and largest bar on the bridge is net revenue yield, which was favorable against the prior period by $50 million. This was driven by the corridor and customer mix, as well as CPI indexation of customer rates. The last bar I'll touch on is operating costs, which increased $23 million against the prior period when fuel and access costs are excluded. This was driven by additional train crew and maintenance costs associated with volume growth, along with the escalation of labor and materials. In terms of the second half for Coal, we expect it to be weaker than half 1 due to recent weather impacts and a reversal in customer mix with higher Goonyella corridor volumes driving lower net revenue yield. Moving on to Bulk. Bulk EBITDA increased to $112 million, an uplift of 12%, outperforming revenue growth of 7%. The result was driven by higher iron ore volumes in WA and new contracts offset by lower grain volumes in Queensland and New South Wales. In terms of operating costs, this was $447 million or 6% higher. However, similar to coal, when excluding fuel and access costs, which are largely a pass-through, operating costs were up $23 million, as you can see on the bridge. This mainly reflects labor and materials escalation and the build of train crew capacity in the Bulk business. Although Bulk achieved revenue and earnings growth in the half, our performance expectations for Bulk fell short during the period due to customer-specific production issues, primarily in Queensland, and lower grain volumes on the East Coast. As Andrew mentioned earlier, we spoke about the fungibility of our assets at Investor Day and the ability to redeploy to match demand. Within the half, as grain volumes on the East Coast dropped, we redeployed narrow-gauge locomotives, wagons, and train crew from Bulk, to capitalize on coal volume growth opportunities in Southeast Queensland, and we are doing the same with standard gauge grain equipment in New South Wales. This means lower bulk earnings, but the assets and train crew are now generating higher coal earnings, and it reinforces the benefits of our fleet and footprint as outlined at Investor Day. We expect higher revenue and EBITDA in half 2 for Bulk, with lower grain volumes being more than offset by the commencement of the 2 new contracts in Bulk Central, as well as the step-up in mineral resources volumes for Aurizon. Moving to Network. The result for Network reinforces that it's a business which should perform well in a higher interest rate and inflationary environment. Network EBITDA increased $123 million or 34% to $486 million for the half. This outcome is driven by an uplift in regulated allowable revenue and higher volumes. I'll turn now to the bridge, which is shown net of electricity charges. That's done due to these charges being a pass-through to network customers. As you can see on the bridge, access revenue was $140 million higher. This relates to higher allowable revenue as a result of the preliminary reset WACC of 8.18% compared to 6.3% in FY '23, and the escalation of the regulated asset base, which lifted from $5.65 billion in FY '23 to $5.86 billion in FY '24, and those numbers are excluding access facilitation deeds of $0.3 billion. Moving to the third bar, which shows operating costs increasing by $18 million, driven by higher maintenance costs due to labor inflation. There was also higher external construction costs, which is offset in revenue. The full year FY '24 volumes are now assumed to be ahead of the approved regulatory forecast of 207.8 million tonnes for FY '24, likely leading to an over-recovery, noting the volume-related over-recovery in the first half was $27 million. In terms of the second half for Network, we aren't expecting the same level of over-recovery as the corridor mix shift towards more Goonyella volumes and I also note we won't have the same level of external works revenue in half 2. Beyond the FY '24 maximum allowable revenue uplift of $125 million, there will be a further step-up of around $70 million in FY 2025, driven by the final WACC of 8.51% coming into effect, FY '23 rev cap of around $30 million, and the usual inflation true-ups. This means that we will see a MAR uplift of $195 million between FY '23 and FY '25. As usual, MAR tables and waterfalls are included in the appendix. Turning to CapEx. Total CapEx for the half was $400 million, of which sustaining or non-growth CapEx was $308 million. More than 60% of sustaining capital was deployed to Network, which benefits from regulatory return of capital mechanisms. On the right-hand side is just a reminder of the breakup of growth capital, with both the historical and expected FY '24 investments for bulk and containerized freight. You can see that the majority of growth capital relates to standard gauge rolling stock and port and terminal equipment that can be used across multiple commodities and freight types across Australia. We continue to expect growth CapEx for FY '24 to be in the range of $250 million to $300 million. As can be seen on the table, growth CapEx in the first half was less than $100 million. Therefore, I expect it to come in closer to $250 million by full year end, but still within the range. This is due to equipment deliveries being weighted to the second half of the financial year. While we will provide more detail at full year results, I can also say that we are expecting lower growth CapEx in FY '25. As for sustaining CapEx, we continue to expect FY '24 to come in at $600 million to $660 million, with $40 million of that capital for transformation, such as the Train Guard rollout and more than half of the spend attributable to Network, therefore, expected to roll into the regulated asset base. Moving now to our funding update. Our treasury team, as always, has been busy on the Aurizon debt profile with over $1 billion of bank refinancing and debt capital markets issuances completed in the first half. This continues to highlight the support we receive from Australian and overseas banks as well as institutional debt investors. For Aurizon Network, funding activity consisted of AUD 500 million syndicated institutional term facility across 5- and 6-year tenors and a AUD 150 mill bilateral bank debt across 5-, 6- and 7- year tenors. I'm pleased to report that Aurizon Network's lending group has expanded to 21 banks, with an additional 9 joining during the period from Japan, Taiwan and India. This additional debt will be used to repay the AMTN and EMTN in about 6 months that you can see in the debt maturity profile chart, noting we are temporarily carrying higher debt levels and therefore, interest costs. I won't cover the Aurizon operations activity, as I spoke about that at the full year results last August, and it settled in July. 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 6.1%, which reflects higher base rates, and hedging for Network at the time of the WACC reset. As I mentioned earlier, the interest cost increases we've seen have been more than offset by regulatory revenue step-ups. Importantly, we maintain a commitment to strong investment grade ratings with Aurizon operations and Aurizon Network's credit ratings, both at BBB+/Baa1. Finally, given debt and interest rates are topical at present, a reminder on Aurizon's funding structure and leverage ratios. Around 70% of group net debt is held in Network, which has regulatory interest rate and inflation reset mechanisms, and you can see the effect of those flowing through in the first half for FY '24. Gearing remains conservative with Network at 63%, or around 4x net debt-to-EBITDA and operations at 2.3x at the half. While network will remain around this level, the strong cash flow that Aurizon is generating will continue to drive down operations debt and we expect it to be around 2x by the end of this financial year, a level aligned with our BBB+/Baa1 credit metrics. I'll say in closing that it is pleasing to see Coal, Bulk, and Network business units all contributing to the uplift in earnings in the first half. With lower debt and lower growth CapEx inspected in FY '25, the strong cash flows Aurizon generates provides flexibility to increase shareholder returns. Thank you, and I'll now hand back to Andrew.

Thanks, George. At our Investor Day in July, we took the opportunity to update our strategic aims, and this slide summarizes progress to date. This includes the resilience of our highly disciplined Network and Coal businesses, growth in Bulk driven by a national footprint, and increased capacity, reflecting the opportunities presenting to the business, and our progress against the 500,000 TEU aspiration in containerized freight, including the contribution of Bulk Central and National Interstate volumes. Although in time, we anticipate the growth in Bulk and containerized freight to reduce the share of thermal coal revenue, there's been an uptick in this half, given the underlying strength in coal markets and the opportunities presented to the business. Our operational footprint and fleet gives us the flexibility to respond and capture such hauls, and we will continue to leverage this position. Turning to outlook. As noted at the start of the call, we've maintained guidance for FY 2024 with an EBITDA of $1.59 billion to $1.68 billion. Network earnings continue to be supported by the uplift in regulatory revenue and volume growth, now expected to be ahead of approved regulatory forecast. Coal revenue and EBITDA across the full year is expected to be higher than FY 2023, driven by volume and revenue yield improvement. In the second half, we expect a lower revenue yield than what was achieved in the first half based on the projected corridor customer mix. Bulk revenue and EBITDA across the full year is expected to be higher than FY 2023, driven by volumes and the full year inclusion of Bulk Central. We now expect containerized freight as captured in other to be an immaterial negative EBITDA contribution in FY 2024 driven by softer freight market conditions. As noted earlier, heavy rainfall has impacted operations, particularly in Queensland and the Northern Territory in January and February in the wake of Tropical Cyclone Kirrily. The Mount Isa line remains closed, and the network owner Queensland Rail has advised that the line will not reopen until later in February. Beyond the impact on supply chains as a result of this activity, no further significant disruptions are assumed such as major derailments or extreme prolonged wet weather. The results today demonstrate a strong and resilient business for Coal, Bulk and Network, each contributing to the step-up in earnings. We have a conservative balance sheet, providing more flexibility to increase shareholder returns in FY 2025. With that, I will hand over to the operator for questions.

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

My first question is just about the comments around increased shareholder returns in 2025. And I think you've sort of articulated that part of that might be driven by lower growth CapEx, presumably that's within the Bulk division. So I was just keen to get some, I guess, high-level thoughts on how you think customer sign-ups or growth in volumes has played out so far relative to your expectations. And then also just with the comments around having fungible train kits and transferring staff, just the extent to which you think that would play out over the next year or so if you were to achieve your aspirations in Bulk.

Okay. Matt, that's one hell of a series of questions, but we'll -- I'll do my best to remember, there's various parts of it. So I think the first part was around expectation from sign-up of contracts in Bulk generally. And what I think, if I was to break it down and work my way across the country, you'd see in Western Australia, we talk about the expansion of the relationship with Minres and another -- a number of other contracts that are contributing in WA. So broadly happy with what we've seen in WA, although I do note on -- that Alcoa has made an announcement from a refinery point of view, which has some impact on WA, but in the scheme of the many different tasks that we do for them, something that is manageable in the scheme of things. If I move to Bulk Central, we talk about the contracts of Linecrest and Warrego, we -- in previous times that we've spoken, expected those contracts to come in. If I was thinking from a downside point of view, I would have expected them earlier than from a budgeting and planning point of view. It's obviously up to the customer when the final document gets signed, but happy with what's happening there, albeit we have to actually execute the actual railing of some of that material in the second half. If I move across to the East Coast, it's not a strong story on contracting. It's a story around a customer that had issues from an explosion in their plant, actually and then grain issues. So it's not really been a story around future contract growth. And I think what we've seen in the last year is probably something that will play out over a reasonable amount of time, as you see a lot of the bulk-oriented projects more strongly presenting West Australia and Northern Territory and South Australia, with a little bit in Queensland. George, you look like you want to add something to my commentary.

I think just the one thing I'd clarify, Matt, is it's -- we're expecting lower growth CapEx, not just bulk, but also containerized freight. But our -- what we're saying about '25 is broadly what we expected 6 months ago. It's just we're 6 months closer to FY '25, have more certainty. That's the first part. And the second one is we've got better line of sight of which assets we can redeploy and which stored rolling stock we can rebirth to meet the growth in demand that we've seen.

And does that include the, I guess, fungible train kits and staff that you're moving around? I mean, is that happening to a greater extent than what you first envisaged?

Yes, we certainly see more evidence of it. And the near term -- or the recent one that I spoke about is Southeast Queensland, where we moved narrow-gauge equipment from grain to coal, and that happened in a matter of weeks. So I think we're getting better at that. Certainly, we're doing it in New South Wales, which is standard gauge equipment. So certainly, we're getting better line of sight on it -- of it, and we're getting more used to doing it faster than we have in the past.

And just cash flow., I think you called out 6 months ago that you'd get something like a $70 million benefit to Network or from Network in first half '24. Just wondering what the other movements were during the period.

George, do you want to keep going?

Yes. Your question, Matt is probably going to the half 1, half 2 of free cash flow. We're expecting a stronger second half. I'll come to that. But if I just focus on the first half first. We did get the take-or-pay cash receipt, so that's the FY '23 take-or-pay into Network in the first half. But what is the benefit that's more weighted towards the second half is from a cash tax perspective. So we'll get a bit more than $100 million cash tax refund in the second half. We'll also have a lower tax installment rate and you should see an unwind of some of the working capital build-up in the second half as well. So a stronger second half free cash flow is what we're expecting.

And just one last one on that. So I think you're guiding now to a 25% effective rate on cash tax. You said over the medium term. Can you define how long medium term goes for?

No, I can't because it largely depends on our CapEx profile. And so the reason our cash tax is lower than 30% is because of accelerated depreciation that relies on you continuing to invest and spend at the same rate. And so if I was to give you that, then I'd be giving you a CapEx forecast over a longer period of time than I typically am willing to give.

Okay.

Your next question comes from Andre Fromyhr from UBS.

Just going back to revenue, I'm wondering if you can help sort of reconcile the step-ups from last year. Obviously, the WACC is a big part of it. But previous guidance you had given was that that would result in about a $125 mill EBITDA uplift in FY '24. But you've done almost that amount already just in the first half. So what are the sort of non-RAB things that are driving that performance in the first half? And does it mean that you're tracking ahead of that previous guidance that you've given for Network?

George, I might get you to break that down.

Sure. Andre, so there's 3 broad moving pieces in Network revenue in the first half. The first is we had a lot of external works revenue that flowed through. So that's for Pembroke, so that shouldn't repeat in the second half. But the other 2 drivers, which are access revenue related is the mass step-up. We said that would be $125 mill for the full year. So if you divide that by 2, that gives you the split broadly, that's due to the maximum allowable revenue step-up. The other gap then is around volumes, and we had a volume over recovery, if you just look at the second half relative to the prior corresponding period where we had a volume under recovery. So hopefully that gives you the building blocks for the first half revenue bridge.

Yes, that's helpful. Just to make sure there wasn't something else going on. And just it'd be good to understand a bit more about the containerized freight comments as the contributions to the full year guidance. So overall, expecting negative but immaterial for the full year. But I would note there are some comments in the financials saying that containerized freight ramp-up was the main contributor to the $14 mill worsening of the other segment profitability. And I guess I'm asking, is it fair to expect that roughly a $14 mill impact would unwind in the second half? And is that a fair run rate to sort of project into next year?

You want to help out there?

Yes. So probably a few things I'd say, Andre, and then I can perhaps get Andrew or Gareth to comment more broadly on containerized freight. The first thing is included in the other segment are things apart from containerized freight. So think about the CEO cost center, think about investor relations strategy. So there are other things flowing through that cost center. That's the first thing I'd say. The second thing I'd say about the accounts is when we say -- when we talk about ramp-up for containerized freight, the ramp-up is on track. But what that means is that our cost base is what we expected, and revenue is slightly off in the first half, driven by volume. So costs, as we expected, revenue off, and that's why we're saying an immaterial negative contribution for containerized freight for the full year. The second half should improve, though, because you're getting more of your services stood up and therefore, more volume and revenue.

I'm really happy that you picked on the CEO cost as being the first part of [indiscernible]. But anyway, Gareth, do you want to talk a little bit -- I think just give some color on containerized freight through the second half [indiscernible].

Sure. Hi, Andre. And so, yes, as George mentioned, I think the first thing to call out is we are delighted at the progress that we've made to implement our ramp. We've delivered on those commitments that we made to our customers and we remain on schedule for the remainder of the services. And again, as Andrew mentioned earlier, our second Sydney-Perth service starts next week. In terms of that financial outcome, again, as Andrew referred to in his speech, volumes have been softer, reflecting the broader macroeconomic conditions. And as we are standing up those services, there is an element of taking some of the costs before the revenue flows through. And a good example of that is the recruitment, obviously, of train crews ready for those services to be stood up. And the final piece that I'd reference is as we are still in our ramp, we are, I suppose, haven't got our complete solution ready yet for the market. And again, a good example is that Sydney-Perth service starting next week, we'll see the doubling of the frequency that we're able to offer to the market. So those 3 things in turn mean that we're a little behind on where we'd expect on EBITDA.

Maybe just an expansion on that ramp-up and the commercial conversations you're having in, I guess, both containerized freight and what you're doing now, but I guess it relates to land bridging as well. There was previous guidance around a total capital investment into containerized freight of $425 million. I understand some of that has now been spent as part of FY '23 and the first half '24. And maybe this is more one for George, but how much of that $425 million is left to go? And will it be done as part of the guidance that you've given for the FY '24 CapEx?

This is definitely one for you, George.

So we're on track with that $425 million, Andre. In terms of the spend, when you get to the end of FY '24, I'd expect that we will have spent about 3/4 of that with the balance being for FY '25 and beyond.

Your next question comes from Anthony Longo from JPMorgan.

Just again, an additional question on containerized freight. I appreciate the utilization that you have highlighted today about low to mid-60s percentage. Just a reminder, what level of utilization do you need for the investment to be breakeven if you like? And ultimately, how are you starting to see that progress or track into next year and beyond? [indiscernible]

Yes, so when the business case was for TGE to provide 70% of the utilized capacity and at that point, the business would be -- would make a very small profit, the backfilling percentage of the back of the train from 75% -- I think when we announced it, we said 75% to 85% would give us a return from a WACC point of view that we'd be proud of and that would be expected.

Okay. So I guess, in terms of what you're seeing, and I guess sort of marrying up the comments that you are giving on the current trade environment you're still reasonably comfortable that you can achieve that on that timeline?

So, yes. So that's why Gareth started by saying he was delighted with where we'd actually come from a ramp-up point of view. So as we have established the services, notwithstanding all the intricate and many difficulties you find on a daily basis, we actually have the national footprint established. We've got to get the service frequency up there so that we can move on with making a full service offering to future customers that aren't just interested from a spot point of view and we had to do that on the back of the TGE volumes coming through. The reality is all the mechanics of supplying the movement of the freight are going well. The volumes, when you look at them, have been impacted by economic conditions. But given the circumstances we're in, not significantly so, and the remaining conversations that we have -- I'm doing your job, Gareth. But the remaining conversations we're having with customers indicate that we remain very confident of being able to deliver the business case, as I described earlier.

And last one for me is just on the refinancing. So appreciate you being proactive in terms of looking at the broader debt book and the like and I guess thinking about the overall tenor. Can I just get a bit more color and appreciate the comments with respect to the operational business gearing of getting that down to that 2x by the end of the year. I mean, what's the natural level do you think is appropriate for Network? I mean, 4x feels like it's reasonably high. But again, I do take your comments on the regulated nature of those revenues and the like, but perhaps a bit more color around that would be great.

George, do you want to give some color to the conversations we have and sort of how we position it?

Sure. Anthony, 4x net debt-to-EBITDA at Network is the level we're really comfortable with. There's a good buffer between that, and our credit rating metrics of BBB+/Baa1, which, of course, is 2 notches above investment grade. So strong rating. So very comfortable with that at the Network level. I think our credit rating agencies reiterate that regularly and so we're comfortable there. Where there is deleveraging is on the operations side of the balance sheet. You'd remember that about a year, 1.5 years ago, we were pushing 3x net debt to EBITDA. We're now down to 2.3x. We expect to be at 2x net debt to EBITDA by the end of this financial year. So with Network at 4x, ops at 2x, they're both levels that we're pretty comfortable with.

Your next question comes from Owen Birrell from RBC.

Look I just wanted to ask a question around the Coal outlook. Obviously, a lot of moving parts with different customers doing different degrees of maintenance and moving volumes around there. I just want to draw back to some color that was provided at the Investor Day where you were looking at roughly a 10% increase in Coal volumes through FY '24. I'm just wondering where your head is at, at the moment in terms of what your expectations are for, I guess, second half Coal growth across your different exposures.

Ed, do you want to talk to Coal expectations?

Yes. Thanks for the question. Owen, you're right, I did say we were expecting a 10% uplift based on what customers are telling us. The way that the first half has played out and looking forward, I think it's going to be more in line with about a 5% uplift.

And that's across both Southeast Queensland, New South Wales, and...

As a portfolio, yes, portfolio, Owen.

At the aggregate level. Okay. Okay. And I just wanted to confirm that as you move into the second half, we're expecting BMA to come back on with their full, I guess, volumes and then that will obviously change the margin mix into the second half?

Yes. That's correct, mate. As George said, we expect second half earnings to be weaker because of the dilution of revenue yield. I mean, there's actually 3 reasons. Firstly, we do expect -- BMA are telling us, that they expect to have come in at the high end of their recent guidance. So that's a stronger half than the first half. We also expect lower inflation -- relative inflation in the September, December quarters going to drive a lower CPI escalation in the second half. And you'll also be aware of the dilution effect of moderately high volumes in -- for revenue yield as well. So all those factors are going to drive a reduction in revenue yield in the second half.

That's excellent. And just as a second question, I just wanted to ask again on the freight strategy. I think at the Investor Day there was an indication that the capacity level by the end of FY '24 would be around about 350,000 TEU. Just wondering if that is still the expectation in terms of the total capacity for freight?

Yes, it is.

Okay. That's it.

Your next question comes from Sam Seow from Citi.

Just a quick question on Bulk. You've obviously had the 34 million tonnes, up 1%. And there's obviously a lot in that segment. So just wondering, is that a like-for-like for NTK or how should we be thinking about what the actual underlying volume growth is in that business? And what seasonality or any comments around, I guess, the current contracting book in Bulk?

Anna, it's about time we heard from you, I think, on some of the more detail for Bulk and the makeup.

Thanks, Andrew, and thanks for the question, Sam. I mean we've talked for some time now around that commodity mix in Bulk. And you're right that it is shared across a portfolio of a range of different commodities. That overall increase in Bulk volumes is probably while slightly up, reasonably flat based on movement in commodities. We're seeing iron ore up, aluminum and bauxite have been somewhat down and obviously, we've talked to the challenges in grain on the East Coast, whereas that's been more stable in South Australia and WA. I think the reality of our business and our market is it's about managing that diversified commodity mix and making sure that we're running full trains and filling them up with what is available and what commodities are strong.

Okay. Okay. And then maybe a quick question on Coal. I think previously you've talked to that 90% utilization. I'm guessing the 82% today means that might be off the cards this year. And appreciate some of your comments on the 5% volume uplift. But just looking forward, I guess, into future years, is that 90% still a realistic target going forward?

Ed, keep going.

Yes. Thanks, Sam. Yes, I think it's a realistic target. It will take us time to get there. But if you look at the last 3 quarters, we've rebuilt post-COVID from 78% to 82%, then we stayed flat into the first half of '24. And we're expecting a contract -- the guidance I gave on volume will drive us -- drive about a mid-80s utilization. So it's trending the right way, but -- and we continue to build.

Your next question comes from Reinhardt van der Walt from Bank of America.

Just back on the Bulk business. Maybe a question for Anna. Can you just give us an update on whether you're seeing market share increases or decreases in any of the West, Central or East parts of the business? And can you maybe just give us an update on what the yields are looking like on some of your newer contracts?

Yes. Thanks, Reinhardt. Yes, we continue to be encouraged by the response that we're getting from customers for the Bulk offering. We've certainly been working very closely with customers in the Central region. So South Australia and Northern Territory around maximizing the benefit of that combined above and below rail offering to unlock project opportunities there. So, really positive response from customers within that region, where we have seen a change in customer behavior and customer engagement to look for ways to bring projects to fruition. I think more broadly, as both Andrew and I think George have alluded to in their discussions, we've seen some challenges in the East, in Queensland and New South Wales that have made us, I guess, lean into that strategy around, looking at the best case use for capacity across the country, and we're seeing the strength in the West Australian market. And obviously, the addition of Bulk Central is really driving a lot of that decision making around where growth is coming through and where we're going to deliver the best returns for shareholders.

Got it. Understood. And can I maybe just get a little bit more color on just the competitive dynamics that you're seeing in that Bulk business? Just as far as yields are concerned on some of the newer contracts, are you seeing sort of a generally deflationary or inflationary environment?

Well, I think the Bulk portfolio is always a mix from a yield perspective. But that combined impact of -- if you look at the announcements that we've made today around new contracts, the addition of Bulk Central contracts, where you get that combined impact of the Bulk, then below rail revenue certainly does generate an uplift in you.

Understood. And just maybe a question on Coal. I'm conscious, obviously, that the BHP contract is coming up in just a couple of years. Magnetic Rail, can you just give us a sense of how they're progressing with the new asset? How competitive the New South Wales market is at the moment?

So before I hand over to Ed to talk about how competitive the New South Wales market is, it's best for us not to make any comments on what we think about Magnetic Rail. It's pretty much I'd go and ask them how they're performing. But I'll hand over to Ed to talk about competitiveness in New South Wales.

Yes, thanks for the question, Reinhardt. Yes, as Andrew said, we don't typically comment on competitors or specific customers and commercials. It's -- I think it's a little too early to tell. In relation to Magnetic Rail, we've really not seen any more assets enter the market yet as a consequence of the dynamic. And we've not really seen a change in the competitive dynamic in Queensland or in New South Wales. We continue to recognize that our best competitive response is to control what we can control, run our business well, continue to innovate deliver for customers. And as our track record shows, over the last 12 months, we've been able to pick up all of the contracts that we've actually competed for and have started 4 of those up in the first half, which is the first time we've ever had to do that. So not -- too early to tell is the short answer.

Got it. Perfect.

Your next question comes from Ian Myles from Macquarie.

Just a couple of things. In the Bulk business, did One Rail actually deliver to its budget expectation?

George, do you want to answer that?

Sure. Yes, we always expected a stronger second half than a first half, Ian. And you'd remember at the guidance, we said we're assuming $100 million for Bulk Central. We're still broadly assuming that for the full FY '24. The driver of first half to second half is those couple of new contracts that Andrew spoke of and Anna reiterated before.

Okay. And then if we look at that and we sort of think about One Rail taken out, the new contracts, which you've got look all great, but what is the drag caused by loss of our Coal volume and also known as the Pilbara rail maintenance contract? And will we see commentary that that's a hand brake to earnings growth in subsequent periods?

Anna, do you want to give some color on that? And, Ian, when you refer to One Rail, I think about a business prior to Bulk Central that we didn't own. So it helps if you...

Sorry.

Just to get the right response out of us, if you refer to it as the business we're running...

Bulk Central. Sorry.

And then -- yes, then it doesn't confuse us. But Anna, do you want to talk about...

Yes.

Handbrakes. That's what he had asked, so.

Yes, I have a very different mental image when you talk about hand brakes, Andrew. But sorry, Ian, again, just kind of reinforcing when we look at the Bulk, contract bulk, we look at the whole, and then we manage down to the individual contracts. So the -- just to reiterate sort of George's earlier point, first half, yes, has been somewhat down on expectations, but second half, we do see the strength coming through. The impact of the changes in the West, the Alcoa, Kwinana refinery closure, really that particular outcome immaterial in the broader Bulk results. And the reason being there's 10 hauls in that contract. So with the changes at Kwinana, we're seeing increased demand for inputs into the Wagerup and Pinjarra refineries. So you'll just see that sort of wash through the operations as we run them. The decision not to extend in the ballast cleaning contract just really does allow us to continue to focus our people and our efforts on areas for strong returns in terms of growth strategies. So whilst there is some impact in the plan, we manage the forecast around bringing in additional opportunities to fill that gap in the second half.

Okay. And can you maybe explain Lynas, your trucking? I thought you guys didn't want to actually get into too much trucking and just what the thought process behind that is.

Yes, absolutely. So we're not opposed to the idea of trucks, Ian. It just -- we're often -- we find ourselves leaning in to support customers where they're looking to connect discrete aspects of their supply chain. So the Lynas example is actually about ensuring that we're connecting activities in and around their operations, our depots and the rail haulage that we do for them.

Okay. And then one final question on the land bridging. Can you maybe go through what actually has changed in the development since July. We're now, what now, 8 months on and like, what initiatives have occurred since then to make this still look like a good opportunity?

Good question. And I'm just going to get George to talk a bit about East Coast grain, I think just from a drag point of view, because I think Anna missed that.

Sure. Again -- so this probably goes back to your question earlier, Ian. So Bulk, Central and WA delivering broadly to our expectations at the start of the year, where the weakness is, particularly in the first half, is Bulk East. It's grain, it's 1 or 2 customers in Queensland. If you back those out, then we'd be on expectations for first half, noting we're expecting a stronger second half in Bulk Central. And in WA, those small things that you mentioned around alumina and also ballast cleaning offset by mineral resources volumes up. So that's a broad way to think about the Bulk portfolio in first half, second half.

Thanks for that, George. Gareth, do you want to talk about what work you've done since July?

Yes. Thanks, Andrew. So in terms of progress since Investor Day, you'll recall those mobile harbor cranes that we spoke about. They are now -- have been commissioned and are ready for operations. And you remember as well, when we talked to the land bridge opportunity, the focus really was around ensuring we get the ramp in place. So, referring back to my answer earlier, delighted at where we are in terms of having those services in place. And as we get through ramp, we'll certainly be looking to prosecute further those land bridging opportunities. Since then as well, we've had a number of very, very constructive discussions with a number of counterparties. And as I say, once we have our final services in place, we look to progress those discussions further. Thanks, Ian.

So how long does it take for ramp, to complete your ramp-up?

So we complete -- yes, final services come on stream in April, Ian.

And how long do you give to smooth things over before you go and start committing more volume into the service?

That will be dependent on the conversations we're having with various counterparties. As you can imagine, any investment would need to be considered in the light of what revenue we think we're going to generate through that activity.

Your next question comes from Cameron McDonald from E&P.

Just following on from the Bulk sort of comments earlier, and -- sorry, actually going to containerized freight, sorry, not Bulk. With the numbers that you've given so far and the utilization, can we just get some sort of further clarity around what's happening with the market share shifts? And obviously, there's been press reports that Linfox has transferred some of the containers away back to one of your competitors but you've then picked up some spot volumes. How do we reconcile the picking up of those spot volumes? And what are you offering to pick those services up given that you still haven't got the full suite of services up and running at this stage and then other than sort of discounting to get that additional volume?

Gareth, do you want to give some color to that?

Yes. Hi, Cameron. So, I mean, the first thing I think to point out is now the containerized freight market is quite different and distinct, say, from Coal. So it tends to be more dynamic. Contracts tend to be shorter and therefore, given the number of counterparties, you will see a degree of wins and losses, that's a natural feature of that market. As we are ramping up, as we're standing up those additional services, we continue to have very, very productive discussions with our current customers about expansion of volumes that they may be able to deploy across our services, as well as prospective new partners and customers going forward, Cameron. So it's a very dynamic environment.

Yes. But you've called out weakness in that market. And so my question is, what are you actually offering other than a discounted price to actually get those spot contracts?

I'd say our offering to the market or our engagement with the market is not solely around the conversation around price, Cameron. It's very much about how we partner with customers, and how we engage with customers as we're building and designing our services to meet and respond to what customers require and that, I think, is quite unique in the marketplace.

Okay. And then the comments around the outlook for weakness in that freight market. What are your customers telling you in terms of the outlook?

Listen, without a doubt, there has been some softness near term. But when you look at the containerized freight market longer term, it's a market that grows year-on-year around 2.5%, which, by our estimates, is probably something in the order of around 25,000 TEU per annum. So the market over the long term, and remembering that cornerstone customer contract is a 11-year contract when you look at it from a long-term perspective, Cameron, it is very positive.

Yes, I get that. But you've called out weakness in the next 6 months. So what -- do we anticipate that getting worse or better than the last 6 months, given the feedback that your customers are giving you, and then obviously that feeding into your planning processes?

Certainly, my outlook is still that I'm holding to the original business plan that Andrew referenced earlier. So I don't see any further degrading in the market. And certainly, in the conversations that we've had with our customers, that holds as well. Remember, this is a market that's around 1 million TEU on freight, on rail. So it's a sizable market.

Okay. Great. And then, Andrew, just in terms of the comments around increased shareholder returns. How are you going to sort of prioritize increased distribution back up to sort of 100% payout range from the current [ 75% ] versus other forms of capital management? I'm thinking sort of buybacks, particularly given the outlook for the cash tax payments at sort of 25% and the impact that has on franking.

Yes. So I thought I was brave enough talking, pointing to flexibility to do this, Cameron. So at this moment in time, I'm comfortable to talk about the flexibility. I'm comfortable to say that where the business has come in recent times, that it's going to support that. That's all in the context of the Board has to -- has the final say, of course. And I'm not going to do anything to actually bind them, but remain open to the detail of how we actually work that through. And I -- as in previous years where changes have been made, I am going to get flooded with suggestions from shareholders about how to best work my way through that. But it is too early to actually get into any -- very specific detail.

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

Andrew, I'm very glad you started to talk about that because that was my first question. Right at the start of George's prepared comment, he made a comment about, in fiscal '25, a lot of the financial flexibility returns. So I guess I just wanted to confirm with you, does that mean you've been very open of the reasons why you've gone to the bottom end of your dividend payout range, and the drivers behind that? And I just want to confirm the most up-to-date thinking in terms of those circumstances do reverse out in fiscal '25. Is that still correct?

Yes. Look, what I might do is just to be very clear, is to get George to just give everyone a little bit of a history. And I know you guys know it, but to remind the group about the history lesson on dividends and buybacks, George, and debt.

Yes. Sure, Andrew. I mean, this management team and our Board has a history of paying out if you go back 6 or 7 years and look at the history of paying out at the top end of our range of 70% to 100% and doing capital management in the form of buybacks. What changed a couple of years ago was we saw the opportunity to do One Rail, we made that acquisition and then we took on the task of divesting East Coast Rail, which we were successful in doing. We'll get though the final payment, that $125 mill of deferred consideration for East Coast Rail in the second half of FY '24. And if you look at our results for this first half, it is exactly what we said it would be, stronger earnings, stronger cash flow. We're starting to see the benefit of that in the deleveraging of the balance sheet, which, assuming that then flows through to '25, gives us the flexibility that both Andrew and I spoke about. It'll be a matter for our Board as to how they use that flexibility and as Andrew said, I'm sure we'll get feedback from investors on it. But hopefully, that answers your question, Scott, both the history and where we sit now in terms of outlook.

Yes. No, that's perfect. And then the other -- the only other bit, I guess, in there was you had some additional growth CapEx on top of One Rail that you needed to get out of the way. And again, you've been pretty clear that what that is in fiscal '24, but that comes down a lot in '25 as well, right?

Exactly right. We have been clear that we're expecting lower growth CapEx in '25. And when I say lower, I wouldn't be saying that if I expected it to be $10 million lower. It will be more than that lower, which also assists us to give the information that we have today around expectations for flexibility.

Okay. Great. And then the second question I had was around Network. And it's more around the access to the Network to put in place the other technology that you need for single-driver trains. Can you just confirm where that's up to? Maybe, Andrew, I'm not sure who you want to bring in there, but just where we're up to on that journey in terms of the putting in the enabling infrastructure, please.

Yes. So that's not something that Pam is going to cover because it's an overlay done from our operations group. I might just get Ed to give the current operating position on it.

Yes, thanks for the -- thanks, Andrew, and thanks for the question, Scott. Yes, Train Guard is the technology we refer to it. It's been successfully implemented in Blackwater, and we transition to driver-only operations on our electric fleet throughout the second quarter of '24. It's delivering budgeted business cases in Blackwater, and we're seeing already improvements in rail safety and essentially a structural reset of fixed costs as we move to driver-only on that fleet. We're pleased how it's going. Really appreciative of our people and how they've embraced the change. And the capacity that we've released has largely relieved our labor tightness in that entire region and therefore avoided recruitment and training costs. So really pleased and on track for deployment in Goonyella in the fourth quarter of this year.

Yes. But in terms of the access to the Network that you need for implementation, where's that up to?, I get you've then got an implementation in your locomotives. But just in terms of the access to Network, please?

Okay. Pam, do you want to talk about access to Network?

Yes. Thank you for the question. In summary, like with all access requests, we get various stakeholders requesting access to do various things on the Network. This would be considered as part of that to make sure we continue to run trains and allow for any changes to be made by various stakeholders. So that's how it's managed.

Yes. But where are you up to? Because I'm imagining Goonyella is done from a Network perspective, it's looking in '25 to roll it out.

Yes, yes, yes.

[indiscernible]

[indiscernible]

It's the installation of an orange rectangle [indiscernible] every kilometer along the railway track.

Yes, so that's working...

That's your specific question?

Yes, that is my specific question.

Sorry, we took a while to get there.

No, that's all right.

Yes, that's fine. It's working very much in parallel with the timing that Ed was talking about. So Goonyella is the first system, and we'll work with the project team to ensure the rest of it gets delivered.

And the work is largely done in closures. So it's not [ going to ] impact access for revenue services.

Your next question comes from Justin Barratt from CLSA.

Look George, you said that utilization rates for [Audio Gap] were in mid to high 60s across the half. I was just wondering if you're willing to share what the rates of utilization were in the half or where they're at currently and whether they will be impacted by the new Sydney-Perth service?

Justin, you're going to have to have another go at that because your phone is flicking in and out, and we only got...

Apologies.

Every second or third word.

No worries. Any comments on exit utilization [Audio Gap] freight business or where the utilization levels are at current, and whether Sydney-Perth service [Audio Gap] impact that at all?

Do you want to try, Gareth? We still didn't hear everything, Justin. But Gareth, do you want to have a go?

I think I've got -- I think I've got that. I think you're asking whether the utilization rate will be impacted by the Sydney-Perth service that starts next week. So that utilization Andrew referred to previously is our rolling average. And as we bring on new fleet and new services, volumes then transition from our cornerstone customers, existing provider on to our service. So, I expect that the utilization would stay the same, if not increase.

And Justin, if the part we missed was around the yield of the different services or the rates of the different services, generally speaking, the longer services in containerized freight achieve a better yield. So Sydney to Perth is a longer corridor, therefore, a better yield, if you like.

Yes, sure. Are you willing to share what exit utilization rates were for the half or where they are right now?

I don't think we will mainly because there's seasonal factors that go into that. I mean, you come into a peak, that's Christmas, you then come down and then you go into another peak, that's Easter. So looking at 1 month won't necessarily give you a good basis for the go forward.

Fantastic. And then quite impressed by the yield that you achieved in Coal in the first half, and I appreciate your comments around what that will happen or what will incur in the second half in Coal. But I was just wondering if you could share, or willing to share the percentage contribution from the corridor or customer mix versus the CPI contracts escalation in the first half?

Ed, do you want to share what you feel you can?

Yes, yes, absolutely. As George said in his speech, first half revenue yield was primarily driven by the corridor and customer mix that we railed acknowledging the CPI was close to 50%. So overall yield upside in the first half was very pleasing, of course. But it's worth remembering that those escalations for first half '24, based on the March and June quarter CPIs of 7% and 6%, respectively. So we're going to see they're subsequently 5.4% and 4.1%, as you'd know, for September and December. So going into the second half, you're going to see an attenuation of the CPI escalation.

Your next question comes from Rob Koh from Morgan Stanley.

May I just ask a question about network and debt hedging? I understand the QCA is proposing to move to a trailing average. Just wondering, if -- when does that come in? Does that come in in 2028 for you guys or within the current reset and if you're bothered either way by a change to hedging practice?

Thanks for the question, Rob. It's something that's still not in place and it's just a discussion we're having. So it's probably too early to comment whether that would be something that is implemented as part of UT6. So at this point, probably nothing to add.

Okay. Cool. And then I guess the second part of that question was, if that comes in, does that just mean you adjust your interest rate hedging practice, and if you're particularly bothered either way?

Yes, yes, you're correct.

Yes, okay, cool. And then just another flyer question, if I can. I just note there's a Slide 26 in the pack, which refers to the battery electrification of the fleet. That looks to me like an identical slide to the full year or the Investor Day [indiscernible] from last year. So I'm just wondering if there's any update to the battery electrification initiatives. I know that it's early days. And then in particular, if there's any Network CapEx that might be a good thing out of this, please?

Yes, I'll get George to talk about that and his role of looking after rolling stock.

Yes, Rob. So the battery electric loco trial continues at pace. So we're doing that retrofit of a diesel locomotive, replacing it with a battery pack out at Redbank. And we're expecting to be able to say more about that being operational as a prototype in the next 6 months. The battery electric tender is the next part that we're focused on. And again, we expect to be able to say more about a trial there in the near future. In terms of Network CapEx, look, we're fortunate that 2,000 kilometers of our 2,700 kilometers of Network track is already electrified. And so it's already well placed to see decarbonization. What we'd need to work through in -- with these battery electric locos and battery electric tenders is where we're going to prioritize operating them and what associated infrastructure we'll need. But that's right across Australia, not just in the CQCN. Pam, is there anything specific to Network that you wanted to cover?

Yes, I think in terms of not specific to your question, but more broadly across the Network in the Goonyella system over a few years, we will see some renewal of traction-related infrastructure, which will happen over the sort of 2 to 3 years, but that would be done regardless, it's older feeder stations that need some renewal expenditure and that will go into the [indiscernible] as you'd expect.

Your next question comes from Jakob Cakarnis from Jarden.

2 just for me on Bulk. I'll pitch the first one at Andrew and George. Just interested in the Bulk Central commentary. Obviously, the second half of '23 was a little bit behind your expectations for that business, and it seems as though you're guiding to hitting that run rate in the second half of '24. Just wondering judgments about the success of that acquisition and whether or not you're seeing synergies at the levels that you expected and how much more you need to see in the second half, just to be firm that it is performing as you guys have spoken to?

George, I know you'd be delighted to answer the synergies question.

Well, the synergies are delivering the cash flowing. We said $7 million to $10 million of synergies and they are delivering at that level. You got to remember, Jake, when we bought the business, it was doing $80 mill of EBITDA. So we're expecting in FY '24, a step-up from that. And as I said, broadly, that $100 million. What that second half step-up depends on is growth volumes, not synergies because of the synergies, as I said, are delivering. So the 2 customers that we're expecting to rail in the second half are Frances Creek Linecrest and Warrego. They're the 2 big contributors to the step-up in second half earnings, and we're working closely with those 2 customers to try and do all we can on our side to help them rail in the second half. That will how we'll measure success in the second half and then we'll have more to say around FY '24 -- '25 expectations at the full year.

And when we put the Bulk slide in the results pack, part of it reflects a slide that was done at Investor Day and talks about, 8 -- I think it's 8 opportunities in Bulk Central, and these 2 contracts being 2 of them. If you remember at the time, we said we'd be very happy from an acquisition point of view, if we delivered 3 or 4 of those 8. So to your question about whether we feel that we're on a good path, the answer is yes, we're on a good path, notwithstanding movements between halves sometimes.

Yes. I'll pitch the second one at Anna. Just in Bulk East, obviously, in the first half of '23, there were some weather impacts, maybe some similar customer impacts. Can you just size how the customer impacts may have changed? And then just give me a relativity of the grain impacts versus the weather impacts that you would have seen in the first half of '23, please?

Yes, sure. Thanks, Jakob. So I think the majority of the impacts that you're seeing in the half 1 results in FY '24 really do come down to changes, as we've said in the grain market. And the opportunity that that created for us was then to take an enterprise approach as to where those assets and people's best resided and would deliver the best returns, which you can see in Ed's results. In terms of sort of the weather-related impacts in the Bulk East business in half 1, relatively little. It was actually more customer impacts. So, whether or not customer production delays or we did have a customer who had a pretty serious incident on their site, which impacted their production over the period. So in terms of a half 1 this year versus last year comparison, I'm not sure that they're necessary like-for-like. But if I take it up a level, what it is doing is demonstrating when we look at the national business, really where we expect to be investing resources, time, and effort to get that greater shareholder return, the Bulk East businesses in both Queensland and New South Wales are an important part of the portfolio, but they will drive different decisions in terms of being able to carry the level of growth and investment that we see in the Central and West Australian business.

And just one final one for George. The working capital changes into the second half, how much of that now is the release of the take-or-pay that you've now received?

None of that is the take-or-pay, Jake, that was collected in the first half.

Yes. Sorry, that's what I'm saying. So now you've collected that. Are we back to [ BAU ] working capital?

Yes, broadly. And look, working capital is not the big driver of the stronger free cash flow in the second half. It's more the tax refund that we'll collect actually this month and also the lower tax installment rate.

Your next question comes from Nathan Lead from Morgans Financial.

2 or 3 for me, if you don't mind. So the first one, just I suppose, in terms of the increased shareholder flexibility that you referenced. I'm just interested in just timing on that. Is that something that's potentially a August this year type decision or is it actually a February next year? Just given you've obviously got these big cash flows that are going to be coming in to help out with the restoration of the credit metrics by the end of the financial year.

Nathan, I think I'll go back to -- I made a comment earlier on in answering more specific detail around the flexibility. I think at this stage, we've pointed to and described why we think the statement is supportable around having greater flexibility. Actual detail is something that I think we'll have to provide as we get closer to the day. Unless, George, do you want to be very brave.

No. I think we said FY '25, Nathan. We won't get more specific than that.

All right. Fair enough. Second question. Obviously, there's been a lot of capital that's gone into the Bulk business, and it's probably not quite hitting people's expectations in terms of the growth. Can you just, I suppose, given the new contracts coming in, the changing mix, et cetera, just give us an update on where you see EBIT margins and ROIC over the medium term?

Yes. So, I mean, the first thing I'd say, Nathan, is the assets and equipment we're putting into Bulk are 30-year assets. And so we'll measure success of those investments, not over 30 years, but I guess my point is we won't measure success over 1 or 2 years. In terms of margins, Bulk at the moment is delivering, I think it's high teens, if not 20% EBITDA margins. We're expecting between 20% and 25% EBITDA margins. They'll be stronger in Bulk Central and WA. It's more competitive market in Queensland. New South Wales, so lower there. In terms of ROIC, you can do those calculations in Bulk and it's in the mid- to high single digits. We're expecting it to get to double digits in terms of the time frame from that, for that, you're talking about 2wo to 3 years we expect.

Okay. And just the final one for me. The -- just the renewals CapEx, the sustaining CapEx, particularly in above rail and I suppose with the cascading very much so in the coal business in particular. But just wondering, I mean, it's obviously been quite a smooth number over time. Is there any sort of spikes that are going to be coming up within that sustaining CapEx profile for repowering of the fleet, et cetera?

George, do you want to talk about [ railing stuff there ]?

Yes, we've been going through a big overhaul program in coal in particular on wagons, Nathan, over the last couple of years. There's nothing in the immediate future that tells me there's going to be a spike in either coal or bulk in the fleet. I think the one that we're tracking is the one Pam mentioned where we do have some electrical infrastructure in Network, which in the next couple of years, there'll need to be decisions made around renewals.

That's within Networks that would get rolled into the RAB?

Yes.

Yes. So there's no major sort of loco overhauls required?

No, nothing that would see a big spike in the next couple of years.

So, Nathan, we're always overhauling locomotives and wagons, and we do a lot of them every year. The aim has been over the last -- or probably the -- what, I'm now 7 years in, over the first few years it was to actually establish a more smooth pattern to that sort of arrangement and more predictability. And we've achieved that for some time.

And that's been able to like push out expected life or end of life?

So it's not as simple as that. So there's -- we've introduced the concept of component change-out so that we actually move away from large-scale locomotive overhauls and actually smooth that as well as we go on. So there's no -- there is component life extension that we do using some of our quite sophisticated reliability and maintenance software that we have courtesy of Ox Mountain to generate value. But in the context of your question, is it -- is it pushing some sort of wave in front of us. No, that's not -- that's never been the intention and as we look forward in our planning processes, there's nothing that says that's the case.

Okay. Great. And then just the final one for me, just more of a modeling one. Just, George, you referenced the tax installments coming through. Could you just give us a bit of a line on what that's going to look like?

I won't give you a percentage, Nathan, but we'll come back to you on what we can give you.

Okay. It'd be great.

Thank you. There are no further questions at this time. I'll now hand back to Mr. Harding for closing remarks.

Thank you. As seen in today's results, Aurizon is in a strong and resilient business and will continue to build upon our position as Australia's largest rail operator, with an operational footprint covering Mainland Australia, the largest fleet of locomotives and wagons, and over 5,000 kilometers of infrastructure. I look forward to delivering for investors both in 2024 and against our long-term aspirations. Thank you.