Aurizon Holdings Limited (AZJ) Earnings Call Transcript & Summary

Good morning, and welcome to Aurizon's FY 2026 Results Presentation. Aurizon delivered strong execution across the business with earnings per share increasing by 29%. Underlying EBITDA was above the midpoint of guidance, supporting full year dividends of $0.23 per share alongside the completion of the $250 million our on-market buyback. I'll focus on 3 themes today: strong financial performance, positive contributions from network, coal and bulk, together with a clear pathway for containerized freight to achieve EBITDA breakeven in FY 2027 and progress on our strategic priorities, including UT5+, coal recontracting, bulk growth and expansion into vehicle logistics. 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 Group Executive Team, including Ian Wells, who commenced as CFO in April. Turning now to safety. Our focus at Aurizon is protecting our employees, customers and the communities in which we operate. While the reduction in serious injury frequencies is encouraging, the increase in total recordable injuries is not where we want performance to be. It was pleasing, however, that the second half had a much lower injury rate than the first half. I'm pleased to announce that in FY 2026, we completed our TrainGuard rollout in CQCN, deploying the technology across 2,000 kilometers of network and more than 100 electric locomotives. As a result, 1/3 of our national coal fleet now operates with supervisory braking protection, helping prevent signals passed at danger and uncontrolled train movements. Level crossings continue to be a safety issue for the rail industry, and we've updated our community engagement program, reframing the importance of waiting at a level crossing as an active responsibility for the people that matter most. Billboards have been rolled out at target locations and used across social media. Our focus continues to be on improving safety performance through stronger frontline safety disciplines, enhanced intervention activity and continuing targeted engagement with employees, contractors and community. Before discussing the year in detail, I want to summarize why Aurizon remains a compelling long-term infrastructure investment. We own and operate strategically significant rail assets, including approximately 5,000 kilometers of rail infrastructure and have Australia's largest rail fleet. These assets connect key commodity basins and exhibit the characteristics of what has been described as [ halo ] assets, heavy assets with low obsolescence risk and high barriers to replication. We're also drawing volume away from road as demonstrated in our bulk and containerized freight business units. Our earnings are supported by contractual and regulatory frameworks. Our haulage contracts generally include indexation mechanisms and fuel and energy cost pass-throughs, supporting resilience through inflationary cycles. Together, these attributes provide investors with exposure to high-quality infrastructure assets, resilient cash flows, a diversified commodity portfolio and disciplined capital returns. Finally, our capital allocation framework has delivered more than $1.8 billion to shareholders over the past 4 years through dividends and buybacks. Turning now to the full year results. FY 2026 was a strong financial result with underlying EBITDA up 9%. NPAT up 24% and importantly, earnings per share increased by 29%. Underlying free cash flow was up 11%, and the Board has declared a final dividend of $0.105 per share franked at 90%. This once again represents a 90% payout ratio of underlying NPAT. At $0.23 per share, full year dividends are up almost 50% compared to last year. A reminder that we also completed the $250 million on-market buyback at an average price of $3.72. This is a strong result for shareholders, high earnings, strong cash generation, a materially higher dividend and additional returns through our completed capital management program. Turning now to the business units. Network underlying EBITDA increased 8%, driven by higher regulatory revenue, partly offset by increased operating costs. Importantly, UT5+ was submitted to the QCA in December 2025, and the QCA draft decision supports material components of the proposal. Coal underlying EBITDA increased 2% with revenue yield and disciplined cost management driving this result. Since July 2025, over 60 million tonnes of annual volume has been recontracted. This includes today's announcement that major Central Queensland customers, BMA and Whitehaven have been recontracted in a competitive market. Bulk delivered a very strong result with underlying EBITDA up 38%, driven by customer growth and the nonrecurrence of doubtful debt provisions from prior year. The successful start of the BHP South Australia logistics contract during the year is a good proof point for our bulk strategy. Containerized freight continued to build momentum with national interstate TEUs up 25% against the prior year, including a significant uplift in non-foundation customer TEUs. We have reached an important inflection point with EBITDA breakeven expected in FY 2027, driven by continued customer growth. Importantly, we've made our entry into vehicle logistics with major new contracts as part of our land bridging strategy, which I will cover shortly. Turning to network. In December 2025, we submitted UT5+, a proposed 10-year access undertaking to the Queensland Competition Authority. The proposal was lodged with customer support approximately 18 months before its scheduled commencement, providing potential for greater long-term regulatory certainty in the network business. In June, the QCA published its draft decision. In material respects, it supported key elements of the proposal, including the WACC methodology, accelerated depreciation profile and the throughput payment. The draft decision also establishes a pathway towards final approval with submissions currently invited. The slide shows regulatory revenue under UT5+ increasing by almost $200 million in the fifth year of the undertaking. These figures are based on our December submission, which included a placeholder WACC of 7.79%. This indicative figure is now approximately 8.3%, but the final WACC will be determined using prevailing market parameters in 2027. As a rule of thumb, a 25 basis point increase in the risk-free rate would increase network revenue by approximately $15 million per annum. The undertaking is subject to QCA's usual process, and we expect to see process progress through the calendar year. Turning to the coal contract book. It has been a significant year for coal recontracting with more than 1/4 of the portfolio recontracted since July 2025 and with these contracts now expiring in the mid to late 2030s. This includes major Central Queensland customers, BMA and Whitehaven. The BMA contract represents 100% of the tonnes tendered for recontracting and services their 5 coking coal mines in the Bowen Basin. The contract is effective from 1 July 2028 for a period of up to 12 years. The Whitehaven Coal contract is a new 10-year contract for the haulage of coal from the Central Queensland mines of Blackwater and Daunia. Aurizon will continue to be the exclusive rail provider for Whitehaven's Central Queensland coal portfolio. The contract began on 1 July 2026. Although the 60 million tonnes of recontracting has been undertaken in a competitive environment, we have not seen a material change in the haulage rates. As shown on this chart, and when looking out to FY 2028, the task is not yet complete and recontracting discussions are taking place with around 10 counterparties at the moment. Before turning to vehicle logistics, I want to provide some context on coal markets. The relevant consideration for Aurizon is not simply the outlook for total global coal consumption, but the outlook for seaborne traded markets and Australia's position within them. The key point is that demand for Australian coal is not simply a function of global coal consumption. It is more specifically linked to seaborne traded markets, which are increasingly concentrated in Asia. For steel producing coking coal, India is expected to be the largest driver of seaborne coking coal demand over the coming decades. India has a deficiency of high-quality domestic coking coal and sources over 90% of supply from the seaborne market. India is already the largest destination for Australian coking coal exports, accounting for more than 1/4 of export volumes. For thermal coal, global import volumes are around record levels at about -- at over 1.2 billion tonnes per annum. The share of Asian demand has increased from 35% of the import market to almost 90% last year. When we look at the average age of coal-fired electricity assets in Asia, it is just 15 years compared with an expected retirement age of 40 years, over 99% of Australian thermal coal is destined for Asia. As demonstrated on this slide, the demand for Australian coal remains strong, but there is no doubt opportunity is being lost to competing supply nations like Russia and Indonesia. Despite significant reserves of premium coking coal and thermal coal, Australian supply is not keeping up with demand, which is flowing through to diminished export volume and in turn, our above rail contract book. There are a number of factors contributing to this, including Queensland's coal royalty regime. Finally, I want to turn to Vehicle Logistics, which is an important development for containerized freight and land bridging. Following our earlier engagement with major vehicle logistics providers, Aurizon has customer contracts to transport vehicles using our containerized freight network and the land bridge through the Port of Darwin. The first is a long-term partnership with CEVA, operator of the largest national vehicle logistics network. Aurizon will transport vehicles by rail for the domestic market, which is a significant road to rail conversion. Initially, vehicles will be carried on existing containerized freight services in CEVA owned and Aurizon-owned car containers. The service is expected to transition to purpose-built auto wagons following their delivery in mid-FY 2028. The contract commenced in June and also includes general freight contributing additional volume in FY 2027. The second contract provides for the initial movement of 7,000 imported vehicles per annum from the Port of Darwin for logistics partner, NYK. While this initial volume is subscale as it involves only partial vessel discharges in Darwin, the longer-term objective is to move to larger scale volumes through full vessel discharges. This has the potential to reduce port calls and improve fleet utilization for our logistics partner. A reminder that a total of 1.25 million cars are imported into Australia each year. The Aurizon auto wagons under construction are fully enclosed with a ventilated sidewall design to protect vehicles during long-haul moves. They are double stacked and engineered to the exterior dimensions required to fit under bridges and access Melbourne and Sydney directly and the only rolling stock in the country able to do this. The initial order has been made with associated CapEx of around $100 million through to FY 2028, including around $20 million outlaid in FY 2026. Returns are expected to be in line with previously outlined IRR targets of low double digits. This is another example of using Aurizon's strategically significant assets to drive growth for the business, supported by customer contracts. Importantly, vehicles will be transported using Aurizon's existing containerized freight services, including the Tarcoola to Darwin rail line, driving asset utilization. On that, I will hand over to Ian to present the financial results in more detail.

Well, thanks, Andrew. It's great to be joining you today for the first time as CFO and Group Executive Strategy of Aurizon. Since joining the company, I've taken the opportunity to visit some of our strategically significant infrastructure and meet with employees. And I've got to tell you, I'm impressed with what I saw. I'm excited for the opportunities ahead for the company, and I acknowledge the quality of employees delivering against our strategic objectives. And it's a privilege to be presenting today's results on behalf of the team, and it's a strong financial performance. To start, we've delivered against all major metrics, EBITDA of $1.7 billion, $718 million of combined sustaining and growth capital as well as FY '26 total declared dividends of $0.23, all within guidance. A couple of headlines. Group revenue of $4.2 billion increased by 6%. That was driven by higher regulatory revenue and network, bulk customer growth as well as the above rail coal business performing consistent with 2025 levels. Underlying EBITDA increased by $148 million or 9%. And importantly, we delivered a significant increase in shareholder returns. In the face of elevated fuel prices and inflationary pressures, combined with customer growth in bulk and containerized freight, total operating costs increased by 4% compared with the prior year, reflecting the focus on cost discipline and targeted savings program implemented from the start of the year. We had an expected -- we had expected an under recovery of fuel costs of approximately $10 million. But by year-end, we had fully recovered these costs at a consolidated group level. Depreciation and amortization was steady year-on-year. Net finance costs increased by 3%, and there was no change in the effective tax rate. That delivered an underlying net profit after tax, which increased by 24% to $433 million. At a statutory level, EBITDA was $1.62 billion, that's $101 million lower than underlying EBITDA and statutory net profit after tax was $71 million, lower at $362 million. So important context for our results are the key items in the underlying earnings reconciliation, which includes the recognition of network revenue, that's a timing difference and the exclusion of 2 expense items. As Aurizon indicated to the market in August 2025, we disclosed the intention to align network revenue recognition with the cost of operating and maintaining the Central Queensland Coal Network. The disclosure advised that from FY '26, the full regulatory allowable revenue, that's including the revenue cap timing component would be recognized in underlying earnings regardless of actual volumes hauled. Actual volumes were lower than the regulatory assumption this year, which has resulted in $27 million being recognized in underlying earnings. So turning to the 2 expense items. The first one is a $54 million noncash impairment, which was recognized against our New South Wales coal assets, and that's after undertaking a carrying value assessment, which included the changed New South Wales contract book, intercompany transfer of locomotives as well as operating cost changes. And just for context, this impairment represents less than 3% of the above rail coal asset base. And the second item was a $20 million expense for enterprise resource planning system upgrade and some redundancy costs associated with the cost-out program. And I'd just note a full reconciliation to statutory earnings is included in the appendix of this investor pack. So moving to the next slide, Slide 14. One of Aurizon's key strengths is the quality and consistency of our cash generation and the metrics on this slide demonstrate how that underpins sustainable shareholder returns. Return on invested capital increased by 1.4 percentage points on the prior year to 9.5%, driven by higher earnings and therefore, improving returns from our invested capital base. Importantly, it was another strong year of cash generation with underlying free cash flow, that's free cash flow before growth CapEx increasing by 11%. This year, we've also added free cash flow to equity. So that's the bottom line cash available to equity with no adjustments. Free cash flow to equity is equal to operating cash flow less total CapEx, less interest paid. Turning to dividends. The Board has declared a final dividend of $0.105 per share, 90% franked, including the interim dividend of $0.125, full year declared dividends of $0.23 represents a payout ratio of 90% of underlying net profit after tax. So you can see that free cash flow translates into higher shareholder returns with FY '26 dividends per share increasing by 46%. The successful completion of our buyback reduced shares on issue by a further 3.8% in FY '26 on top of the 4.9% reduction in FY '25. And the reduction in the shares supports growth in earnings per share, dividends per share and therefore, enhancing shareholder returns. Turning now to our operations and the network business. Network EBITDA increased by $74 million or 8% to $1.03 billion. And turning to the bridge on the right on Slide 15. Access revenue increased by $95 million, reflecting a higher allowable revenue driven by increased returns on and off capital, together with a higher maintenance cost allowance. These figures are shown net of energy costs, which are passed through to network customers. Although volumes increased by 2%, the regulatory assumption of 221 million tonnes was not reached, leading to an under-recovery and future revenue cap. The regulatory regime sets the per tonne revenue based on a forecast of 221 million tonnes when actual volumes were lower at 212.5 million tonnes. The regulatory mechanisms allow Aurizon Network to receive the under-recovery in cash in FY '28 and this under-recovery of $27 million, which I mentioned earlier, is recognized in underlying revenue in FY '26. The inclusion of this timing difference matches revenue with the cost of operating and maintaining the CQCN, providing increased transparency, consistency and predictability of the network and the consolidated Aurizon Group. Looking forward to FY '27 in terms of the broader maximum allowable revenue, we see a further uplift of around $60 million, inclusive of the FY '25 revenue cap adjustment. And we expect approximately 60% of this to flow through to increased FY '27 EBITDA due to it being an offset -- due to it being offset by an expected step-up in maintenance costs and other costs. As usual, the appendix has got a full table on the maximum allowable revenue. Just to focus for a moment on UT5, Andrew has provided important context for where we are at in the process. The UT5 regulatory reset takes effect from FY '28, and it provides an additional 10 years of certainty on the single largest contributor to the group's earnings and cash flow. Moving to Bulk, Bulk's underlying EBITDA increased to $233 million. That's an uplift of 38% year-on-year. And the result was driven by contract and customer growth, including a 6% increase in rail volumes. and the nonrecurrence of a prior year provision for doubtful debts. Bulk revenue was up 10% to $1.23 billion, driven by base metals, grain and new iron ore customers in WA, partially offset by lower iron ore volumes in South Australia and the Northern Territory. Excluding the prior year identified doubtful debt provision, operating costs increased by 11%, including costs that are not expected to flow through to FY '27. So turning your attention to the waterfall, after adjusting for the prior year provision, the increase in revenue can be seen in the first green column, and then we're showing 2 cost elements. The second element is $23 million of one-off margin impacts around fuel timing that is expected to recover in FY '27, with the balance attributable to start-up costs on a number of new contracts that commenced in FY '26. On the fuel timing, some of our bulk contracts adjust quarterly rather than monthly, so the June quarter uplift was not fully recovered within the financial year. On contract start-up costs, establishing and standing up these contracts do involve upfront investment, and that doesn't always align perfectly with revenue. So we don't expect this margin impact to reoccur in FY '27. So looking ahead, we expect bulk EBITDA to grow again in FY '27, supported by a higher contribution from the BHP South Australia copper contract, higher grain volumes and the reversal of the fuel timing impact. These benefits are expected to be partially offset by lower iron ore volumes in South Australia. Regarding containerized freight, whilst it's not reported as a separate business unit, I'd like to call out some performance indicators for the year. Andrew mentioned that National Interstate 20-foot equivalent units or TEUs were 25% higher than the corresponding period. That's representing growth from both existing and new customers. And transport revenue, as shown in the segment note, increased by 32% to $150 million. As a result, containerized freight monthly EBITDA run rate has improved over the course of FY '26, though not yet at a breakeven level. So 2 things change from here for containerized freight. Operationally, we expect continued growth from existing customers, increased utilization and the SCT logistics agreement is now operational. And we've successfully mitigated the third-party rail network outages in Southeast Queensland that constrained us this year. So on that basis, containerized freight is expected to reach breakeven in FY '27. Now turning to coal. Coal EBITDA increased by $13 million, which is consistent with consistent year-on-year demand reflected in haul volumes remaining at 192 million tonnes. The moving parts on tonnes haul showed higher volumes in the Blackwater, Southeast Queensland and Goonyella corridors, and they were offset by lower railings in the weather-impacted New South Wales, Newlands and Moura. Operating costs, that's operating costs, excluding access and fuel were flat. And importantly, controllable unit costs, which are operating costs, excluding access and fuel, reduced by 1% on a net tonne per kilometer basis, reflecting the cost discipline across the business unit and matching operating costs with volumes hauled. At the start of the year, we had expected yield to be negatively impacted by customer mix, and that is exactly what happened. The cost escalation protection within our haulage contracts is reflected in a $10 million year-on-year benefit of access, including $7 million of fuel cost recovery benefit, noting on a group basis, there was no impact because coal offset bulk. Moving to an update on the contract book as we move into FY '27. As noted on Slide 18, FY '27 contracted volume stands at 211 million tonnes, which is a 20 million tonne reduction when compared with the prior year. Half of this volume is the nonrenewal of a major Hunter Valley contract announced this time last year, and the majority of the difference relates to customers rightsizing their contracted volumes to match against respective production plans. In FY '27, we expect rail volumes to remain at a similar level to FY '26, which against a lower contract volume, we'll see contract utilization lifting from around 83% to over 90%. Whilst there's a cost to rising hauling capacity to match contracted volumes, the direct operating cost is relatively low and the fixed revenue coming out, therefore, carries a higher margin. The impact is that coal earnings reduce even though the haulage task doesn't change. So in response and to mitigate the earnings impact, we have a 3-year coal transformation program targeting $30 million in annualized savings. And the program includes deployment and rolling stock optimization, overhead reduction and consideration of TrainGuard or single driver-only services across the diesel fleet in Queensland. At the same time, we remain focused on the contract pipeline to maximize renewals, improve asset utilization and repricing approach, progress cost-to-serve initiatives and further redeployment of New South Wales capacity. Our focus is on the areas within our control, including disciplined management of controllable unit costs and aligning our cost base with contracted volumes. Finally, tighter contract utilization does come with greater opportunity for surge in spot volumes, where customers are seeking to push more volume into the market and maybe hitting the contractual volume ceiling. In closing on operations, the FY '26 results and future outlook highlights Aurizon's portfolio with the network and coal businesses underwriting shareholder returns while continuing to support investment in growth. So I'll just switch gears now and move to the balance sheet, gearing and capital allocation. Having reviewed our funding and balance sheet, one of the things that stood out to me is both the diversity of Aurizon's funding sources and the strong support we received from globally diversified lenders and debt investors. This reflects the quality of our asset base and resultant investment-grade credit profile. And our funding strategy remains the same. At a group level, available liquidity comprising cash and undrawn facilities at 30 June was $1.1 billion. Net debt of $5.2 billion is unchanged. Interest costs are hedged to 95% and group gearing, that's the book value of net debt over net debt plus equity is 57%. Importantly, a key component of our capital allocation framework is our commitment to maintain strong investment-grade credit ratings. Aurizon Operations and Aurizon Networks credit ratings are both BBB+ from S&P and the equivalent Baa1 from Moody's, and this commitment is supported by group net debt to EBITDA of 3x. Turning to capital allocation. Slide 20. Strong free cash flow generation, combined with lower capital expenditures continued to support higher shareholder returns through both dividends and share buybacks during the year. This has been reflected in total shareholder returns for FY '26, which was 45%, including reinvested dividends. Having spent time understanding the business, another observation is Aurizon's capital allocation framework strikes a good balance between maintaining a BBB+ credit rating, funding reinvestment capital back into the business, returning capital to shareholders, while also allowing the flexibility to invest in growth options. The overriding objective, of course, is to optimize each individual part of the framework to maximize returns to shareholders. And I'd like to make one point on durability. 90% of underlying NPAT payout is supported not by a single year of low capital expenditure, but by the structural improvement in free cash flow that follows the completion of our elevated investment phase. As capital expenditure normalizes to the levels I'll come to shortly, we expect dividends to remain in the upper end of the policy to target 90% -- 70% to 100% of underlying NPAT. We also remain disciplined in our approach to capital expenditure. As shown in the chart, over the past 4 years, we've moved through a period of elevated investment and now seeing the benefits with lower capital expenditure and the growth in earnings from those investments contributing to cash flow generation. As a result, the proportion to shareholders has increased in FY '25 and '26, noting that share buybacks were funded principally with debt, not operating cash flow. Looking ahead, we believe the framework continues to position us well to optimize shareholder returns, reinvestment and growth CapEx as well as maintain balance sheet strength. Based on the dividend guidance that Andrew will speak to shortly, we expect similar proportions allocated to shareholder returns in FY '27. So in closing, Aurizon has a privileged position to operate critical national infrastructure and deliver returns to our shareholders and other stakeholders across Australia. Aurizon has a disciplined capital allocation framework and cash generation that is both consistent and predictable. That combination is what converts the quality of this asset base into returns for shareholders, and that is what we will be focused on protecting and improving. We'll continue to focus on the things that we can control, which includes safety, volumes and costs to deliver long-term shareholder returns. Thank you, and I'll now hand back to Andrew.

Thanks, Ian. FY 2027 group underlying EBITDA is expected to be between $1.725 billion and $1.775 billion, with full year dividends of $0.23 per share to $0.24 per share. Non-growth CapEx is expected to be between $590 million and $660 million, including $25 million of transformation capital. Growth CapEx is expected to be between $70 million and $120 million. Network earnings are expected to be higher than FY 2026, reflecting increased regulatory revenue, including the final recognition in underlying earnings of prior year revenue cap adjustments, partly offset by higher direct costs. Coal earnings are expected to be lower than FY 2026, reflecting reduced contracted volumes and yield with haul volumes expected to be broadly flat. Bulk earnings are expected to be higher than FY 2026, driven by full year contributions from new customer growth and nonrecurrence of one-off costs, offset by reduced iron ore volumes in South Australia. Other earnings are expected to be higher than FY 2026 with containerized freight expected to break even on an EBITDA basis. As usual, guidance assumes no significant disruptions to supply chains or customers, including major derailments, extremely prolonged wet weather or inability to access fuel. Overall, the FY 2027 outlook reflects stronger network earnings, continued bulk growth, improvement in containerized freight and a reset in coal as contracted volumes become more closely aligned with customer production plans. To conclude, FY 2026 was a strong year for Aurizon. We delivered earnings growth, strong cash flow, a higher dividend and completion of the $250 million buyback. Bulk continued to demonstrate our strategy in delivering new customer contracts and earnings growth. We secured over 1/4 of the coal contract book. We progressed UT5+ with the QCA draft decision supporting the material components of the proposed undertaking and providing a pathway to final approval. The progress against our strategic aims can be seen on this slide, with Aurizon's resilient network and coal businesses continuing to support growth in bulk and containerized freight, while at the same time, supporting shareholder returns. Thank you, and I will hand over to the operator for questions.

[Operator Instructions] Your first question today comes from Anthony Moulder from Jefferies.

A few questions, if I can, on coal. The BMA contract, if I start with that 65 million tonnes is what I remember, it signed that previously. It's now down to 37 million tonnes. I appreciate that includes the sale of Blackwater and Daunia. But should there also be some lower nominations that you're making for that reduction from 65 million less those contracts -- 2 of those sale of the mines down to 37 million tonnes, please?

Anthony, I'll get Ed to give you some background on the BMA contract.

Thanks, Andrew, and thanks for the question, Anthony. The way -- if you -- the way you think about BMA, the 65 million tonnes is with their current nomination. I won't get into the specifics of their actual nominations. But if you add back in, as you rightly say, the volume associated with the divestment of Blackwater and Daunia to Whitehaven, but also the previous divestment of BMC, that's how you'll get back to the 65 million tonne portfolio.

Right. Okay. So no change -- importantly, no nomination changes from BMA on the mines that's still got.

That's commercially sensitive for BMA. And so I won't get into that. Suffice to say, nominations can go up or down, and that's with the -- with our portfolio of contracts, which is what our customers see.

Secondly, if I can, on coal, that resigning, you've resigned 60 million tonnes of coal contracts in the last 12 months. Can you comment then on the competitive intensity that you're seeing and the yield pressures that you're seeing it more broadly across that recontracting phase, please?

Thanks again, Anthony. I can't get into the specifics of the contracts, of course, and the negotiations. But we've not seen -- as Andrew said in his speech, we've not seen material change in freight rates or deterioration during recent contracting since July '25. It remains a competitive market. Every renewal has its trade-offs around price flexibility, risk sharing and performance. However, as I said, across the portfolio, we're not seeing a material change in rate per tonne and flowing through to FY '27.

Right. But some of these contracts are obviously signed for beyond 2027. So that's still potentially ahead. Is that fair to think?

Yes, that's fair.

If I can just ask quickly on the breakeven that you're expecting through containerized freight. It sounds like it's not currently breakeven, but expected to get to that point -- throughout the -- throughout FY '27. So will it exit FY '27 breakeven? Or will it report a breakeven result through -- throughout FY '27 on average, please?

I might get George to talk about that, Anthony.

Anthony, we're expecting over the full FY '27 for it to be breakeven at an EBITDA level. Maybe just to give you a bit of a sense on the 3 things we need to deliver that. The first one is volumes. So we grew volumes by 25% in FY '26. We need to grow volumes again by 25% in FY '27 to hit that. We're expecting half of that growth to come from new contracted volumes, including CEVA, where we're moving cars in containers and also general freight and then the other half to come from noncontracted customers. So we're expecting to see that growth come through. The second lever is on the cost side. I've talked before about our new terminal in Perth, Kewdale. Maybe remind everyone, we currently operate at Forrestfield, which is 300-meter tracks. We'll be moving to Kewdale in September when it will become operational, and we'll be able to bring in to 1,800-meter trains. So that will reduce shunting time, reduce train crew costs. So that gives you a sense of some of the cost efficiencies that help support that earnings shift from FY '26 to '27.

Your next question comes from Andre Fromyhr from UBS.

Maybe if I could pick up on that question around containerized freight. I guess if I look broadly at the other segment that includes it, we're seeing minus $3 million EBITDA move year-to-year. But I think if you take out the legal settlement benefits from last year, it would have been more like plus $17 million. So I'm just curious to understand how much of that plus $17 million would have come from movements in corporate costs versus the movements in containerized freight itself. And I guess whether or not what's required, as George laid out to get to breakeven in FY '27 is as big a step as what we saw as an improvement in '26?

Ian, I might get you to try and help Andre with that.

Yes. So when you unpack it, Andre, the costs include -- so you've quite rightly identified the legal settlement in other income. And then when you unpack the cost is corporate costs or unallocated corporate costs in there. And so that will give you a better idea of what the EBITDA contribution from CF was, which for the year was obviously a loss, which we've called out an EBITDA loss.

I guess I'm just talking about the scale of improvement. If it improved by $10 million to $15 million, is that the same order of magnitude that you've got to improve by in FY '27 as well?

George, do you want to see if you can help?

Yes, sure, Andre. No, it needs to be a bigger improvement from an earnings perspective in '27 compared to what we saw in '26. A few things I'd call out that are behind that. The first one is we only started moving the CEVA volumes in April to contracted in June. So we'll get the full benefit in FY '27 of that. Secondly, we'll get Kewdale online in September, which will drive the cost benefit. And then the other thing I'd say is in the second half of FY '26 in containerized freight, we had multiple weeks of track outages, which we're not assuming to repeat, and that's consistent with how we provide our guidance to the market.

Sure. No, that's perfect. And then maybe one for Ian, just to pick up on the comments he was making earlier in the prepared remarks about the capital intensity. I guess if we look at the above rail coal maintenance CapEx to D&A, I know this is a topic we've spoken about before, but it fell again year-on-year to only 39% for FY '26. So I guess I'm curious to understand how much of that is a factor of where you are in the cycle and reflecting the investments that you've made in terms of asset productivity, but also a more broad question about what's a more normal rate going forward? And is that a combination of CapEx coming up and D&A coming down because you're now a less capital-intensive business? Or just how we should think about that?

Yes. Okay. Well, there's a few moving parts. So firstly, I'd say with respect to coal, it is part of the cycle. And that's point number one. And point number two, if you separate sustaining capital from growth, which I think that what you're looking at is that we are investing at less than depreciation, which as a major infrastructure company, that's what you would expect. However, we will go through peaks and troughs. A big part of coal, for example, is the refurbishment programs, which you do over time. So this is all scheduled and known and taken into consideration of all of our operating and capital cost planning.

Your next question comes from Matt Ryan from Barrenjoey.

I just had a question on the contracted coal volume expectations for the next 12 months. And I guess, specifically around those customers that have rightsized their coal contract nominations. So I guess I'm trying to sort of interpret what's happening here. I'm just interested in your thoughts on whether this is being driven by the expectations for haulage being lower or whether it's perhaps driven by some sort of cost-saving initiative and the expectation is maybe that they potentially will haul but won't have the certainty of volumes they can potentially move into the spot market, for example. So interested in your thoughts on what's happening there.

So that's a great question, Matt. Look, when I -- I'll start at the top, actually, if you look at demand for the coal in the markets of Australia supplies to, it's quite strong. And you can see Australia is actually losing market share in countries like India, and we're losing it to Russia, et cetera. And if you step back and say, well, if that's happening, what there's probably a challenge with supply. And if you look in both states, there's different reasons for why supply is not keeping up with demand. And then if you look at the just by way of an example, and I mentioned it very briefly in my speech, if you look at the Queensland coal royalty situation, then you've clearly got a lot of angst being expressed by our customers publicly quite strongly. So you've really got a policy setting and supply side settings driving Australian supply into a high demand market. So if I think of having managed a lot of mines in the past, if I think about my reaction to those sort of situation and if I put myself in Queensland, particularly, I'm taking a view that actually royalty -- the royalty situation is not conducive to investment, then -- and I add in the second thing, which is cost pressures, which the customers are clearly under and have talked about regularly in public communications, you'd be reacting to that. So to your very point, one of the ways that you can actually manage your cost exposure, if you take a view that from a contracting point of view, you might risk reducing the volumes that you contract closer to your actual mine plan, which the mine plans are updated all the time, and they reflect all the assumptions that our business will make about its near and medium-term to longer-term future. So you make that cost decision. No decision is risk-free. So one of the risks that you actually get when you actually make a decision like that is if there is world turns out to be upside from a production point of view, then you'll have to compensate for those decisions probably, for example, in the spot market and those sort of things. So that's -- hopefully, that gives you some color as to what we believe is happening. And look, I should also -- it just occurred to me that when Ed finished his answer to Anthony, I think it was, I should make it clear that there is no material change in haulage rates for the 60 million tonnes recontracted since July 2025. It just reflected that, that might have been a possibility of misconstrained what he said. And then if you think about what's seen on the contract expiry chart, which he was talking to at the time, we still have contracts to renew and that the outcome of those negotiations will, of course, impact coal earnings in future years, but you've got to get through the contract negotiation cycle to actually get to that point.

Just to be clear on those rightsized contracts within your guidance, you've effectively taken a hit for the capacity charge that you would receive going down, but you haven't assumed anything for spot volumes that would offset that at all?

So it's exactly -- if you think about what happens in the way the coal business gets its revenue, it gets it from the supply of capacity. So the capacity sits there and doesn't -- it's just available and you've got to be able to supply it on demand. And then you get a payment that's associated with how many tonnes you actually move, and that's to incentivize the moving of the volume. So when we talk about the capacity -- contracted volume going down being the driver of revenue, you can see that in that the volumes -- we're talking about the volume being flat from year-to-year. So it's actually that capacity charge that's actually being reduced. And yes, I'll stop there..

Fair enough. And then just the decision not to announce another buyback today?

So the decision-making behind buybacks from a process point of view, if you look at the way the Board has done it in the past, there's -- you can -- you make it based on your assessment of where things are at the moment in time and where you think the world will be. I mean it's a pretty generic sort of statement. If you look at Aurizon's practice, we've announced buybacks at the full year and at the half year, and there's no -- we're not necessarily trying to establish a pattern as to what time of the year that we would actually announce the buyback. So the Board will consider the matters that lead into a decision like that and make a decision at the right time.

Your next question comes from Jakob Cakarnis from Jarden Australia.

I just wanted to pick up on the other segment, if I could, please. It's probably not the first time that we've had the expectation that we get back to breakeven for that division. But notwithstanding that, there's been really strong volume growth. So I'm just trying to tie together the volume growth and the operating leverage in that business. It looks like FY '26 EBITDA for containerized freight was at or around the FY '24 level. So what gets us back to breakeven from here? I appreciate that there's some costs, but how do we get confidence that volume is the driver that George was just describing, please?

Yes. I might get George to talk through those details rather than Ian.

Jake, yes, I'll start with '26, then I'll move to '27. So there's 3 things to be aware of in '26. Yes, we had strong volume growth, 25% higher TEUs, but we had 3 things that impacted the business. The first was -- we're paying SCT to do that hook and pull arrangement. Now we have to enter into that because we couldn't get into Brisbane for a quarter of the year with the Cross River Rail closures, which will continue for 3 years. So there's an extra cost to that, that we have to offset with volume. The second driver was particularly in the second half, we had about 3 weeks of track outages, which impacted us on the revenue line, but we've still got to keep paying train crew and paying for track access in other parts of the country where the track wasn't out. And the third thing to note is we stood up a new service. So we started the year running 4 Melbourne to Perth services. We're now running 5 Melbourne to Perth services, and it takes some time to utilize those. So there are 3 things in FY '26. When you look at the biggest step we've got to take now from an earnings perspective in '27, you've got the contracted CEVA volumes, you've got cost efficiencies and then you've got the broader market growth. Now that third one, we don't contract for volume. We don't have capacity charge in containerized freight. So it will depend on how the broader macro economy goes in Australia. But we have seen volumes in July up about 10% on the prior corresponding period. So we're getting there, but hopefully, that gives you some color.

Thanks, George. Yes. So GDP growth, is that the right way to think about volumes for that business? Obviously, July trending better than that? I'm just trying to draw the link between volume and the earnings, the balance probably being rate. Like how do we think about that with utilization?

Yes. Rate is pretty consistent. It will be volume growth. So I mentioned about 10% growth versus the prior corresponding period. We need to see about 20% to 25% volume growth to hit that breakeven earnings number. And what you tend to see in containerized freight is a strong October, November. It's called peak period leading into Christmas, and then you see another mini peak coming into Easter. So October to November are kind of our grand final quarter, put it that way.

Understood. And just one for Ed. It's been a while since we've seen the take-or-pay mix across the business generally, particularly for coal. But can you just give us a sense where that stands from a portfolio perspective, just taking into account the recontracting, please?

Yes. Thanks for the question. At a portfolio level, it's not changed materially, and we're still sitting between the 50% and 60%.

Your next question comes from Justin Barratt from CLSA.

Maybe a question for Andrew. Just sort of going back to your, I guess, holistic response to Matt's question on, I guess, coal shipments out of Australia. I guess given the context of everything that you sort of said there, it to me sort of reads like it may be difficult to get yield growth in that coal business for a couple of years or the next few years without meaningful volume growth. Is that fair to say? Or have I guess, misread, I guess, some of your comments there?

I was talking about the -- our potential for volume growth specifically when I was answering the question. I mean at the end of the day, when you're talking about any other factors that come into play, it will depend on the competitive environment that you're in at that moment in time, the decisions that the customer is trying to make and when they're trying to make those decisions. So I would -- I was making comments about volume.

Okay. Understood. And then just with the Hunter Valley contracted volumes that you lost, I guess, based on Slide 18, which is super helpful. I guess I sort of read that there was a fair bit of take-or-pay that will help increase that utilization into FY '27 with those lost volumes. And so with the BMA recontracting that you announced today, how should we think about utilization potentially into FY '28? Do we think it would step up again? Is there a reduction in take-or-pay as part of that recontracting that should drive that utilization potentially higher again into '28?

Ed, do you want to talk about recontracting?

Yes. Sure. Thanks for the question. I can't get into the specifics of the nomination in relation to any particular customer, including the cessation of that previously announced contract loss. I mean what I can say is our customers value some nomination flexibility, so ups and downs as their end user demand for their product changes. But at a macro level, as Andrew and Ian have outlined, whilst the headline contract volume number has come down by 20 million tonnes, we actually expect whole volumes to be broadly flat. So -- and that will mean that contract utilization will rise closer from 82% the low 80s to closer to 90%. So we'll move the same volume, but the revenue mix will shift toward a lower yielding usage charge.

Your next question comes from Rob Koh from Morgan Stanley.

I just wanted to make sure I understood some of your transformation and efficiency initiatives. In coal, you've called out a $30 million 3-year target. I wonder if you could give us any color on the timing of that and the cost to achieve. And is that cost to achieve included in the -- like the $25 million CapEx guidance this year for transformation. And then I guess there's also $50 million transformation project costs scheduled for this year. I wonder if you could just help me understand which buckets I should be putting those numbers in, please?

Ed, do you want to talk through the coal transformation program that you're launching?

Yes. Thanks, Andrew. And I can certainly talk to the capital for our program. So maybe just at a high level, I'll just reiterate what Ian said that we're really focused on what we can control. And so -- and we've got a track record for disciplined cost management. So starting with that, I wanted to make the point that we intend to hold costs flat again in nominal terms, which will be the third consecutive year. We're also -- I didn't want -- we should also keep in mind, we're working hard to secure the contract pipeline and maximize those volumes. So there's levers -- value levers in addition to the coal transformation program. We've already rightsized the workforce and locomotive fleet after the contract cessation in New South Wales, having retained some capacity for spot volumes, which we're trying to pick up at the moment. So in terms of the 3-year coal transformation program, which you've rightly articulated is $30 million over 3 years, we're looking at -- to give you a bit of color, we're looking at opportunities in the deployment, really the planning, scheduling and deployment of our assets. So a focus on productivity, on maintenance efficiency, on overheads and general operating model improvements. In relation to the capital, the capital is phased over the 3 years. So we have to approach it in a digestible way and some improvement initiatives follow on from others. So the first thing we're going to look at is the integration of some technology integration in our deployment center during the course of this year to enable us to make better use of -- better decisions on the day of operations and make better use of the capacity to deploy.

And Rob, you made reference to a $50 million transformation program. So there was the SSR program that was implemented and is flowing from previous year. I might.

I am not sure what the question is. Well, the only thing I can think of, Rob, is are you reflecting on the ERP technology upgrade and migration, which is.

Yes. It's on Slide 13. You said

Okay. So that is the replacement of the ERP program that occurs over a number of years and which I think we announced 12 months ago. So that in itself is not a transformation program, Rob. That's -- we have SAP. We're replacing it with a better SAP with AI tools in it and changing some of the ways that the business processes interact with the ERP program to get more efficient operations. So we'll get some benefits from that point of view. But -- it's not -- I don't want to be selling to you that the ERP upgrade is a transformation process by project by itself.

Just looking at the slide, Rob, what it is, is the second part of transformation goes back to the SSR. And so there's some redundancy costs associated with that, which we've called out, which are pretty much won't be happening going forward.

Yes. Okay. Okay. So the ERP project is $50 million and then there's a separate $25 million transformation. And then it sounded like Mr. McKeiver's efficiency gains is actually pretty small over the -- and phased over the 3 years.

You got it. That's all operational stuff that Ed was talking about.

Yes, lovely. Okay. If I can ask your shiny brand new CFO, a question about debt. Just looking at Slide 19, there's a reasonable debt tower coming up in FY '28. You've got plenty of time. Just wondering if you can give us a steer on how you're thinking about that refi? And would that -- versus what it's hedged at now, would that be -- would current market rates be higher or lower? Just any thoughts there, please.

Yes. Yes. So we'll approach that maturity concentration in advance as you would have expected in the past, and we'll look at the various markets. But I guess the big point that we've called out is that 70% of it is bank debt. We've got great relationships with our banks. So -- it's always better when it's done, but nonetheless, high confidence in relation to that. I In terms of the current interest rates, I guess, naturally, you would expect them to be higher because of a higher interest rate environment. But we are at a good credit rating. So therefore, we'll look to reduce the cost as best we can. But then I'd also note that at the same time, we are heading into UT5 territory and the regulatory reset on that and the WACC associated with the revenue that we earn on the network. So all of these things are happening at the same time. So we've got, I guess, the natural hedge associated with current refinancing as well as hedging that we'll do during that regulatory measurement period. So confident on the refi. Yes, interest costs are going up. But remember, a fundamental premise of our business is our protections, particularly under the regulatory regime.

Okay. Cool. So I mean you can probably find it in the network accounts, but is of the $1.69 billion, how much of that is network?

About 70%, I think, probably consistent with the bank that I -- you guys are confirming yes, 70%.

Yes. Okay. And that's where you've got the natural hedge in the revenue. So that's all good. All right. Maybe just a final question. If I look at your coal volumes, I think for the second year in a row, you're including a bit of grain volumes in the coal volumes. And I wonder if you could just talk a little bit about the wider exposure to agri this year and what's potentially a El Nino year, please?

George, I think that's a question for you.

Sure. Yes, Rob, we do very -- a little bit of grain in New South Wales in [ Ed's ] business. Our main grain exposure is Western Australia and South Australia. If you look at those 2 markets, Western Australia, depending on the year is about 40% of Australian grain exports, South Australia around 20%. But those 2 states are also where they get winter rain. So they tend to experience a lot less volatility than the East Coast. If you look at South Australia's grain outlook, I think there's been GIWA is a good report to look at. South Australia looks like being at average or slightly above average for this next harvest. I think WA looks like being about on average for this next harvest, which, of course, is down from the record year last year. One of the things we'll benefit though from in FY '27 is we have volume that we're still moving from the last harvest. So our July grain volumes in WA were much stronger than the corresponding period. August is looking the same. And that's why Andrew and Ian made the comments that we expect to move more grain in FY '27 than FY '26.

And the next question comes from Sam Seow from Citi.

I just wanted to ask, I guess, post rightsizing some of your contract book, that coal guide implies low 90% utilization. I just want to understand how reflective that number is across the whole book or how we should think about where those contractual volume ceilings are and maybe where the spot opportunities may exist?

Ed, do you want to see if you can help?

Yes, sure. Thanks for the question, Sam. I think you're asking me about the rightsizing and how -- and whether or not we'll think it will be stable for the outlook. If not, please let me know. I think what I'd say about the rightsizing is we've seen we see this as an isolated event for now as our customers -- some customers in Queensland have looked at that profile that Ian showed and have decided that to match their production pipeline, their production output with their rail contracts. We see the rightsizing driven, as Andrew said, by 3 factors. One is their cost focus. Two is that some mines have changed ownership and the new owners are reviewing the production plans, cost structures and other priorities that the previous -- that they inherited from the previous owners and also the broader investment environment that Andrew spoke about. So at 90%, with the trimming then -- of those contracts to more align with their production, we really will see contract utilization lift to 90%. 90% now is sustainable. And we think that the risk of future rightsizing is reduced as haul tonnes will now be within 10% of contract tonnes.

I guess on the other side, can I ask that 90%, is it particularly thin anywhere or expanded anywhere. But I just want to try to understand if you do have opportunities for spot tonnes or the market does turn, where they're probably most likely to appear?

Yes. It's difficult to say in advance, Sam. That's the nature of spot volume. It is very localized and time dependent. And so I made the comment on an earlier question around investing in the deployment center. I mean that's exactly -- exactly the type of thing we're looking at to be able to take advantage of perishable capacity in the day of operation by taking advantage of emerging spot business. So we -- as the largest coal hauler in the country, we have assets deployed delivering to 9 coal seaports. We've got 25 -- well, 50-odd load points we collect from. And there's -- and we're about 50% of the market share. So there's -- it's very dynamic, difficult to predict in advance.

And then maybe just on the impairment. Can we maybe just talk at a high level to some of the underlying assumptions? I think, obviously, it's quite small versus the asset base, but is that just the contract? Or is there anything other changes in forward assumptions that you'd like to call out?

Ian, do you want to talk through the impairment?

Sure. Quite simply, the trigger for an assessment is losing a major contract, which is what occurred. And so that -- you do a DCF, you look at your expectations for recontracting and you look at your DCF relative to the asset base. And as you say, the result is a $50 million write-off, which is noncash and it's written off against hard assets. So it's as simple as that.

Your next question comes from Tom Peyton from RBC Capital Markets.

FY '27, if I look at Slide 20, and this is just me trying to interpret a chart that is clearly a draft. When we look at buybacks and dividends in FY '27, the dotted line on the angle, am I to interpret that as FY '27, we're just seeing dividends. So that dividend figure is growing to the full amount? Or I mean how should I think about that FY '27 split between dividends and buybacks?

So think about it as the proportion of shareholder returns and that's going up to show the proportion of dividends will be higher because it doesn't reflect a buyback. We haven't done a buyback in '27, haven't announced a buyback in '27. So that's what the charts are meant to be showing.

Awesome. And just on the CapEx distribution, if I am correct, you're moving away from coal and into freight, but keeping the sort of headline CapEx figure consistent across periods. Is that a trend that we can expect to continue moving forward?

Well, I think if you think -- George went through the -- this capital program, particularly for finished vehicles. And so we've spent some money on that in '26. We're going to have some more in '27 and then the balance will be in '28. So that growth element is probably, I don't know, round numbers, maybe going to be consistent in '28, not that we're guiding '28 for the moment. But then the discussion on the existing business, that's not going to change particularly depending on the cycle that we're through and the lumpy capital is probably further out than in the medium term.

Your next question comes from Lara Tufegdzic from Bank of America.

With locomotive capacity becoming available from coal, does that provide additional flexibility to accelerate growth opportunities in bulk? How is the balance between the additional locomotive capacity that will be redeployed versus the new customer growth that Bulk is seeing? And will this additional capacity be used up straight away? Or will there potentially be some softer utilization?

Yes. Good question, Lara. I'll get George to talk through what he is doing with some of the extra capacity that has been sent his way from the coal business.

Thanks, Andrew. Thanks, Lara. It's a combination of both. Some are deployed straight away. We've seen that in the early part of FY '27. Some will be deployed over time. To give you a sense of those deployments, we've leased a couple of locomotives to SCT as part of our hook and pull arrangement. We've also deployed a handful of locomotives into our CF business, containerized freight and handed back some locomotives that we had leased as part of the start-up exercise. And then there's a few locomotives that we expect to deploy in calendar year '27 as we're seeing growth projects, particularly in the Northern Territory, some high-grade iron ore, some phosphate rock projects that are coming on there. So it's a combination of deployed straightaway and deployed over time.