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Edited Transcript of AZJ.AX earnings conference call or presentation 10-Feb-19 11:30pm GMT

Half Year 2019 Aurizon Holdings Ltd Earnings Call

Brisbane Jun 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Aurizon Holdings Ltd earnings conference call or presentation Sunday, February 10, 2019 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew T. Harding

Aurizon Holdings Limited - MD, CEO & Director

* Clay McDonald

Aurizon Holdings Limited - Group Executive of Bulk

* Ed McKeiver

Aurizon Holdings Limited - Group Executive of Coal

* Michael G. Carter

Aurizon Holdings Limited - Group Executive of Technical Services & Planning

* Michael Robert Riches

Aurizon Holdings Limited - Group Executive of Network

* Pam Bains

Aurizon Holdings Limited - CFO & Group Executive of Strategy

* Tina Thomas

Aurizon Holdings Limited - Group Executive of Corporate

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Conference Call Participants

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* Anthony Moulder

CLSA Limited, Research Division - Analyst

* Cameron McDonald

Evans & Partners Pty. Ltd., Research Division - Head of Research

* Ian Myles

Macquarie Research - Analyst

* Jakob Cakarnis

Citigroup Inc, Research Division - Associate

* Nathan Lead

Morgans Financial Limited, Research Division - Senior Analyst

* Owen Birrell

Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst

* Paul Butler

Crédit Suisse AG, Research Division - Director

* Robert Koh

Morgan Stanley, Research Division - VP

* Scott Ryall

Rimor Equity Research Pty Ltd - Principal

* Simon A. Mitchell

UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand

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Presentation

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Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [1]

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Good morning, and welcome to the interim results for financial year 2019 for Aurizon. As usual, Pam and I will go through the presentation that we lodged with the ASX this morning, which is available on our website. We will take your questions with the rest of the executive team who are in the room with me here in Brisbane. Just to remind you, the team is Ed McKeiver, Group Executive, Coal; Clay McDonald, Group Executive, Bulk; Michael Riches, Group Executive, Network; Mike Carter, Group Executive, Technical Services and Planning; and Tina Thomas, Group Executive, Corporate.

Before we begin, I did want to make mention of the flooding in North Queensland. While I'm pleased to report that none of our people were hurt during this extreme weather event, the impact on local communities is clearly significant. We will discuss the business impacts later on, but I want to acknowledge our North Queensland employees for their strength and resilience they've shown during this tough time as well as other areas of our business that have been lending their support. We are assisting employees who have been personally impacted. And this week, we'll also launch a special round of our community giving fund to help communities with local projects that assist the recovery and rebuilding process.

Now turning to the safety performance. At Aurizon, we always start with safety. During this half, we've seen an encouraging improvement in safety performance. While 6 months is too short a period to claim substantial changes are working, it is pleasing and demonstrates the improvement initiatives put in place during FY '18 are starting to deliver results. This includes a reduction in contractor injuries by 88%, which is due to the strengthening engagement with our contractors. You will recall, we expanded our metrics to include all contractor-related injuries in 2017.

We've also commenced a long-term program of work called Seamless Safety during the half. This program aims to streamline and simplify our safety systems and processes and consists of 3 interdependent projects around leadership and culture, system and processes and structure. This work will reshape Aurizon's program and approach to safety.

Turning now to an update on key priorities. Before we talk about the numbers, I'd like to give some context about progress on the company's key priorities, which is usually where investors are also focused.

During the half, we've made good progress in these areas, as you can see on the slide. We've also indicated how these priorities align to the value-creation levers contained within our strategy that we introduced last year at the Investor Day. This is about ensuring investors understand that we will continue to deliver on our promises, consistent with the strategy, and that we will continue to prioritize where we see the most value. I'll step through some additional detail on each of these topics shortly, but first, I wanted to talk to some of the high-level points.

The UT5 final decision was handed down last December, and this represented an improvement on the Draft Decision, and I'll cover this in more detail in the Network section. On operational efficiencies, we continued to progress a number of initiatives across key areas, including targeted investments in technology, and I will go through this in more detail shortly.

Good progress has been made on enterprise agreements, and we have now either completed or are awaiting finalization through the Fair Work Commission, 4 enterprise agreements, being WA rolling stock maintenance, Queensland staff, New South Wales coal and West Australian rail operations. Bargaining continues on the 3 remaining Queensland EAs, with the infrastructure agreement currently out to vote with employees. And finally, with Intermodal, the sale of the Queensland business to Linfox has been completed, and we now have a new commercial hook and pull contract for the Bulk business. The remaining asset in Intermodal is the Acacia Ridge terminal. An agreement to sell the terminal to Pacific National remains subject to proceedings in the federal court.

Turning to the first half highlights. The company delivered a first half result in line with expectations, with an underlying EBIT of $406 million. While this is down 16%, above rail is in line with expectations and guidance provided last year. Network revenue for the half is based on the UT5 final decision that was released by the QCA in December. This includes a provision for half of the $61 million true-up relating to FY '18. The final decision represents the low case in terms of the revenue outcome and establishes what could be owed for customers -- to customers for FY '18. Therefore, we believe the most prudent decision is to take this provision now as the longer we wait, the greater the true-up and, therefore, impact on the P&L in future periods. The above rail result includes the impact of the cessation of the Cliffs contract in Bulk in June 2018. Pam will step through the detail in her section shortly.

In above rail, volumes were down 5%. In Coal, volumes were impacted by supply chain constraints, weather events at the back end of the half and protected industrial action across New South Wales and Queensland. Bulk volumes were lower due to the Cliffs construct cessation, partly offset by growth in volumes across WA and Queensland. Network volumes were flat.

Statutory NPAT was down $55 million against prior period, consistent with the reduced EBIT. Free cash flow was higher by $26 million and benefited from the receipt of the termination payment from Cliffs. And finally, an interim dividend of $0.114 per share has been declared by the board, which represents a payout ratio of 100% of underlying NPAT for the continuing operations.

Turning to the Coal business. We continue to operate in a positive market environment, and the Coal team has been progressing its reliability program that was outlined at the Investor Day. This program includes bringing stored rolling stock back into active service to meet volume growth in the CQCN and making investments in rolling stock for Hunter Valley growth. We've been progressively investing to meet growth demands. In the Hunter Valley, since FY 2017, we have invested over $110 million in rolling stocks to meet volumes both from new contracts, such as MACH Energy; but also increased volumes from our existing customers, such as Whitehaven. As well as investing in new rolling stock, we have been able to recycle locomotives from the Intermodal Interstate business into the Hunter Valley. I'm also pleased to announce that we have recently approved 2 new consists of 106-tonne wagons for the CQCN.

This is the first investment in new wagons for this region in nearly a decade and supports our view of coal demand growth. The 264 wagons will progressively go into service during 2020 and will support additional tonnes from existing customers. This investment is a signal of Aurizon's willingness to support our customers' growth ambitions.

The haulage market remains competitive, and the Coal business continues its work on building competitive market offerings to new and existing customers. The Coal business is focused on delivery performance as this is where contracts can be won or lost. While pricing is tight, we've been able to win contracts by not necessarily being the lowest on price but rather by being more innovative and flexible on operational terms. Not only are we tailoring solutions to meet specific customer requirements, we are seeking early renegotiations where this makes sense to do so.

Coal is continuing its work to drive operational efficiencies through targeted investment in technology. Automated scheduling software has been implemented in the Coal planning team across the CQCN and has released around 20 to 25 services per week through more efficient scheduling. In addition, Coal is investing in a workforce planning tool that will drive efficiencies in crew footplate, train crew utilization and reduced car travel, just to name a few of the benefits. These investments in technology will enhance asset utilization and assist in preserving margins in this competitive haulage market.

Moving to Bulk. The Bulk business continues to deliver improving results through its turnaround program. There has been contracting success in the half with the contracts that came as part of the sale of Queensland Intermodal to Linfox. As part of the deal, Bulk has taken ownership of the Queensland Intermodal locos, with Linfox owning the wagon fleet. This is a great example of Bulk leveraging its capability and core strength as it will provide the linehaul services to Linfox through a commercial 10-year arrangement. Bulk has also recommenced the Glencore freighter on the Mount Isa line with a new commercial offering that underpins the efficiencies and operational improvements that have been achieved since moving to the business unit structure. And as we've highlighted previously, the Mount Gibson haul ceased in line with the end of both the contract and mine life in January. And the GrainCorp contract will cease later this year.

Through the turnaround program, further progress has been made in the half through labor productivity initiatives, which have seen Bulk deliver additional services in the East with a minimal increase to FTEs. These initiatives include driver-only operations on some services, roster consolidation and improved crew scheduling and planning. In the West, the team has driven efficiency through the outsourcing of noncore operations, including moving some trucking services to third parties. In addition to the turnaround program, the Bulk team is also focused on growing revenue and volumes in order to build a sustainable business for the long term.

Turning now to Network. As I've said before, we've been pursuing multiple ways to reach an appropriate UT5 outcome. And while there has been positive engagement, resolution remains a work in progress. Engagement with customers and our stakeholders continues, although no agreement has been reached. On the regulatory front, the final decision issued by the QCA in December provided a 6% increase compared to the Draft Decision, including an improvement in the weighted average cost of capital. This is positive but still short of where we believe the appropriate revenue and return should be. We've aligned our financial accounts this half to the final decision, including recording half of the $61 million true-up that relates to FY '18, with the balance to come in the second half. The next milestone in the QCA process is 18 February, being the date by which submission of the UT5 undertaking conforming to the final decision is due.

Turning now to an update on operational efficiency improvements. As we highlighted at the Investor Day, while we have not set a new multi-year transformation target, ongoing operational efficiency improvement remains a key driver for the achievement of our strategy. You will see on the slide, we have highlighted 4 of the key initiatives that are ongoing in the enterprise now. The precision railroading initiative is a program of works that has been led by myself, with the objective of driving precision planning and disciplined delivery, with the aim of improving on-time arrival and departure time of our services. One of the benefits is the release of pathing into the system through scheduling reviews, with the aim of improving scheduling efficiency. Releasing paths has the benefit of increasing capacity for all users and can allow above rail operators to more effectively catch up services where they may be impacted by weather or other events.

The restructure of our support areas commenced during the half. The objective of the restructure is for our support areas to provide more innovative, flexible and lower-cost services to the business units. In our technical services and planning area, approximately 170 roles have been removed, with a further 170 roles being reappointed to the business units. This is expected to drive further synergies to those teams that integrate it into their new structures. We are on track to meet the $20 million cost reduction target set for FY '21.

We continue our investment in technology with the expansion of condition monitoring plans for the Hunter Valley. This is expected to unlock efficiencies in our Hunter Valley maintenance, as we have done in Central Queensland, through predictive maintenance practices. We already have the equipment and are expecting to install this later in 2019.

On the European Train Control Systems program, or ETCS, the trial of the technology is in development and expected to occur in 2019. ETCS supports driver behavior to make our operations safer and more efficient and has the potential to expand driver-only operations in Central Queensland in the future.

Moving to the enterprise agreements. At the Investor Day, I outlined that the renegotiations of our EAs were the key objective under the optimized lever. Negotiating multiple agreements can be complicated, but it is normal business for a company like Aurizon, which has a high proportion of unionized employees. We are coming off agreements that provided above-CPI wage increases of 4% per annum. And one of the key objectives of the renegotiation was to better align our agreements with the market. We are not seeking fundamental changes to conditions. The majority of the changes are aimed at securing agreements that are more flexible, simple and responsive. In addition, we are seeking alignment to each of the business units in meeting their objectives.

Over the last 6 months, we've completed bargaining on 3 of our EAs. Two remain subject to approval from the Fair Work Commission, and the Queensland staff EA received approval in January. This is in addition to the West Australian rolling stock maintenance agreement, which was approved last year. Wage uplifts agreed were between 1.5% and 2.5% in these agreements. The agreements outstanding are the 3 Queensland ones, being Coal, Bulk and Infrastructure. Bargaining is progressing, but there has been some industrial action, which is an unnecessary and unfortunate part of the process. We've managed the impacts well across the business, but it does slow the process down. However, the Infrastructure EA is more progressed, and we recently put this to ballot, with the results expected this week.

Moving to Intermodal. On Intermodal, we had already executed the closure of the Interstate business, which removes the majority of the losses. This allowed the cascading of locomotives to support the growth in the Hunter Valley Coal business.

In August 2018, we announced the termination of a business sale agreement for the Queensland Intermodal business. We subsequently executed an agreement with Linfox in October for the sale of Queensland Intermodal, including all freight-forwarding, pickup and delivery assets, rail wagons, customer contracts and access to terminals. This contract completed on 31 January 2019. This was a positive outcome as it provided ongoing employment for approximately 310 Intermodal employees who are either transferred to Linfox or Aurizon Bulk and avoided significant closure costs for Aurizon. As I highlighted earlier, it also resulted in the execution of a 10-year commercial take or pay contract for Bulk to run the linehaul services and some terminal services for Linfox.

The last remaining piece of Intermodal is the Acacia Ridge terminal. And the transaction to sell to Pacific National remains subject to federal court ACCC proceedings that are adjourned until later this month. This asset remains under Aurizon ownership and operation until the court makes its determination, which is expected later this year. Should the court make a determination that the sale transaction cannot proceed, Aurizon will consider all options available to it, one of which is continuing to hold the asset. The Acacia Ridge terminal made a small profit in the half and is forecast to continue as a profitable going concern.

And now I will hand over to Pam.

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Pam Bains, Aurizon Holdings Limited - CFO & Group Executive of Strategy [2]

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Thank you, Andrew, and good morning to everyone on the call.

As a reminder, the results I will cover today are based on the continuing operations, hence, exclude Intermodal, which is classified as discontinued. I will provide an update on Intermodal a little later.

The FY '19 half year result is very much in line with expectations. Whilst the overall result is lower than the prior period, this should be no surprise as it represents changes communicated during the FY '18 results for each business unit and accounts for the impact of the UT5 final decision. We continue with our disciplined approach to capital management, with CapEx tracking in line with expectations, strong free cash flow and 100% dividend payout.

Moving to the detail. Underlying EBIT has decreased 16% against prior year, impacted by the UT5 final decision in Network and the cessation of the Cliffs contract in Bulk, offset in part by an improvement in costs. Revenue decreased 7%. The UT5 final decision was issued by the QCA in December of 2018. In this half, we have booked revenue in Network based on the final decision and have taken 50% of the true-up in relation to FY '18, with the remainder to be booked in the second half. As Andrew highlighted, this represents the low case in terms of revenue outcomes and what could be owed to customers for FY '18.

We believe the most prudent course of action was to account for the final decision now as the longer we wait, the greater the potential true-up due to customers and consequential impact to the P&L. We have taken the FY '18 true-up adjustment above the line as the revenue was originally booked in underlying earnings in the prior period.

Revenue was also adversely impacted by the cessation of Cliffs. Operating costs reduced $37 million, largely due to lower access costs, with some customers in Coal moving to end-user access agreements and reduced fuel and energy costs. This was partly offset by increased consumable costs in Coal and Network. Net profit after tax has decreased by 19%, broadly in line with the reduction in EBIT. The board has declared an interim dividend of $0.114 per share, [sank] to 70%.

Moving to Coal. EBIT decreased $13 million to $210 million. Volumes have decreased in CQCN, reflecting supply chain constraints, adverse weather and the impact of protected industrial action which took place in December. New South Wales and Southeast Queensland volumes were flat, with additional growth volumes largely offset by one-off events, being protected industrial action in August and December and a third-party derailment in Newdell in September. Revenue quality has improved with decreased contract utilization and CPI escalation impacts. The $4 million reduction in other revenue represents the transfer of internal work trains from Coal to Bulk, principally for network maintenance trains, where above rail provides the [coal] locomotives. As an internal service, there is no impact on group EBIT.

Operating costs, net of fuel and access, have increased $11 million over the half. I outlined at Investor Day and FY '18 results an expected increase in costs for the Coal business for FY '19. As a reminder, these costs represent: firstly, with the new contract secured in 2018, there is a ramp-up process, where resources and assets are deployed before railings commence; and secondly, with new rolling stock in the Hunter Valley and the reinstatement of rolling stock in CQCN, there will be an uplift in maintenance cost during FY '19. We have seen the impact of these costs in the half. This has been offset in part by lower one-off costs incurred against the prior period and redundancy costs which are now reported in the other segment. Depreciation has increased $5 million, in line with increase in fleet, including the transfer of locomotives from the Intermodal Interstate business.

So overall, our results from Coal in line with expectations and guidance we provided in August, we expect maintenance costs to remain higher during the second half of the year that will keep EBIT flat on higher volumes and revenue. With increasing fleet in both the Hunter Valley and CQCN, we expect a moderate increase in maintenance into FY '20. However, with Coal's investment in rolling stock, delivery of ongoing operational efficiency improvements and increased growth volumes, we expect EBIT growth in FY '20 and beyond.

Moving to Bulk. Bulk's underlying EBIT decreased $6 million to $14 million, largely due to the cessation of the Cliffs iron ore contract in June of 2018. Removing the impact of Cliffs, Bulk revenue has increased $10 million in the half from volume growth across a number of customers, both in the East and West. Bulk East is seeing the benefit of MMG operating for a full half, where it commenced later in the prior half. The Glencore freighter service commenced this half on the Mount Isa line, and Bulk East benefited from the internal services that have been transferred from Coal. Bulk revenue per NTK increased predominantly due to the cessation of Cliffs, with this being the longest haul in the Bulk portfolio. And typically, longer hauls will have a lower revenue per NTK.

Operating costs, net of Cliffs, have improved with continued efforts to drive cost out of the business. Impairment represents the sustaining capital written off in Bulk East, which is reported in operating costs. This was higher than the prior period due to the completion of a loco overhaul program.

We expect the second half performance of Bulk to be lower as a result of Mount Gibson ceasing in January of 2019, the ongoing impact from the Cliffs cessation and the impacts from the recent flooding event in North Queensland. This will be partly offset by new volumes and ongoing operational efficiencies. So overall, a good result for Bulk, which demonstrates the work the Bulk team are executing on the turnaround.

Moving to Network. As I highlighted earlier, regulatory access revenue has been booked based on the UT5 final decision. EBIT has decreased $46 million or 18%, largely due to the decreased revenue with the UT5 final decision. Volumes were broadly flat on the half at 116.5 million tonnes. Total revenue has decreased $51 million. This includes recognizing 50% of the true-up to the UT5 final decision for FY '19 being $30 million. There's a further reduction of $24 million, representing the MAR decrease from transitional tariffs to the UT5 final decision for FY '19. This has been partly offset by a positive revenue cap impact in the half of $33 million. The other revenue reduction of $50 million on the bridge principally relates to the recognition of the Caledon bank guarantee in the prior period and the reduction in GAPE revenues, which included our own UT5 final decision true-up. Our reduction in EC revenue has been offset by lower EC expenditure, and this has been netted off against operating costs in the bridge.

Total costs including depreciation have increased by $10 million, with increased consumable costs mainly due to higher maintenance costs from increased track stability works and track inspections, focused on reducing speed restrictions and higher legal and professional services costs; increased labor costs, primarily due to salary escalation, increased depreciation of $7 million, largely related to ballast. This was offset by a decrease in fuel and energy cost net of EC pass-through.

In relation to outlook for FY '19, until the QCA approves a UT5 Access Undertaking, there is some uncertainty around the treatment of any true-up. We have provided a range of Network EBIT scenarios based on various revenue true-up recognition alternatives. This ranges from a low scenario of $380 million, where revenue is based on the UT5 final decision, and the full FY '18 true-up of $61 million has been taken in FY '19; two, a high scenario of $485 million, which assumes Network remains on transitional tariffs for the whole year. Each scenario assumes no volume variance. We've provided more detail on Slide 77.

Moving to Intermodal, which, as a reminder, is treated as a discontinued operation. As you can see, Intermodal generated an EBIT of $6 million in the half, a significant improvement against the prior period due to the closure of the loss-making Interstate business in December of 2017. The sale of Queensland Intermodal was completed last month, and Aurizon received $7 million consideration on settlement. The total loss on sale is approximately $30 million and has been largely recognized this half. As Andrew highlighted, the sale was an excellent result for the company, with the majority of Intermodal employees retaining employment. It also provides a new commercial haulage contract for the -- our Bulk business and avoided $30 million to $40 million in closure costs. The remaining Intermodal asset in the discontinued segment is the Acacia Ridge terminal. This is a profitable asset, which generated a small EBIT in the half. The terminal has a current book value of $37 million. Should the transaction to Pacific National proceed, we will record a significant gain on sale for this asset at the time of settlement.

Looking at capital expenditure. Capital expenditure for the half totaled $223 million, and the guidance range for FY '19 remains $480 million to $520 million. Growth capital of $22 million largely relates to the purchase of new rolling -- coal rolling stock to support growth in the Hunter Valley. Non-growth capital includes the purchase of a replacement rail grinder to support the renewal of the ARTC 10-year rail grinding contract. As Andrew highlighted, we have approved 2 new consists of 106-tonne wagons to support volume growth in CQCN. Total capital investment in relation to the wagons is approximately $60 million, and we expect this investment to occur across FY '19 to FY '21. In relation to FY '20, our expectation is non-growth capital of around $500 million for the year.

Moving to cash flow. Free cash flow for the continuing operation has improved by 8%. This is largely due to the receipt of the termination payment from Cliffs this half. In Network, we have been billing customers based on transitional tariffs. We will continue to bill on transitional tariffs until there is an approved access undertaking in place. Accordingly, there will be a lag between EBIT and cash flow until UT5 is finalized.

The interim dividend has been declared at $0.114 per share, which is a reduction of 19% against the prior period. This represents a payout of 100% of net profit after tax for the continuing operations, something we have continued since second half of FY '15. We spoke about the option to smooth the dividend 6 months ago given the likely lower earnings in UT5. We chose not to smooth as the outcome was not known, and we felt this was inconsistent with our capital management strategy. Reflecting the final decision in our accounts this year maintains our dividend at 100%, consistent with our strategy, as the lower earnings has the effect of smoothing the dividend without altering the payout ratio.

Finally, before I hand back to Andrew, an update on funding and gearing. We have previously advised that we would be looking at our legal entity and capital structure. This work has commenced. Our current legal entity structure is a legacy from IPO and reflects the structure at that time rather than one suitable for a listed company. It limits flexibility and is not completely aligned to the underlying assets. For example, Aurizon Network is a subsidiary of Aurizon Operations. The work that we are currently undertaking will look at opportunities to optimize the group structure. The legal entity and capital structure review is not connected with the work that is underway around the integrated structure. That work is continuing, and we -- as we highlighted previously, we will advise on an outcome at the end of FY '19.

On other funding matters, during the half, we canceled existing bank debt syndicated facilities for above rail expiring July 2019 and July 2020. We replaced them with bilateral bank debt facilities totaling $450 million, with maturity extended to November 2023. Moving to bilateral debt facilities allowed Aurizon to take advantage of competitive pricing in the market at the time of refinance and provided flexibility for funding opportunities in the future. Interest costs remain 4.5%, with approximately 90% of group debt hedged in line with the UT5 regulatory period.

On credit rating, at the half -- at the full year '18 results, I outlined that the UT5 Draft Decision did not meet Moody's credit metrics for Network. Subsequent to this, Moody's lowered its FFO-to-debt threshold to 13%. This now means, with the improved final decision, this supports both Moody's and S&P credit metrics for Baa1 and BBB+. For the group, there is limited headroom in our credit metrics for FY '19 due to earnings being lower. However, the expected earnings growth next year results in a comfortable buffer for FY '20 and beyond.

Thank you. And I'll now hand back to Andrew.

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Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [3]

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Thanks, Pam.

Turning now to the financial outlook for FY '19. In August, we provided guidance for the non-Network business of $390 million to $430 million, excluding redundancy costs and today's results place us comfortably within the range, provided there are no material weather or industrial action impacts. For Network, although we have the final decision and we have recognized this in our accounts at the half, until the QCA approves a UT5 undertaking, there is uncertainty around the treatment of any true-ups. Therefore, we've not provided guidance for Network, but as Pam indicated, we have shown a range of scenarios on Slide 77 to help investors.

Key assumptions in relation to the guidance for above rail are as follows. For Coal, it assumes higher volumes in the second half, offset partly by increased maintenance and operating costs. Coal volume guidance for the year remains 215 to 225 million tonnes. For Bulk, we expect lower second half earnings with the cessation of Mount Gibson in January and the impact of the recent flood events in North Queensland. Ongoing delivery of operational efficiency improvement across the business and no major weather or industrial action impacts beyond that already referenced.

And finally, onto a summary of key takeaways. Before moving on to some questions, I wanted to provide you with a summary of what you have heard and how Aurizon is continuing to deliver on its promises.

The results are positive, with no surprises, and the company continues to focus on shareholder returns, with dividends being paid at 100% of underlying NPAT. UT5 remains a work in progress, with an improved final decision and continuing engagement with customers and stakeholders but no outcome as yet.

We are continuing the work we have been executing since IPO to improve the operational efficiency of the business. This is necessary to create sustainable value through improvements in how we manage our costs and assets.

On the EAs, 2 agreements have been finalized and 2 awaiting approval from the Fair Work Commission. We've also put the Queensland Infrastructure EA to ballot, and bargaining continues for the Queensland Bulk and Coal EAs. In the finalized EAs, we've been able to secure agreements that are better aligned to current market conditions.

The Bulk turnaround continues to generate momentum, and the first half has been a good result for the team, an evidence that the turnaround plan is gaining traction. This places the business on a strong footing to drive its growth agenda.

On Coal, first half performance is in line with expectation given the work the business is doing about improving capability and reliability of the fleet. We are investing in growth both in the Hunter Valley and Central Queensland and taking steps to secure the long-term contract book. Volume growth and operational efficiencies are forecast to grow EBIT in the Coal business from FY '20.

And finally, on Intermodal, we've stemmed the losses through the closure of Intermodal Interstate and the sale of Intermodal Queensland. Acacia Ridge is the remaining asset in the portfolio, and we are hopeful this transaction is resolved over the coming months.

Thank you. And now I'll hand over to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Anthony Moulder from CLSA.

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Anthony Moulder, CLSA Limited, Research Division - Analyst [2]

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Maybe if I can start with the Network UT5, I guess given how far away that decision is from your expectations, and I guess you're calling out some of the -- I guess, how they came to that decision as being fundamentally flawed, why no judicial review was undertaken of that final decision?

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Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [3]

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Thanks, Anthony. I will hand that over to Michael Riches for an answer.

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Michael Robert Riches, Aurizon Holdings Limited - Group Executive of Network [4]

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Thanks, Andrew. I think, importantly, when considering the judicial review of the final decision that was made in December, yes, we looked at the necessity of providing certainty for our investors, for -- and our customers and, as a consequence, decided that, at that time, judicial review of the final decision wasn't an appropriate response.

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Anthony Moulder, CLSA Limited, Research Division - Analyst [5]

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I'm a bit lost. Given how significant it was, why decide that certainty given the difference, given that, I guess, we're talking about hundreds of millions of dollars, and this could potentially have an impact through UT6, 7, et cetera? I appreciate the certainty for this period, but aren't you playing a longer game as far as ensuring that future decisions are not based on such a poor process?

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Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [6]

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Yes, Mike, well, I think you might want to talk about the February 18.

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Michael Robert Riches, Aurizon Holdings Limited - Group Executive of Network [7]

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Yes. Sure. So I mean, we obviously have to respond to the final decision by February 18, and we will do so at that point in time. It's not appropriate at the moment to discuss exactly what that response will be. I mean, ultimately, it will be based on our assessment of what are the impacts for the business longer term and what are the needs for certainty going forward. I think it is important to recognize that we do look at UT6, UT7, and as does the QCA. And they have clearly indicated it in UT5 to be independent and separate decisions going forward. So I don't think you should draw any conclusions that a UT5 outcome will be reflected or replicated in UT6.

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Anthony Moulder, CLSA Limited, Research Division - Analyst [8]

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I guess one would hope not. Michael, while you're there. Change in Network maintenance practices, and I guess you've talked to the impact that, that had in the latest -- in the previous half. But given Network's volumes are kind of flat this half on first half '18, on which there was no impact on maintenance practices, so how should we think about the impacts that you've had of this half from both maintenance changes?

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Michael Robert Riches, Aurizon Holdings Limited - Group Executive of Network [9]

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I think volumes are affected by multiple factors, one of them being our maintenance and operating practices, weather and other supply chain constraints. Accordingly, it's difficult to predict the effect that one single factor has on tonnages. What we have done and will continue to do is always align our maintenance and operating practices to the regulatory environment, which is why we responded to the Draft Decision. As that regulatory environment has changed with the QCA May Consultation Paper and then finally the final decision in December, we have progressively modified those practices, and I think volumes, although flat compared to the first half of last year, probably are less affected by the maintenance practices than they would have been in the second half of FY '18.

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Anthony Moulder, CLSA Limited, Research Division - Analyst [10]

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Can you quantify that impact in this -- in the first half '19?

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Michael Robert Riches, Aurizon Holdings Limited - Group Executive of Network [11]

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It's too hard. What we have discovered through this process is you can sort of give an indication, but with all of the other factors, particularly the weather events we've had, other supply chain constraints, it's too difficult to identify exactly what the impact would have been.

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Anthony Moulder, CLSA Limited, Research Division - Analyst [12]

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Okay. All right. And then lastly, if I could. The redundancies taken in the half, obviously not split by division. How are you looking at redundancies for this coming half, the second half of fiscal '19, please?

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Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [13]

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Anthony, I'll get, Pam to answer that.

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Pam Bains, Aurizon Holdings Limited - CFO & Group Executive of Strategy [14]

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Anthony, we haven't put -- we've deliberately provided guidance excluding redundancies. It very much depends on where the changes will take place to be able to give you a business unit view going forward.

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Anthony Moulder, CLSA Limited, Research Division - Analyst [15]

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But just the quantum, is it...

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Pam Bains, Aurizon Holdings Limited - CFO & Group Executive of Strategy [16]

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Again, the reason we provided guidance excluding it is because there's obviously -- we don't have that clarity. It will depend on the transformation work that takes place in the second half.

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Operator [17]

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Your next question comes from Jacob Cakarnis from Citigroup.

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Jakob Cakarnis, Citigroup Inc, Research Division - Associate [18]

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First things first. Can you just give some update on the progress for the EBAs for Queensland Coal and Bulk? I know that you mentioned that you're almost done for Infrastructure, but I will note that those 2 outstanding divisions or segments there, Coal and Bulk, in Queensland are about 40% of the workforce and there have been ongoing negotiations from August and September last year. Can you just provide us with a little bit of color where they're at? Appreciate that there is bargaining ongoing there, but just some color as to expectations, please?

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Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [19]

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Sure, Jacob. What I'll do is because the bargaining covers a number of areas in the business, I'll get Tina Thomas, who has human resource responsibility, to answer the question.

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Tina Thomas, Aurizon Holdings Limited - Group Executive of Corporate [20]

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Yes. Thanks, Andrew. As Andrew said, 4 of our EAs are now complete or we've said were for approval. The Infrastructure EA is out for employee ballot, and we'll get a result from that this week. The final 2 that you mentioned, Bulk and Coal, we're actually bargaining this week for Bulk and Coal next week, so we are looking to progress that bargaining with the unions and bargaining representatives. So we're very focused on continuing to bargain in good faith. And as I said, we've got them scheduled for next week. The key aim for that bargaining is to achieve outcomes in line with market rates. And as Andrew said, some of the EAs that we've already completed have achieved that. But also, to strike the right balance between the hours of work, so getting certainty for our employees, as well as flexibility for our operations and our customers, so that's really where they're at. We're continuing to push bargaining and to work with union reps and bargaining reps and engaging our people.

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Jakob Cakarnis, Citigroup Inc, Research Division - Associate [21]

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Is it possible, Tina, that you'd just give a little bit more color on where the push points are, I guess, just given how long the negotiations have been going on?

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Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [22]

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So what I might do is I'll get the individual executives responsible for the areas, because there are different points in different areas. So, Clay, I might get you...

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Clay McDonald, Aurizon Holdings Limited - Group Executive of Bulk [23]

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Yes. So I'm going to start with Bulk. For us, Jakob, we're looking at -- we've got 2 employment entities within the one business. So our EA, really, is about bringing those 2 employment entities together under the one set of conditions, because you could imagine the difficulty in rostering and deploying on the same [lined] crews under 2 different employing entities. So a lot of our focus and negotiations around bringing those 2 together, and that's not unscrambling the egg either, it's a lot simpler than that. So we think we've had some good progress in bargaining. We've got bargaining this week, as Tina outlined. We can see progress in the near future in bringing those 2 employment entities together under the one agreement for Bulk.

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Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [24]

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Ed?

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Ed McKeiver, Aurizon Holdings Limited - Group Executive of Coal [25]

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Jacob, Ed McKeiver. So from a Coal perspective, I mean the key terms, as usual, relate around the hours -- or what we call hours of work provisions and some core -- probably, arguably, core conditions. There is also a matter of a shift -- the definition of shift worker with our particular -- with our maintenance employees, in particular, which is one of the key issues to -- yet to resolve. So why -- by hours of work, I mean, essentially, the way that employees are rostered and they're called into work and the changes to those rosters that are allowed. And as Tina said, our employees seek certainty of their hours of work so they can plan their lives, which is completely reasonable. And at the same time, we need the right amount of flexibility, so the company can manage the variance in relation to daily train services.

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Jakob Cakarnis, Citigroup Inc, Research Division - Associate [26]

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Sure. I guess a related follow-up then. In the operating cost notes for the Coal division, there was around this $5 million additional for staffing cost. And the note alongside that note, that, that was in line with additional volumes. All that considered now with what's going on with these negotiations and then the flex that you need in the workforce. Can you just tell us how, I guess, that flows through operating costs if volumes are to be around the guidance, particularly elevated guidance for the second half of '19 on Coal volumes?

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Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [27]

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Yes. Mike, could you answer that?

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Michael G. Carter, Aurizon Holdings Limited - Group Executive of Technical Services & Planning [28]

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Yes. There was a fair bit in that question, Jakob. But the -- one of the larger drivers of the costs, for the labor costs that you're talking about are in the -- are the onboarding of new resource, people for our growth volumes. And so as that -- necessarily, that is done ahead of the volumes coming online. So as you're probably well aware, we've continued to bring new business online over the last year or 2. And in this particular half, it was Baralaba Coal and, obviously, MACH Energy in New South Wales. The other aspect there is a CPI increase necessarily that's flowed through, and there's -- which is also impacting in the maintenance area. Probably not as obvious, is the impact of the Network constraints in CQCN. I mean the practical outcome of tuning the system for lowest maintenance costs and other change practices, essentially, to make it harder to get the pathing, which slows our trains, which means they move slow and we burn more labor resource and over time in order to deliver the same or less services, so that's...

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Operator [29]

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Your next question comes from Simon Mitchell from UBS.

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Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand [30]

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A question on revenue performance in Coal, perhaps one for Ed. Net revenue per NTK up 5% during the half, which is a much better performance than what we've seen in recent years. Just go into a bit more detail on what's driven that and how we should be thinking about that as we see some of these new contracts roll through the business.

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Michael G. Carter, Aurizon Holdings Limited - Group Executive of Technical Services & Planning [31]

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Yes. Thanks, Simon. The -- yes, despite the reduction in volumes, the revenue increased, largely on the back of on -- by $13.3 million compared to the previous comparable period, largely driven by higher fuel charges of $13 million and some contract price escalation associated with CPIs in our contract terms in the order of about $10 million.

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Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand [32]

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Okay. And how should we be thinking about that as the new contracts roll through?

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Michael G. Carter, Aurizon Holdings Limited - Group Executive of Technical Services & Planning [33]

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Could you just reclarify the question, please?

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Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand [34]

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So the number of new contracts in Coal you've just talked about that you've already started and are starting over the course of this year, how should we be thinking about that revenue per NTK as those contracts ramp up?

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Michael G. Carter, Aurizon Holdings Limited - Group Executive of Technical Services & Planning [35]

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Look, there's absolutely a yield benefit that flows from lower contract utilization, as Pam had said. So there'll be an adjustment to that as we see our contract utilization lift during the second half. But my sense is it will normalize largely in line with previous comparable period.

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Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand [36]

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Okay. And just a question for Pam on -- just regarding your comments on Slide 21 around credit metrics and gearing. You've mentioned limited headroom this year and increasing headroom 2020 onwards. Can we just confirm that -- that those comments apply at 100% dividend payout ratio or has that -- has it been modeled at a lower rate?

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Pam Bains, Aurizon Holdings Limited - CFO & Group Executive of Strategy [37]

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It assumes a 100% dividend payout ratio, Simon.

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Simon A. Mitchell, UBS Investment Bank, Research Division - MD and Head of Research for Australia and New Zealand [38]

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Okay, okay. And just also on that slide, your comments about legal and capital structure. Are we to assume that this is purely around flexibility? Or is there actually a negative cost to the business of the current structure continuing?

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Pam Bains, Aurizon Holdings Limited - CFO & Group Executive of Strategy [39]

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Just -- thank you for the question. I just want to emphasize upfront that we are looking at a structure from a technical legal perspective and it's not a change in our business unit structure. Again, just to avoid any confusion. It is -- the benefit of reviewing the structure is around greater flexibility and establishing an optimal structure moving forward. So we should have a further update for you at year-end results in terms of the outcome.

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Operator [40]

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Your next question comes from Owen Birrell from Goldman Sachs.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [41]

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A few questions from me. Just looking firstly on the accounting treatment for the Below Rail, and you've noted that you've conformed it with the final decision. Just looking at the scenarios that you've outlined for FY '19, is it fair to say that the accounting treatment has been aligned with the scenario 3?

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Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [42]

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Pam?

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Pam Bains, Aurizon Holdings Limited - CFO & Group Executive of Strategy [43]

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Yes. The 380, the lower end.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [44]

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Okay. But it's -- as you say, it's not -- we could see some adjustment to that depending on how the actual decision comes out?

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Pam Bains, Aurizon Holdings Limited - CFO & Group Executive of Strategy [45]

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The adjustment, as I touched on, it excludes any volume variance, and naturally, you get a volume variance each year, so it depends on how the railings go in the second half and then, as Michael touched on, any sort of final outcome.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [46]

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Yes. Okay. And you met -- there's comment around how you're continuing with the stakeholder engagement. Given that the -- given you have to conform with the final decision, I'm just wondering what are you hoping to achieve out of that stakeholder engagement. Is it better flexibility or where can you get some adjustment?

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Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [47]

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Michael, I might get you to talk through that?

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Michael Robert Riches, Aurizon Holdings Limited - Group Executive of Network [48]

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Yes. Thanks. I think, generally, what we're looking for is a better outcome holistically for the industry and for Aurizon Network. The detail is matters that are still under discussion and so it wouldn't be appropriate for me to comment on that. But discussions are continuing, although no agreements yet being reached.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [49]

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One thing that you've spoken about historically is around sort of performance benefits, you guys can outperform the structure that you are able to share in some of that benefit. Is that included within this engagement in terms of trying to define what that is? Or is that a UT6 issue?

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Michael Robert Riches, Aurizon Holdings Limited - Group Executive of Network [50]

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Owen, as I said, I think, at this stage of the discussions, it's just not appropriate to comment on that detail.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [51]

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Okay. No problem. And then just finally, you've mentioned a lot of investment in growth CapEx for rolling stock and the Hunter Valley and the positioning, I guess that New South Wales business for increased growth. I'm just wondering if you had any comment around the decision from the New South Wales Land and Environment Court that we've seen on cost of coal, which effectively caps any new market growth, either replacement or new mines. If that comes to pass, and -- is that going to change your view on the New South Wales market?

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Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [52]

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Mike, I might get you talk about the coal decision?

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Michael G. Carter, Aurizon Holdings Limited - Group Executive of Technical Services & Planning [53]

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Yes. Thanks, Andrew, and thanks for the question, Owen. I have not read the judgment personally, Owen. And I'd prefer to refer to avoid commenting on specific companies or their prospects. From our perspective, I mean, we have -- we believe in the long-term prospects for strength thermal coal exports. I mean our coal is among the best quality in the world and is well positioned to meet the growing Asian demand. So we'll stay focused. There are different mines that have different prospects, and we've seen other headwinds for some of these projects, subject to review, of course, but we'll stay focused on our -- on our delivery performance and our own sustainability and -- for the long term.

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Owen Birrell, Goldman Sachs Group Inc., Research Division - Metals and Mining Company Analyst [54]

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Can I get a sense of what you expect long-term growth for your surplus coal exports to be going forward?

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Michael G. Carter, Aurizon Holdings Limited - Group Executive of Technical Services & Planning [55]

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Yes. I'll take that question again. Look, we -- there's some good material in the back-up materials, so I think around page -- Pages 56, 58. Our view is that the long-term outlook for coal exports from Australia, there's a 2% CAGR. Of course, that's -- it's lumpy. And that's broadly both in met coal and particularly in thermal coal as some of the existing reserves expire in the mid-20s there'll be continued growth. So it's lumpy, we -- and we've seen that with the MACH business coming online and the Byerwen business obviously. So we remain positive about the outlook and in line with our long-term growth.

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Operator [56]

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Your next question comes from Rob Koh from Morgan Stanley.

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Robert Koh, Morgan Stanley, Research Division - VP [57]

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Can I just ask a process question about UT5? I take on board your comments about the sensitivities. But just for the submission that you need to make before the 18th of Feb, what should we be looking for in terms of process after that? Does the QCA just then basically rubber-stamp your submission? Or is there a bit of argy bargy after that?

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Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [58]

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Michael, do you want to just talk through what you can about the process?

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Michael Robert Riches, Aurizon Holdings Limited - Group Executive of Network [59]

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Yes. Look, it will be very dependent on what our submission is on the 18th, as to the process, but I think there's a general recognition that trying to get something completed sooner rather than later would be preferable for all parties. And I know the QCA is very focused on ensuring they move their process as quickly as possible. But it will be dependent on the exact nature of what we submit on the 18th.

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Robert Koh, Morgan Stanley, Research Division - VP [60]

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Okay. Now, I'm probably pushing the boundary, as of what you're going to submit. But I mean is there a matter that you could submit, that would then cause further dispute? Or I mean if you basically just submitted the final draft, then the QCA probably approve things pretty quickly, right?

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Michael Robert Riches, Aurizon Holdings Limited - Group Executive of Network [61]

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I think that second statement is a fair assumption, yes.

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Robert Koh, Morgan Stanley, Research Division - VP [62]

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Yes, yes. Okay. No Worries. All right. And then just another quick one, just on possibly to Pam on the legal capital structure review, apologies if you said this before. Does that include optimization of tax structuring? Is there anything we should be thinking about on that front?

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Pam Bains, Aurizon Holdings Limited - CFO & Group Executive of Strategy [63]

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It will include looking at everything associated with the structure.

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Robert Koh, Morgan Stanley, Research Division - VP [64]

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Okay. right. So if you did need to move things around, then you -- part of the metrics of your decision would be fidgety events and the like. Is that fair?

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Pam Bains, Aurizon Holdings Limited - CFO & Group Executive of Strategy [65]

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We'll take absolutely everything into consideration before we put in these changes.

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Operator [66]

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Your next question comes from Ian Myles from Macquarie Group.

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Ian Myles, Macquarie Research - Analyst [67]

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Just a couple of quick ones. Just on the volume risk for FY '19 on Network. Given you're making the application to the QCA, is there a point that you might not have to take the volume risk of joint forecast financial, that you can eliminate that in the process?

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Pam Bains, Aurizon Holdings Limited - CFO & Group Executive of Strategy [68]

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There's always got possibility, Ian. As we've done in the past, sometimes, they do reset the volumes and the adjustment is to the MAR. Again, it's hard to predict without a view from the regulator.

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Ian Myles, Macquarie Research - Analyst [69]

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Is there a precedent of which way they've done it typically?

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Pam Bains, Aurizon Holdings Limited - CFO & Group Executive of Strategy [70]

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A precedent is probably a strong statement, in that there's always been something different in previous decisions, so difficult to say at this stage.

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Ian Myles, Macquarie Research - Analyst [71]

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Okay. And in the EBA negotiation, are you trying to achieve a net outcome of a flat overall cost in labor? I appreciate you're obviously growing or changing shape of the business. But on a sort of standalone basis, the CPR [process has been trying to] offset by that productivity or efficiency or flexibility requirements you're getting?

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Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [72]

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Yes, Ian, I'll get Ed just to give a quick response to that.

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Ed McKeiver, Aurizon Holdings Limited - Group Executive of Coal [73]

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Yes. Ian, in short, that's exactly what we're trying to tag. We're looking for moderate change, not fundamental, and certainly, in real terms for our people.

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Ian Myles, Macquarie Research - Analyst [74]

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Okay. And I will -- I'm going to push for luck here. In terms of the progress, you talked about split and the consideration of the businesses. And I know -- I appreciate you haven't reached conclusions or anything like that, but are you seeing any early indications of maybe a better consideration of why the businesses should be together?

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Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [75]

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Ian, I can confirm you're pushing your luck. And -- but just to be quite clear, the work is underway, and we will deliver the work in time to give an update in the middle of this calendar year.

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Operator [76]

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

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [77]

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Andrew, I wonder if I could ask a question on ROIC, first of all. In the full year, the LTIs were dropped by about 150 basis points in terms of both the upper end and the lower end of the range for a 3-year look forward. Your ROIC, actually, even with the draft -- sorry, with the final QCA decision is up on the first half last year, down on second half last year, and I appreciate it's a rolling 12-month number, so you can't see what the true impact of UT5 was. So can you clarify for me, please, what would have been the ROIC for this period on a rolling 12-month basis if you applied a UT5 for the second half last year as well, please?

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Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [78]

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I will have to get back to you on that, Scott. I only barely followed your question, so -- and I'm not able to answer it at this moment, so I'll get back to you.

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [79]

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Okay, great. And then I guess a second question I had was, I'm very conscious in a week's time, you'll lodge a -- well that's your current deadline for lodging with the QCA. When will we be able to judge whether the -- really strong action that you took last year will be worth it from a regulatory perspective? And I guess in that, if I look at Slide 29 that you've provided in the excel column, which you had a dot next to on one of the first slides, it's mostly about achieving regulatory reform. So we can watch out for the announcement next week in terms of that regulatory reform? That's kind of a critical thing to look out for, or should their milestones going forward that we should also be watching out for in terms of ongoing regulatory reform?

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Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [80]

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So Scott, I might get Michael to follow up after my answer. But look, in my speech, I was very careful to refer to the February 18 to the milestone. So it is just a milestone in the scheme of things. I mean I don't want to get too philosophical, but this is a long-term process, and it will take some time to judge the events that have folded out and are likely to fold out or unfold, I'm sorry. And the reality is, you have no alternative history to compare it with neatly, unfortunately. So those would be my sort of high-level responses. Michael, did you want to add anything?

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Michael Robert Riches, Aurizon Holdings Limited - Group Executive of Network [81]

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Probably, the only thing, Andrew, to add is, at all times, we've said we'll align all of our maintenance operating practices in our business decisions with the regulatory environment that exist at that time, and that was what we did when the Draft Decision came out. We continue to progressively align what we do with the regulatory environment that exists. And in relation to reform, there is certainly a process that we are undertaking internally to look at the most effective regulatory framework for the CQCN, and that will involve engagement with the regulator, with customers and other stakeholders over, as Andrew said, probably an extended period to get what we think is an appropriate regulatory framework.

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [82]

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So I guess, what I'm struggling with though is, what's an extended timeframe? I mean is it -- do you think UT6 is where things really come to a head, is that..?

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Michael Robert Riches, Aurizon Holdings Limited - Group Executive of Network [83]

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I think if you look at, yes, the time it takes to get fundamental regulatory reform undertaken, it is a process of years and not months. So it could be a timeframe in the early 2020s, I would have thought.

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Scott Ryall, Rimor Equity Research Pty Ltd - Principal [84]

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Okay. And that lead me on nicely, all set for the next question, which is the settings that are appropriate, as you say, to whatever the regulatory framework is at the time. Pam was talking about $500 million of CapEx, of non-growth CapEx in fiscal '20. But presumably, with a WACC of 5.7, it's irrational to spend anywhere near depreciation in the Network business if that were to continue. So depreciation is not too far off that $500 million. How do you think about CapEx long-term and whether a BBB+ is an appropriate credit rating?

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Pam Bains, Aurizon Holdings Limited - CFO & Group Executive of Strategy [85]

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So I'll just make a comment on that. From a CapEx perspective, generally, it is a very -- well, it is a sustaining CapEx from a Network perspective, so we're required to maintain the Network, a safe Network at a certain condition. So the CapEx assumes no growth or expansions in the network in that $500 mil. And then from a credit rating perspective, as I said, we will do the review that we're working through. And again, we assess this on a regular basis in terms of what's appropriate.

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Operator [86]

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

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Cameron McDonald, Evans & Partners Pty. Ltd., Research Division - Head of Research [87]

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Just a couple of follow-up questions. You've highlighted the outlook commentary doesn't impact or how it doesn't have any weather impact at the moment. What -- how long does EBIT point need to be down for or the floods have to be cleaned up, impacting the operational performance of Above Rail start to bite? How long does that take?

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Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [88]

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So look, I'll -- what I'll do is I'll get Clay to talk about the impact in the Bulk business, I'd -- where I think the majority of the flooding has impacted. And then I'll get Ed to talk a bit about the EBIT point. I would point ahead as, Clay talked about the Bulk business, it is his whole life, but that doesn't mean it's a significant part of Aurizon, although we -- it's an important part of Aurizon, financially, I'm talking about.

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Clay McDonald, Aurizon Holdings Limited - Group Executive of Bulk [89]

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Yes. Thanks, Andrew. So we've got a large employee and operating base in [Canzila] up in the North Queensland area. So first and foremost, we're relieved to know that we've had no injuries of our employees in that region. As far as operating -- our operating infrastructure goes, our depots sustained very minor impacts, so we've reoccupied those depots late last week. In regards to operations on the Mount Isa line, the Below Rail owner and operator Queensland Rail is still assessing the impact. A lot of that track is still unaccessible at this point in time, so they're assessing that impact, and we'll know possibly mid to late this week on what the scope of works is to bring that track back on at this point in time. And like Andrew said, it's material to my team and to Bulk, but not material in a financial sense to the Aurizon result.

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Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [90]

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Thanks, Clay. Ed, do you want to just talk, give an update on where we are with EBIT point of or what point in the new refine?

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Michael G. Carter, Aurizon Holdings Limited - Group Executive of Technical Services & Planning [91]

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Yes. Yes, certainly. Thanks, Cameron. The -- we've had faced a bit of a famine and feast this year. As you know, we've had a number of events that have found us into the second half with a -- still within guidance, but I'd certainly point towards the mid-to-lower end of the guidance. We -- to finger your -- put the finger on the point of your question, I mean our railings in the system, we've got them actually detailed on Page 51 on the background reading, with approximately 10 million tonnes for the half. So we typically rail between 50,000 and 60,000 tonnes in that corridor a day, so you can get us -- you can probably run the numbers yourselves in relation to what the impact will be of sustained outages in that system.

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Cameron McDonald, Evans & Partners Pty. Ltd., Research Division - Head of Research [92]

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Okay, that's great. And just sort of a couple of more, if I can. Just you mentioned the EBA process. How -- once we -- consider we get to a federal election in the middle of the year, what is the profile of EBAs post that federal election?

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Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [93]

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Okay. Tina, do you want to just talk about the lengths of the EBAs have negotiated and are negotiating?

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Tina Thomas, Aurizon Holdings Limited - Group Executive of Corporate [94]

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Yes. So as we talked about earlier, there's 3 EAs left. And they -- once they're complete, that really sets us up for this round of EAs, and we'll totally be complete. So most of our EAs has either been extended for 3 or 4 years, 3 in New South Wales and 4 across the rest. So that's what we're really focusing on the 3 that we've got outstanding at this stage.

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Cameron McDonald, Evans & Partners Pty. Ltd., Research Division - Head of Research [95]

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Okay. That's great. And final question, just seems, you have mentioned that you started to talk to customers about contract renewals. What has been their initial feedback, both in terms of price, service and service quality?

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Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [96]

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Ed, I will hand that over to you for a very high-level response.

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Ed McKeiver, Aurizon Holdings Limited - Group Executive of Coal [97]

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Sorry, Cameron, can you repeat the question, please?

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Cameron McDonald, Evans & Partners Pty. Ltd., Research Division - Head of Research [98]

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Yes. Just what's been the initial feedback on -- from the customers on contract renewals regarding price and service quality? And what they're looking for into the new contract?

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Ed McKeiver, Aurizon Holdings Limited - Group Executive of Coal [99]

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Yes. So I'll respond in a general way. I mean, not surprisingly, customers want more flexibility, better service performance at a lower price. And with a more competitive marketplace, we've got to find the balance between those things and maintain the value-accretive business. So downward pressure on rates continues. I think this has come up in previous questions. We focus on -- we continue to focus on our transformation and our cost base, preserve our margins and try to listen to the customer and deliver a proposition that meets their particular needs in relation to the particular operational flexibility.

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Operator [100]

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Your next question comes from Paul Butler from Crédit Suisse.

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Paul Butler, Crédit Suisse AG, Research Division - Director [101]

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I just wonder if I could come back to the original question about why no judicial review. In your response to that, you said it was about providing certainty for investors or customers. But you made no comment about your view of the likely success of a judicial review. Do I take it, you think that you would be successful there or not?

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Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [102]

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We have to -- we have a response due on the 18th of February, to the final decision, and we'll make a decision at that point in time. And based on that decision, I suspect you can draw your own conclusions as to how we view judicial review holistically.

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Paul Butler, Crédit Suisse AG, Research Division - Director [103]

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Okay. And look, I know you're limited in what you can say, but -- about the negotiations. But you've said in the release that you're negotiating or you're having discussions with all stakeholders. Is that on a one-on-one basis or is that via the resources counsel? Or so, what are the mechanics of how that's working?

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Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [104]

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Again, in the circumstances, it's not appropriate to provide that extent of detail. But it's fair to say, we are having discussions with all relevant stakeholders.

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Paul Butler, Crédit Suisse AG, Research Division - Director [105]

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Okay. And during the last 6 months, you were still collecting the Network revenue under the transitional arrangements. What was the level of overcollection in the past 6 months compared to the final decision?

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Pam Bains, Aurizon Holdings Limited - CFO & Group Executive of Strategy [106]

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I can take that one. Paul, based on the half, there hasn't been an overcollection to a material extent, its $1 million is the adjustment, $1 million.

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Paul Butler, Crédit Suisse AG, Research Division - Director [107]

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So, $1 million of over or $1 million under?

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Pam Bains, Aurizon Holdings Limited - CFO & Group Executive of Strategy [108]

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Over.

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Paul Butler, Crédit Suisse AG, Research Division - Director [109]

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Over, okay. And then just coming back to your review of the legal structure. You made a comment that Network is a subsidiary of Aurizon operations. This is something I'm not particularly familiar with. But can you just -- I don't know if you can explain, what are the -- what's the significance of that in terms of what the limitations are or what it doesn't allow you to do? Is this things to do with debt capacity or alternative ownership arrangements?

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Pam Bains, Aurizon Holdings Limited - CFO & Group Executive of Strategy [110]

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Yes. It does create and we have a credit rating which can depend on the holdings level, how it's structured. So again, we will provide a full update in terms of the issues and also some other solutions in the full year results.

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Operator [111]

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Your next question comes from Nathan Lead from Morgans Financial.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [112]

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Just interested in the Above Rail for the Coal's part of the business. It sound to me like most of that revenue growth came through from the fuel costs passthrough. So Coal, the contract that you passed it actually increased in the period, so I suppose I'm going with this is just wondering what happened to average pricing in the period, like on a contract capacity basis? And I think you used to provide a little chart in the back of the pack, to sort of split it between capacity charge and throughput in fuel and performance, I don't see it in there. So hence, the reason I'm asking the question.

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Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [113]

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Ed, I might get you to answer the question, please.

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Ed McKeiver, Aurizon Holdings Limited - Group Executive of Coal [114]

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Yes. Thank you, Nathan. Yes. Look, there's a number of factors that drive obviously contract yield, as you know, Nathan. And yes, there is definitely -- as I said, there's definitely downward pressure on tariffs when we do come to recontract. At the same time though, we've been able to keep ahead of the pace in relation of our costs. Either the [UTD], UT5 environment we discount through a side. The other factor, of course, is that different contracts yield different revenue yields. And so depending on the mix of the customer we rail for, that can also impact the system. And finally, the other factor is, yes, we flagged the -- we flagged the -- some of the growth in FY '19. A large part of that was the MACH Energy contract. And of course, rather than the first quarter startup, they'd had some troubles with their washery plant which is now finished, and so that's -- that pushed back by approximately 6 months, so that's also part of -- one of the factors.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [115]

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Okay. And while I've got you, could you just maybe make a couple of comments about contracts forming, maturing in the market with obviously competitor or competitors, and where you guys are out there? And then with your existing contractor book, is there any contracts within there that you know have already been grabbed by the competitors out there? Or is it looking like you've got the most of that sort of FY '21 to '23 sort of still available to recontract?

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Ed McKeiver, Aurizon Holdings Limited - Group Executive of Coal [116]

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In short, yes, mostly available and up for grabs. Our contract books on 52 this year, as you could probably see, Slide 52. And so, yes, while we've had a -- some ability to focus on growth in FY '19, as we went into the 2021, '22 years, there's definitely opportunity. Now we've also been actively engaging with our customers that forward in those bars in relation to recontracting. I'm not in liberty to discuss the details of that on this call.

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Nathan Lead, Morgans Financial Limited, Research Division - Senior Analyst [117]

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But then, in terms of your competitor, though you have previously talked about how their contracts, are supposedly falling [2 earlier] than yours. And I thought you normally need to allow sort of 16 to 18 months before those contracts expire, you might be able to -- when the new contracts gets awarded to allow for new rolling stock, et cetera, to get billed. Can you sort of give a bit of indication about where things are on those?

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Ed McKeiver, Aurizon Holdings Limited - Group Executive of Coal [118]

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No. I'd prefer not to today, Nathan.

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Operator [119]

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Thank you. There are no further questions at this time.

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Andrew T. Harding, Aurizon Holdings Limited - MD, CEO & Director [120]

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Okay. Well, thanks to everyone on the call. Today, we've outlined our results for the first half of the year, but also provided further detail on the work that we're doing to drive long-term earnings growth to the business and create values for our shareholders. Thank you to everyone for joining the call, and good morning.